edX - TXT1x Data
-----BEGIN PRIVACY-ENHANCED MESSAGE-----1Proc-Type: 2001,MIC-CLEAR2Originator-Name: [email protected]3Originator-Key-Asymmetric:4MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen5TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB6MIC-Info: RSA-MD5,RSA,7QjM4+PLahepXuMJhdzhyDBsds0LtPAJihGfdyVc2NaJZmeg+apAna+JQHnnYSKNe8xA+wFDWCP3PpkGlw98Uaaw==910<SEC-DOCUMENT>0000897101-00-000248.txt : 2000032111<SEC-HEADER>0000897101-00-000248.hdr.sgml : 2000032112ACCESSION NUMBER: 0000897101-00-00024813CONFORMED SUBMISSION TYPE: 10-K14PUBLIC DOCUMENT COUNT: 615CONFORMED PERIOD OF REPORT: 1999123116FILED AS OF DATE: 200003201718FILER:1920COMPANY DATA:21COMPANY CONFORMED NAME: APPLIED BIOMETRICS INC22CENTRAL INDEX KEY: 000081656823STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845]24IRS NUMBER: 41150811225STATE OF INCORPORATION: MN26FISCAL YEAR END: 12312728FILING VALUES:29FORM TYPE: 10-K30SEC ACT:31SEC FILE NUMBER: 000-2214632FILM NUMBER: 5739093334BUSINESS ADDRESS:35STREET 1: 501 E HGWY 13 STE 10836CITY: BURNSVILLE37STATE: MN38ZIP: 5533739BUSINESS PHONE: 61289011234041MAIL ADDRESS:42STREET 1: 501 EAST HWY 1343CITY: BURNSVILLE44STATE: MN45ZIP: 5533746</SEC-HEADER>47<DOCUMENT>48<TYPE>10-K49<SEQUENCE>150<TEXT>51525354- --------------------------------------------------------------------------------5556SECURITIES AND EXCHANGE COMMISSION57Washington, D.C. 205495859FORM 10-K6061[X] Annual Report pursuant to Section 13 or 15(d) of the62Securities Exchange Act of 193463For the fiscal year ended December 31, 19996465or6667[ ] Transition report pursuant to Section 13 or 15(d) of the68Securities Exchange Act of 193469For the transition period from _____ to _____7071Commission file number: 0-221467273- --------------------------------------------------------------------------------7475APPLIED BIOMETRICS, INC.76(Exact name of Registrant as specified in its charter)7778- --------------------------------------------------------------------------------7980Minnesota 41-150811281------------------------ -----------------------------------82(State of Incorporation) (I.R.S. Employer Identification No.)8384501 EAST HIGHWAY 13, SUITE 108, BURNSVILLE, MINNESOTA 5533785(Address of principal executive offices)8687TELEPHONE NUMBER: (612) 890-11238889--------------------------9091Securities Registered Pursuant to Section 12(b) of the Act: None9293Securities Registered Pursuant to Section 12(g) of the Act:9495Common Stock, $.01 par value9697----------------------------9899Indicate by check mark whether the Registrant (1) has filed all reports required100to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during101the preceding 12 months (or for such shorter period that the Registrant was102required to file such reports), and (2) has been subject to such filing103requirements for the past 90 days. Yes _X_ No___104105Indicate by check mark if disclosure of delinquent filers pursuant to Item 405106of Regulation S-K is not contained herein, and will not be contained, to the107best of Registrant's knowledge, in definitive proxy or information statements108incorporated by reference in Part III of this Form 10-K or any amendment to this109Form 10-K. [ ]110111As of March 10, 2000, 5,354,004 shares of Common Stock of the Registrant were112outstanding, and the aggregate market value of the Registrant's outstanding113Common Stock (based upon the last reported sale price of the Common Stock on114that date by the Nasdaq SmallCap Market), excluding outstanding shares owned115beneficially by executive officers and directors, was approximately $19,376,767.116117Part III of this Annual Report on Form 10-K incorporates by reference118information (to the extent specific sections are referred to herein) from the119Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held120on May 9, 2000 (the "2000 Proxy Statement").121122<PAGE>123124125Basis(TM) and RealFlow(TM) are trademarks of the Company.126127FORWARD-LOOKING STATEMENTS128129CERTAIN STATEMENTS CONTAINED IN THIS FORM 10-K INCLUDE "FORWARD LOOKING130STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT131OF 1995. THESE STATEMENTS MAY BE IDENTIFIED BY THE USE OF WORDS SUCH AS132"EXPECT," ANTICIPATE," "PLAN," "MAY," "ESTIMATE" OR OTHER SIMILAR EXPRESSIONS.133SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS134WHICH MAY CAUSE THE ACTUAL RESULT TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS,135PERFORMANCE OR ACHIEVEMENTS EXPRESSED IN OR IMPLIED BY SUCH FORWARD-LOOKING136STATEMENTS. SUCH FACTORS MAY INCLUDE THE COMPANY'S DEPENDENCE ON AND NEED FOR137FURTHER DEVELOPMENT OF THE BASIS SYSTEM ITS SOLE PRODUCT, THE COMPANY'S LIMITED138EXPERIENCE AND FINANCIAL RESOURCES AND UNCERTAINTY OF FUTURE RESULTS, THE NEED139FOR FURTHER DEVELOPMENT ON AND THE UNCERTAINTY OF MARKET ACCEPTANCE OF THE BASIS140SYSTEM, THE COMPANY'S NEED FOR ADDITIONAL FINANCING, THE REGULATED NATURE OF THE141MEDICAL DEVICE MARKET, COMPETITIVE FACTORS AND OTHER RISK FACTORS DISCUSSED IN142EXHIBIT 99.1 TO THIS REPORT AND FROM TIME TO TIME IN THE COMPANY'S FILINGS WITH143THE SECURITIES AND EXCHANGE COMMISSION.144145146PART I147148ITEM 1: DESCRIPTION OF BUSINESS149150OVERVIEW AND HISTORY151152Applied Biometrics, Inc. ("Applied Biometrics" or "the Company") is a153late-development stage medical device company engaged in the research,154development, manufacture and marketing of advanced cardio-vascular and155hemodynamic diagnostic and monitoring systems. The Company believes that its156core competencies in ultrasound transducer technology, signal processing,157cardiac anatomy, pathology and hemodynamics position it to develop and158commercialize a range of cardiac diagnostic and patient monitoring products. The159Company's Basis Cardiac Output Monitor and RealFlow Cardiac Output Probe160(collectively, the "Basis System") are medical devices designed to work together161to provide real time, beat-to-beat, cardiac output monitoring in surgical and162post-operative, intensive care unit settings.163164Applied Biometrics was founded in 1984 to develop and market a cardiac output165monitoring system using an ultrasound-based probe mounted in an endotrachial166tube. After a number of years of research and development, the Company decided167in 1996 to focus its efforts on a derivative of this device; a new,168intra-operative cardiac output system using a disposable ultrasound probe169applied directly to the ascending aorta. These efforts have resulted in the170Basis System, which is in final stages of development.171172During 1999, the Company continued development of the Basis System, focusing on173product development and refinement, upgrading and validating its manufacturing174facility, transitioning from prototype production to commercial production175ability, conducting market evaluations and1761771781179<PAGE>180181182completing an equity financing to provide capital for the Company's development183and commercialization efforts.184185The Company is currently conducting product evaluations at adult and pediatric186clinical sites in the U.S. prior to an intended commercial release of the Basis187System. These product evaluations were originally commenced in October 1999 at188one clinical site in the U.S. Although the early results from these evaluations189indicated that the product performed well in a number of respects, the results190also indicated the need for modifications to the Basis System in order to meet191the Company's product performance expectations. The Company anticipates that its192product evaluations and any further modifications necessary will continue in the193first half of 2000 and intends to commercialize the Basis System following their194successful completion. These forward-looking statements will be impacted195however, by the Company's ability to timely and successfully complete product196development and testing, commence manufacture of commercial quantities,197establish adequate sales, marketing and customer support activities, obtaining198additional financial resources and the outcome of end-user product evaluations.199As of the date of this Report, the Company believes that it has made significant200progress toward completing and testing the identified product refinements.201202During 1999, the Company also completed the spin-off distribution of Cardia,203Inc. a company engaged in developing technology designed to correct a certain204class of cardiac conditions involving openings in the septum of the heart. The205Company determined to spin-off Cardia because it believed that this technology206required resources independent of its core cardiac output monitor technology.207208Applied Biometrics' principal offices are located at 501 East Highway 13, Suite209108, Burnsville, MN 55337. The Company can be contacted by telephone at (612)210890-1123, by facsimile at (612) 890-1104, or by electronic mail at211[email protected].212213CLINICAL USE OF CARDIAC OUTPUT214215Cardiac output (or "CO"), is a measure of the volume of blood pumped by the216heart into the aorta and, is one of the most basic physiological parameters of217the body's hemodynamic system. There are typically two types of parameters218measured in the heart for diagnostic and monitoring purposes:219electro-physiological, such as the electrocardiogram ("ECG"), and hemodynamic,220such as heart rate, blood pressure and cardiac output. In many cases, ECG, heart221rate and pressures are used as a proxy to understand cardiac output. Surgical,222electrical and drug therapies, as well as life support systems, such as bypass223machines and heart assist devices, are often designed to develop and sustain a224specified level of cardiac output.225226Since the advent of open-heart surgery, surgeons, anesthesiologists and227intensivists have desired a reliable, accurate, continuous and real time measure228of cardiac output. The Company believes that medical practitioners recognize the229importance of measuring cardiac output and that there is significant demand for230an accurate, real-time cardiac output capability, especially for intra-operative231and post-operative heart surgery settings. In these settings, surgeons,232anesthesiologists and intensivists require continuous, real-time information233about cardiac output to guide surgery, drug delivery and life support systems.234The Company believes that practitioners are particularly2352362372238<PAGE>239240241interested in immediate cardiac output data for certain patients undergoing242cardiac surgery, including heart transplant and coronary artery bypass243surgeries, where the ability to provide real time, beat-to-beat, continuous244cardiac output data can allow surgeons, cardiologists and anesthesiologists to245react quickly to changes in a patient's condition.246247THE COMPANY'S BASIS CARDIAC OUTPUT MONITORING SYSTEM248249The Company's Basis Cardiac Output Monitoring System is an innovative new system250designed to measure CO on a continuous and real-time basis during and after251cardiac surgery. The Company believes that the Basis System is the only system252designed to directly, continuously, and in real-time, measure the velocity and253volume of blood in the ascending aorta. The Basis System is designed for use on254a broad range of aortic diameters in both adults and children. By using255ultrasound to monitor CO directly from the ascending aorta, the Basis System is256expected to provide real-time accuracy never before available. In contrast to257conventional CO techniques, the Basis System is designed to directly measure the258patient's aortic diameter and blood velocity 44 times each second for a true,259real-time view of cardiac output.260261The Basis System consists of the patented, disposable, ultrasonic RealFlow Probe262and the Basis Cardiac Output Monitor. The RealFlow Probe consists of an263ultrasound sensor mounted in the probe head, a power cable and an integrated264release mechanism. The release mechanism involves two nitinol "release" wires265integrated into the sensor head, which the surgeon sutures to the patient's266aorta during open-heart surgery. Later, after the chest cavity has been closed,267the physician may release the sutures by withdrawing the release wires,268permitting the probe to be removed from the chest without additional surgical269intervention.270271The Basis System monitor consists of both software and electronic hardware and272display, which energize the Basis System's RealFlow probe, senses the probe's273signal, determines cardiac output and provides a graphical and numeric display274to the physician. The electro-lumiscent flat panel display provides numerical,275waveform and trend information of the patient's cardiac output, stroke volume,276blood velocity, aortic diameter and blood velocity. The monitor is designed to277be automatic, requiring no user calibration, and to automatically adjust its278analysis and readout to each individual patient.279280The Basis System is specifically designed to address the need for continuous,281real-time, cardiac output data in surgical and post-operative settings by282reporting cardiac output accurately and without subjective user intervention.283The Basis System readings may be used to guide cardiac surgeons during their284surgical procedures and to assist intensivists and anesthesiologists by285monitoring vital signs and managing life support systems both during and after286the procedures.287288CUSTOMERS AND MARKETS289290There are over 1 million open chest cardiac procedures performed worldwide each291year. The Company believes that the Basis System can be applied to the majority292of these cases, but provides its most significant value where real time,293continuous CO is indicated. Based on feedback from cardiovascular surgeons, the294Company believes that these procedures include higher risk cases, a new class of295procedures called "beating heart" surgery and pediatric cardiac2962972983299<PAGE>300301302surgeries. On a global basis, the Company believes that there are approximately303350,000-400,000 procedures of these types conducted every year. The Company304believes that the Basis System is the only method that is designed to provide305continuous, real-time, accurate CO monitoring in these cases.306307The primary market for the Basis System is cardiac surgery centers and the308associated cardiac surgeons. As of 1999, there were approximately 900 open-heart309surgery centers in the United States, and an equal number outside the US. The310primary purchaser and user of the Basis System will be the cardiac surgeon.311312The Company also believes that new products based on Basis technology could open313up new potential markets where blood flow measurements are deemed clinically314useful but are otherwise unavailable or too costly. Among the other potential315applications are carotid endarterectomies, liver transplants, kidney transplants316and femoral bypass, as well as many other vascular procedures. The Company is317unable to predict whether and to what extent such markets will develop until318more investigation is performed.319320BUSINESS STRATEGY321322The Company's mission is to develop its core competences in sensor, signal323processing and probe manufacture, monitor hardware and software technologies to324develop a family of advanced, real-time monitoring products. The Company's focus325is to develop and market unique systems to the cardiac and surgery markets,326which provide high margin, disposable product revenue streams.327328The Company's initial focus is to complete the development and commercialization329of the Basis System. The Company believes that its core technology and expertise330provide the basis for numerous additional product development opportunities in331addition to the Basis System. The Company has several products in early332development that fit this profile, including intra-operative probes, minimally333invasive insertion systems and endo-trachial tube based systems.334335SALES AND MARKETING336337The Company is currently evaluating a number of sales strategies for its Basis338System, including establishing a direct sales force, dealer/distributor339relationships, manufacturers representatives and strategic sales alliances. The340Company intends to hire the appropriate sales support personnel and field sales341resources as needed for domestic and international markets.342343The Company plans to develop a small network of opinion leaders in clinical344practice to develop and validate specific applications for its products. The345plans call for creation of a Medical Advisory Board and a group of Clinical346Development partners. One of the Company's Directors, Dr. Demetre Nicoloff,347M.D., PhD., an influential cardiac surgeon, is advising the Company in this348matter.349350The Company is preparing the appropriate sales and marketing tools for the Basis351System