<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000
REGISTRATION NO. 333-86295
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
ASPECT MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3845 04-2985553
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
TWO VISION DRIVE
NATICK, MASSACHUSETTS 01760
(508) 653-0603
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
NASSIB G. CHAMOUN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ASPECT MEDICAL SYSTEMS, INC.
TWO VISION DRIVE
NATICK, MASSACHUSETTS
(508) 653-0603
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SUSAN W. MURLEY, ESQ. LESLIE E. DAVIS, ESQ.
HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET 125 HIGH STREET
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 248-7000
TELECOPY: (617) 526-5000 TELECOPY: (617) 248-7100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
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, 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 number of the earlier effective registration statement for the same
offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] __________
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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.
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- --------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS 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
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
PROSPECTUS (Subject to Completion)
Issued January 10, 2000
3,000,000 Shares
[Aspects Medical Systems Logo]
COMMON STOCK
------------------------
ASPECT MEDICAL SYSTEMS, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR
INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $11.00 AND
$13.00 PER SHARE.
------------------------
WE HAVE APPLIED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE
SYMBOL "ASPM."
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 9.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS ASPECT
-------- ------------- -----------
<S> <C> <C> <C>
Per Share.......................... $ $ $
Total.............................. $ $ $
</TABLE>
Aspect has granted the underwriters the right to purchase up to an additional
450,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on
, 2000.
------------------------
MORGAN STANLEY DEAN WITTER
DEUTSCHE BANC ALEX. BROWN
U.S. BANCORP PIPER JAFFRAY
, 2000.
<PAGE> 3
[Aspect logo]
[Photograph depicting Aspect's A-2000 BIS Monitor and the BIS Sensor affixed to
the forehead of a model of a human head]
The following words are to the right of the photograph:
The A-2000 BIS Monitor is a compact, portable monitor that displays the BIS
index and supporting information and includes Aspect's digital signal converter.
[Photograph depicting Aspect's BIS Sensor affixed to the forehead of a woman]
The following words are to the right of the photograph:
The BIS Sensor is a single-piece, single-use disposable product for use
with the A-2000 BIS Monitor, the A-1050 Monitor and the BIS Module Kit. The BIS
Sensor is applied to a patient's forehead to acquire the EEG, a measure of the
electrical activity of the brain.
[Photograph depicting Aspect's BIS Sensor, BIS Module Kit and digital signal
converter products]
The following words are to the right of the photograph:
In 1996, Aspect introduced the BIS Module Kit, which is designed to
facilitate the integration of Aspect's BIS index into monitoring products
marketed by third parties that enter into original equipment manufacturer
arrangements with us.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.................... 5
RISK FACTORS.......................... 9
SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS.......................... 17
USE OF PROCEEDS....................... 18
DIVIDEND POLICY....................... 18
CAPITALIZATION........................ 19
DILUTION.............................. 20
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS.............................. 32
MANAGEMENT............................ 47
RELATED-PARTY TRANSACTIONS............ 56
PRINCIPAL STOCKHOLDERS................ 58
DESCRIPTION OF CAPITAL STOCK.......... 61
SHARES ELIGIBLE FOR FUTURE SALE....... 64
UNDERWRITERS.......................... 66
LEGAL MATTERS......................... 68
EXPERTS............................... 68
WHERE YOU CAN FIND MORE INFORMATION... 68
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
------------------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell shares of common stock and
seeking offers to buy shares of common stock only in jurisdictions where offers
and sales are permitted.
UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE THE 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 SUBSCRIPTION.
3
<PAGE> 5
[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]
4
<PAGE> 6
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company, the common stock being sold in this offering
and our consolidated financial statements and related notes appearing elsewhere
in this prospectus.
ASPECT MEDICAL SYSTEMS, INC.
We develop, manufacture and market an anesthesia-monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our single-use, disposable
BIS Sensors. The BIS system is based on our patented core technology, the BIS
index, which is the only FDA-cleared, commercially available, direct measure of
the effects of anesthetics on the brain. We developed the BIS system over 10
years, and it is the subject of 10 issued and six pending United States patents.
Our latest generation monitor, the A-2000 BIS Monitor, was cleared for marketing
by the FDA in February 1998.
Clinical trials and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:
- lower drug costs,
- faster wake-up from anesthesia,
- less patient time in the operating room and the post-anesthesia care unit
following surgery,
- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,
- improvements in the quality of recovery, and
- improvements in the means to assess the risk of surgical awareness, which
is the unintentional regaining of consciousness during surgery.
As of December 31, 1999, more than 5,650 BIS monitors have been installed
worldwide, including 4,881 BIS monitors in approximately 675 sites in the United
States. These sites include 35 of the 100 largest hospitals and 32% of all
teaching hospitals with anesthesia residency programs. We believe that over
1,000,000 patients have been monitored using the BIS index during surgery.
Each year, approximately 29 million patients in the United States and more
than 35 million patients in Europe and Japan receive anesthesia for surgical
procedures. We estimate that approximately 70% of these surgical patients in the
United States, or 20 million patients, receive general anesthesia or deep
sedation monitored by an anesthesia provider. Anesthesia providers historically
have had no direct means of assessing a patient's level of consciousness during
surgery. They have generally relied on recommended drug dosages and on indirect
indicators of consciousness, including blood pressure and heart rate. This
approach cannot always account for variability in patient responses to
anesthesia or changes in anesthetic requirements during the course of surgery.
Consequently, traditional approaches to anesthesia may result in patients being
undermedicated or overmedicated during surgery.
Undermedication may lead to surgical awareness, which is the unintentional
regaining of consciousness during surgery. Overmedication may result from an
effort to ensure that the patient is rendered unconscious to reduce the risk of
surgical awareness. Overmedication contributes to the high cost of surgical care
as a result of increased drug costs, prolonged and unpredictable wake-ups from
anesthesia and prolonged post-anesthesia recovery in the post-anesthesia care
unit.
We market the BIS system in the United States primarily through a direct
sales organization and internationally through distributors and marketing
partners. We have also established original equipment manufacturer relationships
with several patient monitoring and anesthesia equipment companies that will
incorporate our BIS technology into their equipment using the BIS Module Kit.
5
<PAGE> 7
Aspect's objective is to establish the BIS system as a global standard in
anesthesia and sedation monitoring. Key elements of our strategy to accomplish
this objective are to:
- accelerate market penetration through a direct sales force,
- educate and promote the use of the BIS system through clinical
specialists,
- broaden distribution channels through original equipment manufacturer
relationships,
- maintain market leadership through continuous product improvements and
extensions, and
- target new product opportunities through technology development.
RECENT DEVELOPMENTS -- SUMMARY FINANCIAL DATA FOR 1999
The summary financial data below for the year and the three months ended
December 31, 1999 is unaudited. The audit of our financial statements for the
year ended December 31, 1999 is not yet complete.
Our revenue increased to $27.2 million for the year ended December 31, 1999
as compared to $11.2 million for the year ended December 31, 1998. Our revenue
increased to $8.3 million for the three months ended December 31, 1999 as
compared to $3.7 million for the three months ended December 31, 1998.
Our net loss decreased to $7.0 million for the year ended December 31, 1999
as compared to $13.6 million for the year ended December 31, 1998. Our net loss
decreased to $1.3 million for the three months ended December 31, 1999 as
compared to $3.1 million for the three months ended December 31, 1998.
------------------------
We are a Delaware corporation. Our principal executive offices are located
at Two Vision Drive, Natick, Massachusetts 01760 and our telephone number is
(508) 653-0603. Our World Wide Web site address is www.aspectms.com. The
information in the Web site is not incorporated by reference into this
prospectus.
BIS, Bispectral Index, A-1050, A-2000 and Zipprep are our trademarks.
Aspect is a registered trademark licensed to us on a non-exclusive basis. This
prospectus also contains trademarks and trade names of other companies.
6
<PAGE> 8
THE OFFERING
<TABLE>
<S> <C>
Common stock offered................................. 3,000,000 shares
Common stock to be outstanding after this offering... 15,858,372 shares
Over-allotment option................................ 450,000 shares
Use of proceeds...................................... For general corporate purposes, including
working capital and capital expenditures. For
more detailed information, see "Use of
Proceeds" on page 18.
Dividend policy...................................... We do not intend to pay cash dividends on our
common stock. We plan to retain any earnings
for use in the operation and expansion of our
business.
Proposed Nasdaq National Market symbol............... ASPM
</TABLE>
------------------------
Unless otherwise specifically stated, the information throughout this
prospectus does not take into account the possible issuance of additional shares
of common stock to the underwriters pursuant to their rights to purchase
additional shares to cover over-allotments. The information in this prospectus
reflects the conversion of all outstanding shares of our convertible preferred
stock into 11,067,238 shares of common stock.
The number of shares of our common stock that will be outstanding
immediately after the offering is based on shares outstanding as of October 2,
1999 and excludes 2,166,138 shares issuable upon the exercise of stock options
with a weighted average exercise price of $3.07 per share and warrants to
purchase 192,902 shares of common stock with an exercise price of $12.50 per
share.
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following is a summary of financial data included elsewhere in the
prospectus. The information provided for the nine months ended October 3, 1998
and October 2, 1999 and as of October 2, 1999 actual and pro forma as adjusted
is unaudited, but in the opinion of management contains all adjustments,
consisting only of normal, recurring adjustments, which are necessary for a fair
statement of the results of these periods. You should read the following data
with the more detailed information contained in "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and our consolidated financial statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, ------------------------
--------------------------------------------------- OCTOBER 3, OCTOBER 2,
1994 1995 1996 1997 1998 1998 1999
-------- -------- ------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue..................... $ 852 $ 1,067 $ 1,389 $ 3,068 $ 11,238 $ 7,502 $18,838
Costs of revenue............ 525 704 1,096 3,602 5,880 4,125 6,562
Research and development.... 2,311 2,870 2,338 2,603 4,042 3,049 3,567
Sales and marketing......... 1,291 1,285 1,561 4,813 10,354 7,279 11,860
General and
administrative............ 1,216 1,815 1,871 2,358 4,254 3,073 3,551
-------- -------- ------- -------- -------- -------- -------
Loss from operations........ (4,491) (5,607) (5,477) (10,308) (13,292) (10,024) (6,702)
Interest income, net........ 231 61 81 422 459 390 988
Other expense............... -- -- -- -- (774) (825) --
-------- -------- ------- -------- -------- -------- -------
Net loss.................... $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(10,459) $(5,714)
======== ======== ======= ======== ======== ======== =======
Net loss per share:
Basic and diluted......... $(822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
======== ======== ======= ======== ======== ======== =======
Pro forma basic and
diluted................ $ (1.31) $ (0.45)
======== =======
Shares used in computing net
loss per share:
Basic and diluted......... 5 20 93 632 1,163 1,105 1,501
Pro forma basic and
diluted................ 10,352 12,568
</TABLE>
Shares used in computing pro forma basic and diluted net loss per share
above exclude unvested shares of common stock subject to repurchase rights,
which totaled 386,642 and 164,150 at December 31, 1998 and October 2, 1999,
respectively, but include 11,067,238 shares of common stock issuable upon
conversion of our outstanding convertible preferred stock upon the closing of
this offering.
The pro forma as adjusted column in the consolidated balance sheet data
below gives effect to the conversion of our outstanding convertible preferred
stock into common stock upon the closing of this offering and the sale of
3,000,000 shares of common stock in this offering at an assumed initial public
offering price of $12.00 per share, after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
OCTOBER 2, 1999
-----------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $ 14,632 $ 47,212
Working capital............................................. 12,193 44,773
Total assets................................................ 27,990 60,570
Long-term debt.............................................. 1,967 1,967
Total stockholders' equity.................................. 14,250 46,830
</TABLE>
8
<PAGE> 10
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. Our business, financial condition or operating results
could be materially adversely affected by any of these risks. The trading price
of our common stock could decline due to any of these risks, and you may lose
all or part of your investment.
RISKS RELATED TO OUR BUSINESS
WE WILL NOT BE PROFITABLE IF HOSPITALS AND ANESTHESIA PROVIDERS DO NOT BUY AND
USE OUR BIS SYSTEM IN SUFFICIENT QUANTITIES.
Customers may determine that the cost of the BIS system exceeds cost
savings in drugs, personnel and post-anesthesia care recovery resulting from use
of the BIS system. In addition, hospitals and anesthesia providers may not
accept the BIS system as an accurate means of assessing a patient's level of
consciousness during surgery if patients regain consciousness during surgery
while being monitored with the BIS system. If extensive or frequent malfunctions
occur, these providers may also conclude that the BIS system is unreliable. If
hospitals and anesthesia providers do not accept the BIS system as
cost-effective, accurate or reliable, they will not buy and use the BIS system
in sufficient quantities to enable us to be profitable.
WE DEPEND ON OUR BIS SYSTEM FOR SUBSTANTIALLY ALL OF OUR REVENUE, AND IF THE
BIS SYSTEM DOES NOT GAIN WIDESPREAD MARKET ACCEPTANCE, THEN OUR REVENUE WILL NOT
GROW.
We began selling our current BIS system in early 1998. To date, we have not
achieved widespread market acceptance of the BIS system. Because we currently
depend on our BIS system for substantially all of our revenue and we have no
other significant products, if we fail to achieve widespread market acceptance
we will not be able to sustain or grow our product revenue.
WE EXPECT TO INCUR LOSSES IN THE FUTURE.
We have incurred net losses in each year since inception. We expect to
increase significantly our research and development, sales and marketing and
general and administrative expenses in future periods. We will spend these
amounts before we receive any incremental revenue from these efforts. Therefore,
our losses will be greater than the losses we would incur if we developed our
business more slowly. In addition, we may find that these efforts are more
expensive than we currently anticipate, which would further increase our losses.
Failure to become and remain profitable may depress the market price of our
common stock and our ability to raise capital and continue our operations.
CASES OF SURGICAL AWARENESS DURING MONITORING WITH THE BIS SYSTEM COULD LIMIT
MARKET ACCEPTANCE OF BIS SYSTEMS AND COULD EXPOSE US TO PRODUCT LIABILITY
CLAIMS.
Clinicians have reported to us a total of 35 cases of possible surgical
awareness during surgical procedures monitored with the BIS system as of
December 31, 1999. Not all cases of surgical awareness during surgical
procedures monitored with the BIS system may be reported to us, and we have not
systematically solicited reports of surgical awareness. Anesthesia providers and
hospitals may elect not to purchase and use BIS systems if there is adverse
publicity resulting from the report of cases of surgical awareness that were not
detected during procedures monitored with the BIS system. If anesthesia
providers and hospitals do not purchase and use the BIS system, then we may not
sustain or grow our product revenue. Although we do not claim that patient
monitoring with the BIS system will reduce the incidence of surgical awareness,
we may be subject to product liability claims for cases of surgical awareness
during surgical procedures monitored with the BIS system. These claims could
require us to spend significant time and money in litigation or to pay
significant damages.
9
<PAGE> 11
WE MAY NOT BE ABLE TO KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES
DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO REMAIN COMPETITIVE AND
ACHIEVE FUTURE GROWTH.
The medical industry in which we market our products is characterized by
rapid product development and technological advances. Our current or planned
products are at risk of obsolescence from:
- new monitoring products, based on new or improved technologies,
- new products or technologies used on patients or in the operating room
during surgery in lieu of monitoring devices,
- electrical or mechanical interference from new or existing products or
technologies,
- alternative techniques for evaluating the effects of anesthesia,
- significant changes in the methods of delivering anesthesia, and
- the development of new anesthetic agents.
We may not be able to improve our products or develop new products or
technologies quickly enough to maintain a competitive position in our markets
and continue to grow our business.
IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE ENHANCED OR NEW PRODUCTS WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS.
As the market for our BIS system matures, we need to develop and introduce
new products for anesthesia monitoring or other applications. We face at least
the following risks:
- we may not successfully adapt the BIS system to function properly in the
intensive care unit, for procedural sedation, when used with anesthetics
we have not tested or with patient populations we have not studied, such
as infants and young children, and
- our technology is complex, and we may not be able to develop it further
for applications outside anesthesia monitoring.
If we do not successfully adapt the BIS system for new products and
applications both within and outside the field of anesthesia monitoring, then we
could lose revenue opportunities and customers.
IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY,
WE WILL NOT EXPAND OUR BUSINESS.
Our current sales and marketing operation is not sufficient to achieve the
level of market awareness and sales we need to expand our business. We have only
limited sales and marketing experience both in the United States and
internationally and may not be successful in developing and implementing our
strategy. We need to:
- provide or assure that distributors and original equipment manufacturers
provide the technical and educational support customers need to use the
BIS system successfully,
- promote frequent use of the BIS system so that sales of our disposable
BIS Sensors increase,
- encourage our customers to purchase our products prior to availability of
products that are made by original equipment manufacturers incorporating
our technology,
- manage geographically dispersed operations, and
- modify our products for foreign markets.
10
<PAGE> 12
IN ORDER TO REACH THE LEVEL OF SALES WE NEED TO ACHIEVE PROFITABILITY, WE NEED
TO FURTHER DEVELOP OUR DIRECT AND INDIRECT SALES CHANNELS.
In order to increase our sales, we need to add domestic and international
distributors, original equipment manufacturers and other sales channels and
increase sales through these channels. In addition, we need to hire and train
more sales persons and clinical specialists. If we do not further develop our
direct and indirect sales channels, we will not reach the level of sales
necessary to achieve profitability.
OUR THIRD-PARTY DISTRIBUTION AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
COULD NEGATIVELY AFFECT OUR PROFITABILITY, CAUSE SALES OF OUR PRODUCTS TO
DECLINE AND BE DIFFICULT TO TERMINATE IF WE ARE DISSATISFIED.
Sales through distributors could be less profitable than direct sales.
Sales of our products through multiple channels could also confuse customers and
cause the sale of our products to decline. We do not control our original
equipment manufacturers and distribution partners. Our partners could sell
competing products and may devote insufficient sales efforts to our products.
Our partners are generally not required to purchase minimum quantities. As
a result, even if we are dissatisfied with the performance of our partners, we
may be unable to terminate our agreements with these partners or enter into
alternative arrangements.
WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR PLANNED
INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND
MAINTAINING FOREIGN OPERATIOns.
A component of our growth strategy is to expand our presence in foreign
markets. We conduct international business primarily in Europe and we are
attempting to increase the number of countries in which we do business. It will
be costly to establish international facilities and operations and to promote
the BIS system in international markets. In addition, we have little experience
in marketing and distributing products for these markets. Revenue from
international activities may not offset the expense of establishing and
maintaining these foreign operations.
WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL
CHALLENGES THAT WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WHICH MAY
LIMIT THE GROWTH OF OUR BUSINESS.
We are increasingly subject to a number of challenges which specifically
relate to our international business activities. These challenges include:
- failure of local laws to provide the same degree of protection against
infringement of our intellectual property,
- protectionist laws and business practices that favor local competitors,
which could slow our growth in international markets,
- less acceptance by foreign anesthesia providers of the use of disposable
products similar to the BIS Sensor,
- longer sales cycles to sell products like the BIS system to hospitals and
outpatient surgical centers, which could slow our revenue growth from
international sales, and
- longer accounts receivable payment cycles and difficulties in collecting
accounts receivable.
If we are unable to meet and overcome these challenges, our international
operations may not be successful which would limit the growth of our business.
WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER IF
WE FAIL TO MANUFACTURE ENOUGH PRODUCTS TO MEET OUR CUSTOMERS' DEMANDS.
We rely on third-party manufacturers to assemble and manufacture the
components of our BIS monitors and a portion of our BIS Sensors. We manufacture
substantially all BIS Sensors in our own manufacturing facility. We have only
one manufacturing facility and we expect to move our manufacturing facility to a
new
11
<PAGE> 13
location in the first quarter of 2000. If we fail to produce enough products at
our own manufacturing facility or at a third-party manufacturing facility, if we
experience delays in moving to our new facility or if we experience a
termination or modification of any manufacturing arrangement with a third party,
we may be unable to deliver products to our customers on a timely basis. Our
failure to deliver products on a timely basis could lead to customer
dissatisfaction and damage our reputation.
OUR RELIANCE ON SOLE SUPPLIERS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR
CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET.
Some of the components that are necessary for the assembly of our BIS
system, including some of the components used in the BIS Sensor, are currently
provided to us by separate sole suppliers or a limited group of suppliers. We
purchase components through purchase orders rather than long-term supply
agreements and generally do not maintain large volumes of inventory. We have
experienced shortages and delays in obtaining some of the components of our BIS
systems in the past, and we may experience similar delays or shortages in the
future. The disruption or termination of the supply of components could cause a
significant increase in the costs of these components, which could affect our
profitability. A disruption or termination in the supply of components could
also result in our inability to meet demand for our products, which could lead
to customer dissatisfaction and damage our reputation. Furthermore, if we are
required to change the manufacturer of a key component of the BIS system, we may
be required to verify that the new manufacturer maintains facilities and
procedures that comply with quality standards and with all applicable
regulations and guidelines. The delays associated with the verification of a new
manufacturer could delay our ability to manufacture BIS systems in a timely
manner or within budget.
WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR ATTENTION
FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We believe that the success of our business depends, in part, on obtaining
patent protection for our products, defending our patents once obtained and
preserving our trade secrets. We rely on a combination of contractual
provisions, confidentiality procedures and patent, trademark and trade secret
laws to protect the proprietary aspects of our technology. These legal measures
afford only limited protection and competitors may gain access to our
intellectual property and proprietary information. Litigation may be necessary
to enforce our intellectual property rights, to protect our trade secrets and to
determine the validity and scope of our proprietary rights. Any litigation could
result in substantial expense and diversion of our attention from the growth of
the business and may not be adequate to protect our intellectual property
rights.
WE DO NOT OWN THE TRADEMARK "ASPECT" AND ANY COMPETITIVE ADVANTAGE WE DERIVE
FROM THE NAME MAY BE IMPAIRED BY THIRD-PARTY USE.
We are a party to a license agreement with a third party under which we
have obtained the nonexclusive right to make, use or sell products under the
name "Aspect." The licensor of the Aspect name markets products for use in the
health care industry. There may be confusion in the market between the licensor
and us and this confusion would compromise the competitive advantage, if any, we
derive from our name.
WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCTS INFRINGE ON
THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL
UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL DEVICE PATENTS.
We may be exposed to future litigation by third parties based on claims
that our products infringe the intellectual property rights of others. This risk
is exacerbated by the fact that the validity and breadth of claims covered in
medical technology patents involve complex legal and factual questions for which
important legal principles are unresolved. Any litigation or claims against us,
whether or not valid, could result in substantial costs, could place a
significant strain on our financial resources and could harm our reputation. In
addition, intellectual property litigation or claims could force us to do one or
more of the following:
- cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would adversely
affect our revenue,
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<PAGE> 14
- obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms, if at all,
and
- redesign our products, which would be costly and time-consuming.
WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY CLAIMS WHICH COULD DIVERT
MANAGEMENT ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES, OUR ABILITY TO
OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE
AMOUNTS AND OUR REPUTATION.
The manufacture and sale of our products expose us to product liability
claims and product recalls, including those which may arise from misuse or
malfunction of, or design flaws in, our products or use of our products with
components or systems not manufactured or sold by us. Product liability claims
or product recalls, regardless of their ultimate outcome, could require us to
spend significant time and money in litigation or to pay significant damages. We
currently maintain insurance; however, it might not cover the costs of any
product liability claims made against us. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO
DECREASE.
Our operating results have fluctuated significantly from quarter to quarter
in the past and are likely to vary in the future. These fluctuations are due to
several factors relating to the sale of our products, including the timing and
volume of customer orders for our BIS system, customer cancellations, reductions
in orders by our distribution partners and the timing and amount of our
expenses. Because of these fluctuations, it is likely that in some future
quarter or quarters our operating results could fall below the expectations of
securities analysts or investors. If so, the market price of our stock would
likely decrease.
In addition, because we do not have a significant backlog of customer
orders for our BIS system, revenue in any quarter depends on orders received in
that quarter. Our quarterly results may also be adversely affected because some
customers may have inadequate financial resources to purchase our products or
may fail to pay for our products after receiving them. In particular, hospitals
are increasingly experiencing financial constraints, consolidations and
reorganizations as a result of cost containment measures and declining third-
party reimbursement for services, which may result in decreased product orders
or an increase in bad debts in any quarter.
WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS AND
RETURNS, WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN
OPERATING RESULTS.
Depending on factors such as the timing of our introduction of new products
which utilize our BIS technology, as well as warranty claims and product
returns, we may need to reserve amounts in excess of those currently reserved
for product obsolescence, excess inventory, warranty claims and product returns.
These reserves may not be adequate to cover all costs associated with these
items. If these reserves are inadequate, we would be required to incur
unanticipated expenses which could result in unexpected fluctuations in
quarterly operating results.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN PRICE
REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS.
We expect to face substantial competition from larger medical device
companies that may have greater financial, technical, marketing and other
resources than we do. We may not be able to compete effectively with these
potential competitors. For example, we may face substantial competition from
companies developing sensor products that compete with our proprietary BIS
Sensors for use with our BIS monitors or with third-party monitoring systems or
anesthesia delivery systems that incorporate the BIS index. We also expect to
face competition from companies currently marketing conventional
electroencephalogram, or EEG, monitors using standard and novel
signal-processing techniques. Other companies may develop anesthesia-monitoring
systems that perform better than the BIS system and/or sell for less. In
addition, one or more of our competitors may develop products that are
substantially equivalent to our FDA-approved products, in which case they may be
able to use our products as predicate devices to more quickly obtain FDA
approval of
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<PAGE> 15
their competing products. Competition in the sale of anesthesia-monitoring
systems could result in price reductions, fewer orders, reduced gross margins
and loss of market share.
OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND GENERATE REVENUE DEPENDS UPON
RECEIPT OF DOMESTIC AND FOREIGN REGULATORY APPROVAL OF OUR PRODUCTS AND
MANUFACTURING OPERATIONS.
Before we can market new products in the United States we must obtain
clearance from the United States Food and Drug Administration, or FDA. If the
FDA concludes that any of our products do not meet the requirements to obtain
clearance of a premarket notification under Section 510(k) of the Food, Drug and
Cosmetic Act, then we would be required to file a premarket approval
application. The approval process for a premarket approval application is
lengthy, expensive and typically requires extensive preclinical and clinical
trial data. We may not obtain clearance of a 510(k) notification or approval of
a premarket approval application with respect to any of our products on a timely
basis, if at all. If we fail to obtain timely clearance or approval for our
products, we will not be able to market and sell our products, which will limit
our ability to generate revenue. We may also be required to obtain clearance of
a 510(k) notification from the FDA before we can market certain previously
marketed products which we modify after they have been cleared. We have made
certain enhancements to our currently marketed products which we have determined
do not necessitate the filing of a new 510(k) notification. However, if the FDA
does not agree with our determination, it will require us to file a new 510(k)
notification for the modification and we may be prohibited from marketing the
modified device until we obtain FDA clearance.
The FDA also requires us to adhere to current Good Manufacturing Practices
regulations, which include production design controls, testing, quality control,
storage and documentation procedures. The FDA may at any time inspect our
facilities to determine whether adequate compliance has been achieved.
Compliance with current Good Manufacturing Practices regulations for medical
devices is difficult and costly. In addition, we may not continue to be
compliant as a result of future changes in, or interpretations of, regulations
by the FDA or other regulatory agencies. If we do not achieve continued
compliance, the FDA may withdraw marketing clearance or require product recall.
When any change or modification is made to a device or its intended use, the
manufacturer may be required to reassess compliance with current Good
Manufacturing Practices regulations, which may cause interruptions or delays in
the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary from country to country. The time required to
obtain approvals from foreign countries may be longer or shorter than that
required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.
The Federal, state and foreign laws and regulations regarding the
manufacture and sale of our products are subject to future changes, as are
administrative interpretations of regulatory agencies. If we fail to comply with
applicable federal, state or foreign laws or regulations, we could be subject to
enforcement actions, including product seizures, recalls, withdrawal of
clearances or approvals and civil and criminal penalties.
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT
BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.
Our President and Chief Executive, Nassib Chamoun, joined Aspect at its
inception in 1987. Our Chairman, J. Breckenridge Eagle, began serving as a
director of Aspect in 1988. Many other members of our management and key
employees have extensive experience with Aspect and other companies in the
medical device industry. Our success is substantially dependent on the ability,
experience and performance of these members of our senior management and other
key employees. Because of their ability and experience, if we lose one or more
of the members of our senior management or other key employees, our ability to
successfully implement our business strategy could be seriously harmed.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS.
Our products are based on complex signal-processing technology.
Accordingly, we require skilled personnel to develop, manufacture, sell and
support our products. Our future success will depend largely on
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<PAGE> 16
our ability to continue to hire, train, retain and motivate additional skilled
personnel, particularly sales representatives and clinical specialists who are
responsible for customer education and training and post-installation customer
support. We continue to experience difficulty in recruiting and retaining
skilled personnel because the pool of experienced persons is small and we
compete for personnel with other companies, many of which have greater resources
than we do. Consequently, if we are not able to attract and retain skilled
personnel, we will not be able to expand our business.
FAILURE OF USERS OF THE BIS SYSTEM TO OBTAIN ADEQUATE REIMBURSEMENT FROM
THIRD-PARTY PAYORS COULD LIMIT MARKET ACCEPTANCE OF THE BIS SYSTEM, WHICH COULD
PREVENT US FROM ACHIEVING PROFITABILITY.
Anesthesia providers are generally not reimbursed separately for patient
monitoring activities utilizing the BIS system. For hospitals and outpatient
surgical centers, when reimbursement is based on charges or costs, patient
monitoring with the BIS system may reduce reimbursements for surgical
procedures, because charges or costs may decline as a result of monitoring with
the BIS system. Failure by hospitals and other users of the BIS system to obtain
adequate reimbursement from third-party payors, or any reduction in the
reimbursement by third-party payors to hospitals and other users as a result of
using the BIS system could limit market acceptance of the BIS system, which
could prevent us from achieving profitability.
OUR SOFTWARE PRODUCTS AND THOSE OF OUR SUPPLIERS COULD FAIL AS A RESULT OF THE
YEAR 2000 PROBLEM, WHICH COULD CAUSE DISRUPTIONS IN OUR BUSINESS, CAUSE US TO
INCUR UNANTICIPATED EXPENSES, DAMAGE OUR REPUTATION AND CAUSE DELAYS IN PRODUCT
SHIPMENTS OR IN CUSTOMER PURCHASES FROM US.
The year 2000 problem refers to the potential for system and processing
failures as a result of software using two digits rather than four to define the
applicable year. For example, computer programs may recognize a date represented
as "00" as the year 1900 rather than the year 2000. This year 2000 problem could
result in miscalculations, data corruption, system failures or disruptions of
operations. Our products, our internal systems, our customers' systems, our
distributors' systems and our suppliers' systems may experience year 2000
problems, any of which could cause disruptions to our business. Under the
reasonably likely worst case scenario, our suppliers, including our sole and
limited source suppliers, may not be able to supply us with critical components
needed to make our products. Year 2000 errors or defects in the internal systems
of our suppliers could require us to incur significant unanticipated expenses to
remedy any problems or replace affected vendors and could cause cancellations or
delays in product shipments.
Year 2000 errors or defects in our products could give rise to warranty and
other claims by our customers. In addition, year 2000 errors or defects could be
discovered in our internal software systems and, if errors or defects are
present, the costs of making these systems year 2000 compliant could be
material. We have determined that some older versions of our products are not
year 2000 compliant. Some of our other products or internal systems may contain
undetected errors or defects. Additionally, if we are unable to make our
products and internal systems year 2000 compliant in a timely manner, then we
may experience disruptions in our business operations, our reputation may suffer
and customers may delay or cancel purchases from us, which would decrease our
product revenue.
Changing purchasing patterns of customers impacted by year 2000 issues may
result in reduced purchases of our products. In addition, any year 2000 errors
or defects in our distributors' systems or the products of our original
equipment manufacturer partners could cause a reduction in their orders from us.
Any reduction in purchases of our products could decrease our product revenue.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING WHICH MAY CAUSE YOUR
INVESTMENT IN OUR STOCK TO SUFFER A DECLINE IN VALUE.
After this offering, an active trading market in our stock might not
develop or continue. If you purchase shares of our common stock in the offering,
you will pay a price that was not established in a competitive market. Rather,
you will pay a price that we negotiated with the representatives of the
underwriters based
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<PAGE> 17
upon an assessment of the valuation of our stock. The public market may not
agree with or accept this valuation, in which case you may not be able to sell
your shares at or above the initial offering price. See "Underwriters" on page
66. The market price of our common stock may fluctuate significantly in response
to factors which are beyond our control.
In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In addition, the market prices of securities of
technology and medical device companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.
WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR
EXPECTED STOCK VOLATILITY.
Our stock price may fluctuate for many reasons, including addition or
departure of key Aspect personnel, variations in our quarterly operating results
and changes in market valuations of medical device companies. Recently, when the
market price of a stock has been volatile as our stock price may be, holders of
that stock have occasionally instituted securities class action litigation
against the company that issued the stock. If any of our stockholders were to
bring a lawsuit of this type against us, even if the lawsuit is without merit,
we could incur substantial costs defending the lawsuit. The lawsuit could also
divert the time and attention of our management.
WE MAY NEED ADDITIONAL FINANCING TO EXPAND OUR BUSINESS WHICH COULD BE
DIFFICULT TO OBTAIN.
We expect that the net proceeds from this offering and our existing capital
resources will be sufficient to fund our operations at least through 2000.
However, our future capital requirements will depend upon a number of factors,
including:
- the availability of capital resources required to fund future operating
losses, further develop our marketing and sales organization domestically
and internationally, expand manufacturing capacity, finance our
sales-type lease program, and meet market demand for our BIS systems,
- the progress of our research and development programs, including clinical
trials,
- the receipt of and the time required to obtain regulatory clearances and
approvals,
- the resources we devote to developing, manufacturing and marketing our
BIS systems, and
- the resources, if any, we may devote to the expansion of our business,
including through the possible acquisition of businesses, technologies or
other intellectual property rights.
We may require additional funds, and we cannot be certain that additional
funding will be available when needed or on terms acceptable to us. Further, if
we issue additional equity securities, stockholders may experience additional
dilution, or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise funds on acceptable terms, if and when needed, we may not be able to
develop or enhance our products, take advantage of future opportunities, grow
our business or respond to competitive pressures or unanticipated requirements.
OUR STOCK PRICE COULD BE DEPRESSED BY SHARES BECOMING AVAILABLE FOR SALE.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
Sales of a substantial number of shares of our common stock in the public market
after this offering could depress the market price of our common stock and could
impair our ability to raise capital through the sale of additional equity
securities. For a more detailed description, see "Shares Eligible for Future
Sale" on page 64.
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<PAGE> 18
INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER ASPECT AFTER THIS
OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.
After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately 26.9% of our outstanding common stock. As a result,
these stockholders, if acting together, would have the ability to exercise
control over all corporate actions requiring stockholder approval irrespective
of how our other stockholders may vote, including:
- the election of directors,
- the amendment of charter documents,
- the approval of certain mergers and other significant corporate
transactions, including a sale of substantially all of our assets, or
- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY TRANSACTIONS THAT STOCKHOLDERS MAY FAVOR.
Provisions of our restated certificate of incorporation and amended and
restated by-laws may discourage, delay or prevent a merger or acquisition that
stockholders may consider favorable, including transactions in which you might
otherwise receive a premium for your shares. These provisions include:
- authorizing the issuance of "blank check" preferred stock without any
need for action by stockholders,
- providing for a classified board of directors with staggered three-year
terms,
- requiring supermajority stockholder voting to effect certain amendments
to our restated certificate of incorporation and amended and restated
by-laws,
- eliminating the ability of stockholders to call special meetings of
stockholders,
- prohibiting stockholder action by written consent,
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings, and
- providing for the automatic acceleration of the vesting of stock options
upon a change of control of Aspect.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT.
We expect that the initial public offering price per share will
significantly exceed the net tangible book value per share of the outstanding
common stock. Accordingly, purchasers of common stock in this offering will
suffer immediate and substantial dilution of their investment. In the past, we
have issued options to acquire common stock at prices below the initial public
offering price. To the extent these outstanding options are ultimately
exercised, there will be further dilution to investors in this offering.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will" and "would" or similar
words. You should read statements that contain these words carefully because
they discuss our future expectations, contain projections of our future results
of operations or of our financial position or state other forward-looking
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed above in
the section captioned "Risk Factors," as well as any cautionary language in this
prospectus, provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements. Before you invest in our common stock, you should be
aware that the occurrence of the events described in these risk factors and
elsewhere in this prospectus could have a material adverse effect on our
business, results of operations and financial position.
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<PAGE> 19
USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 3,000,000 shares of
common stock will be approximately $32,580,000, assuming an initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us. If the
over-allotment option is exercised in full, we estimate that our net proceeds
will be approximately $37,602,000.
The principal purposes of this offering are to establish a public market
for our common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We currently intend to use a portion of the net proceeds from this offering
for general corporate purposes, including working capital, product development,
increasing our sales and marketing capabilities and expanding our international
operations. We may also use a portion of the net proceeds to acquire or invest
in complementary businesses or products or to obtain the right to use
complementary technologies. We have no specific understandings, commitments or
agreements relating to an acquisition or investment. Pending these uses, we plan
to invest the net proceeds of this offering in short-term, interest-bearing,
investment-grade securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation and expansion of our business. Payment of future cash dividends,
if any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. We have a working
capital line of credit with a bank which prohibits the declaration or payment of
cash dividends without the consent of the lender.
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<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization as of October 2, 1999.
The as adjusted information gives effect to the conversion of all of our
outstanding convertible preferred stock into common stock upon the closing of
this offering and assumes the filing of our restated certificate of
incorporation after the closing of this offering authorizing 5,000,000 shares of
preferred stock and 60,000,000 shares of common stock. The as adjusted
information also gives effect to the issuance and sale of the 3,000,000 shares
of common stock in this offering at an assumed initial public offering price of
$12.00 per share, after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us.
<TABLE>
<CAPTION>
OCTOBER 2, 1999
-----------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,967 $ 1,967
Stockholders' equity:
Preferred stock, $.01 par value; no shares authorized,
issued or outstanding (actual); 5,000,000 shares
authorized, no shares issued or outstanding (as
adjusted).............................................. -- --
Convertible preferred stock, $.01 par value; 22,363,224
shares authorized (actual); 11,067,238 issued and
outstanding (actual); (liquidation
preference -- $58,962,591 (actual)); no shares
authorized, issued or outstanding (as adjusted);
(liquidation preference -- $0 (as adjusted))........... 67,560 --
Common stock, $.01 par value; 17,030,000 shares authorized
(actual); 1,791,134 shares issued and outstanding
(actual); 60,000,000 shares authorized (as adjusted);
15,858,372 shares issued and outstanding (as
adjusted).............................................. 18 159
Additional paid-in capital................................ 1,212 101,211
Warrants.................................................. 146 146
Notes receivable from employees and directors............. (305) (305)
Deferred compensation..................................... (316) (316)
Accumulated other comprehensive income.................... (1) (1)
Accumulated deficit....................................... (54,064) (54,064)
======== ========
Total stockholders' equity........................ 14,250 46,830
======== ========
Total capitalization......................... $ 16,217 $ 48,797
======== ========
</TABLE>
The outstanding share information excludes 2,166,138 shares of common stock
issuable upon exercise of outstanding options as of October 2, 1999 with a
weighted average exercise price of $3.07 and warrants to purchase 192,902 shares
of common stock with an exercise price of $12.50 per share.
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<PAGE> 21
DILUTION
Our pro forma net tangible book value as of October 2, 1999, after giving
effect to the conversion of all outstanding shares of convertible preferred
stock into common stock upon the closing of this offering, was approximately $14
million, or $1.11 per share of common stock. Pro forma net tangible book value
per share represents our total assets less total liabilities and intangibles,
divided by the 12,858,372 shares of common stock outstanding after giving effect
to the conversion of all outstanding shares of convertible preferred stock into
common stock. Net tangible book value dilution per share to new investors is the
difference between the amount per share paid by purchasers of common stock in
this offering and the pro forma net tangible book value per share immediately
following the offering. After giving effect to the issuance and sale of the
3,000,000 shares of common stock in this offering, at an assumed offering price
of $12 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of October 2, 1999 would have been $47 million, or $2.95
per share. This represents an immediate increase in pro forma net tangible book
value to existing stockholders of $1.84 per share. The initial public offering
price per share will significantly exceed the net tangible book value per share.
Accordingly, new investors who purchase common stock in this offering will
suffer an immediate dilution of their investment of $9.05 per share. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 12.00
Pro forma net tangible book value per share as of
October 2, 1999........................................... $ 1.11
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 1.84
Pro forma net tangible book value per share after this
offering.................................................. 2.95
Dilution per share to new investors......................... $ 9.05
========
</TABLE>
The following table summarizes, on a pro forma basis, giving effect to the
conversion of all outstanding shares of convertible preferred stock into common
stock upon the closing of this offering, as of October 2, 1999, the difference
between the number of shares of common stock purchased from Aspect, the total
consideration paid to Aspect and the average price per share paid by existing
stockholders and by new investors. In accordance with the following table, new
investors will contribute 34.4% of the total consideration for, and own 18.9% of
the outstanding shares of, the common stock of Aspect. The calculation below is
based on an assumed initial public offering price of $12 per share, before
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 12,858,372 81.1% $ 68,790,598 65.6% $ 5.35
New investors....................... 3,000,000 18.9 36,000,000 34.4 $ 12.00
---------- ----- ------------ ------
Total..................... 15,858,372 100.0% $104,790,598 100.0%
========== ============
</TABLE>
The table above assumes no exercise of stock options or warrants
outstanding at October 2, 1999. As of October 2, 1999, there were outstanding
options to purchase 2,166,138 shares of common stock with a weighted average
exercise price of $3.07 per share and warrants to purchase 192,902 shares of
common stock with an exercise price of $12.50 per share. To the extent all of
these outstanding options and warrants had been exercised as of October 2, 1999,
pro forma net tangible book value per share after this offering would be $56
million and total dilution per share to new investors would be $8.93.
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 3,450,000 shares, or 21.2% of
the total number of shares of common stock outstanding after this offering.
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<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and related
notes and other financial information included elsewhere in this prospectus. The
consolidated statements of operations data for the years ended December 31,
1996, 1997 and 1998 and the consolidated balance sheet data as of December 31,
1997 and 1998 are derived from our audited consolidated financial statements
included in this prospectus. The consolidated statements of operations data for
the years ended December 31, 1994 and 1995 and the consolidated balance sheet
data as of December 31, 1994, 1995 and 1996 are derived from our audited
consolidated financial statements not included in this prospectus. The
consolidated financial data as of October 2, 1999 and for the nine-months ended
October 3, 1998 and October 2, 1999 are derived from our unaudited consolidated
financial statements included in this prospectus and include all adjustments,
which are only normal, recurring adjustments, necessary for a fair statement of
the financial position and results of operations for the unaudited periods. The
historical results presented here are not necessarily indicative of future
results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------
---------------------------------------------------- OCTOBER 3, OCTOBER 2,
1994 1995 1996 1997 1998 1998 1999
--------- -------- ------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue............................. $ 852 $ 1,067 $ 1,389 $ 3,068 $ 11,238 $ 7,502 $18,838
Costs and expenses:
Costs of revenue.................. 525 704 1,096 3,602 5,880 4,125 6,562
Research and development.......... 2,311 2,870 2,338 2,603 4,042 3,049 3,567
Sales and marketing............... 1,291 1,285 1,561 4,813 10,354 7,279 11,860
General and administrative........ 1,216 1,815 1,871 2,358 4,254 3,073 3,551
--------- -------- ------- -------- -------- -------- -------
Total costs and expenses........ 5,343 6,674 6,866 13,376 24,530 17,526 25,540
Loss from operations................ (4,491) (5,607) (5,477) (10,308) (13,292) (10,024) (6,702)
Interest income, net................ 231 61 81 422 459 390 988
Other expense....................... -- -- -- -- (774) (825) --
--------- -------- ------- -------- -------- -------- -------
Net loss............................ $ (4,260) $ (5,546) $(5,396) $ (9,886) $(13,607) $(10,459) $(5,714)
========= ======== ======= ======== ======== ======== =======
Net loss per share:
Basic and diluted................. $ (822.34) $(281.65) $(57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
========= ======== ======= ======== ======== ======== =======
Pro forma basic and diluted....... $ (1.31) $ (0.45)
======== =======
Shares used in computing net loss
per share:
Basic and diluted................. 5 20 93 632 1,163 1,105 1,501
Pro forma basic and diluted....... 10,352 12,568
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- OCTOBER 2,
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................ $4,258 $3,329 $2,231 $4,981 $21,273 $14,632
Working capital............................. 4,273 3,054 1,852 3,695 19,343 12,193
Total assets................................ 5,719 4,552 3,973 7,603 28,589 27,990
Long-term debt.............................. 423 333 270 118 1,441 1,967
Total stockholders' equity.................. 4,460 3,028 1,066 4,067 19,688 14,250
</TABLE>
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of financial
condition and results of operations together with our financial statements and
related notes appearing elsewhere in this prospectus.
OVERVIEW
We develop, manufacture and market an anesthesia monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our disposable BIS
Sensors. The BIS system is based on our patented core technology, the Bispectral
Index, which we refer to as the BIS index. The BIS index is the only
FDA-cleared, commercially available, direct measure of the effects of
anesthetics on the brain. Our latest generation monitor, the A-2000 BIS Monitor,
was cleared for marketing by the FDA in February 1998. Our other monitor
products are the A-1000 Monitor, the A-1050 EEG Monitor with BIS and the BIS
Module Kit. After the introduction of the A-2000 BIS Monitor, we ceased active
marketing of the A-1050 Monitor domestically. In addition to the disposable BIS
Sensor, we offer the Zipprep EEG Electrode.
We follow a system of fiscal months as opposed to calendar months. Under
this system, the first eleven months of each fiscal year end on a Saturday and
the last month of the fiscal year always ends on December 31. All references to
the nine months ended October 3, 1998 relate to the period from January 1, 1998
to October 3, 1998, and all references to the nine months ended October 2, 1999
relate to the period from January 1, 1999 to October 2, 1999.
We offer customers the option either to purchase the BIS monitors outright
or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby
the customer contractually commits to purchase a minimum number of BIS Sensors
per BIS monitor per year. Under this agreement, customers purchase BIS Sensors
and the BIS monitor for the purchase price of the BIS Sensors plus an additional
charge per BIS Sensor to pay for the purchase price of the BIS monitor and
related financing costs over the term of the agreement. The customer is granted
an option to purchase the BIS monitor at the end of the term of the agreement,
which is typically three to five years. Revenue related to BIS monitors sold
pursuant to sales-type leases is recognized at the time of shipment of the BIS
monitors. Sales-type leases accounted for approximately 11%, 10% and 27% of
revenue in 1996, 1997 and 1998, respectively, and for approximately 29% and 19%
of revenue in the nine months ended October 3, 1998 and the nine months ended
October 2, 1999, respectively.
We derive our revenue primarily from sales of monitors, including related
accessories and BIS Module Kits, and sales of disposable sensors. In 1996, 1997
and 1998, revenue from the sale of monitors represented approximately 87%, 80%
and 67%, respectively, of our revenue, and revenue from the sale of disposable
sensors represented approximately 13%, 20% and 33%, respectively, of our
revenue. In the nine months ended October 3, 1998 and the nine months ended
October 2, 1999, revenue from the sale of monitors represented approximately 70%
and 54%, respectively, of our revenue, and revenue from the sale of disposable
sensors represented approximately 30% and 46%, respectively, of our revenue. We
expect that revenue from the sale of single-use disposable sensors will continue
to increase as a percentage of revenue as the installed base of monitors
continues to grow.
Revenue from domestic sales in 1996, 1997 and 1998 was approximately
$699,000, $1.9 million and $10.3 million, respectively, which represented
approximately 51%, 61% and 92%, respectively, of our revenue. Revenue from
international sales in 1996, 1997 and 1998 was approximately $689,000, $1.2
million and $942,000, respectively, which represented approximately 49%, 39% and
8%, respectively, of our revenue. In the nine months ended October 3, 1998 and
the nine months ended October 2, 1999, revenue from domestic sales was
approximately $6.7 million and $17.1 million, respectively, which represented
approximately 90% and 91%, respectively, of our revenue, and revenue from
international sales was approximately $757,000 and $1.7 million, respectively,
which represented approximately 10% and 9%, respectively, of our revenue.
22
<PAGE> 24
Effective July 1, 1998, our agreement with Spacelabs Medical, Inc. to
distribute our monitors internationally, except in Japan, was terminated
pursuant to the terms of the agreement. Sales to Spacelabs represented
substantially all of our revenue from international sales in 1996, 1997 and
1998. In the nine months ended October 2, 1999, sales to Spacelabs represented
approximately 3% of our international revenue. In December 1998 and March 1999,
we established subsidiaries in The Netherlands and the United Kingdom,
respectively, to facilitate our entry into the international market. The sales
and marketing efforts of these subsidiaries resulted in the majority of the
international sales for the nine months ended October 2, 1999. We are developing
our international sales and distribution program through a combination of
distributors and marketing partners, including companies with which we have
entered into original equipment manufacturer relationships. We expect to enhance
our international third-party distribution program through direct sales efforts
and to support our customers with clinical specialists. In January 1998, we
entered into a three-year distribution agreement with Nihon Kohden Corporation
to distribute BIS monitors in Japan. During 1998 and the nine months ended
October 2, 1999, sales to Nihon Kohden represented approximately 3% and 4% of
international revenue, respectively. As a result of our move into the
international market, we anticipate that international sales will increase in
absolute dollars.
