Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A Amendment No.1 to Form S-1 110 528K
2: EX-10.1 Material Contract 25 87K
5: EX-10.10 Material Contract 22 77K
6: EX-10.11 Material Contract 2± 9K
3: EX-10.2 Material Contract 52 103K
4: EX-10.3 Material Contract 31 101K
7: EX-23.2 Consent of Experts or Counsel 1 5K
8: EX-23.3 Consent of Experts or Counsel 1 6K
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 14, 2000
REGISTRATION NO. 333-45580
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MASIMO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3845 33-0368882
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2852 KELVIN AVENUE
IRVINE, CALIFORNIA 92614
(949) 250-9688
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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JOE E. KIANI
CHIEF EXECUTIVE OFFICER
2852 KELVIN AVENUE
IRVINE, CALIFORNIA 92614
(949) 250-9688
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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CHRISTOPHER KILPATRICK PATRICK T. SEAVER
JACQUELINE E. COWDEN DAVID B. ALLEN
ARTER & HADDEN LLP JEEVAN B. GORE
5 PARK PLAZA, SUITE 1000 LATHAM & WATKINS
IRVINE, CALIFORNIA 92614 650 TOWN CENTER DR., 20TH FLR.
(949) 252-7500 COSTA MESA, CALIFORNIA 92626
(714) 540-1235
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS
PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES
IT SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 2000
[MASIMO LOGO]
5,000,000 SHARES
COMMON STOCK
This is the initial public offering of Masimo Corporation, and we are offering
5,000,000 shares of our common stock. We anticipate that the initial public
offering price will be between $11.00 and $13.00 per share. We have applied to
list our common stock on the Nasdaq National Market under the symbol "MSMO."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS MASIMO
Per Share $ $ $
Total $ $ $
We have granted the underwriters the right to purchase up to 750,000 additional
shares to cover over-allotments.
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
THE DATE OF THIS PROSPECTUS IS , 2000.
LOGO
[The words "Our objective is to improve patient care by establishing our Signal
Extraction Technology, or Masimo SET, as the new performance standard for the
noninvasive measurement of the oxygen saturation level of arterial blood and
pulse rate, or pulse oximetry, and other monitoring applications."]
[THE WORDS "MS BOARDS" AND A PHOTOGRAPH OF MS BOARDS]
[To the right of the photograph of the MS Boards the words "Our MS Boards
incorporate our proprietary Masimo SET signal processing software and algorithms
and are primarily sold to our licensees for incorporation into their monitors."]
[THE WORD "RADICAL" AND A PHOTOGRAPH OF THE RADICAL PRODUCT]
[To the right of the photograph of the Radical product the words "Our Radical is
a standalone pulse oximeter with a detachable module, which functions as a
battery operated, handheld pulse oximeter. Radical's SatShare feature is capable
of upgrading a conventional monitor to Masimo SET technology through a simple
cable connection. We believe that Radical's upgrade capability coupled with its
ability to function in differing capacities will facilitate hospital-wide
conversions of installed monitors to Masimo SET. We are currently offering
Radical primarily through original equipment manufacturer licensees and
distributors worldwide."]
[THE WORDS "SENSOR FAMILY" AND A PHOTOGRAPH OF THE COMPLETE SENSOR LINE]
[To the right of the photograph of the complete sensor line the words "Our line
of disposable and reusable sensors and other accessories are used in combination
with monitors using our boards and our Radical product. Masimo SET monitors are
designed to function only with our proprietary sensors. We sell our sensors
primarily to our licensees for resale to end-users."]
SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus, including "Risk Factors" and the financial statements and
related notes, before making an investment decision.
MASIMO CORPORATION
We develop, license and market advanced signal processing technologies and
products for the noninvasive monitoring of vital signs. Our first products,
based on our proprietary Signal Extraction Technology, or Masimo SET, are
designed to improve the effectiveness of pulse oximetry. Pulse oximetry is the
noninvasive measurement of the oxygen saturation level of arterial blood and
pulse rate. Our family of pulse oximetry products are designed to provide the
clinician with reliable, continuous, real-time information, even in the presence
of patient movement, and low arterial blood flow.
We license our technology and sell our products primarily to patient
monitoring companies with existing installed customer bases, permitting us to
leverage the sales and distribution channels of each OEM licensee. We have
agreements with over 30 OEM licensees. To date, 16 companies have launched a
total of 30 monitors worldwide incorporating Masimo SET. We believe over 25,000
monitors have been installed worldwide which use our technology. Our technology
and products are covered by 70 issued and 113 pending U.S. and foreign patents.
OUR TARGET MARKETS
Early detection of low arterial blood oxygen saturation is critical because
an insufficient supply of oxygen to the body's tissues can result in brain
damage and death in a matter of minutes. The use of pulse oximetry in critical
care settings, such as hospital operating rooms and intensive care units, is
widely accepted as a standard of care because of its ability to provide an early
warning of low arterial blood oxygen saturation. However, conditions such as
patient movement and low arterial blood flow impose operating limitations on
conventional pulse oximeters. These include inaccurate measurements, the loss of
a real-time signal, or false alarms when the pulse oximeter falsely indicates a
drop in the oxygen saturation level, all of which can lead to adverse patient
outcomes.
Despite the limitations of conventional pulse oximeters, pulse oximetry has
gained wide clinical acceptance as a monitoring technology. For example, in the
over 20 million annual surgical procedures performed in the U.S. in which
anesthesia is administered, pulse oximeters are used as part of the standard
protocol of monitoring procedures. We believe that Masimo SET technology may
also be applicable to other existing applications, such as blood pressure
monitoring, respiration monitoring and electrocardiography, as well as
parameters that currently are not well-served by available noninvasive
monitoring technologies, such as fetal oximetry.
OUR TECHNOLOGY AND PRODUCTS
Masimo SET is designed to address the problems of patient movement and low
arterial blood flow, enabling pulse oximeters to provide accurate real-time data
despite these
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challenging conditions. Masimo SET consists of proprietary software and
algorithms, used in combination with a patented sensor design. Our software and
algorithms enable the use of adaptive filters to cancel interference, while our
sensor design enhances the performance of our software. Masimo SET is
incorporated into our printed circuit boards, which are primarily sold to our
original equipment manufacturer licensees and incorporated into their monitors.
We have recently introduced Radical, a standalone and handheld pulse oximeter
that enables continuous monitoring as patients are moved throughout the
continuum of care. In addition, Radical, through a simple cable connection to a
conventional monitor, offers the ability to upgrade the existing installed base
of conventional pulse oximeters to Masimo SET performance. We have developed two
lines of disposable and reusable sensors and other accessories to be used in
combination with monitors using our boards and our Radical product. Once Masimo
SET has been incorporated into a monitor, the pulse oximeter will function only
with our proprietary sensors.
We believe the clinical benefits of our products include the following:
- Accurate Real-Time Measurement: Masimo SET is more reliable than
conventional pulse oximeters in delivering critical information to the
clinician in real-time.
- Reliable Monitoring During Motion: Masimo SET identifies and eliminates
interference caused by patient movement and provides an accurate
measurement of the patient's blood oxygen saturation and pulse rate.
- Accurate Monitoring During Low Perfusion: Masimo SET detects and
measures blood oxygen saturation in most patients who suffer from low
arterial blood flow, such as elderly and critically ill patients.
- Resistance to Electromagnetic Interference and Ambient Light: Masimo SET
boards and sensors are designed to shield against or eliminate
interference caused by ambient light and electrical surgical instruments
commonly used in the hospital.
OUR STRATEGY
Our objective is to improve patient care by establishing Masimo SET as the
new performance standard for pulse oximetry and other monitoring applications.
Key elements of our strategy include:
- Gain Broad Market Acceptance of Masimo SET Through License Arrangements
With Patient Monitoring Companies. We license our proprietary products
to patient monitoring companies for incorporation into their products. We
believe this will facilitate broad commercialization of our technology
and products.
- Upgrade the Existing Installed Base of Conventional Pulse Oximetry
Monitors. We expect to utilize our new product, Radical, to facilitate
upgrades of the installed base of conventional pulse oximeters, in
addition to working with our licensees to develop upgrade modules for
their existing monitors.
- Create and Share With Our Licensees a Proprietary, Recurring Consumables
Business. Masimo SET monitors are designed to only function with our
proprietary sensors, which are primarily sold to our licensees for sale
to end-users.
- Expand the Market for Pulse Oximetry. As a result of the increased
performance and reliability of pulse oximeters utilizing Masimo SET
technology, we expect pulse oximetry to achieve greater penetration in
less acute care hospital settings and the home.
- Apply Masimo SET to Other Monitoring Applications. We believe that
Masimo SET can be used to improve other existing monitoring applications
and can be applied to parameters that currently are not well-served by
available noninvasive monitoring technologies.
2
THE OFFERING
Common stock offered by Masimo...... 5,000,000 shares
Common stock to be outstanding upon
completion of this offering....... 18,577,993 shares
Use of proceeds..................... General corporate purposes, including
working capital, capital equipment
purchases, product development, sales
and marketing, and possible
acquisitions or investments. See "Use
of Proceeds."
Proposed Nasdaq National Market
symbol.............................. MSMO
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of September 30,
2000 and excludes:
- 2,298,260 shares of common stock issuable upon exercise of options
outstanding as of September 30, 2000, at a weighted average exercise
price of $4.89 per share;
- 565,140 shares of common stock available for issuance under our stock
option plans as of September 30, 2000;
- 10,000 shares of common stock issuable upon exercise of a warrant
outstanding as of September 30, 2000, at an exercise price of $3.00 per
share; and
- 90,909 shares of common stock issuable upon exercise of a warrant
outstanding as of September 30, 2000 at an exercise price of $11.00 per
share.
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Unless otherwise indicated, the information in this prospectus assumes:
- the conversion of all outstanding shares of preferred stock into common
stock upon the closing of this offering;
- no exercise of the underwriters' over-allotment option; and
- no issuance of additional common stock to holders of our Series F
preferred stock or to the holder of the warrant to purchase 90,909 shares
of our common stock pursuant to their existing antidilution rights which
will be triggered in the event the initial public offering price is less
than $11.00 per share. See "Description of Capital Stock."
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We were incorporated in California in May 1989 and reincorporated in
Delaware in May 1996. Our executive offices are located at 2852 Kelvin Avenue,
Irvine, CA 92614. Our telephone number is (949) 250-9688 and our website is
www.masimo.com. The information on our website is not incorporated into and is
not intended to be a part of this prospectus.
Masimo, SET, Signal Extraction Technology, Radical, RadicalScreen,
SatShare, LNOP, Discrete Saturation Transform, MS and NR are trademarks of
Masimo. All other trademarks used in this prospectus are the property of their
respective owners.
3
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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NINE MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED YEAR ENDED SEPTEMBER 30,
--------------------------- DECEMBER 31, DECEMBER 31, -------------------
1996 1997 1998 1998 1999 1999 2000
------- ------- ------- ------------ ------------ -------- --------
STATEMENT OF OPERATIONS DATA:
Revenue......................... $ -- $ 367 $ 915 $ 1,697 $ 6,697 $ 4,927 $ 9,580
Cost of goods sold.............. -- 633 2,155 2,985 6,417 4,689 7,971
------- ------- ------- -------- -------- -------- --------
Gross margin.................. -- (266) (1,240) (1,288) 280 238 1,609
------- ------- ------- -------- -------- -------- --------
Operating expenses:
Research and development...... 2,190 2,076 3,089 3,132 5,965 4,138 3,353
Selling, general and
administrative.............. 1,301 1,750 2,599 3,930 7,767 5,034 9,528
------- ------- ------- -------- -------- -------- --------
Total operating expenses.... 3,491 3,826 5,688 7,062 13,732 9,172 12,881
------- ------- ------- -------- -------- -------- --------
Non-refundable advance from
terminated agreement.......... -- 1,000 -- -- -- -- --
------- ------- ------- -------- -------- -------- --------
Loss from operations.......... (3,491) (3,092) (6,928) (8,350) (13,452) (8,934) (11,272)
Interest and other, net......... 263 327 398 433 281 114 412
------- ------- ------- -------- -------- -------- --------
Net loss...................... $(3,228) $(2,765) $(6,530) $ (7,917) $(13,171) $ (8,820) $(10,860)
======= ======= ======= ======== ======== ======== ========
Net loss applicable to common
stockholders................ $(3,950) $(4,329) $(9,041) $(10,898) $(18,022) $(12,118) $(15,746)
======= ======= ======= ======== ======== ======== ========
Net loss per common share:
Basic and diluted........... $ (1.45) $ (1.54) $ (3.16) $ (3.77) $ (6.12) $ (4.13) $ (5.21)
======= ======= ======= ======== ======== ======== ========
Pro forma basic and
diluted................... $ (1.21) $ (.86)
======== ========
Weighted-average shares
outstanding used in
computing net loss per
common share:
Basic and diluted........... 2,726 2,807 2,862 2,889 2,943 2,931 3,021
Pro forma basic and
diluted................... 10,915 12,696
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SEPTEMBER 30, 2000
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PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,086 $14,086 $68,686
Working capital............................................. 19,422 19,422 74,022
Total assets................................................ 29,832 29,832 84,432
Long-term debt, including current portion................... 1,845 1,845 1,845
Redeemable preferred stock.................................. 87,809 -- --
Stockholders' equity (deficit).............................. (64,179) 23,630 78,230
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(1) The pro forma column reflects the conversion of all series of preferred
stock outstanding as of September 30, 2000, into 10,536,720 shares of common
stock upon the closing of this offering.
(2) The pro forma as adjusted column reflects the sale of 5,000,000 shares of
our common stock in the public offering at an assumed initial public
offering price of $12.00 per share, after deducting underwriting discounts
and commissions and estimated offering expenses and the application of the
net proceeds as described in "Use of Proceeds."
4
RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock. If any of the following risks actually occur,
our business, results of operations and financial condition could suffer
significantly. In that case, the market price of our common stock could decline,
and you may lose all or part of the money you paid to buy our common stock.
RISKS RELATED TO OUR BUSINESS
WE WILL NOT BE PROFITABLE IF THE MARKET DOES NOT ACCEPT OUR TECHNOLOGY AND
PRODUCTS BASED ON OUR TECHNOLOGY.
We are dependent upon the success and market acceptance of our proprietary
Signal Extraction Technology, Masimo SET. Market acceptance of equipment
incorporating Masimo SET will depend upon our ability to continue to provide
evidence to the medical community and health care providers that our products
are cost-effective and provide significantly improved performance compared to
conventional arterial blood oxygen saturation monitoring equipment. Health care
providers that currently have significant investments in conventional arterial
blood oxygen saturation monitoring equipment may be reluctant to purchase and
accept new arterial blood oxygen saturation monitoring equipment. If hospitals
and other health care providers do not accept monitoring systems which use our
Masimo SET as cost-effective, accurate or reliable, they may not buy and use
them in sufficient quantities to enable us to be profitable. If we are unable to
achieve significant market acceptance of our core technology or products
incorporating Masimo SET, we will not generate significant revenues from the
sale of our Masimo SET sensors or expand the number of applications for Masimo
SET.
IF OUR RECENTLY RELEASED RADICAL PRODUCT IS NOT ACCEPTED BY THE MARKET OR WE ARE
UNABLE TO GENERATE DEMAND FOR IT, OUR OVERALL BUSINESS STRATEGY MAY NOT BE
SUCCESSFUL AND WE MAY NOT BE PROFITABLE.
The success of our overall business strategy is highly dependent upon our
ability to generate demand for Radical and on market acceptance of Radical.
Radical was first made commercially available in August 2000 and accordingly, we
do not know to what degree the market will accept this product. We cannot assure
you that our customers will accept Radical and purchase it in quantities
sufficient for us to be profitable. If the market does not accept Radical and we
are unable to generate sufficient demand for this product, our business and
results of operations will be adversely affected.
WE DEPEND ON OUR ORIGINAL EQUIPMENT MANUFACTURER LICENSEES FOR SUBSTANTIALLY ALL
OF OUR REVENUE. IF THEY DO NOT DEVOTE SUFFICIENT RESOURCES TO THE PROMOTION OF
PRODUCTS WHICH USE OUR MASIMO SET, THEN WE MAY NEVER BECOME PROFITABLE.
We are and will continue to be dependent upon our licensees for
substantially all of our future revenue through their marketing, selling and
distribution of products that incorporate Masimo SET. The failure of our
original equipment manufacturer, or OEM, licensees to successfully market, sell
or distribute products incorporating our technology, the termination of
licensing agreements, the loss of OEM licensees or the inability to enter into
future OEM licensing agreements would have a material adverse effect on our
business, financial condition and results of operations. Our success will depend
in part upon whether our OEM licensees devote sufficient resources to the
promotion of products which incorporate our technology. These products may
represent a relatively small portion of an OEM licensee's business and some of
our OEM licensees offer competitive products. Therefore, we cannot guarantee
that our
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OEM licensees will promote products incorporating Masimo SET. In addition, we
believe that there has been and may continue to be a trend towards consolidation
in the health care industry. As a result of consolidation, one or more of our
OEM licensees could be acquired, and we cannot assure you that an acquiring
company would devote sufficient resources to promote our technology.
WE HAVE A HISTORY OF LOSSES AND NEGATIVE CASH FLOWS FROM OPERATING ACTIVITIES,
EXPECT TO INCUR OPERATING LOSSES IN THE FUTURE AND MAY NEVER ACHIEVE
PROFITABILITY.
To date, we have incurred net losses, primarily from research and
development and sales and marketing activities, and have an accumulated deficit
of $63.6 million as of September 30, 2000. We expect to incur operating losses
for at least the next twelve months, as we increase our operating expenses to,
among other things:
- market our current products;
- improve our manufacturing capability;
- research and develop new products; and
- increase our general and administrative functions to support our growing
operations.
We may find that these efforts are more expensive than we currently
anticipate, which would further increase our accumulated deficit. With increased
expenses, we will need to generate additional revenues to achieve profitability.
Consequently, it is possible that we will not achieve profitability, and even if
we do achieve profitability, we may not sustain or increase profitability on a
quarterly or annual basis in the future.
IF WE DO NOT PREVAIL IN OUR CURRENT INTELLECTUAL PROPERTY LITIGATION WITH A
MAJOR COMPETITOR, WE MAY LOSE OUR INTELLECTUAL PROPERTY RIGHTS AND COULD BE
LIABLE FOR SIGNIFICANT DAMAGES.
In October 1999, we filed a patent infringement lawsuit against
Mallinckrodt, Inc. and Nellcor Puritan Bennett, Inc., a subsidiary of
Mallinckrodt, Inc. In our complaint, as amended, we allege that Nellcor has
infringed two of our pulse oximetry signal processing patents by making, using,
selling and offering to sell the N-395 pulse oximeter and MP 404 pulse oximeter
circuit board. We are seeking injunctive relief against Nellcor to prohibit the
sale of these products, as well as unspecified damages, costs and expenses,
reasonable attorneys' fees and treble damages for willful infringement. Nellcor
has denied our allegation of infringement and contends that our patents are
invalid or unenforceable. Nellcor's motion for summary judgment seeking
non-infringement findings on two claims in one of our patents was granted in
Nellcor's favor. Another motion for summary judgment of invalidity on the other
patent is pending. Our motion for a preliminary injunction against Nellcor was
denied by the Court. We have appealed the summary judgment ruling in Nellcor's
favor and the denial of our preliminary injunction to the Court of Appeals.
However, the summary judgment ruling results in a loss of some of our
intellectual property rights unless the ruling is overturned on appeal. If
Nellcor's pending motion is granted, we would lose protection for additional
intellectual property rights currently covered by the patents in question. In
the event that we do not ultimately prevail, we may be unable to sell our
products or to compete effectively.
After our filing, in November, 1999 Nellcor filed a patent infringement
lawsuit against us and one of our customers, in which Nellcor alleges that we
are and have been infringing three of Nellcor's patents and alleges that we are
and have been inducing and contributing to the infringement of these three and a
fourth Nellcor patent. Nellcor added three additional patents to the lawsuit in
October 2000, asserting infringement by our Radical product with SatShare.
Nellcor is seeking injunctive relief to prevent our alleged acts of
infringement, as well as
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unspecified damages, costs and expenses, reasonable attorneys' fees and treble
damages for willful infringement. In our answer we have denied Nellcor's
allegation of infringement and allege that Nellcor's patents are invalid or
unenforceable. If we do not prevail in this lawsuit, we could be liable to
Nellcor for significant monetary damages and be prohibited from selling our
products. As a result, an outcome adverse to us will cause our business to
suffer materially.
In addition, whether or not we ultimately prevail in either our lawsuit
against Nellcor or Nellcor's lawsuit against us, these litigations have been and
will continue to be a substantial drain on our financial resources and a
diversion of management's attention from the implementation of our business
strategy.
WE BELIEVE COMPETITORS MAY VIOLATE OUR PROPRIETARY RIGHTS AND WE MAY BE REQUIRED
TO BRING ADDITIONAL LITIGATION IN THE FUTURE TO ENFORCE OUR INTELLECTUAL
PROPERTY RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR
ATTENTION FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY.
We believe that the success of our business depends, in significant part,
on obtaining patent protection for our products and technology, defending our
patents once obtained and preserving our trade secrets. We rely on a combination
of contractual provisions, confidentiality procedures and patent, trademark and
trade secret laws to protect the proprietary aspects of our technology. These
legal measures afford only limited protection and competitors may gain access to
our intellectual property and proprietary information. In addition to the
Nellcor litigation, future litigation may be necessary to enforce our
intellectual property rights, to protect our trade secrets and to determine the
validity and scope of our proprietary rights. The patent positions of medical
device companies, including our patent position, are generally uncertain and
involve complex legal and factual questions. Based on a preliminary review of
recently released competitive technologies, we believe that other competitors
may be violating at least one of our patents. Our failure to pursue any claim
that may exist could result in the loss of our proprietary rights with respect
to any such violator and could result in competitive harm. However, we have not
determined whether any claims are warranted or whether we would proceed against
any such competitors. Any litigation could result in substantial cost, expense
and diversion of our attention from the growth of the business and may not be
adequate to protect our intellectual property rights.
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE
COSTLY AND TIME CONSUMING, AND RESULT IN OUR LOSS OF SIGNIFICANT RIGHTS.
The medical device industry has been characterized by extensive litigation
regarding patents and other intellectual property rights. In addition to the
Nellcor litigation, we may be exposed to future litigation by third parties
based on claims that our products and technology infringe the intellectual
property rights of others. This risk is magnified by the fact that the validity
and breadth of claims covered in medical technology patents involve complex
legal and factual questions for which important legal principles are unresolved.
While intellectual property disputes are often settled through licensing
arrangements, these arrangements may not be favorable to us. In addition,
intellectual property litigation or claims could force us to do one or more of
the following, all of which would be disruptive to our business:
- cease selling, incorporating or using any of our products that
incorporate the challenged intellectual property, which would adversely
affect our revenue;
- obtain a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms, if at all;
- redesign our products and technology, which could be costly and
time-consuming;
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- participate in interference proceedings to determine the priority of
inventions declared by the U.S. Patent and Trademark Office or similar
foreign agencies with respect to our existing patents or patent
applications or future patent applications; or
- payment of substantial damages and attorneys fees.
Any litigation or claims against us, whether or not valid, and however
resolved, could result in substantial costs, could place a significant strain on
our financial resources and could harm our reputation.
OUR OPERATING RESULTS ARE VOLATILE AND DIFFICULT TO PREDICT, WHICH MAY RESULT IN
OUR FAILURE TO MEET QUARTERLY AND ANNUAL FINANCIAL EXPECTATIONS.
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. Factors that might cause
fluctuations in our operating results include the following:
- varying demand for and market acceptance of our technology and products;
- changes in the timing of product orders and the volume of sales by our
OEM licensees;
- competitive pressures resulting in lower selling prices or significant
promotional costs;
- changes in our product or customer mix;
- unanticipated delays or problems in the introduction of new products,
including delays in obtaining FDA clearance;
- manufacturing problems;
- high levels of returns and repairs;
- inaccurate forecasting of revenues; and
- the announcement or introduction of new products or services by our
competitors.
To respond to these and other factors, we may need to make business
decisions that could result in failure to meet quarterly and annual financial
expectations. Most of our expenses, such as employee compensation and lease
payment obligations, are relatively fixed in the short term. Moreover, our
expense levels are based, in part, on our expectations regarding future revenue
levels. As a result, if net sales for a particular period were below our
expectations, we may not be able to proportionately reduce our operating
expenses for that period. Any revenue shortfall would have a disproportionately
negative effect on our operating results for the period.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for any one quarter as an indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts or investors.
OUR FAILURE TO OBTAIN NECESSARY FDA CLEARANCES OR APPROVALS ON A TIMELY BASIS,
IF AT ALL, COULD HURT OUR ABILITY TO COMMERCIALLY DISTRIBUTE OUR PRODUCTS.
Unless an exemption applies, each medical device that we wish to market in
the U.S. must be cleared or approved in advance by the U.S. Food and Drug
Administration, or FDA, through procedures called "510(k) clearances" or "PMA
approvals." We cannot assure you that the FDA will ever grant 510(k) clearance
on a timely basis, if at all, for any future product we propose to market with
Masimo SET MS boards and sensors. The FDA's 510(k) clearance process usually
takes from four to twelve months, but it can last longer. The process of
obtaining PMA approval is much more costly, lengthy and uncertain. It generally
takes from one
8
to three years or even longer. See "Business -- Government Regulation" for more
detailed information on 510(k) clearance and PMA approval.
If the FDA does not grant 510(k) clearance on a timely basis to future
products incorporating our technology, we will not be able to market and sell
products using this technology, which will limit our ability to generate
revenue.
THE FAILURE OF OUR OEM LICENSEES TO OBTAIN NECESSARY FDA CLEARANCES OR APPROVALS
COULD HURT OUR ABILITY TO COMMERCIALLY DISTRIBUTE OUR PRODUCTS.
Unless an exemption applies, each medical device that our OEM licensees
wish to market in the U.S. must be cleared or approved in advance by the U.S.
Food and Drug Administration, or FDA, through procedures called "510(k)
clearances" or "PMA approvals." We believe that our OEM licensees will be
required to obtain their own 510(k) premarket clearance for products
incorporating our technology. We cannot assure you that the 510(k) clearances we
have obtained will make it easier for our OEM licensees to obtain clearances of
products incorporating the technology or that the FDA will ever grant 510(k)
clearances on a timely basis, if at all, for any future product our OEM
licensees propose to market with the Masimo SET MS boards and sensors.
The FDA's 510(k) clearance process usually takes from four to twelve
months, but it can last longer. The process of obtaining PMA approval is much
more costly, lengthy and uncertain. It generally takes from one to three years
or even longer. If the FDA does not grant 510(k) clearance on a timely basis to
products incorporating our technology, our OEM licensees will not be able to
market and sell products using this technology, which will limit our ability to
generate revenue.
Our Radical product using SatShare has received 510(k) clearance as an
upgrade compatible with some models of third-party monitors. The FDA has
informed us that it will require us to seek new 510(k) clearances if we wish to
promote the Radical for use with additional models. We cannot assure you that
the FDA will grant such clearances in a timely fashion or at all.
To date, the FDA has regulated Masimo SET pulse oximeters and sensors,
Radical and other products incorporating this technology for pulse oximetry
products under the 510(k) process. As of November 1, 2000, two of our licensees'
products which incorporate our technology are in the 510(k) clearance process
and five of our licensees' products which incorporate our technology are in the
research and development phase and are not expected to begin the 510(k)
clearance process until sometime during the first half of 2001. The remainder of
our licensees' products, which incorporate our technology and require 510(k)
clearance and are being marketed in the U.S. by our licensees, have received
clearance prior to their launch date. If the FDA were to conclude that future
products using our technology do not meet the requirements to obtain 510(k)
clearance, then a PMA application would have to be filed. We cannot assure you
that the FDA will not impose the more burdensome PMA approval process upon this
technology in the future, either for specific applications or more generally for
all applications.
In addition, many foreign countries in which our products are marketed have
regulatory bodies and restrictions similar to those of the FDA. Our failure to
obtain necessary foreign government approvals or to successfully comply with
foreign regulations could prevent us from selling our products outside of the
U.S.
OFF-LABEL PROMOTION OF OUR PRODUCTS COULD RESULT IN SUBSTANTIAL PENALTIES.
510(k) clearance only permits us to promote our products for the uses
indicated on the labels cleared by the FDA. We may request additional label
indications for our current products,
9
and the FDA may deny those requests, require additional expensive clinical data
to support any additional indications or impose limitations on the intended use
of any cleared product as a condition of clearance. If the FDA determines that
we or our OEM licensees have promoted our products for off-label use, we could
be subject to fines, injunctions or other penalties.