and is developing market segment and target customer data. The Company352intends to be ready with a3533543554356<PAGE>357358359full complement of sales and marketing collateral materials and programs to360support Basis System commercialization.361362MANUFACTURING363364The Company currently builds its prototype probes at its 11,000 sq. ft.365Burnsville, Minnesota location and intends to manufacture both the probe and366monitor for its Basis System in this location. Certain component parts are367manufactured by third party vendors or are off-the-shelf components. However,368the Basis System Monitor contains a number of component parts that are nearing369the end of their product life cycle and availability. The Company is working to370design and test newer parts into the current monitor design in advance of any371potential future component shortages.372373The Company plans to continue to manufacture its proprietary probe, which374requires a controlled environment and proprietary, specialized manufacturing375skills and knowledge. Monitor assembly and testing will also be performed by the376Company internally in the near term, but may be outsourced if the Company377determines that it can improve its overall economics and maintain quality378standards. The Company upgraded its probe and monitor manufacturing capabilities379in 1999 in preparation for production readiness.380381RESEARCH AND DEVELOPMENT382383The Company's research and development strategy has been to perform its product384development with its own staff, and to develop strong, proprietary competencies385in ultrasound transducers, signal processing, cardiac anatomy and pathology, and386the fluid dynamics of blood flow. At December 31, 1999, seven professionals,387constituting 32% of the Company's staff, were devoted full time to research and388development efforts. The Company's research and development expenditures for389continuing operations were approximately $1,469,000, $805,000 and $1,409,000 in3901999, 1998 and 1997, respectively. These funds were used primarily to develop391the Basis System and its underlying core technologies.392393Although the Company believes the development of the Basis System is394substantially complete, the Company may determine through its testing and395evaluation process that further refinements are required prior to market launch.396Initial results from the Company's product evaluations conducted in late 1999397indicated that the Basis System functioned well in many respects, but required398certain modifications to meet the Company's expectations for performance and399reliability on a clinical basis. Additional product evaluations were delayed400until the necessary modifications to the product could be made to address the401clinical performance issues. As of the date of this Report, the Company believes402that it has made significant progress toward completing and testing the403identified product refinements. The Company intends to participate in additional404clinical evaluations during 2000 to continue to broaden the Company's market405knowledge and data regarding the usefulness, cost effectiveness and clinical406application of its products.407408The Company believes that its core technology and expertise provide for numerous409additional product development opportunities - each of which may offer410attractive growth potential for the4114124135414<PAGE>415416417Company. After the commercial launch of the Basis System, the Company plans to418devote resources to these product initiatives, which include an intra-operative419version of the RealFlow probe, an upgraded Basis Monitor and other projects. No420assurance can be provided, that any of these product development projects will421be undertaken or will result in the successful development and commercialization422of additional products. Further, the Company will require additional financial423resources to complete new product development activities and no assurance can be424given that such financial resources will be obtained.425426REGULATORY AND QUALITY ASSURANCE427428The Company has established and maintains a design and development system, a429management process and a manufacturing and quality control system designed to430conform to the Food and Drug Administration's (the "FDA") Quality System431Regulations ("QSR"). The Company plans to apply for ISO certification in 2000,432consistent with its objective to receive CE marking of the Basis System, which,433if received, would allow it to be freely marketed within the European Union434member nations in 2001.435436PATENTS AND PROPRIETARY RIGHTS437438The Company has developed extensive proprietary technology and knowledge in a439variety of fields that relate to cardiac output, blood flow and associated440diagnostic and monitoring products. These include ultrasound transducer design441and manufacturing, signal processing, cardiac anatomy, pathology and clinical442procedures, the fluid dynamics of blood flow and acoustic properties of the443human anatomy.444445The Company's success depends in part on its ability to obtain and maintain446patent protection for its products, to preserve its trade secrets and to operate447without infringing the proprietary rights of other parties. The Company seeks to448protect its technology by filing patent applications for technologies that it449considers important to the development of its business, based on an analysis of450the cost of obtaining a patent, the likely scope of protection and the relative451benefits of patent protection compared to trade secret protection, among other452considerations.453454The Company has U.S. and foreign patents and patents pending, which relate to455devices and methods used to measure blood flow through a major mammalian artery456using ultrasound technology, the release mechanism employed by the RealFlow457probe, and certain methods and techniques which relate to minimally invasive458surgery, beating heart surgery and advanced signal processing.459460There can be no assurance that patents will be issued on current products or on461products developed by the Company in the future, that the patents issued to the462Company in the past or in the future will be of material benefit, or that the463Company will have sufficient resources to enforce its patent rights. There can464also be no assurance that the Company's products do not infringe on patents,465copyrights or other proprietary information known or claimed by others, or that466others will not successfully utilize part of or all of the Company's467technologies without compensation to the Company. Infringement claims by third468parties could have a material adverse effect on the Company. Intellectual469property litigation is complex, time-consuming and4704714726473<PAGE>474475476expensive and the outcome of such litigation is difficult to predict. If the477Company is found to have infringed on the rights of a third party, the Company478may be unable to market its products without a license from such third party.479There is no assurance that the Company would be able to obtain such a license on480satisfactory terms, or at all.481482In addition to its patented technology, the Company also relies heavily on trade483secrets and unprotected proprietary technology. The Company seeks to maintain484the confidentiality of such information through its internal security and485secrecy measures and the employment agreements requiring employees and agents of486the Company to observe the confidentiality of Company information and to assign487to the Company inventions developed in the course of work for the Company. There488can be no assurance, however, that these measures will prevent the unauthorized489disclosure or use of this information or that others will not be able to490independently develop such information. Additionally, there can be no assurance491that any agreements regarding confidentiality and non-disclosure will not be492breached, or, in the event of any breach, that adequate remedies would be493available to the Company.494495COMPETITION AND ALTERNATIVE CARDIAC OUTPUT METHODS496497The medical device marketplace is characterized by rapid innovation and intense498competition. The Company anticipates two types of competition for the Basis499System; indirect competition from pulmonary artery thermodilution catheter500methods for measuring CO, and capnography (or Ficke principle) devices, and dye501dilution products, and direct competition from other ultrasound-based systems.502503The most common method for measuring cardiac output available today is called504the thermal dilution method, which involves insertion of a catheter into the505right side of the heart and the pulmonary artery (PA). Multiple injections of506cold saline solution are made into the PA, and, the temperature change of the507blood is monitored and correlated to blood volume. This method has a number of508limitations: (1) it provides a single reading, based on the average flow over a5091 - 3 minute period, (2) it requires manual timing of the injections and510subjective user interpretation of the results, and (3) it measures pulmonary511artery flow instead of aortic flow.512513Clinically, perhaps the most significant implication of these limitations is514that the surgeon is not provided the actual cardiac output at any given time -515they must wait while a separate, time consuming procedure is being conducted for516a single, time-averaged reading. Although newer, continuous readout PA catheters517are being marketed and have captured approximately 8% market share, these also518average the heart's output over a 3-minute period. This "time-lagged" data means519that the physicians, once again, do not have an accurate, current measure of520cardiac output.521522Bioimpedance measures the change in the electrical impedance of the chest, using523ECG-type leads, and attempts to correlate to cardiac output. This technique is524considered more appropriate as a low cost, non-invasive diagnostic method for525use in a physician's office. Capnography (also referred to as the Ficke526Principle) measures the intake of oxygen in the lungs by monitoring the inhaled527and exhaled gases and correlates these measurements to blood volume in the lungs528and5295305317532<PAGE>533534535then to cardiac output. Both of these systems have seen limited use and, due536to their indirect nature, may be subject to a number of biasing effects.537538Competition with thermodilution, bioimpedance and capnography methods for539measuring CO are deemed indirect in that none of these methods provides540real-time continuous monitoring and readout. The Company's Basis System will541compete against these devices, but will target the surgical and intensive care542markets, which the Company believes, will place high value on these543differentiating features.544545With regard to direct competition from other ultrasound-based systems, the546Company currently knows of no products that are similar to the Company's Basis547System in their underlying technology and application. The Company is aware that548other companies have had development efforts in this area in the past (including549patents received by Medtronic) but it is unaware of the status of the efforts,550and it has not encountered any clinical or marketing activities of any like551devices by any competitors. There are ultrasound-based devices, which monitor552blood flow in the descending aorta from the esophagus, but the Company believes553that there is little market penetration or clinical acceptance of these systems554for cardiac surgery procedures. There can be no assurance, however, that others555will not develop and commercialize cardiac output monitoring systems directly556competitive with the Basis System.557558Many of the Company's competitors and potential competitors have significantly559greater financial, manufacturing, marketing and technical resources than the560Company. The Company's competitors include Edwards Critical Care, a division of561Baxter Healthcare Corporation, Johnson and Johnson, and Abbott Critical Care,562all of which make and sell catheters, thermodilution cardiac monitors and563peripheral products used to measure cardiac output by the thermodilution method.564Two small companies, Deltex and Arrow market ultrasound-based systems, which565monitor the descending aorta from the esophagus. Novametrix provides capnography566systems, and Cardio-Dynamics provides bio-impedance systems. There can be no567assurance that the Company will be able to compete effectively with these or any568future competitors.569570GOVERNMENT REGULATION571572Government regulation in the U.S. and in foreign countries is a significant573factor in the Company's business. In the U.S., manufacturers of medical devices574must comply with certain regulations governing the testing, manufacture,575packaging and marketing of medical devices under the Federal Food, Drug and576Cosmetic Act and related regulations, which is administered by the FDA. All577companies subject to FDA regulation must comply with a variety of rules,578including the QSR, and are subject to periodic inspections by the FDA and other579applicable agencies. If the FDA believes that its regulations have not been580fulfilled, it may implement extensive enforcement powers, which were581strengthened by the enactment of the Safe Medical Devices Act of 1990. The FDA's582powers include, but are not limited to, the ability to ban products from the583market, prohibit the operation of manufacturing facilities and effect recalls of584products from customer locations.585586The Basis System is considered by the FDA to be a Class II medical device, and587is subject to the 510(k) pre-market notification process. The Company received588510(k) clearance to market a5895905918592<PAGE>593594595prior cardiac output device in 1991, and confirmed its clearance for the Basis596System in 1996 and then again in May of 1999, using both internal and external597consulting evaluations. Accordingly, the Company believes that the Basis System598may be marketed in the U.S. without any further regulatory filings. The599Company's regulatory personnel work closely with R&D and manufacturing to600continually evaluate the regulatory status of all products and as with all,601medical device manufacturers, the Company's 510(k) status is subject to review602by the FDA.603604In addition to 510(k) market clearance, the Company must comply with FDA QSR605requirements, including the appropriate design control procedures and606manufacturing quality processes and documentation. The Company will be subject607to routine inspection by the FDA, and to a variety of state laws and regulations608in those states or localities where its products are marketed. The Company is609also subject to numerous federal, state and local laws relating to such matters610as safe working conditions, manufacturing practices, environmental protection611and disposal of hazardous or potentially hazardous substances.612613There can be no assurance that the Company will not incur significant costs to614comply with such laws and regulations now or in the future or that such laws or615regulations will not have a material adverse effect upon the Company's ability616to do business. Changes in existing requirements or adoption of new requirements617or policies may also adversely affect the Company's ability to comply with618regulatory requirements. Failure to comply with regulatory requirements could619have a material adverse effect on the Company's business, financial condition620and results of operations.621622To introduce the Basis System in Europe, the Company must comply with the623"essential requirements" set forth in the Medical Device Directive (the "MDD")624of the European Union (the "EU"), which define the safety, design, and625manufacturing requirements for medical products. Typically, a full quality626assurance system complying with international standards is required to conform627to the MDD. Compliance with these requirements will allow the Company to apply628the CE mark to the Basis System, allowing free sale in the EU, subject only to629certain member country national laws.630631PRICING AND THIRD PARTY REIMBURSEMENT632633Pricing for medical devices is characterized by intense competition, extensive634government regulation and strong cost-containment pressures from third-party635payers such as government health programs, private health insurance plans,636managed care organizations and other similar programs. With regard to the637Company's proposed products, two primary forces are most likely to impact638pricing: third party reimbursement for open heart surgery, and price comparisons639with alternative devices.640641It is well known that hospitals and third-party payers have adopted cost642conscious approaches to the