RESULTS OF OPERATIONS
The following table presents, for the periods indicated, information
expressed as a percentage of revenue. This information has been derived from our
consolidated statements of operations included elsewhere in this prospectus. You
should not draw any conclusions about our future results from the results of
operations for any period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------- ----------------------------------
1996 1997 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
---- ---- ---- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue................................ 100% 100% 100% 100% 100%
Costs and expenses:
Costs of revenue..................... 79 117 52 55 35
Research and development............. 168 85 36 40 19
Sales and marketing.................. 112 157 92 97 63
General and administrative........... 135 77 38 41 19
---- ---- ---- ---- ---
Total costs and expenses.......... 494 436 218 233 136
Loss from operations................... (394) (336) (118) (133) (36)
Interest income, net................... 5 14 4 5 6
Other expense.......................... -- -- (7) (11) --
---- ---- ---- ---- ---
Net loss............................... (389)% (322)% (121)% (139)% (30)%
==== ==== ==== ==== ===
</TABLE>
NINE MONTHS ENDED OCTOBER 2, 1999 COMPARED TO NINE MONTHS ENDED OCTOBER 3,
1998
Revenue. Our revenue increased to approximately $18.8 million in the nine
months ended October 2, 1999 from approximately $7.5 million in the nine months
ended October 3, 1998, an increase of approximately 151%. Revenue from the sale
of monitors increased to approximately $10.2 million in the nine months ended
October 2, 1999 from approximately $5.3 million in the nine months ended October
3, 1998, an increase of approximately 92%. Revenue from the sale of disposable
sensors increased to approximately $8.6 million in the nine months ended October
2, 1999 from approximately $2.2 million in the nine months ended October 3,
1998, an increase of approximately 291%. The growth in revenue from the sale of
monitors was primarily attributable to an increase of approximately 103% in the
number of monitors sold, which resulted from the growth of our direct sales
force and the contribution of our international organization. In addition, sales
of the BIS Module Kit, which was introduced in the second half of 1998,
contributed to the increase in monitor revenue. The increase in revenue from the
sale of disposable sensors was primarily attributable to growth in the installed
base of monitors, which resulted in an increase of approximately 250% in the
number of
23
<PAGE> 25
disposable sensors sold. An increase of approximately 10% in the average selling
price of the disposable sensors also contributed to the increase in revenue.
Our gross profit was approximately 65% of revenue in the nine months ended
October 2, 1999 as compared to a gross profit of approximately 45% of revenue in
the nine months ended October 3, 1998. The increase in the gross profit
percentage in the nine months ended October 2, 1999 as compared to the nine
months ended October 3, 1998 was primarily attributable to an increase in sales
of disposable sensors as a percentage of revenue. Disposable sensors have a
higher profit margin than monitors and contributed approximately 64% of the
increase in gross profit. The increase in the gross profit percentage for this
period also resulted from improved manufacturing efficiencies. We expect that
sales of higher margin disposable sensors will continue to increase as a
percentage of revenue as the installed base of monitors continues to grow.
Research and Development. Research and development expenses increased to
approximately $3.6 million in the nine months ended October 2, 1999 from
approximately $3.0 million in the nine months ended October 3, 1998, an increase
of approximately 20%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in research and development personnel and related
payroll and other expenses, which represented approximately 99% of the increase.
These expenses were incurred in connection with the continued product
development efforts related to the A-2000 BIS Monitor, BIS Sensor and BIS Module
Kit and the development of products for use outside the operating room in the
intensive care unit and for procedural sedation. We expect research and
development expenses to increase in absolute dollars as we continue to invest in
product improvements, product extensions and technology development.
Sales and Marketing. Sales and marketing expenses increased to
approximately $11.9 million in the nine months ended October 2, 1999 from
approximately $7.3 million in the nine months ended October 3, 1998, an increase
of approximately 63%. Sales and marketing expenses decreased as a percentage of
revenue. The increase in absolute dollars in 1999 was primarily attributable to
an increase in sales and marketing personnel and related payroll and other
expenses, which represented approximately 88% of the increase, and an increase
in professional education programs, customer support and clinical education
initiatives, development of sales materials and participation at trade shows. We
expect sales and marketing expenses to increase in absolute dollars as we
continue to expand our international operations, increase our direct sales force
and clinical specialists in the United States and engage in activities to
further educate and promote the use of the BIS system by our customers.
General and Administrative. General and administrative expenses increased
to approximately $3.6 million in the nine months ended October 2, 1999 from
approximately $3.1 million in the nine months ended October 3, 1998, an increase
of approximately 16%. General and administrative expenses decreased as a
percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in general and administrative personnel to support
our growth and related payroll and other expenses. We expect general and
administrative expenses to increase in absolute dollars as we increase the
number of personnel and related resources required to support our growth.
Interest Income, Net. Interest income, net, increased to approximately
$988,000 in the nine months ended October 2, 1999 from approximately $390,000 in
the nine months ended October 3, 1998, an increase of approximately 153%.
Interest income increased to approximately $1.1 million in the nine months ended
October 2, 1999 from approximately $433,000 in the nine months ended October 3,
1998, an increase of approximately 154%. The increase in interest income was
primarily attributable to a higher average outstanding balance of cash and
investments resulting from the sale of our convertible preferred stock in
February 1998 and December 1998, which resulted in approximately 27% of the
increase, and an increase in our investment in sales-type leases, which resulted
in approximately 73% of the increase. Interest expense increased to
approximately $145,000 in the nine months ended October 2, 1999 from
approximately $43,000 in the nine months ended October 3, 1998, an increase of
approximately 237%, as a result of higher average outstanding debt obligations
under an equipment loan in the second half of 1998. We expect interest income to
increase in absolute dollars because of higher cash and investments balances
resulting from our initial public offering.
24
<PAGE> 26
Other Expense. Other expense in the nine months ended October 3, 1998
primarily related to the costs incurred in our proposed initial public offering,
which was terminated in August 1998.
Net Loss. Our net loss decreased to approximately $5.7 million in the nine
months ended October 2, 1999 from approximately $10.5 million in the nine months
ended October 3, 1998, a decrease of approximately 46%, as a result of the
factors discussed above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenue. Our revenue increased to approximately $11.2 million in 1998 from
approximately $3.1 million in 1997, an increase of approximately 261%. Revenue
from the sale of monitors increased to approximately $7.5 million in 1998 from
approximately $2.5 million in 1997, an increase of approximately 200%. Revenue
from the sale of disposable sensors increased to approximately $3.7 million in
1998 from approximately $606,000 in 1997, an increase of approximately 511%. The
increase in revenue from the sale of monitors was primarily attributable to an
increase of approximately 195% in the number of monitors sold, primarily
resulting from the commercial introduction of the A-2000 BIS Monitor. The
introduction of the BIS Module Kit in 1998 and the growth of the direct sales
force in 1998 also contributed to the growth in monitor revenue. The increase in
revenue from the sale of disposable sensors was primarily attributable to the
growth in the installed base of monitors, which resulted in an increase of
approximately 309% in the number of disposable sensors sold. An increase of
approximately 49% in the average selling price of the disposable sensors also
contributed to the increase in revenue.
In 1998, gross profit was approximately 48% of revenue as compared to a
gross loss (revenue less costs of revenue) of approximately 17% of revenue in
1997. The increase in gross profit in 1998 as compared to the gross loss in 1997
was primarily attributable to the introduction of the A-2000 BIS Monitor in 1998
which has a lower per unit cost compared to the A-1050 Monitor, and an increase
in sales of disposable sensors as a percentage of revenue. Disposable sensors
have a higher profit margin than monitors. The increase in gross profit in 1998
also resulted from a higher provision for excess and obsolete inventory in 1997
due to the transition from the A-1050 Monitor to the A-2000 BIS Monitor and
improved manufacturing efficiencies in 1998.
Research and Development. Research and development expenses increased to
approximately $4.0 million in 1998 from approximately $2.6 million in 1997, an
increase of approximately 54%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1998 was primarily
attributable to an increase in research and development personnel and related
payroll and other expenses, which represented approximately 30% of the increase,
an increase in consultants expense, which represented approximately 28% of the
increase, and an increase in expenses related to clinical studies, which
represented approximately 15% of the increase. These expenses were incurred in
connection with the continued product development efforts related to the A-2000
BIS Monitor and the BIS Module Kit, development of products for use outside of
the operating room, in the intensive care unit and for procedural sedation.
Sales and Marketing. Sales and marketing expenses increased to
approximately $10.4 million in 1998 from approximately $4.8 million in 1997, an
increase of approximately 117%. Sales and marketing expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1998 was primarily
attributable to an increase in sales and marketing personnel and related payroll
and other expenses, which represented approximately 68% of the increase, and an
increase in professional education and trade show activities, which together
represented approximately 10% of the increase.
General and Administrative. General and administrative expenses increased
to approximately $4.3 million in 1998 from approximately $2.4 million in 1997,
an increase of approximately 79%. General and administrative expenses decreased
as a percentage of revenue. The increase in absolute dollars in 1998 was
primarily attributable to an increase in general and administrative personnel
and related payroll and other expenses to support our growth, which represented
approximately 37% of the increase, an increase in leased space, which
represented approximately 17% of the increase, and an increase in professional
services, which represented approximately 21% of the increase.
Interest Income, Net. Interest income, net, increased to approximately
$459,000 in 1998 from approximately $422,000 in 1997, an increase of
approximately 9%. Interest income increased to approximately $553,000 in 1998
from approximately $500,000 in 1997, an increase of approximately 11%, due to an
increase
25
<PAGE> 27
in the average outstanding balance of cash and investments resulting from the
sale of our convertible preferred stock in February 1998 and December 1998.
Interest expense increased to approximately $94,000 in 1998 from approximately
$78,000 in 1997, an increase of approximately 21%, as a result of higher average
outstanding debt obligations in 1998 related to borrowings under an equipment
loan in the second half of 1998.
Other Expense. Other expense in 1998 primarily related to the costs
incurred in our proposed initial public offering, which was terminated in August
1998.
Net Loss. Our net loss increased to approximately $13.6 million in 1998
from approximately $9.9 million in 1997, an increase of approximately 37%, as a
result of the factors discussed above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Our revenue increased to approximately $3.1 million in 1997 from
approximately $1.4 million in 1996, an increase of approximately 121%. Revenue
from the sale of monitors increased to approximately $2.5 million in 1997 from
approximately $1.2 million in 1996, an increase of approximately 108%. Revenue
from the sale of disposable sensors increased to approximately $606,000 in 1997
from approximately $181,000 in 1996, an increase of approximately 235%. The
increase in revenue in 1997 from the sale of monitors was primarily attributable
to an increase of approximately 152% in the number of monitors sold, primarily
resulting from the commercial introduction of the A-1050 Monitor in 1996 and the
increase in the growth of our direct sales force in 1997. The increase in
revenue from the sale of disposable sensors was primarily attributable to the
commercial introduction of the BIS Sensor in 1997 and growth in the installed
base of monitors, both of which resulted in an increase of approximately 158% in
the number of disposable sensors sold. Additionally, an increase of
approximately 26% in the average selling price of the disposable sensors also
contributed to the increase in revenue. In 1996, the Zipprep EEG Electrode was
our only disposable sensor.
In 1997, we had a gross loss of approximately 17% of revenue as compared to
a gross profit of approximately 21% of revenue in 1996. The gross loss in 1997
and the decrease in gross profit as compared to 1996 resulted primarily from
under-absorbed overhead costs and provisions for excess and obsolete inventory
due to the transition from the A-1050 Monitor to the A-2000 BIS Monitor.
Research and Development. Research and development expenses increased to
approximately $2.6 million in 1997 from approximately $2.3 million in 1996, an
increase of approximately 13%. Research and development expenses decreased as a
percentage of revenue. The increase in absolute dollars in 1997 was primarily
attributable to the new product development efforts related to the A-2000 BIS
Monitor and the BIS Module Kit.
Sales and Marketing. Sales and marketing expenses increased to
approximately $4.8 million in 1997 from approximately $1.6 million in 1996, an
increase of approximately 200%. This increase was primarily attributable to an
increase in sales and marketing personnel, including the establishment of the
clinical specialist group, and the related costs of compensation, benefits and
travel expenses.
General and Administrative. General and administrative expenses increased
to approximately $2.4 million in 1997 from approximately $1.9 million in 1996,
an increase of approximately 26%. General and administrative expenses decreased
as a percentage of revenue. The increase in absolute dollars was primarily
attributable to an increase in general and administrative personnel to support
our growth.
Interest Income, Net. Interest income, net, increased to approximately
$422,000 in 1997 from $81,000 in 1996, an increase of approximately 421%.
Interest income increased to approximately $500,000 in 1997 from approximately
$144,000 in 1996, an increase of approximately 247%, due to an increase in the
average outstanding balance of cash and investments resulting from the sale of
our convertible preferred stock in February 1997. Interest expense increased to
approximately $78,000 in 1997 from approximately $63,000 in 1996, an increase of
approximately 24%, as a result of higher average outstanding capital lease
obligations in 1997.
Net Loss. Our net loss increased to approximately $9.9 million in 1997
from approximately $5.4 million in 1996, an increase of approximately 83%, as a
result of the factors discussed above.
26
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited selected operating results for
each of the six fiscal quarters in the period ended October 2, 1999. We believe
that the following selected quarterly information includes all adjustments
(consisting only of normal, recurring adjustments) that we consider necessary to
present this information fairly. This financial information should be read in
conjunction with the financial statements and related notes appearing elsewhere
in this prospectus. Our results of operations have fluctuated in the past and
are likely to continue to fluctuate significantly from quarter to quarter in the
future. Therefore, results of operations for any previous periods are not
necessarily indicative of results of operations to be recorded in the future.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------
JULY 4, OCTOBER 3, DECEMBER 31, APRIL 3, JULY 3, OCTOBER 2,
1998 1998 1998 1999 1999 1999
------- ---------- ------------ -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................................. $ 2,687 $ 3,082 $ 3,736 $ 5,327 $ 6,385 $ 7,126
Gross margin............................ 1,236 1,620 1,980 3,274 4,202 4,800
Operating expenses...................... 5,109 4,830 5,248 5,674 6,531 6,773
Net loss................................ (3,700) (3,942) (3,148) (2,120) (1,964) (1,630)
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily from the
sale of our convertible preferred stock. Through October 2, 1999, we raised
approximately $67.6 million from equity financings and have received
approximately $3.4 million in equipment financing and approximately $1.4 million
of financing related to our investments in sales-type leases. We have a working
capital line of credit of which approximately $2.1 million was drawn against at
October 2, 1999. At October 2, 1999, we had approximately $1.3 million primarily
committed to the purchase of equipment related to the expansion of our automated
BIS Sensor production line.
Working capital at October 2, 1999 was approximately $12.2 million compared
to approximately $19.3 million and approximately $3.7 million at December 31,
1998 and 1997, respectively. The decrease in working capital from December 31,
1998 to October 2, 1999 was primarily attributable to continued operating losses
of approximately $5.7 million and an increase in accounts payable and accrued
liabilities of approximately $2.2 million, offset by increases in net accounts
receivable of approximately $2.2 million, investment in sales-type leases of
approximately $1.9 million and inventory of approximately $1.0 million. The
increase in working capital from 1997 to 1998 was primarily attributable to the
sale of our convertible preferred stock in February 1998 and December 1998, and
an increase in net accounts receivable and investment in sales-type leases,
offset by a decrease in inventory and increases in accrued liabilities and
current portion of long-term debt.
We used approximately $7.7 million of cash for operations in the nine
months ended October 2, 1999. Cash used for operations during this period was
primarily driven by operating losses, increases in net accounts receivable,
investment in sales-type leases and inventory, offset by increases in accounts
payable and accrued liabilities. We used approximately $25.7 million for
operations during the three years ended December 31, 1998. Cash used for
operations during this period was also primarily driven by operating losses,
increases in net accounts receivable, investment in sales-type leases and other
current assets, offset by increases in accounts payable, accrued liabilities and
deferred revenue.
We received approximately $1.1 million of cash from investing activities in
the nine months ended October 2, 1999. We sold approximately $2.9 million, net,
of marketable securities and invested approximately $1.8 million primarily in
manufacturing equipment and information systems. We used approximately $6.6
million for investing activities during the three years ended December 31, 1998.
We invested approximately $3.2 million, net, in marketable securities and
approximately $3.4 million in manufacturing equipment, leasehold improvements
and new information systems.
We received approximately $2.9 million of cash from financing activities in
the nine months ended October 2, 1999 primarily as a result of approximately
$2.1 million of borrowings under our working capital line of credit at October
2, 1999 and the sale of approximately $1.4 million of our investments in
sales-type leases offset by approximately $600,000 of debt repayments.
Subsequent to October 2, 1999, the borrowings
27
<PAGE> 29
under our working capital line of credit were repaid. We received approximately
$47.1 million of cash from financing activities during the three years ended
December 31, 1998. Cash provided by financing activities during this period was
primarily the result of the sale of our convertible preferred stock in the three
year period ended December 31, 1998 and proceeds from our equipment loan.
In December 1999, we renegotiated our loan agreement with Imperial Bank.
Borrowings outstanding at December 31, 1999 of approximately $1.4 million under
the equipment portion of the new loan agreement are payable in monthly
installments of approximately $60,000 plus interest through December 31, 2001.
The working capital portion of the original June 1998 loan agreement was
replaced with a term loan portion. Borrowings under the term loan portion
outstanding at December 31, 1999 of approximately $2.8 million are payable in 36
monthly installments of approximately $79,000 plus interest commencing January
2000. The new loan agreement contains restrictive covenants that require us to
maintain liquidity and borrowing base ratios. The new loan agreement also
restricts us from declaring and paying cash dividends. The new loan agreement is
secured by substantially all of our assets. At December 31, 1999, no additional
amounts may be borrowed under the equipment portion or term loan portion of the
new loan agreement. Approximately $1.5 million is available under the standby
letter of credit portion of the new loan agreement.
In July 1999, we entered into an agreement under which we can finance some
of our existing and future investments in sales-type leases with Americorp
Financial, Inc. In August and September 1999, we financed approximately $1.4
million of investments in sales-type leases. Payments on the outstanding
principal under this financing match the timing of the payments due on the
underlying investments in sales-type leases.
We anticipate that capital expenditures for the remainder of 1999 will be
approximately $980,000. These funds will primarily be used for the purchase of
manufacturing equipment and for the preparation of and move to our new facility,
which we anticipate occupying in the first quarter of 2000.
We believe that the financial resources available to us, including our
current working capital, any future availability under the working capital
portion of our loan agreement, proceeds from selling our investments in
sales-type leases, together with the net proceeds of this offering, will be
sufficient to finance our planned operations and capital expenditures at least
through 2000. However, our future liquidity and capital requirements will depend
upon numerous factors, including the resources required to further develop our
marketing and sales organization domestically and internationally, to expand
manufacturing capacity, to finance our sales-type lease program and to meet
market demand for our products.
INCOME TAXES
We have net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $41,452,000 and
$1,292,000, respectively, at December 31, 1998 that will expire commencing in
the year 2002 through the year 2018 if not utilized.
The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on our
value immediately prior to the ownership change. Subsequent ownership changes
may further affect the limitation in future years.
YEAR 2000 COMPLIANCE
The year 2000 problem refers to the potential for system and processing
failures as a result of software using two digits rather than four to define the
applicable year. For example, computer programs may recognize a date represented
as "00" as the year 1900 rather than the year 2000. As a result, computer
software and/or hardware used by many companies and governmental agencies may
need to be upgraded to comply with year 2000 requirements or risk system failure
or miscalculations causing disruptions to normal business activities.
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<PAGE> 30
We have defined year 2000 compliant or year 2000 readiness as the ability
to:
- correctly handle date information needed for dates after December 31,
1999,
- function according to the product documentation provided for these date
changes, without changes in operation, assuming correct configuration,
- where appropriate, respond to two-digit date input in a way that resolves
the ambiguity as to century in a disclosed, defined and predetermined
manner,
- store and provide output of date information in ways that are unambiguous
as to century if the date elements in interfaces and data storage specify
the century, and
- recognize year 2000 as a leap year.
State of Readiness. We have assessed the year 2000 readiness of our
operating, financial and administrative systems, including the hardware and
software that support our systems. This review included assessing, validating,
testing and, where necessary, remediating, upgrading and replacing noncompliant
systems, hardware or software, as well as evaluating the need for contingency
planning.
For our currently marketed products, we have completed our year 2000
compliance testing efforts and believe that our current products are year 2000
compliant in all material respects. We have tested the older versions of our
products for year 2000 compliance and have determined that some older versions
of our products are not year 2000 compliant. We have made available to our
customers a description of the year 2000 readiness of these older versions of
our products. We have made available to our customers who are using older
versions of our products which are not year 2000 compliant the option to upgrade
the software to current versions. The upgrades are easy and quick to perform and
require no special skills or tools.
For all other material internal information technology systems, our year
2000 task force has conducted an inventory of and test procedures for all
software and related systems believed to be affected by year 2000 issues. Since
third parties developed and currently support many of the systems that we use, a
significant part of this effort was to ensure that these third-party systems are
year 2000 compliant. The internal evaluation has determined that all our
critical hardware and software are year 2000 compliant. We identified a small
number of desktop computers and workstations with operating systems that are not
year 2000 compliant. The hardware and operating systems on this equipment were
upgraded. Our current scientific software has been transferred and validated.
We assessed our non-information technology systems. Some aspects of our
facilities and manufacturing equipment include embedded technology, such as
microcontrollers. The year 2000 problem could cause a system failure or
miscalculation in such facilities or manufacturing equipment which could disrupt
our operations. Affected areas include security systems, voice mail and
telephone systems and computer-based production and test equipment. We
identified the potential problem areas and developed a remediation plan to
correct any issues. This plan included contacting vendors to obtain year 2000
compliance certification for the equipment provided by them as well as executing
date forwarding test protocols to validate the equipment. We completed
distribution of a survey of our material suppliers and sub-contract
manufacturers. All but one survey was returned. Two of the eighteen material
suppliers and sub-contract manufacturers who completed our survey have indicated
that they have year 2000 activities to complete. Overall, based upon their
responses to our survey, we believe our material suppliers and sub-contract
manufacturers are taking the necessary steps to ensure that their systems are
year 2000 compliant so that they will be able to continue providing us with
material and services without interruption or delay.
We did not contact or survey our customers to determine whether their
systems are year 2000 compliant. We do not use electronic data interchange
software with our customers and believe that our risk resulting from our
customer's year 2000 non-compliance is not significant.
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As of January 6, 2000, customers have not reported to us any year 2000
related problems or disruptions with any of our systems or products. In
addition, we are not aware of any year 2000 related problems with any of our
equipment, facilities, material suppliers or sub-contract manufacturers.
Costs. Our costs associated with assessment, remediation and testing
activities concerning the year 2000 problem have not been material. Costs
incurred for year 2000 compliance for our products were included in the
continuing costs of research and development. We do not expect that we will
incur material additional costs in connection with identifying, evaluating and
addressing year 2000 compliance issues. It is not possible for us to completely
estimate the costs we have incurred to date or expect to incur in coming months
as most of our expenses are related to, and are expected to continue to relate
to, the operating costs associated with time spent by employees and consultants
in the evaluation process and year 2000 compliance matters generally. We have
funded and will continue to fund all year 2000 compliance activities principally
through cash provided by our financing activities.
Worst Case Scenario. Our reasonably likely worst case year 2000 scenario
would be that a material third-party vendor or supplier, such as a limited or
sole source supplier, would, as a result of its own year 2000 difficulties, fail
to successfully remediate year 2000 problems in hardware, software or equipment
which is material to our business and operations. If this scenario occurred, we
may be required to seek out new vendors and suppliers, which may not be
available to us on a timely basis, if at all. Furthermore, we would be required
to certify certain new limited or sole source suppliers. If we are required to
seek out or certify new vendors or suppliers, it will be costly and divert
management's attention, which could have a material adverse effect on our
business and operating results.
Contingency Plan. We have no specific contingency plan to address the
effect of year 2000 compliance failures. If, in the future, it comes to our
attention that certain of our products need modifications or certain of our
third party hardware, software and equipment are not year 2000 compliant or
certain vendors are not year 2000 compliant, then we will seek to make the
necessary modifications or substitutions. In such cases, we expect these
modifications or substitutions to be made on a timely basis. However, we may not
be able to modify our products, services, systems and equipment or find
alternative vendors in a timely and successful manner to comply with year 2000
requirements, which could have a material adverse effect on our business,
financial condition and results of operations.
CONVERSION TO EURO
Eleven of the 15 members of the European Union have agreed to adopt the
Euro as their legal currency. Our current information systems allow us to
currently process Euro-denominated transactions. We are also assessing the
business implications of the conversion to the Euro, including long-term
competitive implications and the effect of market risk with respect to financial
instruments. Substantially all of our international sales are denominated in
United States dollars. We do not believe the Euro will have a significant effect
on our business, financial condition or results of operations. We will continue
to assess the impact of Euro conversion issues as the applicable accounting,
tax, legal and regulatory guidance evolves.
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in foreign
currency exchange rates and interest rates. Most of our revenue, expenses and
capital spending are transacted in U.S. dollars. However, the expenses and
capital spending of our international subsidiaries are transacted in local
currency. As a result, changes in foreign currency exchange rates or weak
economic conditions in foreign markets could affect our financial results. We do
not use derivative instruments to hedge our foreign exchange risk. Our exposure
to market risk for changes in interest rates relates primarily to our cash and
cash equivalent balances, marketable securities, investment in sales-type leases
and loan agreement. The majority of our investments are in short-term
instruments and subject to fluctuations in U.S. interest rates. Due to the
nature of our short-term investments, we believe that there is no material risk
exposure.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivatives and Hedging Activities," which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivatives and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to
be effective for all fiscal quarters beginning after June 15, 2000. The adoption
of SFAS 133, as amended, is not expected to have a material effect on our
financial condition and results of operations as we do not currently hold any
derivative instruments or engage in hedging activities.
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BUSINESS
OVERVIEW
We develop, manufacture and market an anesthesia-monitoring system that we
call the BIS system. The BIS system enables anesthesia providers to assess and
manage a patient's level of consciousness during surgery. Our proprietary BIS
system includes our BIS monitor or BIS Module Kit and our single-use, disposable
BIS Sensors. The BIS system is based on our patented core technology, the
Bispectral Index, which we refer to as the BIS index. The BIS index is the only
FDA-cleared, commercially available, direct measure of the effects of
anesthetics on the brain. We developed the BIS system over 10 years, and it is
the subject of 10 issued and six pending United States patents. As of December
31, 1999, more than 5,650 BIS monitors have been installed worldwide, including
4,881 BIS monitors in approximately 675 sites in the United States. These sites
include 35 of the 100 largest hospitals and 32% of all teaching hospitals with
anesthesia residency programs. We believe that over 1,000,000 patients have been
monitored using the BIS index during surgery. Our latest generation monitor, the
A-2000 BIS Monitor, was cleared for marketing by the FDA in February 1998. We
market the BIS system in the United States primarily through a direct sales
organization and internationally through distributors and marketing partners. We
have also established original equipment manufacturer relationships with several
patient monitoring and anesthesia equipment companies to incorporate our BIS
technology into their equipment using the BIS Module Kit.
Clinical trials and routine clinical use of the BIS system have shown that
patient monitoring with the BIS system results in:
- a reduction in the amount of anesthetics used,
- faster wake-up from anesthesia,
- less patient time in the operating room and the post-anesthesia care unit
following surgery,
- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,
- improvements in the quality of recovery, and
- improvements in the means to assess the risk of surgical awareness, which
is the unintentional regaining of consciousness during surgery.
MARKET OPPORTUNITY
Each year, approximately 29 million patients in the United States and more
than 35 million patients in Europe and Japan receive anesthesia for surgical
procedures. We estimate that approximately 70% of these surgical patients in the
United States, or 20 million patients, receive general anesthesia or deep
sedation monitored by an anesthesia provider. In the United States, there are
more than 34,000 operating rooms in hospitals and 5,000 operating rooms in
outpatient surgical centers. We believe that the aggregate number of operating
rooms in Europe and Japan exceeds the number of operating rooms in the United
States. Operating rooms represent our initial market opportunity for the sale of
BIS monitors, and surgical procedures utilizing general anesthesia or deep
sedation represent our initial market opportunity for annual sales of BIS
Sensors.
When administering general anesthesia, providers use a combination of drugs
to accomplish three basic objectives:
- to render the patient unconscious,
- to prevent response to pain, and
- to ensure the patient will not move during surgery.
Anesthesia providers historically have had no direct means of assessing a
patient's level of consciousness during surgery. They have generally relied on
recommended drug dosages and on indirect indicators of consciousness, including
blood pressure and heart rate. This approach cannot always account for
variability in
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patient responses to anesthesia or changes in anesthetic requirements during the
course of surgery. Furthermore, indirect measures such as blood pressure and
heart rate are not reliable indicators of a patient's level of consciousness.
Consequently, historical approaches to anesthesia may result in patients being
undermedicated or overmedicated during surgery.
Undermedication may lead to surgical awareness, which is the unintentional
regaining of consciousness during surgery. Surgical awareness may be undetected
during surgery because anesthetized patients who have received muscle relaxants
may be unable to communicate that they are conscious. Published reports estimate
that surgical awareness occurs in approximately 0.2% of procedures requiring
general anesthesia per year. In the United States 0.2% is equal to approximately
35,000 cases of surgical awareness per year.
Overmedication may result from an effort to ensure that the patient is
rendered unconscious to reduce the risk of surgical awareness. Overmedication
contributes to the high cost of surgical care as a result of increased drug
costs, prolonged and unpredictable wake-ups from anesthesia and prolonged
post-anesthesia recovery in the post-anesthesia care unit. These factors, in
turn, lead to inefficiencies in operating room and post-anesthesia care unit
scheduling and increased personnel costs.
Additional market opportunities outside the operating room for patient
monitoring with the BIS system include sedation in intensive care units and for
diagnostic and therapeutic procedures. Sedation of patients is achieved through
the use of anesthetic or sedative drugs to affect the level of consciousness.
During sedation, the desired level of consciousness may range from a relaxed but
awake state to a deep state approaching a general anesthetic level.
In the United States, there are more than 83,000 beds in intensive care
units and over 23 million patient days per year are spent in the intensive care
unit. In Western Europe and Japan, we believe that there are approximately
91,000 intensive care unit beds, and over 22 million patient days per year are
spent in the intensive care unit. We believe that approximately one-third of
patients in the intensive care unit could benefit from consciousness monitoring.
Currently, the assessment of a patient's level of sedation in the intensive care
unit is subjective and is conducted only on an intermittent basis during the
patient's stay. This assessment relies on indirect measures and is usually
carried out by several different medical personnel, many of whom are not trained
in anesthesia. As a result, we believe that both overmedication and
undermedication occur in patients in the intensive care unit, both of which may
extend the patient's length of stay. Extending the patient's length of stay in
the intensive care unit may contribute to additional medical complications and
increased costs of care. In addition, undermedication of patients can lead to
patient discomfort and agitation, which may contribute to dangerous
complications for the patient.
Each year, approximately 200 million patients undergo diagnostic and
therapeutic procedures outside the operating room and intensive care unit. We
estimate that sedation is used in approximately 15% of these procedures. We
refer to diagnostic and therapeutic procedures done under sedation as procedural
sedation. We estimate that in the United States there are more than 46,000 rooms
in hospitals, outpatient surgical centers, doctors' offices and dentists'
offices where these procedures are performed. Overmedication during procedural
sedation may cause a patient to lose consciousness and fall into a state of
general anesthesia resulting in the loss of protective reflexes, including the
ability to breath without mechanical assistance. Undermedication during
procedural sedation may cause a patient to experience significant unnecessary
discomfort.
We believe that an effective tool for monitoring a patient's level of
consciousness will address the problems of overmedication and undermedication in
anesthesia and sedation monitoring and will contribute to improving the quality,
safety and cost effectiveness of anesthesia and sedation.
THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS SYSTEM
We have developed the BIS monitoring system that is based on our
proprietary BIS index, the only FDA-cleared, commercially available, direct
measure of the effects of anesthetics on the brain. Our BIS system is comprised
of our BIS monitor or BIS Module Kit and our single-use, disposable BIS Sensors.
The BIS Sensor is applied to a patient's forehead to acquire the EEG, a measure
of the electrical activity of the brain. The EEG is then analyzed by the BIS
monitor or BIS Module Kit to produce the BIS index. The BIS index is a numerical
index that correlates with levels of consciousness and is displayed as a number
ranging between 100, indicating that the patient is awake, and zero, indicating
an absence of brain activity. In October 1996, the
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FDA cleared the BIS index for marketing for use as a direct measure of
anesthetic effect on the brain, and in February 1998, the FDA cleared for
marketing our A-2000 BIS Monitor.
Our clinically validated BIS index assists anesthesia providers in
assessing levels of consciousness during surgery and minimizing the risk of
unintentional overmedication or undermedication. Clinical trials and routine
clinical use of the BIS system have shown that patient monitoring with the BIS
system results in:
- a reduction in the amount of anesthetics used,
- faster wake-up from anesthesia,
- less patient time in the operating room and the post-anesthesia care unit
following surgery,
- higher rates of outpatients bypassing the post-anesthesia care unit and
proceeding to a less costly step-down recovery area directly from the
operating room,
- improvements in the quality of recovery, and
- improvements in the means to assess the risk of surgical awareness.
Aspect and others have conducted numerous studies to evaluate the clinical
utility of the BIS system. For example, we conducted a 302-patient multicenter,
prospective, randomized, controlled clinical utility trial that demonstrated the
following benefits from using the BIS system:
- Cost-Effective Dosing of Anesthetic Drugs. Patients monitored with the
BIS system during surgery received 23% less anesthetic than patients who
were not monitored with the BIS system. Accordingly, based upon the
average cost of the anesthetic drugs used in this utility trial, the use
of the BIS system could result in drug cost savings of up to $18 per
surgical procedure.
- Faster and More Predictable Recovery From Anesthesia. Patients monitored
with the BIS system during surgery emerged from unconsciousness 35% to
40% faster than patients who were not monitored with the BIS system. Only
5% of patients monitored with the BIS system required more than 15
minutes to emerge from anesthesia compared with 16% of patients who were
not monitored with the BIS system. Moreover, patients who were monitored
with the BIS system were eligible for discharge from the post-anesthesia
care unit 16% faster than patients who were not monitored with the BIS
system.
- Improved Quality of Recovery. Patients received better clinical
assessments of their recovery in post-anesthesia care units when the BIS
system was used. In addition, 43% of patients monitored with the BIS
system were alert and oriented when admitted to the post-anesthesia care
unit, as compared to 23% of patients not monitored with the BIS system
during surgery.
STRATEGY
Our objective is to establish the BIS system as a global standard in
anesthesia and sedation monitoring. Key elements of our strategy to accomplish
our objective include the following:
- Accelerate Market Penetration Through a Direct Sales Force. We will
continue to capitalize on our first-to-market position by utilizing a
direct sales force in the United States to further penetrate the market.
We believe that a direct sales force is best able to convey to anesthesia
providers and administrators the clinical benefits and potential cost
savings achievable when patients are monitored with the BIS system. We
also intend to continue to complement our direct sales force with medical
products distributors in selected markets, the sales organizations of our
original equipment manufacturers and contracts with hospital group
purchasing organizations. In the United States, we had installed 1,926
monitors in approximately 270 sites as of December 31, 1998 and we had
installed 4,881 monitors in approximately 675 sites as of December 31,
1999.
- Educate and Promote the Use of the BIS System Through Clinical
Specialists. We intend to establish and maintain a ratio of
approximately 1.5 clinical specialists for each of our direct sales
representatives. The principal responsibilities of these clinical
specialists are to provide education, training and support
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for the installed base and to promote use of BIS systems. As of December
31, 1999, we estimate that more than 1,000,000 patients have been
monitored using the BIS system. As a result of the growth in the
installed base and the efforts of our clinical specialists, revenue from
the sales of BIS Sensors increased from 30% of revenue for the nine
months ended October 3, 1998 to 46% of revenue for the nine months ended
October 2, 1999. We expect that clinical specialists will also play a key
role in expanding patient monitoring with the BIS system outside the
operating room, including in the intensive care unit and procedural
sedation markets.
- Broaden Distribution Channels Through Original Equipment Manufacturer
Relationships. We have entered into original equipment manufacturer
agreements with Agilent Technologies, Inc., formerly part of
Hewlett-Packard Company, Drager Medizintechnik GmbH, GE Marquette Medical
Systems, Inc., Nihon Kohden Corporation and Spacelabs Medical, Inc. Under
these agreements, our original equipment manufacturers integrate the BIS
Module Kit into their patient-monitoring or anesthesia delivery systems.
These systems will require the use of our BIS Sensor to generate the BIS
index. We believe that original equipment manufacturer relationships will
accelerate market penetration of the BIS technology and provide us with
access to a large installed base of patient monitoring and anesthesia
equipment. We expect to enter into additional original equipment
manufacturer relationships over the next several years to expand the
channels for distribution of the BIS system, particularly in
international markets.
- Maintain Market Leadership Through Continuous Product Improvements and
Extensions. We intend to adapt the BIS technology for use in the
intensive care unit and for procedural sedation. We also plan to utilize
our core expertise in EEG signal processing and sensor technology to
continuously improve the performance of the BIS index in the presence of
noise and motion artifacts. We are developing a BIS Sensor that will
contain an electronic memory device and a smaller BIS Sensor that can be
used with children between the ages of two and eight years. We believe
that these improvements and extensions of the BIS technology will
strengthen our competitive position while providing our customers with
improved products.
- Target New Market Opportunities Through Technology Development. We
intend to continue to focus on new applications for our core technology,
including other neuromonitoring applications, such as the diagnosis of
Alzheimer's disease, and other uses, such as analysis of
electrocardiograms. Continued innovation and commercialization of new
proprietary products are essential elements in our long-term growth
strategy. We intend to protect our technology leadership position and
maintain our competitive advantage through product innovation,
acquisitions of new technologies, by defending our current patents and
other proprietary rights, and by seeking to obtain additional patents and
other proprietary rights.
PRODUCTS
The following chart summarizes our proprietary product offerings, all of
which have received clearance from the FDA:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
INITIAL
COMMERCIAL
PRODUCT SHIPMENT DESCRIPTION
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A-2000 BIS Monitor 1998 Small, lightweight third-generation BIS monitor
BIS Sensor 1997 Disposable product for use with A-2000, A-1050
and BIS Module Kit
BIS Module Kit 1998 Components of BIS monitoring technology to be
integrated into monitors sold by original
equipment manufacturers
A-1050 EEG Monitor with BIS 1996 Second-generation monitor with BIS index and
simplified user interface
Zipprep EEG Electrode 1995 EEG electrode with our Zipprep technology
- -------------------------------------------------------------------------------------------------------
</TABLE>
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A-2000 BIS MONITOR
We began commercial distribution of the A-2000 BIS Monitor, our
third-generation monitor, in February 1998. The A-2000 is a compact,
lightweight, portable monitor designed to accommodate the space limitations and
positioning requirements of surgical settings. The A-2000 displays the BIS index
and supporting information and includes our proprietary digital signal
converter. This converter is a palm-sized module that serves as the interface
between the BIS monitor and the BIS Sensor. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The EEG signal is then processed and the BIS index is displayed
on the A-2000. The current list price for the A-2000 is $8,900.
BIS SENSOR
We commenced commercial distribution of the BIS Sensor in January 1997. The
BIS Sensor is a single-use, disposable product for use with the A-2000, the
A-1050 and the BIS Module Kit. Our BIS monitors and BIS Module Kits require the
use of the BIS Sensor to generate the BIS index. The BIS Sensor provides a
reliable and simple means of acquiring the EEG signal needed to generate the BIS
index. The one-piece design allows quick and accurate placement on the patient's
forehead. The BIS Sensor connects to the monitor by a single-point proprietary
connector. The current list price for the BIS Sensor is $15.
Our Zipprep self-prepping technology is a key feature of the BIS Sensor.
The technology minimizes patient set-up time and establishes effective
electrical contact with the patient which enables consistent, accurate readings
of the EEG signal. Prior to our development of the Zipprep technology, to obtain
an EEG signal the user prepared a patient's skin by rubbing an abrasive cream
over the forehead 10 to 20 times in order to remove the top layer of skin prior
to applying the electrode.
BIS MODULE KIT
In 1996, we introduced our BIS Module Kit, which is designed to facilitate
the integration of the BIS index into monitoring products marketed by our
original equipment manufacturers. The BIS Module Kit consists of two pieces, our
proprietary digital signal converter and a small circuit board that resides in
the original equipment manufacturer's system. The digital signal converter
acquires the EEG signal from the BIS Sensor and converts the EEG signal to
digital format. The circuit board then processes the EEG signal and outputs the
BIS index to the original equipment manufacturer's system.
The common architecture of the BIS Module Kit facilitates integration of
the BIS index into the original equipment manufacturer's system and simplifies
any future software updates of the BIS index technology. Each original equipment
manufacturer is required to obtain FDA and other appropriate regulatory
clearance of its BIS module product.
TECHNOLOGY
We developed the BIS system, including our proprietary BIS index, over 10
years. The BIS index is a numerical index that correlates with levels of
consciousness and is derived from an analysis of the EEG signal. In general, an
EEG signal changes from a small-amplitude, high-frequency signal while a person
is awake to a large-amplitude, low-frequency signal while a person is deeply
anesthetized. Historically, researchers have used observations about these
changes in the EEG signal to create mathematical algorithms to track the effects
of anesthetics on the brain. However, these algorithms have not been widely
adopted because studies have indicated that they generally do not provide
sufficient clinically useful information to assess levels of consciousness with
commonly used anesthetics and doses.
In developing the BIS index, we sought to improve these early EEG analyses
in two ways. First, by using bispectral analysis, a mathematical tool that
examines signals such as the EEG, we can extract new information from the EEG
signal. Second, we developed proprietary processing algorithms that extract
information from bispectral analysis, power spectral analysis and time domain
analysis. Geophysicists originally used bispectral analysis in the early 1960s
to study ocean wave motion, atmospheric pressure
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changes and seismic activity. The advent of high-speed, low-cost digital signal
processors has enabled the use of bispectral analysis for other applications. By
using bispectral analysis, we are able to extract a distinctive fingerprint of
the underlying signal structure of the EEG and represent it as a
three-dimensional mathematical model.
We created the BIS index to describe changes in the EEG that relate to the
effects of anesthetics on the brain in order to assess levels of consciousness.
Over a number of years, Aspect and others collected a large database of high
fidelity EEG recordings and clinical assessments from patients and volunteers
receiving a wide variety of anesthetics. Researchers used clinical assessments
such as a sedation rating scale, picture or word recall memory tests and
response to stimuli to define levels of consciousness. Using statistical
methods, we identified features within the EEG that correlated with sedation and
loss of consciousness. We then used proprietary statistical methods to combine
these features to generate an interpretive numerical index, which we refer to as
the BIS index. The BIS index ranges from 100, indicating that the patient is
awake, to zero, indicating an absence of electrical brain activity.
CLINICAL DEVELOPMENT
Our clinical research and regulatory affairs group is responsible for:
- establishing collaborative relationships with leading clinical
researchers,
- encouraging publications related to the BIS index in the scientific
literature,
- coordinating with the FDA and other regulatory agencies,
- conducting clinical research with the goal of extending the application
of patient monitoring with the BIS system to other settings and clinical
uses, and
- collecting data for new product development.
We have a clinical database of over 5,000 cases for use in algorithm
development and product validation based on trials that we conducted or
sponsored or that third parties undertook.
In 1996, the FDA cleared the BIS index for marketing as a measure of
anesthetic effect on the brain. The regulatory process involved studies we
conducted on over 900 subjects. These studies characterized the relationships
between the BIS index value and various clinical endpoints, including movement,
response to incision, response to verbal command as a measure of consciousness
in volunteers and patients, memory function, drug utilization and speed of
patient recovery following surgery.
We conducted two clinical trials in which we evaluated the use of patient
monitoring with the BIS system as a measure of sedation, consciousness and
memory function. In a multicenter study involving approximately 100 volunteers,
we demonstrated that the BIS index correlated with the level of responsiveness
and memory function and tracked the loss of consciousness. In a second trial
involving 40 patients, the BIS index reliably correlated with the return to
consciousness after a single injection of either propofol or thiopental, two
anesthetics often used to induce unconsciousness. Several studies conducted by
third parties, some of which we partially funded, have generally confirmed these
results.
Our multicenter, prospective, randomized, controlled clinical utility trial
of 302 patients demonstrated the outcome benefits of patient monitoring with the
BIS system. This trial compared clinical outcomes of a group of patients
monitored with the BIS system to a similar group of patients who were monitored
under standard clinical practice without the BIS system. The principal efficacy
endpoints were the amounts of anesthetic given and the speed of recovery
following surgery. Patients monitored with the BIS system:
- received 23% less of the anesthetic drug propofol,
- woke up earlier after surgery in the operating room,
- were more likely, 43% versus 23%, to arrive at the post-anesthesia care
unit fully alert and oriented,
- were judged by post-anesthesia care unit nurses to have had better
recovery, and
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- met criteria for discharge from the post-anesthesia care unit sooner.
Following FDA clearance of the BIS index, there have been at least five
additional prospective, randomized, clinical studies of patient monitoring with
the BIS system. These studies, one of which we conducted and others of which we
partially funded, evaluated the effectiveness of patient monitoring with the BIS
system in conjunction with various commonly used anesthetics on nearly 300
patients. Each of the five studies indicated that patient monitoring with the
BIS system led to a statistically significant reduction, ranging from 15% to
38%, in the amount of anesthetic per patient.
One of the third-party studies, which we partially funded, evaluated
whether patients monitored with the BIS system were more likely to bypass the
post-anesthesia care unit and proceed directly to the step-down recovery unit
following surgery. In this 60-patient study, approximately 90% of patients
monitored with the BIS system were eligible to bypass the post-anesthesia care
unit as compared to 63% of patients who were not monitored with the BIS system.
In 1997, our clinical study of 1,552 patients documented the clinical
impact and cost-effectiveness of routine monitoring with the BIS system in all
operating rooms of a high-acuity teaching hospital located in Atlanta, Georgia.
Patients received a wide variety of anesthetics typically used in general
practice. We collected comprehensive data on all patients who received general
anesthesia for at least one hour. The results of this clinical study
demonstrated that maintaining BIS index values within a recommended target range
during general anesthesia was associated with improved outcomes in terms of drug
utilization, operating room and post-anesthesia care unit recovery and
associated costs.
In 1999, a teaching hospital located in Boston, Massachusetts conducted a
clinical study of over 5,000 patients that documented the clinical impact on
patient recovery of routine monitoring with the BIS system in its outpatient
surgery unit. This study compared both the length of stay in the post-anesthesia
care unit and the eligibility of patients to bypass the post-anesthesia care
unit and proceed directly to the step-down recovery area following surgery, both
before and after the installation of BIS monitors in the hospital's outpatient
surgery unit. Overall, the length of stay in the post-anesthesia care unit was
reduced by 16% after the installation of BIS monitors. In addition, 43% of
patients monitored with the BIS system were eligible to bypass the
post-anesthesia care unit and proceed directly to the step-down recovery area
following surgery compared to 24% of patients prior to monitoring with the BIS
system. By the end of the study, the hospital implemented a formal bypass
program which allowed 35% of general anesthesia patients monitored with the BIS
system to bypass the post-anesthesia care unit and to proceed directly to the
step-down recovery area following surgery. Prior to the implementation of
monitoring with the BIS system, the hospital did not permit patients who
received general anesthesia to bypass the post-anesthesia care unit. This
hospital is one of our customers. We sold or gave some of the products used in
this study to the hospital.
There are more than 385 scientific articles and abstracts reporting the
results of BIS index performance in studies conducted by us and third parties.
In addition, we collaborate with over 50 clinical research sites.
Several of the studies described above have also shown that patient
monitoring with the BIS system can assist anesthesia providers in assessing the
risk of surgical awareness. Estimates of the frequency of surgical awareness
indicate that awareness occurs in only two patients for every 1,000 surgical
procedures requiring general anesthesia. As of December 31, 1999, we believe
that more than 1,000,000 patients have been monitored with the BIS system during
surgery. Although we have not systematically solicited reports of surgical
awareness, only 35 cases of possible surgical awareness during BIS monitoring
had been reported to us as of December 31, 1999. These reports may not include
all cases of surgical awareness that might have occurred during patient
monitoring with the BIS system. In most of the 35 cases that were reported to
us, when BIS index values were recorded at the time of awareness, high BIS index
values were noted, indicating that the BIS index correctly identified the
increased risk of awareness in these patients. However, in a small number of
these reported cases, surgical awareness may not have been detected by
monitoring with the BIS system.
We have not conducted a prospective, randomized, controlled study to
evaluate whether or not monitoring with the BIS system reduces the incidence of
surgical awareness. A controlled study to evaluate
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the ability of monitoring with the BIS system to reduce the frequency of
surgical awareness would require a sample size of up to 50,000 patients, which
is not practicable. Because these studies have not been undertaken, we cannot
and do not claim that patient monitoring with the BIS system will reduce the
incidence of surgical awareness. Although our experience suggests that surgical
awareness is more likely to occur when BIS values are high, we do not believe
that our experience proves that patient monitoring with the BIS system will
reduce the frequency of awareness.