WE HAVE MADE MODIFICATIONS TO MARKETED DEVICES THAT MAY LEAD THE FDA TO REQUIRE
NEW 510(K) CLEARANCES OR PMA APPROVALS AND/OR REQUIRE US TO CEASE MARKETING
AND/OR RECALL THE MODIFIED DEVICES UNTIL THESE CLEARANCES ARE OBTAINED.
Any modification to a 510(k) cleared device that could significantly affect
its safety or effectiveness, or that would constitute a major change in its
intended use, requires a new 510(k) clearance or, possibly, PMA approval. The
FDA requires every manufacturer to make this determination in the first
instance, but the FDA can review any decision. We have modified some of our
marketed devices, and we cannot guarantee that the FDA will agree with any of
our decisions not to seek 510(k) clearance. If the FDA requires us to seek
510(k) clearance for any modification, we also may be required to cease
marketing and/or recall the modified device until we obtain a new 510(k)
clearance or PMA approval.
IF WE DO NOT SUCCESSFULLY DEVELOP AND COMMERCIALIZE ENHANCED OR NEW PRODUCTS OR
KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES DEVELOPED BY OTHERS, WE
COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS AND OUR ABILITY TO REMAIN
COMPETITIVE AND ACHIEVE FUTURE GROWTH WILL BE IMPAIRED.
The medical industry in which we market our products is characterized by
rapid product development and technological advances. Thus, our current or
planned products are at risk of obsolescence from new monitoring products based
on new or improved technologies, and alternative techniques for monitoring
arterial blood oxygen saturation levels. Our long-term success depends upon the
development and successful commercialization of new products, new or improved
technologies and additional applications for our Masimo SET. The technology and
product research and development process is time-consuming and costly and may
not result in products or applications we can successfully commercialize. In
particular, we may not be able to develop our technology for applications other
than arterial blood oxygen saturation monitoring.
If we do not successfully adapt our technology for new products and
applications both within and outside the field of arterial oxygen monitoring, we
could lose revenue opportunities and customers. In addition, we may not be able
to improve our products or develop new products or technologies quickly enough
to maintain a competitive position in our markets and continue to grow our
business.
IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY,
OUR SALES WILL NOT GROW AND OUR PROFITABILITY WILL SUFFER.
Our current sales and marketing efforts may not be sufficient to achieve
the level of market awareness and sales of our products by new and existing OEM
licensees which we need to expand our business. We have limited sales and
marketing experience both in the U.S. and internationally and may not be
successful in developing and implementing our strategy. We need to:
- continue to add domestic and international OEM licensees, key account
sales managers and clinical specialists;
- provide or assure that distributors and OEM licensees provide the
technical and educational support customers need to use monitoring
systems using our Masimo SET successfully;
10
- promote monitoring systems using our Masimo SET so that sales of those
systems increase; and
- be prepared to provide service as necessary to geographically dispersed
users of monitoring systems using our Masimo SET.
Our failure to accomplish any of the items set forth above will adversely
affect our sales and marketing strategy and accordingly, will result in our
failure to meet expected sales goals.
THE LOSS OF ANY LARGE CUSTOMER OR ANY CANCELLATION OR DELAY OF A SIGNIFICANT
PURCHASE BY A LARGE CUSTOMER COULD SIGNIFICANTLY REDUCE OUR NET SALES AND HARM
OUR OPERATING RESULTS.
For the year ended December 31, 1999, sales to Zoll Medical Corporation,
Datascope Corporation and Atom Medical Corporation accounted for approximately
20%, 18% and 13% of our total revenue, respectively. The loss of any of these
large customers, or a significant reduction in sales to these customers, would
significantly reduce our net sales. This would in turn affect our operating
results because if net sales for a particular period were below our
expectations, we may not be able to proportionately reduce our operating
expenses in that period. Although these three OEMs are contractually committed
to make Masimo SET their primary pulse oximetry technology, subject to some
conditions, if any were to breach its agreement, were to not buy components or
were to delay purchases, our net sales would decline substantially, and we may
not be able to recover the lost revenue. We anticipate that our operating
results in any given period will continue to depend to a significant extent upon
revenues from a small number of large customers. We cannot assure you that we
will retain our current customers or that we will be able to attract additional
customers.
OUR SUPPLIERS AND MANUFACTURERS MAY NOT SUPPLY US WITH A SUFFICIENT AMOUNT OF
COMPONENTS OR COMPONENTS OF ADEQUATE QUALITY, AND ACCORDINGLY WE MAY NOT BE ABLE
TO PRODUCE OUR PRODUCT.
We depend on sole or limited source suppliers for key components of our
products, and if we are unable to obtain these components on a timely basis, we
will not be able to deliver our products to customers. Also, we cannot guarantee
that any of the parts or components that we purchase, if available at all, will
be of adequate quality or that the prices we pay for these parts or components
will not increase. For example, there is currently an industry-wide shortage of
several electronic components, some of which we use in our products. We may
experience delays in production of our products if we fail to identify alternate
vendors, or any parts supply is interrupted or reduced or there is a significant
increase in production costs, each of which could materially adversely affect
our business and operations.
POTENTIAL DELAYS IN VERIFYING THAT OUR THIRD-PARTY MANUFACTURERS COMPLY WITH
QUALITY STANDARDS, REGULATIONS AND GUIDELINES FOR MANUFACTURER FACILITIES AND
PROCEDURES MAY PREVENT US FROM MEETING THE DEMAND FOR OUR PRODUCTS, WHICH COULD
LEAD TO CUSTOMER DISSATISFACTION AND HARM OUR REPUTATION.
If we are required to change the third-party manufacturer of a key
component of any of our products, we will be required to verify that the new
manufacturer maintains facilities and procedures that comply with quality
standards and with all applicable regulations and guidelines. The delays
associated with the verification of a new manufacturer could delay our ability
to manufacture Masimo SET products in a timely manner or within budget. This
delay could result in ability to meet the demand for our products, which could
lead to customer dissatisfaction and damage our reputation.
11
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NOT SUCCEED IN EXPANDING OUR
MANUFACTURING CAPABILITY SUFFICIENTLY OR SUCCESSFULLY MANUFACTURING OUR
PRODUCTS.
The manufacturing process for our products is complex and requires
precision in the manufacturing and testing of finished products. Manufacturers
often encounter difficulties in initiating and expanding production, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel.
We have limited experience in manufacturing our Masimo SET sensors, Radical
and our other existing products. If we do not increase manufacturing capacity
and adapt current facilities or develop the capability to manufacture new
products, we may not be able to successfully manufacture any of our existing or
new products in quantities required by our OEM licensees or end-users, in an
efficient, cost-effective manner, if at all.
IF WE ARE UNABLE TO MAINTAIN OR OBTAIN NEW REGULATORY APPROVALS TO MANUFACTURE
IN OUR FACILITY, WE MAY NOT BE ABLE TO MANUFACTURE PRODUCTS IN A COST EFFECTIVE
MANNER, IF AT ALL.
The Company's manufacturing facilities, and those of its contract
manufacturers and OEM licensees, may also be subject to periodic inspections for
compliance with GMP and other regulatory requirements by state and federal
agencies, including the FDA and the California State Department of Health
Services, Food and Drug Branch. If we are unable to maintain current or obtain
new regulatory approvals to manufacture in our facility, we may not be able to
successfully manufacture any of our existing or new products in quantities
required by our OEM licensees or end-users, in a cost-effective manner, if at
all.
WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS OR
RETURNS WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN
OPERATING RESULTS.
Depending on factors such as the timing of our introduction of new products
which utilize our Masimo SET, including our Radical, as well as warranty claims
and product returns, we may need to reserve amounts in excess of those currently
reserved for product obsolescence, warranty claims and product returns. These
additional reserves may not be adequate to cover all costs associated with these
items. If these reserves are inadequate, we would be required to incur
unanticipated expenses which would result in unexpected fluctuations in
quarterly operating results.
BECAUSE WE FACE SIGNIFICANT COMPETITION FROM COMPANIES WITH GREATER RESOURCES
THAN WE HAVE, WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
We face intense competition in licensing our products to OEMs. In addition,
the market for monitoring systems for arterial blood oxygen saturation levels to
health care providers is very competitive. We face substantial competition from
larger medical device companies, including some of our OEM licensees, that have
greater financial, technical, marketing and other resources than we do. Some of
these competitors may strengthen their competitive position by pricing their
products more aggressively. We may not be able to compete effectively with these
companies. For example, we face substantial competition from companies
developing products that compete with our proprietary Masimo SET for use with
third party monitoring systems. We also expect to face competition from
companies currently marketing conventional monitors. One company in particular,
Nellcor, currently holds a substantial share of the conventional arterial blood
oxygen saturation monitoring market. In addition, one or more of our competitors
may develop products that are substantially equivalent to our FDA approved
products, or those of our OEM licensees, in which case they may be able to use
our products, or those of our OEM licensees, as predicate devices to more
quickly obtain FDA clearance of their competing products. Competition could
result in price reductions, fewer orders, reduced gross margins and loss of
market share.
12
IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE
ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY.
We are highly reliant upon our President and Chief Executive Officer, Joe
E. Kiani, and our Chief Technical Officer, Mohamed K. Diab. We are also highly
dependent on the ability, experience and performance of other members of our
senior management and other key employees who have extensive experience in the
medical device industry. We carry key person life insurance on only Messrs.
Kiani and Diab. Because of their ability and experience, if we lose one or more
members of our senior management or other key employees, our ability to
successfully implement our business strategy could be seriously harmed.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND
OUR BUSINESS.
Our technology and products are based on complex technology. Accordingly,
we require skilled personnel to develop, manufacture, sell and support our
products. Our future success will depend largely on our ability to continue to
hire, train, retain and motivate additional skilled personnel, particularly
software engineers, sales representatives and specialists who are responsible
for coordinating with our OEM licensees. We may experience difficulty in
recruiting and retaining skilled personnel because the pool of experienced
persons is small, and we compete for personnel with other companies, many of
which have greater resources than we do. Consequently, if we are not able to
attract and retain skilled personnel, we will not be able to expand our
business.
IF PRODUCT LIABILITY LAWSUITS ARE SUCCESSFULLY BROUGHT AGAINST US, WE COULD FACE
SUBSTANTIAL LIABILITY. PRODUCT LIABILITY CLAIMS COULD DIVERT MANAGEMENT
ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES AS WELL AS OUR ABILITY TO
OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE
AMOUNTS.
The manufacture and sale of products using our Masimo SET expose us to
product liability claims and product recalls, including those which may arise
from misuse or malfunction of, or design flaws in, our products or use of our
products with incompatible components or systems. Any losses that we may suffer
from future liability claims, and the effect that any product liability
litigation may have upon the reputation and marketability of our technology and
products, together with the corresponding diversion of the attention of our key
employees, may adversely affect our business, financial condition and results of
operations. Any product liability claims could require us to spend significant
time and money in litigation and may subject us to significant damages. We
currently have product liability insurance. However, our current insurance
coverage might not be sufficient to cover damages or claims. Furthermore, we may
not be able to obtain or maintain insurance in the future at satisfactory rates
or in adequate amounts to protect us against any product liability claims.
RISKS RELATED TO THIS OFFERING
OUR STOCK PRICE MAY BE VOLATILE, AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
Prior to this offering, there has been no public market for our common
stock. After this offering, an active trading market in our common stock might
not develop or continue. If you purchase shares of our common stock in this
offering, you will pay a price that was not established in a competitive market.
Rather, you will pay a price that we negotiated with the representatives of the
underwriters based upon an assessment of the valuation of our stock. The public
market may not agree with or accept this valuation, in which case you may not be
able to sell your shares at or above the initial offering price. The market
price of our common stock may fluctuate significantly in response to factors
which are beyond our control.
13
In addition, the stock market in general has recently experienced extreme
price and volume fluctuations. In particular, the market prices of securities of
technology and medical device companies have been extremely volatile, and have
experienced fluctuations that often have been unrelated or disproportionate to
the operating performance of these companies. These broad market fluctuations
could result in extreme fluctuations in the price of our common stock, which
could cause a decline in the value of your shares.
WE MAY BE FORCED TO RAISE ADDITIONAL CAPITAL SOONER THAN CURRENTLY ANTICIPATED
AND MAY BE UNABLE TO DO SO ON ACCEPTABLE TERMS, IF AT ALL.
We expect that the net proceeds from this offering and our existing capital
resources will be sufficient to fund our operations at least through the next
twelve months. However, our future capital requirements will depend upon a
number of factors, including:
- our ability to sell our products through our OEMs, which could be
affected by the introduction of competitive products or price pressure;
- market acceptance of Masimo SET;
- obtaining the regulatory approvals required to ship any future products;
- the extent to which we are required to recall products; and
- expenses incurred in connection with litigation.
We may require additional funds, and we cannot be sure that additional
funding will be available when needed or on terms acceptable to us. If we cannot
raise funds on acceptable terms, if and when needed, we may not be able to
develop or enhance our products, take advantage of future opportunities, grow
our business or respond to competitive pressures or unanticipated requirements.
IF OUR STOCKHOLDERS SELL SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK AFTER THE
OFFERING, THE MARKET PRICE FOR OUR COMMON STOCK MAY DECLINE.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their stock for the first time.
The number of shares of common stock available for sale in the public market is
limited by restrictions under federal securities law and under lock-up
agreements with our underwriters. These lock-up agreements restrict some of our
stockholders from disposing of all of their shares for 150 days after the date
of this prospectus, two-thirds of their shares for 180 days, and one-third of
their shares for 210 days after the date of this prospectus without the prior
written consent of Deutsche Bank Securities Inc. However, Deutsche Bank
Securities Inc. may release all or any portion of these shares from the
restrictions in the lock-up agreements. Sales of a substantial number of shares
of our common stock in the public market after this offering could depress the
market price of our common stock and could impair our ability to raise capital
through the sale of additional equity securities.
BECAUSE OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS OWN A
SIGNIFICANT PERCENTAGE OF OUR STOCK, THEY MAY CONTROL ALL MAJOR CORPORATE
DECISIONS, AND OTHER STOCKHOLDERS MAY NOT BE ABLE TO INFLUENCE THESE CORPORATE
DECISIONS.
After this offering, our directors, executive officers and principal
stockholders, together with their affiliates, will beneficially own, in the
aggregate, approximately 17.1% of our outstanding common stock. As a result,
these stockholders, if acting together, would have the ability to exercise
substantial control over all corporate actions requiring stockholder approval
irrespective of how our other stockholders may vote, including:
- the election of directors;
- the amendment of charter documents;
14
- the approval of mergers and other significant corporate transactions,
including a sale of substantially all of our assets; or
- the defeat of any non-negotiated takeover attempt that might otherwise
benefit the public stockholders.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD
PREVENT OR DELAY TRANSACTIONS BENEFICIAL TO STOCKHOLDERS.
Provisions of our certificate of incorporation and by-laws may discourage,
delay or prevent a merger or acquisition that stockholders may consider
favorable, including transactions in which you might otherwise receive a premium
for your shares. These provisions include:
- our board of directors may issue up to five million shares of preferred
stock and determine the applicable powers, preferences and rights,
without any vote or further action by shareholders;
- shareholders cannot call special meetings;
- nomination of a director or the taking of specified actions requires
advance notice; and
- we have a classified board of directors of which approximately one-third
of the directors will be elected each year.
In addition, we are subject to Section 203 of the Delaware General
Corporation Law, an anti-takeover law, which limits us from engaging in any
merger, asset or stock sale or other transaction resulting in a financial
benefit to a shareholder holding 15% or more of our voting shares.
SOME OF OUR CURRENT STOCKHOLDERS AND WARRANTHOLDERS WILL RECEIVE ADDITIONAL
SHARES OF OUR COMMON STOCK IF THE INITIAL PUBLIC OFFERING PRICE IS BETWEEN $9.00
AND $11.00 PER SHARE, WHICH WILL RESULT IN IMMEDIATE AND SUBSTANTIAL DILUTION OF
THE INVESTMENT MADE BY PURCHASERS IN THIS OFFERING.
The holders of our Series F Preferred Stock and one of our warrantholders
have anti-dilution protection which will require us to adjust the price at which
their securities will convert to our common stock to equal the consideration per
share received by us if we issue common stock in this offering at a price
between $9.00 and $11.00 per share. The current price at which their securities
will convert to our common stock equals $11.00 per share. Accordingly, if the
initial public offering price is between $9.00 and $11.00 per share, the holders
of our Series F Preferred Stock will be entitled to receive up to a maximum of
676,134 additional shares of our common stock upon the closing of this offering
and our warrantholders will be entitled to receive up to a maximum of 20,202
additional shares of our common stock upon the closing of this offering. This
would result in immediate and substantial dilution of the investment by
purchasers in this offering.
PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
OF THEIR INVESTMENT BECAUSE THE INITIAL PUBLIC OFFERING PRICE OF A SHARE OF
STOCK WILL EXCEED ITS BOOK VALUE.
The initial public offering price is substantially higher than the book
value per share of our common stock. Accordingly, purchasers of common stock in
this offering will suffer immediate and substantial dilution of their
investment. Purchasers will incur additional dilution upon the exercise of
outstanding stock options and warrants.
15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND INDUSTRY DATA
We make many statements in this prospectus under the captions Summary, Risk
Factors, Management's Discussion and Analysis of Financial Condition and Results
of Operations and Business and elsewhere that are forward-looking and are not
based on historical facts. These statements relate to our future plans,
objectives, expectations and intentions. We have attempted to identify
forward-looking statements by terminology including "anticipates," "believes,"
"can," "continue," "could," "estimates," "expects," "intends," "may," "plans,"
"potential," "predicts," "should" or "will" or the negative of these terms or
other comparable terminology. These statements are only predictions and involve
known and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors," that may cause our, or our industry's, actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels or activity, performance or
achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are not under any duty to update any
of the forward-looking statements after the date of this prospectus to conform
these statements to actual results, unless required by law.
Information regarding market and industry statistics contained in the
Summary and Business sections is included based on information available to us
that we believe is accurate. It is generally based on academic and other
publications that are not produced for purposes of securities offerings or
economic analysis. We have not reviewed or included data from all sources.
16
USE OF PROCEEDS
Our net proceeds from the sale of 5,000,000 shares of common stock we are
offering are estimated to be $54,600,000, after deducting underwriting discounts
and commissions and our estimated offering expenses. This assumes an initial
public offering price of $12.00 per share, the midpoint of the range set forth
on the cover page of this prospectus. If the underwriters' over-allotment option
is exercised in full, the net proceeds are estimated to be approximately
$62,970,000 on this same basis.
We intend to use the proceeds of this offering for general corporate
purposes, including working capital, capital equipment purchases, product
development, increasing our sales and marketing capabilities and possible
acquisitions or investments. However, we currently have no specific
understandings, commitments or agreements relating to an acquisition or
investment.
We presently intend to use approximately $15 to $17 million of the proceeds
of this offering on sales and marketing activities, approximately $7 to $10
million for capital expenditures consisting primarily of manufacturing
equipment, and approximately $6 to $8 million for product development. The
amount and timing of our actual expenditures will depend on a number of factors,
including the amount, if any, of cash generated by our operations. Accordingly,
our management will have broad discretion in the application of the net
proceeds. You will not have the opportunity to evaluate the economic, financial
or other information on which we base our decisions on how to use the proceeds.
Pending these uses, we plan to invest the net proceeds in short-term,
investment-grade instruments, certificates of deposit or direct or guaranteed
obligations of the U.S.
DIVIDEND POLICY
We have not declared or paid any cash dividends or distributions on our
common stock since our inception. We anticipate that, for the foreseeable
future, all earnings will be retained for use in our business, and no cash
dividends will be paid on our common stock. Payment of future cash dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our earnings, operating and financial
condition and projected capital requirements. We have a loan agreement with
Comerica Bank which prohibits the declaration or payment of cash dividends.
17
CAPITALIZATION
The following table sets forth the following information:
- Our actual capitalization as of September 30, 2000;
- Our pro forma capitalization as of that date after giving effect to the
conversion of all outstanding shares of preferred stock as of September
30, 2000, into 10,536,720 shares of common stock upon completion of this
offering;
- Our pro forma as adjusted capitalization as of that date to reflect the
receipt of net proceeds from our sale of 5,000,000 shares of common stock
at an assumed initial public offering price of $12.00 per share in this
offering, less the underwriting discounts and commissions and estimated
offering expenses.
[Enlarge/Download Table]
SEPTEMBER 30, 2000
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
Long-term debt, including current portion............ $ 1,845 $ 1,845 $ 1,845
-------- -------- --------
Convertible redeemable preferred stock, 10,536,720
shares issued and outstanding (actual) and no
shares issued or outstanding (pro forma and pro
forma as adjusted)................................. 87,809 -- --
-------- -------- --------
Stockholders' equity (deficit):
Preferred stock; $0.001 par value, 11,000,000
shares authorized (actual and pro forma);
5,000,000 shares authorized (pro forma as
adjusted).......................................
Common stock; $0.001 par value, 22,000,000 shares
authorized (actual and pro forma); 3,041,273
shares issued and outstanding (actual);
13,577,993 shares issued and outstanding (pro
forma); 60,000,000 shares authorized (pro forma
as adjusted); 18,577,993 issued and outstanding
(pro forma as adjusted)......................... 3 14 19
Common stock subscribed............................ 106 106 106
Additional paid in capital......................... 87,798 142,393
Deferred compensation.............................. (730) (730) (730)
Accumulated deficit................................ (63,558) (63,558) (63,558)
-------- -------- --------
Total stockholders' equity (deficit)....... (64,179) 23,630 78,230
-------- -------- --------
Total capitalization....................... $ 25,475 $ 25,475 $ 80,075
======== ======== ========
The common stock information excludes:
- 2,298,260 shares of common stock issuable upon exercise of options
outstanding as of September 30, 2000 at a weighted-average exercise price
of $4.89 per share;
- 565,140 shares of common stock available for issuance under our stock
option plans as of September 30, 2000;
- 10,000 shares of common stock issuable upon exercise of a warrant
outstanding as of September 30, 2000 at an exercise price of $3.00 per
share; and
- 90,909 shares of common stock issuable upon exercise of a warrant
outstanding as of September 30, 2000 at an exercise price of $11.00 per
share.
18
DILUTION
Our pro forma net tangible book value as of September 30, 2000, after
giving effect to the conversion of all outstanding shares of convertible
preferred stock into common stock upon the closing of this offering, was
approximately $22.5 million, or $1.66 per share. Pro forma net tangible book
value per share represents our total assets less total liabilities and
intangible assets, divided by the 13,577,993 shares of common stock outstanding
after giving effect to the conversion of all outstanding shares of convertible
preferred stock into common stock. Net tangible book value dilution per share to
new investors is the difference between the amount per share paid by purchasers
of common stock in this offering and the pro forma net tangible book value per
share immediately following the offering. After giving effect to the issuance
and sale of the 5,000,000 shares of common stock in this offering, at an assumed
offering price of $12.00 per share and after deducting underwriting discounts
and commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of September 30, 2000, would have been $77.1 million, or
$4.15 per share. This represents an immediate increase in pro forma net tangible
book value to existing stockholders of $2.49 per share. The initial public
offering price per share will significantly exceed the net tangible book value
per share. Accordingly, new investors who purchase common stock in this offering
will suffer an immediate dilution of their investment of $7.85 per share. The
following table illustrates this per share dilution:
[Download Table]
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share as of
September 30, 2000..................................... $ 1.66
Increase per share attributable to new investors.......... 2.49
------
Pro forma net tangible book value per share after the
offering.................................................. 4.15
------
Dilution per share to new investors......................... $ 7.85
======
The following table summarizes, on a pro forma basis as of September 30,
2000, and giving effect to the conversion of all outstanding shares of
convertible preferred stock into common stock upon the closing of this offering,
the difference between the number of shares of stock purchased from us, the
total consideration paid to us and the average price per share paid by existing
stockholders and by new investors. The calculation below is based on an assumed
initial public offering price of $12.00 per share, before deducting underwriting
discounts and commissions and estimated offering expenses payable by us.
[Enlarge/Download Table]
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
Existing stockholders....... 13,577,993 73% $ 74,815,700 55% $ 5.51
New investors............... 5,000,000 27 60,000,000 45 12.00
---------- --- ------------ ---
Total.................. 18,577,993 100% $134,815,700 100%
========== === ============ ===
Assuming the exercise in full of all options and warrants outstanding and
exercisable as of September 30, 2000, the number of shares purchased by existing
stockholders would be 14,386,770, or 74% of the total of 19,386,770 shares
purchased, and the consideration paid for those shares would be $78,422,339, or
57% of the total gross consideration of $138,422,339. After this offering and
assuming the exercise in full of all options and warrants outstanding and
exercisable as of September 30, 2000, the average price per share of existing
stockholders would be reduced to $5.45 per share.
19
After this offering and assuming the exercise in full of all options and
warrants outstanding and exercisable as of September 30, 2000, our pro forma net
tangible book value per share as of September 30, 2000, would be $4.16,
representing an immediate increase in net tangible book value of $2.35 per share
to existing stockholders and an immediate dilution in net tangible book value of
$7.84 per share to new investors.
If the underwriters exercise their over-allotment in full, the following
will occur:
- the number of shares of common stock held by existing stockholders will
decrease to approximately 71% of the total number of shares of our common
stock outstanding; and
- the number of shares held by new investors will increase to 5,750,000
shares, or approximately 29% of the total number of our common stock
outstanding after this offering.
20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The statement of operations
data for the year ended March 31, 1998, the nine-month period ended December 31,
1998, the year ended December 31, 1999, and the balance sheet data as of
December 31, 1998 and 1999, are derived from our financial statements included
elsewhere in this prospectus that have been audited by PricewaterhouseCoopers
LLP, independent accountants. The statement of operations data for the fiscal
years ended March 31, 1996, and 1997 and the balance sheet data at March 31,
1996, 1997 and 1998, are derived from our financial statements that are not
included in the prospectus. The statement of operations data for the nine months
ended September 30, 1999 and 2000, and the balance sheet data as of September
30, 2000, have been derived from our unaudited financial statements included
elsewhere in this prospectus. These unaudited interim financial statements
include all adjustments, consisting of normal recurring adjustments, necessary
for the fair presentation of financial position, results of operations and cash
flows. Historical results do not necessarily show future results. We have
calculated pro forma basic net loss per share assuming the conversion of the
outstanding preferred stock into common stock as of January 1, 1999, or date of
issuance, if later. We changed our fiscal year end from March 31 to December 31
during 1998. Accordingly, 1999 was the first full calendar year of audited
financial statements.
[Enlarge/Download Table]
NINE MONTHS
NINE MONTHS ENDED
YEAR ENDED MARCH 31, ENDED YEAR ENDED SEPTEMBER 30,
--------------------------- DECEMBER 31, DECEMBER 31, -------------------
1996 1997 1998 1998 1999 1999 2000
------- ------- ------- ------------ ------------ -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue............................ $ -- $ 367 $ 915 $ 1,697 $ 6,697 $ 4,927 $ 9,580
Cost of goods sold................. -- 633 2,155 2,985 6,417 4,689 7,971
------- ------- ------- -------- -------- -------- --------
Gross margin..................... -- (266) (1,240) (1,288) 280 238 1,609
------- ------- ------- -------- -------- -------- --------
Operating expenses:
Research and development......... 2,190 2,076 3,089 3,132 5,965 4,138 3,353
Selling, general and
administrative................. 1,301 1,750 2,599 3,930 7,767 5,034 9,528
------- ------- ------- -------- -------- -------- --------
Total operating expenses....... 3,491 3,826 5,688 7,062 13,732 9,172 12,881
------- ------- ------- -------- -------- -------- --------
Non-refundable advance from
terminated agreement............. -- 1,000 -- -- -- -- --
------- ------- ------- -------- -------- -------- --------
Loss from operations............. (3,491) (3,092) (6,928) (8,350) (13,452) (8,934) (11,272)
Interest and other, net............ 263 327 398 433 281 114 412
------- ------- ------- -------- -------- -------- --------
Net loss......................... $(3,228) $(2,765) $(6,530) $ (7,917) $(13,171) $ (8,820) $(10,860)
======= ======= ======= ======== ======== ======== ========
Net loss applicable to common
stockholders................... $(3,950) $(4,329) $(9,041) $(10,898) $(18,022) $(12,118) $(15,746)
======= ======= ======= ======== ======== ======== ========
Net loss per common share:
Basic and diluted.............. $ (1.45) $ (1.54) $ (3.16) $ (3.77) $ (6.12) $ (4.13) $ (5.21)
======= ======= ======= ======== ======== ======== ========
Pro forma basic and diluted.... $ (1.21) $ (.86)
======== ========
Weighted-average shares
outstanding used in computing
net loss per common share:
Basic and diluted.............. 2,726 2,807 2,862 2,889 2,943 2,931 3,021
Pro forma basic and diluted.... 10,915 12,696
[Enlarge/Download Table]
MARCH 31, DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------- -------------
1996 1997 1998 1998 1999 2000
------- -------- -------- -------- -------- -------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 2,719 $ 8,085 $ 17,488 $ 11,596 $ 14,511 $ 14,086
Working capital..................... 2,515 7,823 17,789 12,341 16,614 19,422
Total assets........................ 3,625 9,822 22,594 17,909 24,180 29,832
Long-term debt, including current
portion........................... 7 -- 1,633 1,458 2,439 1,845
Redeemable preferred stock.......... 10,125 21,155 40,707 46,728 68,809 87,809
Stockholders' equity (deficit)...... (7,894) (12,068) (21,039) (32,053) (49,727) (64,179)
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Financial Data" and
our financial statements and related notes appearing elsewhere in this
prospectus. This discussion and analysis contains forward-looking statements
that involve risks, uncertainties and assumptions. The actual results may differ
materially from those anticipated in these forward-looking statements as a
result of many factors, including but not limited to those set forth under "Risk
Factors" and elsewhere in this prospectus.