utilization of new techniques and equipment. This643approach tends to increase the level of acceptance of new products that increase644efficiency and productivity. The Company believes that the Basis System, and645intra-operative real time cardiac output monitoring in cardiac surgery, has the646potential to decrease costs and improve clinical outcomes for a broad range of647cardiac surgery procedures in a large patient population. Advantages could648result from both the6496506519652<PAGE>653654655decreased cost of performing the monitoring procedure, as well as the possible656benefit of decreased patient complications and shorter time required to recover657as a result of continuous cardiac output monitoring using a less invasive658device. There can be no assurance, however that the Company's clinical work will659demonstrate advantages in cost effectiveness of its Basis System. Furthermore,660as with most new technologies there are no established reimbursement practices661in place with third party payors, aside from the normal "999" codes which662provide for physician reimbursement with explanation. The Company intends to663begin to develop data to substantiate its hypotheses of cost savings during6642000.665666Currently, the most common measurement technique for cardiac output uses the667thermodilution PA catheter. These catheters are priced in the range of $75 -668$300. Published reports indicate that the total cost to the hospital of a669traditional thermodilution procedure is in excess of $1,000, given the670requirement of a special test, related materials and personnel costs. The671Company anticipates pricing its probe in the range of $400 - $500, thus at a672price premium over the thermodilution catheter, but at a significant cost saving673with respect to the thermodilution procedure.674675While the Company is not aware of any significant reluctance on the part of the676government or other health care insurers to provide reimbursement for the677procedures performed with its products, future regulation and uncertainty among678health care institutions about the direction of reimbursement rates could679adversely affect the marketing efforts of the Company.680681EMPLOYEES682683As of December 31, 1999, the Company had 22 full-time and no part-time684employees. Of these employees, 7 are engaged in research and development, 1 is685in sales and marketing, 4 are in general and administration, 3 are in686regulatory, quality or clinical affairs and 7 are in manufacturing. The687Company's operating plan for 2000 calls for staffing to approximately 44688employees by year end, which includes 7 people in sales and marketing. The689Company is not a party to any collective bargaining agreements and believes that690its relations with its employees are good.691692693ITEM 1A: IMPORTANT FACTORS694695Included as Exhibit 99.1 to this Report on Form 10-K are factors that are696important and should be considered carefully in connection with any evaluation697of the Company's business, financial condition, results of operations and698prospects. These factors could cause the Company's actual results to materially699differ from those reflected in any forward-looking statements of the Company.70070170210703<PAGE>704705706ITEM 2: DESCRIPTION OF PROPERTY707708The Company presently occupies approximately 11,900 square feet of office,709manufacturing and warehouse space in Burnsville, Minnesota. The Company leases710this space for $83,000 annually plus common area maintenance and real estate711taxes. The lease extends through March 31, 2002. The Company believes that these712facilities are sufficient for its current needs through 2000, at which time713additional office space may be required. The Company plans to evaluate its space714requirements in mid-2000 with the intent to secure additional short-term space715as needed and begin planning for a long-term facility solution.716717718ITEM 3: LEGAL PROCEEDINGS719720None.721722723ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS724725No matter was submitted to a vote of security holders during the fourth quarter726of the fiscal year covered by this Report.727728729ITEM 4A: EXECUTIVE OFFICERS OF THE REGISTRANT730731The Company's executive officers, their ages, and their offices held as of732February 29, 2000 are as follows:733734NAME AGE POSITION WITH COMPANY735---- --- ---------------------736737Andrew M. Weiss 42 PRESIDENT, CHIEF EXECUTIVE OFFICER AND738DIRECTOR739Camille M. Meyer 39 VICE PRESIDENT, FINANCE, CHIEF740FINANCIAL OFFICER AND SECRETARY741Steven R. Wedan 32 VICE PRESIDENT, ENGINEERING742Joshua J. Baltzell. 30 VICE-PRESIDENT, SALES AND MARKETING743Vic Fabano 38 VICE-PRESIDENT, MANUFACTURING744Elizabeth R. Kempen 36 VICE-PRESIDENT, QUALITY ASSURANCE,745REGULATORY AND CLINICAL AFFAIRS746747ANDREW M. WEISS was elected Chief Executive Officer, President, and Director of748the Company in March 1999. In 1998, Mr. Weiss served as President of Intellx of749Boulder, Colorado, a venture stage company involved in medical image processing.750From 1995 to 1998, Mr. Weiss was Chief Executive Officer and President of Vital751Images, Inc., a Minneapolis-based provider of diagnostic and surgical752visualization systems. In 1994 and 1995, he was Vice-President of Global Sales753and Marketing for Marquette Medical Systems, a Milwaukee, Wisconsin based754manufacturer of patient monitoring systems. Prior to 1994, Mr. Weiss held755various positions75675775811759<PAGE>760761762with General Electric Company, including several positions with General Electric763Medical Systems.764765CAMILLE M. MEYER has served as Vice President, Finance and Chief Financial766Officer since April 1999 and Secretary of the Company since June 1999. From July7671995 to March 1999, Ms. Meyer served as Controller of Bio-Vascular, Inc., a768medical products company based in St. Paul, Minnesota. From 1989 to 1995, Ms.769Meyer held a series of positions of increasing responsibility with Deloitte and770Touche LLP, a public accounting firm, in their Minneapolis office. Ms. Meyer is771a certified public accountant and received a Masters Degree in Business Taxation772from the Carlson School of Management at the University of Minnesota.773774STEVEN R. WEDAN has served as Vice President, Engineering since March 1999,775Director of Engineering since December 1995, and Engineering Manager since776December 1994. Prior to joining the Company, Mr. Wedan was a design and777development engineer for General Electric Medical Systems, where he developed778ultrasound, magnetic resonance, and computed tomography systems. Mr. Wedan779received a Bachelor's Degree in Electrical Engineering from Michigan780Technological University and a Master's Degree in Electrical and Computer781Engineering from Marquette University.782783JOSHUA BALTZELL has served as Vice-President, Sales and Marketing since February7842000 and Vice-President, Marketing and Business Development since September7851999. From 1993 to 1999, Mr. Baltzell held a series of marketing position of786increasing scope and responsibility with Boston Scientific Corp., including most787recently, Group Product Manager of Emerging Technologies and Business788Development. Mr. Baltzell received degrees in Economics and Philosophy from St.789Olaf College and a Masters of Business Administration from the Carlson School of790Management at the University of Minnesota.791792VIC FABANO has served as Vice-President, Manufacturing since February 2000 and793Director of Manufacturing since May 1999. Mr. Fabano has extensive experience in794start-up manufacturing of medical devices, including heart catheters and795vascular wound closure devices. Prior to joining the Company, Mr. Fabano was796Director of Manufacturing for Vascular Solutions, a medical device manufacturer797based in Plymouth, Minnesota. From 1992 to 1998, Mr. Fabano worked at Boston798Scientific Corp. in roles of increasing responsibility in manufacturing and799quality engineering. Mr. Fabano received a Mechanical Engineering degree from800the University of North Dakota.801802ELIZABETH R. KEMPEN has served as Vice-President, Quality Assurance, Regulatory803and Clinical Affairs since February 2000 and Director of Quality Assurance,804Regulatory and Clinical Affairs since May 1999. Ms. Kempen has over ten years of805experience in regulatory affairs and quality assurance within the Biomedical806industry. Prior to joining the Company, Ms. Kempen held management positions in807Project Development and Quality Assurance for Bio-Vascular, Inc, a medical808products company based in St. Paul, Minnesota. From 1993 to 1996, Ms. Kempen809worked in Regulatory Affairs for Guidant - Cardiac Pacemaker, Inc. Ms. Kempen810received degrees in Microbiology and Public Health from the University of811Wisconsin and a Masters of Business Administration from the Carlson School of812Management at the University of Minnesota.81381481512816<PAGE>817818819PART II820821ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS822823The Company's Common Stock is traded on the Nasdaq SmallCap Market under the824symbol "ABIO". The following table sets forth, for each of the fiscal periods825indicated, the range of high and low closing sale prices per share as reported826by the Nasdaq SmallCap Market. These prices do not include adjustments for827retail mark-ups, markdowns or commissions.828829HIGH LOW830---- ---8311999832First Quarter ............. $ 8.500 $ 7.625833Second Quarter ............ 8.000 4.375834Third Quarter ............. 5.250 3.875835Fourth Quarter ............ 5.000 2.3758368371998838First Quarter ............. $ 8.250 $ 6.750839Second Quarter ............ 11.250 6.375840Third Quarter ............. 9.250 4.500841Fourth Quarter ............ 7.500 6.875842843The Company has not declared or paid any cash dividends on its Common Stock844since its inception and the Company intends to retain all earnings for use in845the business for the near future. The payment of dividends is subject to the846discretion of the Board of Directors and will depend on the Company's earnings,847financial condition, capital requirements and other relevant factors. As of848March 10, 2000, there were approximately 900 beneficial owners of the Company's849Common Stock.85085185213853<PAGE>854855856ITEM 6: SELECTED FINANCIAL DATA857858SUMMARY STATEMENTS OF OPERATIONS DATA:859860<TABLE>861<CAPTION>862YEAR ENDED DECEMBER 31,8631999 1998 1997(1) 1996 1995864---- ---- ------- ---- ----865<S> <C> <C> <C> <C> <C>866Net revenue ........................ $ -- $ -- $ 64,940 $ 125,120 $ --867Gross margin ....................... -- -- 32,765 63,145 --868Operating Expenses:869Selling, general &870administrative ................ 1,028,065 946,721 1,061,579 862,221 736,531871Research & development .......... 1,469,001 805,459 1,409,280 894,517 689,354872Net loss from continuing873operations ...................... (2,445,942) (1,563,991) (2,134,604) (1,368,961) (1,288,058)874Loss per share from continuing875operations, basic and diluted ... $ (0.52) $ (0.36) $ (0.51) $ (0.35) $ (0.44)876Weighted average shares(2)877outstanding, basic and diluted .. 4,659,300 4,312,077 4,186,896 3,917,268 2,914,049878</TABLE>879880881SUMMARY BALANCE SHEET DATA:882883<TABLE>884<CAPTION>885AT DECEMBER 31,8861999 1998 1997 1996 1995887---- ---- ---- ---- ----888<S> <C> <C> <C> <C> <C>889Cash, cash equivalents & short-890term investments ................ $ 1,910,356 $ 2,369,413 $ 4,420,180 $ 6,374,452 $ 2,210,587891Total assets ....................... 2,827,739 3,296,711 5,437,923 7,490,300 2,632,491892Shareholders' equity(3) ............ 2,516,625 2,151,564 5,271,202 7,287,110 2,447,502893</TABLE>894895896- -----------------------------897(1) In 1997, the Company ceased marketing efforts of two cardiac output devices:898one that was integrated into an endotrachial tube, and the other being a899predecessor to the current Basis System.900901(2) The Company's weighted shares outstanding were increased by the issuance, in902September 1999, of 815,000 shares of Common Stock in a private placement,903904(3) Shareholders' equity increased by approximately $2,100,000 from net proceeds905from the private placement of the Company's Common Stock in September 1999.906Shareholders' equity was reduced by approximately $334,000 as result of the907distribution of Cardia, Inc. to shareholders in February 1999. This amount908represented the net assets of Cardia on the distribution date (See Note 3 to the909Company's financial statements included in this Report).91091191214913<PAGE>914915916ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS917OF OPERATIONS918919920OVERVIEW921922Applied Biometrics, Inc. ("Applied Biometrics" or "the Company") is a923late-development stage medical device company engaged in the research,924development, manufacture and marketing of advanced cardio-vascular and925hemodynamic diagnostic and monitoring systems. The Company believes that its926core competencies in ultrasound transducer technology, signal processing,927cardiac anatomy, pathology and hemodynamics position it to develop and928commercialize a range of cardiac diagnostic and patient monitoring products. The929Company's Basis Cardiac Output Monitor and RealFlow Cardiac Output Probe are930medical devices designed to work together to provide real time, beat-to-beat,931cardiac output monitoring in surgical and post-operative, intensive care unit932settings.933934During 1999, the Company continued development of its Basis System, focusing on935product refinement, upgrading its manufacturing facility, transitioning from936prototype production to commercial production ability, and completing an equity937financing to provide capital for the Company's development and commercialization938efforts.939940The Company is currently conducting product evaluations at adult and pediatric941clinical sites in the U.S. prior to an intended commercial release of the Basis942System. These product evaluations were originally commenced in October 1999 at943one clinical site in the U.S. Although the early results from these evaluations944indicated that the product performed well in a number of respects, the results945also indicated the need for modifications to the Basis System in order to meet946the Company's product performance expectations. The Company anticipates that its947product evaluations and any further modifications necessary will continue in the948first half of 2000 and intends to commercialize the Basis System following their949successful completion. These forward-looking statements will be impacted950however, by the Company's ability to timely and successfully complete product951development and testing, commence manufacture of commercial quantities,952establish adequate sales, marketing and customer support activities, obtaining953additional financial resources and the outcome of end-user product evaluations.954As of the date of this Report, the Company believes that it has made significant955progress toward completing and testing the identified product refinements.956957During 1999, the Company also completed the distribution of Cardia, Inc. to the958Company's shareholders. The distribution was effective on February 11, 1999 to959shareholders of record on January 25, 1999. The completion of the Cardia960distribution allows the Company to focus all of its resources on completing the961development of its cardiac output monitoring system. Results of operations of962the transcatether closure have been presented as discontinued operations for963each year presented. Certain selling and administrative expenses were allocated964between continuing and discontinued operations during 1998 and 1997.96596696715968<PAGE>969970971RESULTS OF CONTINUING OPERATIONS972973YEARS ENDED DECEMBER 31, 1999 AND 1998974975General and administrative expenses increased $353,000 to $935,000 in 1999 from976$582,000 in 1998. The increase in 1999 reflects increased compensation related977costs of approximately $133,000 due to higher compensation levels and additional978personnel hired in anticipation of product launch. The balance of the979year-to-year increase relates to an allocation of personnel and other costs to980discontinued operations in 1998.981982Selling costs decreased $271,000 from $364,000 in 1998 to $93,000 in 1999. The983Company had minimal sales and marketing activity in 1999. Of the $93,000 total984sales and marketing costs for 1999, 32% was incurred in the first quarter and985was related to marketing costs absorbed prior to the spin-off of the986transcatheter business. The remaining 68% was incurred primarily in the fourth987quarter of 1999 as the Company started adding marketing personnel and conducting988marketing research and product evaluation activities related to the Basis989System.990991Research and development expenses increased $664,000 from $805,000 in 1998 to992$1,469,000 in 1999 due to increased engineering, operations and quality993personnel costs, mammal testing and manufacturing pilot costs in 1999 over 1998.994Additionally, some 1998 costs, primarily related to manufacturing and quality995personnel were allocated to discontinued operations in 1998.996997The Company focused all research and development efforts during 1999 to the998Company's Basis Cardiac Output Monitoring System and RealFlow Probe. Although999the Company believes the development of the Basis Cardiac Output Monitoring1000System is nearly complete, the Company believes that further refinements will be1001made as the Company receives feedback from its mammal studies and users of the1002Basis System. Initial results from the Company's product evaluations conducted1003in late 1999 indicated that the Basis System functioned well in many respects,1004but failed to meet the Company's expectations for performance and reliability on1005a clinical basis. Additional product evaluations were delayed until the1006necessary modifications to the product could be made to address the clinical1007performance issues. The Company intends to participate in additional clinical1008validations during 2000 to continue to broaden the Company's market knowledge1009and data regarding the usefulness, cost effectiveness and clinical application1010of its products.10111012Operating costs are expected to continue to increase in 2000 as the Company adds1013personnel, equipment and other costs to complete the development and bring to1014market its Basis Cardiac Output Monitoring System. This forward looking1015statement will be influenced primarily by the Company's estimate of time and1016resources needed to complete development (including the necessary modifications1017discussed above), the Company's ability to establish manufacturing and quality1018systems necessary to produce the product, success of the Company's field product1019evaluations and market acceptance of the cardiac output monitoring system.10201021Other income, primarily interest, decreased $137,000 from $188,000 1998 to1022$51,000 in 1999. The decrease is due to lower average investment balances in10231999 than in 1998.102410251026161027<PAGE>102810291030The 1999 net loss was $2,446,000, or $0.52 per share, compared to a net loss of1031$1,564,000, or $0.36 per share in 1998, excluding a loss of $1,838,000, or $.431032per share, from discontinued operations.10331034YEARS ENDED DECEMBER 31, 1998 AND 199710351036The Company had no revenue in 1998 as compared to $65,000 in 1997. In 1996,1037after a number of years of research and development, the Company decided to1038focus its efforts on a new intra-operative cardiac output system using a1039disposable ultrasound probe applied directly to the ascending aorta. Sales of an1040earlier version of this device were ceased in 1997 until the completion of this1041next generation product.10421043Selling, general and administrative costs decreased $115,000 in 1998 from1044$1,062,000 to $947,000. Lower selling costs accounted for $24,000 of the1045decrease due to the reduction in marketing activities in 1998 as the Company1046focused on research and development. Reduced general and administrative costs of1047$91,000 accounted for the balance of the year-to-year decrease, primarily due to1048costs allocated to discontinued operations.10491050Research and development decreased $604,000 from $1,409,000 in 1997 to $805,0001051in 1998. During 1998, fewer personnel and other resources were dedicated to the1052cardiac output development effort as compared to the 1997 activity. The1053Company's research and development activities were split between its continuing1054operations, cardiac output monitoring, and the transcatether closure business,1055which comprises discontinued operations.10561057Other income, primarily interest, was $188,000 in 1998 as compared to $303,0001058in 1997 a decrease of 115,000. The decrease is the result of fewer funds1059available for investment.10601061The 1998 loss from continuing operations was $1,564,000, or $0.36 per share, as1062compared to a $2,135,000 loss, or $0.51 per share, in 1997. The loss from1063discontinued operations was $1,838,000, or $0.43 per share, in 1998 as compared1064to the 1997 loss from discontinued operations of $458,000, or $0.11 per share.106510661067LIQUIDITY AND CAPITAL RESOURCES10681069Cash was $1,900,000 at December 31, 1999 as compared to $2,400,000 of cash, cash1070equivalents and marketable securities at December 31, 1998, a decrease of1071$500,000. In 1999, the Company completed a private equity financing resulting in1072net proceeds of $2.1 million. The cash inflow from the equity financing was more1073than offset by the year-to-date loss from operations and cash used for leasehold1074improvements and equipment purchases.10751076Continuing operating activities in 1999 used cash of $2,095,000 as compared to1077$1,339,000 used during 1998. Discontinued operations used cash of $121,0001078during 1999 as compared to $909,000 in the prior year.107910801081171082<PAGE>108310841085Investing activities provided cash of $116,000 in 1999 as compared to $3,013,0001086in 1998. In 1999, maturing short-term investments of $500,000 added cash and1087were offset by $400,000 of cash outflow for leasehold improvements, equipment1088purchases, and patent and trademark costs. The 1998 period had $3,100,000 of1089short-term investments maturing, offset by $55,000 of equipment purchases.1090Discontinued operations used $11,000 and $30,000 in the 1999 and 1998 periods,1091respectively.10921093The Company needs approximately $500,000 for capital expenditures in the1094upcoming year. These expenditures will expand the manufacturing and information1095technology capabilities of the Company and directly support the1096commercialization of the Company's Basis Cardiac Output Monitoring System. The1097Company has lease financing for some of the capital expenditures. The lease will1098be secured by the equipment and requires the Company to issue the lenders a1099warrant to purchase the Company's common stock. Additional financing will need1100to be secured to support the balance of the capital spending required.11011102Financing activities provided $2,140,000 of cash, resulting primarily from the1103issuance of Common Stock.11041105Based on its expected rate of spending the Company believes that its existing1106cash and cash equivalents will enable the Company to meet its cash requirements1107until June 30, 2000. See Item 1A: "Important Factors" contained in Exhibit 99.11108of this Report and Note 2 to the Company's financial statements included on Page110930 of this Report regarding the Company's ability to continue as a going1110concern. As a result, the Company will need additional financing in order to1111successfully meet its current product development, market commercialization1112plans for its Basis Cardiac Output Monitoring System and capital expenditure1113needs. This forward-looking statement will be influenced by the Company's1114ability to meet its operational and development plans, as well as unanticipated1115changes to commit cash primarily for additional personnel and capital1116expenditures. The Company continues to pursue alternatives for obtaining1117additional working capital.111811191120INFLATION11211122Management believes inflation has not had a material effect on the Company's1123operations or on its financial condition.112411251126181127<PAGE>112811291130NEW ACCOUNTING STANDARDS11311132Effective January 1, 1999, the Company adopted Statement of Financial Accounting1133Standards No. 130 ("SFAS 130"), Reporting Comprehensive Income, which1134establishes standards for reporting and displaying comprehensive income and its1135components (revenues, expenses, gains and losses) in the financial statements.1136The Company currently has no items that would be included as a component of1137other comprehensive income.11381139Other than the above statement, no other new accounting pronouncements have been1140issued that will have an impact on the Company's financial statements.114111421143ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK11441145Not applicable.114611471148ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA11491150The Company's financial statements can be found on pages 23 to 35 of this1151Report. The index to such items is included on page 21 in Item 14(a)(1).115211531154ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL1155DISCLOSURE11561157On October 18, 1999, the Company appointed Ernst & Young LLP as the Company's1158independent auditors and replaced PricewaterhouseCoopers LLP. The report of1159PricewaterhouseCoopers on the financial statements of the Company for the year1160ended December 31, 1998 was unqualified and did not contain an adverse opinion,1161any disclaimers, qualification or modification as to uncertainty, audit scope,1162or accounting principles. In connection with the audits of the financial1163statements of the Company for the two most recent fiscal years ending December116431, 1998, and each subsequent interim period preceding October 18, 1999, there1165were no disagreements or reportable events. The decision to change firms was1166approved by the Company's Board of Directors.116711681169191170<PAGE>117111721173PART III11741175ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT11761177(a) Directors of the Registrant11781179The information under the caption "Election of Directors" in the Registrant's11802000 Proxy Statement is incorporated by reference herein.11811182(b) Executive Officers of the Registrant11831184Information concerning Executive Officers of the Company is included in this1185Report under Item 4A, "Executive Officers of the Registrant."11861187(c) Compliance with Section 16(a) of the Exchange Act11881189The Information under the caption "Section 16(a) Beneficial Ownership Reporting1190Compliance" in the Registrant's 2000 Proxy Statement is incorporated by1191reference herein.119211931194ITEM 11: EXECUTIVE COMPENSATION11951196The information under the caption "Executive Compensation" and "Other1197Information Regarding the Board - Directors' Compensation" in the Registrant's11982000 Proxy Statement is incorporated by reference herein.119912001201ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT12021203The information under the caption "Security Ownership of Principal Shareholders1204and Management" in the Registrant's 2000 Proxy Statement is incorporated by1205reference herein.120612071208ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS12091210Not applicable.121112121213201214<PAGE>121512161217PART IV12181219ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K12201221(a) List of documents filed as part of this Report:12221223(1) Financial Statements12241225The following financial statements are included hereinafter contained1226on pages 23 to 35 in this Annual Report on Form 10-K:12271228Report of Independent Auditors1229Report of Independent Accountants1230Balance Sheets as of December 31, 1999 and 19981231Statements of Operations for the Years Ended December 31, 1999, 19981232and 19971233Statements of Shareholders' Equity for the Years Ended December 31,12341999, 1998 and 19971235Statements of Cash Flows for the Years Ended December 31, 1999, 19981236and 19971237Notes to Financial Statements12381239(2) Financial Statement Schedules12401241All information required by this section that is applicable to the1242Company is included in the Financial Statements or Notes thereto.12431244(3) Exhibits:12451246The exhibits to this Annual Report on Form 10-K are listed in the1247Exhibit Index hereinafter contained on page E-1 of this Annual Report1248on Form 10-K. The Company will furnish a copy of any exhibit to a1249shareholder who requests a copy in writing upon payment to the Company1250of a fee of $5.00 per exhibit. Requests should be sent to: Camille M.1251Meyer, Vice-President, Finance and Chief Financial Officer; Applied1252Biometrics, Inc.; 501 East Highway 13, Suite 108; Burnsville,1253Minnesota 55337.12541255The following is a list of each management contract or compensatory1256plan or arrangement required to be filed as an exhibit to this Report1257pursuant to Item 14(c):12581259A. Applied Biometrics 1996 Stock Option Plan, amended July 2, 19991260(incorporated by reference to Exhibit 10.1 to the Company's1261Quarterly Report on Form 10-Q for the period ended June 30,12621999).1263B. Applied Biometrics Amended 1994 Stock Option Plan, amended July12642, 1999 (incorporated by reference to Exhibit 10.2 to the1265Company's Quarterly Report on Form 10-Q for the period ended June126630, 1999).1267C. Applied Biometrics 1998 Stock Plan, amended June 12, 19981268(incorporated by reference to Exhibit 10.3 to the Company's1269Quarterly Report on Form 10-Q for the period ended June 30,12701999).127112721273211274<PAGE>127512761277D. Employment letter dated February 19, 1999, between the Company1278and Andrew M. Mr. Weiss (incorporated by reference to Exhibit127910.2 to the Company's Quarterly Report on Form 10-Q for the1280period ended March 31, 1999).12811282(b) Reports on Form 8-K12831284During the quarter ended December 31, 1999, the Company filed a Current Report1285on Form 8-K, dated October 18, 1999, reporting a change in the Company's1286certifying accountants under Item 4.12871288(c) Exhibits12891290The response to this portion of Item 14 is included as a separate section of1291this Report. See the Exhibit Index on page E-1 of this report.12921293(d) Financial Statement Schedules12941295The response to this portion of Item 14 is included as a separate section of1296this Report.129712981299221300<PAGE>130113021303REPORT OF INDEPENDENT AUDITORS130413051306BOARD OF DIRECTORS AND SHAREHOLDERS1307APPLIED BIOMETRICS, INC.130813091310We have audited the accompanying balance sheet of Applied Biometrics, Inc. as of1311December 31, 1999, and the related statements of operations, shareholders'1312equity, and cash flows for the year ended December 31, 1999. These financial1313statements are the responsibility of the Company's management. Our1314responsibility is to express an opinion on these financial statements based on1315our audit.13161317We conducted our audit in accordance with auditing standards generally accepted1318in the United States. Those standards require that we plan and perform the audit1319to obtain reasonable assurance about whether the financial statements are free1320of material misstatement. An audit includes examining, on a test basis, evidence1321supporting the amounts and disclosures in the financial statements. An audit1322also includes assessing the accounting principles used and significant estimates1323made by management, as well as evaluating the overall financial statement1324presentation. We believe that our audit provides a reasonable basis for our1325opinion.13261327In our opinion, the 1999 financial statements referred to above present fairly,1328in all material respects, the financial position of Applied Biometrics, Inc. at1329December 31, 1999, and the results of its operations and its cash flows for the1330year then ended, in conformity with accounting principles generally accepted in1331the United States.13321333The accompanying financial statements have been prepared assuming that the1334Company will continue as a going concern. As more fully described in Note 2, the1335Company has incurred recurring operating losses and does not have sufficient1336liquidity to continue operations for at least the next twelve months. These1337conditions raise substantial doubt about the Company's ability to continue as a1338going concern. The financial statements do not include any adjustments to1339reflect the possible future effects on the recoverability and classification of1340assets or the amounts and classification of liabilities that may result from the1341outcome of this uncertainty.13421343Ernst & Young LLP1344Minneapolis, Minnesota1345January 14, 2000134613471348231349<PAGE>135013511352REPORT OF INDEPENDENT ACCOUNTANTS135313541355TO THE BOARD OF DIRECTORS AND SHAREHOLDERS1356OF APPLIED BIOMETRICS, INC.:13571358In our opinion, the consolidated balance sheet as of December 31, 1998 and the1359related consolidated statements of operations, of shareholders' equity and of1360cash flows for each of the two years in the period ended December 31, 19981361present fairly, in all material respects, the financial position, results of1362operations and cash flows of Applied Biometrics, Inc. and its subsidiary at1363December 31, 1998 and for each of the two years in the period ended December 31,13641998, in conformity with accounting principles generally accepted in the United1365States. These financial statements are the responsibility of the Company's1366management; our responsibility is to express an opinion on these financial1367statements based on our audits. We conducted our audits of these statements in1368accordance with auditing standards generally accepted in the United States,1369which require that we plan and perform the audit to obtain reasonable assurance1370about whether the financial statements are free of material misstatement. An1371audit includes examining, on a test basis, evidence supporting the amounts and1372disclosures in the financial statements, assessing the accounting principles1373used and significant estimates made by management, and evaluating the overall1374financial statement presentation. We believe that our audits provide a1375reasonable basis for the opinion expressed above. We have not audited the1376consolidated financial statements of Applied Biometrics, Inc. for any period1377subsequent to December 31, 1998.137813791380138113821383PricewaterhouseCoopers LLP1384Minneapolis, Minnesota1385March 18, 1999138613871388241389<PAGE>139013911392APPLIED BIOMETRICS, INC.1393BALANCE SHEETS1394AS OF DECEMBER 31, 1999 AND 19981395- --------------------------------------------------------------------------------13961397<TABLE>1398<CAPTION>13991999 19981400---- ----1401<S> <C> <C>1402ASSETS1403Current assets:1404Cash and cash equivalents ........................................ $ 1,910,356 $ 1,869,4131405Marketable securities, short-term ................................ -- 500,0001406Inventories, net ................................................. 167,109 175,0781407Prepaid expenses and other current assets ........................ 90,577 37,8331408------------ ------------1409Total current assets ......................................... 2,168,042 2,582,32414101411Equipment and leasehold improvements, net ........................ 550,675 427,0861412Patents and other intangible assets, net ......................... 99,437 75,0741413Other assets ..................................................... 9,585 9,5851414Net assets of discontinued operations ............................ -- 202,6421415------------ ------------1416TOTAL ASSETS ................................................. $ 2,827,739 $ 3,296,7111417============ ============14181419LIABILITIES AND SHAREHOLDERS' EQUITY1420Current liabilities:1421Accounts payable ................................................. $ 95,255 $ 56,1861422Accrued expenses and short-term debt obligations ................. 195,849 87,2001423Current maturities of capital lease obligations .................. 8,333 --1424------------ ------------1425Total current liabilities .................................... 299,437 143,38614261427Capital lease obligations ........................................ 11,677 --1428Liability for pending issuance of common stock ................... -- 1,001,7611429------------ ------------1430Total liabilities ............................................ 311,114 1,145,1471431------------ ------------143214331434Shareholders' equity:1435Undesignated stock: authorized 5,000,000 shares of $.01 par value; -- --1436none issued or outstanding at December 31, 1999 and 1998 ..... -- --1437Common stock: authorized 20,000,000 shares of $.01 par value;1438issued and outstanding, 5,299,004 and 4,337,1171439at December 31, 1999 and 1998, respectively .................. 52,990 43,3711440Additional paid-in capital ....................................... 23,362,233 20,560,8491441Accumulated deficit .............................................. (20,898,598) (18,452,656)1442------------ ------------1443Total shareholders' equity ................................... 2,516,625 2,151,5641444------------ ------------1445TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $ 2,827,739 $ 3,296,7111446============ ============1447</TABLE>144814491450The accompanying notes are an integral part of the financial statements.14511452251453<PAGE>145414551456APPLIED BIOMETRICS, INC.1457STATEMENTS OF OPERATIONS1458FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 19971459- --------------------------------------------------------------------------------14601461<TABLE>1462<CAPTION>14631999 1998 19971464---- ---- ----1465<S> <C> <C> <C>1466Net revenue ............................................... $ -- $ -- $ 64,9401467Cost of revenue ........................................... -- -- 32,1751468------------ ------------ ------------1469Gross margin .............................................. -- -- 32,76514701471Operating expenses:1472Selling, general and administrative ....................... 1,028,065 946,721 1,061,5791473Research and development .................................. 1,469,001 805,459 1,409,2801474------------ ------------ ------------14751476Operating loss ............................................ (2,497,066) (1,752,180) (2,438,094)1477Other income, net ......................................... 51,124 188,189 303,4901478------------ ------------ ------------14791480Loss from continuing operations ........................... (2,445,942) (1,563,991) (2,134,604)14811482Discontinued operations:1483Loss from operations of discontinued business ............. -- (1,838,147) (457,866)1484------------ ------------ ------------14851486Net loss .................................................. $ (2,445,942) $ (3,402,138) $ (2,592,470)1487============ ============ ============14881489Basic and diluted loss per share:1490Continuing operations ..................................... $ (0.52) $ (0.36) $ (0.51)1491Discontinued operations ................................... -- (0.43) (0.11)1492------------ ------------ ------------1493Net loss .................................................. $ (0.52) $ (0.79) $ (0.62)1494============ ============ ============14951496Weighted average common shares outstanding ................ 4,659,300 4,312,077 4,186,8961497============ ============ ============1498</TABLE>149915001501The accompanying notes are an integral part of the financial statements.15021503261504<PAGE>150515061507APPLIED BIOMETRICS, INC.1508STATEMENTS OF CASH FLOWS1509FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 19971510- --------------------------------------------------------------------------------15111512<TABLE>1513<CAPTION>15141999 1998 19971515---- ---- ----1516<S> <C> <C> <C>1517CASH FLOWS FROM OPERATING ACTIVITIES:1518Net loss .......................................................... $ (2,445,942) $ (3,402,138) $ (2,592,470)1519Net loss from discontinued operations ............................. -- (1,838,147) (457,866)1520------------ ------------ ------------1521Loss from continuing operations ................................... (2,445,942) (1,563,991) (2,134,604)15221523Adjustments to reconcile loss from continuing1524operations to net cash used in operating activities:1525Depreciation and amortization of capital leases ................... 191,391 199,162 179,4701526Amortization of patents and other intangible assets ............... 25,012 25,051 9,1821527Loss on disposal of assets ........................................ 31,776 -- --15281529Changes in operating assets and liabilities:1530Accounts receivable ............................................... -- -- 19,4171531Inventories ....................................................... 7,969 (24,585) 71,98315321533Prepaid expenses and other current assets ......................... (52,744) 48,333 140,4991534Accounts payable .................................................. 39,069 (19,856) (50,215)1535Accrued expenses .................................................. 108,649 (3,479) 13,7461536------------ ------------ ------------1537Net cash used in continuing operations ........................ (2,094,820) (1,339,365) (1,750,522)1538Net cash used in discontinued operations ...................... (120,548) (908,616) (16,409)1539------------ ------------ ------------1540Net cash used in operating activities ......................... (2,215,368) (2,247,981) (1,766,931)1541------------ ------------ ------------15421543CASH FLOWS FROM INVESTING ACTIVITIES:1544Purchase of equipment and improvements ............................ (323,148) (54,874) (222,446)1545Investment in patents and trademarks .............................. (49,375) -- --1546Investments in marketable securities .............................. -- (500,000) (2,700,524)1547Proceeds upon sale and maturity of marketable securities .......... 500,000 3,598,507 4,734,8081548Discontinued operations, net ...................................... (10,981) (30,412) (31,457)1549------------ ------------ ------------1550Net cash provided by investing activities ...................... 116,496 3,013,221 1,780,3811551------------ ------------ ------------15521553CASH FLOWS FROM FINANCING ACTIVITIES:1554Proceeds from private placement of Common Stock ................... 2,067,562 -- --1555Proceeds related to exercise of stock options1556and warrants .................................................. 75,851 282,500 66,5621557Repayment of capital lease obligations ............................ (3,598) -- --1558------------ ------------ ------------1559Net cash provided by financing activities ..................... 2,139,814 282,500 66,5621560------------ ------------ ------------1561NET INCREASE IN CASH AND CASH1562EQUIVALENTS ................................................... 40,943 1,047,740 80,0121563CASH AND CASH EQUIVALENTS AT BEGINNING1564OF YEAR ....................................................... 1,869,413 821,673 741,6611565------------ ------------ ------------1566CASH AND CASH EQUIVALENTS AT END OF YEAR .......................... $ 1,910,356 $ 1,869,413 $ 821,6731567============ ============ ============1568</TABLE>156915701571The accompanying notes are an integral part of the financial statements.15721573271574<PAGE>157515761577APPLIED BIOMETRICS, INC.1578STATEMENTS OF SHAREHOLDERS' EQUITY1579FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 19971580- --------------------------------------------------------------------------------15811582<TABLE>1583<CAPTION>1584ADDITIONAL1585COMMON STOCK PAID-IN ACCUMULATED1586SHARES PAR VALUE CAPITAL DEFICIT1587------ --------- ------- -------1588<S> <C> <C> <C> <C>1589BALANCE AT DECEMBER 31, 1996 ................ 4,168,987 $ 41,690 $ 19,703,468 $ (12,458,048)15901591Shares issued for purchase of1592transcatheter closure product line ....... 85,000 850 509,150 --1593Stock option activity ....................... 22,130 221 66,341 --15941997 Net loss ............................... -- -- -- (2,592,470)1595------------- ------------- ------------- -------------1596BALANCE AT DECEMBER 31, 1997 ................ 4,276,117 42,761 20,278,959 (15,050,518)15971598Stock option activity ....................... 61,000 610 281,890 --15991998 Net loss ............................... -- -- -- (3,402,138)1600------------- ------------- ------------- -------------1601BALANCE AT DECEMBER 31, 1998 ................ 4,337,117 43,371 20,560,849 (18,452,656)16021603Stock option activity ....................... 146,887 1,469 1,076,143 --1604Issuance of stock, net of offering1605costs .................................... 815,000 8,150 2,059,412 --1606Distribution of the net assets of1607Cardia, Inc. ............................. -- -- (334,171) --16081999 Net loss ............................... -- -- -- (2,445,942)1609------------- ------------- ------------- -------------1610BALANCE AT DECEMBER 31, 1999 ................ 5,299,004 $ 52,990 $ 23,362,233 $ (20,898,598)1611============= ============= ============= =============1612</TABLE>161316141615The accompanying notes are an integral part of the financial statements.16161617281618<PAGE>161916201621APPLIED BIOMETRICS, INC.1622NOTES TO FINANCIAL STATEMENTS1623- --------------------------------------------------------------------------------16241625(1) BUSINESS DESCRIPTION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:16261627BUSINESS DESCRIPTION:16281629Applied Biometrics, Inc. ("Applied Biometrics" or the "Company") is a medical1630device company engaged in the research, development, manufacture and marketing1631of advanced cardio-vascular and hemodynamic diagnostic and monitoring systems.1632The Company believes that its core competencies in ultrasound transducer1633technology, signal processing, cardiac anatomy, pathology and hemodynamics1634position it to develop and commercialize a range of cardiac diagnostic and1635patient monitoring products. The Company is currently completing the development1636and testing of an innovative, ultrasound-based cardiac output monitoring system1637for cardiac surgery applications. The Company's Basis(TM) Cardiac Output Monitor1638and RealFlow(TM) Cardiac Output Probe (the "Basis System") are designed to1639provide real time, beat-to-beat, cardiac output monitoring in surgical and1640post-operative intensive care settings.16411642USE OF ESTIMATES:16431644The preparation of financial statements in conformity with generally accepting1645accounting principles requires management to make estimates and assumptions that1646affect the reported amounts of assets and liabilities and disclosure of1647contingent assets and liabilities at the date of the financial statements and1648the reported amounts of revenues and expenses during the reporting periods.1649Actual results could differ from those estimates.16501651CASH AND CASH EQUIVALENTS:16521653Cash and cash equivalents consist of cash and highly liquid investments1654purchased with an original maturity of three months or less. Cash at December165531, 1999 was primarily invested in a money market fund.16561657MARKETABLE SECURITIES:16581659Investments having original maturities in excess of three months are classified1660as marketable securities. Investments are classified as short-term or long-term1661in the balance sheet based on their maturity date. At December 31, 1998, all of1662the Company's marketable securities consisted of U.S. Government or U.S.1663Government-backed obligations and were classified as available-for-sale.1664Available-for-sale investments are recorded at market value with net unrealized1665holding gains and losses included as a separate component of shareholders'1666equity. At December 31, 1998, the market value of the investments approximated1667cost.16681669INVENTORIES:16701671Inventories are comprised of component parts and are valued at the lower of1672first-in, first-out (FIFO) cost or market.16731674EQUIPMENT AND LEASEHOLD IMPROVEMENTS:16751676Equipment and leasehold improvements are stated at cost. Depreciation and1677amortization are calculated using the straight-line method over the estimated1678useful lives of the related assets. Furniture, fixtures, computer and1679manufacturing equipment are depreciated over a 5-year life. Leasehold1680improvements are amortized over the life of the related facility lease or the1681asset whichever is shorter. Major replacements and improvements are capitalized1682and maintenance and repairs that do not improve or extend the useful lives of1683the respective assets are charged to operations. The asset and related1684accumulated depreciation or amortization accounts are adjusted for asset1685retirements and disposals with the resulting gain or loss, if any, recorded in1686"Other income, net" on the Statements of Operations at the time of disposal.168716881689291690<PAGE>169116921693APPLIED BIOMETRICS, INC.1694NOTES TO FINANCIAL STATEMENTS - (CONTINUED)1695- --------------------------------------------------------------------------------16961697LONG-LIVED ASSETS:16981699The Company reviews its long-lived assets for impairment whenever events or1700changes in circumstances indicate that the carrying amount of the asset in1701question may not be recoverable. Impairment losses are recorded whenever1702indicators of impairment are present.17031704PATENTS AND OTHER INTANGIBLE ASSETS:17051706Patents and other intangible assets are recorded at cost and are amortized using1707the straight-line method over their estimated useful lives ranging from ten to1708fifteen years. The Company evaluates the net realizability of intangibles on an1709ongoing basis, based on current and anticipated undiscounted cash flows.17101711RESEARCH AND DEVELOPMENT:17121713Research and development costs are expensed as incurred.17141715STOCK-BASED COMPENSATION:17161717The Company adopted the disclosure-only provisions of Statement of Financial1718Accounting Standard ("SFAS") No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,1719which disclosures are presented in Note 7 "Shareholders' Equity". The Company1720continues to account for employee stock-based compensation using the intrinsic1721value method as prescribed under Accounting Principles Board Opinion ("APB") No.172225, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.17231724INCOME