SALES, MARKETING AND CUSTOMERS
DOMESTIC
Our customers include anesthesia providers, hospitals, outpatient surgical
centers and individual practitioners in office-based practice. The key customers
that we have initially targeted include larger hospitals with a high ratio of
outpatient surgical procedures to total surgical procedures and outpatient
surgical centers, at or near capacity. Through December 31, 1999, BIS systems
have been installed in approximately 675 sites in the United States.
We market our BIS system in the United States primarily through a direct
sales force. As of December 31, 1999, our domestic sales force was comprised of
22 sales professionals and 32 clinical specialists. We have developed a
financial model which is used by sales representatives to assist administrators
in evaluating the economic impact of patient monitoring with the BIS system at
their hospital. We believe that our clinical specialists play a key role in the
ongoing process of developing support for the BIS technology both before and
after the sale of BIS systems. The principal responsibilities of clinical
specialists are clinical training and education at the time the equipment is
installed. Clinical specialists also make follow-up visits at each customer site
at regularly scheduled intervals. These visits allow clinical specialists to
monitor customer satisfaction and provide feedback to our marketing and research
and development staffs. We also believe that these visits may help to establish
patient monitoring with the BIS system as a standard in anesthesia monitoring
and to extend patient monitoring with the BIS system into other settings in the
hospital, such as the intensive care unit and procedural sedation rooms.
Clinical specialists generally have nursing backgrounds and have experience in
anesthesia, perioperative care or critical care. We currently expect to
establish and maintain a ratio of approximately 1.5 clinical specialists for
each of our sales representatives.
We have begun to complement our direct sales force with medical products
distributors in selected markets, including Canada and locations in the United
States not currently targeted by our direct sales force. We have also begun to
market our products through the sales organizations of our original equipment
manufacturers and contracts with hospital group purchasing organizations.
We have entered into an agreement, dated August 13, 1998, with Novation,
the supply cost management company for VHA Inc. and the University Hospital
Consortium, two national health care alliances. Under this agreement, the
approximately 1,900 member healthcare organizations of VHA and the University
Hospital Consortium will have the right to purchase BIS monitors and BIS Sensors
under the pricing terms contained in the agreement. The member healthcare
organizations of the VHA and the University Hospital Consortium represent 30% of
the teaching and community hospitals in the United States and perform 33% of the
surgical procedures in the United States. Novation's field force will work with
our sales force to facilitate the adoption of BIS technology by their member
healthcare organizations.
We offer customers the option either to purchase the BIS monitors outright
or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby
the customer contractually commits to purchase a minimum number of BIS Sensors
per BIS monitor per year. Under this agreement, customers purchase the BIS
Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an
additional charge per BIS Sensor to pay for the purchase price of the BIS
monitor and related financing costs over the term of the agreement. The customer
is granted an option to purchase the BIS monitor at the end of the term of the
agreement, which is typically three to five years. We believe that the
sales-type lease arrangement in some cases reduces the time required for
customers to adopt the BIS system because it provides them with an option to
utilize their operating budget to fund the purchase.
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<PAGE> 41
We conduct several activities for the different constituencies that may be
involved in the decision-making process. For clinical audiences, we exhibit at
tradeshows, sponsor speakers at professional meetings and develop articles for
publication in conjunction with industry experts. In addition, we work with
hospitals to publicize their adoption of patient monitoring with the BIS system
in an effort to assist them in communicating their commitment to improving the
quality and efficiency of patient care.
For the fiscal year ended December 31, 1998, sales to Spacelabs accounted
for approximately 13% of our total revenue. For the nine months ended October 2,
1999, no one customer accounted for 10% or more of our total revenue.
INTERNATIONAL
In late 1998, we established our international operations and opened our
international headquarters in Leiden, The Netherlands. We are developing our
international sales and distribution program through a combination of
distributors and marketing partners, including companies with which we have
entered into original equipment manufacturer relationships. We expect to
complement our international third-party distribution program through direct
sales to select customers and to support these customers with clinical
specialists. As of December 31, 1999, we employed 13 persons in our
international organization. Substantially all international sales are
denominated in United States dollars. See Note 16 of notes to our consolidated
financial statements for domestic and international financial information.
ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS
We have entered into agreements with four patient monitoring companies,
Agilent Technologies, Inc., formerly part of Hewlett-Packard Company, GE
Marquette Medical Systems, Inc., Nihon Kohden Corporation and Spacelabs Medical,
Inc. and one anesthesia equipment company, Drager Medizintechnik GmbH, that
provide for the integration of our BIS technology into their equipment.
Spacelabs introduced a BIS module for its patient monitoring systems in October
1998. We currently expect that BIS modules for our other four original equipment
manufacturers will be available within the next several years.
Under an OEM Development and Purchase Agreement, dated August 6, 1999,
between Aspect and Agilent Technologies, we have agreed with Agilent
Technologies to integrate our BIS technology with Agilent Technologies' patient
monitors. Unless terminated sooner if milestones are not achieved by October 31,
2001, this agreement expires on August 6, 2005. The term of the agreement
automatically renews for one-year periods unless either party provides written
notice of termination to the other party, at least 60 days prior to expiration
of the agreement.
Under an OEM Development and Purchase Agreement, dated December 22, 1999,
between Aspect and GE Marquette Medical Systems, Inc., we have agreed with GE
Marquette to integrate our BIS technology with GE Marquette's patient monitors.
Unless terminated sooner if milestones are not achieved by October 31, 2001, in
the case of GE Marquette, or December 31, 2000, in the case of Aspect, the
agreement expires three years following the introduction of a GE Marquette
patient monitor which integrates Aspect's BIS technology.
Under an International License Agreement, dated January 21, 1998, between
Aspect and Nihon Kohden, we have licensed our technology to Nihon Kohden on a
worldwide non-exclusive basis. Nihon Kohden has the right to incorporate our
technology into its patient monitoring systems. Unless terminated sooner, the
agreement expires four years following approval by the Japanese Ministry of
Health and Welfare of a Nihon Kohden patient monitor which integrates Aspect's
BIS technology.
Pursuant to the terms of a Distribution and License Agreement, dated April
1, 1996, between Aspect and Spacelabs Medical, Inc., we have granted to
Spacelabs a worldwide, non-exclusive license to the BIS index to develop,
manufacture, market and sell Spacelabs monitoring equipment that incorporates
the BIS index. Spacelabs also has the right to distribute BIS Sensors on a
non-exclusive basis throughout the world with the exception of the United
States. Unless earlier terminated, the license expires in April 2006.
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Under a Product Agreement with Drager Medizintechnik GmbH, dated May 5,
1999, we have agreed to integrate our technology with Drager's patient therapy
and monitoring technology. Unless terminated sooner, this agreement will expire
on December 31, 2005. This agreement automatically renews for successive one-
year periods thereafter unless either party provides written notice of
termination to the other party, at least twelve months prior to expiration of
the renewal period.
For the fiscal years ended December 31, 1996, 1997 and 1998, sales to
Spacelabs accounted for approximately 49%, 35% and 13%, respectively, of our
total revenue. For the nine months ended October 3, 1998 and the nine months
ended October 2, 1999, sales to Spacelabs accounted for approximately 14% and 3%
or our revenue, respectively.
RESEARCH AND DEVELOPMENT
Our research and development efforts focus primarily on continuing to
improve the function and features of the BIS system and enhancing our technical
leadership in signal-processing technology for use in patient care. We intend to
leverage the BIS technology for the development of new monitoring products and
proprietary disposable sensors for new applications and to take advantage of new
opportunities such as the intensive care unit and procedural sedation markets.
During the fiscal years ended December 31, 1996, 1997 and 1998, and the
nine months ended October 2, 1999, we spent approximately $2.3 million, $2.6
million, $4.0 million and $3.6 million, respectively, in our research and
development efforts, including clinical and regulatory expenses. We expect
research and development expenses to increase in the future as we seek to
enhance our existing products and develop additional products.
Our research and development department has four primary areas of
responsibility:
- algorithm research,
- product development,
- pre-production quality assurance, and
- clinical engineering.
Algorithm research involves developing signal-processing techniques to
analyze the EEG and other electrical signals generated by the body. Our product
development activities include developing and maintaining the hardware and
software, including signal-processing software employed in the BIS systems, and
coordinating with external resources, particularly with respect to mechanical
engineering and industrial design. Disposable-product research and development
combines expertise in materials science, disposable-products design, electrode
technology and design for manufacturing to develop our disposable products,
including the BIS Sensor products. Pre-production quality-assurance activities
include testing our products to ensure that they meet FDA guidelines, other
applicable regulatory and international quality standards and internal
verification and validation protocols. Our clinical engineering activities
include optimizing products for use in the clinical environment.
We are developing a BIS Sensor with improved signal processing for
detection and filtration of electrical interference. We also continue to explore
new signal-processing techniques to improve the quality of the BIS index. We are
developing a new version of the BIS Sensor that will contain an electronic
memory device. This memory device will allow information about the sensor, such
as lot code, expiration date and type of sensor, to be stored on the sensor and
to be retrieved by the BIS monitor when used. In addition, we are developing a
smaller BIS Sensor that can be used with children between the ages of two and
eight years. We are exploring the development of other BIS Sensors which offer
advantages in cases where patients may require extended monitoring with the BIS
system, such as in the intensive care unit.
We are also investigating other product areas that utilize our expertise in
anesthesia delivery and monitoring. Specifically, we are exploring the
application of the BIS index to provide additional information about other
effects of anesthetics on the patient. We are evaluating the application of the
BIS index to
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measure additional states of the brain, including dementia, which may apply to
detection of Alzheimer's disease, sleep cycles, seizure detection, and/or other
neurological states. We believe that bispectral analysis may provide a means for
extracting and quantifying subtle physiological information contained in the
electrocardiogram, or ECG, and thus has the potential to enhance the diagnostic
accuracy of many ECG applications, including the early diagnosis and assessment
of coronary artery disease, a more rapid assessment of heart attacks and
monitoring for advanced perioperative ischemia, which is inadequate blood flow
to the heart during surgery, for patients at risk for heart attacks.
Additional studies, some of which we sponsored, are being conducted to
assess the performance of the BIS index in the presence of certain anesthetics,
such as ketamine, and patient populations such as infants and young children,
not included in the clinical development of the BIS algorithms.
MANUFACTURING
We have a 7,000 square foot manufacturing facility located in our Natick,
Massachusetts headquarters. In this facility we assemble all of our BIS
monitors, and we produce substantially all of our BIS Sensors on a
semi-automated production line. Prior to 1998, we outsourced all BIS Sensor
manufacturing. We currently outsource to third parties the production of our
Zipprep EEG Electrodes. In the first quarter of 2000, we expect to move into
approximately 60,000 square feet of development, production and administrative
space.
Our production process for our BIS monitors consists of final assembly,
integration and testing of standard and custom components. Our production
process for our BIS Sensor consists of several manufacturing and assembly
processes using custom components. Qualified sub-contractors, who have met our
supplier certification process and are placed on an approved vendors list,
produce certain custom components.
We maintain a quality-assurance program covering our manufacturing
operations. Suppliers of purchased components are required to meet stated
specifications. We certify suppliers prior to use by conducting audits and
product inspections. We engage in ongoing evaluations of the performance of our
suppliers by evaluating the results of inspections and tests as well as the
timeliness of product deliveries. We employ numerous quality-assurance
procedures during our in-house manufacturing processes to ensure finished
products meet specification. Quality assurance procedures include operator
training, process validation, equipment calibration, inspection and testing. All
manufacturing procedures and processes are formally approved and updated using
established revision control procedures. Documentation of in-process and final
testing results is maintained in device history records for every unit. We
maintain an ongoing post-sale performance-monitoring program.
COMPETITION
The medical device industry is subject to intense competition. We believe
that competition will initially come from companies, including patient
monitoring companies, currently marketing conventional EEG monitors utilizing
standard signal-processing techniques such as spectral edge frequency analyses
and median frequency analyses. We also believe that competition will come from
companies that market EEG monitors utilizing novel signal-processing
technologies, including at least two companies that are currently conducting
clinical trials on products under development. Several potential competitive
products are currently being marketed outside the United States although we do
not believe that these products provide any significant advantages relative to
the BIS technology. Additionally, a number of academic researchers worldwide are
studying the potential use of other techniques to measure the effects of
anesthetics. These other products and techniques include the use of auditory
evoked potentials, heart rate variability, pupillary reflexes and skin blood
flow measurement techniques.
We believe that the principal competitive factors in the market for
anesthesia-monitoring products include:
- improved patient outcomes,
- cost effectiveness,
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- acceptance by leading anesthesia providers,
- ease of use for anesthesia providers,
- the publication of peer reviewed clinical studies,
- sales and marketing capability,
- timing and acceptance of product innovation,
- patent protection, and
- product quality.
PATENTS AND PROPRIETARY RIGHTS
Our policy is to prosecute and enforce our patents and proprietary
technology. We intend to continue to file United States and foreign patent
applications to protect technology, inventions and improvements that are
considered important to the development of our business. We also rely upon trade
secrets, know how, continuing technological innovation and licensing
opportunities to develop and maintain our competitive position. We have
established a substantial proprietary position with respect to our products and
our core signal processing technology, bispectral analysis, and its application
to biological signals. As of December 31, 1999, we held 10 United States patents
and had filed six additional United States patent applications. We also have
numerous corresponding patents and pending patent applications in certain major
industrial countries, including Canada, the major European market countries,
Australia and Japan. The following chart summarizes our United States patents
and patent applications:
<TABLE>
<C> <C> <S> <C> <C>
- --------------------------------------------------------------------------------------------------------
NUMBER NUMBER PATENT
OF ISSUED OF PATENT EXPIRATION
PATENTS APPLICATIONS TECHNOLOGY COVERED DATE
- --------------------------------------------------------------------------------------------------------
4 -- Application of Bispectral and higher order March 13, 2007
analysis and various statistical modeling April 30, 2008
technologies to EEG signals June 14, 2011
October 17, 2012
1 1 Methods of ensuring the reliability of the
computed values December 24, 2016
-- 1 Method of evaluating BIS information to facilitate
clinical decision making
2 -- Application of bispectral and higher order May 15, 2007
analysis to electrocardiogram signals June 4, 2008
1 -- Zipprep self-prepping disposable electrode April 26, 2011
technology
1 1 Technology relating to the interface between the
BIS Sensor and the BIS monitor October 20, 2015
-- 3 BIS Sensor technology
1 -- Signal acquisition technology for digital signal
------ ------ converter October 15, 2012
10 6
------ ------
------ ------
- --------------------------------------------------------------------------------------------------------
</TABLE>
We have also been granted a perpetual, royalty-free, non-exclusive license by
Siemens Medical Systems, Inc. to a United States patent covering signal
acquisition technology for digital signal converters.
GOVERNMENT REGULATION
The manufacture and sale of medical diagnostic devices intended for
commercial distribution and use are subject to extensive government regulation
in the United States and in other countries. Our existing products
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are regulated in the United States as medical devices by the FDA under the
Federal Food, Drug, and Cosmetic Act, or FDC Act. Pursuant to the FDC Act, the
FDA regulates the research, testing, manufacturing, safety, labeling, storage,
record keeping, advertising, distribution and production of medical devices.
Noncompliance with applicable regulations can result in refusal of the
government to grant clearance for devices, withdrawal of prior clearances or
approvals, total or partial suspension of production, fines, injunctions, civil
penalties, recall or seizure of products and criminal prosecution.
Generally, before we can introduce a new product in the United States, we
must obtain FDA clearance of a premarket notification under Section 510(k) of
the FDC Act, referred to as a 510(k) notification, or approval of a premarket
approval application under Section 515 of the FDC Act. To date, we have received
clearance of 510(k) notification from the FDA with respect to the following
products:
- Zipprep EEG Electrodes (June 1994),
- A-1050 EEG Monitor with BIS (January 1996),
- BIS Sensor (October 1996),
- BIS Clinical Utility Indication (October 1996), and
- A-2000 BIS Monitor (February 1998).
Once we have received clearance of a 510(k) notification, any products we
manufacture or distribute are subject to extensive and continuing regulation by
the FDA, including compliance with current Good Manufacturing Practices
regulations, recordkeeping requirements, reporting of adverse experience with
the use of the device, post-market surveillance, and other actions deemed
necessary by the FDA. A new 510(k) notification is also required when a medical
device manufacturer makes a change or modification to a legally marketed device
that could significantly affect the safety or effectiveness of the device, or
where there is a major change or modification in the intended use of the device.
When any change or modification is made to a device or its intended use, the
manufacturer must make the initial determination whether the change or
modification is of a kind that would necessitate the filing of a new 510(k)
notification. The FDA's regulations provide only limited guidance for making
this determination.
The FDC Act regulates our quality control and manufacturing procedures by
requiring us to demonstrate and maintain compliance with current Good
Manufacturing Practices regulations, including quality systems regulations, as
specified by the FDA. This regulation requires, among other things, that:
- we use written procedures to control our product development and
manufacturing process,
- we validate, by extensive and detailed testing of every aspect of the
process, our ability to produce devices which meet our manufacturing
specifications,
- we investigate any deficiencies in the manufacturing process or in the
products produced, and
- we maintain detailed record keeping.
The current Good Manufacturing Practices regulations are applicable to
manufacturers that produce components specifically for use in a medical device,
and require design controls and maintenance of service records.
The FDA monitors compliance with current Good Manufacturing Practices
regulations by conducting periodic inspections of manufacturing facilities. If
violations of applicable regulations are noted during FDA inspections of our
manufacturing facilities, the continued marketing of our products may be
adversely affected. In August 1996, the FDA conducted a routine inspection of
our manufacturing facility to ensure compliance with current Good Manufacturing
Practices regulations. The FDA noted no adverse observations during this
inspection. We believe that we have continued to maintain manufacturing
facilities and procedures that are fully compliant with all applicable
government quality systems regulations and guidelines.
In June 1998, we obtained ISO 9001/EN 46001 international quality systems
registration, a certification showing that our procedures and manufacturing
facilities comply with standards for quality assurance and manufacturing process
control. Our compliance with this registration has been confirmed since June
1998 in
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semi-annual surveillance audits. The ISO 9001 certification, along with the EN
46001, the European Medical Device Directive certification, signifies compliance
with the requirements enabling us to affix the CE Mark to our current products.
The CE Mark denotes conformity with European standards for safety and allows
certified devices to be placed on the market in all European Union countries.
After June 1998, medical devices may not be sold in European Union countries
unless they display the CE Mark.
We have established a dedicated regulatory and quality assurance group to
maintain regulatory compliance and manage all of our quality-assurance
activities. This group is responsible for the following activities:
- all regulatory submissions and communications,
- scheduling and performing company-wide audits,
- coordinating product update procedures and corrective actions,
- maintaining adherence to appropriate procedures and applicable
requirements related to the FDA's quality systems regulations, and
- coordinating appropriate documentation for FDA and ISO 9001/EN 46001
review and audits.
THIRD-PARTY REIMBURSEMENT
Third-party payors, including Medicare, Medicaid, private health insurance
carriers, managed care organizations, health care administration authorities in
foreign countries and other organizations, may affect the pricing or demand for
our products by regulating the maximum amount of reimbursement provided for by
these payors to the anesthesia providers, hospitals, outpatient surgical centers
or physicians' offices where surgical procedures are performed.
We expect that anesthesia providers will not be separately reimbursed for
patient-monitoring activities utilizing the BIS system. When providers, such as
hospitals or outpatient surgical centers, are reimbursed a fixed fee calculated
on a per case, per stay, or per capita basis, the cost of monitoring with the
BIS system will not be recovered by these providers unless the incremental costs
of this monitoring are offset by savings in other costs, such as the costs of
anesthetics or costs of the operating room or post-anesthesia care unit. This
type of reimbursement policy is typical for inpatient hospital procedures and
procedures performed in outpatient surgical centers and we expect it will become
typical for all outpatient surgeries beginning in the year 2000. Patient
monitoring with the BIS system may not result in sufficient savings to offset
these costs. When reimbursement is based on charges or costs, patient monitoring
with the BIS system may have the effect of reducing reimbursement because the
charges or costs for surgical procedures, including operating room and
post-anesthesia care unit charges and costs, may decline as a result of
monitoring with the BIS system.
EMPLOYEES
As of December 31, 1999, we had 184 full-time employees, of which:
- 21 persons were engaged in research and development activities,
- 37 persons were engaged in manufacturing and engineering,
- 11 persons were engaged in clinical and regulatory affairs,
- 90 persons were engaged in sales and marketing and clinical support, and
- 25 persons were engaged in general and administrative functions.
None of our employees is covered by a collective bargaining agreement. We
consider relations with our employees to be good.
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SCIENTIFIC ADVISORS
We seek advice from a number of leading scientists and physicians on
scientific and medical matters, including experts in EEG monitoring,
pharmacology and anesthesia management. These individuals advise us concerning a
number of matters, including:
- our research and development programs,
- the design and implementation of our clinical research program,
- our publication strategies,
- the identification of market opportunities from the clinical perspective,
and
- specific scientific and technical issues.
FACILITIES
We currently lease approximately 23,000 square feet of development,
production, and administrative space in Natick, Massachusetts pursuant to a
lease which expires on October 31, 2000. We have entered into a seven-year lease
of approximately 60,000 square feet of development, production and
administrative space beginning in the first quarter of 2000. We expect to move
our operations to this space in the first quarter of 2000. Our international
organization is based in approximately 2,800 square feet of office space in
Leiden, The Netherlands, which is expected to be sufficient to meet our needs
for the next 18 months. We believe our current facilities, including the space
to be occupied in the first quarter of 2000, will be sufficient to meet our
needs through mid-2001 and that additional space will be available at a
reasonable cost to meet our space needs thereafter.
INSURANCE
Our business entails the risk of product liability and product recall
claims and any claims of these types could have an adverse impact on us. We have
taken and will continue to take what we believe are appropriate precautions,
including maintaining general liability and commercial liability insurance
policies which include adequate coverage for product liability and product
recall claims. We evaluate our insurance requirements on an ongoing basis to
enable us to maintain adequate level of coverage. However, product liability or
product recall claims could exceed our insurance coverage limits and our
insurance may not be available on commercially reasonable terms or at all.
LITIGATION
We are not a party to any material threatened or pending legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of Aspect, their respective ages as of
December 31, 1999 and their positions with Aspect are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Nassib G. Chamoun.................... 37 Chief Executive Officer, President and Director
J. Breckenridge Eagle................ 50 Chairman of the Board of Directors
J. Neal Armstrong.................... 61 Vice President, Chief Financial Officer and Secretary
Jeffrey L. Barrett................... 36 Vice President of Manufacturing and Operations
Philip H. Devlin..................... 43 Vice President of Research and Development
Steven H. Kane....................... 47 Vice President of Sales and Field Operations
Paul J. Manberg, Ph.D................ 45 Vice President of Clinical, Regulatory and Quality
Assurance
Jean M. Nelson....................... 40 Vice President of Marketing
Helgert van Raamt.................... 51 Vice President and Managing Director -- International
Boudewijn L.P.M. Bollen.............. 53 Director
Stephen E. Coit...................... 51 Director
Edwin M. Kania, Jr................... 42 Director
Lester John Lloyd.................... 63 Director
Terrance G. McGuire.................. 43 Director
Donald R. Stanski, M.D............... 49 Director
</TABLE>
Nassib G. Chamoun is a founder of Aspect and has served as a director of
Aspect since 1987. Mr. Chamoun has served as President of Aspect since 1996 and
Chief Executive Officer since 1995. Mr. Chamoun served as Chairman of the Board
of Directors from 1987 to 1996 and as Chief Scientific Officer from 1991 to
1995. Mr. Chamoun also served as President and Chief Executive Officer prior to
1995 at various times since founding Aspect in 1987. From 1984 to 1987, Mr.
Chamoun was a fellow in cardiovascular physiology at the Lown Cardiovascular
Laboratory of the Harvard School of Public Health. Mr. Chamoun earned a
bachelors degree in Electrical Engineering from Northeastern University and a
masters degree in Computer Engineering from Boston University.
J. Breckenridge Eagle has served as a director of Aspect from 1988 to 1991
and from 1996 to the present. Mr. Eagle has served as Chairman of the Board of
Directors since November 1996. He served as President and Chief Operating
Officer of Aspect in 1996 and served as a consultant to Aspect in 1995. From
1989 to 1995, he served as President of ECS, Inc., a medical practice management
company, which he founded in 1989. From 1981 to 1988, he served as Chief
Financial Officer, Vice President and General Manager of The Health Data
Institute, Inc., a health care services company, which he co-founded. Mr. Eagle
earned a bachelors degree in Psychology and a masters degree in Public Health
from Yale University and received a masters degree in Business Administration
from Harvard Business School.
J. Neal Armstrong has served as Vice President, Chief Financial Officer and
Secretary of Aspect since 1996. From 1990 to 1996, he served as Vice President
of Finance, Chief Financial Officer and a director of Haemonetics, Inc., a
manufacturer of blood processing systems. From 1985 to 1990, he served as Vice
President of Finance and Administration, Treasurer and Chief Financial Officer
at BTU International, a manufacturer of thermal processing systems. He
previously served for 14 years in senior operating and financial positions at
Texas Instruments, Inc., an electronics company. Mr. Armstrong holds a bachelors
degree in Business Administration from the University of Texas and is a
certified public accountant.
Jeffrey L. Barrett has served as Vice President of Manufacturing and
Operations of Aspect since 1997. From 1996 to 1997, he served as Vice President
of Manufacturing at Aksys, Ltd., a developer of dialysis equipment. From 1989 to
1996, Mr. Barrett served in a variety of manufacturing and operating positions
at Haemonetics, Inc., serving most recently as its Vice President of Operations.
Mr. Barrett received a bachelors
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degree in Economics and Industrial Engineering from Rutgers University and a
masters degree in Business Administration from Boston University.
Philip H. Devlin has served as Vice President of Research and Development
of Aspect since 1994 and served as Director of Product Development of Aspect
from 1990 to 1994. From 1984 to 1985 and 1986 to 1990, he served as Software
Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a
medical products and communications company. From 1980 to 1984, he served as
Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and
from 1985 to 1986, he served as Technical Marketing Engineer in the Medical
Product Group of Hewlett-Packard Company, a manufacturer of computers and
medical devices. Mr. Devlin holds a bachelors and masters degree in Electrical
Engineering from Northeastern University.
Steven H. Kane has served as Vice President of Sales and Field Operations
of Aspect since 1997. From 1990 to 1997, he was employed by Pyxis Corp., a
medical technology company, serving as Area Vice President, Sales and
Operations, Northeast United States, from 1992 to 1997. From 1983 to 1990, he
was employed by IVAC Corporation, a manufacturer of infusion therapy and vital
signs monitoring technology owned by Eli Lilly and Company, serving as Regional
Manager, Northeastern United States, from 1988 to 1990.
Paul J. Manberg has served as Vice President of Clinical, Regulatory and
Quality Assurance of Aspect since 1991. From 1984 to 1990, he served in a
variety of clinical research positions at Serono Laboratories, a pharmaceutical
company, most recently as Vice President, Research and Development. From 1979 to
1984, he served as a Clinical Research Scientist at Burroughs -- Wellcome
Company, a pharmaceutical company, and served as an Adjunct Research Scientist
at the University of North Carolina. Dr. Manberg received a bachelors degree in
Biological Sciences from the State University of New York at Binghamton and a
doctorate in Pharmacology from the University of North Carolina at Chapel Hill.
Jean M. Nelson has served as Vice President of Marketing of Aspect since
1995 and served as Director of Marketing of Aspect from 1992 to 1995. From 1988
to 1992, she was employed by Nellcor Incorporated, a medical device company,
serving from 1990 to 1992 as Manager of Advanced Technologies, from 1989 to 1990
as Multi-Function Monitor Group Manager and from 1988 to 1989 as New Products
Manager. From 1984 to 1988, Ms. Nelson served as a consultant with Bain and
Company, Inc., a strategic management consulting firm. Ms. Nelson earned a
bachelors degree in Metallurgy and Materials Engineering from Lehigh University
and a masters degree in Business Administration from the University of Chicago
Graduate School of Business.
Helgert van Raamt has served as Vice President and Managing
Director -- International of Aspect since November 1998. From April 1990 to
October 1998, Mr. van Raamt held several positions with Mallinckrodt, Inc., a
specialty chemicals and healthcare company, and its predecessor entities,
Nellcor Puritan Bennett, Inc. and Nellcor Incorporated. From February 1998 to
October 1998, Mr. van Raamt served as Mallinckrodt's Vice President and Managing
Director, Europe and as a member of Mallinckrodt's General Management Committee.
From August 1996 to February 1998, Mr. van Raamt served as Vice President and
Managing Director of Nellcor Puritan Bennett. From July 1995 to August 1996, Mr.
van Raamt was Director of Sales and Marketing at Nellcor Puritan Bennett, and
from April 1990 to July 1995, he held a variety of positions at Nellcor
Incorporated, including General Manager Europe North, Middle East, and Africa
and Director of Sales and Marketing. Mr. van Raamt studied mechanical
engineering at the Technical University of Twente in The Netherlands.
Boudewijn L.P.M. Bollen has served as a director of Aspect since November
1998. Since November 1998, he has been a self-employed consultant. From June
1998 to October 1998, Mr. Bollen served as President -- International of Aspect.
From 1986 to June 1998, Mr. Bollen held several positions with Mallinckrodt,
Inc. and predecessor entities, including Executive Vice President for Worldwide
Sales, Service and Distribution, Vice President of European Sales and Marketing
and Vice President and Managing Director for Europe. From 1981 to 1986, Mr.
Bollen served as Vice President of Marketing and Sales in Europe for Bentley
Laboratories, Inc., a manufacturer of specialized monitoring and medical
equipment. Mr. Bollen
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<PAGE> 50
holds the equivalent of a bachelors degree in Hotel Business Management from the
Hotel Business School in Maastricht, Holland.
Stephen E. Coit has served as a director of Aspect since 1987. He has been
a self-employed artist since 1997. From 1995 to 1997, Mr. Coit served as a
general partner of Charles River Ventures, a venture capital firm. From 1984 to
1994, Mr. Coit served as a general partner of Merrill, Pickard, Anderson & Eyre,
a venture capital firm. Since 1989, Mr. Coit has also served as a director of
International Data Group, a provider of media research and conferences to the
information technology industry.
Edwin M. Kania, Jr. has served as a director of Aspect since 1995. Mr.
Kania is a founding general partner of OneLiberty Ventures, a venture capital
firm. Previously, he was a general partner at a predecessor firm, Morgan Holland
Ventures, which he joined in 1985.
Lester John Lloyd has served as a director of Aspect from 1991 to April
1995 and from November 1995 to the present. He served as President and Chairman
of Aradigm, Inc., a medical device company, from 1992 to 1997. Mr. Lloyd was a
founder and served as Chief Executive Officer of Nellcor Incorporated from 1981
to 1990.
Terrance G. McGuire has served as a director of Aspect since 1997. He was a
founder and has been a general partner of Polaris Venture Partners, Inc., a
venture capital firm, since June 1996. Since 1992, Mr. McGuire has served as
general partner of Burr, Egan, Deleage & Co., a venture capital firm, and since
1988, he has served as general partner of Beta Partners, a venture capital firm.
Mr. McGuire is also a director of Akamai Technologies, Inc. and deCode Genetics,
Inc.
Donald R. Stanski has served as a director of Aspect since 1996. Dr.
Stanski has been a professor of anesthesia and medicine (Clinical Pharmacology)
at Stanford University since 1979 and is an anesthesiologist/clinical
pharmacologist. He served as Chair of the Department of Anesthesia at Stanford
University from 1992 to 1997. Dr. Stanski received his medical degree from the
University of Calgary, Canada, and his anesthesiology training at the
Massachusetts General Hospital.
Pursuant to the terms of a voting agreement, certain stockholders of Aspect
have the right to nominate persons as their representatives on the board of
directors. Each of the current directors has been nominated to serve as a
director pursuant to this agreement. This agreement will terminate concurrently
with the closing of this offering.
BOARD OF DIRECTORS
The board of directors is currently fixed at eight members. Following this
offering, the board of directors will be divided into three classes, each of
whose members will serve for a staggered three-year term. The board of directors
will consist of three Class I Directors (Messrs. Coit and McGuire and Dr.
Stanski), three Class II Directors (Messrs. Bollen, Eagle and Kania) and two
Class III Directors (Messrs. Chamoun and Lloyd). At each annual meeting of
stockholders, a class of directors will be elected for a three-year term to
succeed the directors of the same class whose terms are then expiring. The terms
of the Class I Directors, Class II Directors and Class III Directors expire upon
the election and qualification of successor directors at the annual meeting of
stockholders held during the calendar years 2000, 2001 and 2002, respectively.
In addition, Aspect's by-laws provide that the authorized number of
directors may be changed only by resolution of the board of directors or by the
stockholders. Any additional directorships resulting from an increase in the
number of directors will be distributed among the three classes, so that, as
nearly as possible, each class will consist of one-third of the total number of
directors. This classification of the board of directors may have the effect of
delaying or preventing changes in control or management of Aspect.
Each executive officer is elected by, and serves at the discretion of, the
board of directors. Each of Aspect's officers and directors, other than
nonemployee directors, devotes his or her full time to the affairs of Aspect.
There are no family relationships among any of the directors or officers of
Aspect.
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<PAGE> 51
COMPENSATION OF DIRECTORS
We reimburse non-employee directors for reasonable out-of-pocket expenses
incurred in attending meetings of the board of directors or of any committee of
the board of directors. No director who is also an employee of Aspect receives
separate compensation for services rendered as a director.
In addition, Aspect's non-employee directors are eligible to receive stock
options under Aspect's 1998 Director Stock Option Plan.
On June 15, 1998, Mr. Bollen received a stock option to purchase 40,000
shares of common stock in connection with his employment with Aspect. In
November 1998, Mr. Bollen ceased to be an employee of Aspect and was elected to
the board of directors. In accordance with the original terms of his stock
option agreement, the option will continue to vest monthly over four years for
so long as Mr. Bollen continues to serve as a director of Aspect. The option has
an exercise price of $4.20.
1998 Director Stock Option Plan. Our 1998 Director Stock Option Plan was
initially adopted by our board of directors and stockholders in February 1998.
Under the terms of the director plan, our directors who are not our employees
are eligible to receive nonstatutory options to purchase shares of common stock.
A total of 100,000 shares of common stock may be issued upon exercise of options
granted under the director plan. On October 5, 1999, our board of directors
approved an amendment, subject to stockholder approval, to increase to 200,000
shares of common stock the number of shares that may be issued upon exercise of
options granted under the director plan. As of December 31, 1999, options to
purchase an aggregate of 55,000 shares of common stock at a weighted average
exercise price of $4.94 were outstanding under the director plan.
Pursuant to the director plan, on April 14, 1998, each non-employee
director (other than Messrs. Bollen and Lloyd and Dr. Stanski) received an
initial option to purchase 10,000 shares of our common stock. Each person who
first becomes a non-employee director after that initial grant date is eligible
to receive an option to purchase 10,000 shares of our common stock on the date
of his or her initial election to the board of directors. In addition, on May 3,
1999, the following non-employee directors received additional options to
purchase 5,000 shares of our common stock: Messrs. Coit, Kania, Lloyd and
McGuire and Dr. Stanski. Upon completion of this offering, each non-employee
director will be eligible to receive an additional option to purchase 5,000
shares of our common stock on the date of each annual meeting of stockholders,
commencing with the 2000 annual meeting of stockholders. Each non-employee
director will be eligible to receive additional options if he or she is serving
as a director immediately prior to the annual meeting of stockholders and
continues to serve immediately following that annual meeting of stockholders and
if the grant date of that additional option is at least six months after the
non-employee director receives an initial option. In July 1998, the board of
directors adopted an amendment to the director plan to provide that options held
by non-employee directors would vest and become fully exercisable upon a change
of control event or acquisition event of Aspect, each as defined in the director
plan. In August 1998, our stockholders approved this amendment.
The exercise price per share of initial options that were granted on April
14, 1998 is $2.80 and the exercise price per share of the additional options
granted on May 3, 1999 is $7.50. The exercise price of any other initial options
and of any additional options will be the closing price per share of our common
stock on the date of grant. Initial options are exercisable as to one-half of
the shares as of the date of grant and as to one-sixth of the shares on the
first, second and third anniversaries of the date of grant, provided that the
optionee continues to serve as a director. Additional options are exercisable in
three equal annual installments on each of the first, second and third
anniversaries of the date of grant, provided that the optionee continues to
serve as a director. Options granted under the director plan terminate on the
earlier of ten years from the date of grant or sixty days after the optionee
ceases to serve as a director (180 days after the optionee ceases to serve as a
director if due to death or disability).
BOARD COMMITTEES
Aspect has a standing audit committee and compensation committee of the
board of directors. The audit committee reviews the results and scope of audits
and other services provided by Aspect's independent
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accountants. The audit committee also reviews Aspect's system of internal
accounting and financial controls. The audit committee consists of Messrs. Lloyd
and Kania.
The compensation committee of the board of directors reviews and recommends
to the Board the compensation and benefits of all executive officers of Aspect,
administers Aspect's stock option plan and establishes and reviews general
policies relating to compensation and benefits of employees of Aspect. The
compensation committee consists of Mr. Coit and Dr. Stanski. No interlocking
relationships exist between Aspect's board of directors or compensation
committee and the board of directors or compensation committee of any other
company.
EXECUTIVE COMPENSATION
The table below sets forth the total compensation paid or accrued for the
fiscal years ended December 31, 1999, 1998 and 1997 for our Chief Executive
Officer and each of our four other most highly compensated executive officers,
who received annual compensation in excess of $100,000 for the fiscal year ended
December 31, 1999, collectively referred to below as our named executive
officers. In accordance with the rules of the Securities and Exchange
Commission, the compensation set forth in the table below does not include
medical, group life or other benefits which are available to all of our salaried
employees, and perquisites and other benefits, securities or property which do
not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown
in the table. In the table below, columns required by the regulations of the SEC
have been omitted where no information was required to be disclosed under those
columns.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
------------------- NUMBER OF SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- --------------------------- ---- ------ ----- --------------------
<S> <C> <C> <C> <C>
Nassib G. Chamoun............................ 1999 $200,000 50,000
Chief Executive Officer and President 1998 $190,000 $63,250 110,000
1997 $170,000 $40,000 200,000
J. Breckenridge Eagle........................ 1999 $175,350 25,000
Chairman of the Board of Directors 1998 $167,000 $41,750 74,500
1997 $157,500 $27,565 --
J. Neal Armstrong............................ 1999 $171,150 25,000
Vice President, Chief Financial Officer 1998 $163,000 $40,750 37,500
and Secretary 1997 $153,750 $26,910 70,000
Steven H. Kane............................... 1999 $181,125 38,750
Vice President of Sales and Field
Operations 1998 $172,000 $80,935 28,750
1997 $127,153 $58,648 180,000
Paul J. Manberg.............................. 1999 $153,300 20,000
Vice President of Clinical, Regulatory 1998 $146,000 $32,850 27,500
and Quality Assurance 1997 $137,500 $24,065 50,000
</TABLE>
- ------------
Mr. Kane commenced employment with us on April 1, 1997 and received a salary for
only nine months of the year ended December 31, 1997.
Annual compensation for 1997 and 1998 includes bonuses paid or accrued for
services rendered in those years. Aspect has not yet determined bonuses for
services rendered in 1999.
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<PAGE> 53
OPTION GRANTS IN LAST FISCAL YEAR
The table below sets forth grants of stock options to our named executive
officers. The exercise price per share of each option was equal to the fair
market value of the common stock on the date of grant as determined by the board
of directors. The potential realizable value is calculated based on the term of
the option at its time of grant, which is 10 years. It is calculated assuming
that the fair market value of common stock on the date of grant appreciates at
the indicated annual rate compounded annually for the entire term of the option
and that the option is exercised and sold on the last day of its term for the
appreciated stock price. These numbers are calculated based on the requirements
of the SEC and do not reflect our estimate of future stock price growth.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION
UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION -------------------
NAME GRANTED YEAR PER SHARE DATE 5% 10%
- ---- ---------- ---------- ----------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun............ 50,000 5.2% $10.20 10/5/09 $320,736 $812,809
J. Breckenridge Eagle........ 25,000 2.6% $10.20 10/5/09 $160,368 $406,404
J. Neal Armstrong............ 25,000 2.6% $10.20 10/5/09 $160,368 $406,404
Steven H. Kane............... 12,500 1.3% $ 6.00 3/9/09 $ 47,167 $119,531
6,250 .7% $ 7.50 5/14/09 $ 29,479 $ 74,707
20,000 2.1% $10.20 10/5/09 $128,295 $325,123
Paul J. Manberg.............. 20,000 2.1% $10.20 10/5/09 $128,295 $325,123
</TABLE>
- ------------
The dates of exercisability of the options are determined in accordance with
their respective vesting schedules.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The table below sets forth information regarding exercisable and
unexercisable stock options held as of December 31, 1999 by our named executive
officers. There was no public trading market for our common stock as of December
31, 1999. Accordingly, the value of unexercised in-the-money options at fiscal
year end has been calculated by determining the difference between the exercise
price per share and the fair market value of our common stock at fiscal year
end, $10.20, as determined by our board of directors.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nassib G. Chamoun........ -- $-- 124,583 193,750 $1,030,830 $1,117,500
J. Breckenridge Eagle.... -- $-- 32,563 66,937 $ 221,278 $ 277,522
J. Neal Armstrong........ -- $-- 43,230 74,687 $ 358,548 $ 387,372
Steven H. Kane........... -- $-- 16,771 50,729 $ 116,458 $ 176,667
Paul J. Manberg.......... -- $-- 41,563 55,937 $ 355,628 $ 279,372
</TABLE>
STOCK PLANS
Amended and Restated 1991 Stock Option Plan. Our Amended and Restated 1991
Stock Option Plan was initially adopted by the board of directors and approved
by our stockholders in April 1991. As of
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<PAGE> 54
December 31, 1999, 3,360,000 shares of common stock were authorized for issuance
upon exercise of outstanding options under this plan and options to purchase an
aggregate of 1,521,356 shares of common stock at a weighted average exercise
price of $2.05 per share were outstanding under this plan.
This plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock and other stock-based awards.
Our officers, employees, directors, consultants and advisors are eligible
to receive awards under this plan. Under present law, however, incentive stock
options may only be granted to employees. No employee may receive any award for
more than 200,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to any other terms and
conditions specified in connection with the option grant. We may grant options
at an exercise price which may be less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of our common stock
on the date of grant, or less than 110% of the voting power of all shares of our
capital stock. The plan permits the board of directors to determine how
optionees may pay the exercise price of their options, including through payment
by cash, check or in connection with a "cashless exercise" through a broker, by
surrender to us of shares of common stock, by delivery to us of a promissory
note, or by any combination of the permitted forms of payment.
Our board of directors administers the plan. Our board of directors has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the plan and to interpret its provisions. It may delegate
authority under the plan to one or more committees of the board of directors
and, subject to certain limitations, to one or more of our executive officers.
Our board of directors has authorized our compensation committee to administer
the plan, including the granting of options to our executive officers. Subject
to any applicable limitations contained in the plan, our board of directors, our
compensation committee or any other committee or executive officer to whom our
board of directors delegates authority, as the case may be, selects the
recipients of awards and determines:
- the number of shares of common stock covered by options and the dates
upon which these options become exercisable,
- the exercise price of options,
- the duration of options, and
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of these awards,
including our conditions for repurchase, issue price and repurchase
price.
No award may be granted under the plan after April 1, 2001, but the vesting
and effectiveness of awards previously granted may extend beyond that date. Our
board of directors may at any time amend, suspend or terminate the plan, except
that no award granted after an amendment of the plan and designated as subject
to Section 162(m) of the Internal Revenue Code by the board of directors will
become exercisable, realizable or vested (to the extent that amendment was
required to grant that award) unless and until the amendment is approved by our
stockholders.
1998 Stock Incentive Plan. Our 1998 Stock Incentive Plan was initially
adopted by the board of directors and approved by our stockholders in July 1998.
The 1998 Stock Incentive Plan is intended to replace the 1991 plan. Up to
2,100,000 shares of common stock, subject to adjustment in the event of stock
splits and other similar events, may be issued pursuant to awards granted under
the plan. On October 5, 1999, our board of directors approved an amendment to
the plan to increase to 3,000,000 the number of shares that may be issued
pursuant to awards granted under this plan. The amendment was approved by our
stockholders in December 1999. As of December 31, 1999, options to purchase an
aggregate of 1,119,324 shares of common stock at a weighted average exercise
price of $8.05 were outstanding under this plan.
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<PAGE> 55
This plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options, restricted stock awards and other stock-based awards.
Our officers, employees, directors, consultants and advisors are eligible
to receive awards under this plan. Under present law, however, incentive stock
options may only be granted to employees. No employee may receive any award for
more than 250,000 shares in any calendar year.
Optionees receive the right to purchase a specified number of shares of
common stock at a specified option price and subject to any other terms and
conditions specified in connection with the option grant. We may grant options
at an exercise price which may be less than, equal to or greater than the fair
market value of our common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of our common stock
on the date of grant (or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the voting
power of all shares of our capital stock). The plan permits the board of
directors to determine how optionees may pay the exercise price of their
options, including through payment by cash, check or in connection with a
"cashless exercise" through a broker, by surrender to us of shares of common
stock, by delivery to us of a promissory note, or by any combination of the
permitted forms of payment.
Our board of directors administers this plan. Our board of directors has
the authority to adopt, amend and repeal the administrative rules, guidelines
and practices relating to the plan and to interpret its provisions. It may
delegate authority under the plan to one or more committees of the board of
directors and, subject to certain limitations, to one or more of our executive
officers. Our board of directors has authorized our compensation committee to
administer this plan, including the granting of options to our executive
officers. Subject to any applicable limitations contained in the plan, our board
of directors, our compensation committee or any other committee or executive
officer to whom our board of directors delegates authority, as the case may be,
selects the recipients of awards and determines:
- the number of shares of common stock covered by options and the dates
upon which these options become exercisable,
- the exercise price of options,
- the duration of options and
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of these awards,
including the conditions for repurchase, issue price and repurchase
price.
The 1998 Stock Incentive Plan provides that, unless otherwise specified, in
the event of a merger, liquidation or other acquisition event, as defined in the
plan, our board of directors is authorized to:
- cause all options to be assumed by the acquiring company,
- in the case of a cash acquisition, cause all options to be accelerated
and the acquiring company to pay cash to the optionees equal to their
spread, and
- in the case of stock options and restricted stock that do not become
fully exercisable upon an acquisition event,
- cause those options to be accelerated in full, and/or
- cause all restricted stock awards to become free of all
restrictions.
No award may be granted under the plan after June 2008, but the vesting and
effectiveness of awards previously granted may extend beyond that date. Our
board of directors may at any time amend, suspend or terminate the plan, except
that no award granted after an amendment of the plan and designated as subject
to Section 162(m) of the Internal Revenue Code by the board of directors shall
become exercisable, realizable or vested, to the extent that amendment was
required to grant that award, unless and until the amendment is approved by our
stockholders.
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<PAGE> 56
1998 Director Stock Option Plan. Our 1998 Director Stock Option Plan was
adopted by our board of directors and approved by our stockholders in February
1998. Under the terms of the director plan, directors who are not our employees
are eligible to receive nonstatutory options to purchase shares of common stock.
A total of 100,000 shares of common stock may be issued upon exercise of options
granted under the director plan. On October 5, 1999, our board of directors
approved an amendment to increase to 200,000 shares of common stock the number
of shares that may be issued upon exercise of options granted under the director
plan. The amendment was approved by our stockholders in December 1999. As of
December 31, 1999, options to purchase an aggregate of 55,000 shares of common
stock at a weighted average exercise price of $4.94 were outstanding under the
director plan. For more information about the director plan, see
"-- Compensation of Directors."
1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan
was adopted by our board of directors on October 5, 1999 and was approved by the
stockholders in December 1999, to be effective upon the closing of this
offering. The purchase plan provides for the issuance of a maximum of 300,000
shares of common stock to participating employees.
The purchase plan will be administered by the compensation committee. All
of our employees, including our directors who are employees, whose customary
employment is for more than 20 hours per week and for more than five months in
any calendar year, are eligible to participate in the purchase plan. Employees
who would own 5% or more of the total combined voting power or value of our
capital stock immediately after the grant may not participate in the purchase
plan. To participate in the purchase plan, an employee must authorize us to
deduct from one percent to 10 percent of his or her base pay during the offering
period. The exercise price for the option granted in each payment period is 85%
of the lesser of the last reported sale price of the common stock on the first
or last business day of the payment period. No options have been granted to date
under the purchase plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of the board of directors
are Mr. Coit and Dr. Stanski. No executive officer of Aspect has served as a
director or member of the compensation committee, or other committee serving an
equivalent function, of any other entity, any of whose executive officers served
as a director of or member of the compensation committee of the board of
directors.
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<PAGE> 57
RELATED-PARTY TRANSACTIONS
PREFERRED STOCK ISSUANCES
Series B-1 Financing. In October 1995, investors, including One Liberty
Fund III, L.P., Charles River Partnership VII, Limited Partnership, New
Enterprise Associates IV, Limited Partnership and Catalyst Ventures, Limited
Partnership, made bridge loans to us in the aggregate amount of $500,000 in
exchange for promissory notes. In November 1995 and June 1996, we sold an
aggregate of 3,800,428 shares of our Series B-1 preferred stock to a group of
existing and new investors, including Messrs. J. Breckenridge Eagle, the
Chairman of the Board of Directors, and J. Neal Armstrong, Vice President, Chief
Financial Officer and Secretary of Aspect, One Liberty, Charles River, New
Enterprise Associates and Catalyst, at a purchase price of $2.00 per share for
an aggregate purchase price of approximately $7.6 million. The purchase price
was paid, in part, by the cancellation and conversion of the promissory notes.