OVERVIEW
We currently derive our revenues primarily through the sale, to our OEM
licensees, of printed circuit boards and consumables, such as sensors and
cables, used with those boards. The printed circuit board contains the Masimo
SET signal processing software and is integrated into the licensee's monitor.
The Masimo SET board permits the use of Masimo consumables only. Pulse oximeters
typically have useful lives of at least five years, so every monitor
incorporating Masimo SET technology which is sold adds to the base of monitors
that use only Masimo consumables. This creates an increasing and recurring
source of revenue for Masimo. Based on this model, we expect the portion of our
total sales attributable to consumables to increase each year as additional
monitors with Masimo SET boards are placed.
The first shipment of the Radical pulse oximeter to end-users occurred in
August 2000. Radical is a standalone pulse oximeter with a detachable battery
operated module that functions as a handheld pulse oximeter. Radical has a
unique feature that allows it to upgrade existing conventional pulse oximeters
to Masimo SET performance. In order to promote conversions of the current
installed base of monitors and commitments to purchase sensors, we may sell
Radical through some of our licensees at prices that are lower than our list
price and may, in limited instances, sell Radical at prices that are lower than
our costs. Over the next 12 to 24 months, we expect sales of Radical will have a
negative impact on margins, which we expect to be offset by the growth in sales
of higher margin consumables.
Since our inception in 1989, we have been unprofitable and, as of September
30, 2000, had an accumulated deficit of $63.6 million. Results of operations may
fluctuate significantly from quarter to quarter and will depend upon numerous
factors, including the extent to which our technology and products gain market
acceptance, the timing and volume of sales by our OEM licensees, introduction of
new monitoring technology and products by our competitors, and the pricing of
competitors' products. In addition, our margins will vary based upon the manner
of distribution and the region in which our products are purchased during any
particular quarter. Accordingly, our results of operations may fluctuate based
on the mix of products sold and the customers that purchase our products from
quarter to quarter. Further, the timing of FDA and other regulatory approvals
which must be obtained by us or our licensees will affect our ability to
generate revenues from our technology.
Since October 1999 we have been in litigation with respect to patent
infringement claims with one of our competitors, Mallinckrodt/Nellcor. In the
event of an adverse outcome to us, Nellcor may obtain an injunction against some
or all of our products, which would restrict us from selling our current
products. If this were to occur and we were unable to design around the patents
at issue, our revenue would substantially and materially decrease. In connection
with this litigation, we have incurred and expect to continue to incur
substantial legal and other litigation related expenses. In addition, this
litigation has diverted, and is expected to continue to divert, the attention of
management from our on-going business. See "Business -- Legal Proceedings" for
more information regarding this litigation.
There is currently a shortage in our industry of some electronic components
which is causing longer lead-times for their delivery. While our revenue has not
been affected to date,
22
the cost that we incur on our MS boards have increased by approximately 20% as a
result of the shortage. The shortage has not affected our ability to accept
orders, but we may be unable to meet our sales demand if we are unable to
manufacture our MS boards or Radical due to the shortage. We expect the shortage
to continue for at least the next six months to one year.
During the remainder of 2000 and in 2001, we plan to increase our level of
operations substantially. In particular, we plan to expand our commercial
manufacturing capability by purchasing additional manufacturing equipment to
accommodate significantly higher production volumes at our existing facility and
to obtain additional manufacturing space, comparable to our existing facility,
at other locations. We also plan to expand our marketing and sales activities to
establish sales channels worldwide.
We changed our fiscal year end from March 31 to December 31 during 1998.
Accordingly, a nine-month period from April 1, 1998 to December 31, 1998 is
shown. Please be aware that comparisons in this section are being made between
audited 12-month and nine-month periods and that many of the differences were
due solely to the number of months in the periods being compared.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statements of
operations data expressed as a percentage of revenues. This information has been
derived from our statements of operations included elsewhere in this prospectus.
Results of operations for any prior periods are not necessarily indicative of
future results of operations.
[Enlarge/Download Table]
PERCENTAGE OF REVENUES
---------------------------------------------------------------
NINE MONTHS
TWELVE MONTHS NINE MONTHS TWELVE MONTHS ENDED
ENDED ENDED ENDED SEPTEMBER 30,
MARCH 31, DECEMBER 31, DECEMBER 31, --------------
1998 1998 1999 1999 2000
-------------- ------------ ------------- ---- ----
Revenue..................... 100% 100% 100% 100% 100%
Cost of goods sold.......... 235 176 96 95 83
---- ---- ---- ---- ----
Gross margin........... (135) (76) 4 5 17
---- ---- ---- ---- ----
Operating expenses:
Research and development.. 338 185 89 84 35
Selling, general and
administrative......... 284 231 116 102 99
---- ---- ---- ---- ----
Total operating
expenses............. 622 416 205 186 134
---- ---- ---- ---- ----
Loss from operations... (757) (492) (201) (181) (117)
Interest and other, net..... 43 25 4 2 4
---- ---- ---- ---- ----
Net loss............... (714)% (467)% (197)% (179)% (113)%
==== ==== ==== ==== ====
Nine Months Ended September 30, 2000, Compared to Nine Months Ended September
30, 1999
Revenue. Total revenue increased 94% to approximately $9.6 million for the
nine months ended September 30, 2000, from approximately $4.9 million for the
nine months ended September 30, 1999. The increase in revenue was primarily due
to the increase in the total number of products available in the market that
incorporate Masimo SET to 30 at September 30, 2000, from 24 at September 30,
1999, and increased levels of sales by many of our existing licensees. Of the
total revenue recognized during the nine months ended September 30, 2000 and
1999, approximately $5.5 million and $3.0 million, respectively, was from
consumables sales, approximately $3.1 million and $1.9 million, respectively,
was from MS board sales, approximately $737,000 and $0, respectively, were from
Radical sales and
23
approximately $125,000 and $0, respectively, was from other monitor sales. The
growth rate of our consumables exceeds that of our MS boards because every MS
board sale leads to multiple and recurring consumable sales over an estimated
five to ten year period. The remaining revenue of approximately $73,000 and
$29,000 for the nine months ended September 30, 2000 and 1999, respectively, was
attributable to amortization of licensing fees received from our OEM licensees.
Over the next 12 to 24 months, we expect that sales of Radical will account for
a significant portion of our revenue, but after that, we expect that sales of
consumables will increase as a percentage of revenue as our installed base of
monitors continues to grow.
Cost of Goods Sold. Cost of goods sold increased 70% to approximately $8.0
million for the nine months ended September 30, 2000, from approximately $4.7
million for the nine months ended September 30, 1999. The net increase was
primarily due to increased product sales during the nine months ended September
30, 2000, compared with the nine months ended September 30, 1999, offset by
lower direct product costs resulting from volume pricing discounts on material
and decreased per unit labor time due to higher volumes and automation. In
addition, as manufacturing volume increased, the overhead costs as a percentage
of total cost of goods sold decreased to 35% for the nine months ended September
30, 2000, compared to 38% for the nine months ended September 30, 1999. Over the
next 12 to 24 months, we expect sales of Radical will have a negative impact on
margins, which we expect to be offset by the growth in sales of higher margin
consumables.
Research and Development. Research and development expenses decreased 19%
to approximately $3.4 million for the nine months ended September 30, 2000, from
approximately $4.1 million for the nine months ended September 30, 1999. The
decrease was primarily due to the completion of the development of the Radical
product in February 2000, resulting in lower development costs such as
consulting, prototypes, and supplies in the nine months ended September 30,
2000, compared with the nine months ended September 30, 1999. We expect research
and development expenses to increase in absolute dollars as we continue to
invest in product improvements and technology development.
Selling, General and Administrative. Selling, general and administrative
expenses increased 89% to approximately $9.5 million for the nine months ended
September 30, 2000, from approximately $5.0 million for the nine months ended
September 30, 1999. The increase was primarily attributable to the increase in
sales and marketing expenses to approximately $6.2 million for the nine months
ended September 30, 2000, from approximately $3.6 million for the nine months
ended September 30, 1999. We substantially increased our marketing activities,
including advertising and trade show expenses, and increased the number of our
total sales and marketing employees from 25 at September 30, 1999, to 36 at
September 30, 2000. We expect sales and marketing expenses to increase in
absolute dollars as we continue to expand our key account sales force and engage
in activities to further educate and promote the use of Masimo SET. General and
administrative costs increased to approximately $3.3 million for the nine months
ended September 30, 2000, from approximately $1.4 million for the nine months
ended September 30, 1999, primarily due to increased salaries, legal fees,
accounting fees, and insurance costs. We incurred approximately $935,000 related
to our litigation with Nellcor/Mallinckrodt in the nine months ended September
30, 2000 as compared to $0 for the nine months ended September 30, 1999. We
anticipate expenses related to our litigation with Nellcor to continue, and to
substantially increase, in the future. In addition, we expect general and
administrative expenses to increase in absolute dollars as we continue to build
the infrastructure necessary to support the growth of our business and to
operate as a public company.
Interest Income. Interest income increased 127% to approximately $590,000
for the nine months ended September 30, 2000, from approximately $259,000 for
the nine months ended September 30, 1999. The increase was due to higher average
cash balances during the nine
24
months ended September 30, 2000 as a result of the Series F financing which
occurred in September and October 1999 and May and September 2000, as well as
higher interest rates in 2000.
Interest Expense. Interest expense increased 22% to approximately $174,000
for the nine months ended September 30, 2000, from approximately $143,000 for
the nine months ended September 30, 1999. The increase in interest expense was
due to additional capital equipment acquired under our equipment line of credit
in the second and third quarters of 1999, resulting in a higher average
outstanding loan balance during the nine months ended September 30, 2000, as
compared to the nine months ended September 30, 1999, as well as higher interest
rates in 2000.
Year Ended December 31, 1999, Compared to Nine Months Ended December 31, 1998,
Compared to Year Ended March 31, 1998
Revenue. Total revenue increased to approximately $6.7 million for 1999,
from approximately $1.7 million for the nine months ended December 31, 1998, and
approximately $915,000 for the year ended March 31, 1998. The increase in
revenue was primarily due to the increase in the total number of products with
Masimo SET available in the market to 25 at December 31, 1999 from five at
December 31, 1998, and two at March 31, 1998. Many of our early licensees, which
are non-U.S. companies that do not have as extensive of a regulatory process as
U.S. companies or smaller companies, are generally able to integrate our
products into their products more rapidly than those licensees which are larger
companies or U.S. companies. At December 31, 1998, we had agreements with 20
licensees, most of which were smaller or non-U.S. companies, and the launch of
substantially all of the products of these licensees occurred during the first
six months of 1999. Revenue from consumables increased to approximately $4.0
million for 1999, from approximately $981,000 for the nine months ended December
31, 1998, and approximately $387,000 for the year ended March 31, 1998. Revenue
from board sales increased to approximately $2.6 million for 1999, from
approximately $697,000 for the nine months ended December 31, 1998, and
approximately $367,000 for the year ended March 31, 1998. The remaining revenue
of approximately $48,000 for 1999, approximately $19,000 for the nine months
ended December 31, 1998, and approximately $161,000 for the year ended March 31,
1998, was attributable to licensing fees from various licensees.
Cost of Goods Sold. Cost of goods sold increased to approximately $6.4
million for 1999, from approximately $3.0 million for the nine months ended
December 31, 1998, and approximately $2.2 million for the year ended March 31,
1998. The net increase was primarily due to increased product sales, offset by
lower direct product costs resulting from volume pricing discounts on material
and decreased per unit labor time due to higher volumes and automation. In
addition, as manufacturing volume increased, the overhead costs decreased as a
percentage of total cost of goods sold to approximately 40% for 1999, from
approximately 63% for the nine months ended December 31, 1998, and approximately
78% for the year ended March 31, 1998.
Research and Development. Research and development expenses increased to
approximately $6.0 million for 1999, from approximately $3.1 million for the
nine months ended December 31, 1998, and approximately $3.1 million for the year
ended March 31, 1998. The increase in expenses for 1999 was primarily due to
additional costs for consulting, prototypes and supplies incurred to develop
Radical. The Radical project accelerated in the second quarter of 1999 and was
transferred to production in February 2000. In addition, in the fourth quarter,
$490,000 was attributable to the purchase of technology from a development stage
company. The technology consists of certain patents and research data that we
intend to use in our current research related to the continuous and noninvasive
measurement of blood pressure. Although the technology had not reached
technological feasibility and it is not
25
deemed to have alternative future uses, we believe the methodology utilized and
patented in the research is consistent with our methodology. We estimate it will
take three to five years and approximately $15-$20 million of additional
research to potentially develop a commercially viable product. We plan to fund
any such substantial additional research with private corporate funds, if
available, in exchange for certain product exclusivity rights or, if we become
profitable, through internally generated excess cash. We are currently in the
process of gathering and reviewing research and clinical data. The increase in
expenses for the nine months ended December 31, 1998, was primarily due to
higher payroll costs from employing additional staff and additional engineering
costs due to product line expansion and product design improvements.
Selling, General and Administrative. Selling, general and administrative
expenses increased to approximately $7.8 million for 1999, from approximately
$3.9 million for the nine months ended December 31, 1998, and approximately $2.6
million for the year ended March 31, 1998. The increase was primarily
attributable to the increase in sales and marketing expenses to approximately
$5.6 million for 1999, from approximately $2.3 million for the nine months ended
December 31, 1998, and approximately $875,000 for the year ended March 31, 1998.
We substantially increased our marketing activities, including advertising and
trade shows, beginning in the fourth calendar quarter of 1998. We also increased
the total number of our sales and marketing employees from nine at March 31,
1998 to 22 at December 31, 1999. General and administrative costs increased to
approximately $2.2 million for 1999, from approximately $1.6 million for the
nine months ended December 31, 1998, and approximately $1.7 million for the year
ended March 31, 1998, due to increases in various costs, such as rent, legal
fees and insurance related to the commercial launch of our products, expansion
of operations, and operation of a new, larger facility to which we relocated in
1997. We incurred approximately $180,000 in the fourth calendar quarter of 1999
related to our litigation with Nellcor/Mallinckrodt. We anticipate expenses
related to this case to continue and substantially increase in the future.
Interest Income. Interest income was approximately $465,000 for 1999 as
compared to approximately $561,000 for the nine months ended December 31, 1998,
and approximately $453,000 for the year ended March 31, 1998. These differences
were directly related to the average cash balances on hand during the respective
periods and not related to the average interest rate, which remained fairly
constant during the entire period. The average cash balances on hand were
affected by equity financings closing in August 1996, December 1997 through
January 1998, and September through October 1999, and were significantly higher
during the nine months ended December 31, 1998 compared with 1999 and the year
ended March 31, 1998.
Interest Expense. Interest expense was approximately $206,000 for 1999,
approximately $128,000 for the nine months ended December 31, 1998, and
approximately $58,000 for the year ended March 31, 1998. The increase in
interest expense was primarily due to capital equipment acquired under our
equipment financing lines to develop a commercial manufacturing capability.
STOCK COMPENSATION
In connection with the grant of stock options to employees, directors, and
consultants, we recorded deferred compensation totaling $779,326 for the year
ended December 31, 1999. Deferred compensation represents the difference between
the exercise price and the deemed fair value of our common stock for financial
reporting purposes on the date those options were granted, as well as the value
of options granted to consultants, using the Black-Scholes model. This amount is
initially recorded as a component of stockholders' equity and is being amortized
over the vesting period of the individual options. In fiscal 1996, we recorded
deferred compensation totaling $313,000, of which only $15,935 remains deferred
at December 31,
26
1999. We amortized deferred stock compensation expense of $44,375, $27,984 and
$149,753 for the year ended March 31, 1998, the nine months ended December 31,
1998, and the year ended December 31, 1999, respectively. We recorded additional
compensation expense for the year ended December 31, 1999, of $35,323
representing the fair market value of options granted to consultants in 1999.
Deferred compensation related to these options to consultants of $138,828 at
December 31, 1999, will be amortized to compensation expense over the vesting
period of the related options. At December 31, 1999, we had deferred
compensation recorded of $638,031 remaining to be amortized over the vesting
periods of the stock options. We expect to amortize this deferred compensation
for options granted prior to December 31, 1999, as follows:
[Download Table]
YEAR AMOUNT
---- --------
2000.................................................... $209,995
2001.................................................... 140,935
2002.................................................... 119,410
2003.................................................... 109,680
2004.................................................... 58,011
In addition, we recorded additional deferred compensation of approximately
$116,000 for options granted during the first quarter of 2000, which is being
amortized over the vesting periods of these options. Please read the notes to
the financial statements for more information.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited selected quarterly operating
results for the two years ended September 30, 2000. We believe that the
following selected quarterly information includes all adjustments which consist
only of normal, recurring adjustments that we consider necessary to present this
information fairly. This financial information should be read in conjunction
with the financial statements and related notes appearing elsewhere in this
prospectus. Our results of operations have fluctuated in the past and are likely
to continue to fluctuate significantly from quarter to quarter in the future.
Therefore, results of operations for any previous periods are not necessarily
indicative of results of operations to be recorded in the future.
[Enlarge/Download Table]
QUARTERS ENDED
---------------------------------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1999 1999 1999 1999 2000 2000 2000
------------ --------- -------- ------------- ------------ --------- -------- -------------
Revenue............... $ 701 $ 1,261 $ 1,533 $ 2,133 $ 1,770 $ 2,496 $ 2,850 $ 4,234
Gross margin.......... (429) (11) (4) 253 42 645 457 507
Operating expenses.... 2,653 2,267 4,007 2,898 4,560 3,684 4,346 4,851
Net loss.............. $(2,954) $(2,193) $(3,980) $(2,646) $(4,352) $(2,937) $(3,740) $(4,183)
Net loss applicable to
common
stockholders........ $(4,020) $(3,293) $(5,079) $(3,746) $(5,904) $(4,435) $(5,352) $(5,960)
Basic and diluted net
loss per common
share............... $ (1.38) $ (1.13) $ (1.74) $ (1.27) $ (1.98) $ (1.48) $ (1.77) $ (1.96)
27
Revenue. Revenue has fluctuated primarily due to new product launches by
our licensees. When a licensee launches a new product with Masimo SET, it
typically places initial stocking orders to allow fulfillment of orders from
hospitals which require delivery within days or weeks. In addition, since we
supply products to our licensees on an OEM basis, any seasonality that exists
for sales by our licensees will likely affect our results for the previous
quarter. Since medical equipment manufacturers typically experience an increase
in sales in the fourth quarter, this would indicate that we would likely
experience a similar effect in our third quarter. This effect may be offset by
new product launches which occur in the quarter. An example of these effects was
the third quarter of 1999 as compared to the fourth quarter of 1999.
Gross Margin. Gross margin is affected by the portion of sales for the
quarter from lower margin boards as compared to higher margin consumables. Gross
margin has also fluctuated due to costs incurred in various quarters to develop
a commercial manufacturing capability. An example of these effects is the
decrease in the gross margin as a percentage of sales in the first quarter as
compared to the second quarter of 1999 when the portion of sales attributable to
consumables decreased in the second quarter while overhead costs in the areas of
nonrecurring engineering, tooling and indirect salaries were higher than normal,
which resulted in a relatively flat gross margin even though sales increased
approximately $272,000.
Operating Expenses. Operating expenses have fluctuated quarterly primarily
due to the timing of various marketing activities such as trade shows,
advertising and direct mail, and the timing of research and development
activities related primarily to the Radical project. Two specific examples of
these effects were the second and fourth quarters of 1999. We attended four
major tradeshows in the second quarter and our two most significant tradeshows
in the fourth quarter which resulted in a significant increase in marketing
costs in the second and fourth quarters compared to the other quarters of 1999.
Also, the Radical project accelerated in the second quarter of 1999 and added
approximately $650,000 in incremental research and development costs for that
quarter. In addition, in the fourth quarter of 1999, $490,000 was attributable
to the purchase of technology related to the continuous and noninvasive
measurement of blood pressure project.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed our operations primarily through the
private sale of equity securities. Through September 30, 2000, we have raised
$70.5 million in net proceeds through private equity financing and stock option
and warrant exercises. At September 30, 2000, cash and cash equivalents was
$14.1 million.
Working capital at September 30, 2000, was approximately $19.4 million
compared to approximately $16.6 million and approximately $12.3 million at
December 31, 1999 and 1998, respectively. The increase in working capital from
December 31, 1999, to September 30, 2000, was primarily due to the sale of our
Convertible Preferred Stock in May and September 2000, and increases in accounts
receivable and inventory, offset by increases in accounts payable and accrued
liabilities. The increase in working capital from December 31, 1998 to December
31, 1999 was primarily due to the sale of the our Convertible Preferred Stock in
September and October 1999, and increases in inventory and accounts receivable,
offset by increases in accounts payable and current portion of long-term debt.
We used approximately $13.0 million of cash for operations in the nine
months ended September 30, 2000. Cash used for operations during this period was
primarily driven by operating losses, increases in inventory, accounts
receivable, and other assets offset by increases in accumulated depreciation,
accounts payable, and accrued expenses. These changes were primarily due to the
139% increase in sales levels from the quarter ended December 31, 1999 as
compared to the quarter ended September 30, 2000 and the related increase in
manufacturing activities and inventory levels necessary to satisfy increased
actual and
28
anticipated demand for our products. We used approximately $27.6 million for
operations during the 33-month period ended December 31, 1999. Cash used for
operations during this period was primarily driven by operating losses,
increases in inventory and accounts receivable, offset by increases in
accumulated depreciation and amortization and accounts payable. These changes
were also primarily due to the increased sales levels which increased 685% over
this period.
We used approximately $1.6 million of cash for investing activities in the
nine months ended September 30, 2000. We invested approximately $1.3 million in
manufacturing equipment, computer equipment and demonstration equipment and
approximately $300,000 in intangible assets including patents and trademarks. We
used approximately $5.4 million for investing activities during the 33-month
period ended December 31, 1999. We invested approximately $4.7 million in
manufacturing equipment, demonstration equipment, computer equipment and
leasehold improvements and $700,000 in intangible assets including patents and
trademarks.
We received approximately $14.1 million of cash from financing activities
in the nine months ended September 30, 2000, primarily as a result of the sale
of our Convertible Preferred Stock in May and September 2000. We received
approximately $39.3 million of cash from financing activities during the
33-month period ended December 31, 1999. Cash provided by financing activities
during this period was primarily the result of the sale of our Convertible
Preferred Stock.
As of September 30, 2000, we had approximately $1.8 million outstanding
under two term loans under a loan and security agreement with Comerica Bank. The
amounts outstanding are payable in 48 equal monthly principal payments of
approximately $66,000. Amounts outstanding under the two loans bear interest at
the prime rate plus 1.5% and 1.25%, respectively. There are no additional
borrowings available under the loan and security agreement.
During the remainder of 2000 and in 2001, we plan to increase our level of
operations substantially. In particular, we plan to expand our commercial
manufacturing capability by purchasing additional manufacturing equipment to
accommodate significantly higher production volumes at our existing facility and
to obtain additional manufacturing space, comparable to our existing facility,
at other locations. We also plan to expand our marketing and sales activities to
establish sales channels worldwide. Although we believe that the proceeds from
the offering and cash generated from future sale of products will be sufficient
to meet our operating and capital requirements for at least the next 12 months,
we may require additional financing prior to such time. In addition, we are
unable to predict whether the net proceeds from this offering and future sales
of products will be adequate to satisfy our working capital requirements beyond
12 months after the offering because our capital needs will vary depending upon
future market conditions and business opportunities, among other factors, and we
are not certain when or if we will be able to achieve profitable operations and
positive cash flow. If we need additional funds, we may seek to raise them from
equity or debt financing. Regardless of whether additional funds are actually
required, we may seek to raise funds from equity or debt financing. We may not
be able to raise additional funds on acceptable terms, if at all.
TAX MATTERS
As of December 31, 1999, we had federal and state net operating loss
carryforwards of approximately $25.3 million and $12.6 million, respectively.
Our federal net operating loss carryforwards expire beginning in 2010 and our
state net operating loss carryforwards expire beginning in 2000, if not
utilized. As of December 31, 1999, we had federal and state research and
experimentation credit carryforwards of approximately $716,000 and $563,000,
respectively. These carryforwards expire beginning in 2007 for federal purposes
and carry
29
forward indefinitely for state purposes. In addition, we have state
manufacturers' investment tax credit carryforwards of approximately $195,000
which expire beginning in 2006.
The utilization of net operating loss and tax credit carryforwards are
subject to review by the Internal Revenue Service and may be limited under the
provisions of the Internal Revenue Code and similar state provisions. Ownership
changes, as defined in the Internal Revenue Code, may limit the amount of these
tax attributes that can be utilized annually to offset future taxable income or
tax liabilities. The amount of the annual limitation is determined based on our
value immediately prior to the ownership change. Subsequent ownership change may
further affect the limitation in future years.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates to the
increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited to our
outstanding term loans, which have interest rates that are closely tied to
market rates. Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation or our invested principal funds by limiting default risk,
market risk and reinvestment risk. We reduce default risk by investing in
investment grade securities. A hypothetical 100 basis point drop in interest
rates along the entire interest rate yield curve would not significantly affect
the fair value of our interest sensitive financial instruments at December 31,
1998, December 31, 1999, or June 30, 2000. Declines in interest rates over time
will, however, reduce our interest income and expense while increases in
interest rates will increase our interest income and expense.
The Company does not have any significant foreign currency risks as the
majority of our assets and liabilities are maintained in the U.S.; and all of
our sales and substantially all of our expenditures are transacted in U.S.
dollars.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting
for Derivatives and Hedging Activities," which establishes accounting and
reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivatives and Hedging Activities -- Deferral of the Effective
Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to
be effective for all fiscal quarters beginning after June 15, 2000. The adoption
of SFAS 133, as amended is not expected to have a material effect on our
financial condition and results of operations as we do not currently hold any
derivative instruments or engage in hedging activities.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 (SAB
101) entitled "Revenue Recognition," which outlines the basic criteria that must
be met to recognize revenue and provides guidance for the presentation of
revenue and for disclosure related to revenue recognition policies in financial
statements filed with the SEC. The adoption of SAB 101 did not have a material
impact on our financial position or results of operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44) entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board No. 25 (APB 25). This
interpretation clarifies the definition of an employee for purposes of applying
APB 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequences of various modifications to
the terms of a previously fixed stock option or award; and the accounting for an
exchange of stock
30
compensation awards in a business combination. This interpretation is effective
July 1, 2000, but certain conclusions in this interpretation cover specific
events that occur after either December 15, 1998 or January 12, 2000. To the
extent that this interpretation covers events occurring during the period after
December 15, 1998 or January 12, 2000, but before the effective date of July 1,
2000, the effects of applying this interpretation are recognized on a
prospective basis from July 1, 2000. We believe that the adoption of FIN 44 will
not have a material impact on our financial position or results of operations.
31
BUSINESS
THE COMPANY
We develop, license and market advanced signal processing technologies and
products for the noninvasive monitoring of vital signs. Our first products,
designed to improve the effectiveness of pulse oximetry, are based on our
proprietary Signal Extraction Technology, or Masimo SET. Pulse oximetry, or the
noninvasive measurement of the arterial saturation level of blood and pulse
rate, has been established as a standard of care in patient care settings over
the last 20 years because of the potential adverse effects of low oxygen
saturation levels. Pulse oximeters typically give audio and visual alarms when
the patient's blood oxygen or pulse rate falls outside of a prescribed range,
enabling clinicians to initiate treatment.