TAXES:17251726The Company accounts for income taxes using the asset and liability method. The1727asset and liability method provides that deferred tax assets and liabilities are1728recorded based on the differences between the tax basis of assets and1729liabilities and their carrying amounts for financial reporting purposes1730("temporary differences"). Temporary differences relate primarily to operating1731and capital loss carryforwards and research and experimentation tax credit1732carryforwards. The Company has established a valuation allowance against its1733deferred tax assets as the relizability of such deferred tax assets is1734uncertain.17351736LOSS PER COMMON SHARE:17371738Basic earnings per share ("EPS") is computed based on the weighted average1739number of common shares outstanding, while diluted EPS is computed based on the1740weighted average number of common shares outstanding adjusted by the weighted1741average number of additional shares that would have been outstanding had the1742potential dilutive common shares been issued. Potential dilutive shares of1743common stock include stock options and other stock-based awards granted under1744the Company's stock-based compensation plans. Diluted earnings per share is not1745separately presented as the effect of outstanding options and warrants is1746antidilutive.17471748(2) GOING CONCERN:17491750The accompanying financial statements have been prepared on the basis that the1751Company will continue as a going concern, which contemplates the realization of1752assets and the satisfaction of liabilities in the normal course of business. The1753Company has incurred operating losses and has not generated positive cash flow1754from operations. As a result, the Company needs additional financing to continue1755as a going concern. The Company continues to explore possible financing1756alternatives.17571758Because of uncertainties regarding the achievability of additional financing, no1759assurance can be given as to the Company's ability to continue in existence. The1760financial statements do not include any adjustments to reflect the possible1761future effects on the recoverability and classification of assets or the amount1762and classification of liabilities that may result from the possible inability of1763the Company to continue as a going concern.176417651766301767<PAGE>176817691770APPLIED BIOMETRICS, INC.1771NOTES TO FINANCIAL STATEMENTS - (CONTINUED)1772- --------------------------------------------------------------------------------17731774(3) DISCONTINUED OPERATIONS:17751776The Company's Board of Directors approved a plan in December 1998 to distribute1777to the shareholders of the Company its transcatheter closure business. On1778February 11, 1999, the Company completed the spin-off distribution of Cardia,1779Inc. ("Cardia") with Cardia thereafter operating as an independent company with1780its own publicly traded securities. All Applied Biometrics shareholders of1781record received one share of Cardia common stock for every 11.563 shares of1782Applied Biometrics common stock held, comprising 75% of Cardia's common stock.17831784The spin-off distribution was recorded by reducing shareholders' equity by1785$334,000, which represents the carrying value of Cardia's net assets. Cardia's17861999 operating results through the distribution date were breakeven. No gain or1787loss was recorded on the distribution. The Company's financial statements report1788the operating results of the transcatheter closure business as discontinued1789operations. Costs of $1,001,761 were incurred as a result of amendments to1790previously issued stock options to employees departing the Company for Cardia.1791Loss from operations of the transcatheter closure business for 1997 included1792results from the date of acquisition of the underlying technology through1793December 31, 1997.17941795<TABLE>1796<CAPTION>17971998 19971798---- ----1799<S> <C> <C>1800DISCONTINUED OPERATIONS18011802Net revenue .............................................. $ 167,240 $ --1803Loss from operations of discontinued business ............ (836,386) (457,866)1804Costs related to spin-off of discontinued business ....... (1,001,761) --1805Loss from discontinued operations ........................ $ (1,838,147) $ (457,866)18061807NET ASSETS OF DISCONTINUED OPERATIONS18081809Accounts receivable ...................................... $ 92,917 $ --1810Inventories .............................................. 50,888 --1811Prepaid expenses and other current assets ................ 11,785 --1812Equipment, net ........................................... 27,371 --1813Intangible assets, net ................................... 83,332 100,0001814Accounts payable ......................................... (63,651) --1815------------ ------------1816Net assets of discontinued operations ................. $ 202,642 $ 100,0001817============ ============1818</TABLE>181918201821311822<PAGE>182318241825APPLIED BIOMETRICS, INC.1826NOTES TO FINANCIAL STATEMENTS - (CONTINUED)1827- --------------------------------------------------------------------------------18281829(4) SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION:18301831<TABLE>1832<CAPTION>18331999 19981834---- ----1835<S> <C> <C>1836EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET:1837Furniture and fixtures .................................................... $ 106,484 $ 83,9841838Machinery and equipment ................................................... 919,239 894,8341839Leasehold improvements .................................................... 266,784 70,7731840Computer equipment under capital leases ................................... 23,608 --1841Less accumulated depreciation and leasehold improvement amortization ...... (763,079) (622,505)1842Less accumulated amortization of capital leases ........................... (2,361) --1843------------ ------------1844$ 550,675 $ 427,0861845============ ============1846PATENTS AND OTHER INTANGIBLE ASSETS, NET:1847Patents ................................................................... $ 203,803 $ 156,5641848Other intangibles ......................................................... 2,136 --1849Less accumulated amortization ............................................. (106,502) (81,490)1850------------ ------------1851$ 99,437 $ 75,0741852============ ============1853ACCRUED EXPENSES AND SHORT-TERM OBLIGATIONS:1854Payroll, other employee benefits and related taxes ........................ $ 90,486 $ 53,8241855Other accrued expenses .................................................... 105,363 33,3761856------------ ------------1857$ 195,849 $ 87,2001858============ ============1859</TABLE>18601861(5) INCOME TAXES:18621863The Company has approximately $20,000,000 of net operating loss carryforwards1864that begin to expire in 2003 and $450,000 of research and experimentation1865credits. As a result of limitations imposed under ss.382 and ss.383 of the1866Internal Revenue Code of 1986, both the annual amount and timing of the1867utilization of these carryforwards will be limited. As the Company issues1868additional common stock, the Company's carryforwards may be subject to further1869limitation. A valuation allowance has been established that offsets the1870Company's entire net deferred tax asset, as the realization of the deferred tax1871asset is uncertain.18721873(6) COMMITMENTS:18741875OPERATING LEASES:18761877The Company is committed under a non-cancelable operating lease that expires1878March 31, 2002 for the rental of its office and production facilities in1879Burnsville, MN. In addition to base rent charges, the Company also pays1880apportioned real estate taxes and common costs on its leased facility. Total1881facility rent expense, including real estate taxes and common costs, was1882$118,000, $102,000 and $98,000 for the years ended December 31, 1999, 1998 and18831997, respectively.18841885As of December 31, 1999, future minimum lease payments, excluding real estate1886taxes and common costs, due under this non-cancelable operating lease are as1887follows:18881889YEAR ENDING DECEMBER 31 AMOUNT1890----------------------- ------189118922000........................... $ 80,00018932001........................... 82,00018942002........................... 21,000189518961897321898<PAGE>189919001901APPLIED BIOMETRICS, INC.1902NOTES TO FINANCIAL STATEMENTS - (CONTINUED)1903- --------------------------------------------------------------------------------19041905(7) SHAREHOLDERS' EQUITY:19061907AUTHORIZED SHARES AND DESIGNATION OF AN UNDESIGNATED CLASS OF STOCK:19081909The Company's authorized capital stock consists of 20,000,000 shares of common1910stock and 5,000,000 shares of undesignated stock.19111912WARRANTS:19131914During 1999, in connection with a private offering of its common shares, the1915Company issued the underwriters warrants to purchase 81,500 shares of common1916stock at an exercise price of $3.000 per share. These warrants became1917exercisable in September 1999 and expire in September 2009.19181919STOCK-BASED COMPENSATION:19201921The Company has various stock plans. Under these plans, the Company is1922authorized to grant up to 1,400,000 shares of its Common Stock for issuance and1923at December 31, 1999, 38,932 shares remained available for grant.19241925STOCK OPTIONS:19261927The exercise price of each stock option generally equals 100% of the market1928price of the Company's stock on the date of grant and has a maximum term of up1929to ten years. A summary of the status of the Company's stock options for the1930years ended December 31 is as follows:19311932<TABLE>1933<CAPTION>19341999 1998 19971935---- ---- ----1936WEIGHTED WEIGHTED WEIGHTED1937AVERAGE AVERAGE AVERAGE1938EXERCISE EXERCISE EXERCISE1939SHARES PRICE SHARES PRICE SHARES PRICE1940------ ----- ------ ----- ------ -----1941<S> <C> <C> <C> <C> <C> <C>1942Outstanding at beginning of year ..... 389,167 $ 9.68 628,667 $ 7.15 691,967 $ 7.4119431944Granted .............................. 788,750 5.23 336,370 7.90 69,000 9.8219451946Exercised ............................ (21,667) 3.46 (61,000) 4.63 (22,130) 4.6319471948Canceled ............................. (296,100) 9.79 (514,870) 6.64 (110,170) 10.971949-------- -------- --------19501951Outstanding at end of year ........... 860,150 5.72 389,167 9.68 628,667 7.151952======== ======== ========19531954Options exercisable at end of year ... 469,733 5.00 239,867 9.54 505,166 6.201955======== ======== ========1956</TABLE>195719581959331960<PAGE>196119621963APPLIED BIOMETRICS, INC.1964NOTES TO FINANCIAL STATEMENTS - (CONTINUED)1965- --------------------------------------------------------------------------------19661967The following table summarizes information about stock options outstanding at1968December 31, 1999:19691970<TABLE>1971<CAPTION>1972OPTIONS OUTSTANDING OPTIONS EXERCISABLE1973------------------- -------------------1974WEIGHTED1975WEIGHTED AVERAGE WEIGHTED1976NUMBER OF AVERAGE REMAINING NUMBER OF AVERAGE1977OPTIONS EXERCISE CONTRACTUAL OPTIONS EXERCISE1978RANGE OF PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE1979--------------- ----------- ----- ------------ ----------- -----1980<S> <C> <C> <C> <C> <C>1981$2.656 - $ 3.125 279,500 $ 2.660 5.0 279,500 $ 2.66019824.250 - 5.500 184,750 4.817 9.5 10,000 4.50019836.560 - 8.500 341,500 7.896 8.5 125,833 7.74319849.000 - 12.625 54,400 10.800 5.5 54,400 10.8001985--------- ---------1986$2.656 - $12.625 860,150 5.717 7.4 469,733 5.0041987========= =========1988</TABLE>19891990SFAS NO. 123 DISCLOSURE:19911992For the years ended December 31, 1999, 1998 and 1997 the Company did not record1993any compensation expense for stock-based compensation awards.19941995Had compensation expense for the Company's stock-based compensation plans been1996determined based on the fair value at the grant dates consistent with SFAS No.1997123, the Company's net loss and loss per share would have been increased to the1998pro forma amounts indicated below:19992000<TABLE>2001<CAPTION>20021999 1998 19972003---- ---- ----2004<S> <C> <C> <C>2005Net loss ....................................As Reported $ (2,445,942) $ (3,402,138) $ (2,592,470)2006...............................................Pro Forma (3,388,707) (4,228,043) (3,236,790)20072008Basic and diluted loss per share ............As Reported (0.52) (0.79) (0.62)2009...............................................Pro Forma (0.73) (0.98) (0.77)2010</TABLE>20112012The weighted average fair value per option granted during 1999, 1998 and 19972013was $ 2.41, $ 5.08, and $ 5.33, respectively. The weighted average fair value2014was calculated by using the fair value of each option on the date of grant. The2015fair value of the options was estimated using the Black-Scholes option-pricing2016model with the following weighted average assumptions:20172018<TABLE>2019<CAPTION>20201999 1998 19972021---- ---- ----2022<S> <C> <C> <C>2023Expected option term ....................... 3 years 6 years 6 years2024Expected volatility factor.................. 63% 59% 49%2025Expected dividend yield .................... 0.0% 0.0% 0.0%2026Risk-free interest rate .................... 5.2% 5.7% 5.7%2027</TABLE>202820292030342031<PAGE>20322033APPLIED BIOMETRICS, INC.2034NOTES TO FINANCIAL STATEMENTS - (CONTINUED)2035- --------------------------------------------------------------------------------20362037(8) EMPLOYEE BENEFIT PLAN:20382039SALARY REDUCTION PLAN:20402041During 1999, the Company established a salary reduction plans for all full-time2042employees, which qualify under Section 401(k) of the Internal Revenue Code.2043Employee contributions are limited to 20% of their annual compensation, subject2044to annual limitations. At its discretion, the Company may make matching2045contributions equal to a percentage of the salary reduction or other2046discretionary amount. The Company has made no contributions to the plan during20471999.204820492050352051<PAGE>205220532054SIGNATURES20552056Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange2057Act of 1934, the registrant has duly caused this report to be signed on its2058behalf by the undersigned, thereunto duly authorized.20592060APPLIED BIOMETRICS, INC.206120622063By /s/ Andrew M. Weiss2064-----------------------2065Andrew M. Weiss2066President and Chief Executive Officer20672068Dated: March 20, 200020692070Pursuant to the requirements of the Securities Exchange Act of 1934, this report2071has been signed below on March 20, 2000 by the following persons on behalf of2072the Registrant and in the capacities indicated.20732074Signature Title2075- --------- -----20762077/s/ Andrew M. Weiss President, Chief Executive Officer and2078- -------------------------------- Director (Principal Executive Officer)2079Andrew M. Weiss20802081/s/ Camille M. Meyer Vice-President, Finance and Chief Financial2082- -------------------------------- Officer (Principal Financial and Accounting2083Camille M. Meyer Officer)20842085/s/ Jeffrey Green Director2086- --------------------------------2087Jeffrey Green20882089/s/ Demetre Nicoloff, M.D., PhD. Director2090- --------------------------------2091Demetre Nicoloff, M.D., PhD.20922093/s/ Norman Dann Director2094- --------------------------------2095Norman Dann209620972098362099<PAGE>210021012102APPLIED BIOMETRICS, INC.2103EXHIBIT INDEX TO ANNUAL REPORT ON FORM 10-K2104FOR THE YEAR ENDED DECEMBER 31, 19992105- --------------------------------------------------------------------------------210621073.1 Restated Articles of Incorporation of the Company, as amended,2108(filed herewith electronically).210921103.2 Bylaws of the Company (incorporated by reference to Exhibit21113.2 to the Company's Registration Statement on Form SB-2,2112Commission File No. 33-63754C).211321144.1 Restated Articles of Incorporation of the Company, as amended2115(see Exhibit 3.1).211621174.2 Bylaws of the Company (see Exhibit 3.2).211821194.3 Form of common stock Certificate of the Company (incorporated2120by reference to Exhibit 4.1 to the Company's Registration2121Statement on Form SB-2, Commission File No. 33-63754C).2122212310.1 Lease dated February 8, 1994 by and between the Company and2124American Industrial Properties REIT (incorporated by reference2125to Exhibit 10.1 to the Company's Annual Report on Form 10-K2126for the fiscal year ended December 31, 1993.2127212810.2 Amendment No. 1 to Lease Agreement dated December 31, 19982129between the Company and The Trustees under the Will and of the2130Estate of James Campbell, Deceased (incorporated by reference2131to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q2132for the period ended March 31, 1999).2133213410.3 Applied Biometrics 1996 Stock Plan, amended July 2, 19992135(incorporated by reference to Exhibit 10.1 to the Company's2136Quarterly Report on