Mr. Kania, a director of Aspect, is a general partner of One Liberty Partners
III, L.P., which is the general partner of One Liberty. Mr. Coit, a director of
Aspect, served as a general partner of Charles River at the time that Charles
River purchased these securities from us.
Series C Financing. In February 1997, August 1997 and October 1997, we
sold an aggregate of 3,439,949 shares of our Series C preferred stock to a group
of existing and new investors, including Messrs. Eagle and Armstrong, Jeffrey L.
Barrett, Vice President of Manufacturing and Operations of Aspect, and Stephen
H. Kane, Vice President of Sales and Field Operations of Aspect, One Liberty,
Charles River, New Enterprise Associates, Orchid & Co., nominee for T. Rowe
Price Threshold Fund III, L.P., Merrill, Pickard, Anderson & Eyre IV Limited
Partnership, Polaris Venture Partners, L.P. and Polaris Venture Partners
Founders' Fund, L.P., at a purchase price of $3.75 per share for an aggregate
purchase price of approximately $12.9 million. Mr. Jordan, who served as a
director of Aspect until August 1999, is a Vice President of T. Rowe Price
Associates, Inc., the general partner of T. Rowe Price. Mr. McGuire, a director
of Aspect, is a member of Polaris Venture Management Co., LLC, which is a
general partner of Polaris Venture Partners and Polaris Venture Founders' Fund.
Series D Financing. In February 1998, we sold an aggregate of 1,666,234
shares of our Series D preferred stock to a group of existing and new investors,
including Messrs. Armstrong, Kane, Coit and Lester John Lloyd, a director of
Aspect, One Liberty, Charles River, T. Rowe Price, Polaris Venture Partners,
Polaris Venture Partners Founders' Fund and Merrill Pickard, at a purchase price
of $7.00 per share for an aggregate purchase price of approximately $11.7
million.
Series E Financing. In December 1998, we sold an aggregate of 1,753,729
shares of our Series E preferred stock and warrants to purchase an aggregate of
192,902 shares of our common stock to a group of existing and new investors,
including a trust for which Mr. Lloyd is a trustee, One Liberty, Charles River,
T. Rowe Price, Polaris Venture Partners, Polaris Venture Founders' Fund and
QuestMark Partners, L.P., at a purchase price of $10.00 per unit for an
aggregate purchase price of approximately $17.5 million. The warrants have an
exercise price of $12.50 per share.
LOANS TO EXECUTIVE OFFICERS
In February 1997, we entered into a pledge agreement with Nassib Chamoun,
our Chief Executive Officer and President, pursuant to which we loaned to Mr.
Chamoun $68,214, on a full recourse basis, representing 90% of the aggregate
exercise price of certain options exercised by Mr. Chamoun. Mr. Chamoun pledged
341,068 of the 378,964 shares of restricted common stock issued upon exercise of
these options as collateral for the loan. The loan bears interest at 8% per
annum. As of December 31, 1999, $60,634 of the principal amount of the loan plus
accrued interest was outstanding.
In May 1997, we loaned $80,000 to Mr. Chamoun. The loan is represented by
two promissory notes and is secured by a security interest in securities of
Aspect owned by Mr. Chamoun. The loan bears interest at 6.42% per annum. As of
December 31, 1999, $65,927 of the principal amount of the loan plus accrued
interest was outstanding.
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<PAGE> 58
In May 1997, we entered into a pledge agreement with Mr. Kane, pursuant to
which we loaned Mr. Kane $60,750, on a full recourse basis, representing 90% of
the aggregate exercise price of certain options exercised by Mr. Kane. Mr. Kane
pledged the 180,000 shares of restricted common stock issued upon exercise of
these options as collateral for the loan. The loan bears interest at 8% per
annum. As of December 31, 1999, $54,000 of the principal amount of the loan plus
accrued interest was outstanding. In the event that Mr. Kane ceases to be
employed by us, we will have the right, for 90 days after that termination of
employment, to purchase from Mr. Kane, for a repurchase price equal to the
original exercise price of $0.375 per share, up to the number of shares which
have not yet vested. As of December 31, 1999, 60,000 shares of common stock were
subject to repurchase by us.
In September 1997, we loaned $27,000 to Mr. Barrett. The loan is evidenced
by a promissory note and bears interest at 8% per annum. As of December 31,
1999, $11,813 of the principal amount of the loan plus accrued interest was
outstanding. Pursuant to the terms of the promissory note, on each of September
24, 1998 and 1999 we forgave the payment by Mr. Barrett of $8,152 and that
amount was considered and treated as compensation to Mr. Barrett by us. In
addition, pursuant to the terms of the promissory note, in the event that Mr.
Barrett is employed by us on each of September 24, 2000 and 2001, respectively,
we will forgive the payment by Mr. Barrett of $8,152 on each of those date and
those amounts will be considered and treated as compensation to Mr. Barrett by
us.
In April 1998, we entered into a pledge agreement with Mr. Barrett,
pursuant to which we loaned to Mr. Barrett $63,000, on a full recourse basis,
representing 90% of the aggregate exercise price of certain options exercised by
Mr. Barrett. Mr. Barrett pledged the 87,500 shares of restricted common stock
issued upon exercise of these options as collateral for the loan. The loan bears
interest at 8% per annum. As of December 31, 1999, the entire principal amount
of the loan plus accrued interest was outstanding. In the event that Mr. Barrett
ceases to be employed by us, we will have the right, for 90 days after that
termination of employment, to purchase from Mr. Barrett, for a repurchase price
equal to the original exercise price of $0.80 per share, up to the number of
shares which have not yet vested. As of December 31, 1999, 36,458 shares of
common stock were subject to repurchase by us.
In November 1998, we entered into a pledge agreement with Mr. Chamoun,
pursuant to which we loaned Mr. Chamoun $33,334, on a full recourse basis. Mr.
Chamoun pledged 41,667 shares of common stock as collateral for this loan. The
loan bears interest at 8% per annum. As of December 31, 1999, the entire
principal amount of the loan plus accrued interest was outstanding.
We have adopted a policy providing that all material transactions between
us and our officers, directors and other affiliates must be:
- approved by a majority of the members of our board of directors and by a
majority of the disinterested members of our board of directors, and
- on terms no less favorable to us than could be obtained from unaffiliated
third parties.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of December 31, 1999, and as adjusted to reflect the sale
of the shares of common stock in this offering, by:
- each person who owns beneficially more than 5% of the outstanding shares
of our common stock,
- each of our directors and the named executive officers, and
- all of our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting or investment power with
respect to shares. Shares of common stock issuable under stock options that are
exercisable within 60 days after December 31, 1999 or issuable pursuant to
outstanding warrants that may be exercised upon completion of this offering are
deemed outstanding for computing the percentage ownership of the person holding
the options or warrants but are not deemed outstanding for computing the
percentage ownership of any other person. Unless otherwise indicated below, to
our knowledge, all persons named in the table have sole voting and investment
power with respect to their shares of common stock, except to the extent
authority is shared by spouses under community property laws. Unless otherwise
indicated, the address of each person owning more than 5% of the outstanding
shares of common stock is c/o Aspect Medical Systems, Inc., Two Vision Drive,
Natick, Massachusetts 01760. The percentage of common stock outstanding reflects
the conversion, upon the closing of this offering, of all outstanding shares of
preferred stock into an aggregate of 11,067,238 shares of common stock. The
number of shares of common stock deemed outstanding after this offering includes
the 3,000,000 shares of common stock being offered for sale in this offering but
assumes no exercise of the underwriters' over-allotment option.
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY OWNED SECURITIES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
---------------------------------------- ----------------------------------------
NUMBER PERCENT NUMBER PERCENT
------------------------------ ------- ------------------------------ -------
STOCK OPTIONS WARRANTS STOCK OPTIONS WARRANTS
--------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
5% STOCKHOLDERS
Charles River Partnership VII, Limited
Partnership........................... 1,585,953 -- 550 12.3% 1,585,953 -- 550 10.0%
1000 Winter Street, Suite 3300
Waltham, MA 02154
One Liberty Fund III, L.P.(1)........... 1,530,596 -- 275 11.9 1,530,596 -- 275 9.7
OneLiberty Ventures
One Liberty Square
Boston, MA 02109
Polaris Venture Partners, L.P.(2)....... 1,012,143 -- 549 7.9 1,012,143 -- 549 6.4
Bay Colony Corporate Center
1000 Winter Street, Suite 3350
Waltham, MA 02154
QuestMark Partners, L.P.(3)............. 825,000 -- 90,750 7.1 825,000 -- 90,750 5.7
QuestMark Advisers, LLC
One South Street, Suite 800
Baltimore, MD 21202
New Enterprise Associates IV, Limited
Partnership(4)........................ 654,493 -- -- 5.1 654,493 -- -- 4.1
1119 St. Paul Street
Baltimore, MD 21202
Orchid & Co., Nominee for T. Rowe Price
Threshold Fund III, L.P.(5)........... 643,382 -- 2,750 5.0 643,382 -- 2,750 4.1
T. Rowe Price Assoc. Inc.
100 East Pratt
Baltimore, MD 21202
DIRECTORS AND NAMED EXECUTIVE OFFICERS
Nassib G. Chamoun(6).................... 375,490 145,833 -- 4.0% 375,490 145,833 -- 3.3%
J. Breckenridge Eagle(7)................ 210,447 40,347 -- 1.9 210,447 40,347 -- 1.6
Lester John Lloyd(8).................... 47,974 6,667 71 * 47,974 6,667 71 *
Stephen E. Coit......................... 3,572 6,666 -- * 3,572 6,666 -- *
Edwin M. Kania, Jr.(9).................. 1,530,596 6,666 275 11.9 1,530,596 6,666 275 9.7
Donald R. Stanski....................... 20,000 34,000 -- * 20,000 34,000 -- *
</TABLE>
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<PAGE> 60
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY OWNED SECURITIES TO BE BENEFICIALLY
PRIOR TO OFFERING OWNED AFTER OFFERING
---------------------------------------- ----------------------------------------
NUMBER PERCENT NUMBER PERCENT
------------------------------ ------- ------------------------------ -------
STOCK OPTIONS WARRANTS STOCK OPTIONS WARRANTS
--------- ------- -------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Terrance McGuire(10).................... 1,012,143 6,666 549 7.9 1,012,143 6,666 549 6.4
J. Neal Armstrong....................... 173,155 51,876 -- 1.7 173,155 51,876 -- 1.4
Steven H. Kane.......................... 210,239 22,084 -- 1.8 210,239 22,084 -- 1.5
Paul J. Manberg(11)..................... 77,636 48,124 -- 1.0 77,636 48,124 -- *
Boudewijn L.P.M. Bollen................. -- 17,500 -- * -- 17,500 -- *
All current executive officers and
directors as a group (15
persons)(12)(13)...................... 3,913,861 496,116 895 33.0 3,913,861 496,116 895 26.9
</TABLE>
- ------------
* Less than 1% of the outstanding common stock.
(1) Mr. Kania, a director of Aspect, is a general partner of One Liberty
Partners III, L.P., a general partner of One Liberty. Mr. Kania disclaims
beneficial ownership of the shares held by One Liberty, except to the
extent of his pecuniary interest therein.
(2) Includes 55,111 shares held by Polaris Venture Partners Founders' Fund and
31 shares of common stock subject to a warrant exercisable by Polaris
Venture Partners Founders' Fund upon completion of this offering. North
Star Ventures directly or indirectly provides investment advisory services
to various venture capital funds, including Polaris Venture Partners and
Polaris Venture Partners Founders' Fund. The general partner of these funds
exercises sole voting and investment power with respect to the shares held
by the funds. The principals of North Star Ventures, including Mr. McGuire,
a director of Aspect, are members of Polaris Venture Management Co., L.L.C.
(the general partner of both Polaris Venture Partners and Polaris Venture
Partners Founders' Fund). As a member of the general partner, Mr. McGuire
may be deemed to share voting and investment power for the shares held by
the funds. Mr. McGuire disclaims beneficial ownership of all shares held by
all of these funds except to the extent of his proportionate pecuniary
interests therein.
(3) Includes 186,661 shares held by QuestMark Partners Side Fund, L.P. and
20,537 shares of common stock subject to a warrant exercisable by QuestMark
Partners Side Fund upon completion of this offering.
(4) Includes 154,203 shares held by Catalyst. New Enterprise Associates is a
general partner of Catalyst and may be deemed to share voting and
investment power with respect to the shares held by Catalyst.
(5) Includes 5,000 shares of common stock held by T. Rowe Price Threshold Fund
Associates, Inc. Mr. Jordan, a former director of Aspect, is a Vice
President of T. Rowe Price Associates, Inc., the general partner of T. Rowe
Price. Mr. Jordan disclaims beneficial ownership of the shares by T. Rowe
Price, except to the extent of his pecuniary interest therein.
(6) Includes 50,000 shares of common stock held by The Nassib G. Chamoun 1998
Irrevocable Trust, of which Mr. Chamoun disclaims beneficial ownership.
(7) Includes 35,000 shares of common stock held by Jeanne Warren Eagle as
Trustee for the Trust for John Warren Eagle, of which Mr. Eagle disclaims
beneficial ownership.
(8) Includes 652 shares of common stock held by Lester John Lloyd and/or Lynne
Dewar Lloyd, Trustees or Successor Trustees under the Lloyd Trust U/A/D
10/05/88, of which Mr. Lloyd disclaims beneficial ownership. Mr. Lloyd also
disclaims beneficial ownership of the warrant, which is held by Lester John
Lloyd and/or Lynne Dewar Lloyd, Trustees or Successor Trustees under the
Lloyd Trust U/A/D 10/05/88.
(9) Includes 1,530,871 shares held by One Liberty. See Note 1 above.
(10) Includes 957,550 shares held by Polaris Venture Partners and 55,142 shares
held by Polaris Venture Partners Founders' Fund. See Note 2 above.
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<PAGE> 61
(11) Includes 3,571 shares of common stock held by Paul Manberg, as Custodian
under the Uniform Transfer to Minors Act, for Shawn Joseph Manberg, and
3,571 shares of common stock held by Paul Manberg, as Custodian under the
Uniform Transfer to Minors Act, for Kate Michelle Manberg.
(12) The foregoing table includes shares of common stock subject to repurchase
by Aspect from certain officers if the officers cease to be employed by or
provide services to Aspect as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
J. Neal Armstrong........................................... 15,000
Steven H. Kane.............................................. 60,000
</TABLE>
(13) The foregoing table does not include shares of common stock underlying
stock options held by certain officers and directors which will not become
exercisable within 60 days of December 31, 1999 as follows:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Nassib G. Chamoun........................................... 172,500
J. Breckenridge Eagle....................................... 59,153
Lester John Lloyd........................................... 8,333
Stephen E. Coit............................................. 8,334
Edwin M. Kania, Jr. ........................................ 8,334
Donald R. Stanski........................................... 16,000
Terrance McGuire............................................ 8,334
J. Neal Armstrong........................................... 66,041
Steven H. Kane.............................................. 45,416
Paul J. Manberg............................................. 49,376
Boudewijn L.P.M. Bollen..................................... 22,500
</TABLE>
60
<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
After this offering, we will be authorized to issue 60,000,000 shares of
common stock, $.01 par value per share, and 5,000,000 shares of preferred stock,
$.01 par value per share. As of October 2, 1999, we had outstanding:
- 1,791,134 shares of common stock held by 103 stockholders of record;
- 11,067,238 shares of preferred stock held by 95 stockholders of record;
- options to purchase 2,166,138 shares of common stock; and
- warrants to purchase 192,902 shares of common stock.
Upon the closing of this offering, all outstanding shares of preferred
stock will automatically convert into 11,067,238 shares of common stock, which
will result in an aggregate of 15,858,372 shares of common stock outstanding,
based on shares outstanding as of October 2, 1999. The options and warrants will
remain outstanding.
The following summary is qualified by reference to the provisions of
applicable law and to our restated certificate of incorporation and amended and
restated by-laws included as exhibits to the registration statement of which
this prospectus is a part.
COMMON STOCK
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders. Holders of our common stock do
not have cumulative voting rights. Directors are elected by a plurality of the
votes of the shares present in person or by proxy at the meeting. Holders of
common stock are entitled to receive proportionately any lawful dividends as may
be declared by our board of directors. However, all dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of the
affairs of Aspect, whether voluntarily or involuntarily, the holders of common
stock will be entitled to receive proportionately all of our remaining assets
available for distribution to stockholders. This distribution would be subject
to the rights of the holders of any outstanding shares of preferred stock.
Holders of common stock have no preemptive, redemption, conversion or
subscription rights. Our outstanding shares of common stock are fully paid and
non-assessable. The shares of common stock offered by us in this offering will
also be, when issued and paid for, fully paid and non-assessable. The rights,
powers, preferences and privileges of holders of common stock are subject to,
and may be adversely affected by, the rights of the holders of shares of any
series of preferred stock which we may designate and issue in the future. Upon
the closing of this offering, there will be no shares of preferred stock
outstanding.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 5,000,000 shares of preferred stock, in one or
more series. Our board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to establish the number of shares to be
included in each series and to fix the voting powers, preferences,
qualifications and special or relative rights or privileges of each series. Our
board of directors is authorized to issue preferred stock with voting,
conversion and other rights and preferences that could adversely affect the
voting power or other rights of the holders of common stock.
The purpose of authorizing our board of directors to issue preferred stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. However, the issuance of preferred
stock or of rights to purchase preferred stock could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, a majority of our outstanding common stock. We have
no current plans to issue any preferred stock.
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<PAGE> 63
WARRANTS
The warrants have an exercise price of $12.50. The warrants have net
exercise provisions under which the holder may, instead of paying the exercise
price in cash, surrender the warrant and receive a net amount of shares, based
on the fair market value of our shares of common stock at the time of exercise
of the warrant, after deducting the exercise price. These warrants expire on the
third anniversary of the date of this offering. However, if our common stock is
traded on a national exchange or trading system and the average closing price of
our common stock equals or exceeds $25.00 for 25 consecutive trading days, then
we have the right to require the holders to exercise their warrants. If the
holders do not exercise their warrants, the warrants will be automatically
exercised according to the net exercise provisions described above.
REGISTRATION RIGHTS
Pursuant to the terms of a registration rights agreement, the holders of
11,067,238 shares of common stock are entitled to rights with respect to the
registration of those shares under the Securities Act of 1933. The holders of
warrants to purchase 192,902 shares of common stock are also party to the
registration rights agreement and entitled to these registration rights. Under
that agreement, if we propose to register any of our securities under the
Securities Act of 1933, either for our own account or for the account of other
security holders, the holders of registration rights are entitled to notice of
the registration and to include their registrable shares in the registration.
However, in the event of a registration pursuant to an underwritten public
offering of our common stock, the underwriters have the right to limit the
number of shares included in the registration.
The holders of registration rights may, at any time after one year
following the date of the closing of this offering and upon the request of
holders of not less than 35% of the registrable shares then outstanding, require
us to prepare and file a registration statement under the Securities Act of 1933
with respect to their registrable shares. We are required to effect only three
of these demand registrations. In addition, at any time after we become eligible
to file a registration statement on Form S-3 (or any successor form), holders of
registration rights may request us to effect a registration on Form S-3 of
registrable shares having an aggregate offering price of at least $250,000.
These rights terminate six years following the date of this prospectus.
DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
Upon the closing of this offering, our restated certificate of
incorporation will provide that:
- the board of directors be divided into three classes, with staggered
three-year terms,
- directors may be removed only for cause by the vote of the holders of at
least two-thirds of the shares of our capital stock entitled to vote, and
- any vacancy on the board of directors, however occurring, including a
vacancy resulting from an enlargement of the board, may only be filled by
vote of a majority of the directors then in office.
These provisions could discourage, delay or prevent a change in control of
Aspect or an acquisition of Aspect at a price which many stockholders may find
attractive. The existence of these provisions could limit the price that
investors might be willing to pay in the future for shares of common stock.
These provisions may also have the effect of discouraging a third party from
initiating a proxy contest, making a tender offer or attempting to change the
composition or policies of our board of directors.
Upon the closing of this offering, our restated certificate of
incorporation and amended and restated by-laws will also provide that:
- stockholder action may be taken only at a duly called and convened annual
or special meeting of stockholders and then only if properly brought
before the meeting,
- stockholder action not be taken by written action in lieu of a meeting,
- special meetings of stockholders may be called only by our Chairman of
the Board, our Chief Executive Officer or by our board of directors, and
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<PAGE> 64
- in order for any matter to be considered "properly brought" before a
meeting, a stockholder must comply with requirements regarding providing
certain information and advance notice to us.
These provisions could delay, until the next stockholders' meeting, actions
which are favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or entity from
making a tender offer for our common stock, because a person or entity, even if
it acquired a majority of our outstanding voting securities, would be able to
take action as a stockholder only at a duly called stockholders' meeting, and
not by written consent.
The Delaware General Corporation Law provides that the vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or by-laws, unless a corporation's
certificate of incorporation or by-laws, as the case may be, requires a greater
percentage. Our restated certificate of incorporation will require the vote of
the holders of at least 75% of our capital stock entitled to vote to amend or
repeal any of the foregoing provisions. The 75% stockholder vote would be in
addition to any separate class vote that might be required pursuant to the terms
of any series of preferred stock that might be then outstanding.
Aspect is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is
approved in a prescribed manner. A "business combination" includes mergers,
asset sales and other transactions 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 did own, 15% or more
of the corporation's voting stock.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our certificate of incorporation provides that our directors will not be
personally liable to us or to our stockholders for monetary damages for breach
of fiduciary duty as a director, except that the limitation will not eliminate
or limit liability to the extent that the elimination or limitation of this
liability is not permitted by the Delaware General Corporation Law as it exists
or may later be amended.
Our certificate of incorporation further provides for the indemnification
of our directors and officers to the fullest extent permitted by Section 145 of
the Delaware General Corporation Law, including circumstances in which
indemnification is otherwise discretionary.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Boston EquiServe
L.P.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of our common stock in the public market could
adversely affect prevailing market prices of our common stock. Furthermore,
since some shares of common stock will not be available for sale shortly after
this offering because of the contractual and legal restrictions on resale
described below, sales of substantial amounts of common stock in the public
market after these restrictions lapse could adversely affect the prevailing
market price and our ability to raise equity capital in the future.
Prior to this offering, there has been no public market for our common
stock. Upon completion of this offering, we will have outstanding an aggregate
of 15,887,291 shares of our common stock assuming no exercise of outstanding
options or warrants. Of these shares, the 3,000,000 shares sold in this offering
will be freely tradable without restriction or further registration under the
Securities Act of 1933, unless those shares are purchased by "affiliates" as
that term is defined in Rule 144 under the Securities Act of 1933. The remaining
12,887,291 shares of common stock held by existing stockholders are "restricted
securities" as that term is defined in Rule 144 under the Securities Act of 1933
or are subject to the contractual restrictions described below. Of these
remaining securities:
- 71,496 shares which are not subject to the 180-day lock-up period
described below may be sold immediately after completion of
this offering,
- 13,868 additional shares which are not subject to the 180-day lock up
period described below may be sold beginning 90 days after the
effective date of this offering, and
- 12,801,927 additional shares may be sold upon expiration of the 180-day
lock-up period described below.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act of 1933, which rules are summarized below.
LOCK-UP AGREEMENTS
Our officers and directors and stockholders holding an aggregate of
12,801,927 shares of common stock have signed lock-up agreements under which
they agreed not to transfer or dispose of, directly or indirectly, any shares of
common stock or any securities convertible into or exercisable or exchangeable
for shares of common stock, for a period ending 180 days after the date of this
prospectus. Transfers or dispositions by our officers, directors and
stockholders can be made sooner:
- with the written consent of Morgan Stanley & Co. Incorporated,
- as a bona fide gift,
- to immediate family members, or
- to a trust, the beneficiaries of which are immediate family members.
RULE 144
In general, under Rule 144, beginning 90 days after the date of this
prospectus, a person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% 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 on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
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<PAGE> 66
RULE 144(k)
Shares eligible for sale under Rule 144(k) may be sold immediately upon the
completion of this offering. Under Rule 144(k), a person may sell shares
acquired from us immediately upon completion of this offering, without regard to
manner of sale, the availability of public information or volume, if:
- the person is not one of our affiliates at any time during the three
months preceding a sale, and
- the person has beneficially owned the shares proposed to be sold for at
least two years, including the holding period of any prior owner other
than an affiliate.
RULE 701
In general, under Rule 701 of the Securities Act of 1933, any of our
employees, consultants or advisors who purchases shares from us in connection
with a compensatory stock plan or other written agreement is eligible to resell
those shares 90 days after the effective date of this offering in reliance on
Rule 144, but without compliance with various restrictions, including the
holding period, contained in Rule 144.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 11,067,238 shares of our
common stock, or their transferees, will be entitled to rights with respect to
the registration of those shares under the Securities Act of 1933. The holders
of warrants to purchase 192,902 shares of our common stock will also be entitled
to these registration rights. See "Description of Capital Stock -- Registration
Rights" on page 62.
STOCK OPTIONS
Immediately after the 180-day lock-up period expires, we intend to file a
registration statement under the Securities Act of 1933 covering 6,860,000
shares of common stock reserved for issuance under our Amended and Restated 1991
Stock Option Plan, 1998 Stock Incentive Plan, 1999 Employee Stock Purchase Plan
and 1998 Director Stock Option Plan. That registration statement is expected to
become effective as soon as it is filed. Accordingly, shares registered under
that registration statement will, subject to vesting provisions and limitations
as to the volume of shares that may be sold by our affiliates under Rule 144
described above, be available for sale in the open market immediately after the
180-day lock-up period expires.
As of October 2, 1999, options to purchase 2,166,138 shares of common stock
were issued and outstanding. Upon the expiration of the lock-up period described
above, at least 1,270,313 shares of common stock will be subject to vested
options, based on options outstanding as of October 2, 1999.
WARRANTS
Upon completion of this offering, there will be warrants outstanding to
purchase 192,902 shares of common stock at an exercise price of $12.50 per
share. Any shares purchased pursuant to the "cashless exercise" feature of
outstanding warrants may be sold approximately 90 days after completion of this
offering, subject to the requirements of Rule 144.
EFFECT OF SALES OF SHARES
Prior to this offering, there has been no public market for our common
stock, and no prediction can be made as to the effect, if any, that market sales
of shares of common stock or the availability of shares for sale will have on
the market price of our common stock prevailing from time to time. Nevertheless,
sales of significant numbers of shares of our common stock in the public market
could adversely affect the market price of the common stock and could impair our
future ability to raise capital through an offering of our equity securities.
65
<PAGE> 67
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the underwriters named below, for
whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc. and U.S.
Bancorp Piper Jaffray Inc. are acting as representatives, have severally agreed
to purchase, and Aspect has agreed to sell to the underwriters, the respective
number of shares of common stock set forth opposite the names of the
underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Deutsche Bank Securities Inc................................
U.S. Bancorp Piper Jaffray Inc..............................
---------
Total............................................. 3,000,000
=========
</TABLE>
The underwriters are offering the shares of our common stock subject to
their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of our common stock offered in this
offering are subject to the approval of legal matters by their counsel and to
customary closing conditions. The underwriters are obligated to take and pay for
all of the shares of our common stock offered by this prospectus if any shares
are taken. However, the underwriters are not required to take or pay for the
shares covered by the over-allotment options described below.
The underwriters initially propose to offer part of the shares of our
common stock directly to the public at the initial public offering price listed
on the cover page of this prospectus and part to dealers at a price that
represents a concession not in excess of $ a share under the public
offering price. Any underwriters may allow, and these dealers may reallow, a
concession not in excess of $ a share to other underwriters or to other
dealers. After the initial offering of the shares of our common stock, the
offering price and other selling terms may from time to time be varied by the
representatives.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to an aggregate of 450,000
additional shares of our common stock at the public offering price set forth on
the cover page of this prospectus, less underwriting discounts and commissions.
The underwriters may exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
our common stock offered by this prospectus. To the extent the option is
exercised, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares of our common stock as the number set forth next to the names of all
underwriters in the preceding table. If the underwriters' over-allotment option
is exercised in full, the total price to the public would be $ , the
total underwriters' discounts and commissions would be $ , and the
total proceeds to us would be $ .
Each of Aspect and our directors and executive officers and substantially
all other stockholders has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the
period ending 180 days after the date of this prospectus, he, she or it will not
directly or indirectly:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock, or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our
common stock,
whether any transaction described above is to be settled by delivery of our
common stock or other securities, in cash or otherwise.
66
<PAGE> 68
The restrictions described in this paragraph do not apply to:
- the sale of shares to the underwriters,
- transactions by any person other than Aspect relating to shares of common
stock or other securities acquired in open market transactions after the
completion of the offering of the shares, or
- the sale or transfer of shares of common stock to an acquiror in
connection with the sale of Aspect pursuant to a merger, sale of stock or
otherwise.
The underwriters have informed us that they do not expect sales to
discretionary accounts to exceed five percent of the total number of shares
offered by them.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "ASPM."
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in our common stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of our common stock, the underwriters may bid for, and purchase, shares of
our common stock in the open market. Finally, the underwriting syndicate may
reclaim selling concessions allowed to an underwriter or a dealer for
distributing our common stock in the offering, if the syndicate repurchases
previously distributed shares of our common stock in transactions to cover
syndicate short positions, in stabilization transactions or otherwise. Any of
these activities may stabilize or maintain the market price of our common stock
above independent market levels. The underwriters are not required to engage in
these activities and may end any of these activities at any time.
We and the underwriters have agreed to indemnify each other against
liabilities in connection with this offering, including liabilities under the
Securities Act of 1933.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares of common stock offered in
this offering for our directors, officers, employees and related persons.
Individuals purchasing these shares must have a retail account with Morgan
Stanley & Co. Incorporated. No offer to buy any shares will be accepted and no
part of the purchase price will be received by Morgan Stanley & Co. Incorporated
prior to the date of this prospectus. Individuals purchasing these shares must
commit to the purchase within one day after the date of this prospectus. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these persons purchase reserved shares. Any reserved
shares which are not so purchased will be offered by the underwriters to the
general public on the same basis as the other shares offered in this prospectus.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for our shares of
common stock. Consequently, the initial public offering price for our shares of
common stock will be determined by negotiations between us and the
representatives of the underwriters. Among the factors to be considered in
determining the initial public offering price will be:
- our record of operations, our current financial position and future
prospects,
- the experience of our management,
- sales, earnings and other financial and operating information in recent
periods, and
- the price-earnings ratios, price-sales ratios, market prices of
securities and financial and operating information of companies engaged
in activities similar to ours.
The estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
67
<PAGE> 69
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters
in connection with this offering will be passed upon for the underwriters by
Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The audited consolidated financial statements as of December 31, 1997 and
1998 and for each of the three years in the period ended December 31, 1998
included in this prospectus and elsewhere in the registration statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1 (including the exhibits and schedules to the registration
statement) under the Securities Act of 1933 with respect to the common stock we
propose to sell in this offering. This prospectus, which is part of the
registration statement, does not contain all the information set forth in the
registration statement. For further information about us and the common stock we
propose to sell in this offering, we refer you to the registration statement.
Statements contained in this prospectus as to the contents of any contract,
agreement or other document referred to, are not necessarily complete, and in
each instance reference is made to the copy of each contract, agreement or other
document filed as an exhibit to the registration statement, each statement being
qualified by this reference.
You may read and copy all or any portion of the registration statement or
any reports, statements or other information we file at the Securities and
Exchange Commission's public reference room at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located
at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of
these documents upon payment of a duplicating fee, by writing to the Securities
and Exchange Commission. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Aspect's Securities and Exchange Commission filings, including the
registration statement, will also be available to you on the Securities and
Exchange Commission's website (http://www.sec.gov).
We intend to distribute to our stockholders annual reports containing
audited consolidated financial statements. We also intend to make available to
our stockholders, within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports containing interim unaudited financial
information.
68
<PAGE> 70
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
----
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and
1998, October 2, 1999 (Unaudited) and Pro Forma October 2,
1999 (Unaudited).......................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine Months
Ended October 3, 1998 (Unaudited) and October 2, 1999
(Unaudited)............................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1997 and 1998 and for the
Nine Months Ended October 2, 1999 (Unaudited)............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and for the Nine Months
Ended October 3, 1998 (Unaudited) and October 2, 1999
(Unaudited)............................................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Aspect Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Aspect
Medical Systems, Inc. (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1998, and the related statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Aspect Medical Systems, Inc.
and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 15, 1999
F-2
<PAGE> 72
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
OCTOBER 2,
DECEMBER 31, DECEMBER 31, OCTOBER 2, 1999
1997 1998 1999 (NOTE 2)
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 368,507 $ 17,122,993 $ 13,445,731 $ 13,445,731
Marketable securities........................... 4,612,462 4,150,336 1,186,340 1,186,340
Accounts receivable, net of allowance of
$62,400, $200,000 and $347,000 at December 31,
1997 and 1998 and October 2, 1999,
respectively.................................. 719,172 2,108,944 4,198,995 4,198,995
Current portion of investment in sales-type
leases........................................ 136,392 776,275 1,519,884 1,519,884
Inventory....................................... 387,479 270,189 1,246,422 1,246,422
Other current assets............................ 245,962 316,773 515,650 515,650
------------ ------------ ------------ ------------
Total current assets..................... 6,469,974 24,745,510 22,113,022 22,113,022
Property and equipment, net....................... 923,559 2,121,915 2,987,163 2,987,163
Long-term investment in sales-type leases......... 209,074 1,721,825 2,889,970 2,889,970
------------ ------------ ------------ ------------
Total assets............................. $ 7,602,607 $ 28,589,250 $ 27,990,155 $ 27,990,155
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Working capital line of credit.................. $ -- $ -- $ 2,059,616 $ 2,059,616
Current portion of capital lease obligations.... 154,906 126,775 30,731 30,731
Current portion of long-term debt............... -- 720,670 1,093,224 1,093,224
Accounts payable................................ 1,119,055 891,943 1,923,201 1,923,201
Accrued liabilities............................. 1,500,591 3,663,407 4,813,147 4,813,147
------------ ------------ ------------ ------------
Total current liabilities................ 2,774,552 5,402,795 9,919,919 9,919,919
------------ ------------ ------------ ------------
Deferred revenue.................................. 643,000 2,056,893 1,853,611 1,853,611
Long-term debt obligations........................ -- 1,441,339 1,966,643 1,966,643
Long-term capital lease obligations............... 117,680 -- -- --
------------ ------------ ------------ ------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred Stock, $.01 par value; (pro forma
5,000,000 shares authorized, no shares issued
or outstanding)............................... -- -- -- --
Convertible Preferred Stock, $.01 par value;
22,363,224 shares authorized, 7,647,275,
11,067,238 and 11,067,238 shares issued and
outstanding at December 31, 1997 and 1998 and
October 2, 1999, respectively (liquidation
preference -- $58,962,591 at October 2, 1999)
(pro forma -- no shares authorized, issued or
outstanding).................................. 38,726,070 67,560,365 67,560,365 --
Common Stock, $.01 par value; 17,030,000 shares
authorized, 1,548,027, 1,778,692 and 1,791,134
shares issued and outstanding at December 31,
1997 and 1998, and October 2, 1999,
respectively (pro forma -- 60,000,000 shares
authorized, 12,858,372 shares issued and
outstanding).................................. 15,480 17,787 17,911 128,583
Additional paid-in capital...................... 338,970 933,467 1,212,322 68,662,015
Warrants........................................ -- 146,606 146,606 146,606
Notes receivable from employees and directors... (273,579) (306,182) (305,323) (305,323)
Deferred compensation........................... -- (317,564) (316,779) (316,779)
Accumulated other comprehensive income(loss).... 3,098 3,641 (767) (767)
Accumulated deficit............................. (34,742,664) (48,349,897) (54,064,353) (54,064,353)
------------ ------------ ------------ ------------
Total stockholders' equity............... 4,067,375 19,688,223 14,249,982 14,249,982
------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity................................. $ 7,602,607 $ 28,589,250 $ 27,990,155 $ 27,990,155
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 73
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------------
----------------------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue...................... $ 1,388,788 $ 3,067,573 $ 11,238,205 $ 7,502,414 $18,837,661
Costs and expenses:
Costs of revenue........... 1,095,872 3,601,569 5,880,288 4,124,498 6,561,492
Research and development... 2,338,239 2,603,117 4,041,753 3,049,302 3,566,758
Sales and marketing........ 1,560,635 4,813,505 10,354,411 7,279,497 11,860,062
General and
administrative.......... 1,871,071 2,357,695 4,253,712 3,072,712 3,551,242
----------- ------------ ------------ ------------ -----------
Total costs and
expenses......... 6,865,817 13,375,886 24,530,164 17,526,009 25,539,554
----------- ------------ ------------ ------------ -----------
Loss from operations......... (5,477,029) (10,308,313) (13,291,959) (10,023,595) (6,701,893)
Interest income.............. 143,675 500,485 553,365 432,661 1,132,597
Interest expense............. (63,084) (78,027) (94,137) (42,979) (145,160)
Other expense (Note 19)...... -- -- (774,502) (825,000) --
----------- ------------ ------------ ------------ -----------
Net loss..................... $(5,396,438) $ (9,885,855) $(13,607,233) $(10,458,913) $(5,714,456)
=========== ============ ============ ============ ===========
Net loss per share:
Basic and diluted.......... $ (57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
=========== ============ ============ ============ ===========
Pro forma basic and
diluted................. $ (1.31) $ (0.45)
============ ===========
Shares used in computing net
loss per share:
Basic and diluted.......... 93,424 632,377 1,162,695 1,105,048 1,501,240
Pro forma basic and
diluted................. 10,351,979 12,568,478
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 74
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
CONVERTIBLE ---------------------
PREFERRED STOCK
COMPREHENSIVE ------------------------ PAR
LOSS SHARES AMOUNT SHARES VALUE
------------- ---------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... 2,481,940 $22,454,371 93,424 $ 934
Issuance of Series B-1 convertible preferred stock,
net of issuance costs of approximately $14,000....... -- 1,725,386 3,436,899 -- --
Comprehensive loss:
Net loss............................................ $ (5,396,438) -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities.......... (2,506) -- -- -- --
------------
Comprehensive loss.................................. (5,398,944) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1996........................... 4,207,326 25,891,270 93,424 934
Issuance of Series C convertible preferred stock,
net of issuance costs of approximately $61,000.... -- 3,439,949 12,834,800 -- --
Issuance of common stock upon exercise of common
stock options..................................... -- -- -- 1,454,603 14,546
Comprehensive loss:
Net loss............................................ (9,885,855) -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... 3,260 -- -- -- --
------------
Comprehensive loss.................................. (9,882,595) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1997........................... 7,647,275 38,726,070 1,548,027 15,480
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- 1,666,234 11,573,816 -- --
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 1,753,729 17,260,479 -- --
Issuance of common stock upon exercise of common
stock options..................................... -- -- -- 230,665 2,307
Deferred compensation related to stock options...... -- -- -- -- --
Reversal of unamortized deferred compensation
related to canceled stock options................. -- -- -- -- --
Payments on notes receivable........................ -- -- -- -- --
Amortization of deferred compensation related to
stock options..................................... -- -- -- -- --
Comprehensive loss:
Net loss............................................ (13,607,233) -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... 543 -- -- -- --
------------
Comprehensive loss.................................. (13,606,690) -- -- -- --
---------- ----------- --------- ---------
Balance, December 31, 1998........................... 11,067,238 67,560,365 1,778,692 17,787
Issuance of common stock upon exercise of common
stock options (unaudited)......................... -- -- -- 12,442 124
Payments on notes receivable from employees and
directors (unaudited)............................. -- -- -- -- --
<CAPTION>
NOTES
RECEIVABLE ACCUMULATED
ADDITIONAL FROM OTHER
PAID-IN EMPLOYEES DEFERRED COMPREHENSIVE
CAPITAL WARRANTS AND DIRECTORS COMPENSATION INCOME(LOSS)
---------- -------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... $ 31,096 $ -- $ -- -$-........ $ 2,344
Issuance of Series B-1 convertible preferred stock,
net of issuance costs of approximately $14,000....... -- -- -- -- --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable securities.......... -- -- -- -- (2,506)
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1996........................... 31,096 -- -- -- (162)
Issuance of Series C convertible preferred stock,
net of issuance costs of approximately $61,000.... -- -- -- -- --
Issuance of common stock upon exercise of common
stock options..................................... 307,874 -- (273,579) -- --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... -- -- -- -- 3,260
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1997........................... 338,970 -- (273,579) --........ 3,098
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- -- -- -- --
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 146,606 -- -- --
Issuance of common stock upon exercise of common
stock options..................................... 180,595 -- (63,001) -- --
Deferred compensation related to stock options...... 758,152 -- -- (758,152) --
Reversal of unamortized deferred compensation
related to canceled stock options................. (344,250) -- -- 344,250 --
Payments on notes receivable........................ -- -- 30,398 -- --
Amortization of deferred compensation related to
stock options..................................... -- -- -- 96,338 --
Comprehensive loss:
Net loss............................................ -- -- -- -- --
Other comprehensive income -
Unrealized gain on marketable securities.......... -- -- -- -- 543
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, December 31, 1998........................... 933,467 146,606 (306,182) (317,564) 3,641
Issuance of common stock upon exercise of common
stock options (unaudited)......................... 10,716 -- -- -- --
Payments on notes receivable from employees and
directors (unaudited)............................. -- -- 859 -- --
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
<S> <C> <C>
Balance, December 31, 1995........................... $(19,460,371) $ 3,028,374
Issuance of Series B-1 convertible preferred stock,
net of issuance costs of approximately $14,000....... -- 3,436,899
Comprehensive loss:
Net loss............................................ (5,396,438) (5,396,438)
Other comprehensive loss -
Unrealized loss on marketable securities.......... -- (2,506)
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1996........................... (24,856,809) 1,066,329
Issuance of Series C convertible preferred stock,
net of issuance costs of approximately $61,000.... -- 12,834,800
Issuance of common stock upon exercise of common
stock options..................................... -- 48,841
Comprehensive loss:
Net loss............................................ (9,885,855) (9,885,855)
Other comprehensive income -
Unrealized gain on marketable securities.......... -- 3,260
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1997........................... (34,742,664) 4,067,375
Issuance of Series D convertible preferred stock,
net of issuance costs of approximately $73,000.... -- 11,573,816
Issuance of Series E convertible preferred stock and
warrants, net of issuance costs of approximately
$130,000.......................................... -- 17,407,085
Issuance of common stock upon exercise of common
stock options..................................... -- 119,901
Deferred compensation related to stock options...... -- --
Reversal of unamortized deferred compensation
related to canceled stock options................. -- --
Payments on notes receivable........................ -- 30,398
Amortization of deferred compensation related to
stock options..................................... -- 96,338
Comprehensive loss:
Net loss............................................ (13,607,233) (13,607,233)
Other comprehensive income -
Unrealized gain on marketable securities.......... -- 543
Comprehensive loss.................................. -- --
------------ -----------
Balance, December 31, 1998........................... (48,349,897) 19,688,223
Issuance of common stock upon exercise of common
stock options (unaudited)......................... -- 10,840
Payments on notes receivable from employees and
directors (unaudited)............................. -- 859
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... -- -- -- -- --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- -- -- -- --
Comprehensive loss:
Net loss (unaudited)................................ (5,714,456) -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... (4,408) -- -- -- --
------------
Comprehensive loss.................................. $ (5,718,864) -- -- -- --
---------- ----------- --------- ---------
Balance, October 2, 1999 (unaudited)................. 11,067,238 $67,560,365 1,791,134 $ 17,911
========== =========== ========= =========
<CAPTION>
<S> <C> <C> <C> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... 268,139 -- -- (268,139) --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- -- -- 268,924 --
Comprehensive loss:
Net loss (unaudited)................................ -- -- -- -- --
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... -- -- -- -- (4,408)
Comprehensive loss.................................. -- -- -- -- --
---------- -------- --------- --------- -------
Balance, October 2, 1999 (unaudited)................. $1,212,322 $146,606 $(305,323) $(316,779) $ (767)
========== ======== ========= ========= =======
<CAPTION>
<S> <C> <C>
Deferred compensation related to stock options
(unaudited).......................................... -- --
Amortization of deferred compensation related to
stock options (unaudited)......................... -- 268,924
Comprehensive loss:
Net loss (unaudited)................................ (5,714,456) (5,714,456)
Other comprehensive loss -
Unrealized loss on marketable
securities(unaudited)........................... -- (4,408)
Comprehensive loss.................................. -- --
------------ -----------
Balance, October 2, 1999 (unaudited)................. $(54,064,353) $14,249,982
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 75
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------------
----------------------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(5,396,438) $ (9,885,855) $(13,607,233) $(10,458,913) $(5,714,456)
Adjustments to reconcile net loss to net cash
used for operating activities -
Depreciation and amortization.................. 189,378 192,571 623,133 392,126 972,685
Provision for doubtful accounts................ 43,000 14,333 146,500 40,000 152,100
Compensation expense related to stock
options...................................... -- -- 96,338 59,886 268,924
Changes in assets and liabilities -
Increase in accounts receivable.............. (92,990) (437,525) (1,536,272) (1,191,906) (2,242,151)
Decrease (increase) in inventory............. 61,193 763,483 117,290 (369,541) (976,233)
Increase in other current assets............. (60,628) (108,343) (70,811) (158,287) (198,877)
Increase in investment in sales-type
leases..................................... -- (345,466) (2,152,634) (1,711,799) (1,911,754)
Increase (decrease) in accounts payable...... 493,575 459,778 (227,112) (793,515) 1,031,258
(Decrease) increase in accrued liabilities... (4,385) 776,260 2,162,816 1,986,204 1,149,740
Increase (decrease) in deferred revenue...... 814,717 (180,000) 1,413,893 1,377,186 (203,282)
----------- ------------ ------------ ------------ -----------
Net cash used for operating activities..... (3,952,578) (8,750,764) (13,034,092) (10,828,559) (7,672,046)
----------- ------------ ------------ ------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment............ (622,384) (958,271) (1,821,489) (1,561,331) (1,837,933)
Purchases of marketable securities............... (23,953,144) (65,379,625) (42,947,415) (38,957,167) (1,810,895)
Proceeds from sales of marketable securities..... 24,045,377 61,647,164 43,410,084 39,850,760 4,770,481
----------- ------------ ------------ ------------ -----------
Net cash (used for) provided by
investing activities..................... (530,151) (4,690,732) (1,358,820) (667,738) 1,121,653
----------- ------------ ------------ ------------ -----------
Cash flows from financing activities:
Proceeds from working capital line of credit..... -- -- -- 1,300,000 2,059,616
Principal payments on capital lease
obligations.................................... (287,616) (427,558) (145,811) (110,003) (96,044)
Proceeds from sale leaseback of property and
equipment...................................... 330,291 -- -- -- --
Proceeds from equipment loan..................... -- -- 2,162,009 1,908,927 --
Payments on equipment loan....................... -- -- -- -- (540,502)
Proceeds from sale of investment in sales-type
leases......................................... -- -- -- -- 1,447,130
Payments on debt related to investment in
sales-type leases.............................. -- -- -- -- (8,768)
Proceeds from issuance of convertible preferred
stock and warrants, net of issuance costs...... 3,436,899 12,834,800 28,980,901 11,573,816 --
Proceeds from issuance of common stock........... -- 48,841 119,901 117,932 10,840
Payments received on notes receivable from
employees and directors........................ -- -- 30,398 30,397 859
----------- ------------ ------------ ------------ -----------
Net cash provided by financing
activities............................... 3,479,574 12,456,083 31,147,398 14,821,069 2,873,131
----------- ------------ ------------ ------------ -----------
Net (decrease) increase in cash and cash
equivalents...................................... (1,003,155) (985,413) 16,754,486 3,324,772 (3,677,262)
Cash and cash equivalents, beginning of period..... 2,357,075 1,353,920 368,507 368,507 17,122,993
----------- ------------ ------------ ------------ -----------
Cash and cash equivalents, end of period........... $ 1,353,920 $ 368,507 $ 17,122,993 $ 3,693,279 $13,445,731
=========== ============ ============ ============ ===========
Supplemental disclosure of cash flow information:
Interest paid.................................... $ 63,084 $ 78,027 $ 94,137 $ 42,979 $ 145,160
=========== ============ ============ ============ ===========
Supplemental disclosure of noncash financing
activities:
Capital lease obligations totaling $367,000,
including sale leaseback transactions, were
incurred in 1996
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 76
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) DESCRIPTION OF OPERATIONS
Aspect Medical Systems, Inc. and its subsidiaries (the "Company") develops,
manufactures and markets an anesthesia monitoring system that enables anesthesia
providers to assess and manage a patient's level of consciousness. The BIS
system incorporates the Company's proprietary disposable BIS Sensors and the
Company's BIS monitor or BIS Module Kit. The Company's latest generation BIS
monitor, the A-2000 BIS Monitor, was cleared for marketing by the United States
Food and Drug Administration in February 1998. The BIS system is based on the
Company's patented core technology, the BIS index, which is the only FDA-
cleared, commercially available, direct measure of the effects of anesthetics on
the brain.