We have developed a family of pulse oximetry products that provide the
clinician with reliable, continuous, real-time information, even in the presence
of motion artifact, or patient movement, and low perfusion, or low arterial
blood flow, two factors which have limited the operating effectiveness of
conventional pulse oximeters. From our inception until 1995, we were focused on
the development of our technology and products. We began our licensing efforts
in 1995 and our first licensee launched a product incorporating our technology
in 1996. Our products include printed circuit boards and our Radical pulse
oximeter, both of which incorporate the Masimo SET signal processing software,
and sensors and cables for use with pulse oximeters that utilize Masimo SET
boards. Our technology and products are covered by 70 issued and 113 pending
U.S. and foreign patents.
We currently manufacture in-house Radical, our full line of disposable and
reusable sensors and our patient cables. We utilize third-party contract
manufacturers for products that can be more efficiently manufactured by such
third-parties. We license and sell our products primarily to patient monitoring
companies with existing installed customer bases, permitting us to leverage the
sales and distribution channels of each OEM licensee. To date, we have
agreements with over 30 OEM licensees. Of these licensees, 16 have launched a
total of 30 monitors worldwide incorporating Masimo SET. We believe over 25,000
monitors have been installed worldwide which use our technology.
PATIENT MONITORING AND PULSE OXIMETRY
Patient monitoring systems provide clinicians with early warnings of
patient distress and allow, when necessary, the initiation of treatment or the
intensification of therapy. Monitoring systems are widely used in critical care
settings such as hospital operating rooms and other patient care settings, such
as intermediate care units and ambulatory settings. Historically, most patient
monitors were configured as standalone units measuring only a single patient
vital sign, or parameter. More recently, multi-parameter monitors, which
incorporate modules to measure more than one patient parameter, have begun to
constitute an increasing portion of the patient monitoring market. The five most
common parameters measured are:
- electrocardiography, or EKG;
- blood pressure;
- body temperature;
- respiration rate; and
- pulse oximetry.
Pulse oximetry has been established as a standard of care over the last 20
years because of the potential adverse effects of low arterial blood oxygen
saturation levels. The lack of sufficient arterial blood oxygen saturation,
known as hypoxemia, can lead to a deficiency of oxygen reaching the tissues of
the body, known as hypoxia. Early detection of hypoxemia is
32
critical because hypoxia can result in brain damage and death in a matter of
minutes. Pulse oximetry enables the detection of hypoxemia, allowing immediate
intervention by the clinician to increase the patient's oxygen intake. In the
absence of pulse oximetry, there is no other reliable noninvasive method to
detect hypoxemia until damage has occurred. In addition to providing continuous
monitoring of arterial blood oxygen saturation, pulse oximetry is used to
measure and report the pulse rate of the patient.
Pulse oximeters utilize sensors attached to an extremity, typically the
fingertip, to measure the arterial blood oxygen saturation level and pulse rate.
These sensors contain light emitting diodes that transmit red and infrared light
through the tissue to a photodetector on the sensor. The photodetector measures
the amount of red and infrared light absorbed by the tissue. A microprocessor
then analyzes the changes in light-absorption to provide a continuous, real-time
measurement of the amount of oxygen in the patient's blood. Pulse oximeters
typically give audio and visual alerts, or alarms, when the patient's blood
oxygen saturation or pulse rate falls outside of the prescribed range. As a
result, clinicians are able to initiate treatment or intensify therapy on a
real-time basis to prevent the serious clinical consequences of hypoxia.
Since the first pulse oximeters were introduced in the early 1980s, pulse
oximetry has gained wide clinical acceptance as a monitoring technology because
it gives an early warning of hypoxemia, is noninvasive and requires little or no
special training to use in the clinical setting. Pulse oximeters are used as a
standard patient monitor in operating rooms, recovery rooms and intensive care
units, including neonatal intensive care units. For example, in the over 20
million annual surgical procedures performed in the U.S. in which anesthesia is
administered, pulse oximeters are used as part of the standard protocol of
monitoring procedures. We believe that Masimo SET technology may also be
applicable to other existing applications, such as blood pressure monitoring,
respiration monitoring and electrocardiography, as well as parameters that
currently are not well-served by available noninvasive monitoring technologies,
such as fetal oximetry. In addition, we believe that pulse oximetry will achieve
greater penetration in less acute care settings, such as intermediate care
settings, the general ward and the home.
LIMITATIONS OF CONVENTIONAL PULSE OXIMETERS
Despite its acceptance as a standard of care, conventional pulse oximetry
is still subject to technological limitations that reduce its effectiveness and
can contribute to adverse patient outcomes. Pulse oximetry utilizes the
absorption patterns of red and infrared light passing through tissue to
calculate blood oxygen saturation. Since different blood oxygen levels change
the degree to which light is absorbed by tissue, pulse oximeters can measure
blood oxygen levels by reading the amount of light being absorbed as it passes
through the tissue. Conventional pulse oximetry assumes that arterial blood is
the only element in motion within body tissue and that simply focusing on the
variations in absorption within the tissue will accurately identify the arterial
blood flow to be measured. While this assumption may hold true in a stable
environment, the presence of interfering signals found in everyday operating
environments, such as motion artifact, can cause this assumption to fail. For
example, patient movement causes other bodily elements besides arterial blood,
particularly venous blood, to move within the site being measured, resulting in
interfering signals. In addition, ambient, or bright light, and electrical
interference from the presence of electrical surgical equipment which is
typically found in the hospital environment may result in interfering signals.
In addition to motion artifact, the effectiveness of conventional pulse
oximeters is also limited by signal recognition problems caused by low
perfusion. While motion artifact can cause inaccurate measurements, low
perfusion can result in a complete failure by the pulse oximeter to obtain a
measurement. Further, the combination of motion artifact with low perfusion
exacerbates the difficulty in measuring arterial blood oxygen saturation because
motion artifact can "drown out" weak physiological signals. Independent,
published research shows that
33
conventional pulse oximeters are subject to several operating limitations in the
presence of motion artifact and low perfusion, including:
- inaccurate measurements, which can lead to the non-detection of a
hypoxemic event or improper and unnecessary treatment;
- false alarms, when the pulse oximeter falsely indicates a drop in the
oxygen saturation level, which can lead to the inefficient use of
clinical resources as clinicians respond to the false alarms, or the
non-detection of a true alarm if clinicians become indifferent to
frequently occurring false alarms; or
- signal drop-outs, or the loss of a real-time signal as the monitor
attempts to find or distinguish the pulse, which can lead to the
non-detection of clinical events due to the lack of a functioning
monitor.
The clinical community has long recognized these limitations and
manufacturers of pulse oximeters have been actively seeking technological
solutions to address these issues. Some devices have been developed which
attempt to filter out interference and noise. However, none of these new devices
has been clinically proven through independent clinical studies to significantly
improve measurement performance under conditions of both motion artifact and low
perfusion. Other devices have attempted to minimize the effects of motion
artifact by freezing, or repeating the last measurement when motion artifact is
detected, until a new, clean signal is detected and a new measurement can be
displayed. Still other devices have attempted to average the signal over a
longer period of time, known as long-averaging, to reduce the effect of
temporary erroneous measurements. These solutions, commonly referred to as alarm
management techniques, amount to masking the limitations of conventional pulse
oximetry. Several published studies have demonstrated that some of these alarm
management technologies have actually contributed to increased occurrences of
undetected true alarm events, or events where hypoxemia occurs but is not
detected by the pulse oximeter.
THE MASIMO SOLUTION
We have developed a family of products, based on our proprietary Signal
Extraction Technology, or Masimo SET, that provides the clinician with reliable,
continuous, real-time information even in the presence of both motion artifact
and low perfusion. Masimo SET represents a fundamental departure from
conventional pulse oximetry technologies. Masimo SET does not attempt to mask
the limitations of conventional pulse oximetry with alarm management techniques
but instead is designed to work through the interference to obtain reliable,
continuous measurements under difficult conditions.
Independent researchers have published over 30 studies to date which detail
the clinical advantages of Masimo SET technology. These studies have covered a
broad range of patients, including healthy adult volunteers, as well as adults,
children and neonates in hospital settings, in conditions involving both motion
and low perfusion. These studies were conducted over a five year period and
evaluate our products for accurate oxygen saturation and pulse rate readings, as
well as false alarm rates. All of these studies showed significant performance
improvements with Masimo SET as compared to the current industry leading
devices. As a result of these studies and our clinical experience, we believe
that our products offer several key benefits, including:
- Accurate Real-Time Measurement. Masimo SET delivers critical information
to the clinician in real-time. By utilizing proprietary algorithms and
sensor designs, Masimo SET eliminates the need to utilize alarm
management techniques such as freezing and long-averaging of signals. We
believe that the ability to provide accurate and reliable information in
critical medical situations will enhance current applications of pulse
oximetry and expand its use in a variety of other patient care settings.
34
- Reliable Monitoring During Motion. Masimo SET identifies and
substantially eliminates interference caused by patient movement and
provides an accurate measurement of the patient's blood oxygen saturation
and pulse rate. We believe that the elimination of motion artifact will
enhance the performance of pulse oximeters in environments such as the
recovery room, intensive care units, emergency care and ambulatory
settings. In addition, we believe Masimo SET's ability to provide
reliable monitoring during motion artifact will expand pulse oximetry to
other settings where motion has previously prohibited its use. These
settings include intermediate care units, subacute centers, skilled
nursing facilities, the general ward and the home.
- Accurate Monitoring During Low Perfusion. Masimo SET detects and
measures blood oxygen saturation in most patients who suffer from low
perfusion, such as elderly and critically ill patients. We believe that
this enhances the performance of pulse oximeters in critical medical
situations, where there is often the greatest need for accurate and
reliable measurements.
- Resistance to Electromagnetic Interference and Ambient Light. Masimo SET
boards and sensors are designed to shield against or eliminate
interference caused by ambient light, electrical surgical instruments and
other electromagnetic instruments commonly used in the hospital. This
permits pulse oximetry to function reliably in environments where
interference is common, such as in neonatal intensive care units,
operating rooms, ambulatory and other intermediate care settings.
There have been two published studies that concluded that another
technology performed better than ours in the presence of motion artifact and low
perfusion in healthy adults.
OUR STRATEGY
Our objective is to improve patient care by establishing Masimo SET as the
new performance standard for pulse oximetry and other monitoring applications.
The key elements of our strategy are as follows:
- Gain Broad Market Acceptance of Masimo SET Through OEM License
Arrangements With Patient Monitoring Companies. We license our
proprietary products to patient monitoring companies for incorporation
into their products. In order to enhance wide market acceptance, we have
designed Masimo SET to be easily integrated into conventional monitoring
systems, thereby providing patient monitoring companies with the option
of retrofitting existing instruments depending upon their current
configuration. We have licensing agreements with over 30 OEM licensees.
We believe these licensees account for approximately 50% of the worldwide
pulse oximetry market. We believe that patient monitoring companies with
established sales and distribution channels will facilitate broad
commercialization of our technology and products.
- Upgrade the Existing Installed Base of Conventional Pulse Oximetry
Monitors. We expect to utilize our new product, Radical, to facilitate
upgrades of the installed base of conventional pulse oximeters, in
addition to working with our licensees to develop upgrade modules for
their existing monitors. Radical represents a convenient and cost-
effective upgrade solution which we believe will facilitate large-scale
conversions of existing installed monitors to Masimo SET.
- Create and Share With Our Licensees a Proprietary, Recurring Consumables
Business. Masimo SET monitors are designed to only function with our
proprietary sensors. The patented design prevents any other sensor from
being used with a Masimo SET system. Our sensors are primarily sold to
our licensees for sale to end-users. With an average life of five to ten
years, we expect each monitor to represent a source of proprietary,
recurring sensor revenue for Masimo and our licensees.
35
- Expand the Market for Pulse Oximetry. We believe that because
conventional pulse oximeters are often ineffective during conditions of
motion artifact and low perfusion, their widespread adoption beyond
operating rooms, recovery rooms and intensive care units has been
limited. We believe that Masimo SET substantially overcomes the problems
of motion artifact and low perfusion and provides significantly improved
performance in pulse oximeters, particularly in less acute care settings.
As a result of the increased performance and reliability of pulse
oximeters utilizing Masimo SET technology, we expect pulse oximetry to
achieve greater penetration in less acute care settings, such as
intermediate care settings and the general ward.
- Apply Masimo SET to Other Monitoring Applications. We believe that
Masimo SET can be used to improve other existing monitoring applications,
such as blood pressure, respiration monitoring and electrocardiography.
We believe that the development of such applications involves adapting
our pulse oximetry software, algorithms and sensors to the specific needs
of each application. We acquired technology for the continuous
noninvasive measurement of blood pressure and are currently evaluating
other applications in which to focus future development efforts. In
addition, we believe that Masimo SET can be applied to parameters that
currently are not well-served by available noninvasive monitoring
technologies, such as fetal oximetry.
MASIMO SET TECHNOLOGY
Masimo SET is a combination of signal processing software, algorithms and
sensor designs. Our signal processing software and algorithms enable the
effective use of adaptive filters to cancel interference in real-time. Masimo
SET is incorporated into our MS printed circuit boards, which are primarily sold
to our licensees and OEM partners and incorporated into their monitors. This
represents a fundamentally unique approach to calculating arterial blood oxygen
saturation and pulse rate by first assuming that interference will be present.
Masimo SET utilizes our proprietary Discrete Saturation Transform algorithm to
distinguish the signal from the noise. With this improved ability to distinguish
the signal from the noise, Masimo SET enables accurate measurements in the
presence of motion and also allows the monitor to recognize smaller signals
caused by low perfusion.
Conventional pulse oximeters have been unable to effectively use adaptive
filters because of the occurrence of unpredictable in-band noise, or noise which
is in the same frequency range as the signal being measured. Widely used in
other industries, such as telecommunications, adaptive filters change their
filtering characteristics in response to changing in-band noise. Adaptive
filters work by tuning the filter's parameters to the predicted frequency
characteristics of the noise or the signal, creating a reference signal. In
pulse oximetry, the unpredictability of the noise and signal has previously made
the use of adaptive filters unachievable. Our proprietary technology, including
our Discrete Saturation Transform algorithm effectively solves this problem. The
Discrete Saturation Transform algorithm builds a reference signal from the
incoming red and infrared signals for each blood oxygen level between 1% and
100% saturation. The reference signal along with the incoming red and infrared
signals are passed through an adaptive filter, which cancels the correlated
frequencies between the reference signal and the incoming red or infrared
signals. If the frequencies between the two inputs are all similar, the entire
signal cancels and a low energy output occurs. If they are dissimilar, a high-
energy output is obtained. Twice per second, the energy output from the adaptive
filter is determined based on potential oxygen saturation levels from 1-100% and
a plot is created of the results. Based on the assumption that arterial blood
has higher oxygen saturation levels than anything else present within the
monitoring site, the algorithm then finds the peaks on the plot and, so long as
system models are satisfied, displays the highest saturation peak as the
arterial oxygen saturation reading.
36
In addition, our sensors are uniquely designed to limit the effects of
motion artifact, both physiological and non-physiological. Patient movement may
cause body tissue, for example, a finger, to compress within the sensor. As a
result, the distance that the signal light travels through the tissue will vary,
resulting in variances and inaccuracies in the initial signal reading. Our
sensors minimize these limitations through our proprietary and patented design.
Unlike conventional pulse oximetry sensor designs, the photodetector receiving
the signal light passing through the tissue in our sensor is recessed in a
cavity. The cavity is covered by a comfortable adhesive that allows body tissue
to move in and out of the cavity during motion. By allowing for movement without
compression of body tissue, the sensor minimizes the variances in the optical
path length. This design also stabilizes venous blood movement due to motion at
the monitored site. In addition, our recessed photodetector design allows the
photodetector to be better protected from ambient light and electromagnetic
interference as compared to conventional sensors, which have the photodetector
flush with the tissue.
PRODUCTS
Masimo SET MS Printed Circuit Boards
Our Masimo SET MS printed circuit boards house the signal processing
technology and apparatus. Our MS printed circuit boards are primarily sold to
our licensees and OEM partners for incorporation into their monitors. Once
incorporated, the MS board performs all data acquisition processing and reports
the pulse oximetry levels to the host monitor. We price our MS boards
competitively with other third-party vendors of conventional pulse oximetry
boards and modules. We originally released the MS-1 board with our first
generation of software to the market in 1996. In 1998, we released the MS-3, and
our second generation of software. The MS-3 utilizes approximately one-half the
power of the MS-1.
Radical Signal Extraction Pulse Oximeter
We made commercially available our newest product, Radical, in August 2000.
Designed for flexibility, Radical may be used as:
- a standalone device for bedside monitoring;
- a detachable handheld unit for easy portable monitoring; and
- a monitor interface to upgrade existing multi-parameter patient monitors
to Masimo SET technology.
Radical is a fully equipped standalone pulse oximeter with a detachable
module, which functions as a battery operated, handheld pulse oximeter. The
handheld module can be connected into any other Radical base station, which
allows Radical to stay with the patient, enabling continuous and reliable
arterial oxygen saturation monitoring as patients are transported and moved
within the hospital. For example, Radical can monitor a patient from the
ambulatory environment, to the emergency room, to the operating room, to the
general ward, and on until the patient is discharged. Radical delivers the
accuracy and reliability of Masimo SET technology with multi-functionality, ease
of use and a convenient upgrade path for existing monitors.
The upgrade capability is enabled by our proprietary SatShare technology.
SatShare enables a conventional monitor to upgrade to Masimo SET technology
through a simple cable connection from the back of Radical to the sensor input
port of the conventional monitor. No software upgrades or new modules are
necessary for the upgrade, which can be completed in several minutes. We believe
that Radical's upgrade capability coupled with its multi-functionality will
facilitate hospital-wide conversions of installed monitors to Masimo SET. We are
currently offering Radical primarily through OEM licensees and distributors.
37
Masimo Pulse Oximetry Sensors and Cables
LNOP Sensors. We have developed a line of disposable and reusable, low
noise optical probe, or LNOP, pulse oximetry sensors. We sell our sensors
primarily to our licensees for resale to end-users. We have designed different
sensors for adults, children, infants and pre-term infants.
Our LNOP sensors are available in both disposable and reusable lines. Our
disposable, or single-patient use, sensors offer several advantages over
reusable sensors including cleanliness, increased comfort and greater
reliability. Our single-patient use LNOP sensors also offer several advantages
over competitive disposable sensors, including a substantially more durable tape
material which is less likely to tear and has an adhesive which can be easily
rejuvenated with an alcohol pad. As a result, our single-patient use sensors
were shown in an independent, published study to last nearly twice as long as
the market leading disposable sensor. We also offer an adult and pediatric
reusable sensor. Reusable sensors are primarily used for short term hospital
stays and spot checks.
NR Sensors. We have also developed a line of value-priced disposable and
reusable noise reduction, or NR, sensors. NR sensors are designed for less
critically ill patients who do not typically suffer from low perfusion. They are
intended to function at a higher performance level than conventional pulse
oximeter sensors under motion and low perfusion conditions, but are not as
sensitive or durable as our LNOP sensors. We expect to commercially launch our
NR sensors in the fourth quarter of 2000 through our OEM licensees to hospitals
and group purchasing organizations that utilize both types of sensors and are
trained on the appropriate conditions under which NR sensors could be relied
upon to provide adequate performance.
Cables. We also offer a variety of different low noise cables to connect
our sensors to our pulse oximetry monitors. We offer these cables primarily
through our OEM licensees and distributors worldwide.
LICENSING AND DEVELOPMENT AGREEMENTS
We license our pulse oximetry technology to monitoring companies with
existing customer bases, permitting us to leverage the sales and distribution
channels of each OEM licensee. To date, we have agreements with over 30 OEM
licensees. To date, 16 companies have launched a total of 30 monitors worldwide
incorporating Masimo SET. While some of our OEM licensees have decided to
withhold public disclosure until their product launch, the companies listed
below have publicly announced their agreements with us:
[Download Table]
- Alaris Medical Systems, Inc. - Island Critical Care Corporation
- Allegiance Healthcare Corporation - Ivy Biomedical Corporation
- Atom Medical Corporation - Kohken Medical Co., Ltd.
- Bitmos Medizintechnik GmbH - Medical Data Electronics, Inc.
- Cardiopulmonary Corporation - Nascor PTY, Ltd.
- Datascope Corporation - NEC Corporation
- Datex-Ohmeda, Inc - Ohmeda Medical, Inc.
- Drager Medizintechnik GmbH - Omnitech Ltda.
- F. Stefan GmbH Medizintechnik - Quartz Medical, Inc.
- GE Marquette Medical Systems, Inc. - Respironics, Inc.
- GeTeMed GmbH - Schiller AG Corporation
- GS-Elektromedizinishe Gerate - VitalCom Inc.
- Hill-Rom, Inc. - Welch Allyn Protocol Inc.
- Invivo Research Incorporated - Zoll Medical Corporation
Most of the current agreements contain integration commitments to make
Masimo SET their primary pulse oximetry platform, which is defined in most cases
as at least 80% of all new
38
shipments by the third year of the agreement. The current agreements grant a
license to our pulse oximetry products and include a license fee and negotiated
pricing schedule. In addition, they have terms averaging approximately six
years, expiring between 2001 and 2008. The list of our licensees above is solely
for information purposes and does not constitute an endorsement of us or our
technology by such licensees.
For the year ended December 31, 1999 sales to Zoll Medical Corporation,
Datascope Corporation and Atom Medical Corporation accounted for approximately
20%, 18% and 13% of our total revenue. For the year ended December 31, 1999, no
other customer accounted for 10% or more of our total revenue.
SALES AND MARKETING
We do not currently derive a significant portion of our revenue from sales
directly to end-users, and as a result do not employ a large, direct sales
force. We have key account sales managers that work primarily with our
licensees' sales representatives to facilitate the conversion of large accounts
to our products. In addition, we employ clinical specialists to work with our
licensees and end-users to educate them on the benefits of Masimo SET. Our sales
and marketing strategy is focused on:
- building end-user awareness of the clinical and cost-saving benefits of
Masimo SET; and
- utilizing the upgrade feature of Radical to facilitate large account
conversions to Masimo SET.
We build end-user awareness through advertising, direct mail, tradeshows,
distributing published clinical studies, sponsoring accredited educational
seminars for doctors, nurses and therapists and conducting clinical evaluations.
All of our OEM licensees are required to put the Masimo designation logo on
their products to establish brand recognition. As of September 30, 2000, we had
36 employees in sales and marketing, including 16 nurses and respiratory
therapists and 12 key account sales managers, and anticipate hiring additional
clinical specialists and key account managers in the future. We also provide
sales materials, including brochures, reprints, technical materials and
summaries of clinical studies, to our licensees for use in the sales process. We
plan to expand our marketing and sales activities to establish sales channels on
a global basis. We currently intend to spend between $15 million and $17 million
through the end of 2001 on sales and marketing. We intend to fund these expenses
from the proceeds of this offering, existing cash and cash from operations.
MANUFACTURING
Our strategy is to manufacture products in-house when it is efficient and
cost-effective to do so. We currently manufacture in-house our Radical product,
our full line of disposable and reusable sensors and our patient cables. As of
September 30, 2000, we had 78 dedicated employees in manufacturing and we
maintain a 15,000 square foot ISO 9001 certified manufacturing area in our
facility.
Our Masimo SET MS printed circuit boards are currently manufactured by a
third party manufacturer. Our agreement with this third party manufacturer
terminates June 2001. We will continue to utilize third-party contract
manufacturers for products that can be more efficiently manufactured by such
third-parties. We monitor our third-party manufacturers and perform inspections
and product tests at various steps in the manufacturing cycle to ensure
compliance with our specifications. We also do full functional testing of our MS
printed circuit boards.
We and our contract manufacturers rely on sole source suppliers for some
components, including digital signal processor chips and analog to digital
converter chips. We and our contract manufacturers have taken steps to minimize
the impact of a shortage or stoppage of shipments of digital signal processor
chips or analog to digital converter chips, including
39
maintaining excess inventory and designing software that may be easily ported to
another digital signal processor chip. In the event of a delay or disruption in
the supply of sole source components, we believe that we and our contract
manufacturers will be able to locate additional sources of these sole source
components on commercially reasonable terms and without experiencing material
disruption in our business or operations.
RESEARCH AND PRODUCT DEVELOPMENT
We believe that ongoing research and development efforts are essential to
our success. As of September 30, 2000, we employed 34 engineers and engineering
support staff. Our research and development efforts focus primarily on
continuing to enhance our technical expertise in pulse oximetry. We intend to
continue to develop and release new versions of our signal processing software,
printed circuit board and sensor lines. We are also researching the use of
Masimo SET to other applications, such as:
- continuous noninvasive blood pressure monitoring;
- fetal oximetry;
- monitoring for sudden infant death syndrome; and
- respiration monitoring.
We expect research and development expenses to increase in the future as we seek
to enhance our existing products and develop additional products and
applications of our technology. We acquired technology for the continuous
noninvasive monitoring of blood pressure and plan to increase development
efforts with respect to this technology starting in 2001 and increasing in 2002.
Our total research and development expenditures were $3.1 million for the year
ended March 31, 1998, $3.1 million for the nine months ended December 31, 1998,
$6.0 million for the year ended December 31, 1999, and $3.4 million for the nine
months ended September 30, 2000.
COMPETITION
The medical device industry is highly competitive and we currently do not
have a significant market share in any of our markets. Most of our competitors
have substantially greater financial, technical, marketing and other resources
than we do. We regard any company that sells pulse oximeters as a potential
customer, but at the same time recognize that the companies selling pulse
oximetry modules on an OEM basis and/or pulse oximetry sensors are also
potential competitors. Our primary competitor Nellcor currently holds a
substantial share of the conventional arterial blood oxygen saturation
monitoring market. Nellcor sells its own pulse oximeters to end-users and also
sells pulse oximetry modules to other monitoring companies on an OEM basis. We
face substantial competition from larger medical device companies, including
companies that develop products that compete with our proprietary Masimo SET for
use with third party monitoring systems. To date, Nellcor, Hewlett Packard and
Novametrics Medical Systems, Inc. have announced products which claim to have
performance similar to ours with respect to accuracy during motion and low
perfusion. Other competitors include BCI International Inc., and Nonin Medical,
Inc.
In addition to their position in disposable sensors, Nellcor also has
significant relationships and contracts with various health care networks and
group purchasing organizations. While our agreements with our OEM licensees
contain integration commitments to make Masimo SET their primary pulse oximetry
platform, the contracts between Nellcor and the group purchasing organizations
frequently involve a commitment by the group purchasing organization to purchase
a specified percentage of its products from Nellcor and, thus, may inhibit the
wide adoption of pulse oximeters utilizing Masimo SET. We have ongoing
negotiations with several group purchasing organizations, and most of our
licensees also have relationships and contracts with these group purchasing
organizations. Our strategy is to demonstrate, and help our
40
licensees demonstrate, the advantages of Masimo SET to group purchasing
organizations and their clinician members in order to encourage the group
purchasing organizations to allow Masimo SET equipped monitors to be purchased
by their members.
We believe that the principal competitive factors in the market for pulse
oximetry products include:
- accurate monitoring during both motion and low perfusion;
- competitive products;
- sales and marketing capability;
- gaining access to hospitals which are members of purchasing groups; and
- patent protection.
PATENTS AND PROPRIETARY RIGHTS
We have filed patent applications in the U.S. and in selected foreign
countries to seek to protect some of our inventions, including, in some
instances, Canada, Japan, Australia, and some Western European countries. As of
November 1, 2000, we have 50 issued U.S. patents, 20 issued foreign patents, 53
pending U.S. patent applications and 60 pending foreign patent applications
relating to our technologies and products. Of these patents and patent
applications:
- 35 foreign applications, 12 foreign patents, 39 U.S. applications and 24
U.S. patents relate to pulse oximetry and sensors;
- 10 foreign applications, three foreign patents, two U.S. applications and
12 U.S. patents relate to blood pressure monitoring and sensors; and
- 15 foreign applications, three foreign patents, three U.S. applications
and five U.S. patents relate to other blood component monitoring and
sensors. The first of our patents expires in 2011. We also rely upon trade
secrets, continuing technological innovations and licensing opportunities
to develop and maintain our competitive position. We have also been
granted an option to purchase a license to technology developed by Masimo
Laboratories, Inc. for use in blood glucose monitoring applications in the
hospital market.
GOVERNMENT REGULATION
FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Unless an exemption
applies, each medical device that we wish to market in the U.S. must receive
either 510(k) clearance or PMA approval in advance from the FDA pursuant to the
Federal Food, Drug, and Cosmetic Act. The FDA's 510(k) clearance process usually
takes from four to twelve months, but it can last longer. The process of
obtaining PMA approval is much more costly, lengthy and uncertain. It generally
takes from one to three years or even longer. We cannot be sure that 510(k)
clearance or PMA approval will ever be obtained for any product we propose to
market.
The FDA decides whether a device must undergo either the 510(k) clearance
or PMA approval process based upon statutory criteria. These criteria include
the level of risk that the agency perceives is associated with the device and a
determination whether the product is a type of device that is similar to devices
that are already legally marketed. Devices deemed to pose relatively less risk
are placed in either class I or II, which requires the manufacturer to submit a
premarket notification requesting 510(k) clearance, unless an exemption applies.