Form 10-Q for the period ended June 30,21371999).2138213910.4 Applied Biometrics Amended 1994 Stock Plan, amended July 2,21401999 (incorporated by reference to Exhibit 10.2 to the2141Company's Quarterly Report on Form 10-Q for the period ended2142June 30, 1999).2143214410.5 Applied Biometrics 1998 Stock Plan, amended June 12, 19982145(incorporated by reference to Exhibit 10.3 to the Company's2146Quarterly Report on Form 10-Q for the period ended June 30,21471999).2148214910.6 Employment letter dated February 19, 1999, between the Company2150and Andrew M. Weiss (incorporated by reference to Exhibit 10.22151to the Company's Quarterly Report on Form 10-Q for the period2152ended March 31, 1999).2153215423.1 Consent of Ernst & Young LLP (filed herewith electronically).2155215623.2 Consent of PricewaterhouseCoopers LLP (filed herewith2157electronically).2158215999.1 Important Factors (filed herewith electronically).2160216127.1 Financial Data Schedule for the year ended December 31, 19992162(filed herewith electronically).216321642165E 121662167</TEXT>2168</DOCUMENT>2169<DOCUMENT>2170<TYPE>EX-3.12171<SEQUENCE>22172<DESCRIPTION>RESTATED ARTICLES OF INCORPORATION2173<TEXT>217421752176Exhibit 3.1217721782179RESTATED ARTICLES OF INCORPORATION2180OF2181APPLIED BIOMETRICS, INC.218221832184Pursuant to the provisions of Chapter 302A of the Minnesota Statutes, known as2185the Minnesota Business Corporation Act, and amendments thereto, the following2186Restated Articles of Incorporation are adopted and shall supersede and take the2187place of the existing Articles of Incorporation and all amendments thereto.218821892190ARTICLE 1 - NAME219121921.1) The name of the corporation shall be APPLIED BIOMETRICS, INC.219321942195ARTICLE 2 - REGISTRATION OFFICE219621972.1) The location and post office address of the registered office of2198the corporation shall be 501 East Highway 13, Suite 108, Burnsville, MN 55337.219922002201ARTICLE 3 - PURPOSE220222033.1) The corporation is organized for general business purposes.220422052206ARTICLE 4 - DURATION220722084.1) The duration of the corporation shall be perpetual.220922102211ARTICLE 5 - CAPITAL STOCK221222135.1) The aggregate number of shares that the Corporation has authority2214to issue shall be Twenty-Five Million (25,000,000) shares, which shall consist2215of Twenty Million (20,000,000) shares that shall be designated as common shares,2216$.01 par value and Five Million (5,000,000) of undesignated shares. The Board of2217Directors of the Corporation is authorized to establish from the undesignated2218shares by resolution adopted and filed in the manner provided by law, one or2219more classes or series of shares, to designate each class or series, and to fix2220the relative powers, qualifications, restrictions, rights and preferences of2221each such class or series, including, without limitation, the right to create2222voting, dividend and liquidation rights and preferences greater than those of2223common stock. The Board of Directors may designate such shares as shares of2224Preferred Stock or may designated such shares as additional common shares.222522265.2) Shareholders shall not have any preemptive rights to subscribe for2227or purchase any shares of the Capital Stock of the corporation. The Board of2228Directors may, at any time and from time to time, issue and sell for such2229consideration as may be permitted by law, any or all of the authorized shares of2230the Capital Stock of the corporation not then issued.223122325.3) The Board of Directors may issue any or all shares of Capital2233Stock of the corporation authorized by these Articles and not already issued,2234including any shares previously issued and reacquired by the corporation,2235provided such shares have not been retired. Upon approval by the Board of2236Directors, shares may be issued for any consideration or for no consideration to2237effectuate share conversions, dividends or splits, including reverse splits.22382239224012241<PAGE>22422243Exhibit 3.1224422452246The Board of Directors may determine the value of nonmonetary consideration2247received for shares.224822495.4) The Board of Directors may issue rights to purchase shares of2250Capital Stock of the corporation, and shall fix the terms, provisions and2251conditions of such rights to purchase, including the conversion basis and the2252price at which shares may be purchased or subscribed for. Shares to be issuable2253upon the exercise of all outstanding rights to purchase, including such rights2254to be issued, must be authorized by these Articles and not already issued.225522562257ARTICLE 6 - DIRECTORS225822596.1) The Board of Directors shall have the power and authority to take2260any action required to permitted of it by law or by these Articles. The Board2261shall take action by the affirmative vote of a majority of directors present at2262a duly held meeting, except where law requires the affirmative vote of a larger2263proportion or number.226422656.2) Any action required or permitted to be taken at a Board meeting2266may be taken by written action signed by a majority of directors. If the action2267must also be approved by the shareholders, then the action must be taken by2268written action of all the directors.226922706.3) A director of the corporation shall not be personally liable to2271the corporation or its shareholders for monetary damages for breach of fiduciary2272duty as a director, except for (i) liability based on a breach of the duty of2273loyalty to the corporation or the shareholders; (ii) liability for acts or2274omissions not in good faith or that involve intentional misconduct or a knowing2275violation of law; (iii) liability under Minnesota Statutes Section 302A.559 or227680A.23; (iv) liability for any transaction from which the director derived an2277improper personal benefit; or (v) liability for any act or omission occurring2278prior to the date when these Articles of Incorporation become effective. If2279Chapter 302A, the Minnesota Business Corporation Act, is hereafter amended to2280authorize the further elimination or limitation of the liability of directors,2281then the liability of a director of the corporation in addition to the2282limitation on personal liability provided herein, shall be limited to the2283fullest extent permitted by the amended Chapter 302A, the Minnesota Business2284Corporation Act. Any repeal or modification of this article by the shareholders2285of the corporation shall be prospective only, and shall not adversely affect any2286limitation on the personal liability of a director of the corporation at the2287time of such repeal or modification.228822892290ARTICLE 7 - POWERS229122927.1) The corporation shall have the unlimited power to engage in and to2293do any act necessary or incidental to the carrying out of its purposes, together2294with the power to do or perform any acts consistent with or which may be implied2295from the powers expressly conferred upon corporations by Minnesota Statutes,2296Chapter 302A.229722982299ARTICLE 8 - BYLAWS230023018.1) The Board of Directors may adopt Bylaws which may contain any2302provision relating to the management of the business or the regulation of the2303affairs of the corporation not inconsistent with law or the Articles of2304Incorporation. The power to adopt, amend or repeal the Bylaws shall be vested in2305the Board.230623072308ARTICLE 9 - SHAREHOLDERS230923109.1) Actions which require shareholder approval shall be taken by the2311affirmative vote of the holders of a majority of the voting power of the shares2312present, except when Minnesota Statutes, Chapter 302A, requires a larger2313proportion or number.23142315231622317<PAGE>23182319Exhibit 3.12320232123229.2) The affirmative vote of the holders of a majority of the voting2323power of the shares present shall be sufficient to amend these Articles of2324Incorporation. All other shareholder actions shall require an affirmative vote2325of the holders of a majority of the voting power of the shares present.232623279.3) There shall be no cumulative voting by the holders of the Common2328Shares.232923302331323322333</TEXT>2334</DOCUMENT>2335<DOCUMENT>2336<TYPE>EX-23.12337<SEQUENCE>32338<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS2339<TEXT>234023412342Exhibit 23.1234323442345CONSENT OF INDEPENDENT AUDITORS234623472348We consent to the incorporation by reference in the Registration Statements on2349Form S-8 (Nos. 333-62117, 33-81486 and 333-04555) and in the Registration2350Statement No. 333-42789 on Form S-3, of our report dated January 14, 2000, with2351respect to the financial statements of Applied Biometrics, Inc. included in the2352Annual Report (Form 10-K) for the year ended December 31, 1999.235323542355235623572358ERNST & YOUNG LLP2359Minneapolis, Minnesota2360March 17, 200023612362</TEXT>2363</DOCUMENT>2364<DOCUMENT>2365<TYPE>EX-23.22366<SEQUENCE>42367<DESCRIPTION>CONSENT OF INDEPENDENT ACCOUNTANTS2368<TEXT>236923702371Exhibit 23.2237223732374CONSENT OF INDEPENDENT ACCOUNTANTS237523762377We hereby consent to the incorporation by reference in the Registration2378Statements on Form S-8 (Nos. 333-62117, 33-81486 and 333-04555) and in the2379Registration Statement on Form S-3 (No. 333-42789), of our report dated March238018, 1999, with respect to the financial statements of Applied Biometrics, Inc.2381included in the Annual Report on Form 10-K for the year ended December 31, 1999.2382238323842385238623872388PRICEWATERHOUSECOOPERS LLP2389Minneapolis, Minnesota2390March 15, 200023912392</TEXT>2393</DOCUMENT>2394<DOCUMENT>2395<TYPE>EX-99.12396<SEQUENCE>52397<DESCRIPTION>IMPORTANT FACTORS2398<TEXT>239924002401Exhibit 99.1240224032404IMPORTANT FACTORS240524062407HISTORY OF LOSSES; ANTICIPATED FUTURE LOSSES; ABILITY TO CONTINUE AS A GOING2408CONCERN24092410The Company has experienced continued and significant operating losses since its2411inception in 1984 and has an accumulated deficit. The Company anticipates2412continuing operating losses for the near future. The Company's ability to,2413continue as a going concern or to ultimately generate revenues from operations2414and achieve profitability depend upon a number of factors, including its ability2415to successfully complete development work on and commercialize the Basis(TM)2416Cardiac Output Monitoring System (the "Basis System") and the costs and related2417timing of implementation of its marketing, sales and manufacturing activities.2418There can be no assurance that the Company will be able to successfully2419introduce the Basis System or that the Company will generate revenues or achieve2420profitability at any time in the future.24212422DEPENDENCE ON AND NEED FOR FURTHER DEVELOPMENT OF THE BASIS CARDIAC OUTPUT2423MONITORING SYSTEM24242425The Company's success depends upon the Basis System, which currently is its sole2426product. Although product prototypes were found to perform consistently with the2427Company's expectations in Company lab and mammal tests, early results from the2428Company's product evaluations of the Basis System and RealFlow Probe indicated2429the need for modifications in order to meet the Company's product performance2430expectations. While the Company believes that it has made significant progress2431completing these modifications, there can be no assurance that all necessary2432modifications have been or can be timely and successfully developed. Any2433inability to timely and successfully make necessary product modifications could2434delay or prevent successful commercialization of the Basis System, which would2435have a material, adverse effect on the Company's business, financial condition2436and results of operations.24372438FAILURE OF PRIOR CARDIAC OUTPUT MONITORING SYSTEM24392440In the Company's early stages - from the years 1984 to 1994 - it developed and2441marketed two ultrasound-based cardiac output devices: one that was integrated2442into an endotrachial tube, and the other being a predecessor to the current2443Basis System. Both products were sold or distributed in the 1990's in small2444quantities. After a small commercialization effort, the Company ceased marketing2445due to unreliable product performance caused by a variety of factors, including2446inadequate probe sensitivity and signal processing, and hardware performance2447constraints. Although management believes that the Basis System incorporates2448design changes that address the shortcomings of the prior systems, there can be2449no assurance that performance problems will not occur in clinical use of the2450Basis System.24512452NEED FOR ADDITIONAL FINANCING24532454The Company expects that additional financing will be needed in the first half2455of 2000 to fund its development and product commercialization plans. If the2456Company's operational plans do not progress as anticipated, the Company's2457ability to attract additional financing could be impaired. No assurance can be2458given that the Company will be able to obtain any additional financing on2459acceptable terms or at all, and failure to do so would have a material, adverse2460effect on the Company's business, financial condition and results of operations.24612462UNCERTAINTY OF MARKET ACCEPTANCE24632464The commercial success of the Company's Basis System will require acceptance by2465cardiac surgeons and other medical specialists. Such acceptance will depend, in2466part, upon clinical validation results and the conclusion by these medical2467professionals that the Basis System is accurate, reliable and effective and that2468that Basis System offers enhanced functionality relative to current cardiac2469output monitoring technologies. There can be no assurance that the Basis System2470will provide clinical benefits considered superior by these professionals or2471that a sufficient number of such professionals will use the Basis System for2472commercial success to be achieved. Because the Basis System represents a2473different method of clinical assessment and an improved product compared to the2474Company's earlier development efforts that failed to achieve commercial success,2475there may be greater reluctance to accept this product than would occur with2476products using well-established technologies. Substantial efforts may need to be2477devoted to2478247912480<PAGE>24812482Exhibit 99.1248324842485educating the market to the Company's technologically different approach and the2486improvements in the Basis System over the Company's prior cardiac output2487monitoring systems. Failure of the Company's product to achieve market2488acceptance would have a material adverse effect on the Company's business,2489financial condition and results of operations.24902491LACK OF MANUFACTURING EXPERIENCE24922493The Company's current plans call for it to manufacture the Basis System2494internally. The Company has only limited manufacturing experience and could2495encounter difficulties in scaling up production. These problems may include2496estimating optimal product volume and mix requirements, production yields,2497controlling and anticipating product costs, quality control and assurance,2498component supply and contending with shortages of qualified personnel. There can2499be no assurance that manufacturing difficulties will not occur. Such2500difficulties could have a material adverse effect on the Company.25012502LACK OF MARKETING EXPERIENCE25032504The Company has no experience in marketing the Basis System and no current sales2505capabilities. There can be no assurance that the Company's marketing efforts2506will result in commercial sales or that the Company will be able to develop an2507effective sales force and distribution network without incurring substantial2508delays or costs or at all. Failure to develop an effective direct sales2509organization or an effective distribution network would have a material adverse2510effect on the Company.25112512COMPETITION25132514Competition in the medical device industry in general and in the market for2515cardiac output monitoring in particular is intense. Edwards Critical Care (a2516division of Baxter Healthcare Corporation), Johnson and Johnson and Abbott2517Critical Care currently dominate the cardiac output monitoring market. These2518companies make and sell catheters, thermodilution cardiac monitors and2519peripheral products used to measure cardiac output by the widely used2520thermodilution method. While the Company believes its Basis System represents2521significant improvements over existing products in the marketplace, the Company2522must be able to effectively demonstrate the beneficial features of the Basis2523System and must maintain competitive pricing in order to successfully sell its2524products. Competition in the Company's market may result in pricing pressures2525that may adversely affect product gross