The Company incurred net losses of $5,396,438, $9,885,855 and $13,607,233
for the years ended December 31, 1996, 1997 and 1998, respectively, and
$5,714,456 for the nine month period ended October 2, 1999. At October 2, 1999,
the Company had an accumulated deficit of $54,064,353. Principal risks that may
affect the business, results of operations and financial condition of the
Company include the Company's ability to raise sufficient capital to fund
operations, market acceptance of the Company's technology and products, limited
sales and marketing experience, the reliance on a single product family,
manufacturing risks, the dependence on single source or limited suppliers,
technological risks and other risks.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies used by the Company in the
preparation of its financial statements are as follows:
INTERIM FINANCIAL STATEMENTS
The accompanying consolidated balance sheet as of October 2, 1999,
statements of operations and cash flows for the nine months ended October 3,
1998 and October 2, 1999 and the statement of stockholders' equity for the nine
months ended October 2, 1999 are unaudited but, in the opinion of management,
include all adjustments (consisting of normal, recurring adjustments) necessary
for a fair presentation for results of these interim periods. The results of
operations for the nine months ended October 2, 1999 are not necessarily
indicative of results to be expected for the entire year or for any other
interim period.
The Company follows a system of fiscal months as opposed to calendar
months. Under this system, the first eleven months of each fiscal year end on a
Saturday and the last month of the fiscal year always ends on December 31. All
references to the nine months ended October 3, 1998 relate to the period from
January 1, 1998 to October 3, 1998, and all references to the nine months ended
October 2, 1999 relate to the period from January 1, 1999 to October 2, 1999.
UNAUDITED PRO FORMA PRESENTATION
Under the terms of the Company's restated certificate of incorporation, all
outstanding preferred stock will be converted automatically into shares of
common stock upon the closing of the Company's initial public offering. Also,
upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 60,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated. The unaudited pro forma balance sheet information at October 2, 1999
reflects the conversion of all series of preferred stock into 11,067,238 shares
of common stock as if the conversion occurred on October 2, 1999.
F-7
<PAGE> 77
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all wholly-owned subsidiaries. All material intercompany accounts and
transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
Financial statements of international subsidiaries are translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for revenue and expenses. The
functional currency of the Company's international subsidiaries is the U.S.
dollar; therefore, translation adjustments are recorded in the consolidated
statements of operations and have not been material.
CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company invests its excess cash in money market accounts, certificates
of deposit, U.S. Treasury bills, high-grade commercial paper and debt
obligations of various government agencies. The Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents.
The Company accounts for its investments in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the
Company has classified all of its investments as available-for-sale at December
31, 1997 and 1998 and October 2, 1999. The securities are reported at fair
value, with any unrealized gains and losses excluded from earnings and reported
as other comprehensive income.
REVENUE RECOGNITION
Revenue from equipment sales, disposable product sales and sales-type
leases are recognized at the time of shipment. Payments received prior to
shipment are recorded as deferred revenue. The Company has entered into certain
licensing and distribution agreements for which payments received in advance are
recorded as deferred revenue. Revenue is recognized as earned per the terms of
the respective agreements. The Company provides for the cost of warranty at the
time of product shipment.
RESEARCH AND DEVELOPMENT COSTS
The Company charges research and development costs to operations as
incurred.
INVENTORY
Inventory is valued at the lower of cost or estimated market, cost being
determined on a first-in, first-out basis.
ADVERTISING COSTS
Advertising costs are expensed as incurred. These costs are included in
sales and marketing expense in the consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the related equipment.
Equipment held under capital leases is stated at the lower of the fair market
value of the equipment or the present value of the minimum lease payments at the
inception of
F-8
<PAGE> 78
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
the lease and is amortized on a straight-line basis over the shorter of the
lives of the related assets or the term of the leases. Maintenance and repair
expenditures are charged to expense as incurred.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences, utilizing
currently enacted tax rates, of temporary differences between the carrying
amounts and the tax bases of assets and liabilities. Deferred tax assets are
recognized, net of any valuation allowance, for the estimated future tax effects
of deductible temporary differences and tax operating loss and credit
carryforwards.
CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMER AND SINGLE OR LIMITED
SOURCE SUPPLIERS
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of trade accounts receivable, investment in
sales-type lease receivables and investments. To minimize the risk with respect
to accounts receivable and investment in sales-type lease receivables, the
Company maintains reserves for potential credit losses and such losses, in the
aggregate, have not exceeded management's expectations. The Company maintains
cash, cash equivalents and investments with various financial institutions. The
Company performs periodic evaluations of the relative credit quality of
investments and Company policy is designed to limit exposure to any one
institution or type of investment. The primary objective of the Company's
investment strategy is the safety of the principal invested.
At December 31, 1997 and 1998 and October 2, 1999, accounts receivable from
one of the Company's international distributors accounted for approximately 19%,
14% and less than 1%, respectively, of the total amounts due to the Company. For
the years ended December 31, 1996, 1997 and 1998, sales to this customer
accounted for approximately 49%, 35% and 13%, respectively, of the Company's
total revenue. For the nine months ended October 3, 1998 and the nine months
ended October 2, 1999, sales to this customer accounted for approximately 14%
and 3% of the Company's total revenue, respectively. Effective July 1, 1998,
this customer no longer distributes the Company's monitors.
The Company currently obtains certain key components of its products from
single or limited sources. The Company purchases components pursuant to purchase
orders rather than long-term supply agreements. The Company has experienced
shortages and delays in obtaining certain components of its products in the
past. There can be no assurance that the Company will not experience similar
delays or shortages in the future. The disruption or termination of the supply
of components or a significant increase in the costs of these components from
these sources could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all
components of comprehensive income on an annual and interim basis. Comprehensive
income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner
sources. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. The adoption of SFAS No. 130 did not have a material effect on the
Company's financial statements, as the only element of comprehensive income
impacting the Company is the unrealized gain (loss) on marketable securities.
F-9
<PAGE> 79
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair market values of the Company's financial instruments,
which include marketable securities, accounts receivable, investment in
sales-type leases, accounts payable, bank loans and capital lease obligations,
approximate their carrying values.
(3) CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 2,
1997 1998 1999
-------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash.............................................. $131,757 $11,122,993 $ 9,314,131
Certificates of deposit........................... -- 6,000,000 4,131,600
U.S. Government debt securities................... 236,750 -- --
-------- ----------- -----------
$368,507 $17,122,993 $13,445,731
======== =========== ===========
</TABLE>
Available-for-sale securities included in marketable securities at December
31, 1997 and 1998 and October 2, 1999 consist of the following:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997 --
U.S. Government debt securities.................... $ 99,187 $ -- $ -- $ 99,187
Corporate debt securities........................ 4,010,177 3,098 -- 4,013,275
Municipal notes.................................. 500,000 -- -- 500,000
---------- ------ ----- ----------
$4,609,364 $3,098 $ -- $4,612,462
========== ====== ===== ==========
December 31, 1998 --
Corporate debt securities........................ $3,136,075 $ 241 $ -- $3,136,316
Municipal notes.................................. 1,010,620 3,400 -- 1,014,020
---------- ------ ----- ----------
$4,146,695 $3,641 $ -- $4,150,336
========== ====== ===== ==========
October 2, 1999 -- (unaudited)
U.S. Government debt securities.................. $1,000,000 $ -- $ -- $1,000,000
Corporate debt securities........................ 187,107 -- (767) 186,340
---------- ------ ----- ----------
$1,187,107 $ -- $(767) $1,186,340
========== ====== ===== ==========
</TABLE>
F-10
<PAGE> 80
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The amortized cost and estimated fair value of investments in debt
securities at October 2, 1999, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
ESTIMATED
FAIR
COST VALUE
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Maturing in one year or less................................ $ 187,107 $ 186,340
Maturing in one to two years................................ 1,000,000 1,000,000
---------- ----------
$1,187,107 $1,186,340
========== ==========
</TABLE>
The cost of securities sold is determined based on the specific
identification method for purposes of recording realized gains and losses. Gross
realized gains and losses on the sales of investments have not been material to
the Company's financial statements.
(4) INVESTMENT IN SALES-TYPE LEASES
The Company leases equipment to customers under sales-type leases. The
components of the Company's net investment in sales-type leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- OCTOBER 2,
1997 1998 1999
-------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Total minimum lease payments
receivable............................ $505,474 $3,300,533 $5,621,755
Less -- unearned interest............... 160,008 802,433 1,211,901
-------- ---------- ----------
Net investment in sales-type leases..... 345,466 2,498,100 4,409,854
Less -- current portion............... 136,392 776,275 1,519,884
-------- ---------- ----------
$209,074 $1,721,825 $2,889,970
======== ========== ==========
</TABLE>
Future minimum lease payments due under non-cancelable leases as of
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------
<S> <C>
1999........................................................ $1,226,664
2000........................................................ 892,561
2001........................................................ 559,384
2002........................................................ 402,093
2003........................................................ 219,831
----------
$3,300,533
==========
</TABLE>
(5) INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- OCTOBER 2,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials..................................... $322,636 $165,682 $ 604,109
Work-in-progress.................................. -- -- 75,350
Finished goods.................................... 64,843 104,507 566,963
-------- -------- ----------
$387,479 $270,189 $1,246,422
======== ======== ==========
</TABLE>
F-11
<PAGE> 81
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ------------------------ OCTOBER 2,
IN YEARS 1997 1998 1999
---------------------------- ---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Computer equipment........... 3 $ 707,071 $1,626,676 $2,079,758
Construction in progress..... -- 490,194 98,866 983,929
Machinery and equipment...... 3 to 5 152,735 887,046 1,268,605
Furniture and fixtures....... 3 133,114 308,656 365,513
Shorter of the life of the
lease or the estimated
Leasehold improvements....... remaining useful life 1,485 273,313 298,198
---------- ---------- ----------
1,484,599 3,194,557 4,996,003
Accumulated depreciation and
amortization............... (561,040) (1,072,642) (2,008,840)
---------- ---------- ----------
$ 923,559 $2,121,915 $2,987,163
========== ========== ==========
</TABLE>
At December 31, 1997, 1998 and October 2, 1999, property and equipment held
under capital leases totaled approximately $521,651, $86,944 and $12,788,
respectively. Accumulated depreciation of these assets totaled approximately
$458,988 and $67,850 at December 31, 1997 and 1998, respectively, and $11,723 at
October 2, 1999.
During 1996, the Company entered into sale-leaseback transactions. The
Company received proceeds of approximately $330,000 from the sale of these
assets. A gain of approximately $99,000 relating to the sale-leaseback
transaction was deferred in 1996 and is being amortized over the term of the
respective lease.
(7) INCOME TAXES
Deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards.......................... $12,254,000 $16,693,000
Tax credit carryforwards.................................. 1,119,000 1,292,000
Other..................................................... 782,000 1,507,000
----------- -----------
Gross deferred tax assets............................... 14,155,000 19,492,000
Valuation allowance..................................... (14,155,000) (19,492,000)
----------- -----------
Net deferred tax asset.................................. $ -- $ --
=========== ===========
</TABLE>
The Company has provided a full valuation allowance against its gross
deferred tax assets at December 31, 1997 and 1998 because the future
realizability of such asset is uncertain. Should the Company achieve
profitability in the future, various components of the gross deferred tax assets
would be available to offset future income tax liabilities and expenses.
The Company has net operating loss and research and development tax credit
carryforwards for federal income tax purposes of approximately $41,452,000 and
$1,292,000, respectively, at December 31, 1998 that will expire commencing in
the year 2002 through the year 2018 if not utilized.
The net operating loss and research and development tax credit
carryforwards are subject to review by the Internal Revenue Service. Ownership
changes, as defined in the Internal Revenue Code, may limit the
F-12
<PAGE> 82
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
amount of these tax attributes that can be utilized annually to offset future
taxable income or tax liabilities. The amount of the annual limitation is
determined based on the Company's value immediately prior to the ownership
change. Subsequent ownership changes may further affect the limitation in future
years.
(8) STOCKHOLDERS' EQUITY
AUTHORIZED CAPITAL STOCK
As of December 31, 1998, the Company's authorized capital stock consisted
of 17,030,000 shares of common stock, $.01 par value, and 22,363,224 shares of
preferred stock, $.01 par value. Of the 22,363,224 shares of preferred stock,
406,898 shares are designated Series A-1 convertible preferred stock, 3,800,428
shares are designated Series B-1 convertible preferred stock, 3,500,000 shares
are designated Series C convertible preferred stock, 1,714,286 shares are
designated Series D convertible preferred stock, 1,760,000 shares are designated
Series E convertible preferred stock, 406,898 shares are designated Series A-2
convertible preferred stock, 3,800,428 shares have been designated Series B-2
convertible preferred stock, 3,500,000 shares have been designated Series C-2
convertible preferred stock, 1,714,286 shares have been designated Series D-2
convertible preferred stock and 1,760,000 shares have been designated Series E-2
convertible preferred stock.
CONVERTIBLE PREFERRED STOCK
Convertible preferred stock outstanding consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- OCTOBER 2,
1997 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Series A-1 convertible preferred stock; 406,898 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ $18,384,462 $18,384,462 $18,384,462
Series B-1 convertible preferred stock; 3,800,428 shares
issued and outstanding, at issuance price, net of
issuance costs.......................................... 7,506,808 7,506,808 7,506,808
Series C convertible preferred stock; 3,439,949 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ 12,834,800 12,834,800 12,834,800
Series D convertible preferred stock; 1,666,234 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ -- 11,573,816 11,573,816
Series E convertible preferred stock; 1,753,729 shares
issued and outstanding, at issuance price, net of
issuance costs........................................ -- 17,260,479 17,260,479
----------- ----------- -----------
$38,726,070 $67,560,365 $67,560,365
=========== =========== ===========
</TABLE>
In 1995 and 1996, the Company sold 2,075,042 and 1,725,386 shares,
respectively, of Series B-1 convertible preferred stock in a private placement,
for total net proceeds of $7,506,808 including the conversion of $500,000 of
notes payable to certain stockholders that were issued in 1995. As a result of
anti-dilution provisions associated with this transaction and an associated
recapitalization of the Company, certain preferred stockholders received an
additional 357,761 shares of Series A-1 convertible preferred stock.
In 1997, the Company issued 3,439,949 shares of Series C convertible
preferred stock for net proceeds of $12,834,800.
In February 1998, the Company issued 1,666,234 shares of Series D
convertible preferred stock for net proceeds of $11,573,816.
In December 1998, the Company issued 1,753,729 shares of Series E
convertible preferred stock and warrants to purchase 192,902 shares of common
stock for net proceeds of $17,407,085. The warrants are fully
F-13
<PAGE> 83
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
exercisable with an exercise price of $12.50 per share and expire on the earlier
of the third anniversary of the Company's initial public offering or December
2008. However, if the common stock is traded on a national exchange or trading
system and the average closing market price per share of common stock over 25
consecutive trading days equals or exceeds $25.00, the Company has the right to
require the exercise of the warrants. The Company has allocated the proceeds
received between the Series E convertible preferred stock and the warrants based
on the estimated fair market value of the convertible preferred stock and the
warrants.
The rights and preferences of the Company's convertible preferred stock are
as follows:
VOTING RIGHTS
Except as set forth in the restated certificate of incorporation, the
holders of the convertible preferred stock are entitled to vote, together with
the holders of common stock, as a single class on all matters. Each preferred
stockholder is entitled to the number of votes equal to the number of whole
shares of common stock into which such stockholder's shares are convertible.
CONVERSION
Each share of convertible preferred stock is convertible into common stock
at the option of the stockholder or automatically upon the closing of a public
offering of the Company's common stock in which the price per common share
equals or exceeds $14.00, resulting in gross proceeds of at least $20,000,000.
The number of shares of common stock into which holders of convertible preferred
stock shall be entitled upon conversion is one-for-one, subject to adjustment
for certain dilutive events.
LIQUIDATION, DISSOLUTION OR WINDING UP OF THE COMPANY
In the event of any liquidation, dissolution or winding up of the Company,
the holders of Series E convertible preferred stock will receive an amount equal
to the greater of (i) $10.00 per share plus any dividends declared and/or
accrued but unpaid on such shares or (ii) the amount per share that would have
been payable had all series of Preferred Stock been converted into common stock.
If the remaining assets of the Company available for distribution are
insufficient to pay the Series E preferred stockholders the full amount they are
entitled to, the holders of Series E stock shall share ratably in any
distribution of the assets. Thereafter, the remaining assets shall be
distributed ratably as follows: the Series A-1 convertible preferred
stockholders will receive $22.76 per share, the Series B-1 convertible preferred
stockholders will receive $2.00 per share, the Series C convertible preferred
stockholders will receive $3.75 per share and the Series D convertible preferred
stockholders will receive $7.00 per share. In the case where the remaining
assets of the Company available for distribution are insufficient to pay the
preferred stockholders the full amount they are entitled to, the holders of
convertible preferred stock (other than Series E convertible preferred stock)
shall share ratably in any distribution of the assets. Any amounts available
after these distributions are to be distributed to the holders of common stock.
DIVIDENDS
The holders of convertible preferred stock are entitled to dividends when
and if declared by the Board of Directors.
COMMON STOCK
At October 2, 1999, the Company has reserved 11,067,238 shares of common
stock for issuance upon conversion of the preferred stock, 3,862,290 shares of
common stock for issuance under the Company's stock option plans, and 192,902
for issuance upon the exercise of outstanding warrants.
F-14
<PAGE> 84
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) STOCK OPTION PLANS
At October 2, 1999, the Company's stock option plans provided for the
granting, at the discretion of the Board of Directors, of options for the
purchase of up to 5,560,000 shares of common stock to employees, directors and
advisors. Option prices are determined by the Board of Directors. At October 2,
1999, 1,696,152 shares were available for future grant under the Company's stock
option plans.
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE OPTION
NUMBER OF OPTION PRICE PRICE PER
SHARES PER SHARE SHARE
---------- ------------ --------------
<S> <C> <C> <C>
Outstanding, December 31, 1995.............................. 1,106,010 $ .20-45.83 $ .32
Granted................................................... 451,002 .20 .20
Exercised................................................. -- -- --
Canceled.................................................. (939) .20 .20
---------- ----------- -----
Outstanding, December 31, 1996.............................. 1,556,073 .20-45.83 .28
Granted................................................... 1,046,532 .20-.80 .66
Exercised................................................. (1,454,603) .20-.375 .22
Canceled.................................................. (77,376) .20-.375 .20
---------- ----------- -----
Outstanding, December 31, 1997.............................. 1,070,626 .20-45.83 .74
Granted................................................... 1,613,632 .80-11.05 6.18
Exercised................................................. (230,665) .20-4.20 1.32
Canceled.................................................. (616,577) .20-45.83 10.07
---------- ----------- -----
Outstanding, December 31, 1998.............................. 1,837,016 .20-45.83 2.31
Granted (unaudited)....................................... 383,510 6.00-11.05 6.80
Exercised (unaudited)..................................... (12,442) .20-4.20 .87
Canceled (unaudited)...................................... (41,946) .375-11.05 4.51
---------- ----------- -----
Outstanding, October 2, 1999 (unaudited).................... 2,166,138 $.20-$45.83 $3.07
========== =========== =====
Exercisable, December 31, 1996.............................. 1,347,642 $.20-$45.83 $ .29
Exercisable, December 31, 1997.............................. 170,747 $.20-$45.83 $ .96
Exercisable, December 31, 1998.............................. 406,706 $.20-$45.83 $ .83
Exercisable, October 2, 1999 (unaudited).................... 866,088 $.20-$45.83 $2.00
</TABLE>
On September 17, 1998, the Company's Board of Directors authorized the
repricing of 480,698 stock options previously granted under the Company's stock
option plans. The repricing provided for the exercise price of the options to be
reduced from $11.05 per share to $4.20 per share, the estimated fair market
value of the Company's common stock at that time.
Subsequent to October 2, 1999, stock options to purchase 577,905 shares of
common stock were granted with an exercise price of $10.20 per share, stock
options to purchase 24,706 shares of common stock with exercise prices ranging
from $.20 to $6.00 per share were exercised and stock options to purchase 23,657
shares of common stock with exercise prices ranging from $.80 to $11.05 per
share were canceled.
During 1997 and 1998, the Company accelerated the vesting of certain
employees' and directors' stock options. These employees and directors exercised
options to acquire 1,495,470 shares of common stock. The shares of common stock
are subject to a repurchase right by the Company and the number of shares
subject to the repurchase provision decreases over time in accordance with the
vesting schedule of the original option grant. The option exercise price was
paid in the form of cash of $45,735 and by delivery to the Company of full
recourse promissory notes of $336,580. In the event that any holder of shares of
common stock which remain
F-15
<PAGE> 85
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
subject to the repurchase provision ceases to be employed by the Company, the
Company has the right to repurchase such shares for 90 days at a price equal to
the original exercise price. The shares generally vest over two to four years
from the initial grant date, provided that the holder continues to be employed
by the Company. As the shares of restricted common stock vest, they cease to be
subject to the repurchase provision. As of October 2, 1999, an aggregate of
164,150 shares remain subject to repurchase.
Stock options and restricted common stock generally vest over two to four
years and provide for the acceleration of vesting upon a change of control of
the Company.
A summary of outstanding and exercisable options as of October 2, 1999 is
as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING
EXERCISE NUMBER CONTRACTUAL NUMBER
PRICE OUTSTANDING LIFE EXERCISABLE
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.20 190,222 6.59 168,821
0.375 99,604 7.64 59,157
0.80 587,499 8.03 282,590
2.80 185,257 8.53 85,784
4.20 737,662 8.17 230,795
6.00 218,439 9.34 36,221
7.50 128,218 8.26 2,500
11.05 19,017 9.80 --
16.67 207 .88 207
45.83 13 4.5 13
--------- ----- -------
$0.20-$45.83 2,166,138 8.14 866,088
</TABLE>
In 1998, the Company recorded deferred compensation in connection with
certain stock option grants, of approximately $506,250, which represents the
aggregate difference between the estimated fair market value of the common stock
and the exercise price of the stock options. In connection with an employee
termination, an option to purchase 85,000 shares of common stock was canceled,
and the related unamortized deferred compensation of $344,250 was reversed. In
1998 and in the nine months ended October 2, 1999, the Company recorded
additional deferred compensation of approximately $252,000 and $268,100,
respectively, which represents the estimated fair value of stock options granted
to non-employees. The remaining unamortized deferred compensation of $316,779 at
October 2, 1999 will be recognized as compensation expense over the vesting term
of the related options.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options or warrants to be included in the statement of income or disclosed in
the notes to financial statements. The Company has determined that it will
continue to account for stock-based compensation for employees under Accounting
Principles Board Opinion No. 25 and elect the disclosure-only alternative under
SFAS No. 123. The Company has computed the value of options granted in 1996,
1997, 1998 and the nine months ended October 3, 1998 and October 2, 1999 using
the Black-Scholes option-pricing model prescribed by SFAS No. 123. The following
table shows the weighted
F-16
<PAGE> 86
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
average assumptions used in the applicable periods and the weighted average fair
market value of the options granted in each period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -----------------------------
------------------------------------ OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----------- ----------- -------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Risk-free interest rate............... 6.4%-6.8% 6.5%-6.75% 5.47% 4.75%-6.75% 4.34%-4.98%
Expected dividend yield............... -- -- -- -- --
Expected life......................... 7 years 7 years 7 years 7 years 7 years
Expected volatility................... 60% 60% 60% 60% 60%
Weighted average fair market value of
options granted..................... $0.15 $0.48 $1.92 $1.91 $3.78
</TABLE>
Had compensation cost for these options been determined consistent with
SFAS No. 123, the Company's net loss and pro forma net loss per common share
would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, --------------------------
----------------------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
----------- ------------ ------------ ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net loss
As reported.................. $(5,396,438) $ (9,885,855) $(13,607,233) $(10,458,913) $(5,714,456)
=========== ============ ============ ============ ===========
Pro forma.................. $(5,457,382) $(10,073,236) $(13,842,377) $(10,572,644) $(6,158,922)
=========== ============ ============ ============ ===========
Basic and diluted net loss
per common share
As reported................ $ (57.76) $ (15.63) $ (11.70) $ (9.46) $ (3.81)
=========== ============ ============ ============ ===========
Pro forma.................. $ (58.42) $ (16.54) $ (11.91) $ (9.57) $ (4.10)
=========== ============ ============ ============ ===========
Pro forma basic and diluted
net loss per common share
As reported................ $ (1.31) $ (.45)
============ ===========
Pro forma.................. $ (1.34) $ (.49)
============ ===========
</TABLE>
The Black-Scholes option-pricing model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. Also, because options
vest over several years and the Company expects to grant options in future
years, the above pro forma results of applying the provisions of SFAS No. 123
are not necessarily representative of the pro forma results in future years.
1991 AMENDED AND RESTATED STOCK OPTION PLAN
The Company's 1991 Amended and Restated Stock Option Plan (the "1991 Plan")
provides for the granting, at the discretion of the Board of Directors, of
options for the purchase of up to 3,360,000 shares of common stock to employees,
directors and advisors. Option prices are determined by the Board of Directors.
F-17
<PAGE> 87
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
1998 STOCK INCENTIVE PLAN
The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on July 8, 1998 and is intended to replace the 1991
Plan. The Board of Directors has authorized the Compensation Committee to
administer the Incentive Plan, including the granting of options to executive
officers. At October 2, 1999, the Incentive Plan provided for the granting, at
the discretion of the Compensation Committee, of options for the purchase of up
to 2,100,000 shares of common stock (subject to adjustment in the event of stock
splits and other similar events) to employees, directors and advisors. Option
prices are determined by the Compensation Committee, but cannot be less than
100% of fair market value for incentive stock options (or less than 110% of the
fair market value in the case of incentive stock options granted to optionees
holding more than 10% of the voting power of the Company).
1998 DIRECTOR STOCK OPTION PLAN
In February 1998, the Company adopted the 1998 Director Stock Option Plan
("Director Plan"). Under the terms of this plan, directors of the Company who
are not employees of the Company are eligible to receive nonstatutory options to
purchase shares of common stock. At October 2, 1999, a total of 100,000 shares
of common stock could be issued upon exercise of options under this plan. The
initial options granted under the Director Plan are exercisable as to 50% of the
option as of the date of grant and as to one-sixth of the shares on the first,
second and third anniversaries of the date of grant, provided that the optionee
continues to serve as a director and provide for the acceleration of vesting
upon a change of control of the Company. Additional options granted will be
exercisable in three equal annual installments on each of the first, second and
third anniversaries of the date of grant, provided that the optionee continues
to serve as a director. Options granted under the Director Plan terminate on the
earlier of (i) ten years from the date of grant, or (ii) sixty days after the
optionee ceases to serve as a director.
1999 EMPLOYEE STOCK PURCHASE PLAN
On October 5, 1999, the Company's 1999 Employee Stock Purchase Plan (the
"Purchase Plan") was adopted by the Board of Directors. The Purchase Plan was
approved by the stockholders in December 1999. The Purchase Plan allows eligible
employees the right to purchase shares of common stock at the lower of 85% of
the closing price per share of common stock on the first or last day of an
offering period. Each offering period is six months. An aggregate of 300,000
shares of common stock have been reserved for issuance pursuant to the Purchase
Plan.
(10) NET LOSS PER SHARE
The Company follows Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Basic net loss per share represents net loss available
to common stockholders divided by the weighted average number of common shares
outstanding. The Company has excluded all shares of restricted common stock that
are subject to repurchase by the Company from the weighted average number of
common shares outstanding. Diluted net loss per share is the same as basic net
loss per share as the inclusion of common stock issuable pursuant to the
exercise of stock options, warrants and the conversion of convertible preferred
stock would be antidilutive. The Company evaluated the requirements of the
Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"),
and concluded that there are no nominal issuances of common stock or common
stock equivalents which would be required to be shown as outstanding for all
periods as outlined in SAB 98. Pro forma net loss per share includes the
weighted average common shares outstanding and reflects the automatic conversion
of all convertible preferred stock into common stock upon completion of the
Company's initial public offering based on the original issuance date using the
"if-converted" method.
F-18
<PAGE> 88
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(11) DISTRIBUTION AND LICENSING AGREEMENTS
The Company has entered into various distribution, licensing and royalty
agreements relating to its products with distributors covering both the domestic
and the international markets. These agreements have terms ranging from two to
ten years. In connection with these agreements, approximately $643,000 and
$1,770,000 in revenue was deferred as of December 31, 1997 and 1998,
respectively, and approximately $1,674,000 was deferred as of October 2, 1999.
The deferred revenue relates to prepayments for monitoring systems under minimum
purchase obligations and also includes prepaid license and royalty fees. The
deferred revenue will be recognized upon product shipment and as license and
royalty fees are earned. License and royalty fees are related to future
technological developments and will be recognized upon shipment of units
incorporating the technology.
(12) 401(k) SAVINGS PLAN
The Company has a 401(k) savings plan in which substantially all employees
can participate. Employer contributions are at the discretion of the Board of
Directors and vest ratably over five years. The Company made no contributions to
the plan during the years ended December 31, 1996, 1997 and 1998.
(13) COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space under operating leases that expire in
October 2000. Rent expense was approximately $335,000, $346,000 and $414,000 in
1996, 1997 and 1998, respectively. Future gross minimum lease commitments for
all operating leases as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999..................................................... $ 495,000
2000..................................................... 434,000
2001..................................................... 93,000
2002..................................................... 97,000
2003..................................................... 45,000
Thereafter............................................... 23,000
----------
Total minimum lease payments............................. $1,187,000
==========
</TABLE>
The Company has entered into a seven-year lease of approximately 60,000
square feet of development, production and administrative space beginning in the
first quarter of 2000.
SUBLEASES
During 1996 and 1997, the Company had a sublease agreement whereby a
portion of existing office space was leased to a third party under an operating
lease. Rental income for 1996 and 1997 approximated $129,000 and $113,000,
respectively. This agreement expired in 1997.
(14) OTHER RELATED PARTY TRANSACTIONS
In addition to the transactions discussed in Note 9, during 1997 and 1998,
the Company loaned a total of $107,000 and $53,000, respectively, to certain
employees of the Company. The loans are evidenced by promissory notes bearing
interest with rates ranging from 6.42% to 8% per annum. The outstanding balance
on these notes at December 31, 1997 and 1998 and October 2, 1999 was
approximately $105,000, $138,000 and $133,000, respectively.
F-19
<PAGE> 89
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(15) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ OCTOBER 2,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Payroll and payroll-related............ $ 375,121 $1,220,000 $1,958,506
Clinical studies....................... 75,000 254,000 284,000
Warranty............................... 130,000 249,037 399,297
Other.................................. 920,470 1,940,370 2,171,344
---------- ---------- ----------
$1,500,591 $3,663,407 $4,813,147
========== ========== ==========
</TABLE>
(16) SEGMENT INFORMATION AND ENTERPRISE REPORTING
The Company has adopted the FASB's Statements of Financial Accounting
Standards No. 131, or SFAS 131, Disclosures about Segments of an Enterprise and
Related Information, effective for fiscal years beginning after December 31,
1997. The Company operates in one reportable segment as it has one family of
anesthesia monitoring systems. The Company does not disaggregate financial
information by product or geographically, other than export sales by region and
sales by product, for management purposes. Substantially all of the Company's
assets are located within the United States. All of the Company's products are
manufactured in the United States.
Revenue by geographic destination and as a percentage of total revenue is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------- ---------------------------------
1996 1997 1998 OCTOBER 3, 1998 OCTOBER 2, 1999
---------- ---------- ----------- --------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic...................... $ 699,362 $1,881,409 $10,296,424 $6,745,010 $17,135,698
International............... 689,426 1,186,164 941,781 757,404 1,701,963
---------- ---------- ----------- ---------- -----------
$1,388,788 $3,067,573 $11,238,205 $7,502,414 $18,837,661
========== ========== =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, -------------------------
------------------------------------- OCTOBER 3, OCTOBER 2,
1996 1997 1998 1998 1999
---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
GEOGRAPHIC AREA BY DESTINATION
Domestic......................... 51% 61% 92% 90% 91%
International.................. 49 39 8 10 9
--- --- --- --- ---
100% 100% 100% 100% 100%
--- --- --- --- ---
</TABLE>
F-20
<PAGE> 90
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(17) VALUATION AND QUALIFYING ACCOUNTS
The following table sets forth activity in the Company's allowance for
doubtful accounts:
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF CHARGES TO END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended --
December 31, 1996................................. $ 7,000 $ 43,000 $ -- $ 50,000
December 31, 1997................................. 50,000 14,333 1,933 62,400
December 31, 1998................................. 62,400 146,500 8,900 200,000
Nine months ended October 2, 1999 (unaudited)....... 200,000 152,100 5,100 347,000
</TABLE>
(18) LOAN AGREEMENTS
In June 1998, the Company entered into a loan agreement with a commercial
bank. Under the terms of this loan agreement, the Company may borrow up to $5.0
million for working capital and equipment. The amount available to the Company
under the working capital portion of the loan agreement is based upon a
percentage of the Company's outstanding accounts receivable. The outstanding
principal under the working capital portion of the loan agreement is due and
payable in December 1999. Interest on the working capital portion of the loan
agreement was at the prime rate plus 0.5% until September 30, 1998 at which time
it became the prime rate plus 0.25%. There were no borrowings under the working
capital loan as of December 31, 1998. As of October 2, 1999, $2,059,616 was
outstanding under the working capital portion of the loan agreement and based on
the Company's outstanding accounts receivable at October 2, 1999 there was no
additional availability under the working capital portion of the loan agreement.
Subsequent to October 2, 1999, the borrowings under the working capital portion
of the loan agreement were repaid.
During 1998, the Company borrowed approximately $2,162,000 under the
equipment portion of the loan agreement. The principal amount outstanding under
the equipment portion of the loan agreement is due in 36 equal monthly
installments of approximately $60,000, which commenced in January 1999. Interest
on the equipment portion of the loan agreement is at the prime rate plus 1.0% up
to and including the closing date of the Company's initial public offering.
After the closing of the Company's initial public offering, the interest rate
becomes the prime rate. As of October 2, 1999, no additional amounts are
available to the Company under the equipment portion of the loan agreement.
The loan agreement contains restrictive covenants including minimum
liquidity or debt service coverage ratios. The agreement also restricts the
Company from declaring and paying cash dividends. As of October 2, 1999, the
Company was in compliance with these covenants or had received a waiver from the
bank for any events of default.
In December 1999, the Company renegotiated its loan agreement with the
bank. Borrowings outstanding at December 31, 1999 of approximately $1.4 million
under the equipment portion of the new loan agreement are payable in monthly
installments of approximately $60,000 plus interest through December 31, 2001.
The working capital portion of the original loan agreement was replaced with a
term loan portion. Borrowings under the term loan portion outstanding at
December 31, 1999 of approximately $2.8 million are payable in 36 monthly
installments of approximately $79,000 plus interest commencing January 2000.
Interest on both the equipment portion and the term loan portion of the new loan
agreement is at the prime rate plus 1.0% up to and including the closing date of
the Company's initial public offering. After the closing of the Company's
initial public offering, the interest rate becomes the prime rate plus 0.5%. At
December 31, 1999, no additional amounts may be borrowed under the equipment
portion or term loan portion of the new loan agreement. Approximately $1.5
million is available under the standby letter of credit portion of the new loan
agreement.
F-21
<PAGE> 91
ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
The new loan agreement contains restrictive covenants that require the
Company to maintain liquidity and borrowing base ratios. The new loan agreement
also restricts the Company from declaring and paying cash dividends. The new
loan agreement is secured by substantially all of the Company's assets.
In July 1999, the Company entered into an agreement under which it can sell
some of its existing and future investments in sales-type leases to a
third-party finance company. In August and September 1999, the Company sold
approximately $1.4 million of investments in sales-type leases. In accordance
with Statement of Financial Accounting Standards No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
the proceeds from these sales are classified as debt. Payments on the
outstanding principal under this debt match the timing of the payments due on
the underlying investments in sales-type leases.
(19) OTHER EXPENSE
In 1998, the Company incurred approximately $775,000 in one-time charges
related to a proposed initial public offering that was terminated in August
1998.
F-22
<PAGE> 92
[Aspect Medical Systems LOGO]
<PAGE> 93
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee, the NASD filing fee and the Nasdaq
National Market listing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 12,405
NASD filing fee........................................ 4,985
Nasdaq National Market listing fee..................... 95,000
Blue Sky fees and expenses............................. 15,000
Transfer Agent and Registrar fees...................... 2,000
Accounting fees and expenses........................... 250,000
Legal fees and expenses................................ 350,000
Printing and mailing expenses.......................... 150,000
Miscellaneous.......................................... 20,610
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article EIGHTH of the Registrant's Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") provides that no director of the
Registrant shall be personally liable for any monetary damages for any breach of
fiduciary duty as a director, except to the extent that the Delaware General
Corporation Law prohibits the elimination or limitation of liability of
directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the
II-1
<PAGE> 94
Registrant fails to make an indemnification payment within 60 days after such
payment is claimed by such person, such person is permitted to petition the
court to make an independent determination as to whether such person is entitled
to indemnification. As a condition precedent to the right of indemnification,
the director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 7 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933 (the "Securities Act").
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is information regarding shares of Common Stock and
Preferred Stock issued, and options and warrants granted, by the Registrant
within the past three years. Further included is the consideration, if any,
received by the Registrant for such shares, options and warrants and information
relating to the section of the Securities Act, or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.
Some of the transactions described below involved directors, officers and
5% stockholders of the Registrant. See "Related-Party Transactions."
Certain Sales of Securities. Within the past three years, the Registrant
has issued the following securities that were not registered under the
Securities Act.
(a) Issuances of Capital Stock and Warrants.
1. On February 26, 1997, August 8, 1997 and October 7, 1997, the
Registrant issued and sold an aggregate of 3,439,949 shares of its Series C
Convertible Preferred Stock to a group of investors at a purchase price of
$3.75 per share.
2. On February 13, 1998, the Registrant issued and sold an aggregate
of 1,666,234 shares of its Series D Convertible Preferred Stock to a group
of investors at a purchase price of $7.00 per share.
3. On December 17, 1998, the Registrant issued and sold an aggregate
of 1,753,729 shares of its Series E Convertible Preferred Stock, coupled
with Warrants to purchase an aggregate of 192,902 shares of Common Stock,
to a group of investors at a purchase price of $10.00 per share.
(b) Stock Option Grants.
The Registrant's Amended and Restated 1991 Stock Option Plan was adopted by
the Board of Directors and approved by the stockholders of the Registrant in
April 1991. As of October 2, 1999, options to purchase 1,698,401 shares of
Common Stock had been exercised for an aggregate consideration of $631,985 and
options
II-2
<PAGE> 95
to purchase 1,549,595 shares of Common Stock, at a weighted average exercise
price of $2.04 per share, were outstanding under the plan.
The Registrant's 1998 Stock Incentive Plan was adopted by the Board of
Directors and approved by the stockholders of the Registrant in July 1998. As of
October 2, 1999, options to purchase 729 shares of Common Stock had been
exercised for an aggregate consideration of $3,062 and options to purchase
561,543 shares of Common Stock, at a weighted average exercise price of $5.74
per share, were outstanding under the plan.
The Registrant's 1998 Director Stock Option Plan was adopted by the Board
of Directors and approved by the stockholders of the Registrant in February
1998. As of October 2, 1999, options to purchase 5,000 shares of Common Stock
had been exercised for an aggregate consideration of $14,000 and options to
purchase 55,000 shares of Common Stock, at a weighted average exercise price of
$4.94 per share, were outstanding under such plan.
No underwriters were involved in the foregoing sales of securities. The
sales were made in reliance upon exemptions from the registration provisions of
the Securities Act set forth in Sections 3(b) and 4(2) thereof relative to sales
by an issuer not involving any public offering or the rules and regulations
thereunder or, in the case of options to purchase Common Stock, Rule 701 of the
Securities Act. All of the foregoing securities are deemed restricted securities
for purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of the Registrant.
3.2** Form of Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.3** By-Laws of the Registrant, as amended.
3.4** Form of Amended and Restated By-laws of the Registrant to be
in effect upon the closing of the offering.
4.1** Specimen common stock certificate.
4.2** See Exhibits 3.2 and 3.4 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights
of holders of common stock.
5.1 Opinion of Hale and Dorr LLP.
10.1** 1998 Director Stock Option Plan, as amended.
10.2+** International Distribution Agreement, dated as of January
21, 1998, by and between the Registrant and Nihon Kohden
Corporation.
10.3+** International License Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden
Corporation.
10.4** Trademark License Agreement, dated May 25, 1994, by and
between the Registrant and Aspect Electronics, Inc.
10.5** License Agreement, dated as of October 31, 1995, by and
between the Registrant and Siemens Medical Systems, Inc.
10.6+** Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH.
10.7+** OEM Development and Purchase Agreement, dated August 6,
1999, by and between the Registrant and Agilent
Technologies, Inc. (formerly part of Hewlett-Packard
Company).
10.8+** Letter Agreement, dated August 3, 1999, by and between the
Registrant and Agilent Technologies, Inc. (formerly part of
Hewlett-Packard Company).
</TABLE>
II-3
<PAGE> 96
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.9+** Distribution and License Agreement, dated as of April 1,
1996, between SpaceLabs Medical, Inc. and the Registrant.
10.10** Property Lease at 2 Vision Drive, by and between the
Registrant and Vision Drive, Inc., successor in interest to
Natick Executive Park Trust No. 2, dated September 8, 1994,
as amended, together with Subordination, Non-Disturbance and
Attornment Agreement, by and between the Registrant and
Teachers Insurance Association of America, dated June 15,
1995.
10.11** Lease Extension Agreement, dated as of August 7, 1997, by
and between the Registrant and Vision Drive, Inc.
10.12 Loan and Security Agreement, dated as of December 10, 1999,
by and between the Registrant and Imperial Bank; together
with an Intellectual Property Security Agreement, dated as
of December 10, 1999, by and between the Registrant and
Imperial Bank and a Securities Account Control Agreement,
dated as of December 10, 1999, by and between the Registrant
and Imperial Bank.
10.13** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Registrant by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, by and
between the Registrant and Nassib G. Chamoun.
10.14** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.15** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.16** Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form
of Pledge Agreement, by and between the Registrant and
certain directors and executive officers, together with a
schedule of material terms.
10.17** Promissory Note, dated September 24, 1997, made in favor of
the Registrant by Jeffrey Barrett.
10.18** Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge
Agreement, dated as of April 10, 1998, by and between the
Registrant and Jeffrey Barrett.
10.19** Series E Convertible Preferred Stock and Warrant Purchase
Agreement, dated December 17, 1998, by and among the
Registrant and the several purchasers named on Schedule I
thereto.
10.20** Fourth Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated December 17, 1998, by and among the
Registrant and the several parties named on Schedules I, II
and III thereto.
10.21** Fourth Amended and Restated Registration Rights Agreement,
dated December 17, 1998, by and among the Registrant and the
several purchasers named on the signature pages thereto.
10.22** Fourth Amended and Restated Voting Agreement, dated December
17, 1998, by and among the Registrant and the several
parties named on Schedules I, II and III thereto.
10.23** Form of Warrant to purchase the Registrant's common stock,
together with schedule of Warrantholders.
10.24+** Supplier Agreement, dated August 13, 1999, between Novation,
LLC and the Registrant.
10.25+** Medical Products Distribution Agreement, dated October 1,
1999, between Hewlett-Packard Company and the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
</TABLE>
II-4
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
27.1** Financial Data Schedule for fiscal year end December 31,
1998.
27.2** Financial Data Schedule for the nine months ended October 2,
1999.
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
portions have been omitted and filed separately with the Securities and
Exchange Commission.
** Previously filed.
Schedules have been omitted because they are not required or because the
required information is presented in the Company's consolidated financial
statements or related notes.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the provisions
contained in the Registrant's Restated Certificate of Incorporation, the
Underwriting Agreement, the laws of the State of Delaware, 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 that 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, 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, 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-5
<PAGE> 98
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Natick,
Massachusetts on January 10, 2000.
ASPECT MEDICAL SYSTEMS, INC.
By: /s/ J. NEAL ARMSTRONG
------------------------------------
J. Neal Armstrong
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ NASSIB G. CHAMOUN* President, Chief Executive January 10, 2000
- --------------------------------------------------- Officer and Director
Nassib G. Chamoun (Principal Executive Officer)
/s/ J. BRECKENRIDGE EAGLE* Chairman of the Board of January 10, 2000
- --------------------------------------------------- Directors
J. Breckenridge Eagle
/s/ J. NEAL ARMSTRONG Vice President and Chief January 10, 2000
- --------------------------------------------------- Financial Officer (Principal
J. Neal Armstrong Financial and Accounting
Officer)
/s/ BOUDEWIJN L.P.M. BOLLEN* Director January 10, 2000
- ---------------------------------------------------
Boudewijn L.P.M. Bollen
/s/ STEPHEN E. COIT* Director January 10, 2000
- ---------------------------------------------------
Stephen E. Coit
/s/ EDWIN M. KANIA* Director January 10, 2000
- ---------------------------------------------------
Edwin M. Kania
/s/ LESTER J. LLOYD* Director January 10, 2000
- ---------------------------------------------------
Lester J. Lloyd
/s/ TERRANCE MCGUIRE* Director January 10, 2000
- ---------------------------------------------------
Terrance McGuire
/s/ DONALD STANSKI* Director January 10, 2000
- ---------------------------------------------------
Donald Stanski
*By: /s/ J. NEAL ARMSTRONG
---------------------------------------------
J. Neal Armstrong
Attorney-In-Fact
</TABLE>
II-6
<PAGE> 99
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1** Restated Certificate of Incorporation of the Registrant.
3.2** Form of Restated Certificate of Incorporation to be in
effect upon the closing of the offering.
3.3** By-Laws of the Registrant, as amended.
3.4** Form of Amended and Restated By-laws of the Registrant to be
in effect upon the closing of the offering.
4.1** Specimen common stock certificate.
4.2** See Exhibits 3.2 and 3.4 for provisions of the Registrant's
certificate of incorporation and by-laws defining the rights
of holders of common stock.
5.1 Opinion of Hale and Dorr LLP.
10.1** 1998 Director Stock Option Plan, as amended.
10.2+** International Distribution Agreement, dated as of January
21, 1998, by and between the Registrant and Nihon Kohden
Corporation.
10.3+** International License Agreement, dated as of January 21,
1998, by and between the Registrant and Nihon Kohden
Corporation.
10.4** Trademark License Agreement, dated May 25, 1994, by and
between the Registrant and Aspect Electronics, Inc.
10.5** License Agreement, dated as of October 31, 1995, by and
between the Registrant and Siemens Medical Systems, Inc.
10.6+** Product Agreement, dated May 5, 1999, by and between the
Registrant and Drager Medizintechnik GmbH.
10.7+** OEM Development and Purchase Agreement, dated August 6,
1999, by and between the Registrant and Agilent
Technologies, Inc. (formerly part of Hewlett-Packard
Company).
10.8+** Letter Agreement, dated August 3, 1999, by and between the
Registrant and Agilent Technologies, Inc. (formerly part of
Hewlett-Packard Company).
10.9+** Distribution and License Agreement, dated as of April 1,
1996, between SpaceLabs Medical, Inc. and the Registrant.
10.10** Property Lease at 2 Vision Drive, by and between the
Registrant and Vision Drive, Inc., successor in interest to
Natick Executive Park Trust No. 2, dated September 8, 1994,
as amended, together with Subordination, Non-Disturbance and
Attornment Agreement, by and between the Registrant and
Teachers Insurance Association of America, dated June 15,
1995.
10.11** Lease Extension Agreement, dated as of August 7, 1997, by
and between the Registrant and Vision Drive, Inc.
10.12 Loan and Security Agreement, dated as of December 10, 1999,
by and between the Registrant and Imperial Bank; together
with an Intellectual Property Security Agreement, dated as
of December 10, 1999, by and between the Registrant and
Imperial Bank and a Securities Account Control Agreement,
dated as of December 10, 1999, by and between the Registrant
and Imperial Bank.
10.13** Promissory Note, dated February 18, 1997, as amended on
April 14, 1997, made in favor of the Registrant by Nassib G.
Chamoun, together with Pledge Agreement, dated as of
February 18, 1997, as amended on April 14, 1997, by and
between the Registrant and Nassib G. Chamoun.
</TABLE>
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.14** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.15** Promissory Note, dated May 1, 1997, made in favor of the
Registrant by Nassib G. Chamoun, together with Pledge
Agreement, dated as of May 1, 1997, by and between the
Registrant and Nassib G. Chamoun.
10.16** Form of Promissory Note made in favor of the Registrant by
certain directors and executive officers, together with Form
of Pledge Agreement, by and between the Registrant and
certain directors and executive officers, together with a
schedule of material terms.
10.17** Promissory Note, dated September 24, 1997, made in favor of
the Registrant by Jeffrey Barrett.
10.18** Promissory Note, dated April 10, 1998, made in favor of the
Registrant by Jeffrey Barrett, together with Pledge
Agreement, dated as of April 10, 1998, by and between the
Registrant and Jeffrey Barrett.
10.19** Series E Convertible Preferred Stock and Warrant Purchase
Agreement, dated December 17, 1998, by and among the
Registrant and the several purchasers named on Schedule I
thereto.
10.20** Fourth Amended and Restated Right of First Refusal and
Co-Sale Agreement, dated December 17, 1998, by and among the
Registrant and the several parties named on Schedules I, II
and III thereto.
10.21** Fourth Amended and Restated Registration Rights Agreement,
dated December 17, 1998, by and among the Registrant and the
several purchasers named on the signature pages thereto.