The premarket notification must demonstrate that the proposed device is
"substantially equivalent" in intended use and in safety and effectiveness to a
legally marketed "predicate device" that is either in class I, class II, or is a
class III device that was in commercial distribution before May 28, 1976, for
which the FDA has not yet called for submission of a PMA application.
After a device receives 510(k) clearance, any modification that could
significantly affect its safety or effectiveness, or that would constitute a
major change in its intended use, requires a
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new 510(k) clearance or could require a PMA approval. The FDA requires each
manufacturer to make this determination in the first instance, but the FDA can
review any decision. If the FDA disagrees with a manufacturer's decision not to
seek a new 510(k) clearance, the agency may retroactively require the
manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require
the manufacturer to cease marketing and/or recall the modified device until
510(k) clearance or PMA approval is obtained. We have modified some of our
510(k) cleared devices, including our Masimo SET Software and Radical, but have
determined that, in our view, based on FDA guidelines as to when to submit a
510(k) notification for changes to a cleared device, new 510(k) clearances or
PMA approvals are not required. We cannot guarantee that the FDA would agree
with any of our decisions not to seek 510(k) clearance or PMA approval. If the
FDA requires us to seek 510(k) clearance or PMA approval for any modification,
we also may be required to cease marketing and/or recall the modified device
until we obtain a new 510(k) clearance or PMA approval.
Devices deemed by the FDA to pose the greatest risk, such as
life-sustaining, life-supporting or implantable devices, or deemed not
substantially equivalent to a legally marketed predicate device, are placed in
class III. These devices are required to undergo the PMA approval process in
which the manufacturer must prove the safety and effectiveness of the device to
the FDA's satisfaction. A PMA application must provide extensive preclinical and
clinical trial data and also information about the device and its components
regarding, among other things, device design, manufacturing and labeling. After
approval of a PMA, a new PMA or PMA supplement is required in the event of a
modification to the device, its labeling or its manufacturing process.
A clinical trial may be required in support of a 510(k) submission and
generally is required for a PMA application. These trials generally require an
Investigational Device Exemption, or IDE, application approved in advance by the
FDA for a specified number of patients, unless the product is deemed a
nonsignificant risk device eligible for more abbreviated IDE requirements. The
IDE application must be supported by appropriate data, such as animal and
laboratory testing results. Clinical trials may begin if the IDE application is
approved by the FDA and the appropriate institutional review boards at the
clinical trial sites.
We believe that our OEM licensees may be required to obtain 510(k)
premarket clearance from the FDA for products that incorporate Masimo SET MS
boards and LNOP sensors. In order to facilitate our OEM licensees in obtaining
510(k) clearance for their products that incorporate Masimo SET MS boards and
LNOP sensors, we have submitted seven 510(k) notices covering our Masimo SET MS
board and LNOP sensors and have received clearances as follows:
[Enlarge/Download Table]
510(K)
CLEARANCE
PRODUCT YEAR DESCRIPTION
------- --------- -----------
Masimo SET Radical with Satshare......... 2000 Additional claims for use with adult,
pediatric and neonatal patients with
motion and low perfusion in mobile
environments
LNOP-DCIP................................ 2000 Reusable pediatric sensor
Masimo SET Radical with Satshare......... 1999 A three in one pulse oximeter with
handheld, standalone, upgrade capability
Masimo SET/Quartz 2500 Pulse Oximeter.... 1999 A standalone pulse oximeter
Masimo SET 2000 and LNOP - Series of
Sensors................................ 1999 Motion and low perfusion claims for
adults, pediatrics and neonates
Masimo SET MS-1p and LNOP - Series of
Sensors................................ 1998 Motion claims for adults and pediatrics
Masimo SET MS-1 and LNOP - Series of
Sensors................................ 1997 First generation pulse oximeter
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As of November 1, 2000, two of our licensees' products which incorporate
our technology are in the 510(k) clearance process and five of our licensees'
products which incorporate our technology are in the research and development
phase and are not expected to begin the 510(k) clearance process until sometime
during the first half of 2001. The remainder of our licensees' products, which
incorporate our technology and require 510(k) clearance and are being marketed
in the U.S. by our licensees, have received clearance prior to their launch
date.
Our Radical product using SatShare has received 510(k) clearance as an
upgrade compatible with 59 models of third party monitors and none are currently
pending. In August 2000, the FDA orally informed us that we must seek new
"special 510(k)" clearances if we wish to promote the Radical for use as an
upgrade with additional models. The special 510(k) process is an abbreviated
version of the normal 510(k) process. It is reserved for device modifications
that ordinarily would require 510(k) clearance but do not affect the intended
use or fundamental scientific technology of a device. As of November 1, 2000, we
have submitted filings for seven special 510(k) clearances. In September 2000,
we received clearance for three of the filings, in October 2000 we received
clearance for two of the filings, and in November 2000 we received clearance for
the final two. Six of the seven for which we have received clearance are for
additional monitors to be used with SatShare and the other one for which we have
received clearance is for reusable sensors for pediatric patients. The FDA's
stated policy is to rule on special 510(k) submissions in a 30 day time frame.
We cannot assure you that the FDA will provide special 510(k) clearance for
compatibility of SatShare with additional models in a timely fashion or at all.
Nor can we assure you that the FDA will agree to allow future clearance requests
to undergo the special 510(k) process rather than the more costly and lengthy
510(k) process.
In the future, we may be required to submit additional 510(k) clearance to
address new claims, uses or products. We cannot assure you that FDA will not
deem one or more of our future products (or those of our OEM licensees) to be a
class III device subject to the more burdensome PMA approval process.
PERVASIVE AND CONTINUING FDA REGULATION. A host of regulatory requirements
apply to our marketed devices, including the Quality System Regulation (which
requires manufacturers to follow elaborate design, testing, control,
documentation and other quality assurance procedures), the Medical Device
Reporting regulation (which requires that manufacturers report to the FDA
specified types of adverse events involving their products), labeling
regulations, and the FDA's general prohibition against promoting products for
unapproved or "off-label" uses. We have not had any reportable adverse events.
Class II devices also can have special controls such as performance standards,
postmarket surveillance, patient registries, and FDA guidelines that do not
apply to class I devices. Unanticipated changes in existing regulatory
requirements or adoption of new requirements could hurt our business, financial
condition and results of operations.
Our OEM licensees and we are subject to inspection and market surveillance
by the FDA to determine compliance with regulatory requirements. If the FDA
finds that our OEM licensees or we have failed to comply, the agency can
institute a wide variety of enforcement actions, ranging from a public warning
letter to more severe sanctions such as:
- fines, injunctions, and civil penalties;
- recall or seizure of our products;
- the issuance of public notices or warnings;
- operating restrictions, partial suspension or total shutdown of
production;
- refusing our requests for 510(k) clearance or PMA approval of new
products;
- withdrawing 510(k) clearance or PMA approvals already granted; and
- criminal prosecution.
43
The FDA also has the authority to request repair, replacement or refund of the
cost of any medical device manufactured or distributed by us. Our failure (or
the failure of our OEM licensees) to comply with applicable requirements could
lead to an enforcement action that may have an adverse effect on our financial
condition and results of operations.
OTHER U.S. REGULATION. We and our OEM licensees also must comply with
numerous federal, state and local laws relating to matters such as safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and hazardous substance disposal. We cannot be sure that we will not be
required to incur significant costs to comply with these laws and regulations in
the future or that these laws or regulations will not hurt our business,
financial condition and results of operations. Unanticipated changes in existing
regulatory requirements or adoption of new requirements could hurt our business,
results of operations and financial condition.
FOREIGN REGULATION. Many foreign countries in which we market or may
market our products have regulatory bodies and restrictions similar to those of
the FDA. International sales are subject to foreign government regulation, the
requirements of which vary substantially from country to country. The time
required to obtain approval by a foreign country may be longer or shorter than
that required for FDA approval and the requirements may differ. Companies are
now required to obtain the CE Mark prior to sale of some medical devices within
the European Union. During this process, the sponsor must demonstrate compliance
with ISO manufacturing and quality requirements. We do have CE Marking on all
our products that require such markings. We cannot assure you that we or our OEM
licensees will be able to obtain necessary foreign government approvals or
successfully comply with foreign regulations. Our failure to do so could hurt
our business, results of operations and financial condition.
EMPLOYEES
As of September 30, 2000, we have approximately 159 full-time employees and
1 part-time employee, 34 of which are engaged in research and development
activities, 80 of which are engaged in manufacturing, quality assurance and
regulatory affairs, 36 of which are engaged in sales and marketing activities
and 10 of which are engaged in general and administrative functions. We believe
that our relations with our employees are good.
FACILITIES
We lease approximately 30,000 square feet of manufacturing, laboratory and
office space in Irvine, California. This lease expires in May 2002. We expect to
require additional space within the next 12 months.
LEGAL PROCEEDINGS
In October 1999, we filed a patent infringement lawsuit in the United
States District Court for the Central District of California against
Mallinckrodt, Inc. and Nellcor Puritan Bennett, Inc., a subsidiary of
Mallinckrodt, Inc., or Nellcor, for infringement of a U.S. patent issued to us
in February 1996. In our complaint, we alleged that Nellcor has infringed one of
our pulse oximetry signal processing patents by making, using, selling and
offering to sell the N-395 pulse oximeter and MP 404 pulse oximeter circuit
board. We amended the lawsuit to allege that Nellcor and Mallinckrodt infringed
a second pulse oximetry signal processing patent. We are seeking injunctive
relief against Nellcor to prohibit the sale of these products, as well as
unspecified damages, costs and expenses, reasonable attorneys' fees and treble
damages for willful infringement. Nellcor has denied our allegation of
infringement and contends that our patents are invalid or unenforceable. Nellcor
sought and was granted a motion for summary judgment on non-infringement of two
claims in one of these two patents. Nellcor's motion for summary
44
judgment seeking invalidity on the other one of our patents is pending and
argument on the remaining motion is currently scheduled for January 2001. Our
motion for a preliminary injunction against Nellcor was denied by the Court. We
have appealed the summary judgment ruling in Nellcor's favor and the denial of
our preliminary injunction to the Court of Appeals. However, the summary
judgment ruling results in a loss of some of our intellectual property rights
unless the ruling is overturned on appeal. If Nellcor's pending motion is
granted, we would lose protection for additional intellectual property rights
currently covered by the patents in question.
After our filing, in November, 1999 Nellcor filed a patent infringement
lawsuit against us and one of our customers in the United States District Court
for the District of Delaware. This lawsuit has been transferred to the Central
District of California pursuant to our request. Nellcor alleges that we are and
have been infringing three of Nellcor's patents and alleges that we are and have
been inducing and contributing to the infringement of these three and a fourth
Nellcor patent. Nellcor added three additional patents to the lawsuit in October
2000, asserting infringement by our Radical product with SatShare. Nellcor is
seeking injunctive relief to prevent our alleged acts of infringement, as well
as unspecified damages, costs and expenses, reasonable attorneys' fees and
treble damages for willful infringement. In our answer we have denied Nellcor's
allegation of infringement and allege that Nellcor's patents are invalid or
unenforceable. We are in the initial phase of discovery and no court dates have
been scheduled. We have indemnity obligations to our customers in the event that
we are found to infringe. We are currently defending one of our customers that
was named in the Nellcor suit.
We intend to vigorously prosecute our patent infringement case against
Nellcor and to vigorously defend ourselves against Nellcor's patent infringement
case, which is in the discovery phase. However, due to the nature of litigation
generally, we cannot be sure whether we will have any liability in this
litigation. In addition, we cannot assure you that we will obtain any remedy or
that our patents will survive the validity and non-infringement challenges by
Nellcor. In the event that we do not ultimately prevail, we may be unable to
sell our products or to compete effectively. An outcome adverse to us will cause
our business to suffer materially.
In connection with this litigation, we have incurred and expect to continue
to incur substantial legal and other litigation related expenses. In addition,
this litigation has diverted, and is expected to continue to divert, the
attention of management and technical personnel from our on-going business.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information about our executive officers and
directors as of September 30, 2000:
[Download Table]
NAME AGE POSITION
---- --- --------
Joe E. Kiani......................... 36 President, Chief Executive Officer
and Chairman of the Board
Mohamed K. Diab...................... 42 Chief Technical Officer and Director
Bradley R. Langdale.................. 36 Executive Vice President, Chief
Financial Officer and Secretary
Ammar Al-Ali......................... 37 Vice President, Engineering
James J. Cronin...................... 52 Vice President, Regulatory Affairs
and Quality Assurance
Julian M. Goldman, M.D. ............. 40 Vice President, Medical Affairs
Eric M. Heer......................... 36 Vice President, Marketing
Drew J. Rogers....................... 46 Vice President, Sales
George R. Ryan....................... 50 Vice President, Business Development
Gary L. Waite........................ 44 Vice President, Manufacturing
Edward L. Cahill(1).................. 47 Director
Robert L. Coleman, Ph.D.(1)(2)....... 54 Director
Jack W. Lasersohn(2)................. 47 Director
Frederick A. Robertson, M.D.(1)...... 45 Director
H.J.C. Swan, Ph.D., M.A.C.P. ........ 78 Director
---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Kiani is a founder of Masimo and has served as President, Chief
Executive Officer and Chairman of the Board since our inception in 1989. Prior
to founding Masimo, Mr. Kiani served as the Engineering Director of Newport
Medical Electronics, a developer of conventional pulse oximeters. Mr. Kiani
served as regional technical manager for Antherm Electronics, as a field
applications engineer for Bell Industries and product design engineer at Unisys.
Mr. Kiani holds a B.S.E.E. degree and an M.S.E.E. degree from San Diego State
University. In addition, Mr. Kiani serves on the boards of Masimo Laboratories
and Saba Software Inc. In February 2000, Mr. Kiani received the first Society of
Critical Care Medicine Industry & Technology Critical Care Technology Excellence
Achievement Award.
Mr. Diab is a founder of Masimo and has served as Chief Technical Officer
and director since September 1989. Prior to founding Masimo, Mr. Diab served as
Chief Engineering Consultant at Newport Medical Electronics, developing
conventional pulse oximetry, and as Senior Design Engineer at Galiso, developing
precision data acquisition boards for testing high pressure gas cylinders and
the purification of industrial gases. Mr. Diab holds a B.S.E.E. degree from
California State University, Fullerton.
Mr. Langdale has served as Executive Vice President, Chief Financial
Officer and Secretary of Masimo since July 1998. Mr. Langdale joined Masimo as
Vice President, Finance and Chief Financial Officer in February 1996. From July
1993 to November 1995, Mr. Langdale served as Director of Finance for CareLine,
Inc., a publicly-held provider of emergency medical services that was acquired
by Laidlaw Inc. in November 1995. Prior to March 1990, Mr. Langdale was employed
by the public accounting firm Price Waterhouse & Company LLP. Mr. Langdale is a
46
Certified Public Accountant and holds a B.S. degree from the University of
California, Los Angeles.
Mr. Al-Ali has served as Vice President, Engineering of Masimo since
December 1996. Prior to December 1996, Mr. Al-Ali was most recently the Director
of Software Development and held various other engineering positions since
joining Masimo in April 1995. From January 1992 to November 1994, Mr. Al-Ali
served as the Director of Research and Development, Electronics for Ami-Med
Corporation, a medical company providing devices for continuous cardiac output.
Mr. Al-Ali holds a B.S. degree from the University of Arizona.
Mr. Cronin has served as Vice President, Regulatory Affairs and Quality
Assurance of Masimo since April 1996. Between January 1995 and April 1996, Mr.
Cronin served as our Director, Regulatory Affairs and Quality Assurance. From
August 1991 to July 1993, Mr. Cronin served as Product Development Manager for
O.B. Tech, a medical device manufacturer. Prior to that, Mr. Cronin held various
management positions in regulatory, research and development and operations for
Microgon and Purolator Technologies. Mr. Cronin holds a B.S. degree from New
York University.
Dr. Goldman has served as Vice President, Medical Affairs of Masimo since
January 1999. Prior to January 1999, Dr. Goldman was a Tenured Associate
Professor of Anesthesiology and Director of Anesthesia Research at the
University of Colorado Health Sciences Center in Denver, where he was on the
faculty since January 1990. In December 1990, he completed research fellowship
training in artificial intelligence applications in anesthesia monitoring. Dr.
Goldman holds a B.S. degree from Touro College, an M.D. from SUNY Health
Sciences Center at Brooklyn and anesthesiology training at University of
Colorado Health Sciences Center. He is certified by the American Board of
Anesthesiology and serves on national and international anesthesia and standards
committees.
Mr. Heer has served as Vice President, Marketing of Masimo since March
2000. Prior to March 2000, Mr. Heer held various management positions with Zoll
Medical Corporation, a manufacturer of cardiac resuscitation devices and one of
our licensees, including Regional Sales Manager between March 1999 and March
2000, Director of Hospital Marketing between September 1994 and October 1997 and
Territory Sales Manager between July 1991 and September 1994. From October 1997
to March 1999, Mr. Heer served as Senior Marketing Manager and Business
Development and Strategic Planning Manager for St. Jude Medical. Mr. Heer holds
a B.S. degree from Stanford University, an M.S. degree from the University of
California, Los Angeles, and an M.B.A. from Pepperdine University.
Mr. Rogers has served as Vice President of Sales of Masimo since March
2000. Mr. Rogers joined the Company as Vice President, Marketing and Business
Development in June 1999. Mr. Rogers held various management positions with MDE,
a manufacturer of patient monitors and one of our licensees, including General
Manager between July 1996 and March 1999, Vice President of Sales & Marketing
between April 1993 and June 1996, and Director of Sales between January 1989 and
March 1992 during which he established worldwide distribution. Mr. Rogers holds
a B.S. degree from the University of Missouri.
Mr. Ryan has served as Vice President, Business Development of Masimo since
July 2000. Prior to July 2000, Mr. Ryan served as Director, Business Development
for Hill-Rom, a manufacturer of maternal infant care, patient transport and
support equipment and one of our licensees. Mr. Ryan also held various
management positions with Respironics including Director of Business Development
from October 1994 to January 1999 and Director of Worldwide Marketing from March
1992 to September 1994. Mr. Ryan holds a B.S.E.E. from the Milwaukee School of
Engineering and an M.B.A. in International Marketing and Finance from the
University of Southern California.
47
Mr. Waite has served as Vice President, Manufacturing of Masimo since May
1998. From May 1993 to May 1998, Mr. Waite was Director of Manufacturing for
Nellcor, our principal competitor. Mr. Waite has held various positions at
Printronix, Inc. and Allen-Bradley, respectively. Mr. Waite holds a B.S. degree
in Operations Management from Long Beach State University.
Mr. Cahill has served as a director since January 1999. Mr. Cahill is a
partner of HLM Management Company, a private investment firm. From June 1995 to
May 2000, Mr Cahill was a partner of Cahill, Warnock & Company, LLC, a private
investment firm. Prior to founding Cahill, Warnock & Company, LLC, Mr. Cahill
was a Managing Director at Alex. Brown & Sons, where he headed the Health Care
Investment Banking Group from 1986 to 1995. Mr. Cahill is a director of
Occupational Health Rehabilitation, Inc., Centene Corporation, MedPlus, Inc. and
is also a trustee of Johns Hopkins Medicine, The Johns Hopkins Health System
Corporation and St. Johns Preparatory School. Mr. Cahill holds a B.A. from
Williams College and an M.P.P.M. from Yale University.
Dr. Coleman has served as a director since February 1997. Dr. Coleman was
President and CEO of MediSense, a manufacturer of blood glucose self-testing
devices, from 1991 to May 1996 and President of MediSense, an Abbott
Laboratories Company, from June 1996 to December 1996. Dr. Coleman was a
co-founder of Nova Biomedical Corporation, a manufacturer of clinical laboratory
equipment, and served as President and CEO from 1976 to 1991. Dr. Coleman holds
a B.S. degree from Morehead State University, Morehead, Kentucky and a Ph.D.
degree in Analytical Chemistry from the University of Tennessee. Dr. Coleman
held a faculty appointment as Associate in Medicine (Biochemistry) at Harvard
Medical School for the academic years 1971 and 1972.
Mr. Lasersohn has served as a director since January 1995. He has been a
General Partner of The Vertical Group, L.P., a private venture capital and
investment management firm, since its formation in 1989 by former principals of
F. Eberstadt & Co., Inc. From January 1981 to March 1989, he was a Vice
President and later a Managing Director of the venture capital division of F.
Eberstadt & Co., Inc. Mr. Lasersohn also serves as a director of Kyphon, Inc.
and a number of privately-held health care companies. He holds B.S. and M.A.
degrees from Tufts University and a J.D. degree from Yale University.
Dr. Robertson has served as a director since September 2000. Dr. Robertson
has been an Associate Clinical Professor of Anesthesiology at the Medical
College of Wisconsin since March 1993. From January 1993 to July 2000, Dr.
Robertson held various management positions with GE Marquette Medical Systems
and the former Marquette Medical Systems, including President and Chief
Executive Officer between November 1998 and July 2000, Chief Executive Officer
and President - Monitoring Group between November 1997 and November 1998,
Medical Director between February 1997 and November 1997 and Vice
President/President, Patient Monitoring Division between May 1994 to February
1997. Dr. Robertson is certified by the American Board of Anesthesiology and
serves as a director of the Anesthesia Patient Safety Foundation as well as a
privately-held health care research foundation. Dr. Robertson attended the
University of Wisconsin, holds an M.D. degree from the University of Wisconsin
Medical School and an M.B.A. from San Diego State University.
Dr. Swan has served as a director since August 1992. Dr. Swan is a past
President and Distinguished Fellow of the American College of Cardiology, and a
Master of the American College of Physicians. He is the 1985 recipient of the
James Herrick Award of the American Heart Association. Dr. Swan is a Professor
of Medicine (Emeritus) at the University of California, Los Angeles and is the
inventor of the Swan-Ganz Catheter. Dr. Swan holds a Ph.D. degree in Physiology
from the University of London and has held academic positions in London, at the
Mayo Clinic and at Cedars-Sinai Hospital in Los Angeles. Dr. Swan has published
over 140 scientific papers in the areas of cardiology and physiology.
48
COMMITTEES OF OUR BOARD OF DIRECTORS
The board of directors has established a compensation committee and an
audit committee. The compensation committee, consisting of Messrs. Coleman and
Lasersohn, reviews and approves the salaries, bonuses and other compensation
payable to our executive officers and administrators and makes recommendations
concerning our employee benefit plans.
The audit committee, consisting of Messrs. Cahill, Coleman and Robertson,
recommends the selection of independent public accountants to the board of
directors, reviews the scope and results of the audit and other services
provided by our independent accountants and reviews our accounting practices and
systems of internal accounting controls.
BOARD COMPOSITION
We currently have six directors. Upon the closing of this offering the
terms of office of the board of directors will be divided into three classes. As
a result, a portion of our board of directors will be elected each year.
- The class I directors will be Messrs. Cahill and Kiani and their term
will expire at the annual meeting of stockholders to be held in 2001.
- The class II directors will be Messrs. Swan and Diab and their term will
expire at the annual meeting of stockholders to be held in 2002.
- The class III directors will be Messrs. Coleman, Lasersohn and Robertson
and their term will expire at the annual meeting of stockholders to be
held in 2003.
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election. In addition, the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of Masimo.
DIRECTOR COMPENSATION
Directors who are also our employees currently receive no additional
compensation for their services as directors of our company. Directors who are
not our employees receive an annual grant of 3,000 non-qualified stock options,
with an exercise price equal to the fair market value at the date of grant,
under our Third Amended and Restated 1996 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan. We have no other director
compensation arrangements, other than reimbursement for travel expenses and
other out-of-pocket costs incurred in connection with directors' attendance at
meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as members of our board of directors or compensation committee.
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EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by us to our chief
executive officer and to our four other most highly compensated executive
officers who earned more than $100,000 in salary and bonus for all services
rendered in all capacities during the calendar years ended December 31, 1999,
1998 and 1997.
SUMMARY COMPENSATION TABLE
[Download Table]
LONG-TERM
COMPENSATION
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING
NAME AND POSITION YEAR SALARY BONUS(1) OPTIONS
----------------- ---- -------- -------- ------------
Joe E. Kiani............................... 1999 $224,406 17,930
Chief Executive Officer and President 1998 208,177 $87,500 269,250
1997 202,260 0
Mohamed K. Diab............................ 1999 154,450 9,890
Chief Technical Officer 1998 142,750 48,000 110,600
1997 122,324 0
Bradley R. Langdale........................ 1999 152,500 27,090
Executive Vice President, Chief 1998 127,500 49,600
Financial Officer and Secretary 1997 120,615 15,000
Ammar Al-Ali............................... 1999 156,461 26,720
Vice President, Engineering 1998 147,779 38,300
1997 137,610 20,000
Julian M. Goldman, M.D..................... 1999 191,667 4,390
Vice President, Medical Affairs 1998 -- 80,000
1997 -- 0
------------
(1) Bonuses for 1999, 1998 (except Joe E. Kiani and Mohamed K. Diab) and 1997
were paid in stock options and are included in the above table as long-term
compensation.
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OPTION GRANTS IN 1999
The table below sets forth grants of stock options during 1999 to our named
executive officers. The potential realizable value is calculated based on the
term of the option at its time of grant, which is 10 years. It is calculated
assuming that the fair market value of common stock on the date of grant
appreciates at the indicated annual rate compounded annually for the entire term
of the option and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These numbers are calculated based on the
requirements of the SEC and do not reflect our estimate of future stock price
growth.
OPTION GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENT OF OF ASSUMED ANNUAL
NUMBER OF OPTIONS RATES OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM
OPTIONS IN FISCAL PRICE FAIR VALUE EXPIRATION -----------------------------
NAME GRANTED YEAR (PER SHARE) (PER SHARE) DATE 0% 5% 10%
---- ---------- ---------- ----------- ----------- ---------- ------- -------- --------
Joe E. Kiani......... 5,800 1.0% $5.00 $6.50 10/20/09 $ 8,700 $ 32,409 $ 68,784
12,130 2.1% $5.50 $6.70 1/26/10 14,556 65,667 144,081
Mohamed K. Diab...... 3,200 0.6% $5.00 $6.50 10/20/09 4,800 17,881 37,950
6,690 1.2% $5.50 $6.70 1/26/10 8,028 36,217 79,464
Bradley R.
Langdale........... 20,400 3.5% $5.00 $6.50 10/20/09 30,600 113,991 241,930
6,690 1.2% $5.50 $6.70 1/26/10 8,028 36,217 79,464
Ammar Al-Ali......... 10,000 1.7% $4.00 $6.00 6/11/09 20,000 57,734 115,625
11,700 2.0% $5.00 $6.50 10/20/09 17,550 65,377 138,754
5,020 0.9% $5.50 $6.70 1/26/10 6,024 27,176 59,628
Julian M. Goldman,
M.D. .............. 4,390 0.8% $5.50 $6.70 1/26/10 5,268 23,766 52,145
The dates of exercisability of the options are determined in accordance with
their respective vesting schedules.
OPTION EXERCISES AND YEAR-END OPTION VALUES
The table below sets forth information concerning stock options exercised
during the year ended December 31, 1999 by our named executive officers and
options outstanding at December 31, 2000.
The information regarding the value realized reflects the fair market value
of our common stock underlying the option on date of exercise minus the
aggregate exercise price of the option.
The information regarding the value of unexercised in-the-money options is
based on a value of $12.00 per share, the assumed initial public offering price,
minus the per share exercise price, multiplied by the number of shares
underlying the option.
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FISCAL YEAR-END OPTION VALUES
[Enlarge/Download Table]
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN
OPTIONS AT THE MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999
SHARES ACQUIRED ---------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED VESTED UNVESTED EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ---------- ---------- ----------- -------------
Joe E. Kiani.............. 6,500 $35,100 188,797 298,383 $1,652,181 $2,421,264
Mohamed K. Diab........... 4,000 $21,600 13,357 107,133 96,821 853,864
Bradley R. Langdale....... 35,690 81,000 296,485 646,600
Ammar Al-Ali.............. 31,520 73,500 280,730 604,200
Julian M. Goldman, M.D. .. 4,390 80,000 28,535 640,000
EMPLOYMENT AGREEMENTS
On May 4, 1996, we entered into employment agreements with each of Mr. Joe
E. Kiani, our President and Chief Executive Officer and Mr. Mohamed K. Diab, our
Chief Technical Officer. The agreements terminate three years after notice of
non-renewal is given by either the executive or Masimo. Under these agreements,
Mr. Kiani is currently entitled to a base salary of $255,200 and Mr. Diab is
currently entitled to a base salary of $176,000 and each is entitled to a bonus
based upon attainment of specified operating income. If either of these
agreements is terminated by us without cause, Mr. Kiani and Mr. Diab, as
applicable, are entitled to a lump sum payment equal to two years of his then
base salary and immediate vesting of all outstanding stock options, and issuance
of such related stock as additional compensation.