margins. The Company competes with the2526companies listed above and other large companies, many of which have greater2527resources and established operations. These competitors also have greater depth2528in research and development, manufacturing and marketing and sales capabilities.2529The ability of the Company to compete effectively will depend upon the2530advantages and proprietary nature of the Basis System, on the Company's ability2531to attain and maintain technological leadership and to generate sales. There can2532be no assurance that the Company will be able to successfully compete against2533its current or future competitors.25342535LIMITED HUMAN USE OF THE BASIS CARDIAC OUTPUT MONITORING SYSTEM25362537To date, the Company has completed extensive research, conducted lab and animal2538testing and conducted limited human clinical use of the Basis System. Although2539the Company believes that its research and testing provide support for the Basis2540System's performance in humans, there can be no assurance that research and2541animal testing alone will identify all the technical issues or potential2542problems with use of the Basis System in humans in generally, or in any subset2543of humans having differing anatomical structures or disease characteristics. The2544Company began product evaluations of the Basis System and RealFlow Probe at one2545clinical site in the U.S. Early results from these evaluations indicated the2546need for modifications to the Basis System in order to meet the Company's2547product performance expectations. While the Company believes that it has made2548significant progress completing these modifications, there can be no assurance2549that all necessary modifications can be timely and successfully developed. Any2550failure of the Basis System to achieve acceptable results in future evaluations2551could lead to delays in the introduction and market acceptance of the Basis2552System. A delay in market introduction of the Basis System would have a material2553adverse effect on the Company's business, financial condition and results of2554operations.25552556255722558<PAGE>25592560Exhibit 99.1256125622563TECHNOLOGICAL OBSOLESCENCE; DEVELOPMENT OF NEW PRODUCTS25642565Rapid technological advances characterize the medical device market. Even if the2566Basis System is successfully developed and accepted, it may be rendered obsolete2567by technological developments, new innovations or changes in the medical2568marketplace. The Company's success will depend in part on its ability to respond2569quickly to medical and technological changes and to develop and introduce new,2570cost-effective versions of its Basis System in response to competitive2571innovations. Development and commercialization of new products will require2572additional research and development expenditures and may require new regulatory2573approvals. There can be no assurance that the Company will successfully identify2574new market opportunities and develop new products or that these new products2575will receive necessary regulatory approvals or be successfully received by the2576marketplace or, if so, that the Company's products will not be rendered obsolete2577by changes in technology.25782579LIMITATIONS ON THIRD PARTY REIMBURSEMENT25802581The Basis System will generally be purchased by hospitals which then seek2582reimbursement from various public and private third party payers covering2583cardiac surgery patients, such as Medicare, Medicaid and private insurers, for2584the health care services provided to patients. There can be no assurance that2585these third party payers will consider use of the Basis System cost-effective.2586If the Basis System is not considered cost-effective and not approved for2587reimbursement, this will materially adversely affect the prospects of the Basis2588System and the Company itself. Even if the third party payers approve the Basis2589System for reimbursement, there can be no assurance that the level of2590reimbursement approved will be high enough to make the Company a profit from2591selling the Basis System. Furthermore, the amount of reimbursement for treatment2592for various cardiac diseases could decrease in the future and reduce the amount2593paid for the Basis System. Failure by hospitals and other users of the Company's2594products to obtain sufficient reimbursement for use of the Basis System in2595cardiac output monitoring could have a material adverse effect on the Company.25962597PATENTS AND PROPRIETARY RIGHTS25982599The Company's success depends in part on its ability to obtain and maintain2600patent protection for its products, to preserve its trade secrets and to operate2601without infringing the proprietary rights of third parties. The Company has U.S.2602and foreign patents and patents pending, which relate to devices and methods2603used to measure blood flow through a major mammalian artery using ultrasound2604technology, the release mechanism employed by the RealFlow probe, and certain2605methods and techniques which relate to minimally invasive surgery, beating heart2606surgery and advanced signal processing.. The validity and breadth of claims2607covered in medical technology patents involve complex legal and factual2608questions and, therefore, may be highly uncertain. No assurances can be given2609that any current patents will be maintained, that patents under pending2610applications or any future patent applications will be issued, that the scope of2611any patent protection will exclude competitors or provide competitive advantages2612to the Company, that any of the Company's patents will be held valid if2613subsequently challenged, that others will not claim rights in or ownership of2614the patents and other proprietary rights held by the Company or that the Basis2615System or other products and processes will not infringe, or be alleged to2616infringe, the proprietary rights of others.26172618If the Company is found to have infringed on the rights of a third party, the2619Company may be unable to market its products without a license from such third2620party. There can be no assurance that the Company would be able to obtain such a2621license on satisfactory terms, or at all. Furthermore, there can be no assurance2622that others have not developed or will not develop similar products or2623manufacturing processes, duplicate any of the Company's products or2624manufacturing processes, or design around the Company's patents. In addition,2625whether or not additional patents are issued to the Company, others may hold or2626receive patents that contain claims having a scope that covers products2627subsequently developed by the Company.26282629The Company also relies on unpatented trade secrets to protect its proprietary2630technology, and no assurance can be given that others will not independently2631develop or otherwise acquire substantially equivalent technologies or otherwise2632gain access to the Company's proprietary technology or disclose such technology2633or that the Company can ultimately protect meaningful rights to such unpatented2634proprietary technology.26352636There has been substantial litigation regarding patent and other intellectual2637property rights in the medical device industry. Litigation, which could result2638in substantial cost to and diversion of effort by the Company, may be necessary2639to enforce patents issued to the Company, to protect trade secrets or know-how2640owned by the Company, to defend the Company against claimed infringement of the2641rights of others or to determine the ownership, scope or26422643264432645<PAGE>26462647Exhibit 99.1264826492650validity of the proprietary rights of the Company and others. An adverse2651determination in such litigation could subject the Company to significant2652liabilities to third parties, require the Company to seek licenses from third2653parties and prevent the Company from manufacturing, selling or using its2654products, any of which could have a material adverse effect on the Company's2655business, financial condition and results of operations.26562657GOVERNMENTAL REGULATION26582659As a medical device company, the Company is subject to extensive and rigorous2660regulation by the FDA in the United States and by comparable agencies in foreign2661countries. The FDA regulates the introduction of medical devices as well as2662manufacturing, labeling, distribution, sale, marketing, advertising, promotion2663and record keeping procedures for such products.26642665Although the 510(k) marketing clearance received from the FDA in 1991 for the2666Company's trans-aortic system was confirmed in 1996 and then again in May of26671999, using both internal and external consulting evaluations and is believed to2668be valid for the Basis System, such clearance can be withdrawn temporarily or2669permanently by the FDA due to failure to comply with regulatory standards or the2670occurrence of unforeseen problems with the Basis System. The FDA also has the2671power to limit or prevent the manufacture or distribution of the Basis System2672and could require its recall. FDA regulations depend heavily on administrative2673interpretation, and there can be no assurance that future interpretation made by2674the FDA or other regulatory bodies, with possible retroactive effect, will not2675adversely affect the Company. The FDA and various agencies inspect the Company2676and its facilities from time to time to determine whether the Company is in2677compliance with regulations relating to medical device manufacturing, including2678regulations concerning manufacturing, testing, quality control and product2679labeling practices. A determination that the Company is in material violation of2680such regulations could lead to the imposition of civil penalties, including2681fines, product recalls, product seizures, or, in extreme cases, criminal2682sanctions. In addition, there can be no assurance that the government2683regulations will not change, and thereby prevent the Company from temporarily or2684permanently marketing the Basis System. The withdrawal by the FDA of its2685marketing approval for the Basis System, the recall of the Basis System or2686similar regulatory action would have a material adverse effect on the Company's2687business, financial condition and results of operations.26882689As part of its strategy, the Company expects to pursue commercialization of its2690products in international markets, and therefore, the Company's products will be2691subject to regulations that vary from country to country. The process of2692obtaining foreign regulatory approvals in certain countries can be lengthy and2693require the expenditure of substantial resources. There can be no assurance that2694the Company will be able to obtain necessary regulatory approvals or clearances2695on a timely basis or at all, and delays in receipt of or failure to receive such2696approvals or clearances, or failure to comply with existing or future regulatory2697requirements, could have a material adverse effect on the Company's business,2698financial condition and results of operations.26992700UNCERTAINTY OF HEALTH CARE REFORM27012702The levels of revenue and profitability of medical device companies may be2703affected by the continuing efforts of government and third party payers to2704contain or reduce the costs of health care through various means. In the United2705States there have been, and the Company expects that there will continue to be,2706a number of federal and state proposals to control health care costs. These2707proposals contain measures intended to control public and private spending on2708health care as well as to provide universal public access to the health care2709system. If enacted, such proposals may result in a substantial restructuring of2710the health care delivery system. Significant changes in the nation's health care2711system are likely to have a substantial impact on the manner in which the2712Company conducts its business and could have a material adverse effect on the2713Company's business, financial condition and results of operations. Similarly,2714the marketing and sale of the Company's products in foreign countries could be2715materially adversely affected by health care reform in such countries.27162717NEED TO EXPAND; DEPENDENCE ON KEY PERSONNEL27182719The Company needs to expand its management, research and development,2720manufacturing and sales and marketing personnel in order to support development2721and commercialization of the Basis System. The inability to hire personnel as2722needed may have a material adverse effect on the Company. The success of the2723Company will depend in part upon its ability to attract and retain capable2724technical staff as well as sales and marketing personnel in the27252726272742728<PAGE>27292730Exhibit 99.1273127322733future. The Company is currently dependent on the services of Andrew M. Weiss,2734the Company's President and Chief Executive Officer, and Steven R. Wedan, the2735Company's Vice-President, Engineering. The loss of either of Messrs. Weiss or2736Wedan could have a material adverse effect on the Company.27372738RISKS RELATED TO INTERNATIONAL SALES27392740The Company's plan to distribute the Basis System in international markets2741involves certain risks, including the impact of any tariffs, quotas and taxes2742which may be imposed by foreign governments on international sales of the Basis2743System, the impact of potential political and economic instability on demand for2744the Basis System, restrictions on import or export of technology which could2745prohibit or restrict international sales, and potentially limited intellectual2746property protection which could cause the Company to refrain from selling in2747certain international markets. Currency fluctuations could also cause the Basis2748System to become less affordable or less price competitive in international2749markets. Any of these factors would adversely impact the Company's ability to2750sell the Basis System internationally, and could in turn have a material,2751adverse impact on the Company's business, financial condition and results of2752operations.27532754DEPENDENCE ON KEY SUPPLIERS27552756There are multiple sources for most of the components used in the Basis System.2757Several components, however, are currently available from only a limited number2758of vendors or are nearing the end of their product life cycle and availability.2759The inability to obtain such components on a timely basis or to identify,2760validate and procure alternative components would have an adverse impact on the2761Company's ability to fill orders from customers.27622763PRODUCT LIABILITY; AVAILABILITY OF INSURANCE27642765The medical device industry is subject to substantial litigation, and the2766Company faces an inherent business risk of exposure to product liability claims2767in the event that the use of the Basis System is alleged to have resulted in2768adverse effects to a patient. Although the Company maintains product liability2769insurance, there can be no assurance that the coverage limits of its insurance2770policies will be adequate, or that such insurance will be available in the2771future on acceptable terms, if at all. A product liability claim or other claim2772with respect to uninsured liabilities or in excess of insured liabilities could2773have a material adverse effect on the business, financial conditions and results2774of operations of the Company.277527762777527782779</TEXT>2780</DOCUMENT>2781<DOCUMENT>2782<TYPE>EX-27.12783<SEQUENCE>62784<DESCRIPTION>FINANCIAL DATA SCHEDULE2785<TEXT>27862787<TABLE> <S> <C>278827892790<ARTICLE> 52791<LEGEND>2792THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM FINANCIAL STATEMENTS2793AND RELATED NOTES FOR THE YEAR ENDED DECEMBER 31, 1999.2794</LEGEND>27952796<S> <C>2797<PERIOD-TYPE> YEAR2798<FISCAL-YEAR-END> DEC-31-19992799<PERIOD-START> JAN-01-19992800<PERIOD-END> DEC-31-19992801<CASH> 1,910,3562802<SECURITIES> 02803<RECEIVABLES> 02804<ALLOWANCES> 02805<INVENTORY> 167,1092806<CURRENT-ASSETS> 2,168,0422807<PP&E> 1,316,1152808<DEPRECIATION> 765,4402809<TOTAL-ASSETS> 2,827,7392810<CURRENT-LIABILITIES> 299,4372811<BONDS> 02812<PREFERRED-MANDATORY> 02813<PREFERRED> 02814<COMMON> 52,9902815<OTHER-SE> 2,463,6352816<TOTAL-LIABILITY-AND-EQUITY> 2,827,7392817<SALES> 02818<TOTAL-REVENUES> 02819<CGS> 02820<TOTAL-COSTS> 02821<OTHER-EXPENSES> (2,497,066)2822<LOSS-PROVISION> 02823<INTEREST-EXPENSE> 02824<INCOME-PRETAX> (2,445,942)2825<INCOME-TAX> 02826<INCOME-CONTINUING> (2,445,952)2827<DISCONTINUED> 02828<EXTRAORDINARY> 02829<CHANGES> 02830<NET-INCOME> (2,445,942)2831<EPS-BASIC> (.52)2832<EPS-DILUTED> (.52)2833283428352836</TABLE>2837</TEXT>2838</DOCUMENT>2839</SEC-DOCUMENT>2840-----END PRIVACY-ENHANCED MESSAGE-----284128422843