10.22** Fourth Amended and Restated Voting Agreement, dated December
17, 1998, by and among the Registrant and the several
parties named on Schedules I, II and III thereto.
10.23** Form of Warrant to purchase the Registrant's common stock,
together with schedule of Warrantholders.
10.24+** Supplier Agreement, dated August 13, 1999, between Novation,
LLC and the Registrant.
10.25+** Medical Products Distribution Agreement, dated October 1,
1999, between Hewlett-Packard Company and the Registrant.
23.1 Consent of Hale and Dorr LLP (contained in Exhibit 5.1).
23.2 Consent of Arthur Andersen LLP.
24.1** Power of Attorney.
27.1** Financial Data Schedule for fiscal year end December 31,
1998.
27.2** Financial Data Schedule for the nine months ended October 2,
1999.
</TABLE>
- ------------
* To be filed by amendment.
+ Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
portions have been omitted and filed separately with the Securities and
Exchange Commission.
** Previously filed.
<PAGE> 1
Exhibit 1.1
3,000,000 Shares
ASPECT MEDICAL SYSTEMS, INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
January ___, 2000
<PAGE> 2
January ___, 2000
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities, Inc.
U.S. Bancorp Piper Jaffray, Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs and Mesdames:
Aspect Medical Systems, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters named in Schedule I
hereto (the "UNDERWRITERS") 3,000,000 shares of its Common Stock, par value $.01
per share (the "FIRM SHARES"). The Company also proposes to issue and sell to
the several Underwriters not more than an additional 450,000 shares of its
Common Stock, par value $.01 per share (the "ADDITIONAL SHARES") if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 2 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES." The
shares of Common Stock, par value $.01 per share of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON Stock."
The Company has filed with the Securities and Exchange Commission (the
"COMMISSION") a registration statement, including a prospectus, relating to the
Shares. The registration statement as amended at the time it becomes effective,
including the information (if any) deemed to be part of the registration
statement at the time of effectiveness pursuant to Rule 430A under the
Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the prospectus in the form first
used to confirm sales of Shares is hereinafter referred to as the "PROSPECTUS."
If the Company has filed an abbreviated registration statement to register
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act (the "RULE 462 REGISTRATION STATEMENT"), then any reference herein to the
term "REGISTRATION STATEMENT" shall be deemed to include such Rule 462
Registration Statement.
Morgan Stanley & Co. Incorporated ("MORGAN STANLEY") has agreed to reserve
up to _______ Shares to be purchased by it under this Agreement for sale to the
Company's directors, officers, employees and business associates and other
parties related to the Company (collectively, "PARTICIPANTS"), as set forth in
the Prospectus under the heading "Underwriters"(the "DIRECTED SHARE PROGRAM").
The Shares to be sold by Morgan
2
<PAGE> 3
Stanley and its affiliates pursuant to the Directed Share Program are referred
to hereinafter as the "DIRECTED SHARES." Any Directed Shares not orally
confirmed for purchase by any Participants by the end of the business day on
which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
1. Representations and Warranties. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective; no stop order
suspending the effectiveness of the Registration Statement is in effect,
and no proceedings for such purpose are pending before or, to the Company's
knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became effective, did not
contain and, as amended or supplemented, if applicable, will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading, (ii) the Registration Statement and the Prospectus comply
and, as amended or supplemented, if applicable, will comply in all material
respects with the Securities Act and the applicable rules and regulations
of the Commission thereunder and (iii) the Prospectus does not contain and,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph do not apply to statements or
omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in writing
by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Delaware, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
(d) Each subsidiary of the Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to
3
<PAGE> 4
transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires
such qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect
on the Company and its subsidiaries, taken as a whole; all of the issued
shares of capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and non-assessable and,
except for director qualifying shares, are owned directly by the Company,
free and clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed and delivered by
the Company.
(f) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(g) The shares of Common Stock outstanding prior to the issuance of
the Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
(h) The Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be validly
issued, fully paid and non-assessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and the performance
by the Company of its obligations under, this Agreement will not contravene
any provision of applicable law or the certificate of incorporation or
by-laws of the Company or any agreement or other instrument binding upon
the Company or any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Company or
any subsidiary which specifically names the Company or such subsidiary or
as to which the Company is otherwise aware, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by the Company of its obligations
under this Agreement, except such as may be required by the securities or
Blue Sky laws of the various states in connection with the offer and sale
of the Shares.
(j) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in the Prospectus
4
<PAGE> 5
(exclusive of any amendments or supplements thereto subsequent to the date
of this Agreement).
(k) There are no legal or governmental proceedings pending or, to the
Company's knowledge, threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be described in the
Registration Statement or the Prospectus and are not so described or any
statutes, regulations, contracts or other documents that are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement that are not described or filed as
required.
(l) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Securities Act, complied when so filed in
all material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as described
in the Prospectus, will not be an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(n) The Company and its subsidiaries (i) are in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("ENVIRONMENTAL LAWS"), (ii) have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and (iii) are in compliance with all terms and
conditions of any such permit, license or approval, except where such
noncompliance with Environmental Laws, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and
conditions of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(o) To the Company's knowledge, there are no costs or liabilities
associated with Environmental Laws (including, without limitation, any
capital or operating expenditures required for clean-up, closure of
properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have
a material adverse effect on the Company and its subsidiaries, taken as a
whole.
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(p) There are no contracts, agreements or understandings between the
Company and any person (other than such contracts, agreements or
understandings the applicability of which to the transactions contemplated
hereby have been properly waived) granting such person the right to require
the Company to file a registration statement under the Securities Act with
respect to any securities of the Company or to require the Company to
include such securities with the Shares registered pursuant to the
Registration Statement.
(q) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(r) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, (1) the Company and
its subsidiaries have not incurred any material liability or obligation,
direct or contingent, nor entered into any material transaction not in the
ordinary course of business; (2) the Company has not purchased any of its
outstanding capital stock, other than pursuant to any stock repurchase
rights pursuant to agreements with officers of the Company described in the
Prospectus, nor declared, paid or otherwise made any dividend or
distribution of any kind on its capital stock other than ordinary and
customary dividends; and (3) there has not been any material change in the
capital stock, short-term debt or long-term debt of the Company and its
subsidiaries, except in each case as described in the Prospectus.
(s) The Company and its subsidiaries have good and marketable title
in fee simple to all real property and good and marketable title to all
personal property owned by them which is material to the business of the
Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in the Prospectus or
such as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such property by the
Company and its subsidiaries; and any real property and buildings held
under lease by the Company and its subsidiaries are held by them under
valid, subsisting and enforceable leases with such exceptions as are not
material and do not interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in each
case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names currently
employed by them in
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connection with the business now operated by them, and neither the Company
nor any of its subsidiaries has received any notice of infringement or of
conflict with asserted rights of others with respect to any of the
foregoing which would be reasonably likely to have a material adverse
effect on the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of the Company or
any of its subsidiaries exists, except as described in the Prospectus, or,
to the knowledge of the Company, is imminent; and the Company is not aware
of any existing, threatened or imminent labor disturbance by the employees
of any of its principal suppliers, manufacturers or contractors that could
have a material adverse effect on the Company and its subsidiaries, taken
as a whole.
(v) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and risks and in
such amounts as, in the Company's reasonable judgment, are prudent and
customary in the business in which they are engaged; neither the Company
nor any of its subsidiaries has been refused any insurance coverage sought
or applied for; and neither the Company nor any of its subsidiaries has any
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage
from similar insurers as may be necessary to continue its business at a
cost that would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all certificates,
authorizations and permits issued by the appropriate federal, state or
foreign regulatory authorities necessary to conduct their respective
businesses, other than those which, if not so possessed, would not have a
material adverse effect on the Company, and neither the Company nor any of
its subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on the
Company and its subsidiaries, taken as a whole, except as described in the
Prospectus.
(x) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (1) transactions are executed in accordance with management's general
or specific authorizations; (2) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (3)
access to assets is permitted only in accordance with management's general
or specific authorization; and (4) the
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<PAGE> 8
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(y) The Registration Statement, the Prospectus and any preliminary
prospectus comply, and any amendments or supplements thereto will comply,
with any applicable laws or regulations of foreign jurisdictions in which
the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share
Program.
(z) No consent, approval, authorization on order of, or qualification
with, any governmental body or agency, other than those obtained, is
required in connection with the offering of the Directed Shares in any
jurisdiction where the Directed Shares are being offered.
(aa) The Company has not offered, or caused Morgan Stanley or its
affiliates to offer, Shares to any person pursuant to the Directed Share
Program with the specific intent to unlawfully influence (i) a customer or
supplier of the Company to alter the customer's or supplier's level or type
of business with the Company, or (ii) a trade journalist or publication to
write or publish favorable information about the Company or its products.
(bb) The Company has reviewed its operations and that of its
subsidiaries to evaluate the extent to which the business or operations of
the Company or any of its subsidiaries will be affected by the Year 2000
Problem (that is, any significant risk that computer hardware or software
applications used by the Company and its subsidiaries will not, in the case
of dates or time periods occurring after December 31, 1999, function at
least as effectively as in the case of dates or time periods occurring
prior to January 1, 2000); as a result of such review, (i) the Company does
not believe that (A) there are any issues related to the Company's
preparedness to address the Year 2000 Problem that are of a character
required to be described or referred to in the Registration Statement or
Prospectus which have not been accurately described in the Registration
Statement or Prospectus and (B) the Year 2000 Problem will have a material
adverse effect on the condition, financial or otherwise, or on the
earnings, business or operations of the Company and its subsidiaries, taken
as a whole, or result in any material loss or interference with the
business or operations of the Company and its subsidiaries, taken as a
whole, and (ii) the Company reasonably believes, after due inquiry, that
the suppliers, vendors, customers or other material third parties used or
served by the Company and such subsidiaries are addressing or will address
the Year 2000 Problem in a timely manner, except to the extent that a
failure to address the Year 2000 Problem by any supplier, vendor, customer
or material third party would not have a material adverse effect on the
condition,
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<PAGE> 9
financial or otherwise, or on the earnings, business or operations of the
Company and its subsidiaries, taken as a whole.
2. Agreements to Sell and Purchase. The Company hereby agrees
to sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedule I hereto
opposite its name at $______ a share (the "PURCHASE PRICE").
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Company agrees to sell
to the Underwriters the Additional Shares, and the Underwriters shall have a
one-time right to purchase, severally and not jointly, up to _______________
Additional Shares at the Purchase Price. If you, on behalf of the Underwriters,
elect to exercise such option, you shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the Underwriters and the date
on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each Underwriter agrees, severally and
not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as you may determine) that bears the
same proportion to the total number of Additional Shares to be purchased as the
number of Firm Shares set forth in Schedule I hereto opposite the name of such
Underwriter bears to the total number of Firm Shares.
The Company hereby agrees that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it will not,
during the period ending 180 days after the date of the Prospectus, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or (ii) enter into any swap or other arrangement
that transfers to another, in whole or in part, any of the economic consequences
of ownership of the Common Stock, whether any such transaction described in
clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Shares to be sold hereunder, (B) the issuance by the Company of
shares of Common Stock upon the exercise of an option or warrant or the
conversion of a security outstanding on the date hereof that is disclosed in the
Prospectus or of which the
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Underwriters have been advised in writing or (C) the issuance of shares of
Common Stock or options therefor pursuant to equity incentive plans described in
the Prospectus.
3. Terms of Public Offering. The Company is advised by you that
the Underwriters propose to make a public offering of their respective portions
of the Shares as soon after the Registration Statement and this Agreement have
become effective as in your judgment is advisable. The Company is further
advised by you that the Shares are to be offered to the public initially at
$_____________ a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of $______
a share under the Public Offering Price, and that any Underwriter may allow, and
such dealers may reallow, a concession, not in excess of $_____ a share, to any
Underwriter or to certain other dealers.
4. Payment and Delivery. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on November ___, 1999 or
at such other time on the same or such other date, not later than November ___,
1999 as shall be designated in writing by you. The time and date of such payment
are hereinafter referred to as the "CLOSING DATE". The closing of the offer and
the sale of the Firm Shares will be held at the offices of Hale and Dorr LLP, 60
State Street, Boston, Massachusetts.
Payment for any Additional Shares shall be made to the Company in
Federal or other funds immediately available in New York City against delivery
of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than November ___, 1999 as shall be designated in
writing by you. The time and date of such payment are hereinafter referred to as
the "OPTION CLOSING DATE". The closing of the offer and the sale of the
Additional Shares will be held at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts.
Certificates for the Firm Shares and Additional Shares shall be in
definitive form and registered in such names and in such denominations as you
shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
5. Conditions to the Underwriters' Obligations. The obligations
of the Company to sell the Shares to the Underwriters and the several
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<PAGE> 11
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the condition that the Registration Statement shall
have become effective not later than [_____] (New York City time) on the date
hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this Agreement and
prior to the Closing Date:
(i) if any of the Company's securities are rated by any
"nationally recognized statistical rating organization," as such term
is defined for purposes of Rule 436(g)(2) under the Securities Act,
there shall not have occurred any downgrading, nor shall any notice
have been given of any intended or potential downgrading or of any
review for a possible change that does not indicate the direction of
the possible change, in the rating accorded any of such Company
securities; and
(ii) there shall not have occurred any change, or any development
involving a prospective change, in the condition, financial or
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer of
the Company, to the effect that the representations and warranties of the
Company contained in this Agreement are true and correct as of the Closing
Date and that the Company has complied with all of the agreements and
satisfied all of the conditions on its part to be performed or satisfied
hereunder on or before the Closing Date.
The officer signing and delivering such certificate may rely upon the
best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date an
opinion of Hale and Dorr LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of the State of
Delaware
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incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in
the Commonwealth of Massachusetts, which to such counsel's knowledge
is the only jurisdiction in which the Company maintains an office or
leases property in the United States;
(ii) each U.S. subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in
which the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as
a whole;
(iii) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding of record prior to
the issuance of the Shares have been duly authorized and are validly
issued, fully paid and non-assessable;
(v) all of the issued shares of capital stock of each subsidiary
of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned of record directly by the
Company, to the knowledge of such counsel free and clear of all liens,
encumbrances, equities or claims;
(vi) the Shares have been duly authorized and, when issued and
delivered in accordance with the terms of this Agreement, will be
validly issued, fully paid and non-assessable, and the issuance of
such Shares will not be subject to any preemptive or similar rights;
provided, however, with respect to preemptive or similar rights
granted by contract to which the Company is a party, the existence of
such preemptive or similar rights shall be limited to such counsel's
knowledge;
(vii) this Agreement has been duly authorized, executed and
delivered by the Company;
(viii) the execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement
will
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not contravene any provision of applicable law or the certificate of
incorporation or by-laws of the Company or, to the best of such
counsel's knowledge, any agreement or other instrument binding upon
the Company or any of its subsidiaries that is filed as an exhibit to
the Registration Statement, or, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the
Company or any subsidiary of which such counsel is aware, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares;
(ix) the statements (A) in the Prospectus under the captions
"Business - Patents and Proprietary Rights," "Shares Eligible for
Future Sale," "Description of Capital Stock" and the [first, second,
fourth, fifth, eight and tenth] paragraphs under "Underwriters" and
(B) in the Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents
and proceedings and fairly summarize in all material respects the
matters required to be disclosed therein;
(x) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company or any of its
subsidiaries is a party or to which any of the properties of the
Company or any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and are not
so described or of any statutes, regulations, contracts or other
documents that are required by the Securities Act or rules and
regulations thereunder to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(xi) the Company is not and, after giving effect to the offering
and sale of the Shares and the application of the proceeds thereof as
described in the Prospectus, will not be an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended;
(xii) such counsel is of the opinion that the Registration
Statement and Prospectus (except for financial statements and
schedules and other financial and statistical data included therein as
to which such counsel need not express any opinion) comply as to form
in all material respects
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<PAGE> 14
with the requirements of the Securities Act and the applicable rules
and regulations of the Commission thereunder.
(xiii) such counsel knows of no facts which would result in any
third party possessing any ownership right in any of the Company's
patents and patent applications referred to or described in the
Registration Statement and Prospectus. To the knowledge of such
counsel, the Company has complied with the Patent and Trademark Office
("PTO") duty of candor and good faith in dealing with the PTO,
including the duty to disclose to the PTO all information known to be
material to the patentability of each of such United States patents
and patent applications. To the knowledge of such counsel, all
assignments from each named inventor to the Company have been executed
and recorded with the PTO for each patent and patent application.
Such counsel shall state that (A) nothing has come to its attention that
would cause such counsel to believe that (except for financial statements and
schedules and other financial and statistical data as to which such counsel need
not express any belief) the Registration Statement and the Prospectus included
therein at the time the Registration Statement became effective contained any
untrue statement of a material fact or omitted to state a material fact required
to be stated therein or necessary to make the statements therein not misleading
and (B) it has no reason to believe that (except for financial statements and
schedules and other financial and statistical data as to which such counsel need
not express any belief) the Prospectus contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(d) The Underwriters shall have received on the Closing Date an
opinion of Covington and Burling, special FDA regulatory counsel for the
Company, dated the Closing Date, to the effect that they serve as special
FDA regulatory counsel to the Company and that:
(i) The statements in the Registration Statement and Prospectus
under the captions "Risk Factors -- Government Regulation" and
"Business -- Government Regulation," insofar as such statements
purport to summarize applicable provisions of the Federal Food, Drug
and Cosmetic Act, as amended, and the regulations promulgated
thereunder, are accurate in all material respects.
(ii) Such counsel is of the opinion that the statements under the
caption "Business -- Government Regulation," insofar as such
statements purport to summarize applicable European regulatory
requirements for medical device products, are accurate in all material
respects.
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(iii) Based solely on oral representations made to such
counsel by officers of the Company and a review of certain regulatory
documents made available by the Company, such counsel is not aware of
any adverse judgment, injunction, decree or order that has been issued
by the FDA or brought by or on behalf of the FDA against the Company,
or any action, proceeding or investigation pending before the FDA, or
threatened by the FDA, against the Company.
(iv) Based solely on the description of the Company's
business and products set forth in the Prospectus, and on oral
representations made to such counsel by certain officers of the
Company concerning certain conversations and meetings held by the
Company with FDA reviewers to discuss the applicable regulatory
requirements for those products (in which such counsel did not
participate), and with the exception of certain modifications to
approved products for which the Company has independently determined
that additional approvals are not required, the Company has obtained
all product approvals from the FDA for its currently marketed products
described in the Prospectus.
In rendering the foregoing opinion, such counsel may state that they have
not independently verified nor do they take any responsibility for nor are they
addressing in any way any statements of fact, any statements concerning foreign
law (except as set forth in Section 5(d)(ii) above) or any legal conclusions or
statements of belief attributable to the Company or whether or not the Company
is in compliance with applicable FDA regulations.
In addition to the foregoing opinions, counsel shall state that:
During the course of preparation of the Registration Statement, such
counsel participated in certain discussions with officers of the Company as to
the FDA regulatory matters dealt with under the captions "Risk Factors - Our
future success depends on our ability to obtain domestic and foreign regulatory
approval of our products and manufacturing operations" and "Business -Government
Regulation" in the Prospectus. While such counsel has not undertaken to
determine independently and such counsel does not assume any responsibility for,
the accuracy, completeness, or fairness of the statements of fact under such
captions in the Prospectus, such counsel shall state on the basis of these
discussions that no facts have come to their attention which cause them to
believe that the statements in the Prospectus under the captions "Risk Factors -
Our future success depends on our ability to obtain domestic and foreign
regulatory approval of our products and manufacturing operations" and Business -
Government Regulation," insofar as such statements relate to FDA regulatory
matters, at the time the Registration
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Statement became effective, contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading, or at the Closing Date, contains an
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(e) The Underwriters shall have received on the Closing Date an
opinion of Testa, Hurwitz & Thibeault, LLP, counsel for the Underwriters,
dated the Closing Date, covering the matters referred to in Sections
5(c)(vi), 5(c)(vii), 5(c)(ix) (but only as to the statements in the
Prospectus under "Description of Capital Stock" and "Underwriters") and
5(c)(xiii) above.
With respect to Section 5(c)(xiii) above, Hale and Dorr LLP and Testa,
Hurwitz & Thibeault, LLP may state that their opinion and belief are based
upon their participation in the preparation of the Registration Statement
and Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified.
The opinion of Hale and Dorr, LLP described in Section 5(c) above
shall be rendered to the Underwriters at the request of the Company and
shall so state therein.
(f) The Underwriters shall have received, on each of the date hereof
and the Closing Date, a letter dated the date hereof or the Closing Date,
as the case may be, in form and substance satisfactory to the Underwriters,
from Arthur Andersen LLP, independent public accountants, containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements
and certain financial information contained in the Registration Statement
and the Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, officers and
directors of the Company relating to sales and certain other dispositions
of shares of Common Stock or certain other securities, delivered to you on
or before the date hereof, shall be in full force and effect on the Closing
Date.
(h) The Underwriters shall have received on the Closing Date an
opinion of _________, U.K. counsel for the Company, dated the Closing Date,
to the effect that each U.K. subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing under
the laws of the
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jurisdiction of its incorporation, has the corporate power and authority to
own its property and to conduct its business as described in the Prospectus
and is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(i) The Underwriters shall have received on the Closing Date an
opinion of Nauta Dutilh, Netherlands counsel for the Company, dated the
Closing Date, to the effect that each Netherlands subsidiary of the Company
has been duly incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a material adverse effect on the Company
and its subsidiaries, taken as a whole.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the delivery to you on the Option Closing Date
of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of the Additional
Shares and other matters related to the issuance of the Additional Shares.
6. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed copies of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City, without
charge, prior to 10:00 a.m. New York City time on the business day next
succeeding the date of this Agreement and during the period mentioned in
Section 6(c) below, as many copies of the Prospectus and any supplements
and amendments thereto or to the Registration Statement as you may
reasonably request.
(b) Before amending or supplementing the Registration Statement or the
Prospectus, to furnish to you a copy of each such proposed amendment or
supplement and not to file any such proposed amendment or supplement to
which you reasonably object, and to file with the Commission within the
applicable
17
<PAGE> 18
period specified in Rule 424(b) under the Securities Act any prospectus
required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public offering
of the Shares as in the opinion of counsel for the Underwriters the
Prospectus is required by law to be delivered in connection with sales by
an Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus in
order to make the statements therein, in the light of the circumstances
when the Prospectus is delivered to a purchaser, not misleading, or if, in
the opinion of counsel for the Underwriters, it is necessary to amend or
supplement the Prospectus to comply with applicable law, forthwith to
prepare, file with the Commission and furnish, at its own expense, to the
Underwriters and to the dealers (whose names and addresses you will furnish
to the Company) to which Shares may have been sold by you on behalf of the
Underwriters and to any other dealers upon request, either amendments or
supplements to the Prospectus so that the statements in the Prospectus as
so amended or supplemented will not, in the light of the circumstances when
the Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and sale under the
securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) To make generally available to the Company's security holders and
to you as soon as practicable an earning statement covering the
twelve-month period ending December 31, 2001 that satisfies the provisions
of Section 11(a) of the Securities Act and the rules and regulations of the
Commission thereunder.
(f) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of its obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the
Company's counsel and the Company's accountants in connection with the
registration and delivery of the Shares under the Securities Act and all
other fees or expenses in connection with the preparation and filing of the
Registration Statement, any preliminary prospectus, the Prospectus and
amendments and supplements to any of the foregoing, including all printing
costs associated therewith, and the mailing and delivering of copies
thereof to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and delivery
of the Shares to the Underwriters, including any transfer or other taxes
payable thereon, (iii) the cost of printing or producing any Blue Sky or
Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of
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<PAGE> 19
the Shares for offer and sale under state securities laws as provided in
Section 6(d) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements
of counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) all fees and expenses in connection with the
preparation and filing of the registration statement on Form 8-A relating
to the Common Stock and all costs and expenses incident to listing the
Shares on the Nasdaq National Market, (vi) the cost of printing
certificates representing the Shares, (vii) the costs and charges of any
transfer agent, registrar or depositary, (viii) the costs and expenses of
the Company relating to investor presentations on any "road show"
undertaken in connection with the marketing of the offering of the Shares,
including, without limitation, expenses associated with the production of
road show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval of
the Company, travel and lodging expenses of the representatives and
officers of the Company and any such consultants, and the cost of any
aircraft chartered in connection with the road show, (ix) all fees and
disbursements of counsel incurred by the Underwriters in connection with
the Directed Share Program and stamp duties, similar taxes or duties or
other taxes, if any, incurred by the Underwriters in connection with the
Directed Share Program and (x) all other costs and expenses incident to the
performance of the obligations of the Company hereunder for which provision
is not otherwise made in this Section. It is understood, however, that
except as provided in this Section, Section 7 entitled "Indemnity and
Contribution", and the last paragraph of Section 10 below, the Underwriters
will pay all of their costs and expenses, including fees and disbursements
of their counsel, stock transfer taxes payable on resale of any of the
Shares by them and any advertising expenses connected with any offers they
may make.
(g) To place stop transfer orders on any Directed Shares that have
been sold to Participants subject to the three month restriction on sale,
transfer, assignment, pledge or hypothecation imposed by NASD Regulation,
Inc. under its Interpretative Material 2110-1 on free-riding and
withholding to the extent necessary to ensure compliance with the three
month restrictions.
(h) To comply with all applicable securities and other applicable
laws, rules and regulations in each jurisdiction in which the Directed
Shares are offered in connection with the Directed Shares Program.
7. Indemnity and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any
19
<PAGE> 20
Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), from and against any and all losses, claims, damages and liabilities
(including, without limitation, any legal or other expenses reasonably incurred
in connection with defending or investigating any such action or claim) caused
by any untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement or any amendment thereof, any preliminary
prospectus or the Prospectus (as amended or supplemented if the Company shall
have furnished any amendments or supplements thereto), or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused by any such
untrue statement or omission or alleged untrue statement or omission based upon
information relating to any Underwriter furnished to the Company in writing by
such Underwriter through you expressly for use therein; provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
(b) Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, its directors, its officers who sign the
Registration Statement and each person, if any, who controls the Company within
the meaning of either Section 15 of the Securities Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
such Underwriter, but only with reference to information relating to such
Underwriter furnished to the Company in writing by such Underwriter through you
expressly for use in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to Section 7(a) or 7(b), such person (the "INDEMNIFIED PARTY")
shall promptly notify the person against whom such indemnity may be sought (the
"INDEMNIFYING PARTY") in writing and the indemnifying party, upon request of the
indemnified party, shall retain counsel reasonably satisfactory to the
indemnified party to represent the indemnified party and any others the
indemnifying party may designate in such proceeding and shall pay the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain
20
<PAGE> 21
its own counsel, but the fees and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the indemnifying party and the
indemnified party shall have mutually agreed to the retention of such counsel or
(ii) the named parties to any such proceeding (including any impleaded parties)
include both the indemnifying party and the indemnified party and representation
of both parties by the same counsel would be inappropriate due to actual or
potential differing interests between them. It is understood that the
indemnifying party shall not, in respect of the legal expenses of any
indemnified party in connection with any proceeding or related proceedings in
the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all such indemnified
parties and that all such fees and expenses shall be reimbursed as they are
incurred. Such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated, in the case of parties indemnified pursuant to Section 7(a), and
by the Company, in the case of parties indemnified pursuant to Section 7(b). The
indemnifying party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party from and against any loss or liability by reason
of such settlement or judgment. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any pending
or threatened proceeding in respect of which any indemnified party is or could
have been a party and indemnity could have been sought hereunder by such
indemnified party, unless such settlement includes an unconditional release of
such indemnified party from all liability on claims that are the subject matter
of such proceeding.
(d) To the extent the indemnification provided for in Section 7(a) or
7(b) is unavailable to an indemnified party or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then each
indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. The
21
<PAGE> 22
relative fault of the Company on the one hand and the Underwriters on the other
hand shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or by the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
7 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
(e) The Company and the Underwriters agree that it would not be just
or equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to in Section 7(d). The amount paid or payable
by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
(f) The indemnity and contribution provisions contained in this
Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter or by or on behalf of the Company, its officers or directors or
any person controlling the Company and (iii) acceptance of and payment for any
of the Shares.
8. Directed Share Program Indemnification.
(a) The Company agrees to indemnify and hold harmless Morgan Stanley
and its affiliates and each person, if any, who controls Morgan Stanley and its
affiliates within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act ("MORGAN STANLEY ENTITIES"), from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses
22
<PAGE> 23
reasonably incurred in connection with defending or investigating any such
action or claim) (i) caused by any untrue statement or alleged untrue statement
of a material fact contained in any material prepared by or with the consent of
the Company for distribution to Participants in connection with the Directed
Share Program, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; (ii) caused by the failure of any Participant to pay for
and accept delivery of Directed Shares which promptly following the
effectiveness of the Registration Statement were subject to a properly evidenced
agreement to purchase; or (iii) related to, arising out of, or in connection
with the Directed Share Program other than losses, claims, damages or
liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from the bad faith or gross negligence of Morgan
Stanley Entities.
(b) In case any proceeding (including any governmental investigation)
shall be instituted involving any Morgan Stanley Entity in respect of which
indemnity may be sought pursuant to Section 8(a), the Morgan Stanley Entity
seeking indemnity shall promptly notify the Company in writing and the Company,
upon request of the Morgan Stanley Entity, shall retain counsel reasonably
satisfactory to the Morgan Stanley Entity to represent the Morgan Stanley Entity
and any other person or entity the Company may designate in such proceeding. In
any such proceeding, any Morgan Stanley Entity shall have the right to retain
its own counsel, but the fees and expenses of such counsel shall be at the
expense of such Morgan Stanley Entity unless (i) the Company shall have agreed
to the retention of such counsel or (ii) the named parties to any such
proceeding (including any impleaded parties) include both the Company and the
Morgan Stanley Entity and representation of both parties by the same counsel
would be inappropriate due to actual or potential differing interests between
them. The Company shall not, in respect of the legal expenses of the Morgan
Stanley Entities in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the fees and expenses of more than one separate
firm (in addition to any local counsel) for all Morgan Stanley Entities. Any
such firm for the Morgan Stanley Entities shall be designated in writing by
Morgan Stanley. The Company shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the Company agrees to
indemnify the Morgan Stanley Entities from and against any loss or liability by
reason of such settlement or judgment. The Company shall not, without the prior
written consent of Morgan Stanley, effect any settlement of any pending or
threatened proceeding in respect of which any Morgan Stanley Entity is or could
have been a party and indemnity could have been sought hereunder by such Morgan
Stanley Entity, unless such settlement includes an unconditional release of the
Morgan Stanley Entities from all liability on claims that are the subject matter
of such proceeding.
(c) To the extent the indemnification provided for in Section 8(a) is
unavailable to a Morgan Stanley Entity or insufficient in respect of any losses,
claims,
23
<PAGE> 24
damages or liabilities referred to therein, then the Company, in lieu of
indemnifying the Morgan Stanley Entity thereunder, shall contribute to the
amount paid or payable by the Morgan Stanley Entity as a result of such losses,
claims, damages or liabilities (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand and the
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities, as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and of the Morgan Stanley Entities on the other hand in connection with
the offering of the Directed Shares shall be deemed to be in the same respective
proportions as the net proceeds from the offering of the Directed Shares (before
deducting expenses) and the total underwriting discounts and commissions
received by the Morgan Stanley Entities for the Directed Shares, bear to the
aggregate Public Offering Price of the Shares. If the loss, claim, damage or
liability is caused by an untrue or alleged untrue statement of a material fact,
the relative fault of the Company on the one hand and the Morgan Stanley
Entities on the other hand shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement or the omission or
alleged omission relates to information supplied by the Company or by the Morgan
Stanley Entities and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
(d) The Company and the Morgan Stanley Entities agree that it would
not be just or equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 8(c). The amount paid or payable by the Morgan Stanley Entities as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
the Morgan Stanley Entities in connection with investigating or defending any
such action or claim. Notwithstanding the provisions of this Section 8, no
Morgan Stanley Entity shall be required to contribute any amount in excess of
the amount by which the total price at which the directed Shares distributed to
the public were offered to the public exceeds the amount of any damages that
such Morgan Stanley Entity has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. The remedies
provided for in this Section 8 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any Morgan Stanley Entity or law
or in equity.
24
<PAGE> 25
(e) The indemnity and contribution provisions contained in this
Section 8 shall remain operative and in full force and effect regardless of (i)
any termination of this Agreement, (ii) any investigation made by or on behalf
of any Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. Termination. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 9(a)(i) through 9(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
10. Effectiveness; Defaulting Underwriters. This Agreement shall
become effective upon the execution and delivery hereof by the parties hereto.
If, on the Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Shares
that it has or they have agreed to purchase hereunder on such date, and the
aggregate number of Shares which such defaulting Underwriter or Underwriters
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 10 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you and
the Company for the purchase of such Firm Shares are not made
25
<PAGE> 26
within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter or the Company. In any
such case either you or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Registration Statement and in the Prospectus or in any
other documents or arrangements may be effected. If, on the Option Closing Date,
any Underwriter or Underwriters shall fail or refuse to purchase Additional
Shares and the aggregate number of Additional Shares with respect to which such
default occurs is more than one-tenth of the aggregate number of Additional
Shares to be purchased, the non-defaulting Underwriters shall have the option to
(i) terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or any of
them, because of any failure or refusal on the part of the Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company shall be unable to perform its obligations under this
Agreement, the Company will reimburse the Underwriters or such Underwriters as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by such Underwriters in connection with this Agreement or
the offering contemplated hereunder.
11. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
12. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
26
<PAGE> 27
13. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
Aspect Medical Systems, Inc.
By:____________________________
Name:
Title:
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities, Inc.
U.S. Bancorp Piper Jaffray Inc.
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:__________________________
Name:
Title:
27
<PAGE> 28
SCHEDULE I
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
Morgan Stanley & Co. Incorporated
Deutsche Bank Securities, Inc.
U.S. Bancorp Piper Jaffray, Inc.
[NAMES OF OTHER UNDERWRITERS]
---------------
Total ........
===============
<PAGE> 29
EXHIBIT A
[FORM OF LOCK-UP LETTER]
August __, 1999
Morgan Stanley & Co. Incorporated
Deutsche Banc Alex. Brown
Piper Jaffray Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated ("MORGAN
STANLEY") proposes to enter into an Underwriting Agreement (the "UNDERWRITING
AGREEMENT") with Aspect Medical Systems, Inc., a Delaware corporation (the
"COMPANY") providing for the public offering (the "PUBLIC OFFERING") by the
several Underwriters, including Morgan Stanley (the "UNDERWRITERS"), of shares
(the "SHARES") of common stock, par value $.01 per share, of the Company (the
"COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering to
continue their efforts in connection with the Public Offering, the undersigned
hereby agrees that, without the prior written consent of Morgan Stanley on
behalf of the Underwriters, it will not, during the period commencing on the
date hereof and ending 180 days after the date of the final prospectus relating
to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell, contract to
sell, sell any option or contract to purchase, purchase any option or contract
to sell, grant any option, right or warrant to purchase, lend, or otherwise
transfer or dispose of, directly or indirectly, any shares of Common Stock or
any securities convertible into or exercisable or exchangeable for Common Stock
or (2) enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of Common Stock,
whether any such transaction described in clause (1) or (2) above is to be
settled by delivery of Common Stock or such other securities, in cash or
otherwise. The foregoing sentence shall not apply to (a) the sale of any Shares
to the Underwriters pursuant to the Underwriting Agreement, (b) transactions
relating to shares of Common Stock or other securities acquired in open market
transactions after the completion of the Public Offering, or (c) the sale or
transfer of Shares to an acquiror in connection with the sale of the Company
pursuant to a merger, sale of stock or otherwise. In addition, the undersigned
agrees that, without the prior written consent of Morgan Stanley on behalf of
the Underwriters, it will not, during the period commencing on the date hereof
and ending 180 days after the date of the Prospectus, make any demand for or
exercise any right with respect to, the registration of any shares of Common
Stock or any security convertible into or exercisable or exchangeable for Common
Stock.
Notwithstanding the foregoing (i) gifts or (ii) transfers to (A) the
undersigned's immediate family or (B) a trust, the beneficiaries of which are
the undersigned and/or members of the undersigned's immediate family, shall not
be prohibited by this agreement; provided, that, (x) the
<PAGE> 30
donee or transferee agrees in writing to be bound by the foregoing in the same
manner as it applies to the undersigned and (y) if the donor or transferor is a
reporting person subject to Section 16(a) of the Securities Exchange Act of 1934
(the "Exchange Act"), any gifts or transfer made in accordance with this
paragraph shall not require such person to, and such person shall not
voluntarily, file a report of such transaction on Form 4 under the Exchange Act.
"Immediate family" shall mean spouse, lineal descendants, father, mother,
brother or sister of the transferor and father, mother, brother or sister of the
transferor's spouse.
The undersigned acknowledges that this agreement is in lieu of any other
agreement, arrangement or understanding that the undersigned has previously
entered into with respect to restrictions on the sale or other disposition of
the undersigned's shares of Common Stock of the Company in connection with an
initial public offering of Common Stock by the Company.
Whether or not the Public Offering actually occurs depends on a number of
factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
This agreement shall automatically terminate if either (i) the Underwriting
Agreement has not been entered into by February 28, 2000 or (ii) the
Underwriting Agreement is terminated in accordance with its terms prior to the
closing of the Public Offering .
Very truly yours,
_____________________________
(Name)
_____________________________
(Address)
<PAGE> 1
Exhibit 5.1
HALE AND DORR LLP
Counsellors at Law
60 State Street, Boston Massachusetts 02109
January 10, 2000
Aspect Medical Systems, Inc.
Two Vision Drive
Natick, Massachusetts 01760
RE: Registration Statement on Form S-1
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Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (Commission File No. 333-86295) (the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), for the
registration of 3,450,000 shares of Common Stock, $0.01 par value per share (the
"Shares"), of Aspect Medical Systems, Inc., a Delaware corporation (the
"Company"), including 450,000 Shares issuable upon exercise of an over-allotment
option granted by the Company.
The Shares are to be sold by the Company pursuant to an underwriting
agreement (the "Underwriting Agreement") to be entered into by and among the
Company and Morgan Stanley & Co. Incorporated, Deutsche Bank Securities, Inc.
and U.S. Bancorp Piper Jaffray, Inc., as representatives of the several
underwriters named in Schedule I to the Underwriting Agreement, the form of
which has been filed as Exhibit 1 to the Registration Statement.
We are acting as counsel for the Company in connection with the issue and
sale by the Company of the Shares. We have examined signed copies of the
Registration Statement as filed with the Commission. We have also examined and
relied upon the Underwriting Agreement, minutes of meetings of the stockholders
and the Board of Directors of the Company as provided to us by the Company,
stock record books of the Company as provided to us by the Company, the
Certificate of Incorporation and By-Laws of the Company, each as restated and/or
amended to date, and such other documents as we have deemed necessary for
purposes of rendering the opinions hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to us
as originals, the conformity to original documents of all documents submitted to
us as copies, the authenticity of the originals of such latter documents and the
legal competence of all signatories to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "blue
sky" laws.
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Aspect Medical Systems, Inc.
January 10, 2000
Page 2
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America. To the extent that any other laws govern the matters as to which we are
opining herein, we have assumed that such laws are identical to the state laws
of the Commonwealth of Massachusetts, and we are expressing no opinion herein as
to whether such assumption is reasonable or correct.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and, when the Shares are issued
and paid for in accordance with the terms and conditions of the Underwriting
Agreement, the Shares will be validly issued, fully paid and nonassessable.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is based upon currently existing statutes, rules, regulations and judicial
decisions, and we disclaim any obligation to advise you of any change in any of
these sources of law or subsequent legal or factual developments which might
affect any matters or opinions set forth herein.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
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Exhibit 10.12
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ASPECT MEDICAL SYSTEMS, INC.
LOAN AND SECURITY AGREEMENT
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This LOAN AND SECURITY AGREEMENT is entered into as of December 10,
1999, by and between IMPERIAL BANK ("Bank") and ASPECT MEDICAL SYSTEMS, INC.
("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors, and partners.
"AFI" means Americorp Financial, Inc.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; reasonable Collateral audit fees, not to exceed $1,500 per annum as
long as an Event of Default has not occurred; and Bank's reasonable attorneys'
fees and expenses incurred in amending, enforcing or defending the Loan
Documents (including fees and expenses of appeal), incurred before, during and
after an Insolvency Proceeding, whether or not suit is brought.
"Borrower" means Aspect Medical Systems, Inc. This term does
not include any Subsidiaries.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" means an amount equal to the eighteen (18)
month rolling value of the sensor portion of Eligible Contracts, as determined
by Bank with reference to the most recent Borrowing Base Certificate delivered
by Borrower.
"Business Day" means any day that is not a Saturday, Sunday,
or other day on which banks in the State of California or the Commonwealth of
Massachusetts are authorized or required to close.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
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"Collateral" means the property described on EXHIBIT A
attached hereto.
"Committed SBLC Line" means a credit extension of up to Five
Hundred Thousand Dollars ($500,000).
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"Credit Extension" means each SBLC Advance, Equipment Advance,
Reducing Revolving Advance, Letter of Credit, HP Letter of Credit, or any other
extension of credit by Bank for the benefit of Borrower hereunder.
"Daily Balance" means the amount of the Obligations owed at
the end of a given day.
"Eligible Contracts" means those usage agreements entered into
by Borrower from time to time in the ordinary course of business in a form
reasonably acceptable to Bank in connection with the sale of its (BISsystem)
products produced by Borrower, excluding usage agreements transferred to AFI.
Such usage agreements shall in all cases have a term of at least two (2) years,
shall have been entered into on or after January 1, 1998 and before December 10,
1999, and shall not permit deferral or other postponement of payment obligations
or cancellation before the stated term thereof. Any agreement on which a
customer is behind in its minimum contractual sensor purchase commitments for a
period of more than ninety (90) days shall not be an Eligible Contract.
Standards of eligibility may be fixed and revised from time to time by Bank as a
consequence of any Collateral audits done pursuant to Section 6.3 in Bank's
reasonable judgment and upon notification thereof to Borrower in accordance with
the provisions hereof. No contract which was not an Eligible Contract on the
Closing Date may be counted as an Eligible Contract after such date. Unless
otherwise agreed to by Bank, Eligible Contracts shall not include the following:
(a) Contracts on which the customer is more than 90 days
behind in its minimum monthly purchase commitment;
(b) Contracts with respect to a customer twenty-five percent
(25%) of whose invoiced amounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Contracts with respect to which the customer is an
officer, employee, or agent of Borrower;
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(d) Contracts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
(e) Contracts with respect to which the customer is an
Affiliate of Borrower;
(f) Contracts with respect to which the customer does not have
its principal place of business in the United States;
(g) Contracts with respect to which the customer is the United
States or any department, agency, or instrumentality of the United States;
(h) Contracts with respect to which Borrower is liable to the
customer for goods sold or services rendered by the customer to Borrower, but
only to the extent of any amounts owing to the account debtor against amounts
owed to Borrower;
(i) Contracts with respect to a customer, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(j) Contracts with respect to which the customer disputes
liability or makes any claim with respect thereto as to which Bank believes, in
its sole discretion, that there may be a basis for dispute (but only to the
extent of the amount subject to such dispute or claim), or is subject to any
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(k) Contracts all or any portion of which have been
transferred to AFI or to any other Person who enters into an Intercreditor
Agreement in form and substance acceptable to Bank; and
(l) After investigation and due consideration, Contracts the
collection of which Bank reasonably determines to be doubtful (which Contracts
Bank shall discuss with Borrower prior to exclusion, and provide Borrower with
information supporting the decision to exclude from Eligible Contracts).
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and attachments
in which Borrower has any interest.
"Equipment Advance" has the meaning set forth in Section
2.1(d).
"ERISA" means the Employee Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed money
or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Initial Public Offering" means the closing by Borrower of an
underwritten public offering pursuant to a registration statement under the
Securities Act of 1933, as amended.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States Bankruptcy
Code, as amended, or under any other bankruptcy or
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insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
"Intellectual Property Collateral" means all of Borrower's
right, title, and interest in and to the following:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing. "Investment" means any beneficial ownership of
(including stock, partnership interest or other securities) any Person, or any
loan, advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.
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"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an Insolvency Proceeding and including any debt, liability, or
obligation owing from Borrower to others that Bank may have obtained by
assignment or otherwise.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Periodic Payments" means all installments or similar
recurring payments that Borrower may now or hereafter become obligated to pay to
Bank pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and disclosed in
the Schedule;
(c) Indebtedness secured by a lien described in clause (c) of
the defined term "Permitted Liens," provided such Indebtedness does not exceed
the lesser of the cost or fair market value of the equipment financed with such
Indebtedness;
(d) Subordinated Debt; and
(e) Indebtedness incurred in connection with the funding of
Borrower's contracts by AFI and other transfers that are substantially similar
to the transfers made by Borrower to AFI and which transferees have entered into
an Intercreditor Agreement with Bank in form and substance acceptable to Bank.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in the
Schedule;
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having rating of at least A-2 or P-2 from either
Standard & Poor's Corporation or Moody's Investors Service, (iii) certificates
of deposit maturing no more than one (1) year from the date of investment
therein issued by Bank and (iv) Bank's money market accounts;
(c) Investments in Borrower's Subsidiaries, which shall not
exceed $250,000 in the aggregate in any given year, plus any management service
charges from any Subsidiary to the Borrower at the end of any fiscal period
which are made in the ordinary course of business, are on fair and reasonable
terms that are no less favorable to Borrower than would be obtained in an
arms-length transaction from a non-affiliated Person, and are consistent with
Borrower's practice as of the Closing Date;
(d) Investments approved by Borrower's Board of Directors
according to Borrower's investment policy in the form submitted to Bank as of
the Closing Date; and
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(e) Investments made in the ordinary course of business,
consistent with prior practice, and approved by the Board of Directors, in the
form of loans and advances to officers and employees of the Borrower including
loans made in connection with the exercise of stock options by officers and
employees of Borrower made pursuant to plans approved by the Board of Directors
of Borrower so long as an Event of Default does not exist prior to such
Investments and would not exist after making such Investments.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed in
the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, provided the same have no priority over any of Bank's
security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a) through (c) above, provided that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the indebtedness being extended, renewed or
refinanced does not increase; and
(e) Liens incurred in connection with the financing of
Borrower's Contracts by AFI and other transfers that are substantially similar
to the transfers made by Borrower to AFI and which transferees have entered into
an Intercreditor Agreement with Bank in form and substance acceptable to Bank.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Reducing Revolving Advance" has the meaning set forth in
Section 2.1(b).
"Reducing Revolving Line" means a credit extension of up to
Four Million Two Hundred Fifty Thousand Dollars ($4,250,000).
"Reducing Revolving Maturity Date" means December 10, 2002.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Operating Officer, the Chief Financial Officer and the
Controller of Borrower.
"SBLC Advance" or "SBLC Advances" means a payment on a Letter
of Credit under the SBLC Facility.
"SBLC Facility" means the facility under which Borrower may
request Bank to issue Letters of Credit, as specified in Section 2.1(a) hereof.
"SBLC Maturity Date" means December 9, 2000.
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"Schedule" means the schedule of exceptions attached hereto,
if any.
"Subordinated Debt" means any debt incurred by Borrower that
is subordinated to the debt owing by Borrower to Bank on terms reasonably
acceptable to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which (i)
any general partnership interest or (ii) more than 50% of the stock of which by
the terms thereof ordinary voting power to elect the Board of Directors,
managers or trustees of the entity, at the time as of which any determination is
being made, is owned by Borrower, either directly or through an Affiliate.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT.
2.1 CREDIT EXTENSIONS.
Borrower promises to pay to the order of Bank, in lawful money
of the United States of America, the aggregate unpaid principal amount of all
Credit Extensions made by Bank to Borrower hereunder. Borrower shall also pay
interest on the unpaid principal amount of such Credit Extensions at rates in
accordance with the terms hereof.
(a) LETTERS OF CREDIT.
(i) Subject to the terms and conditions of this
Agreement, Bank agrees to issue or cause to be issued letters of credit for the
account of Borrower (each, a "Letter of Credit" and collectively, the "Letters
of Credit") in an aggregate outstanding face amount not to exceed the
availability under the Committed SBLC Line minus the then outstanding principal
balance of the SBLC Advances. All Letters of Credit shall be, in form and
substance acceptable to Bank in its sole discretion and shall be subject to the
terms and conditions of Bank's form of standard application and letter of credit
agreement, including Bank's fee equal to one percent (1%) of the face amount of
each Letter of Credit. No Letter of Credit may have an expiration date later
than the SBLC Maturity Date.
(ii) The obligation of Borrower to immediately
reimburse Bank for drawings made under Letters of Credit shall be absolute,
unconditional and irrevocable, and shall be performed strictly in accordance
with the terms of this Agreement and such Letters of Credit, under all
circumstances whatsoever. Without limiting the foregoing, on any drawn but
unreimbursed Letter of Credit, the unreimbursed amount shall deemed a SBLC
Advance and shall bear interest at the rate specified in Section 2.3. Borrower
shall indemnify, defend, protect, and hold Bank harmless from any loss, cost,
expense or liability, including, without limitation, reasonable attorneys' fees,
arising out of or in connection with any Letters of Credit, except for expenses
caused by Bank's gross negligence or willful misconduct.
(b) REDUCING REVOLVING ADVANCES.