STOCK OPTION PLANS
Third Amended and Restated 1996 Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan
Our Third Amended and Restated 1996 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. The 1996 stock plan was initially adopted
by our board of directors and approved by our stockholders in May 1996, and was
amended and restated by our board of directors and approved by our stockholders
in August 1999. Unless terminated sooner, the 1996 stock plan will terminate
automatically ten years from the date of obtaining board of directors approval.
Initially, 1,000,000 shares of common stock were reserved for issuance
under this plan. In December 1997, our board of directors approved an amendment
to the 1996 Stock Plan to increase the number of shares reserved for issuance to
1,200,000 and then in August 1999 to 1,400,000. In October 1999, our board of
directors approved an amendment to the 1996 stock plan to increase the number of
shares reserved for issuance to include the unissued options from the 1989
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan prior to its expiration, as well as any additional options that would
become available through future forfeitures. In March 2000, our board of
directors and in May 2000, our stockholders approved an amendment to the 1996
stock plan to increase the number of shares reserved for issuance to 2,400,000.
As of September 30, 2000, options to purchase 1,896,760 shares of common stock
were outstanding under the 1996 stock plan and 565,140 were available for
further issuance.
Authority to control and manage the operation and administration of the
1996 stock plan is vested with the board of directors which may delegate some or
all of such responsibilities to an
52
administrator. The administrator of our 1996 stock plan has the power to
determine among other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares issuable under each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
The board of directors has the authority to amend, suspend or terminate the
1996 stock plan, so long as no such action affects any shares of common stock
previously issued and sold or any option previously granted under the 1996 stock
plan. During any calendar year, each optionee may be granted options to purchase
a maximum of 500,000 shares.
Options and stock purchase rights granted under our 1996 stock plan are
generally not transferable by the optionee, and each option is exercisable
during the lifetime of the optionee only by such optionee.
In the case of stock purchase rights, unless the administrator determines
otherwise, the restricted stock purchase agreement grants us the right to have a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment or consulting relationship with us for any reason,
including death or disability. The purchase price for shares repurchased under
the restricted stock purchase agreement must be the original price paid by the
purchaser for shares which have not vested and at fair market value for shares
which have vested.
The exercise price of all incentive stock options granted under the 1996
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1996 stock plan is determined by the
administrator, but in no event may be less than 85% of fair market value. For
nonstatutory stock options intended to qualify as "performance-based
compensation" under Section 162(m) of the Internal Revenue code, the exercise
price must be at least equal to the fair market value of our common stock on the
date of grant. For any participant who owns stock possessing more than 10% of
the voting power of all classes of our outstanding capital stock, the exercise
price of any incentive stock option granted must be at least equal to 110% of
the fair market value on the grant date and the term of such incentive stock
option must not exceed five years. The term of all other options granted under
the 1996 stock plan may not exceed ten years.
The 1996 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall either be assumed or an equivalent option substituted for
by the successor corporation or if the outstanding options and stock purchase
rights are not assumed or substituted for by the successor corporation, the
optionees will become fully vested in and have the right to exercise such
options or stock purchase rights. If an option or stock purchase right becomes
fully vested and exercisable upon a merger or sale of assets, the administrator
must notify the optionee that the option or stock purchase right is fully
exercisable for a period of 15 days from the date of the notice, and the option
or stock purchase right will terminate upon the expiration of the 15 day period.
1989 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan
Our amended and restated 1989 stock plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants.
53
The 1989 stock plan was initially adopted by our board of directors and approved
by our stockholders in September 1989, and was amended by our board of directors
and approved by our stockholders in May 1999. The 1989 stock plan has terminated
as it has been more than ten years from the date of obtaining stockholder
approval.
A total of 1,000,000 shares of common stock were reserved for issuance
under this plan. As of September 30, 2000, options to purchase 401,500 shares of
common stock were outstanding under the 1989 stock plan and there are no more
shares under this plan available for further issuance.
The administrator of our 1989 stock plan has the power to determine among
other things:
- the terms of the options or stock purchase rights granted, including the
exercise price of the option or stock purchase right;
- the number of shares issuable under each option or stock purchase right;
- the exercisability of each option or stock purchase right; and
- the form of consideration payable upon the exercise of each option or
stock purchase right.
During any fiscal year, each optionee may be granted options to purchase a
maximum of 500,000 shares.
Options and stock purchase rights granted under our 1989 stock plan are
generally not transferable by the optionee, and each option and stock purchase
right is exercisable during the lifetime of the optionee only by such optionee.
Options granted under the 1989 stock plan must generally be exercised within
three months after the end of optionee's status as an employee, director or
consultant, or within twelve months after such optionee's termination by death
or disability, but in no event later than the expiration of the option's term.
The exercise price of all incentive stock options granted under the 1989
stock plan must be at least equal to the fair market value of the common stock
on the date of grant. The exercise price of nonstatutory stock options and stock
purchase rights granted under the 1998 stock plan is determined by the
administrator, but for nonstatutory stock options intended to qualify as
"performance-based compensation" under Section 162(m) of the Internal Revenue
code, the exercise price must be at least equal to the fair market value of our
common stock on the date of grant. For any participant who owns stock possessing
more than 10% of the voting power of all classes of our outstanding capital
stock, the exercise price of any incentive stock option granted must be at least
equal to 110% of the fair market value on the grant date and the term of such
incentive stock option must not exceed five years. The term of all other options
granted under the 1989 stock plan may not exceed ten years.
The 1989 stock plan provides that if we merge with or into another
corporation, or sell substantially all of our assets, each option and stock
purchase right shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding options and stock purchase rights are
not assumed or substituted for by the successor corporation, the optionees will
become fully vested in and have the right to exercise such options or stock
purchase rights. If an option or stock purchase right becomes fully vested and
exercisable upon a merger or sale of assets, the administrator must notify the
optionee that the option or stock purchase right is fully exercisable for a
period of 30 days from the date of the notice, and the option or stock purchase
right will terminate upon the expiration of the 30 day period.
2000 EMPLOYEE STOCK PURCHASE PLAN
Our 2000 Employee Stock Purchase Plan was adopted by our board of directors
in August 2000, and stockholder approval is expected before the closing of the
offering. The purchase
54
plan will become effective immediately upon the signing of the underwriting
agreement for this offering. A total of 500,000 shares of common stock have been
reserved for issuance under the purchase plan. The share reserve will increase
annually by the lesser of (a) 1% of the outstanding shares on the last day of
our fiscal year, or (b) a lesser amount determined by our board of directors.
The purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the U.S. Internal Revenue Code. Under the
purchase plan, our board of directors may specify offering periods of up to 24
months, except for the first offering period which commences upon the date the
underwriting agreement is signed and ends on the last business day in December
2002. The purchase plan also contains consecutive six month purchase periods.
Subsequent offering and all purchase periods start on the first business day in
January and July of each year, and end on the last business day in June and
December of each year.
Employees are eligible to participate if they are customarily employed by
us or any participating subsidiary for at least 20 hours per week and more than
five months in any calendar year. However, any employee who immediately after
receiving a grant owns stock possessing 5% or more of the total combined voting
power of value of all classes of our capital stock or whose rights to purchase
stock under this plan accrues at a rate which exceeds $25,000 in fair market
value of common stock for each calendar year, may not participate in this plan.
The purchase plan permits participants to purchase common stock through payroll
deduction of up to 15% of the participant's base salary.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each purchase period. The purchase price
will be 85% of the lower of the fair market value of the common stock at the
beginning of the offering period and the fair market value of the common stock
at the end of the purchase period. Participants may end their participation at
any time during an offering period, and they will be paid their payroll
deductions to date. Participation ends automatically upon termination of
employment with us.
If the fair market value of our common stock on any purchase date is less
than the fair market value on the start date of the offering period, then that
offering period will automatically terminate, and a new offering period will
begin on the next business day. All participants in the terminated offering will
be transferred to the new offering.
Rights granted under the purchase plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the plan. In the event of our merger, consolidation,
reorganization or liquidation, our board of directors has discretion to provide
that each outstanding option may be assumed or an equivalent right substituted
by the successor corporation or the board of directors may provide for all sums
collected by payroll deductions to be applied to a purchase of our common stock
immediately prior to such merger or other transaction. The purchase plan will
terminate automatically in 2010 unless terminated earlier. Our board of
directors has the authority to amend or terminate the purchase plan, except that
no such action may adversely affect any outstanding rights to purchase stock
under the purchase plan. Our board of directors has the exclusive authority to
interpret and apply the provisions of the purchase plan.
401(k) PLAN
All full-time employees of Masimo over age 21 are eligible to participate
in the Masimo Retirement Savings Plan, a defined contribution plan, effective
April 1, 1995 and intended to qualify under Section 401 of the Internal Revenue
Code. Eligible employees may enter the savings plan immediately upon hire date.
Participants may make pre-tax contributions to the savings plan of up to 15%
percent of their eligible earnings, but not in excess of a statutory annual
limit. We may make discretionary matching contributions to the savings plan. As
of September 30, 2000, we have not made any matching contributions to the Masimo
Retirement Savings Plan.
55
CERTAIN TRANSACTIONS
SPIN-OFF OF MASIMO LABORATORIES
In April 1998, we completed the spin-off of our non-vital signs monitoring
applications (including all applications other than specified clinical oxygen
saturation measurements, sudden infant death syndrome monitoring,
electrocardiography, and blood pressure, temperature and respiration monitoring)
to a newly formed entity, Masimo Laboratories, Inc. The spin-off was effectuated
through a stock dividend whereby we distributed all of the issued and
outstanding shares of our wholly-owned subsidiary, Masimo Laboratories, to the
holders of the outstanding shares of our common stock and preferred stock, which
included our officers and directors who owned shares of our stock at that time,
in each case, on a one-for-one basis. Our stockholders were not required to pay
any cash or other consideration for the shares of Masimo Laboratories and were
not required to surrender or exchange shares of our stock in order to receive
the shares of Masimo Laboratories. Masimo Laboratories received $18,223 of cash
as part of the spin-off from us for start-up purposes. After the spin-off, we
and Masimo Laboratories entered into a cross-licensing agreement, whereby we
agreed to fund research and development conducted by Masimo Laboratories for a
period of up to two years, which was extended for another two years effective
March 2000, in an amount not to exceed $2,500,000 in exchange for licensing
rights to technology developed by Masimo Laboratories for use in blood glucose
monitoring applications in the hospital market. In addition, we granted to
Masimo Laboratories the right to use our Masimo SET technology, products, and
trademarks in the development of Masimo Laboratories' technology. All technology
developed by Masimo Laboratories under this cross-licensing agreement will be
owned by Masimo Laboratories. On a monthly basis, we reimburse Masimo
Laboratories for its cash expenditures and charge it an allocation of
engineering labor, facility, administrative, and equipment related costs paid by
Masimo on behalf of Masimo Laboratories. As of September 30, 2000, we had
expensed as research and development approximately $645,000 related to the
cross-licensing agreement with Masimo Laboratories, of which approximately
$62,000 was reimbursement of Masimo Laboratories' cash expenditures and
approximately $583,000 was an allocation of engineering labor, facility,
administrative, and equipment related costs paid by us.
WARBURG, PINCUS VENTURES, L.P.
In October 1998, Warburg, Pincus Ventures, L.P. sold and transferred
1,487,500 of the 1,541,490 shares it held of our Series C Preferred Stock to
INVESCO (NY), Inc., as investment manager, INVESCO Funds Group, Inc., and
several other investors. Pursuant to the Warburg sale, Warburg received gross
proceeds of $9,073,750 and we received gross proceeds of $2,826,215 as
consideration for making specific representations, warranties, covenants and
agreements in connection with the sale. Warburg sold and transferred its
remaining 53,990 shares of our Series C Preferred Stock to INVESCO (NY), Inc.
(and its affiliated entities) in a subsequent sale.
INVESCO PRIVATE CAPITAL, INC.
In September 1999, we sold an aggregate of 181,819 shares of our Series F
preferred stock to entities affiliated with Invesco Private Capital, Inc., an
existing investor, at a purchase price of $11.00 per share for an aggregate
purchase price of approximately $2 million.
MOORE GLOBAL INVESTMENTS, LTD.
In September 1999, we sold an aggregate of 181,819 shares of our Series F
preferred stock to Moore Global Investments, Ltd. and its related entity,
Remington Investment Strategies, L.P., existing investors, at a purchase price
of $11.00 per share for an aggregate purchase price of approximately $2 million.
56
VITAL INSITE ACQUISITION
In December 1999, we acquired primarily intangible assets of Vital Insite,
Inc., a development stage medical device company engaged in the development of
technology for continuous noninvasive measurement of blood pressure, in exchange
for 45,455 shares of our Series F Preferred Stock. Mr. Lasersohn, one of our
directors, was also one of the directors of Vital Insite, Inc.
GE MARQUETTE MEDICAL SYSTEMS, INC.
In September 2000, we sold 454,546 shares of Series F Preferred Stock for
$11.00 per share and issued warrants to purchase 90,909 shares of Common Stock
at an exercise price of $11.00 per share to GE Marquette Medical Systems, Inc.
Dr. Robertson, one of our directors, was President and Chief Executive Officer
of GE Marquette Medical Systems, Inc. until July 2000.
LOAN TO EXECUTIVE OFFICER
In January 1998, we loaned $80,000 to Mr. Al-Ali. The loan is evidenced by
a letter agreement and bears interest at 3.5% per annum beginning October 1,
1998. As of September 30, 2000, $59,600 of the principal amount of the loan was
outstanding and $4,330 of interest has been paid by Mr. Al-Ali. Pursuant to the
terms of the letter agreement, no principal payments are due until January 2003.
In the event that Mr. Al-Ali terminates his employment with us prior to a change
of more than 50% of the voting stock of Masimo, the loan will become immediately
due and payable. In the event that we terminate Mr. Al-Ali's employment, the
interest rate will increase to 7%.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
We have entered into an agreement with our preferred stockholders, other
than the Series D stockholders, pursuant to which they will have registration
rights with respect to their shares of common stock following this offering.
Please see "Description of Capital Stock -- Registration Rights" for a further
description of the terms of this agreement.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been otherwise obtained from
unaffiliated third parties. All future transactions, including loans, if any,
between us and our officers, directors and principal stockholders and their
affiliates and any transactions between us and any entity with which our
officers, directors or principal stockholders are affiliated will be approved by
a majority of the board of directors, including a majority of the independent
and disinterested directors.
57
PRINCIPAL STOCKHOLDERS
The following table provides summary information regarding beneficial
ownership of our outstanding common stock as of September 30, 2000:
- each person or group who beneficially owns more than 5% of our common
stock,
- each of our directors and the named executive officers, and
- all of our directors and executive officers as a group.
Beneficial ownership of shares is determined under the rules of the SEC and
generally includes any shares over which a person exercises sole or shared
voting or investment power. Except as indicated by footnote, and subject to
applicable community property laws, each person identified in the table
possesses sole voting and investment power with respect to all shares of common
stock held by them. Shares of common stock subject to options currently
exercisable or exercisable within 60 days of September 30, 2000 or issuable
pursuant to outstanding options that may be exercised upon completion of this
offering are deemed outstanding for calculating the percentage of outstanding
shares of the person holding these options, but are not deemed outstanding for
calculating the percentage of any other person. Applicable percentage ownership
in the following table is based on 13,577,993 shares of common stock outstanding
as of September 30, 2000, after giving effect to the conversion of all
outstanding shares of preferred stock into common stock upon the closing of the
offering, and 18,577,993 shares of common stock outstanding immediately
following the completion of this offering.
Unless otherwise indicated, the address of each of the named individuals is
c/o Masimo Corporation, 2852 Kelvin Ave., Irvine, CA 92614.
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PERCENT OF SHARES OUTSTANDING
---------------------------------
NAME AND ADDRESS SHARES BEFORE OFFERING AFTER OFFERING
---------------- --------- --------------- --------------
Invesco Private Capital, Inc.(1)................ 1,469,900 10.8% 7.9%
1166 Ave. of the Americas
New York, NY 10036
Joe E. Kiani(2)................................. 1,151,348 8.3 6.1
Mohamed K. Diab(3).............................. 1,056,158 7.7 5.7
Entities affiliated with Moore
Capital Management, Inc.(4)................... 959,598 7.1 5.2
1251 Ave. of the Americas, 53rd Fl.,
New York, NY 10020
DSV Partners IV(5).............................. 925,000 6.8 5.0
620 Newport Center Dr., St 1600
Newport Beach, CA 92660
Franklin Templeton Group(6)..................... 909,091 6.7 4.9
777 Mariners Island Blvd.
San Mateo, CA 94404
Feibusch & Co., Inc.(7)......................... 708,061 5.2 3.8
80 E. Sir Francis Drake Blvd., 3D
Larkspur, CA 94939
Bradley R. Langdale(8).......................... 67,850 * *
Ammar Al-Ali(9)................................. 58,080 * *
James J. Cronin(10)............................. 36,240 * *
Gary L. Waite(11)............................... 23,680 * *
Drew J. Rogers(12).............................. 10,730 * *
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[Enlarge/Download Table]
PERCENT OF SHARES OUTSTANDING
---------------------------------
NAME AND ADDRESS SHARES BEFORE OFFERING AFTER OFFERING
---------------- --------- --------------- --------------
Julian M. Goldman(13)........................... 8,390 * *
Eric M. Heer(14)................................ 2,000 * *
George R. Ryan.................................. 0 * *
Edward L. Cahill(15)............................ 440,230 3.2 2.4
Jack W. Lasersohn(16)........................... 312,748 2.3 1.7
Robert L. Coleman(17)........................... 44,750 * *
Frederick A. Robertson M.D. .................... 0 * *
H.J.C. Swan, M.D., Ph.D......................... 81,000 * *
All executive officers and directors as a group
(15 persons)(18).............................. 3,293,204 23.1 17.1
---------------
* Less than 1% of the outstanding common stock
(1) Includes 197,816 shares of Series C Preferred Stock and 25,169 shares of
Series F Preferred Stock sold to Chancellor Private Capital Partners III,
L.P., 753,836 shares of Series C Preferred Stock and 95,912 shares of
Series F Preferred Stock sold to Citiventure 96 Partnership, L.P., 325,997
shares of Series C Preferred Stock and 41,478 shares of Series F Preferred
Stock sold to Chancellor Private Offshore Partners II, L.P., and 26,341
shares of Series C Preferred Stock and 3,351 shares of Series F Preferred
Stock sold to Chancellor Private Capital Offshore Partners I, C.V., Invesco
Private Capital, Inc. is the investment manager and is a general partner of
the general partner of the aforementioned funds.
(2) Includes 250,514 shares of common stock subject to options exercisable
within 60 days of September 30, 2000 and 83,334 shares of common stock
subject to options exercisable upon completion of this offering.
(3) Includes 33,824 shares of common stock subject to options exercisable
within 60 days of September 30, 2000 and 33,334 shares of common stock
subject to options exercisable upon completion of this offering.
(4) Includes 637,779 shares of Series E Preferred Stock and 149,092 shares of
Series F Preferred Stock sold to Moore Global Investments, LTD. and 140,000
shares of Series E Preferred Stock and 32,727 shares of Series F Preferred
Stock sold to Remington Investment Strategies, L.P. Moore Capital
Management, Inc. exercises voting and investment power with respect to
portfolio assets held for the account of Moore Global Investments, Ltd.
Moore Capital Advisors, L.L.C. is the sole general partner of Remington
Investment Strategies, L.P. Mr. Louis M. Bacon is the majority shareholder
of Moore Capital Management, Inc. and is the majority equity holder of
Moore Capital Advisors, L.L.C. As a result, Mr. Bacon may be deemed to be
the beneficial owner of the aggregate shares held of record or beneficially
by Moore Global Investments, Ltd. and Remington Investment Strategies, L.P.
(5)DSV Management Ltd. is the general partner of DSV Partners IV. Morton
Collins, Bergman Family, LLC, John Clarke, Robert Hillas, James Millar and
John Park are the general partners of DSV Management Ltd. and have voting
and investment power over these shares. Each of the general partners of DSV
Management Ltd. disclaims beneficial ownership of the shares held by DSV
Partners IV except to the extent of each of their proportional interest
therein.
(6) Includes 772,727 shares of Series F Preferred Stock sold to Hare & Co. FBO
California Growth Fund 180 and 136,364 shares of Series F Preferred Stock
sold to Hare & Co. FBO Global Health Care Fund 1999. Franklin Advisors,
Inc. is the investment manager to California Growth Fund 180 and Global
Health Care Fund 1999.
(7) Includes 398,061 shares of Series A Preferred Stock and 110,000 shares of
Series B Preferred Stock issued to Feibusch & Co., Inc. and 200,000 shares
of Series A Preferred Stock issued to Tamalpais Associates. Robert J.
Feibusch holds voting and investment control over the shares held by
Feibusch & Co., Inc. and Tamalpais Associates. Mr. Feibusch is a majority
shareholder of Feibusch & Co., Inc. and a general partner of Tamalpais
Associates.
(8) Includes 67,850 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(9) Includes 58,080 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(10) Includes 36,240 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(11) Includes 20,080 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(12) Includes 10,730 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(13) Includes 8,390 shares of common stock subject to options exercisable within
60 days of September 30, 2000.
(14) Includes 2,000 shares of common stock subject to options exercisable within
60 days of September 30, 2000.
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(15) Includes 285,715 shares of Series D Preferred Stock sold to Cahill, Warnock
Strategic Partners Fund L.P., CWSPF, 151,515 shares of Series A Preferred
Stock issued upon exercise of Series A Warrants in October 1996, and 3,000
shares of common stock subject to options exercisable within 60 days of
September 30, 2000. All of the preferred stock indicated as owned by Mr.
Cahill are owned directly by CWSPF and are included because of his
affiliation with CWSPF. Mr. Cahill disclaims beneficial ownership of the
preferred stock.
(16) Includes 306,748 shares of Series C Preferred Stock held of record by
Vertical Fund Associates, L.P., of which Mr. Lasersohn disclaims beneficial
ownership, and 6,000 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(17) Includes 44,750 shares of common stock subject to options exercisable
within 60 days of September 30, 2000.
(18) Includes directors' and executive officers' shares listed above, including
306,748 shares of capital stock held of record by Vertical Fund and the
151,515 and 285,715 shares of capital stock held of record by CWSPF.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
As of September 30, 2000, there were outstanding:
- 3,041,273 shares of common stock held of record by 96 stockholders,
- 10,536,720 shares of preferred stock held of record by 200 stockholders;
- options to purchase 2,298,260 shares of common stock; and
- warrants to purchase 100,909 shares of common stock.
Upon the closing of this offering, all outstanding shares of preferred
stock will automatically convert into 10,536,720 shares of common stock. The
options and warrants will remain outstanding. The holders of our Series F
Preferred Stock and one of our warrantholders have anti-dilution protection
which will require us to adjust the price at which their securities will convert
to our common stock to equal the consideration per share received by us if we
issue common stock in this offering at a price between $9.00 and $11.00 per
share. The current price at which their securities will convert to our common
stock equals $11.00 per share. Accordingly, if the initial public offering price
is between $9.00 and $11.00 per share, the holders of our Series F Preferred
Stock will be entitled to receive up to a maximum of 676,134 additional shares
of our common stock upon the closing of this offering and our warrantholders
will be entitled to receive up to a maximum of 20,202 additional shares of our
common stock upon the closing of this offering.
Upon completion of this offering, our authorized capital stock will consist
of 60,000,000 shares of common stock, $0.001 par value per share, and 5,000,000
shares of preferred stock, $0.001 par value per share.
COMMON STOCK
Subject to the preferences of any preferred stock outstanding at the time,
the holders of our common stock are entitled to receive dividends out of legally
available assets as and when determined by our board. Holders of our common
stock are entitled to one vote for each share held on all matters submitted to a
vote of stockholders. Our certificate of incorporation does not authorize
cumulative voting for the election of directors, which means that the holders of
a majority of shares voted can elect all of our directors then standing for
election. Our common stock is not entitled to preemptive rights and is not
subject to conversion or redemption. Upon liquidation, dissolution or
winding-up, the assets legally available for distribution to our stockholders
are distributable ratably among the holders of our common stock after payment of
liquidation preferences, if any, on any outstanding preferred stock and payment
of other claims of creditors. Each outstanding share of our common stock is, and
all shares of our common stock to be outstanding upon completion of this
offering will be, when issued and paid for, fully paid and nonassessable.
PREFERRED STOCK
Our board of directors is authorized, without further stockholder approval,
to issue up to an aggregate of 5,000,000 shares of preferred stock in one or
more series. Our board of directors is also authorized, subject to the
limitations prescribed by Delaware law, to fix the rights, preferences and
privileges of the shares of each series.
Our board may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of our common stock. Although we have no present plan to issue
any shares of preferred stock, any future issuance of shares of preferred stock,
or the issuance of rights to purchase preferred shares, may have the effect of
delaying, deferring or preventing a change of control of our company or an
unsolicited acquisition proposal.
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WARRANT
As of September 30, 2000, there was an outstanding warrant to purchase
10,000 shares of common stock at an exercise price of $3.00 per share, which
expires on May 1, 2004. The holder of the warrant may also from time to time
convert all or a portion of the warrant into a number of shares of common stock
to be determined by dividing (a) the aggregate fair market value of the shares
of common stock to be converted minus the aggregate warrant price for such
shares, by (b) the fair market value of one share of common stock. The warrant
also provides for anti-dilution protection in the event of stock dividends,
splits, combinations, issuances for less than the exercise price and other
diluting events. The holder of the warrant is also entitled to certain
piggy-back registration rights.
In addition, as of September 30, 2000, there was an outstanding warrant to
purchase 90,909 shares of common stock at an exercise price of $11.00 per share,
which expires on September 7, 2005. The holder of the warrant may also from time
to time convert all or a portion of the warrant into a number of shares of
common stock equal to the difference of (a) the total number of shares of common
stock into which the warrant is exercisable minus (b) that number of shares of
common stock having an aggregate spread equal to the aggregate warrant price,
with the spread being the difference between the warrant price and the fair
market value of the common stock. The warrant also provides for anti-dilution
protection in the event of stock dividends, splits, combinations, issuances for
less than the exercise price and other diluting events.
REGISTRATION RIGHTS
Under the terms of a registration rights agreement, the holders of
9,036,721 shares of our common stock are entitled to rights with respect to the
registration of those shares under the Securities Act of 1933. Under the
agreement, the holders of registration rights who hold threshold amounts of
common stock may demand that we register their securities for resale under the
Securities Act, in which case holders of registration rights who hold other
shares of common stock may join in such demand registration. In addition, if we
propose to register any of our securities under the Securities Act, either for
our own account or the account of other stockholders, the holders of
registration rights are entitled to notice of such registration and are entitled
to include their registrable shares in the registration. In either case, among
other conditions and limitations, the underwriters have the right to limit the
number of shares included in the registration. Holders of registration rights
also may require us to register, at our expense, all or a portion of their
registrable shares on Form S-3 when such form becomes available to us, subject
to specified conditions and limitations.
CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER LAW
Provisions of Delaware law and our certificate of incorporation and bylaws
summarized below could make more difficult our acquisition by means of a tender
offer, a proxy contest or otherwise and the removal of incumbent officers and
directors. These provisions are expected to discourage coercive takeover
practices and inadequate takeover bids and to encourage persons seeking to
acquire control to first negotiate with us. We believe that the benefits of
increased protection of our potential ability to negotiate with the proponent of
an unfriendly or unsolicited proposal to acquire or restructure us outweighs the
disadvantages of discouraging such proposals because negotiation of these
proposals could result in an improvement of their terms.
Stockholder Meetings. Under our restated certificate of incorporation and
restated bylaws, the board of directors, the chairman of the board and the
president may call special meetings of stockholders but our stockholders may not
call a special meeting. In addition, our restated
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certificate of incorporation and restated bylaws do not provide for the right of
stockholders to act by written consent without a meeting or for cumulative
voting in the election of directors.
Requirements for Advance Notification of Stockholder Nominations and
Proposals. Our restated bylaws establish advance notice procedures for
proposals and the nomination of candidates for election as directors, other than
nominations made by or at the direction of the board of directors or a board
committee.
No Stockholder Action by Written Consent. Our certificate of incorporation
provides that stockholders can take action only at an annual or special meeting
of stockholders duly called in accordance with our bylaws. Accordingly, our
stockholders will not be able to take action by written consent in lieu of a
meeting.
Staggered Board. Under our restated certificate of incorporation, there
will be three classes of directors, approximately one-third of whom would be
elected each year, thus requiring any potential acquirer to successfully
complete two proxy contests in order to take control of the board of directors.