(i) Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make an initial advance (a "Reducing Revolving
Advance") to Borrower in the amount of the lesser of the Borrowing Base and
either (i) the Reducing Revolving Line if Borrower does not request Bank to
issue the HP Letter of Credit under Section 2.1(c) or (ii) $3,250,000 if
Borrower does request that Bank issue the HP Letter of Credit under Section
2.1(c). If the Reducing Revolving Advance is for more than $3,250,000, Borrower
may no
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longer request Bank to issue the HP Letter of Credit. In no event shall the face
amount of the HP Letter of Credit PLUS the amount of the initial Reducing
Revolving Advance exceed the lesser of the Reducing Revolving Line and the
Borrowing Base. The initial Reducing Revolving Advance shall be used to pay in
full all Obligations under Section 1 of that certain Loan Agreement between Bank
and Borrower dated as of June 22, 1998 (the "Original Loan Agreement") and under
that certain Promissory Note (Revolving Loans) issued by Borrower to Bank on
June 22, 1998 (collectively, the Original Agreements), and after such
Obligations are paid in full, the Original Agreements shall have no further
force and effect. Subject to the terms and conditions of this Agreement, Bank
agrees to make an additional Reducing Revolving Advance to Borrower (i) after
the termination or expiration of the HP Letter of Credit and (ii) after any
usage agreement which was previously ineligible becomes an Eligible Contract,
PROVIDED that, in either case, such additional Reducing Revolving Advance may
not bring the aggregate Reducing Revolving Advances up to an outstanding amount
which is greater than the then applicable limit for the Reducing Revolving
Advances set forth in the amortization schedule attached hereto as EXHIBIT D (if
Bank has issued the HP Letter of Credit) or EXHIBIT E (if Bank has not issued
the HP Letter of Credit).
(ii) Interest shall accrue from the date of each
Reducing Revolving Advance at the rate specified in Section 2.3(a), and shall be
payable on January 10, 1999. Any Reducing Revolving Advances that are
outstanding on January 10, 2000 shall be payable in thirty-six (36) equal
monthly installments of principal, plus all accrued interest, beginning on
January 31, 2000, and continuing on the last day of each month thereafter
through the Reducing Revolving Maturity Date, at which time all amounts due
under this Section 2.1(b) and any other amounts due under this Agreement shall
be immediately due and payable. If further Reducing Revolving Advances are made
after cancellation or expiration of the HP Letter of Credit, such monthly
payments shall be proportionately increased to accommodate additional advances.
Reducing Revolving Advances, once repaid, may not be reborrowed. Borrower may
prepay any Reducing Revolving Advances without penalty or premium.
(iii) When Borrower desires to obtain a Reducing
Revolving Advance, Borrower shall notify Bank (which notice shall be
irrevocable) by facsimile transmission to be received no later than 5:00 p.m.
Eastern time one (1) Business Day before the day on which the Reducing Revolving
Advance is to be made. Such notice shall be substantially in the form of EXHIBIT
B. The notice shall be signed by a Responsible Officer or its designee.
(c) HP LETTER OF CREDIT.
(i) Subject to the terms and conditions of this
Agreement, upon Borrower's request at any time on or after the Closing Date,
Bank agrees to issue or cause to be issued a letter of credit for the account of
Borrower (the "HP Letter of Credit") in favor of Hewlett Packard in an aggregate
outstanding face amount of $1,000,000, provided that the face amount of the HP
Letter of Credit PLUS the amount of the initial Reducing Revolving Advance shall
not exceed the lesser of the Reducing Revolving Line and the Borrowing Base. The
HP Letter of Credit shall be, in form and substance acceptable to Bank in its
sole discretion and shall be subject to the terms and conditions of Bank's form
of standard application and letter of credit agreement, including Bank's fee
equal to one percent (1%) of the face amount of each Letter of Credit. On any
drawn but unreimbursed Letter of Credit, the unreimbursed amount shall be deemed
a Reducing Revolving Advance under Section 2.1(b), and shall be amortized in
equal monthly installments of principal plus accrued interest for complete
repayment on or before the Reducing Revolving Maturity Date. The HP Letter of
Credit may have an expiration date no later than October 31, 2001.
(ii) The obligation of Borrower to reimburse Bank for
drawings made under the HP Letter of Credit shall be absolute, unconditional and
irrevocable, and shall be performed strictly in accordance with the terms of
this Agreement and the HP Letter of Credit, under all circumstances whatsoever.
Borrower shall indemnify, defend, protect, and hold Bank harmless from any loss,
cost, expense or liability, including, without limitation, reasonable attorneys'
fees, arising out of or in connection with the HP Letter of Credit, except for
expenses caused by Bank's gross negligence or willful misconduct.
(d) EQUIPMENT ADVANCES. There are currently, as of
December 10, 1999, outstanding Equipment Advances in an aggregate principal
amount equal to One Million Five Hundred One Thousand Three Hundred Ninety-Five
Dollars ($1,501,395) outstanding under Section 2 of the Original Loan
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Agreement and under that certain Promissory Note (Equipment Loans) issued by
Borrower to Bank on June 22, 1998 (the "Original Equipment Note"). Borrower
shall not request or receive any further Equipment Advances. Interest shall
continue to accrue on the Equipment Advances at the rate specified in Section
2.3(a). Principal payments on the Equipment Advances shall continue to be made
on the last day of each month in the amount of $60,055.80, plus all accrued
interest, through December 31, 2001, at which time all amounts due under this
Section 2.1(d) shall be immediately due and payable. Equipment Advances, once
repaid, may not be reborrowed. Borrower may prepay any Equipment Advances
without penalty or premium. The Original Loan Agreement and the Original
Equipment Note shall have no further force and effect once all Obligations under
Section 1 of the Original Agreement are paid in full, as provided in Section
2.1(b) hereof.
(e) LOCK BOX ACCOUNT. After the occurrence of an Event of
Default, at Bank's request in its sole discretion, Borrower shall open and
maintain with Bank an account (the "Lock Box Account") into which all funds
received by Borrower from any source other than on account of Contracts sold to
AFI (and other transfers that are substantially similar to the transfers made by
Borrower to AFI and which transferees have entered into an Intercreditor
Agreement with Bank in form and substance acceptable to Bank) shall be deposited
or transferred from other accounts in Borrower's name. After the occurrence of
an Event of Default, at the request of Bank, Borrower shall direct all customers
to mail or deliver all checks or other forms of payment for amounts owing to
Borrower to a post office box designated by Bank, over which Bank shall have
exclusive and unrestricted access. After the occurrence of an Event of Default,
Bank shall collect the mail delivered to such post office box, open such mail,
and endorse and credit all items to the Lock Box Account. After the occurrence
of an Event of Default, Borrower shall direct all customers or other persons
owing money to Borrower who make payments by electronic transfer of funds to
wire such funds directly to the Lock Box Account. After the occurrence of an
Event of Default, Borrower shall hold in trust for Bank all amounts that
Borrower receives despite the directions to make payments to the post office box
or Lock Box Account. After the occurrence of an Event of Default, Borrower shall
immediately deliver such payments to Bank in their original form as received
from the customer, with proper endorsements for deposit into the Lock Box
Account. After the occurrence of an Event of Default, Borrower irrevocably
authorizes Bank to transfer to the Lock Box Account any funds that have been
deposited into any other accounts or that Bank has otherwise received. After the
occurrence of an Event of Default, Borrower shall not establish or maintain any
accounts with any Person other than Bank except for accounts opened in the
ordinary course of business from which all funds are transferred on a daily
basis to the Lock Box Account. After the occurrence of an Event of Default, Bank
shall have all right, title and interest in all of the items from time to time
in the Lock Box Account and their proceeds. After the occurrence of an Event of
Default, neither Borrower nor any person claiming through Borrower shall have
any right or control over the use of, or any right to withdraw any amount from,
the Lock Box Account, which shall be under the sole control of Bank.
2.2 OVERADVANCES. If Borrower has requested that Bank issue
the HP Letter of Credit and if, at any time, the aggregate amount of the
outstanding Reducing Revolving Advances PLUS the amount of the HP Letter of
Credit, including drawn but unreimbursed amounts outstanding under such letter
of credit, exceeds the lesser of (i) the Borrowing Base and (ii) the then
applicable limit for the Reducing Revolving Advances set forth in the
amortization schedule attached hereto as EXHIBIT D, Borrower shall immediately
pay to Bank, in cash, the amount of such excess. If Borrower has not requested
that Bank issue the HP Letter of Credit and if, at any time, the aggregate
amount of the outstanding Reducing Revolving Advances exceeds the lesser of (i)
the Borrowing Base and (ii) the then applicable limit for the Reducing Revolving
Advances set forth in the amortization schedule attached hereto as EXHIBIT E,
Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATES. Except as set forth in Section 2.3(b), the
Equipment Advances, the Reducing Revolving Advances, and the SBLC Advances shall
bear interest, on the outstanding daily balance thereof, at a rate equal to one
percent (1.0%) above the Prime Rate, provided that after the Initial Public
Offering, except as set forth in Section 2.3(b), the Equipment Advances, the
Reducing Revolving Advances, and the SBLC Advances shall bear interest, on the
outstanding daily balance thereof, at a rate equal to one half percent (0.5%)
above the Prime Rate
(b) LATE FEE; DEFAULT RATE. If any payment is not made within
ten (10) days after the date of written notice that such payment is due,
Borrower shall pay Bank a late fee equal to the lesser of (i) five
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percent (5%) of the amount of such unpaid amount or (ii) the maximum amount
permitted to be charged under applicable law. All Obligations shall bear
interest, from and after the occurrence and during the continuance of an Event
of Default, at a rate equal to five (5) percentage points above the interest
rate applicable immediately prior to the occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on
the last calendar day of each month during the term hereof. Bank shall charge
such interest, all Bank Expenses, and all Periodic Payments first against any of
Borrower's deposit accounts and second against the Reducing Revolving Line, in
which case those amounts shall thereafter accrue interest at the rate then
applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased, effective as of the day the Prime Rate is changed, by an
amount equal to such change in the Prime Rate. All interest chargeable under the
Loan Documents shall be computed on the basis of a three hundred sixty (360) day
year for the actual number of days elapsed.
2.4 CREDITING PAYMENTS. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 3:00 p.m. Eastern time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. On the Closing Date, a Facility Fee equal to
Seven Thousand Five Hundred Dollars ($7,500), which shall be nonrefundable;
(b) BANK EXPENSES. On the Closing Date, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses and, after the Closing Date, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law,
regulation, treaty or official directive or the interpretation or application
thereof by any court or any governmental authority charged with the
administration thereof or the compliance with any guideline or request of any
central bank or other governmental authority (whether or not having the force of
law):
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
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and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
the Obligations, Bank shall notify Borrower thereof. Borrower agrees to pay to
Bank the amount of such increase in cost, reduction in income or additional
expense as and when such cost, reduction or expense is incurred or determined,
upon presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 TERM. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Term Maturity Date. Notwithstanding the foregoing, Bank shall
have the right to terminate its obligation to make Credit Extensions under this
Agreement immediately and without notice upon the occurrence and during the
continuance of an Event of Default. Notwithstanding termination, Bank's Lien on
the Collateral shall remain in effect for so long as any Obligations are
outstanding.
3. CONDITIONS OF LOANS.
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION. The
obligation of Bank to make the initial Credit Extension is subject to the
condition precedent that Bank shall have received, in form and substance
satisfactory to Bank, the following:
(a) this Agreement;
(b) a certificate of the Secretary of Borrower with respect to
incumbency and resolutions authorizing the execution and delivery of this
Agreement;
(c) two financing statements (Form UCC-1);
(d) an intellectual property security agreement;
(e) agreement to provide insurance;
(f) a control agreement;
(g) payment of the fees and Bank Expenses then due specified
in Section 2.5 hereof;
(h) a report on the Collateral, the results of which shall be
satisfactory to Bank; and
(i) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS. The
obligation of Bank to make each Credit Extension, including the initial Credit
Extension, is further subject to the following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of such
Payment/Advance Form and on the effective date of each Credit Extension as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would exist after giving effect to such Credit
Extension (provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date). The making of each Credit Extension shall be
deemed to be a representation and warranty by Borrower on the date of such
Credit Extension as to the accuracy of the facts referred to in this Section
3.2(b).
4. CREATION OF SECURITY INTEREST.
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4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower
shall from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours but no more than once every
six months (unless an Event of Default has occurred and is continuing), to
inspect Borrower's Books and to make copies thereof and to check, test, and
appraise the Collateral in order to verify Borrower's financial condition or the
amount, condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each
Subsidiary is a corporation duly existing under the laws of its state of
incorporation and qualified and licensed to do business in any state in which
the conduct of its business or its ownership of property requires that it be so
qualified.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery,
and performance of the Loan Documents are within Borrower's powers, have been
duly authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ELIGIBLE CONTRACTS. The Eligible Contracts are
in the form presented to Bank prior to the Closing Date and are unconditional,
non-cancelable and non-deferrable bona fide existing obligations of the parties
to each Eligible Contract. Each Eligible Contract has an original minimum term
of two (2) years, and was entered into on or after January 1, 1998 but not later
than December 10, 1999. No customer who is a party to an Eligible Contract is
more than 90 days behind in its minimum monthly purchase commitment.
5.5 MERCHANTABLE INVENTORY. All Inventory is in all material
respects of good and marketable quality, free from all material defects, except
for Inventory for which adequate reserves have been made.
5.6 INTELLECTUAL PROPERTY COLLATERAL. Borrower is the sole
owner of, or has rights to use, the Intellectual Property Collateral, except for
non-exclusive licenses granted by Borrower to its customers in the ordinary
course of business. Each of the Patents is valid and enforceable, and no part of
the Intellectual Property Collateral has been judged invalid or unenforceable,
in whole or in part, and no claim has been made that any part of the
Intellectual Property Collateral violates the rights of any third party.
5.7 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as
disclosed in the Schedule, Borrower has not done business under any name other
than that specified on the signature page hereof. The chief executive office of
Borrower is located at the address indicated in Section 10 hereof.
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5.8 LITIGATION. Except as set forth in the Schedule, there are
no actions or proceedings pending by or against Borrower or any Subsidiary
before any court or administrative agency in which an adverse decision could
have a Material Adverse Effect, or a material adverse effect on Borrower's
interest or Bank's security interest in the Collateral.
5.9 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated and consolidating financial statements related to Borrower and any
Subsidiary that are delivered by Borrower to Bank fairly present in all material
respects Borrower's financial condition as of the date thereof and Borrower's
results of operations for the period then ended. There has not been a material
adverse change in the financial condition of Borrower since the date of the most
recent of such financial statements submitted to Bank.
5.10 SOLVENCY, PAYMENT OF DEBTS. Borrower is solvent and able
to pay its debts (including trade debts) as they mature.
5.11 REGULATORY COMPLIANCE. Borrower and each Subsidiary have
met the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from Borrower's
failure to comply with ERISA that is reasonably likely to result in Borrower's
incurring any liability that could have a Material Adverse Effect. Borrower is
not an "investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940. Borrower is not
engaged principally, or as one of the important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulations T and U of the Board of Governors of the Federal
Reserve System). Borrower has complied with all the provisions of the Federal
Fair Labor Standards Act. Borrower has not violated any statutes, laws,
ordinances or rules applicable to it, violation of which could have a Material
Adverse Effect.
5.12 ENVIRONMENTAL CONDITION. Except as disclosed in the
Schedule, none of Borrower's or any Subsidiary's properties or assets has ever
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous owners or operators, in the disposal of, or to produce, store,
handle, treat, release, or transport, any hazardous waste or hazardous substance
other than in accordance with applicable law; to the best of Borrower's
knowledge, none of Borrower's properties or assets has ever been designated or
identified in any manner pursuant to any environmental protection statute as a
hazardous waste or hazardous substance disposal site, or a candidate for closure
pursuant to any environmental protection statute; no lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned by Borrower or any Subsidiary; and neither Borrower nor
any Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment, which if adversely determined
could reasonably be expected to have a Material Adverse Effect.
5.13 TAXES. Borrower and each Subsidiary have filed or caused
to be filed all tax returns required to be filed, and have paid, or have made
adequate provision for the payment of, all taxes reflected therein.
5.14 SUBSIDIARIES. Borrower does not own any stock,
partnership interest or other equity securities of any Person, except for
Permitted Investments.
5.15 GOVERNMENT CONSENTS. Borrower and each Subsidiary have
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted, the failure to obtain which could have a Material Adverse Effect.
5.16 YEAR 2000. Borrower and its Subsidiaries have reviewed
the areas within their operations and business which could be adversely affected
by, and have developed or are developing a program to address on a timely basis,
the Year 2000 Problem and have made related appropriate inquiry of material
suppliers and vendors, and based on such review and program, the Year 2000
Problem will not have a Material Adverse Effect upon its financial condition,
operations or business as now conducted. "Year 2000 Problem" means the
possibility that any
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computer applications or equipment used by Borrower may be unable to recognize
and properly perform date sensitive functions involving certain dates prior to
and any dates on or after December 31, 1999.
5.17 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, until payment in full of
all outstanding Obligations, and for so long as Bank may have any commitment to
make a Credit Extension hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a Material Adverse Effect. Borrower shall maintain, and shall cause
each of its Subsidiaries to maintain, in force all licenses, approvals and
agreements, the loss of which could have a Material Adverse Effect.
6.2 GOVERNMENT COMPLIANCE. Borrower shall meet, and shall
cause each Subsidiary to meet, the minimum funding requirements of ERISA with
respect to any employee benefit plans subject to ERISA. Borrower shall comply,
and shall cause each Subsidiary to comply, with all statutes, laws, ordinances
and government rules and regulations to which it is subject, noncompliance with
which could have a Material Adverse Effect, or a material adverse effect on the
Collateral or the priority of Bank's Lien on the Collateral.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower
shall deliver to Bank: (a) as soon as available, but in any event within thirty
(30) days after the end of each calendar month, a company prepared consolidated
and consolidating balance sheet and income statement covering Borrower's
consolidated and consolidating operations during such period, in a form
acceptable to Bank and certified by a Responsible Officer; (b) as soon as
available, but in any event within one hundred twenty (120) days after the end
of Borrower's fiscal year, audited consolidated financial statements of Borrower
prepared in accordance with GAAP, consistently applied, together with an
unqualified opinion on such financial statements of an independent certified
public accounting firm reasonably acceptable to Bank; (c) if applicable, copies
of all statements, reports and notices sent or made available generally by
Borrower to its security holders or to any holders of Subordinated Debt and all
reports on Forms 10-K and 10-Q filed with the Securities and Exchange
Commission; (d) promptly upon receipt of notice thereof, a report of any legal
actions pending or threatened against Borrower or any Subsidiary that could
result in damages or costs to Borrower or any Subsidiary of Fifty Thousand
Dollars ($50,000) or more in excess of insurance coverage that has not been
taken by Borrower's insurance company subject to any reservation; (e) within
thirty (30) days after the end of each month, Borrower shall deliver to Bank a
report in substantially the same form that was presented to Bank as of the
Closing Date on the pool of Eligible Contracts and actual sensor units shipped
measured against the number contracted for and sensor revenue by fee-for-usage
contracts; (f) such budgets, sales projections, operating plans or other
financial information as Bank may reasonably request from time to time generally
prepared by Borrower in the ordinary course of business; and (g) within thirty
(30) days of the last day of each fiscal quarter, a report signed by Borrower,
in form reasonably acceptable to Bank, listing any applications or registrations
that Borrower has made or filed in respect of any Patents, Copyrights or
Trademarks and the status of any outstanding applications or registrations, as
well as any material change in Borrower's intellectual property, including but
not limited to any subsequent ownership right of Borrower in or to any Trademark
or Patent not specified in EXHIBITS A, B, and C of the Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement.
Within thirty (30) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of the usage agreement report submitted to the
Bank as of the Closing Date.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of EXHIBIT C hereto.
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Bank shall have a right from time to time hereafter to audit the
Collateral, including fee-for-usage contracts and fee-for-usage schedules, at
Borrower's expense (such expense not to exceed $1,500 in any given year unless
an Event of Default has occurred), provided that such audits will be conducted
no more often than every six (6) months unless an Event of Default has occurred
and is continuing.
6.4 INVENTORY; RETURNS. Borrower shall keep all Inventory in
good and marketable condition, free from all material defects except for
Inventory for which adequate reserves have been made. Returns and allowances, if
any, as between Borrower and its account debtors shall be on the same basis and
in accordance with the usual customary practices of Borrower, as they exist at
the time of the execution and delivery of this Agreement.
6.5 TAXES. Borrower shall make, and shall cause each
Subsidiary to make, due and timely payment or deposit of all material federal,
state, and local taxes, assessments, or contributions required of it by law, and
will execute and deliver to Bank, on demand, appropriate certificates attesting
to the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form, with
such companies, and in such amounts as reasonably satisfactory to Bank. All such
policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof, and all liability insurance policies shall show the Bank as an
additional insured and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank a certificate summarizing such policies
of insurance and evidence of the payments of all premiums therefor. After the
occurrence of an Event of Default, all proceeds payable under any such policy
shall, at the option of Bank, be payable to Bank to be applied on account of the
Obligations.
6.7 YEAR 2000 COMPLIANCE. Borrower shall perform all acts
reasonably necessary to ensure that (a) Borrower and any business in which
Borrower holds a substantial interest, and (b) all customers, suppliers and
vendors that are material to Borrower's business, become Year 2000 Compliant in
a timely manner. Such acts shall include, without limitation, performing a
comprehensive review and assessment of all Borrower's systems and adopting a
detailed plan, with itemized budget, for the remediation, monitoring and testing
of such systems. As used in this paragraph, "Year 2000 Compliant" shall mean, in
regard to any entity, that all software, hardware, firmware, equipment, goods or
systems utilized by or material to the business operations or financial
condition of such entity, will properly perform date sensitive functions before,
during and after the year 2000. Borrower shall, immediately upon request,
provide to Bank such certifications or other evidence of Borrower's compliance
with the terms of this paragraph as Bank may from time to time require.
6.8 PRINCIPAL DEPOSITORY. Borrower shall maintain a minimum of
One Hundred Thousand Dollars ($100,000) in its principal, depository, operating
and overnight investment accounts with Bank; provided that Borrower need not
maintain such accounts if Bank's rates or services cease to be competitive.
6.9 ADJUSTED LIQUIDITY RATIO. Borrower shall maintain, as of
the last day of each calendar month, a ratio of (i) unrestricted cash, cash
equivalents, and marketable securities plus eighty percent (80%) of
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domestic Accounts satisfactory to Bank to (ii) outstanding Credit Extensions,
including drawn and undrawn Letters of Credit, of not less than 1.50 to 1.00.
6.10 CASH BURN. Borrower shall maintain, as of the last day of
each calendar month, a balance of unrestricted cash, cash equivalents and
marketable securities which is at least five (5) times Borrower's Monthly Cash
Burn. "Monthly Cash Burn" means Borrower's average monthly negative operating
cash flow plus capital expenditures for the three months immediately prior to
the date of measurement.
6.11 INSTALLED BASE. The number of monitors and modules placed
with Persons who have executed usage agreements in substantially the form
presented to the Bank at the Closing Date, measured as of the last day of the
quarter, shall increase each quarter.
6.12 CONTRACT STATUS. The Eligible Contracts which fall behind
in their minimum monthly orders by more than three months shall not represent
more than 20% of the aggregate value, measured on an eighteen (18) month rolling
average basis, of the sensor portion of the pool of all Eligible Contracts.
Borrower shall enforce all of its rights under the Eligible Contracts and shall
neither amend nor waive any payments affecting the payments due thereunder
without Bank's prior consent, except for waivers and modifications in the
ordinary course of business which do not cause Eligible Contracts to become
ineligible.
6.13 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
(a) Borrower shall register or cause to be registered on an
expedited basis (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as applicable
those intellectual property rights listed on EXHIBITS A, B and C to the
Intellectual Property Security Agreement delivered to Bank by Borrower in
connection with this Agreement, within thirty (30) days of the date of this
Agreement. Borrower shall give Bank notice of all applications or registrations
filed with the Untied States Patent and Trademark Office or the United States
Copyright Office within thirty (30) days after the application date, and
Borrower shall execute and deliver such additional instruments and documents
from time to time as Bank shall reasonably request to perfect Bank's security
interest in such additional Intellectual Property Collateral. Notwithstanding
the foregoing, upon the occurrence and during the continuance of an Event of
Default, if so requested by Bank, Borrower shall register, on an expedited
basis, any registerable intellectual property rights which Borrower has
previously failed to register.
(b) Borrower shall (i) protect, defend and maintain the
validity and enforceability of the Trademarks, Patents and Copyrights, (ii) use
its best efforts to detect infringements of the Trademarks, Patents and
Copyrights and promptly advise Bank in writing of material infringements
detected and (iii) not allow any material Trademarks, Patents or Copyrights to
be abandoned, forfeited or dedicated to the public without the written consent
of Bank, which shall not be unreasonably withheld. Notwithstanding the
foregoing, Borrower shall not be required to take any action under this Section
6.13(b) if Borrower's Board of Directors determines that, in its good faith
judgment, any such Copyright, Trademark, or Patent is of immaterial value.
(c) Bank may audit Borrower's Intellectual Property Collateral
to confirm compliance with this Section 6.13, provided such audit may not occur
more often than once per year, unless an Event of Default has occurred and is
continuing. Bank shall have the right, but not the obligation, to take, at
Borrower's sole expense, any actions that Borrower is required under this
Section 6.13 to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.13.
6.14 FURTHER ASSURANCES. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS.
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Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Credit
Extensions, Borrower will not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise
dispose of (collectively, a "Transfer"), or permit any of its Subsidiaries to
Transfer, all or any part of its business or property, other than: (i) Transfers
of Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; or (iii) Transfers of surplus, worn-out or obsolete Equipment.
Notwithstanding the foregoing, Borrower may transfer and encumber assets for the
benefit of Americorp Financial, Inc. and such other Persons as may enter into
intercreditor agreements acceptable to Bank from time to time.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any
of its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Borrower will not, without thirty (30)
days prior written notification to Bank, relocate its chief executive office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit
any of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, in each
case, without the consent of the Bank, which consent will not be unreasonably
withheld.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for (i) Permitted Liens and (ii) Liens
incurred in connection with the financing of Borrower's Contracts by AFI and
other transfers that are substantially similar to the transfers made by Borrower
to AFI and which transferees have entered into an Intercreditor Agreement with
Bank in form and substance acceptable to Bank.
7.6 DISTRIBUTIONS. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock, except that Borrower may repurchase the stock of former
employees pursuant to stock repurchase agreements as long as an Event of Default
does not exist prior to such repurchase or would not exist after giving effect
to such repurchase.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or
make any Investment in or to any Person, or permit any of its Subsidiaries so to
do, other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a non-affiliated Person.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent.
7.10 INVENTORY AND EQUIPMENT. Store the Inventory or the
Equipment with a bailee, warehouseman, or similar party that may have a Lien or
other interest in the Inventory or Equipment, unless either (i) Bank has
received a pledge of the warehouse receipt covering such Inventory or (ii)
Borrower owes no more than Twenty-Five Thousand Dollars ($25,000) to such
warehouseman at any given time; provided, however, that Borrower may deposit
software code in escrow for customers in the ordinary course of business. Except
for
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Inventory sold in the ordinary course of business and except for such other
locations as Bank may approve in writing, Borrower shall keep the Inventory and
Equipment only at the location set forth in Section 10 hereof and such other
locations of which Borrower gives Bank prior written notice and as to which
Borrower signs and files a financing statement where needed to perfect Bank's
security interest.
7.11 COMPLIANCE. Become an "investment company" or be
controlled by an "investment company," within the meaning of the Investment
Company Act of 1940, or become principally engaged in, or undertake as one of
its important activities, the business of extending credit for the purpose of
purchasing or carrying margin stock, or use the proceeds of any Credit Extension
for such purpose. Fail to meet the minimum funding requirements of ERISA, permit
a Reportable Event or Prohibited Transaction, as defined in ERISA, to occur,
fail to comply with the Federal Fair Labor Standards Act or violate any law or
regulation, which violation could have a Material Adverse Effect, or a material
adverse effect on the Collateral or the priority of Bank's Lien on the
Collateral, or permit any of its Subsidiaries to do any of the foregoing.
7.12 INTELLECTUAL PROPERTY AGREEMENTS. Borrower shall not
permit the inclusion in any material contract to which it becomes a party of any
provisions that could or might in any way prevent the creation of a security
interest in Borrower's rights and interests in any property included within the
definition of the Intellectual Property Collateral acquired under such
contracts, except to the extent that (i) any such contract is determined in the
good faith judgment of Borrower's Board of Directors to be necessary to
Borrower's business, (ii) Borrower uses reasonable efforts to obtain the consent
of, or waiver by, any person whose consent or waiver is necessary for Bank to
have a security interest in any such contract, and (iii) Borrower gives Bank
notice of any such contract within a reasonable period of time after its
execution.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
Event of Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay, when due, any
of the Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any
obligation under Article 6 or violates any of the covenants contained in Article
7 of this Agreement, or fails or neglects to perform, keep, or observe any other
material term, provision, condition, covenant, or agreement contained in this
Agreement, in any of the Loan Documents, or in any other present or future
agreement between Borrower and Bank and as to any default under such other term,
provision, condition, covenant or agreement that can be cured, has failed to
cure such default within ten (10) days after Borrower receives written notice
thereof or any officer of Borrower becomes aware thereof; provided, however,
that if the default cannot by its nature be cured within the ten (10) day period
or cannot after diligent attempts by Borrower be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then
Borrower shall have an additional reasonable period (which shall not in any case
exceed thirty (30) days) to attempt to cure such default, and within such
reasonable time period the failure to have cured such default shall not be
deemed an Event of Default (provided that no Credit Extensions will be required
to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material
adverse change in Borrower's business or financial condition, or if there is a
material impairment of the prospect of repayment of any portion of the
Obligations or a material impairment of the value or priority of Bank's security
interests in the Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any trustee, receiver or person acting in a
similar capacity and such attachment, seizure, writ or distress warrant or levy
has not been removed, discharged or rescinded within ten (10) days, or if
Borrower is enjoined, restrained, or in any way prevented by court order from
continuing to conduct all or any material part of its business affairs, or if a
judgment or other claim becomes a lien or encumbrance upon any material portion
of Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of
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Default where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Credit Extensions
will be required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within thirty (30)
days (provided that no Credit Extensions will be made prior to the dismissal of
such Insolvency Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement
to which Borrower is a party with a third party or parties resulting in a right
by such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on
account of Subordinated Debt, except to the extent such payment is allowed under
any subordination agreement entered into with Bank;
8.8 JUDGMENTS. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least Fifty Thousand
Dollars ($50,000) in excess of available insurance coverage that has not been
taken by Borrower's insurance company subject to any reservation shall be
rendered against Borrower and shall remain unsatisfied and unstayed for a period
of ten (10) days (provided that no Credit Extensions will be made prior to the
satisfaction or stay of such judgment);
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document; or
8.10 CONTRACT DELINQUENCIES. If Eligible Contracts consisting
of twenty percent (20%) or more of the 18-month rolling value of the total pool
of Eligible Contracts as of the Closing Date become past due by more than three
months.
9. BANK'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5, all Obligations shall become immediately due and payable without
any action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Make such payments and do such acts as Bank considers
necessary or reasonable to protect its security interest in the Collateral.
Borrower agrees to assemble the Collateral if Bank so requires, and to make the
Collateral available to Bank as Bank may designate. Borrower authorizes Bank to
enter the premises where the Collateral is located, to take and maintain
possession of the Collateral, or any part of it, and to pay, purchase, contest,
or compromise any encumbrance, charge, or lien which in Bank's determination
appears to be prior or superior to its security interest and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned
premises, Borrower hereby grants Bank a license to enter into possession of such
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premises and to occupy the same, without charge, in order to exercise any of
Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(e) Set off and apply to the Obligations any and all (i)
balances and deposits of Borrower held by Bank, or (ii) indebtedness at any time
owing to or for the credit or the account of Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right, solely
pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms, in
such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the Obligations
in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) dispose of any Collateral; (e) make, settle, and adjust all
claims under and decisions with respect to Borrower's policies of insurance; (f)
settle and adjust disputes and claims respecting the accounts directly with
account debtors, for amounts and upon terms which Bank determines to be
reasonable; (g) to modify, in its sole discretion, any intellectual property
security agreement entered into between Borrower and Bank without first
obtaining Borrower's approval of or signature to such modification by amending
EXHIBITS A, B, and C, thereof, as appropriate, to include reference to any
right, title or interest in any Copyrights, Patents or Trademarks acquired by
Borrower after the execution hereof or to delete any reference to any right,
title or interest in any Copyrights, Patents or Trademarks in which Borrower no
longer has or claims to have any right, title or interest; (h) to file, in its
sole discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (i) to transfer the Intellectual Property Collateral
into the name of Bank or a third party to the extent permitted under the
California Uniform Commercial Code; provided Bank may exercise such power of
attorney to sign the name of Borrower on any of the documents described in
Section 4.2 regardless of whether an Event of Default has occurred so long as
Bank has requested in writing that Borrower sign its name on any such document
and Borrower has not done so by the tenth day after receiving such notice. The
appointment of Bank as Borrower's attorney in fact, and each and every one of
Bank's rights and powers, being coupled with an interest, is irrevocable until
all of the Obligations have been fully repaid and performed and Bank's
obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. After the occurrence and during the
continuation of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
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9.4 BANK EXPENSES. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following after reasonable written notice to Borrower: (a) make payment of the
same or any part thereof; (b) set up such reserves under the SBLC Facility as
Bank deems necessary to protect Bank from the exposure created by such failure;
or (c) obtain and maintain insurance policies of the type discussed in Section
6.6 of this Agreement, and take any action with respect to such policies as Bank
deems prudent. Any amounts so paid or deposited by Bank shall constitute Bank
Expenses, shall be immediately due and payable, and shall bear interest at the
then applicable rate hereinabove provided, and shall be secured by the
Collateral. Any payments made by Bank shall not constitute an agreement by Bank
to make similar payments in the future or a waiver by Bank of any Event of
Default under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 DEMAND; PROTEST. Except as otherwise provided in this
Agreement, Borrower waives demand, protest, notice of protest, notice of default
or dishonor, notice of payment and nonpayment, notice of any default, nonpayment
at maturity, release, compromise, settlement, extension, or renewal of accounts,
documents, instruments, chattel paper, and guarantees at any time held by Bank
on which Borrower may in any way be liable.
10. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: Aspect Medical Systems, Inc.
2 Vision Drive
Natick, MA 01760-2059
Attn: Neal Armstrong
FAX: (508) 653-5788
If to Bank: Imperial Bank
226 Airport Parkway
San Jose, CA 95110-1024
Attn: Corporate Banking Center
FAX: (408) 451-8586
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with a copy to: Imperial Bank
225 Franklin Street, Suite 2900
Boston, MA 02110
Attn: William Sweeney / Karen Dunn
FAX: (617)956-0557
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
This Agreement shall be governed by, and construed in
accordance with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to the
exclusive jurisdiction of the state and Federal courts located in the County of
Santa Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS.
12.1 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and permitted assigns of each
of the parties; provided, however, that neither this Agreement nor any rights
hereunder may be assigned by Borrower without Bank's prior written consent,
which consent may be granted or withheld in Bank's sole discretion. Bank shall
have the right with the consent of the Borrower, not to be unreasonably
withheld, to sell, transfer or negotiate all or any part of, or any interest in,
Bank's obligations, rights and benefits hereunder. Bank shall have the right
without the consent of or notice to Borrower to grant participation in all or
any part of, or any interest in, Bank's obligations, rights and benefits
hereunder.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and
hold harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the
performance of all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot
be amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
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12.6 COUNTERPARTS. This Agreement may be executed in any
number of counterparts and by different parties on separate counterparts, each
of which, when executed and delivered, shall be deemed to be an original, and
all of which, when taken together, shall constitute but one and the same
Agreement.
12.7 SURVIVAL. All covenants, representations and warranties
made in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
ASPECT MEDICAL SYSTEMS, INC.
By: /s/ J. Neal Armstrong
Title: Vice President and
Chief Financial Officer
IMPERIAL BANK
By: /s/ Karen Dunn
Title: Vice President
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EXHIBIT A
COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(a) all accounts receivable, accounts, chattel paper, contract
rights (including, without limitation, royalty agreements, license agreements
and distribution agreements), documents, instruments, money, deposit accounts
and general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(b) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(c) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(d) all guarantees and other security therefor;
(e) all trademarks, service marks, trade names and service
names and the goodwill associated therewith;
(f) (a) all patents and patent applications filed in the
United States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(g) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
Notwithstanding the foregoing, "Collateral" shall not include (i)
Contracts and rights thereunder transferred to Americorp Financial, Inc., (ii)
Borrower's equipment and other related general intangibles to the extent that
the same are subject to a lease or financing arrangement permitted under the
Loan and Security Agreement between Bank and Borrower dated as of December 10,
1999, which financing arrangement includes a valid and enforceable prohibition
on further encumbrances ("Excluded Equipment") and (iii) additions, attachments,
accessories and accessions to, substitutions, replacements and exchanges for,
and proceeds of the Excluded Equipment.
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EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 5:00 P.M., EASTERN TIME
TO: EMERGING GROWTH INDUSTRIES DATE: _______________
FAX #: 617-956-0557 TIME: _______________
- --------------------------------------------------------------------------------
FROM: Aspect Medical Systems, Inc.
------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
----------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
--------------------------------------------------------
PHONE NUMBER:
----------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
---------------------- ----------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
$________________________________
PRINCIPAL INCREASE (ADVANCE) $________________________________
PRINCIPAL PAYMENT (ONLY) $________________________________
INTEREST PAYMENT (ONLY) $________________________________
PRINCIPAL AND INTEREST (PAYMENT) $________________________________
OTHER INSTRUCTIONS:
----------------------------------------------------------
- ------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- ------------------------------------------------ ------------------------------
Authorized Requester Phone #
- ------------------------------------------------ ------------------------------
Received By (Bank) Phone #
---------------------------------------------
Authorized Signature (Bank)
- --------------------------------------------------------------------------------
25
<PAGE> 27
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: IMPERIAL BANK
FROM: Aspect Medical Systems, Inc.
The undersigned authorized officer of Aspect Medical Systems, Inc.
hereby certifies that in accordance with the terms and conditions of the Loan
and Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower
is in complete compliance for the period ending _______________ with all
required covenants except as noted below and (ii) all representations and
warranties of Borrower stated in the Agreement are true and correct in all
material respects as of the date hereof. Attached herewith are the required
documents supporting the above certification. The Officer further certifies that
these are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
<S> <C> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
Eligible Contract Report(1) Monthly within 30 days Yes No
10K and 10Q (as applicable) Yes No
Borrowing Base Cert. Monthly within 30 days Yes No
Collateral Audit Semi-annual Yes No
Collateral Report Initially Yes No
IP Report Quarterly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
Maintain on a Monthly Basis:
Minimum Adjusted Liquidity Ratio(2) 1.50:1.00 ____:1.00 Yes No
Cash Burn 3 _________ Yes No
Minimum Installed Base4 Increase (Quarterly) 1 _________ Yes No
Contract Status 5 _________ Yes No
</TABLE>
(1) Report on pool of Eligible Contracts & actual sensor units shipped
measured against # contracted for & sensor revenue by fee-for-usage contracts
(2) Ratio of (i) unrestricted cash and cash equivalents and marketable
securities plus eighty percent 80% of domestic Accounts satisfactory to Bank to
(ii) outstanding Credit Extensions, including both drawn and undrawn Letters of
Credit.
(3) Borrower shall maintain a balance of unrestricted cash, cash
equivalents, and marketable securities which is at least 5 times Borrower's
average monthly negative operating cash flow plus capital expenditures for the 3
months immediately prior to the date of measurement.
(4) The number of monitors and modules placed with account debtors.
(5) The Eligible Contracts which fall behind in their minimum monthly
orders by more than 3 months shall not represent more than 20% of the total
value, measured on an 18 month rolling average basis, the sensor portion of the
pool of all Eligible Contracts.
-----------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached.
BANK USE ONLY
Received by: ______________________
Sincerely, AUTHORIZED SIGNER
Date:______________________________
- ---------------------------------------- Verified:__________________________
SIGNATURE AUTHORIZED SIGNER
- ---------------------------------------- Date:______________________________
TITLE
Compliance Status Yes No
- ----------------------------------------
DATE -----------------------------------
26
<PAGE> 28
EXHIBIT D
AMORTIZATION SCHEDULE WITH $1,000,000 HP LETTER OF CREDIT
27
<PAGE> 29
EXHIBIT E
AMORTIZATION SCHEDULE IF NO HP LETTER OF CREDIT
28
<PAGE> 30
SCHEDULE OF EXCEPTIONS
PERMITTED INDEBTEDNESS (SECTION 1.1)
1. Master Lease Agreement dated December 21, 1994 and LTI Ventures Leasing
Corp. for which certain schedules thereunder have been assigned to
Corestates Bank, N.A. and Silicon Valley Bank.
Original amount: $1,235,715
Outstanding
at 10/2/99: $ 30,731
2. Loan Agreement dated June 22, 1998 with Imperial Bank for which funds were
loaned under the Equipment Loan portion of the Agreement.
Original amount: $2,162,009
Outstanding
at 10/2/99: $1,621,507
3. Master Assignment Agreement dated July 23, 1999 and Servicing Agreement
dated July 23, 1999 with Americorp Financial, Inc. under which certain
Usage Agreement contracts are sold to Americorp Financial, Inc.
Original amount: $1,447,131*
Outstanding
at 10/2/99: $1,438,362
Availability remains under this Master Assignment Agreement and the
Company continues to sell additional Usage Agreements to Americorp
Financial, Inc. An additional draw of $404,962 has been made subsequent to
October 2, 1999.
PERMITTED LIENS (SECTION 1.1)
1. The Company granted a security interest pursuant to the Master Lease
Agreement dated December 21, 1994 with LTI Ventures Leasing Corp., for
which certain schedules thereunder have been assigned to Corestates Bank,
N.A. and Silicon Valley Bank.
2. Subordination, Non-Disturbance and Attornment Agreement between the
Company and Teachers Insurance Association of America, dated June 15, 1995.
3. The Company granted a security interest pursuant to the Loan Agreement
dated June 22, 1998 with Imperial Bank.
29
<PAGE> 31
SCHEDULE OF EXCEPTIONS
Permitted Investments (Section 1.1)
1. Loans made to certain employees and directors in order to exercise options
to acquire a total of 1,495,470 shares of common stock. The shares of
common stock are subject to a repurchase right by the Company and the
number of shares subject to the repurchase provision decreases over time in
accordance with the vesting schedule of the original option grant. In the
event that any holder of shares of common stock which remain subject to the
repurchase provision ceases to be employed by the Company, the Company has
the right to repurchase such shares for 90 days at a price equal to the
original exercise price.
Original Investment: $336,580
Investment at
October 2, 1999 $305,324
2. Loans made to certain employees of the Company that are evidenced by
promissory notes bearing interest with rates ranging from 6.42% to
8% per annum.
Original Investment: $160,334
Investment at
October 2, 1999 $132,760
3. Investments in and inter-company loans made to wholly-owned subsidiaries
of the Company (Aspect Medical Systems International B.V., the Netherlands
and Aspect Medical Systems UK Limited, the United Kingdom).
Investment at
October 2, 1999 $983,003
4. Marketable investments at October 2, 1999:
Sallie-Mae Floating Rate Note $1,000,000
Imperial Bank
Banker's Acceptances $ 186,340
Certificates of Deposit $4,131,600
5. See attached draft Board of Directors Investment Policy
PRIOR NAMES (SECTION 5.7)
Originally incorporated under the name "Biometrak Corporation"
on October 14, 1987.
LITIGATION (SECTION 5.8)
On May 5, 1999, a former employee of the Borrower filed a complaint with the
Massachusetts Commission Against Discrimination (the "MCAD") which alleges that
the Borrower discriminated against the employee by subjecting him to sexual
harassment and retaliating against his complaint by terminating his
employment, due to his opposition to that sexual harassment. By letter dated
September 14, 1999, the former employee's counsel informed Borrower that,
despite diligent efforts, he is unable to locate the former employee. On
September 16, 1999, the Borrower sent to the MCAD an Unopposed Motion for
Administrative Closure. That motion is still pending before the MCAD.
30
<PAGE> 32
SCHEDULE OF EXCEPTIONS
DRAFT
Aspect Medical Systems
Recommended Investment Policy Guidelines
1. Purpose
To establish policy and guidelines for investment of corporate surplus
cash. "Surplus cash" is cash in corporate accounts not immediately required for
debt repayment, working capital, capital investment, or other outstanding
near-term financial obligations.
Objectives
Conservation of capital and maintenance of liquidity until funds can be
used in business operations.
A. Preserve capital.
B. Anticipate liquidity requirements.
C. Diversify investments to minimize the risk and inappropriate
concentrations of investments with any one entity.
D. Deliver above-market returns versus the industry averages.
E. Provide fiduciary control of cash and investments by individuals
approved by the Board.
II. Liquidity Guidelines
Excess cash is invested with liquidity in mind, and without any loss of
principal. Daily liquidity is essential; restrictions on liquidity are:
At least twice the amount of the monthly burn must be available each
business day until 1:30 p.m. Eastern time with no loss of principal.
The remainder of the funds are to be invested, consistent with anticipated
cash needs, in securities with maturities no longer than 24 months.
Repositioning of these securities before their maturity, generating small gains
or losses, is permitted for managing liquidity requirements only. Any
repositioning of securities causing a gain or loss must be pre-approved by
Aspect Medical Systems' management for fiduciary control purposes.
31
<PAGE> 33
SCHEDULE OF EXCEPTIONS
III. Investment Restrictions
Investments shall be made in the context of the following investment
guidelines:
Eligible Investments
1. Direct obligations of the U.S. Treasury, including bills, notes, and
bonds.
2. Obligations issued or guaranteed by agencies or instrumentalities of
the U.S. government.
3. Bank obligations, including certificates of deposit, bank notes, and
bankers acceptances. Investments in these securities are limited to banks whose
long-term debt is rated "A" or higher by Moody's and Standard & Poor's and
short-term obligations are rated "P1" by Moody's and "A1" or higher by
Standard & Poor's.
4. Corporate obligations, including intermediate-term notes rated "A" or
higher by Moody's and Standard & Poor's and commercial paper rated "P1" or
higher by Moody's and "A1" or higher by Standard & Poor's.
5. Repurchase agreements collateralized at a minimum of 102% with U.S.
Treasury securities or other securities rated "AAA" or equivalent that would be
permitted by this policy.
6. Money market funds over $1 billion in assets, with a historically
constant dollar net asset value, consisting of acceptable securities as stated
above are appropriate for investing, as long as the fund's manager has been in
business over five years, has name recognition, and has performance that is
easily tracked.
7. U.S. and dollar-denominated international corporate debt of all types
is acceptable as long as the issuer meets credit rating and marketability
guidelines.
8. Derivative instruments are ineligible as investments. This would
cover all investments where the value is based on an underlying variable causing
the coupon and/or the maturity value to be unknown for the life of the security.
32
<PAGE> 34
SCHEDULE OF EXCEPTIONS
IV. Maturities
The maximum maturity of individual securities in the portfolio may not
exceed twenty-four (24) months.
The average maturity of the portfolio may not exceed twelve (12) months.
For securities which have put dates or reset dates, the put date or reset
date will be used, instead of the final maturity date, for maturity guideline
purposes.
V. Concentration Limits/Restrictions
There is no limit to the percentage of the portfolio which may be
maintained in securities issued by the U.S. Treasury or by its agencies and
instrumentalities.
No one issuer or group of issuers from the same holding company is to
exceed 15% of the portfolio at time of purchase, with the exception of
Government securities.
No investment will be permitted in common stocks, preferred stocks,
options (put or calls), commodities, foreign securities, futures or mutual
funds whose underlying securities are ineligible investments according to this
investment policy.
VI. Credit Quality
Trends for a given company or industry must be reviewed periodically by the
investment officer and adjustments in percentage positions made accordingly.
Should any investment held in Aspect Medical Systems' portfolio fall short of
prescribed guidelines, immediate notification must be made to the individual
appointed by the Board to oversee fiduciary control.
33
<PAGE> 35
SCHEDULE OF EXCEPTIONS
VII. Marketability
All securities are to be purchased through investment banking and
brokerage firms of high quality and reputation, with a history of making markets
for the securities in which we invest. In the unlikely event that securities
must be sold before their maturity, the securities must be easily remarketed. To
accomplish this, the securities must be conventional "products" with strong name
recognition.
VIII. Trading Guidelines
Normal investing practice is to reinvest the funds on the day a
security matures, to minimize lost interest. A daily transaction log is to be
maintained and available for review at any time. All trading firms must generate
a hard copy document for each transaction which is mailed to us on a timely
basis, and then matched to the transaction log. Quarterly summaries of our
investment holdings and cash usage are to be made available for Board review.
IX. Safekeeping
Assets are to be held in a segregated bank custody account with
separate fiduciary account documents executed by the bank. Assets shall not be
held by any investment manager or securities dealer.
X. Fiduciary Discretion
The Chief Financial Officer or other individual appointed by the Board
and his/her authorized employees are responsible for securing and managing
investments and cash for operations. These individuals have full discretion to
invest any excess capital subject to strict adherence to these guidelines. These
guidelines are to be reviewed periodically with the Chief Financial Officer or
Chief Executive Officer and revisions made consistent with objectives set forth
herein.
Date ______________ BY ___________________________________
Title
BY ___________________________________
Title
BY ___________________________________
Title
34
<PAGE> 36
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
BORROWER: Aspect Medical Systems, Inc.
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Aspect Medical
Systems, Inc. (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Third Restated Certificate of Incorporation, as
amended, and the Restated Bylaws of the Corporation, each of which is in full
force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITION ACTUAL SIGNATURES
----- -------- -----------------
J. Neal Armstrong Vice President, CFO & Secretary /s/ J. Neal Armstrong
_____________________ _______________________________ _____________________
Robert Solomon Corporate Controller /s/ Robert Solomon
_____________________ _______________________________ _____________________
_____________________ _______________________________ _____________________
_____________________ _______________________________ _____________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Imperial Bank ("Bank"),
on such terms as may be agreed upon between the officers, employees, or agents
and Bank, such sum or sums of money as in their judgment should be borrowed,
without limitation, including such sums as are specified in that certain Loan
and Security Agreement dated as of December 10, 1999 (the "Loan Agreement").
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the Loan
Agreement and any other agreement entered into between Borrower and Bank in
connection with the Loan Agreement, all as amended or extended from time to time
(collectively, with the Loan Agreement, the "Loan Documents"), and also to
execute and deliver to Bank one or more renewals, extensions, modifications,
refinancings, consolidations, or substitutions for the Loan Documents, or any
portion thereof.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Documents, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Documents.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letters of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
1
<PAGE> 37
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on December 10,
1999 and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED AND ATTESTED BY:
X J. Neal Armstrong
____________________________
J. Neal Armstrong, Secretary
- --------------------------------------------------------------------------------
2
<PAGE> 38
IMPERIAL BANK
MEMBER FDIC
ITEMIZATION OF AMOUNT FINANCED
DISBURSEMENT INSTRUCTIONS
Name(s): Aspect Medical Systems, Inc. Date: December 10, 1999
$ paid to you directly by Cashiers Check No. _______________
$3,250,000.00 credited to deposit account No. 37001031 when Advances are
requested
$1,000,000 to be used for Hewlett Packard I./CS.
Amounts paid to others on your behalf:
$7,500 to Imperial Bank for Loan Fee - charged to acct. No.
370001031 at closing.
$ to Imperial Bank for Collateral audit (estimate)
$ to Bank counsel fees and expenses
$ to _______________
$ to _______________
$4,250,000 TOTAL (AMOUNT FINANCED)
Upon consummation of this transaction, this document will also serve as the
authorization for Imperial Bank to disburse the loan proceeds as stated above.
/s/ J. Neal Armstrong
------------------------------------- -------------------------------------
Signature Signature
<PAGE> 39
AGREEMENT TO PROVIDE INSURANCE
TO: IMPERIAL BANK Date: December 10, 1999
9920 S. La Cienega, Ste. 636
Inglewood, CA 90301 Borrower: Aspect Medical Systems, Inc.
In consideration of a loan in the amount of $6,750,000, secured by all
tangible personal property including inventory and equipment.
I/We agree to obtain adequate insurance coverage to remain in force
during the term of the loan.
I/We also agree to advise the below named agent to add Imperial Bank as
lender's loss payable on the new or existing insurance policy, and to furnish
Bank at above address with a copy of said policy/endorsements and any subsequent
renewal policies.
I/We understand that the policy must contain:
1. Fire and extended coverage in an amount sufficient to cover:
(a) The amount of the loan, OR
(b) All existing encumbrances, whichever is greater,
But not in excess of the replacement value of the improvements on the
real property.
2. Lender's "Loss Payable" Endorsement Form 438 BFU in favor of
Imperial Bank, or any other form acceptable to Bank.
INSURANCE INFORMATION
Insurance Co./Agent Telephone No.:
Agent's Address:
Signature of Obligor: /s/ Robert Solomon, Controller
Signature of Obligor:____________________________________
- --------------------------------------------------------------------------------
- -------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION: Date:_______________________________
Person Spoken to:___________________________________________
Policy Number:______________________________________________
Effective From:_____________ To:____________________________
Verified by: _______________________________________________
- -------------------------------------------------------------
<PAGE> 40
- --------------------------------------------------------------------------------
IMPERIAL BANK
CALIFORNIA'S BUSINESS BANKS AUTOMATIC DEBIT AUTHORIZATION
MEMBER FDIC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To: IMPERIAL BANK
Re: LOAN # 73700008 (New)
You are hereby authorized and instructed to charge account No. 37001031
in the name of Aspect Medical Systems, Inc.
- --------------------------------------------------------------------------------
for principal and interest payments due on above referenced loan as set forth
below and credit the loan referenced above.
____ Debit each interest payment as it becomes due according to the terms
of the note and any renewals or amendments thereof.
____ Debit each principal payment is at becomes due according to the terms
of the note and any renewals or amendments thereof.
This Authorization is to remain in full force and effect until revoked in
writing.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Borrower Signature Date
- ----------------------------------------------------- --------------------------
/s/ Robert Solomon 12-13-99
- ----------------------------------------------------- --------------------------
- --------------------------------------------------------------------------------
<PAGE> 41
[IMPERIAL BANK LOGO]
IMPERIAL BANK/BOSTON OFFICE
Phone: (800) 413-4624 CLIENT AUTHORIZATION
Fax (617) 956-0557
- --------------------------------------------------------------------------------
GENERAL AUTHORIZATION
I hereby authorize Imperial Bank to use my company name, logo, and information
relating to our banking relationship in its marketing and advertising campaigns
which is intended for Imperial Bank's customers, prospects and shareholders.
Imperial Bank will forward any advertising or article including client for prior
review and approval.
/s/ J. Neal Armstrong
- -------------------------------------------------------------------
Signature
J. Neal Armstrong Vice President & CFO
- -------------------------------------------------------------------
Printed Name Title
Aspect Medical Systems, Inc.
- -------------------------------------------------------------------
Company
2 Vision Drive
- -------------------------------------------------------------------
Mailing Address
Natick, MA 01760
- -------------------------------------------------------------------
City, State, Zip Code
508-653-0603
- -------------------------------------------------------------------
Phone Number
508-653-6788
- -------------------------------------------------------------------
Fax Number
[email protected]
- -------------------------------------------------------------------
E-Mail
December 10, 1999
- -------------------------------------------------------------------
Date
<PAGE> 42
YEAR 2000 QUESTIONNAIRE
FOR CUSTOMERS OF IMPERIAL BANK
Customer Name: Aspect Medical Systems, Inc. Date: December 10, 1999
Relationship Manager: Karen Dunn
Please complete the questionnaire based on responses from the customer. If
necessary, comment in the space provided or attach additional information to
this form. Any "NO" responses require appropriate follow-up with the customer on
a periodic basis. Please retain a copy of this form in the credit file.
- --------------------------------------------------------------------------------
YES NO N/A
- --- -------------------------------------------------------- ------ ----- ------
1. Has the company developed a comprehensive plan for
Year 2000 compliance? X
- --- -------------------------------------------------------- ------ ----- ------
2. Is someone in the company specifically responsible for
managing the Year 2000 plan: Name: Phone: X
- --- -------------------------------------------------------- ------ ----- ------
3. Has senior management and the Board of Directors
reviewed and approved the plan? X
- --- -------------------------------------------------------- ------ ----- ------
4. Has the company completely inventoried its software,
hardware and telecommunications? X
- --- -------------------------------------------------------- ------ ----- ------
5. Has the company identified all equipment with
date-sensitive operating controls such as elevators,
HVAC, security systems, manufacturing equipment, etc.? X
- --- -------------------------------------------------------- ------ ----- ------
6. Has the company verified that vendor-supplied systems
will be Year 2000 compliant? X
- --- -------------------------------------------------------- ------ ----- ------
7. Has the company verified Year 2000 compliance of
outside data-processing companies and established a
testing time frame? X
- --- -------------------------------------------------------- ------ ----- ------
8. Has the company budgeted sufficient resources (both
financial and personnel) to accomplish its Year 2000
mission? X
- --- -------------------------------------------------------- ------ ----- ------
9. Has the plan been reviewed by the company's external
auditors? x
- --- -------------------------------------------------------- ------ ----- ------
10. Does the company's plan call for remediation and
preliminary testing of critical systems to be largely
completed by 12/31/99? X
- --- -------------------------------------------------------- ------ ----- ------
11. Will the company have contingency plans for mission
critical systems in place by 12/31/99? X
- --- -------------------------------------------------------- ------ ----- ------
12. Does the company have any ongoing or long-term
contracts that could subject it to liability if it
failed to perform as a result of Year 2000 compliance
failure? X
- --- -------------------------------------------------------- ------ ----- ------
13. Has the company discussed potential legal
ramifications or expenses with its attorney? X
- --- -------------------------------------------------------- ------ ----- ------
14. Has the company discussed potential losses from Year
2000 problems with insurers to determine coverage of
any losses? X
- --------------------------------------------------------------------------------
Comments:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
<PAGE> 43
DEBTOR: ASPECT MEDICAL SYSTEMS, INC.
SECURED PARTY: IMPERIAL BANK
EXHIBIT A
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(i) all accounts receivable, accounts, chattel paper, contract
rights (including, without limitation, royalty agreements, license agreements
and distribution agreements), documents, instruments, money, deposit accounts
and general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(ii) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(iii) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(iv) all guarantees and other security therefor;
(v) all trademarks, service marks, trade names and service
names and the goodwill associated therewith;
(vi) (a) all patents and patent applications filed in the
United States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(vii) all products and proceeds, including, without
limitation, insurance proceeds, of any of the foregoing.
Notwithstanding the foregoing, "Collateral" shall not include (i)
Contracts and rights thereunder transferred to Americorp Financial, Inc., (ii)
Borrower's equipment and other related general intangibles to the extent that
the same are subject to a lease or financing arrangement permitted under the
Loan and Security Agreement between Bank and Borrower dated as of December 10,
1999, which financing arrangement includes a valid and enforceable prohibition
on further encumbrances ("Excluded Equipment") and (iii) additions, attachments,
accessories and accessions to, substitutions, replacements and exchanges for,
and proceeds of the Excluded Equipment.
<PAGE> 44
INTELLECTUAL PROPERTY SECURITY AGREEMENT
This Intellectual Property Security Agreement is entered into as of
December 10, 1999 by and between IMPERIAL BANK ("Bank") and ASPECT MEDICAL
SYSTEMS, INC., a Delaware corporation ("Grantor").
RECITALS
A. Bank has agreed to make certain advances of money and to extend
certain financial accommodation to Grantor (the "Loans") in the amounts and
manner set forth in that certain Loan and Security Agreement by and between Bank
and Grantor dated of even date herewith (as the same may be amended, modified or
supplemented from time to time, the "Loan Agreement"; capitalized terms used
herein are used as defined in the Loan Agreement).
B. Bank is willing to make the Loans to Grantor, but only upon the
condition, among others, that Grantor shall grant to Bank a security interest in
certain Copyrights, Trademarks and Patents to secure the obligations of Grantor
under the Loan Agreement.
C. Pursuant to the terms of the Loan Agreement, Grantor has granted to
Bank a security interest in all of Grantor's right, title and interest, whether
presently existing or hereafter acquired, in, to and under all of the
Collateral.
NOW, THEREFORE, for good and valuable consideration, receipt of which
is hereby acknowledged, and intending to be legally bound, as collateral
security for the prompt and complete payment when due of its obligations under
the Loan Agreement and all other agreements now existing or hereafter arising
between Grantor and Bank, Grantor hereby represents, warrants, covenants and
agrees as follows:
AGREEMENT
To secure its obligations under the Loan Agreement and under any other
agreement now existing or hereafter arising between Bank and Grantor, Grantor
grants and pledges to Bank a security interest in all of Grantor's right, title
and interest in, to and under its Intellectual Property Collateral (including
without limitation those Copyrights, Patents and Trademarks listed on Schedules
A, B and C hereto), and including without limitation all proceeds thereof (such
as, by way of example but not by way of limitation, license royalties and
proceeds of infringement suits), the right to sue for past, present and future
infringements, all rights corresponding thereto throughout the world and all
re-issues, divisions continuations, renewals, extensions and
continuations-in-part thereof.
This security interest is granted in conjunction with the security
interest granted to Bank under the Loan Agreement. The rights and remedies of
Bank with respect to the security interest granted hereby are in addition to
those set forth in the Loan Agreement and the other Loan Documents, and those
which are now or hereafter available to Bank as a matter of law or equity. Each
right, power and remedy of Bank provided for herein or in the Loan Agreement or
any of the Loan Documents, or now or hereafter existing at law or in equity
shall be cumulative and concurrent and shall be in addition to every right,
power or remedy provided for herein and the exercise by Bank of any one or more
of the rights, powers or remedies provided for in this Intellectual Property
Security Agreement, the Loan Agreement or any of the other Loan Documents, or
now or hereafter existing at law or in equity, shall not preclude the
simultaneous or later exercise by any person, including Bank, of any or all
other rights, powers or remedies.
Grantor represents and warrants that Exhibits A, B, and C attached
hereto set forth any and all intellectual property rights in connection to which
Grantor has registered or filed an application with either the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable.
1
<PAGE> 45
IN WITNESS WHEREOF, the parties have caused this Intellectual Property
Security Agreement to be duly executed by its officers thereunto duly authorized
as of the first date written above.
GRANTOR:
Address of Grantor: ASPECT MEDICAL SYSTEMS, INC.
2 Vision Drive
Natick, MA 01760-2059 By: /s/ J. Neal Armstrong
___________________________________
Title: VP & CFO
________________________________
Attn: Neal Armstrong
BANK:
IMPERIAL BANK
Address of Bank:
226 Airport Parkway By: /s/ Karen Dunn
San Jose, CA 95110-1024 ___________________________________
Title: Vice President
________________________________
Attn: Corporate Banking Center
2
<PAGE> 46
EXHIBIT A
Copyrights
Registration Registration
Description Number Date
- ----------- ------ ----
<PAGE> 47
EXHIBIT B
Patents
Registration/ Registration/
Application Application
Description Number Date
- ----------- ------ ----
Electrode connector system 5,813,404 09/29/98
Method and system for the extraction of cardiac 5,792,069 08/11/98
artifacts from eeg signals
Cerebral biopotential analysis system and method 5,458,117 10/17/95
Monitor and method for acquiring and processing 5,381,804 01/17/95
electrical signals relating to bodily functions
Monitor and method for acquiring and processing 5,368,041 11/29/94
electrical signals relating to bodily functions
Cerebral biopotential analysis system and method 5,320,109 06/14/94
Disposable, pre-gelled, self-prepping electrode 5,305,746 04/26/94
08/320,191 10/07/94
08/730,638 10/11/96
09/016,104 01/30/98
Cerebral biopotential analysis system and method 4,907,597 03/13/90
Cardiac biopotential analysis system and method 4,924,875 05/15/90
Cerebral biopotential analysis system and method 5,010,891 04/30/91
Cardiac biopotential analysis system and method 5,020,540 06/04/91
Electrode for measuring Electrophysiological 09/100,290 06/19/98
signals using liquid electrolytic gel with
a high salt concentration
System and method for facilitating clinical 09/135,931 08/18/98
decision making
Electrode connector system 09/162,025 09/28/98
A smart electrophysiological sensor system with 09/328/945 06/09/99
automatic authentication and validation
<PAGE> 48
ASPECT MEDICAL SYSTEMS, INC. PATENTS
<TABLE>
<CAPTION>
PATENT ISSUE COUNTRY TITLE
NUMBER DATE
<S> <C> <C> <C>
653318 03/13/90 AUSTRALIA CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
638708 03/13/90 AUSTRALIA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
678176 09/23/93 AUSTRALIA DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
0468999 03/13/90 AUSTRIA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0489010 03/13/90 AUSTRIA CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0610365 10/23/92 AUSTRIA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0898234 09/24/98 AUSTRIA METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
0468999 03/13/90 BELGIUM CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0489010 3/13/90 BELGIUM CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0610365 10/23/92 BELGIUM CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0898234 09/24/98 BELGIUM METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
2064791 03/13/90 CANADA CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0468999 03/13/90 FRANCE CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0489010 03/13/90 FRANCE CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0610365 10/23/92 FRANCE CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0898234 09/24/98 FRANCE METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
DE 69031118 03/13/90 GERMANY CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
(0468999)
</TABLE>
<PAGE> 49
<TABLE>
<CAPTION>
PATENT ISSUE COUNTRY TITLE
NUMBER DATE
<S> <C> <C> <C>
DE 69032771 03/13/90 GERMANY CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
(0489010)
DE_________ 10/23/92 GERMANY CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
(0610365)
0898234 09/24/98 GERMANY METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
0468999 03/13/90 GREAT BRITAIN CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0489010 03/13/90 GREAT BRITAIN CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0610365 10/23/92 GREAT BRITAIN CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0898234 09/24/98 GREAT BRITAIN METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
0468999 03/13/90 SWITZERLAND CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0489010 3/13/90 SWITZERLAND CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0610365 10/23/92 SWITZERLAND CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
0898234 09/24/98 SWITZERLAND METHOD AND SYSTEM FOR GENERATING A DIAGNOSTIC INDEX
4907597+ 03/13/90 UNITED STATES CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
4924875+ 05/15/90 UNITED STATES CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
5010891+ 04/30/91 UNITED STATES CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
5020540+ 06/04/91 UNITED STATES CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
5320109 06/14/94 UNITED STATES CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
5381804 01/17/95 UNITED STATES MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
</TABLE>
<PAGE> 50
<TABLE>
<CAPTION>
PATENT ISSUE COUNTRY TITLE
NUMBER DATE
<S> <C> <C> <C>
5305746 04/26/94 UNITED STATES DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
5368041* 11/29/94 UNITED STATES MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
5458117 10/17/95 UNITED STATES CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
5792069 08/11/98 UNITED STATES METHOD AND SYSTEM FOR THE EXTRACTION OF CARDIAC
ARTIFACTS FROM EEG SIGNALS
5813404 09/29/98 UNITED STATES ELECTRODE CONNECTOR SYSTEM
</TABLE>
- -------------------------------------
+ Vikas Saini has alleged that he should be listed as an inventor on one or
more of these patents. The Company is currently investigating these
allegations.
* Licensed to Aspect Medical Systems, Inc. from Siemens Medical Systems, Inc.
<PAGE> 51
ASPECT MEDICAL SYSTEMS, INC. PATENT APPLICATIONS
<TABLE>
<CAPTION>
SERIAL FILING COUNTRY TITLE
NUMBER DATE
<S> <S> <C> <C>
75171/96 10/18/96 AUSTRALIA ELECTRODE CONNECTOR SYSTEM
49082/97 10/10/97 AUSTRALIA ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
56150/98 12/19/97 AUSTRALIA SYSTEM FOR THE EXTRACTION OF CARDIAC ARTIFACTS FROM EEG
SIGNALS
________ 01/25/99 AUSTRALIA SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
2123807 09/23/93 CANADA DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
2122032 10/23/92 CANADA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
2146979 10/13/93 CANADA MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
2051683 03/13/90 CANADA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
2191594 06/08/95 CANADA CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
2235317 10/18/96 CANADA ELECTRODE CONNECTOR SYSTEM
2268483 10/10/97 CANADA ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
2275901 12/19/97 CANADA SYSTEM FOR THE EXTRACTION OF CARDIAC ARTIFACTS FROM EEG
SIGNALS
2285354 01/25/99 CANADA SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
92922952.4 10/23/92 EPO CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
93921721.2 09/23/93 EPO DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
93923860.6 10/13/93 EPO MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
</TABLE>
<PAGE> 52
<TABLE>
<CAPTION>
SERIAL FILING COUNTRY TITLE
NUMBER DATE
<S> <S> <C> <C>
95922265.4 06/08/95 EPO CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
96110142.5 10/13/93 EPO MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
96937692.0 10/18/96 EPO ELECTRODE CONNECTOR SYSTEM
97911789.2 10/10/97 EPO ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
97952570.6 12/19/97 EPO SYSTEM FOR THE EXTRACTION OF CARDIAC ARTIFACTS FROM EEG
SIGNALS
99903375.6 01/25/99 EPO SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
06-509165 09/23/93 JAPAN DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
8-501313 06/08/95 JAPAN CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
02-504848 03/13/90 JAPAN CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
05-507930 10/23/92 JAPAN CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
02-505692 03/13/90 JAPAN CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
09-515970 10/18/96 JAPAN ELECTRODE CONNECTOR SYSTEM
10-518626 10/10/97 JAPAN ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
10-529004 12/19/97 JAPAN SYSTEM FOR THE EXTRACTION OF CARDIAC ARTIFACTS FROM EEG
SIGNALS
_________ 01/25/99 JAPAN SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
US92/09074 10/23/92 PCT CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
US90/01378 03/13/90 PCT CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
US90/01385 03/13/90 PCT CARDIAC BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
</TABLE>
<PAGE> 53
<TABLE>
<CAPTION>
SERIAL FILING COUNTRY TITLE
NUMBER DATE
<S> <S> <C> <C>
US93/09029 09/23/93 PCT DISPOSABLE, PRE-GELLED, SELF-PREPPING ELECTRODE
US93/09763 10/13/93 PCT MONITOR AND METHOD FOR ACQUIRING AND PROCESSING
ELECTRICAL SIGNALS RELATING TO BODILY FUNCTIONS
US95/07310 06/08/95 PCT CEREBRAL BIOPOTENTIAL ANALYSIS SYSTEM AND METHOD
US96/16596 10/18/96 PCT ELECTRODE CONNECTOR SYSTEM
US97/18833 10/10/97 PCT ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
US97/23624 12/19/97 PCT SYSTEM FOR THE EXTRACTION OF CARDIAC ARTIFACTS FROM EEG
SIGNALS
US99/01544 01/25/99 PCT SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
US99/13849 06/18/99 PCT ELECTRODE FOR MEASURING ELECTRO-PHYSIOLOGICAL SIGNALS
USING LIQUID ELECTROLYTIC GEL WITH A HIGH SALT
CONCENTRATION
US99/17688 08/04/99 PCT SYSTEM AND METHOD FOR FACILITATING CLINICAL DECISION
MAKING
08/730638 10/11/96 UNITED STATES ELECTRODE ARRAY SYSTEM FOR MEASURING
ELECTROPHYSIOLOGICAL SIGNALS
09/100290 06/19/98 UNITED STATES ELECTRODE FOR MEASURING ELECTROPHYSIOLOGICAL SIGNALS
USING LIQUID ELECTROLYTIC GEL WITH A HIGH SALT
CONCENTRATION
09/016104 01/30/98 UNITED STATES SYSTEM AND METHOD FOR ENHANCING AND SEPARATING
BIOPOTENTIAL SIGNALS
09/135931 08/18/98 UNITED STATES SYSTEM AND METHOD FOR FACILITATING CLINICAL DECISION
MAKING
09/162025 09/28/98 UNITED STATES ELECTRODE CONNECTOR SYSTEM
09/328945 06/09/99 UNITED STATES A SMART ELECTROPHYSIOLOGICAL SENSOR SYSTEM WITH
AUTOMATIC AUTHENTICATION AND VALIDATION
</TABLE>
<PAGE> 54
EXHIBIT C
Trademarks
Registration/Application Registration/Application
Description Number Date
----------- ------ ----
BIS 2,229,390 03/02/99
BIS 2,226,559 02/23/99
BIS 2,226,557 02/23/99
BIS 2,229,392 03/02/99
Bispectral Index 2,226,558 02/23/99
Bispectral Index 2,229,389 03/02/99
Aspect 1,932,423 11/07/95
Zipprep 2,032,419 01/21/97
Bis Plus (and Design) 75/712,953 05/24/99
<PAGE> 55
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
AS OF NOVEMBER 1999
<TABLE>
<CAPTION>
MARK SERIAL NO. FILING DATE COUNTRY
---- ---------- ----------- -------
<S> <C> <C> <C>
BIS 841586 04/08/97 Canada
BIS 970077905 07/28/97 China
BIS 754929 04/10/97 India
BIS 754928 04/10/97 India
BIS 9-104830 04/08/97 Japan
BIS 291654 04/08/97 Mexico
BIS and design 841588 04/08/97 Canada
BIS and design 970077907 07/28/97 China
BIS and design 504332 04/08/97 European Community
BIS and design 754931 04/10/97 India
BIS and design 754930 04/10/97 India
BIS and design 9-104831 04/08/97 Japan
BIS PLUS logo 10/22/99 European Community
BIS PLUS logo 11/02/99 Japan
BIS PLUS logo 75/712953 05/24/99 United States
BISPECTRAL INDEX 791834 04/21/99 Australia
BISPECTRAL INDEX 841587 04/08/97 Canada
BISPECTRAL INDEX 754932 04/10/97 India
BISPECTRAL INDEX 754933 04/10/97 India
ZIPPREP 633985 07/15/94 India
</TABLE>
<PAGE> 56
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
AS OF NOVEMBER 1999
<TABLE>
<CAPTION>
MARK REGIS. NO. REGIS. DATE COUNTRY
---- ---------- ----------- -------
<S> <C> <C> <C>
ASPECT * 1932423 11/07/95 United States
BIS 731547 04/08/97 Australia
BIS 1237474 01/07/99 China
BIS 504340 10/29/98 European Community
BIS 559963 09/30/97 Mexico
BIS 428/51 03/08/98 Saudi Arabia
BIS 428/52 03/08/98 Saudi Arabia
BIS 2229390 03/02/99 United States
BIS 2226559 02/23/99 United States
BIS and design 731546 10/08/96 Australia
BIS and design 1237475 01/07/99 China
BIS and design 556233 08/27/97 Mexico
BIS and design 558374 09/22/97 Mexico
BIS and design 428/53 04/09/97 Saudi Arabia
BIS and design 428/54 04/09/97 Saudi Arabia
BIS and design 2229392 03/02/99 United States
BIS and design 2226557 02/23/99 United States
BISPECTRAL INDEX 1229054 12/7/98 China
BISPECTRAL INDEX 1219345 10/28/98 China
BISPECTRAL INDEX 504233 04/08/97 European Community
</TABLE>
- --------
* Trademark owned by Aspect Electronics, Inc. and licensed to Aspect Medical
Systems.
<PAGE> 57
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK REGIS. NO. REGIS. DATE COUNTRY
---- ---------- ----------- -------
<S> <C> <C> <C>
BISPECTRAL INDEX 4181898 04/28/98 Japan
BISPECTRAL INDEX 599964 09/30/97 Mexico
BISPECTRAL INDEX 599965 09/30/97 Mexico
BISPECTRAL INDEX 428/50 03/08/98 Saudi Arabia
BISPECTRAL INDEX 2226558 02/23/99 United States
BISPECTRAL INDEX 2229389 03/02/99 United States
ZIPPREP A633957 07/04/94 Australia
ZIPPREP 555286 06/22/94 Benelux
ZIPPREP 818036346 09/10/96 Brazil
ZIPPREP 505106 12/4/98 Canada
ZIPPREP 872161 09/21/96 China
ZIPPREP 297853 12/3/98 European Community
ZIPPREP 94525823 06/22/94 France
ZIPPREP 2095913 05/09/95 Germany
ZIPPREP 3310703 05/23/97 Japan
ZIPPREP 501063 06/29/94 Mexico
ZIPPREP 332/43 02/20/95 Saudi Arabia
ZIPPREP 1912152 07/05/95 Spain
ZIPPREP 265621 03/31/95 Sweden
ZIPPREP 1575989 06/21/94 United Kingdom
</TABLE>
<PAGE> 58
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK REGIS. NO. REGIS. DATE COUNTRY
---- ---------- ----------- -------
<S> <C> <C> <C>
ZIPPREP 2032419 01/21/97 United States
</TABLE>
<PAGE> 59
Copyrights owned by Aspect Medical Systems, Inc.
as of November 1999
<TABLE>
<CAPTION>
TITLE REGISTRATION NUMBER REGISTRATION DATE
----- ------------------- -----------------
<S> <C> <C>
BIS MONTAGE submitted on
05/36/99
BIS RANGE GUIDELINES TX 4-900-007 12/04/98
BIS RANGE GUIDELINES AND USING BIS booklet submitted on
09/08/99
</TABLE>
<PAGE> 60
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
AS OF NOVEMBER 1999
<TABLE>
<CAPTION>
MARK SERIAL FILING DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
-------
<S> <C> <C> <C> <C> <C>
BIS 841586 04/08/97 Canada Corresponds to United Response to Office Action
States registrations due 12/29/99
2229390 and 2226559
BIS 970077905 07/28/97 China Corresponds to United Pending
States registration
2229390
BIS 754929 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2226559 expected 04/2002
BIS 754928 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2229390 expected 04/2002
BIS 9-104830 04/08/97 Japan Corresponds to United Pending
States registrations
2229390 and 2226559
BIS 291654 04/08/97 Mexico Corresponds to United Pending
States registration
2229390
BIS and design 841588 04/08/97 Canada Corresponds to United Response to Office Action
States registrations due 12/29/99
2226557 and 2229392
BIS and design 970077907 07/28/97 China Corresponds to United Pending
States registration
2226557
BIS and design 504332 04/08/97 European Corresponds to United Approved for Registration
Community States registrations
2226557 and 2229392
BIS and design 754931 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2226557 expected 04/2002
</TABLE>
<PAGE> 61
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK SERIAL FILING DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
BIS and design 754930 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2229392 expected 04/2002
BIS and design 9-104831 04/08/97 Japan Corresponds to United Pending
States registrations
2226557 and 2229392
BIS PLUS logo 10/22/99 European Corresponds to United Pending
Community States application
75/712953
BIS PLUS logo 11/02/99 Japan Corresponds to United Pending
States application
75/712953
BIS PLUS logo 75/712953 05/24/99 United States Print material in the Newly filed application
field of anesthesia
technology
BISPECTRAL INDEX 791834 04/21/99 Australia computer programs for Pending
use in monitoring and
processing
electroencephalograph
signals
BISPECTRAL INDEX 841587 04/08/97 Canada Corresponds to United Response to Office Action
States registrations due 01/10/2000
2226558 and 2229389
BISPECTRAL INDEX 754932 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2226558 expected 04/2002
BISPECTRAL INDEX 754933 04/10/97 India Corresponds to United First official report from
States registration Indian Trademark Office
2229389 expected 04/2002
ZIPPREP 633985 07/15/94 India Corresponds to United First official report from
States registration Indian Trademark Office
2032419 expected 01/2000
</TABLE>
<PAGE> 62
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
AS OF NOVEMBER 1999
<TABLE>
<CAPTION>
MARK REGIS. REGIS. DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
ASPECT * 1932423 11/07/95 United States Electroencephalograph Section 8
analysis instrument; Affidavit due
namely a cerebral 11/07/2001
phenomena detector and
diagnostic index
generator used for a
quantifying cerebral
phenomena; electrodes for
electroencephalograph
BIS 731547 04/08/97 Australia Corresponds to United Renewal due
States registrations 04/08/2007
2229390 and 2226559
BIS 1237474 01/07/99 China Corresponds to United Renewal due
States registration 01/06/2009
2226559
BIS 504340 10/29/98 European Community Corresponds to United Renewal due
States registrations 04/08/2007
2229390 and 2226559
BIS 559963 09/30/97 Mexico Corresponds to United Renewal due
States registration 09/30/2007
2226559
BIS 428/51 03/08/98 Saudi Arabia Corresponds to United Renewal due
States registration 11/18/2007
2226559
BIS 428/52 03/08/98 Saudi Arabia Corresponds to United Renewal due
States registration 11/18/2007
2229390
BIS 2229390 03/02/99 United States Computer programs for use Section 8
in monitoring and Affidavit due
processing 03/02/2005
electroencephalograph
signals
</TABLE>
- --------
* Trademark owned by Aspect Electronics, Inc. and licensed to Aspect Medical
Systems.
<PAGE> 63
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK REGIS. REGIS. DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
BIS 2226559 02/23/99 United States Electroencephalograph Section 8
monitors and sensors Affidavit due
02/23/2005
BIS and design 731546 10/08/96 Australia Corresponds to United Renewal due
States registrations 04/08/2007
2226557 and 2229392
BIS and design 1237475 01/07/99 China Corresponds to United Renewal due
States registration 01/06/2009
2229392
BIS and design 556233 08/27/97 Mexico Corresponds to United Renewal due
States registration 08/27/2007
2226557
BIS and design 558374 09/22/97 Mexico Corresponds to United Renewal due
States registration 09/22/2007
2229392
BIS and design 428/53 04/09/97 Saudi Arabia Corresponds to United Renewal due
States registration 11/18/2008
2226557
BIS and design 428/54 04/09/97 Saudi Arabia Corresponds to United Renewal due
States registration 11/18/2007
2226557
BIS and design 2229392 03/02/99 United States Electroencephalograph Section 8
monitors and sensors Affidavit due
03/02/2005
BIS and design 2226557 02/23/99 United States Computer programs for use Section 8
in monitoring and Affidavit due
processing 02/23/2005
electroencephalograph
signals
</TABLE>
<PAGE> 64
<TABLE>
<CAPTION>
MARK SERIAL FILING DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
BISPECTRAL INDEX 1229054 12/7/98 China Corresponds to United Renewal due
States registration 12/06/2008
2226558
BISPECTRAL INDEX 1219345 10/28/98 China Corresponds to United Renewal due
States registration 10/27/2008
2229389
BISPECTRAL INDEX 504233 04/08/97 European Community Corresponds to United Renewal due
States registrations 04/08/2007
2226558 and 2229389
BISPECTRAL INDEX 4181898 04/28/98 Japan Corresponds to United Renewal due
States registrations 08/28/2008
2226558 and 2229389
BISPECTRAL INDEX 599964 09/30/97 Mexico Corresponds to United Renewal due
States registration 09/30/2007
2226558
BISPECTRAL INDEX 599965 09/30/97 Mexico Corresponds to United Renewal due
States registration 09/30/2007
2229389
BISPECTRAL INDEX 428/50 03/08/98 Saudi Arabia Corresponds to United Renewal due
States registration 05/18/2007
2226558
BISPECTRAL INDEX 2226558 02/23/99 United States Computer programs for use Section 8
in monitoring and Affidavit due
processing 02/23/2005
electroencephalograph
signals
BISPECTRAL INDEX 2229389 03/02/99 United States Electroencephalograph Section 8
monitors and sensors Affidavit due
03/02/2005
</TABLE>
Page 5 of 9
<PAGE> 65
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK REGIS. REGIS. DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
ZIPPREP A633957 07/04/94 Australia EEG and ECG electrodes Renewal due
and sensors 07/04/2001
ZIPPREP 555286 06/22/94 Benelux EEG and ECG electrodes Renewal due
and sensors 06/22/2004
ZIPPREP 818036346 09/10/96 Brazil EEG and ECG electrodes Renewal due
and sensors and all other 09/10/2006
goods in Class 10
ZIPPREP 505106 12/4/98 Canada EEG electrodes Renewal due
12/04/2013
ZIPPREP 872161 09/21/96 China EEG and ECG electrodes Renewal due
and sensors 09/20/2006
ZIPPREP 297853 12/3/98 European Community Corresponds to United Renewal due
States registration 6/27/2006
2032419
ZIPPREP 94525823 06/22/94 France Corresponds to United Renewal due
States registration 06/21/2004
2032419
ZIPPREP 2095913 05/09/95 Germany Medical and veterinary Renewal due
instruments and 07/31/2004
apparatus; electro
encephalographs and
electro cardiographs as
well as electrodes and
sensors for use therewith
ZIPPREP 3310703 05/23/97 Japan EEG and ECG electrodes Renewal due
and sensors 05/23/2007
</TABLE>
<PAGE> 66
TRADEMARKS OWNED BY ASPECT MEDICAL SYSTEMS, INC.
as of November 1999
<TABLE>
<CAPTION>
MARK REGIS. REGIS. DATE COUNTRY GOODS STATUS
---- NO. ----------- ------- ----- ------
------
<S> <C> <C> <C> <C> <C>
ZIPPREP 501063 06/29/94 Mexico Corresponds to United Renewal due
States registration 06/29/2004
2032419
ZIPPREP 332/43 02/20/95 Saudi Arabia EEG and ECG electrodes Renewal due
and sensors 03/15/2004
ZIPPREP 1912152 07/05/95 Spain EEG and ECG electrodes Renewal due
and sensors 07/05/2004
ZIPPREP 265621 03/31/95 Sweden EEG and ECG electrodes Renewal due
and sensors 03/31/2005
ZIPPREP 1575989 06/21/94 United Kingdom Medical apparatus and Renewal due
instruments; 06/21/2001
electroencephalographs
and electrocardiographs;
electrodes and sensors
for
electroencephalographs
and electrocardiographs;
parts and fittings for
all the aforesaid goods
ZIPPREP 2032419 01/21/97 United States EEG electrodes Declaration of Use
due 01/21/2003
</TABLE>
<TABLE>
<CAPTION>
TITLE REGISTRATION NUMBER REGISTRATION DATE
----- ------------------- -----------------
<S> <C> <C>
BIS MONTAGE submitted on
05/36/99
</TABLE>
<PAGE> 67
Copyrights owned by Aspect Medical Systems, Inc.
as of November 1999
<TABLE>
<S> <C> <C>
BIS RANGE GUIDELINES TX 4-900-007 12/04/98
BIS RANGE GUIDELINES AND USING BIS booklet submitted on
09/08/99
</TABLE>
<PAGE> 68
INACTIVE TRADEMARKS
<TABLE>
<S> <C> <C> <C> <C> <C>
BISPECTRAL INDEX 731545 04/08/97 Australia Corresponds to United States Abandoned
registrations 2226558 and 2229389
</TABLE>
<PAGE> 69
SECURITIES ACCOUNT CONTROL AGREEMENT
This Securities Account Control Agreement is made as of December 14,
1999, by and among Imperial Bank ("Creditor"), Aspect Medical Systems, Inc.
("Pledgor" or "Customer"), and State Street Bank and Trust Company, a
Massachusetts trust company ("Bank"). Capitalized terms used without other
definition herein shall have the respective meanings assigned to such terms in
Division 8 or 9, as applicable, of the Uniform Commercial Code as enacted and in
effect in the Commonwealth of Massachusetts on the date hereof (the "UCC").
PREAMBLE
1. Bank has established a securities account in the name of Pledgor
(the "Account"). Bank and Pledgor have entered into a Customer Agreement (as in
effect on the date hereof, the "Customer Agreement") with respect to the
Account, pursuant to which Bank has agreed to maintain the Account and to act as
Pledgor's agent to execute transactions therein at Pledgor's direction.
2. Pledgor has granted Creditor a security interest in the Account and
the investment property held therein pursuant to that certain Loan and Security
Agreement dated as of December 10, 1999 (as amended from time to time, the
"Pledge Agreement") to secure certain obligations of Pledgor to Creditor under
the Pledge Agreement.
3. The parties are entering into this Agreement to provide for control
by Creditor of the Account and the other Investment Property (as defined below)
and to perfect the security interest of Creditor therein.
In consideration of the foregoing premises, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Creditor, Pledgor and Bank hereby agree as follows:
TERMS
SECTION 1. ESTABLISHMENT OF THE ACCOUNT; REPRESENTATIONS OF BANK. The
Account has been established in the name of Pledgor as recited above. The
Account and all investment property, securities (certificated and
uncertificated), securities entitlements, and all other financial assets from
time to time held therein or credited thereto, including any free credit
balance, all of such property, together with any proceeds, profits and products
thereof, and dividends and distributions, and all books and records relating
thereto, collectively, are referred to as the "Investment Property".
Bank hereby represents and warrants to Creditor that except for the
respective claims and interests of Creditor, Pledgor and Bank in and to the
Account and the other Investment Property, Bank is not aware of any claim to or
interest in the Account or any other Investment Property. In particular, Bank
has not agreed to honor entitlement orders relating to the Investment Property
from any person or entity other than Pledgor and the Creditor.
SECTION 2. PRIORITY OF LIEN. Pledgor hereby grants to Creditor a
security interest in the Investment Property and agrees that the Account and
other Investment Property constitute Collateral under the Pledge Agreement. Bank
hereby acknowledges the security interest granted to Creditor by Pledgor. Except
for the Bank's lien of a Securities Intermediary under the UCC (as defined
therein), Bank hereby waives and releases all liens, encumbrances, claims and
rights of setoff it may have against the Investment Property and agrees that it
will not assert any such lien, encumbrance, claim or right against any
Investment Property or any interest therein. Pledgor, however shall pay on
demand all of Bank's costs and expenses relating to performance of its
obligations hereunder, including expenses relating to sale or transfer of any
Investment Property and legal costs in the event of a dispute with respect to
the Bank's obligations hereunder, and the Bank is authorized by Pledgor and
Creditor to set off against amounts in the Account for payment of such costs and
expenses prior to remitting amounts in the Account to Creditor. Bank will not
agree with any third party to comply with entitlement orders concerning the
Account or any other Investment Property originated by such third party without
the prior written consent of Creditor and Pledgor.
CONTROL. Bank will comply with entitlement orders originated by
Creditor concerning the Account without any further consent by Pledgor. In
furtherance and not in limitation of the foregoing, Bank shall execute
<PAGE> 70
transactions in the Investment Property at the direction of Pledgor, or its
authorized representatives and agents, including, without limitation, any
entitlement orders withdrawing financial assets from the Account or directing
delivery of Investment Property or other assets to the Pledgor, unless and until
Bank receives from Creditor a written Notice of Exclusive Control in
substantially the form of EXHIBIT A hereto (a "Notice of Exclusive Control"),
which Creditor shall only give if an Event of Default (as defined in the Pledge
Agreement) has occurred and is continuing under the Pledge Agreement. Upon
receipt of a Notice of Exclusive Control, Bank will immediately cease complying
with entitlement orders or other directions concerning the Investment Property
originated by Pledgor or its representatives or agents, and shall comply only
with the directions of Bank.
BANK. Notwithstanding anything to the contrary in this Agreement, the
Pledgor and Creditor acknowledge and agree that Bank shall not be held
responsible for any market decline in the value of the Investment Property or to
notify Pledgor or Creditor of any such decline in the market value of the
Investment Property or to take any action with regard to such Investment
Property except upon the specific written direction stated herein. Further, the
Bank shall have no liability for any Investment Property that is delivered out
of the Account and is not replaced, or if such Investment Property matures and
is not replaced.
SECTION 3. [Intentionally omitted.]
SECTION 4. STATEMENTS, CONFIRMATIONS AND NOTICES OF ADVERSE CLAIMS.
After receipt of a Notice of Exclusive Control, Bank will send copies of all
statements, confirmations and other correspondence concerning the Account and
the other Investment Property simultaneously to Pledgor and Creditor at their
respective addresses set forth in Paragraph 16 of this Agreement. If the Bank is
aware of any person asserting any lien, encumbrance or adverse claim against the
Account or in any financial asset carried therein, Bank will promptly notify
Creditor and Pledgor thereof.
SECTION 5. RESPONSIBILITY OF BANK. Except for losses, liabilities or
damages caused by Bank's gross negligence or willful misconduct, Bank shall have
no responsibility or liability to Creditor for executing transactions in the
Investment Property at the direction of Pledgor, or Pledgor's authorized
representatives, or complying with entitlement orders concerning the Investment
Property from Pledgor or its authorized representatives, which are received by
Bank before Bank receives a Notice of Exclusive Control. Bank shall have no
responsibility or liability to Pledgor for complying with a Notice of Exclusive
Control or complying with entitlement orders concerning the Investment Property
originated by Creditor. Bank may rely on a Notice of Exclusive Control
purportedly signed by Creditor and shall have no duty to investigate or make any
determination as to the validity, genuineness or propriety thereof, or the facts
giving rise thereto. This Agreement does not create or impose any obligation or
duty upon Bank other than those expressly set forth herein. Pledgor hereby
agrees to indemnify and hold Bank harmless from all liabilities, obligations,
losses or claims which may be asserted against Bank arising out of this
Agreement or performance of Bank's duties hereunder other than as the same may
relate to Bank's gross negligence or willful misconduct. This indemnification
shall survive termination of this Agreement and Creditor's interest in the
Account.
SECTION 6. TAX REPORTING. All items of income, gain, expense and loss
recognized in the Account shall be reported to the Internal Revenue Service and
all state and local taxing authorities under the name and taxpayer
identification number of Pledgor.
SECTION 7. TERMINATION. The rights and powers granted herein to
Creditor have been granted in order to perfect its security interest in the
Investment Property, are powers coupled with an interest and will neither be
affected by the dissolution or bankruptcy of Pledgor nor by the lapse of time.
Bank acknowledges that Pledgor shall have no right to terminate the Account
without the prior written consent of Creditor.
SECTION 8. WAIVER AND INDEMNIFICATION. Creditor shall not be liable to
Pledgor or Bank for any acts or omissions of Creditor in connection with this
Agreement and the Customer Agreement, including without limitation, the delivery
of entitlement orders and all other transactions regarding the Investment
Property, except for Creditor's gross negligence or willful misconduct. Other
than losses caused by the Creditor's gross negligence or willful misconduct,
Pledgor shall indemnify, defend and hold harmless Creditor, and its respective
agents, representatives, successors and assigns, from and against any and all
claims, judgments, damage, demands, losses, expenses, costs or liability arising
in connection with this Agreement and the Customer Agreement, and from any
breach or default by
2
<PAGE> 71
Pledgor in the performance of any obligation on the part of Pledgor to be
performed under the terms of this Agreement and the Customer Agreement. Pledgor
agrees to defend all such indemnification claims against Creditor on behalf of
Creditor, with counsel reasonably acceptable to Creditor. The obligations of
Pledgor under this Section 8 shall survive the expiration of this Agreement, or
sooner termination thereof.
SECTION 9. AMENDMENTS. No amendment, modification or termination of
this Agreement or waiver of any right hereunder shall be binding on any party
hereto unless it is in writing and is signed by the party to be charged.
SECTION 10. SEVERABILITY. If any term or provision set forth in this
Agreement shall be invalid or unenforceable, the remainder of this Agreement, or
the application of such terms or provisions to persons or circumstances, other
than those to which it is held invalid or unenforceable, shall be construed in
all respects as if such invalid or unenforceable term or provision were omitted.
SECTION 11. SUCCESSORS AND ASSIGNS. The terms of this Agreement shall
be binding upon, and shall inure to the benefit of, the parties hereto and their
respective successors and assigns.
SECTION 12. RULES OF CONSTRUCTION. Words in the singular number include
the plural, and in the plural include the singular; words of the masculine
gender include the feminine and the neuter, and when the context requires words
of the neuter gender may refer to any gender and the word "or" is disjunctive
but not exclusive. The captions and section numbers appearing in this Agreement
are inserted only as a matter of convenience and do not define, limit or
describe the scope or intent of the provisions of this Agreement. References to
any statute or regulation shall mean the same as amended and in effect from time
to time, and shall include any successor statute or regulation governing the
same subject matter.
SECTION 13. NOTICES. Any notice, request or other communication
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been properly given when delivered in person, or when
sent by telecopy or other electronic means and electronic confirmation of error
free receipt is received or upon actual receipt or refusal of delivery when sent
by certified or registered United States mail, return receipt requested, postage
prepaid, addressed to the party at the addresses set forth next such parties'
name below. Any party may change its address for notices in the manner set forth
above.
Creditor: Imperial Bank
225 Franklin Street, Ste. 2730
Boston, MA 02110
Attn: Karen Dunn
FAX: 617-956-0557
Pledgor: Aspect Medical Systems, Inc.
2 Vision Drive
Natick, MA 01760-2059
FAX: 617-956-0557
Bank: State Street Bank and Trust Company
Ann Hutchinson Building
108 Myrtle Street
N. Quincy, MA 02171
Attention: Craig Pessina
FAX: 617-985-8896
SECTION 14. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, all of which shall constitute but one and the same instrument.
To make proof of this Agreement, it shall only be necessary to produce one such
counterpart (or a copy thereof if no such counterpart is available).
SECTION 15. CHOICE OF LAW. This Agreement shall be governed by and
interpreted in accordance with the laws of The Commonwealth of Massachusetts,
without giving effect to the conflict of laws provisions thereof. The
3
<PAGE> 72
parties hereby consent and submit to the jurisdiction of the courts of
Massachusetts and the federal courts sitting in Massachusetts in connection with
any proceedings or actions relating to the performance of the duties and
obligations as set forth herein.
IN WITNESS WHEREOF, each of the undersigned has duly executed and
delivered this Agreement to take effect as of the date first herein above
written
"CREDITOR"
IMPERIAL BANK
By: __________________________________
Title: _______________________________
"PLEDGOR"
ASPECT MEDICAL SYSTEMS, INC.
By: /s/ J. Neal Armstrong
----------------------------------
Title: VP & CFO
-------------------------------
"BANK"
STATE STREET BANK AND TRUST COMPANY
By: __________________________________
Title: _______________________________
4
<PAGE> 73
EXHIBIT A
NOTICE OF EXCLUSIVE CONTROL
State Street Bank and Trust Company
Ann Hutchinson Building
108 Myrtle Street
N. Quincy, MA 02171
Attention: Craig Pessina
Re: Aspect Medical Systems, Inc.
Account No. ______________
Ladies and Gentlemen:
Reference is made to the Securities Account Control Agreement dated as
of _______________________ (the "Control Agreement") by and among you, the
undersigned, and Aspect Medical Systems, Inc. Terms defined in the Control
Agreement and used without other definition herein shall have the respective
meanings herein assigned to such terms in the Control Agreement.
Pursuant to Section 4 of the Control Agreement, you are hereby
directed, from and after the date hereof, to execute only entitlement orders
originated by Creditor, and not to accept for execution any further entitlement
orders originated by Pledgor.
Very truly yours,
IMPERIAL BANK
By: __________________________________
Title: _______________________________
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 7, 2000