Limitation of Liability and Indemnification. Our certificate of
incorporation provides that our directors will not be personally liable to us or
to our stockholders for monetary damages for breach of fiduciary duty as a
director, except that the limitation will not eliminate or limit liability to
the extent that the elimination or limitation of this liability is not permitted
by the Delaware General Corporation Law as it exists or may later be amended.
Our certificate of incorporation further provides for the indemnification of our
directors and officers to the fullest extent permitted by law.
Delaware Anti-Takeover Law. We are a Delaware corporation and are subject
to the provisions of Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the transaction by
which that person became an interested stockholder, unless the business
combination is approved in a prescribed manner. For purposes of Section 203, a
business combination includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder, and an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years prior did own, 15% or more of our voting stock.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation will be our transfer agent and registrar
for our common stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 18,577,993 shares of common
stock outstanding. Of these shares, the 5,000,000 shares sold in this offering
will be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates," as that term is defined in Rule 144 under the
Securities Act. A significant number of shares of our stock outstanding prior to
this offering are subject to a lock-up agreement restricting the sale of these
shares for 150 days, two-thirds of these shares for 180 days and one-third of
these shares for 210 days, and may not be sold in the public market prior the
expiration of the lock-up agreements. Deutsche Bank Securities Inc. may release
the shares subject to the lock-up agreements in whole or in part at any time
without prior public notice. However, Deutsche Bank Securities Inc. has no
current plans to effect such a release. Upon the expiration of all of the
lock-up agreements, approximately 11,742,577 additional shares will be available
for sale in the public market, subject in some cases to compliance with the
volume and other limitations of Rule 144.
[Enlarge/Download Table]
DAYS AFTER DATE SHARES ELIGIBLE
OF THIS PROSPECTUS FOR SALE COMMENT
------------------ --------------- -------
Upon effectiveness........................ 189,469 Freely tradable shares eligible for sale
under Rule 144(k) and not locked-up
90 days................................... 236,855 Shares not locked-up and saleable under
Rules 144 and 701
150 days.................................. 3,914,192 One-third of lock-up released; shares
saleable under Rules 144 and 701
180 days.................................. 7,828,385 Two-thirds of lock-up released; shares
saleable under Rules 144 and 701
210 days.................................. 11,742,577 All of lock-up released; shares saleable
under Rules 144 and 701
Various dates thereafter.................. 1,409,092 Restricted securities held for one year or
less as of 180 days following
effectiveness
RULE 144
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares for at least one year is entitled
to sell within any three-month period commencing 90 days after the date of this
prospectus a number of shares that does not exceed the greater of
- 1% of the then outstanding shares of our common stock (approximately
185,780 shares immediately after this offering) or
- the average weekly trading volume during the four calendar weeks
preceding such sale, subject to the filing of a Form 144 with respect to
the sale.
A person (or persons whose shares are aggregated) who is not deemed to have
been our affiliate at any time during the 90 days immediately preceding the sale
who has beneficially owned his or her shares for at least two years is entitled
to sell these shares pursuant to Rule 144(k) without regard to the limitations
described above. Affiliates must always sell pursuant to Rule 144, even after
the applicable holding periods have been satisfied.
We cannot estimate the number of shares that will be sold under Rule 144,
as this will depend on the market price for our common stock, the personal
circumstances of the sellers and other factors. Prior to this offering, there
has been no public market for our common stock, and there can be no assurance
that a significant public market for our common stock will
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develop or be sustained after this offering. Any future sale of substantial
amounts of our common stock in the open market may adversely affect the market
price of our common stock.
LOCK-UP AGREEMENTS
We and our directors, executive officers and substantially all of our
stockholders have agreed pursuant to the underwriting agreement and other
agreements not to sell without the prior consent of Deutsche Bank Securities
Inc. any of our common stock until 150 days from the date of this prospectus,
two-thirds of our common stock until 180 days from the date of this prospectus,
and one-third of our common stock until 210 days from the date of this
prospectus. Transfers or dispositions can be made sooner only with the prior
written consent of Deutsche Bank Securities Inc.
STOCK OPTIONS
We intend to file a registration statement on Form S-8 under the Securities
Act to register shares of our common stock that are subject to outstanding
options or reserved for issuance under our equity incentive plans 180 days
following the effectiveness of this registration statement, which permits the
resale of these shares by nonaffiliates in the public market without restriction
under the Securities Act.
RULE 701
Any of our employees or consultants who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701, which permits nonaffiliates to sell their Rule
701 shares without having to comply with the public information, holding period,
volume limitations or notice provisions of Rule 144 and permits affiliates to
sell their Rule 701 shares without having to comply with the Rule 144 holding
period restrictions, in each case commencing 90 days after the date of this
prospectus.
REGISTRATION RIGHTS
After this offering the holders of 9,036,721 shares of our common stock
will be entitled to rights with respect to registration of such shares under the
Securities Act. Registration of these shares under the Securities Act would
result in these shares becoming freely tradable without restriction under the
Securities Act except for shares purchased by affiliates. See "Description of
Capital Stock -- Registration Rights."
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives Deutsche Bank Securities
Inc., Chase Securities Inc. and U.S. Bancorp Piper Jaffray, Inc. have severally
agreed to purchase from Masimo the following respective number of shares of
common stock at a public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus:
[Download Table]
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
Deutsche Bank Securities Inc. ..............................
Chase Securities Inc. ......................................
U.S. Bancorp Piper Jaffray Inc. ............................
----------
Total.................................................. $5,000,000
==========
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of common stock offered hereby are subject
to certain conditions precedent and that the underwriters will purchase all
shares of the common stock offered hereby, other than those covered by the
over-allotment option described below, if any of these shares are purchased.
The underwriters propose to offer the shares of common stock to the public
at the public offering price set forth on the cover of this prospectus and to
dealers at a price that represents a concession not in excess of $ per
share under the public offering price. The underwriters may allow, and these
dealers may re-allow, a concession of not more than $ per share to
other dealers. After the initial public offering, representatives of the
underwriters may change the offering price and other selling terms.
We have granted to the underwriters an option, exercisable not later than
30 days after the date of this prospectus, to purchase up to 750,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise this option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above tables bears to the total number of shares of
common stock offered hereby. We will be obligated, pursuant to the option, to
sell these additional shares of common stock to the underwriters to the extent
the option is exercised. If any additional shares of common stock are purchased,
the underwriters will offer the additional shares on the same terms as those on
which the 5,000,000 shares are being offered.
The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common
stock. The underwriting fee is currently expected to be approximately
of the initial public offering price. We have agreed to pay the
underwriters the following fees, assuming either no exercise or full exercise by
the underwriters of the underwriters' over-allotment option:
[Enlarge/Download Table]
TOTAL FEES
----------------------------------------------
WITHOUT EXERCISE OF WITH FULL EXERCISE OF
FEES PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
-------------- --------------------- ---------------------
Fees paid by Masimo...... $ $ $
In addition, we estimate that our share of the total expenses of this
offering, excluding underwriting discounts and commissions, will be
approximately $1,200,000.
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We have agreed to indemnify the underwriters against some specified types
of liabilities, including liabilities under the Securities Act, and to
contribute to payments the underwriters may be required to make in respect of
any of these liabilities.
Each of our officers and directors, and certain holders of our stock, have
agreed not to offer, transfer or contract to transfer, or enter into any
transaction that is expected to result in the transfer or disposition of shares
of our common stock or other securities convertible, exchangeable or exercisable
for shares of our common stock, including derivatives of our common stock, owned
by these persons prior to this offering:
- for a period of 150 days;
- with respect to two-thirds of their stock, for a period of 180 days; and
- with respect to one-third of their stock, for a period of 210 days
after the effective date of the registration statement of which this prospectus
is a part without the prior written consent of Deutsche Bank Securities, Inc.
This consent may be given at any time without public notice. We have
entered into a similar agreement with the representatives of the underwriters,
except that we may grant options and issue shares under our Third Amended and
Restated 1996 Incentive Stock Option Nonqualified Stock Option and Restricted
Stock Purchase Plan. There are no agreements between the representatives and any
of our stockholders or affiliates releasing them from these lock-up agreements
prior to the expiration of the lock-up period described above.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
In order to facilitate the offering of our common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of our common stock. Specifically, the underwriters may make short
sales of our common stock and may purchase our common stock on the open market
to cover positions created by short sales. Short sales involve the sale by the
underwriters of a greater number of shares than they are required to purchase in
the offering. "Covered" short sales are sales made in an amount not greater than
the underwriters' over allotment option to purchase additional shares in the
offering. The underwriters may close out any covered short position by either
exercising their over-allotment option or purchasing our common stock in the
open market. In determining the source of our common stock to close out the
covered short position, the underwriters will consider, among other things, the
price of our common stock available for purchase in the open market as compared
to the price at which they may purchase our common stock through the over-
allotment option. "Naked" short sales are sales in excess of the over-allotment
option. The underwriters must close out any naked short position by purchasing
our common stock in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure on
the price of our common stock in the open market after pricing that could
adversely affect investors who purchase in the offering. The representatives, on
behalf of the underwriters, may reclaim selling concessions allowed to an
underwriter or a dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer. Similar to other purchase
transactions, any of these transactions may have the effect of raising or
maintaining the market price of our common stock or preventing or retarding a
decline in the market price of our common stock. As a result, the price of our
common stock may be higher than the price that might otherwise exist in the open
market. These transactions may be effected on the Nasdaq Stock Market or
otherwise. The underwriters are not required to engage in these activities and,
if commenced, may end any of these activities at any time.
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At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares for our employees, family members
of employees, customers and other third parties. The number of shares of our
common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved shares that are not
purchased by these persons will be offered by the underwriters to the general
public on the same basis as the other shares in this offering.
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock has
been determined by negotiation among us and the representatives of the
underwriters. Among the primary factors considered in determining the public
offering price were:
- prevailing market conditions;
- our sales, earnings and other financial and operating information in
recent periods;
- our record of operations, our current financial position and future
prospects;
- the market capitalization, price-earnings ratios, price-sales ratios and
financial and operating information of other companies that we and the
representatives of the underwriters believe to be comparable to our
business; and
- the experience of our management.
The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
LEGAL MATTERS
The validity of the shares of common stock we are offering will be passed
upon for us by Arter & Hadden LLP, Irvine, California. As of the date of this
prospectus, a member of Arter & Hadden LLP beneficially owns 32,000 shares of
our common stock and options to purchase 8,000 shares of our common stock.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Latham & Watkins, Costa Mesa, California. As of the date of
this prospectus, a member of Latham & Watkins beneficially owns 5,555 shares of
our common stock.
EXPERTS
The financial statements as of December 31, 1998 and 1999 and for the year
ended March 31, 1998, the nine months ended December 31, 1998, and the year
ended December 31, 1999, included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The information contained in "Business -- Patents and Proprietary Rights",
excluding the last two sentences, and the first two paragraphs of
"Business -- Legal Proceedings" have been reviewed and approved by Knobbe,
Martens, Olson & Bear LLP Newport Beach, California, our patent counsel, as
experts in such matters, and are included herein in reliance upon their review
and approval. As of the date of this prospectus, members of Knobbe, Martens,
Olson & Bear beneficially own 33,675 shares of our common stock.
68
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares of common stock offered under this
prospectus. This prospectus does not contain all of the information in the
registration statement and the exhibits and schedule to the registration
statement. For further information with respect to us and our common stock, we
refer you to the registration statement and to the exhibits and schedule to the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance we refer you to the copy of each contract or
other document filed as an exhibit to the registration statement. Each of these
statements is qualified in all respects by this reference. You may inspect a
copy of the registration statement without charge at the SEC's principal office
in Washington, D.C., and copies of all or any part of the registration statement
may be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549, upon payment of fees prescribed by the SEC. The
SEC maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. The address of the Web site is http://www.sec.gov. The SEC's toll
free investor information service can be reached at 1-800-SEC-0330. Information
contained on our website does not constitute part of this prospectus.
Upon completion of the offering, we will be subject to the information
reporting requirements of the Securities Exchange Act of 1934, as amended, and
we will file reports, proxy statements and other information with the SEC.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent public accountants and quarterly
reports for the first three fiscal quarters of each fiscal year containing
unaudited interim financial information.
69
MASIMO CORPORATION
INDEX TO FINANCIAL STATEMENTS
[Download Table]
PAGE
----
Report of Independent Accountants........................... F-2
Balance Sheets.............................................. F-3
Statements of Operations.................................... F-5
Statements of Stockholders' Equity (Deficit)................ F-6
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-9
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Masimo Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit), and cash flows present fairly, in
all material respects, the financial position of Masimo Corporation at December
31, 1998 and 1999, and the results of its operations and its cash flows for the
year ended March 31, 1998, the nine months ended December 31, 1998, and the year
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
March 17, 2000
F-2
MASIMO CORPORATION
BALANCE SHEETS
[Enlarge/Download Table]
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,596,421 $ 14,511,154 $ 14,086,388
Accounts receivable, net of allowance for doubtful
accounts of $220,000, $74,372 and $366,220
(unaudited) at December 31, 1998, December 31,
1999, and September 30, 2000, respectively........ 307,689 1,296,388 3,016,551
Inventories, net.................................... 1,972,294 3,579,326 6,388,204
Other current assets................................ 487,503 341,985 747,832
------------ ------------ ------------
Total current assets......................... 14,363,907 19,728,853 24,238,975
Fixed assets, net..................................... 2,703,557 3,423,907 3,671,267
Intangible assets, net................................ 761,875 946,650 1,157,940
Other assets.......................................... 80,113 80,113 764,172
------------ ------------ ------------
Total assets................................. $ 17,909,452 $ 24,179,523 $ 29,832,354
============ ============ ============
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Accounts payable.................................... $ 547,123 $ 1,222,265 $ 2,130,359
Accrued liabilities................................. 1,009,696 1,019,793 1,793,929
Deferred revenue.................................... 28,571 80,442 100,516
Current portion of long-term debt................... 437,500 792,113 792,113
------------ ------------ ------------
Total current liabilities.................... 2,022,890 3,114,613 4,816,917
Deferred revenue...................................... 191,131 334,971 332,686
Long-term debt........................................ 1,020,833 1,647,172 1,053,088
------------ ------------ ------------
Total liabilities............................ 3,234,854 5,096,756 6,202,691
------------ ------------ ------------
Commitments and contingencies
Redeemable preferred stock:
Convertible Series A Preferred Stock, 966,362 shares
issued and outstanding (pro forma no shares issued
or outstanding) (liquidation preference of
$1,829,082 at December 31,
1999)............................................. 1,394,246 1,394,246 1,394,246 $ --
Convertible Redeemable Series B Preferred Stock,
1,125,000 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $3,114,972 at December 31, 1999).... 2,940,811 3,115,910 3,247,356 --
Convertible Redeemable Series C Preferred Stock,
1,848,238 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $12,603,519 at December 31, 1999)... 11,007,371 12,085,440 12,826,520
Convertible Redeemable Series D Preferred Stock,
1,500,000 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $13,677,564 at December 31, 1999)... 12,123,069 13,250,547 14,040,548 --
F-3
[Enlarge/Download Table]
PRO FORMA
STOCKHOLDERS'
EQUITY
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Convertible Redeemable Series E Preferred Stock,
2,054,516 shares issued and outstanding (pro forma
no shares issued or outstanding) (liquidation
preference of $21,803,630 at December 31, 1999)... $ 19,262,197 $ 21,189,006 $ 22,554,072 $ --
Convertible Redeemable Series F Preferred Stock,
1,678,967 shares issued and outstanding at
December 31, 1999 and 3,042,604 shares (unaudited)
at September 30, 2000 (pro forma no shares issued
or outstanding)(liquidation preference of
$18,935,270 at December 31, 1999)................. 17,774,241 33,746,026 --
------------ ------------ ------------ ------------
Total redeemable preferred stock............. 46,727,694 68,809,390 87,808,768 --
------------ ------------ ------------ ------------
Stockholders' equity (deficit):
Preferred stock; $0.001 par value, 11,000,000 shares
authorized (pro forma 5,000,000 shares authorized,
no shares issued or outstanding)..................
Common stock; $0.001 par value, 22,000,000 shares
authorized, 2,907,348, 2,984,326 and 3,041,273
(unaudited) shares issued and outstanding at
December 31, 1998, December 31, 1999, and
September 30, 2000, respectively, (pro forma
60,000,000 shares authorized, 13,577,993 issued
and outstanding).................................. 2,907 2,984 3,041 13,578
Common stock subscribed............................... 40,898 106,401 106,401
Additional paid in capital............................ 87,798,231
Deferred compensation................................. (43,781) (638,031) (730,212) (730,212)
Accumulated deficit................................... (32,012,222) (49,132,474) (63,558,335) (63,558,335)
------------ ------------ ------------ ------------
Total stockholders' equity (deficit)......... (32,053,096) (49,726,623) (64,179,105) $ 23,629,663
------------ ------------ ------------ ============
Total liabilities, redeemable preferred
stock, and stockholders' equity
(deficit).................................. $ 17,909,452 $ 24,179,523 $ 29,832,354
============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-4
MASIMO CORPORATION
STATEMENTS OF OPERATIONS
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NINE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, DECEMBER 31, DECEMBER 31, ------------------------------
1998 1998 1999 1999 2000
----------- ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
Revenue:
Product sales................... $ 753,878 $ 1,677,967 $ 6,649,136 $ 4,898,030 $ 9,506,637
License fees.................... 161,250 19,048 48,103 29,190 73,396
----------- ------------ ------------ ------------ ------------
Total revenue................... 915,128 1,697,015 6,697,239 4,927,220 9,580,033
Cost of goods sold................ 2,154,753 2,985,009 6,416,764 4,688,704 7,970,933
----------- ------------ ------------ ------------ ------------
Gross margin.................... (1,239,625) (1,287,994) 280,475 238,516 1,609,100
----------- ------------ ------------ ------------ ------------
Operating expenses:
Research and development........ 3,089,611 3,132,279 5,965,672 4,137,709 3,352,755
Selling, general and
administrative................ 2,598,877 3,929,376 7,766,798 5,034,152 9,528,284
----------- ------------ ------------ ------------ ------------
Total operating expenses........ 5,688,488 7,061,655 13,732,470 9,171,861 12,881,039
----------- ------------ ------------ ------------ ------------
Loss from operations............ (6,928,113) (8,349,649) (13,451,995) (8,933,345) (11,271,939)
Non-operating income (expense):
Interest income................. 453,380 561,625 465,168 259,418 589,705
Interest expense................ (58,406) (128,140) (206,005) (143,154) (174,062)
Other........................... 4,121 22,207 (1,777) (3,414)
----------- ------------ ------------ ------------ ------------
Loss before provision for income
taxes......................... (6,529,018) (7,916,164) (13,170,625) (8,818,858) (10,859,710)
Provision for income taxes........ 823 800 800 800 800
----------- ------------ ------------ ------------ ------------
Net loss........................ $(6,529,841) $ (7,916,964) $(13,171,425) $ (8,819,658) $(10,860,510)
=========== ============ ============ ============ ============
Net loss applicable to common
stockholders.................. $(9,041,365) $(10,897,728) $(18,022,393) $(12,117,916) $(15,746,389)
=========== ============ ============ ============ ============
Net loss per common share:
Basic and diluted............. $ (3.16) $ (3.77) $ (6.12) $ (4.13) $ (5.21)
=========== ============ ============ ============ ============
Pro forma basic and diluted
(unaudited)................. $ (1.21) $ (.86)
============ ============
Weighted-average shares
outstanding used in computing
net loss per common share:
Basic and diluted............. 2,862,365 2,889,257 2,943,113 2,930,985 3,021,487
Pro forma basic and diluted
(unaudited)................. 10,914,836 12,695,566
The accompanying notes are an integral part of these financial statements.
F-5
MASIMO CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MARCH 31, 1998, THE NINE MONTHS ENDED DECEMBER 31, 1998,
THE YEAR ENDED DECEMBER 31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
[Enlarge/Download Table]
COMMON STOCK
------------------- ADDITIONAL COMMON STOCK DEFERRED ACCUMULATED
SHARES AMOUNT PAID IN CAPITAL SUBSCRIBED COMPENSATION DEFICIT
--------- ------ --------------- ------------ ------------ ------------
BALANCE AT MARCH 31, 1997.......... 2,831,998 $2,832 $ -- $ -- $(146,723) $(11,924,535)
Stock options exercised............ 47,150 47 26,333
Amortization of deferred
compensation...................... 44,375
Reversal of deferred compensation
for stock options canceled........ 10,720 (10,720)
Accretion of redemption value on
redeemable preferred stock........ (26,333) (2,485,191)
Net loss........................... (6,529,841)
--------- ------ ----------- -------- --------- ------------
BALANCE AT MARCH 31, 1998.......... 2,879,148 2,879 -- -- (91,628) (20,950,287)
Spin-off of Masimo Laboratories,
Inc. ............................. (169,866)
Stock options exercised............ 28,200 28 25,522
Amortization of deferred
compensation...................... 27,984
Reversal of deferred compensation
for stock options canceled........ 19,863 (19,863)
Accretion of redemption value on
redeemable preferred stock........ (25,522) (2,955,242)
Net loss........................... (7,916,964)
--------- ------ ----------- -------- --------- ------------
BALANCE AT DECEMBER 31, 1998....... 2,907,348 2,907 -- -- (43,781) (32,012,222)
Stock options exercised............ 62,400 62 47,598
Common stock issued/subscribed in
exchange for legal services....... 14,578 15 75,217 40,898
Deferred compensation related to
stock option grants in 1999....... 605,175 (605,175)
Amortization of deferred
compensation...................... 149,753
Compensation related to stock
option grants to consultants in
1999.............................. 174,151 (138,828)
Accretion of redemption value on
redeemable preferred stock........ (902,141) (3,948,827)
Net loss........................... (13,171,425)
--------- ------ ----------- -------- --------- ------------
BALANCE AT DECEMBER 31, 1999....... 2,984,326 2,984 -- 40,898 (638,031) (49,132,474)
Stock options exercised*........... 44,850 45 89,268
Common stock subscribed in exchange
for legal services*............... 12,097 12 84,267 65,503
Deferred compensation related to
stock option grants in 2000*...... 229,168 (229,168)
Amortization of deferred
compensation*..................... 242,580
Compensation related to stock
option grants to consultants*..... 327,322 (105,593)
Common stock warrants issued in
connection with Series F
financing*........................ 536,503
Accretion of redemption value on
redeemable preferred stock*....... (1,266,528) (3,619,351)
Net loss*.......................... (10,806,510)
--------- ------ ----------- -------- --------- ------------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)....................... 3,041,273 $3,041 $ -- $106,401 $(730,212) $(63,558,335)
========= ====== =========== ======== ========= ============
TOTAL
------------
BALANCE AT MARCH 31, 1997.......... $(12,068,426)
Stock options exercised............ 26,380
Amortization of deferred
compensation...................... 44,375
Reversal of deferred compensation
for stock options canceled........ --
Accretion of redemption value on
redeemable preferred stock........ (2,511,524)
Net loss........................... (6,529,841)
------------
BALANCE AT MARCH 31, 1998.......... (21,039,036)
Spin-off of Masimo Laboratories,
Inc. ............................. (169,866)
Stock options exercised............ 25,550
Amortization of deferred
compensation...................... 27,984
Reversal of deferred compensation
for stock options canceled........ --
Accretion of redemption value on
redeemable preferred stock........ (2,980,764)
Net loss........................... (7,916,964)
------------
BALANCE AT DECEMBER 31, 1998....... (32,053,096)
Stock options exercised............ 47,660
Common stock issued/subscribed in
exchange for legal services....... 116,130
Deferred compensation related to
stock option grants in 1999....... --
Amortization of deferred
compensation...................... 149,753
Compensation related to stock
option grants to consultants in
1999.............................. 35,323
Accretion of redemption value on
redeemable preferred stock........ (4,850,968)
Net loss........................... (13,171,425)
------------
BALANCE AT DECEMBER 31, 1999....... (49,726,623)
Stock options exercised*........... 89,313
Common stock subscribed in exchange
for legal services*............... 149,782
Deferred compensation related to
stock option grants in 2000*...... --
Amortization of deferred
compensation*..................... 242,580
Compensation related to stock
option grants to consultants*..... 221,729
Common stock warrants issued in
connection with Series F
financing*........................ 536,503
Accretion of redemption value on
redeemable preferred stock*....... (4,885,879)
Net loss*.......................... (10,806,510)
------------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)....................... $(64,179,105)
============
------------
* unaudited
The accompanying notes are an integral part of these financial statements
F-6
MASIMO CORPORATION
STATEMENTS OF CASH FLOWS
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NINE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, DECEMBER 31, DECEMBER 31, ---------------------------
1998 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss.............................. $(6,529,841) $(7,916,964) $(13,171,425) $ (8,819,658) $(10,860,510)
Adjustments to reconcile net loss to
net cash used by operating
activities:
Depreciation and amortization....... 426,483 519,347 1,565,133 766,657 1,030,843
Compensation related to stock
options granted................... 44,375 27,984 185,076 40,554 404,841
(Gain) loss on disposal of fixed
assets............................ (4,121) 77,931 79,708 84,346
Gain on insurance recovery.......... (22,207)
Provision for doubtful accounts..... 20,000 203,900 29,363 29,363 291,848
Provision for inventory............. 130,000 239,311 521,677 100,876 120,000
Stock issued/subscribed for legal
services.......................... 116,130 79,064 149,782
Changes in operating assets and
liabilities:
Accounts receivable............... (139,878) (229,532) (1,018,062) (1,053,232) (2,012,011)
Inventories....................... (1,136,866) (992,958) (2,128,709) (1,370,632) (2,928,878)
Other assets...................... (340,877) (111,802) 160,418 (173,094) (1,076,706)
Accounts payable.................. 144,821 110,713 675,142 (102,630) 908,094
Accrued liabilities............... 274,621 290,808 10,097 114,341 887,608
Deferred revenue.................. 138,750 80,952 195,711 185,809 17,789
----------- ----------- ------------ ------------ ------------
Net cash used by operating
activities................... (6,972,533) (7,778,241) (12,803,725) (10,122,874) (12,982,954)
----------- ----------- ------------ ------------ ------------
Cash flows from investing activities:
Cash disbursed in Masimo Laboratories,
Inc. spin-off....................... (18,223)
Proceeds from insurance recovery...... 22,207
Proceeds from disposal of fixed
assets.............................. 6,758 1,000
Purchases of fixed assets............. (2,016,956) (837,661) (1,821,565) (1,506,589) (1,315,689)
Increase in intangible assets......... (310,179) (147,078) (228,024) (184,853) (258,149)
----------- ----------- ------------ ------------ ------------
Net cash used by investing
activities................... (2,320,377) (1,002,962) (2,027,382) (1,690,442) (1,573,838)
----------- ----------- ------------ ------------ ------------
F-7
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, DECEMBER 31, DECEMBER 31, ---------------------------
1998 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Cash flows from financing activities:
Proceeds from issuance of preferred
stock, net of offering costs........ $17,040,000 $ 299,997 $ 16,730,728 $ 14,679,173 $ 14,650,000
Proceeds for assistance in
facilitating Series C stock
resale.............................. 2,740,349
Proceeds from issuance of common
stock............................... 23,880 23,050 34,160 20,420 76,110
Proceeds from issuance of notes
payable............................. 1,632,507 117,493 1,418,452 1,418,452
Principal payments of notes payable... (291,667) (437,500) (328,125) (594,084)
----------- ----------- ------------ ------------ ------------
Net cash provided by financing
activities................... 18,696,387 2,889,222 17,745,840 15,789,920 14,132,026
----------- ----------- ------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents......... 9,403,477 (5,891,981) 2,914,733 3,976,604 (424,766)
Cash and cash equivalents at beginning
of period............................. 8,084,925 17,488,402 11,596,421 11,596,421 14,511,154
----------- ----------- ------------ ------------ ------------
Cash and cash equivalents at end of
period................................ $17,488,402 $11,596,421 $ 14,511,154 $ 15,573,025 $ 14,086,388
=========== =========== ============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid for:
Interest............................ $ 58,406 $ 127,835 $ 205,288 $ 143,154 $ 174,062
Taxes............................... $ 823 $ 800 $ 800 $ 800 $ 800
Noncash investing and financing
activities:
Accretion of redemption value of
redeemable preferred stock........ $ 2,511,524 $ 2,980,764 $ 4,850,968 $ 3,298,258 $ 4,885,879
Reversal of deferred compensation
for stock options canceled........ $ 10,720 $ 19,863
Deferred compensation for stock
options granted................... $ 779,326 $ 334,761
Assets transferred in Masimo
Laboratories, Inc. spin-off, net
of cash........................... $ 151,643
Asset acquisition with issuance of
Series F Preferred Stock.......... $ 500,000
The accompanying notes are an integral part of these financial statements.
F-8
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE COMPANY:
In May 1989, Masimo Corporation ("Masimo" or the "Company") was
incorporated in California, then reincorporated in Delaware in May 1996, to
design, develop and license advanced medical technology for the noninvasive
monitoring of certain physiological parameters. The Company's first products,
based on its proprietary digital signal processing and sensor technology, are
designed to improve the effectiveness of pulse oximetry by overcoming the
inability of current monitors to precisely measure arterial blood oxygen
saturation levels in the presence of certain "noise" interference and low
perfusion. The Company is designing and developing monitoring instruments for a
variety of other applications, including fetal oximetry and Sudden Infant Death
Syndrome monitoring. Masimo licenses its products to companies with existing
installed customer bases, permitting the Company to leverage the sales and
distribution channels of each of its customers. In late 1999, the Company began
allocating financial resources to develop its own sales force to work in
conjunction with its customers' sales forces. The Company is currently working
with several of its customers to incorporate Masimo's technology into certain of
their products.
During 1998, the Company changed its fiscal year end from March 31 to
December 31. Accordingly, a nine-month period from April 1, 1998 to December 31,
1998 is reflected in the accompanying financial statements.
In April 1998, the Company completed a spin-off of its non-vital signs
monitoring applications by forming a new Delaware corporation, Masimo
Laboratories, Inc. ("Masimo Labs"), transferring certain fixed assets, patents,
and cash valued at $169,866 (which approximated net book value), and
distributing Masimo Labs common stock, through a stock dividend, to Masimo
Corporation stockholders on a share for share basis. After the transaction, the
companies entered into a cross-licensing agreement whereby the Company agreed to
fund research and development conducted by Masimo Labs for a period of up to two
years in an amount not to exceed $2,000,000 in exchange for certain licensing
rights of Masimo Labs technologies. On a monthly basis, the Company reimburses
Masimo Labs for its cash expenditures and charges it an allocation of
engineering labor, facility, administrative, and equipment related costs paid by
Masimo on behalf of Masimo Labs. The Company expenses all such costs and
allocations as research and development as incurred, except for capital
equipment, which are owned by Masimo and are depreciated over their useful lives
with the related depreciation being charged to Masimo Labs as rental expense and
included in the monthly allocation. Such expenses included in research and
development for the nine months ended December 31, 1998 and the year ended
December 31, 1999 approximated $169,000 and $248,000, respectively. At December
31, 1999, the Company had approximately $1,583,000 remaining under this funding
commitment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash And Cash Equivalents:
For purposes of the balance sheet and statement of cash flows, the Company
considers all highly liquid investments that are readily convertible into known
amounts of cash and have a maturity of three months or less when acquired to be
cash equivalents. At December 31, 1998 and 1999, management believes that the
carrying amount of cash equivalents approximates fair value due to the type and
short maturity of these financial instruments.
F-9
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
using a standard cost method, which approximates FIFO (first in, first out).
Inventory valuation allowances are recorded for materials that have become
obsolete or are no longer used in current production and for finished goods that
have a market price less than the carrying value in inventory.
Fixed Assets:
Fixed assets are stated at cost, less accumulated depreciation and
amortization. Depreciation and amortization are provided using the straight-line
method over the estimated useful lives of the related assets, which range from
three to seven years, or over the lesser of the term of the lease or the
estimated useful life of the asset for assets under capital lease. Leasehold
improvements are amortized over the lesser of the term of the lease or the
estimated useful life of the improvements. Normal repairs and maintenance are
expensed as incurred whereas significant improvements that materially increase
values or extend useful lives are capitalized and depreciated over the remaining
estimated useful lives of the related assets. Upon sale or retirement of
depreciable assets, the related cost and accumulated depreciation or
amortization are removed from the accounts. Any gain or loss on the sale or
retirement is recognized in current operations.
Long-lived assets are reviewed for impairment when events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability is measured by comparison of the asset's carrying amount to
future net undiscounted cash flows the assets are expected to generate. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
projected discounted future net cash flows arising from the asset.
Intangible Assets:
Intangible assets consist of patents and trademarks. Costs related to
patents and trademarks, which include legal and application fees, are
capitalized and amortized over their estimated useful lives using the
straight-line method. Patents and trademarks are amortized over 10 and 17 years,
respectively, which commences once final approval of the patent or trademark has
been obtained. The Company continually evaluates the amortization period and
carrying basis of patents and trademarks to determine whether any events or
circumstances warrant a revised estimated useful life or reduction in value.
Capitalized application costs are charged to operations when it is determined
that the patent or trademark will not be obtained or is abandoned.
Deferred Revenue:
Deferred revenue consists of license fees received in connection with
certain licensing agreements. License fees are amortized over the term of the
respective agreements using the straight-line method.
Income Taxes:
In accordance with Statement of Financial Accounting Standards (SFAS) No.
109, "Accounting for Income Taxes", deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory tax
F-10
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. The provision for
income taxes represents the tax payable for the period and the change during the
period in deferred tax assets and liabilities.
Management's Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Accounting For Employee Stock Options:
In conformity with SFAS No. 123 "Accounting for Stock-Based Compensation,"
the Company has adopted the disclosure-only provisions of SFAS No. 123 and
continues to follow Accounting Principles Board Opinion No. 25 for measurement
and recognition of employee stock-based transactions.
Fair Value of Financial Instruments:
The estimated fair market values of the Company's financial instruments,
which include accounts receivable, accounts payable, and bank notes payable,
approximate their carrying values due to their short maturities and/or market
rates of interest.
Revenue Recognition:
The Company recognizes revenue from product sales at the time of shipment.
The Company only accepts returns for products under warranty against defects in
material and workmanship, with warranty periods ranging from three to eighteen
months. The Company provides for the estimated cost of warranty at the time of
product shipment. The accrued liability for estimated warranty cost is included
in accrued liabilities in the accompanying balance sheets. License fees are
recognized ratably over the terms of the related agreements in accordance with
SEC Staff Accounting Bulletin No. 101.
Advertising Costs:
Advertising costs are expensed as incurred. These costs are included in
selling, general and administrative expense in the statements of operations.
Advertising costs for the year ended March 31, 1998, the nine months ended
December 31, 1998, and the year ended December 31, 1999 were approximately
$13,000, $780,000, and $1,660,000, respectively.
Research And Development:
Research and development is expensed as incurred and includes personnel
costs, materials, depreciation and amortization on associated tangible and
intangible assets and an allocation of facility costs, all of which are directly
related to research and development activities. As of December 31, 1999, no
research and development activities had been funded by third parties.
F-11
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Comprehensive Income:
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income." SFAS No. 130 requires disclosure of
all components of comprehensive income on an annual and interim basis.
Comprehensive income is defined as the change in equity of a business enterprise
during a period from transactions and other events and circumstances from
non-owner sources. The adoption of SFAS No. 130 did not have any effect on the
Company's financial statements, as there were no elements of comprehensive
income impacting the Company.
Reclassifications:
Certain reclassifications have been made in the prior period financial
statements to conform to the 1999 presentation.
Net Loss Applicable to Common Stockholders:
Net loss applicable to common stockholders is net loss increased by
accreted additions, primarily for cumulative but undeclared and unpaid
dividends, to the carrying amount of mandatorily redeemable preferred stock
during the respective periods.
Net Loss Per Common Share:
The Company follows SFAS No. 128, "Earnings per Share." Basic net loss per
common share represents net loss applicable to common stockholders divided by
the weighted average number of common shares outstanding. Diluted net loss per
common share is the same as basic net loss per common share as the inclusion of
common stock issuable pursuant to the exercise of stock options, warrants and
the conversion of convertible preferred stock would be antidilutive. Pro forma
net loss per common share includes the weighted average common shares
outstanding and reflects the automatic conversion of all convertible preferred
stock into common stock upon completion of the Company's initial public offering
using the "as-if-converted" method. Pro forma net loss per common share assumes
no accretion as all shares of preferred stock are assumed to have converted on
January 1, 1999, or date of issuance, if later.
No potential common shares were included in the diluted per share amounts
for any periods presented as the effect would have been anti-dilutive. For the
year ended March 31, 1998, the nine months ended December 31, 1998, the year
ended December 31, 1999, and the nine month periods ended September 30, 1999 and
2000, potentially dilutive securities consisted of options, preferred stock and
warrants and resulted in potential common shares of 8,617,083, 8,950,316,
10,919,633, 10,465,144 (unaudited) and 12,935,889 (unaudited), respectively.
Unaudited Pro Forma Presentation
Under the terms of the Company's restated certificate of incorporation, all
outstanding preferred stock will be converted automatically into shares of
common stock upon the closing of the Company's initial public offering. Also,
upon the closing of the Company's initial public offering, the authorized
capital stock of the Company will consist of 60,000,000 shares of common stock
and 5,000,000 shares of preferred stock, the terms of which will not be
designated. The unaudited pro forma stockholders' equity information at
September 30, 2000 and the unaudited pro forma net loss per common share
information for the year ended 1999 and for the nine months ended September 30,
2000 reflects the conversion of all series of
F-12
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
preferred stock outstanding at September 30 into 10,536,720 shares of common
stock as if the issuance and subsequent conversion had occurred on January 1,
1999, or date of issuance, if later.
Unaudited Interim Financial Information
The interim financial information as of September 30, 2000 and for the nine
months ended September 30, 1999 and 2000 is unaudited and has been prepared on
the same basis as the audited financial statements. In the opinion of
management, such unaudited information includes all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
interim information. Operating results for the nine months ended September 30,
2000 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000.
3. INVENTORY:
Inventory consists of the following as of:
[Download Table]
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
Raw materials.......................... $1,391,815 $2,496,798 $4,892,161
Work in-process........................ 398,978 429,455 1,175,280
Finished goods......................... 287,382 1,195,703 611,848
Valuation allowance.................... (105,881) (542,630) (291,085)
---------- ---------- ----------
$1,972,294 $3,579,326 $6,388,204
========== ========== ==========
4. FIXED ASSETS:
Fixed assets consist of the following as of:
[Download Table]
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
Machinery and equipment............ $ 1,884,622 $ 2,797,604 $ 3,538,667
Computer equipment................. 1,123,483 1,123,127 1,351,918
Furniture and office equipment..... 299,569 338,847 349,211
Leasehold improvements............. 368,873 394,661 394,661
Demonstration units................ 192,369 802,627 1,015,598
----------- ----------- -----------
3,868,916 5,456,866 6,650,055
Less, Accumulated depreciation and
amortization..................... (1,308,255) (2,052,985) (2,993,656)
Add, Construction-in-progress...... 142,896 20,026 14,868
----------- ----------- -----------
$ 2,703,557 $ 3,423,907 $ 3,671,267
=========== =========== ===========
F-13
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INTANGIBLE ASSETS:
Intangible assets consist of the following as of:
[Download Table]
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
Patents................................ $756,670 $ 938,425 $1,153,077
Trademarks............................. 78,081 124,350 167,847
-------- ---------- ----------
834,751 1,062,775 1,320,924
Less, Accumulated amortization......... (72,876) (116,125) (162,984)
-------- ---------- ----------
$761,875 $ 946,650 $1,157,940
======== ========== ==========
6. ACCRUED LIABILITIES:
Accrued liabilities consist of the following as of:
[Download Table]
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
Payroll costs.......................... $ 496,445 $ 545,328 $ 775,034
Warranty reserve....................... 275,288 202,882 391,917
Legal fees............................. -- 122,557 598,340
Other.................................. 237,963 149,026 28,638
---------- ---------- ----------
$1,009,696 $1,019,793 $1,793,929
========== ========== ==========
7. LONG-TERM DEBT
During May 1997, the Company entered into a Loan and Security Agreement
(the "Agreement") with Comerica Bank (the "Bank") pursuant to which it could
borrow up to a maximum of $2,285,000. The Agreement included an equipment line
of up to a maximum of $1,750,000. The equipment line expired on April 30, 1998
at which time the amounts outstanding were converted to an installment note,
payable in 48 equal monthly principal payments, plus interest at the Bank's Base
Rate plus 1.5% (9.25% and 10% at December 31, 1998 and 1999, respectively). As
of December 31, 1998 and 1999, $1,458,333 and $1,020,833, respectively, were
outstanding under the installment note. The Agreement also included a working
capital line of up to a maximum of $250,000. The working capital line was never
used and expired on July 15, 1998. The Agreement further included a letter of
credit facility of up to a maximum of $285,000, of which $265,582 had been
issued but not drawn upon as of December 31, 1998. No amounts were ever drawn
and the letter of credit facility expired on May 2, 1999. In connection with
entering into the Agreement, the Company issued to the Bank a warrant to
purchase 10,000 shares of the Company's common stock at an exercise price of
$3.00 per share. The fair value of the warrant was nominal at its date of
issuance. The warrant is exercisable at any time through its expiration on May
1, 2004.
In April 1999, the Company entered into an amended Loan and Security
Agreement with Comerica Bank that included an additional equipment line pursuant
to which the Company could borrow up to a maximum of $2,500,000 for equipment
purchases. Interest at the prime rate plus 1.25% was payable monthly on
advances. The equipment line draw period expired on December 31, 1999, at which
time the amounts outstanding were to be converted to an installment note,
payable in 48 equal monthly principal payments, plus interest at the prime rate
F-14
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
plus 1.25% (9.75% at December 31, 1999). As of December 31, 1999, $1,418,452 was
outstanding on the equipment line prior to its conversion to an installment note
in early January 2000. The entire Agreement, as amended, is collateralized by
substantially all of the assets of the Company, requires the Company to maintain
certain financial ratios and covenants and prohibits the declaration or payment
of cash dividends by the Company.
In July 1999, the Company opened a standby letter of credit with Comerica
Bank for up to $50,000 in connection with implementing a Corporate American
Express Program. The letter of credit has never been drawn upon and expires on
July 15, 2000.
At December 31, 1999, Principal payments required on both installment notes
for each of the years ending December 31 are as follows:
[Download Table]
2000........................................................ $ 792,113
2001........................................................ 792,113
2002........................................................ 500,446
2003........................................................ 354,613
----------
$2,439,285
==========
8. REDEEMABLE PREFERRED STOCK:
Series A, Series B, Series C, Series D, Series E, and Series F
Between December 1997 and April 1998, the Company sold 2,054,516 shares of
Series E Preferred Stock at a price of $9 per share raising proceeds of
$17,339,997, net of offering costs of $1,150,647.
During October 1998, one of the Series C Preferred Stock shareholders sold
its investment in Masimo Corporation to an outside party. As a result of this
transaction, the Company received $2,740,349 in cash, without issuing any new
shares, in exchange for its assistance in facilitating the transaction. Such
amount has been included in Series C Preferred Stock.
In September and October 1999, the Company sold 1,633,512 shares of Series
F Preferred Stock at a price of $11 per share raising proceeds of $16,730,728,
net of offering costs of $1,237,904. In December 1999, the Company issued 45,455
shares of Series F Preferred Stock valued at $11 per share in connection with an
asset acquisition.
Dividends
Holders of Series A Preferred Stock are entitled to receive annual
non-cumulative preferred cash dividends on each outstanding share at a rate of
$.09 per share if declared by the Board of Directors. Holders of Series B
Preferred Stock are entitled to receive annual cumulative (from November 21,
1992) preferred cash dividends on each outstanding share at a rate of $.144 per
share, increasing to $.156 per share on and after December 21, 1993, upon
declaration by the Company's Board of Directors. Holders of Series C, Series D,
Series E and Series F Preferred Stock are entitled to receive annual cumulative
preferred cash dividends on each outstanding share at a rate of $.2934,
increasing to $.4635 after September 18, 1998, $.63, $.81, and $.99 per share,
respectively, upon declaration by the Company's Board of Directors. As of
December 31, 1999, no dividends have been declared. Total dividends in arrears
on Series B Preferred Stock at December 31, 1998 and 1999 were $993,222 and
$1,168,722, respectively. Total dividends in arrears on Series C Preferred Stock
at December 31, 1998 and 1999 were $2,228,435 and $3,085,093, respectively.
Total dividends in arrears on Series D
F-15
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock at December 31, 1998 and 1999 were $2,232,564 and $3,177,564,
respectively. Total dividends in arrears on Series E Preferred Stock at December
31, 1998 and 1999 were $1,648,828 and $3,312,986, respectively. Total dividends
in arrears on Series F Preferred Stock at December 31, 1999 were $466,633.
Voting
The holders of Series A Preferred Stock and Series B Preferred Stock,
voting as one class, are entitled to elect one director. The holders of Series C
Preferred Stock, voting as one class, are entitled to elect one director. The
holders of preferred stock and common stock, voting as one class, elect the
remaining directors; however, the holders of Series C and Series E Preferred
Stock have agreed to vote for the nominees designated by the majority of the
outstanding common stock. On all other matters, all of the shares of Series A,
Series B, Series C, Series D, Series E, and Series F Preferred Stock will be
voted with the shares of common stock as one class.
Liquidation
In the event of voluntary or involuntary liquidation of the Company,
holders of Series F Preferred Stock will be entitled to receive, prior to any
distribution to common and Series A, Series B, Series C, Series D and Series E
Preferred stockholders, an amount equal to $11.00 per Series F Preferred Share,
plus all unpaid, accumulated cumulative dividends. Holders of Series C, Series
D, and Series E Preferred Stock will be entitled to receive, as one class, prior
to any distribution to common and Series A and Series B Preferred stockholders,
an amount equal to $5.15 per Series C Preferred Share, $7.00 per Series D
Preferred Share, and $9.00 per Series E Preferred Share, plus all unpaid,
accumulated cumulative dividends. Holders of Series B Preferred Stock will be
entitled to receive, prior to any distribution to common and Series A Preferred
stockholders, an amount equal to $1.73 per Series B Preferred Share, plus all
unpaid, accumulated cumulative dividends. Holders of Series A Preferred Stock
will be entitled to receive, prior to any distribution to common stockholders,
an amount equal to $1.10 per Series A Preferred Share plus an amount equal to 9%
per annum, cumulative from the date the first Series A Preferred Share was
issued. A consolidation or merger of the Company with or into any other
corporation or corporations, or the sale, transfer or other disposition of all
or substantially all of the assets of the Company in which more than 50% of the
voting power of the Company (a "Sale Transaction") is disposed of shall be
deemed to be a liquidation, dissolution or winding up of the Company; provided,
however, such liquidation preference shall not apply to any Sale Transaction for
a total value greater than (i) $150 million with respect to Series F, (ii) $100
million with respect to Series E, (iii) $75 million with respect to Series D,
(iv) $40 million with respect to Series C and (v) $20 million with respect to
Series B.
Conversion
Each share of Series A, Series B, Series C, Series D, Series E, and Series
F Preferred Stock is convertible, at the option of the holder or automatically
at the closing of an initial public offering, into common stock at an initial
conversion rate of one-to-one. The conversion rate is subject to adjustment upon
the occurrence of certain equity transactions, as defined.
Mandatory Redemption
On December 10, 2003, 2004 and 2005, the Company will be obligated to
redeem one-third, respectively, of any outstanding Series B, Series C, Series D,
Series E, and Series F
F-16
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Preferred Stock at a per share redemption price of $1.73, $5.15, $7.00, $9.00,
and $11.00, respectively, plus any accrued and unpaid dividends. The Company
records the incremental increase in per share redemption price through periodic
additions to Series B, Series C, Series D, Series E, and Series F Preferred
Stock and charges to additional paid in capital-common stock and, for amounts in
excess of additional paid in capital-common stock, to the accumulated deficit
using the straight-line method, which approximates the interest method, over the
period from issuance to December 10, 2003.
F-17
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table presents the changes in each series of redeemable
preferred stock for the year ended March 31, 1998, the nine months ended
December 31, 1998, the year ended December 31, 1999, and the nine months ended
September 30, 2000:
[Enlarge/Download Table]
REDEEMABLE PREFERRED STOCK
-----------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
-------------------- ---------------------- ----------------------- ---------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------- ---------- --------- ---------- --------- ----------- ---------
BALANCE AT MARCH 31, 1997........ 966,362 $1,394,246 1,125,000 $2,634,903 1,848,238 $ 7,204,202 1,500,000
Preferred stock issued, net of
costs of $1,150,647.............
Accretion of redemption value on
redeemable preferred stock...... 174,624 547,021
------- ---------- --------- ---------- --------- ----------- ---------
BALANCE AT MARCH 31, 1998........ 966,362 1,394,246 1,125,000 2,809,527 1,848,238 7,751,223 1,500,000
Preferred stock issued...........
Accretion of redemption value on
redeemable preferred stock...... 131,284 515,799
Additional paid in capital on
Series C resale, net of costs of
$85,866......................... 2,740,349
------- ---------- --------- ---------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1998..... 966,362 1,394,246 1,125,000 2,940,811 1,848,238 11,007,371 1,500,000
Preferred stock issued, net of
costs of $1,237,904.............
Preferred stock issued in
connection with asset
acquisition.....................
Accretion of redemption value on
redeemable preferred stock...... 175,099 1,078,069
------- ---------- --------- ---------- --------- ----------- ---------
BALANCE AT DECEMBER 31, 1999..... 966,362 1,394,246 1,125,000 3,115,910 1,848,238 12,085,440 1,500,000
Preferred stock issued, net of
costs of $350,000*..............
Accretion of redemption value on
redeemable preferred stock*..... 131,446 741,080
------- ---------- --------- ---------- --------- ----------- ---------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)..................... 966,362 $1,394,246 1,125,000 $3,247,356 1,848,238 $12,826,520 1,500,000
======= ========== ========= ========== ========= =========== =========
REDEEMABLE PREFERRED STOCK
------------------------------------------------------------------------------------------
SERIES D SERIES E SERIES F TOTAL
----------- ----------------------- ----------------------- ------------------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- ----------- ---------- -----------
BALANCE AT MARCH 31, 1997........ $ 9,921,709 5,439,600 $21,155,060
Preferred stock issued, net of
costs of $1,150,647............. 2,021,183 $17,040,000 2,021,183 17,040,000
Accretion of redemption value on
redeemable preferred stock...... 1,337,215 452,664 2,511,524
----------- --------- ----------- --------- ----------- ---------- -----------
BALANCE AT MARCH 31, 1998........ 11,258,924 2,021,183 17,492,664 7,460,783 40,706,584
Preferred stock issued........... 33,333 299,997 33,333 299,997
Accretion of redemption value on
redeemable preferred stock...... 864,145 1,469,536 2,980,764
Additional paid in capital on
Series C resale, net of costs of
$85,866......................... 2,740,349
----------- --------- ----------- --------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1998..... 12,123,069 2,054,516 19,262,197 7,494,116 46,727,694
Preferred stock issued, net of
costs of $1,237,904............. 1,633,512 $16,730,728 1,633,512 16,730,728
Preferred stock issued in
connection with asset
acquisition..................... 45,455 500,000 45,455 500,000
Accretion of redemption value on
redeemable preferred stock...... 1,127,478 1,926,809 543,513 4,850,968
----------- --------- ----------- --------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1999..... 13,250,547 2,054,516 21,189,006 1,678,967 17,774,241 9,173,083 68,809,390
Preferred stock issued, net of
costs of $350,000*.............. 1,363,637 14,113,499 1,363,637 14,113,499
Accretion of redemption value on
redeemable preferred stock*..... 790,001 1,365,066 1,858,286 4,885,879
----------- --------- ----------- --------- ----------- ---------- -----------
BALANCE AT SEPTEMBER 30, 2000
(UNAUDITED)..................... $14,040,548 2,054,516 $22,554,072 3,042,604 $33,746,026 10,536,720 $87,808,768
=========== ========= =========== ========= =========== ========== ===========
------------
* unaudited
F-18
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMON STOCK:
Certain stockholders, both common and preferred, have preemptive rights to
purchase any of the Company's capital stock except in the event of an initial
public offering. No cash dividends shall be paid to common stockholders unless
an equal dividend is paid to all preferred stockholders in an amount for each
share of preferred stock equal to the aggregate amount of such dividend for all
common stock into which each such share of preferred stock could then be
converted. The holders of common stock, voting as one class, are entitled to
elect two directors.
At December 31, 1999, the Company has reserved 9,173,083 shares of common
stock for issuance upon conversion of the Series A, Series B, Series C, Series
D, Series E and Series F Preferred Stock.
10. STOCK OPTION PLAN:
The Company's 1989 Incentive Stock Option, Nonqualified Stock Option, and
Restricted Stock Purchase Plan (the "1989 Plan") provides for the issuance of
options to purchase up to 1,000,000 shares of the Company's common stock to
eligible officers, key employees, non-employee directors and consultants of the
Company at prices not less than the fair market value of the common stock on the
date the option is granted, as determined by the Board of Directors. The options
vest annually over 5 years using the straight-line method, unless otherwise
provided, and expire five or ten years from the date of grant. In May 1996, the
Company adopted the 1996 Incentive Stock Option, Nonqualified Stock Option, and
Restricted Stock Purchase Plan (the "1996 Plan"), which provides for the
issuance of options to purchase up to 200,000 shares of the Company's common
stock, with basically the same terms as the 1989 Plan. The Board of Directors
approved increases in the number of shares available for grant under the 1996
Plan to 1,200,000 shares in December 1997 and to 1,400,000 shares in August
1999.
The Company may terminate the 1996 Plan at any time. The 1989 Plan
terminated on September 26, 1999, however, the Board of Directors voted in
October 1999 to amend the 1996 Plan to increase the number of shares authorized
for issuance to include the unissued options from the 1989 Plan prior to its
expiration, as well as any additional options that would become available
through future forfeitures. If not terminated sooner, the 1996 Plan terminates
on May 4, 2006.
F-19
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The number and weighted average exercise price of options issued and
outstanding under the 1989 and 1996 Plans, at exercise prices of between $.60
and $11.00 per share, are as follows:
[Enlarge/Download Table]
NINE MONTHS NINE MONTHS
YEAR ENDED AVERAGE ENDED AVERAGE YEAR ENDED AVERAGE ENDED AVERAGE
MARCH 31, EXERCISE DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE SEPTEMBER 30, EXERCISE
1998 PRICE 1998 PRICE 1999 PRICE 2000 PRICE
---------- -------- ------------ -------- ------------ -------- -------------- --------
(UNAUDITED)
Options outstanding,
beginning of period..... 705,700 $2.25 1,146,300 $3.12 1,446,200 $3.42 1,736,550 $3.78
Granted (exercise price
equals fair value).... 556,850 3.99 455,950 4.00 28,500 4.00 431,740 8.61
Granted (exercise price
less than fair
value)................ 452,900 4.59 231,930 5.95
Canceled................ (69,100) 2.93 (127,850) 3.29 (128,650) 4.13 (57,110) 5.75
Exercised............... (47,150) 0.56 (28,200) .91 (62,400) .76 (44,850) 1.99
--------- --------- --------- ---------
Options outstanding, end
of period............... 1,146,300 $3.12 1,446,200 $3.42 1,736,550 $3.78 2,298,260 $4.89
========= ========= ========= =========
Options exercisable, end
of period............... 216,966 $2.03 295,426 $2.43 479,454 $3.09 707,868 $3.64
========= ========= ========= =========
The difference between the exercise price and the fair market value of the
options at the dates of grant is accounted for as unearned compensation and
amortized to expense over the related vesting period using the straight-line
method. During the year ended March 31, 1998, $10,720 of unearned compensation
related to grants in previous years was reversed due to the cancellation of
certain unvested options and $44,375 was amortized to expense. During the nine
months ended December 31, 1998, $19,863 of unearned compensation related to
grants in previous fiscal years was reversed due to the cancellation of certain
unvested options and $27,984 was amortized to expense. During the year ended
December 31, 1999, $605,175 of unearned compensation related to grants in 1999
and representing the difference between the exercise price and the fair market
value was recorded and $149,753 was amortized to expense. In addition, deferred
compensation related to options granted to consultants of $174,151 was recorded
and $35,323 was expensed. Options granted to consultants in 1999 were valued at
the date of grant using the Black-Scholes model with a dividend yield of 0%, an
expected volatility of 67%, an average risk-free rate of 6.086%, and an expected
life of seven years. Services provided by consultants include sales and
marketing or financing related services. Options vest over the service period
ranging from immediately vested to vesting over five years. Deferred
compensation related to these options to consultants of $138,828 at December 31,
1999 will be amortized to compensation expense over the vesting terms of the
related options.
For options granted with an exercise price less than fair value, the
weighted average per share fair value of options granted during 1999 and for the
nine months ended September 30, 2000 were $6.09 and $6.94, respectively.
F-20
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had
compensation expense for the Company's stock option plans been determined based
on the fair value at the grant date for awards during the year ended March 31,
1998, the nine months ended December 31, 1998, and the year ended December 31,
1999 consistent with the provisions of SFAS No. 123, the Company's net loss
would have increased to the pro forma amounts indicated below:
[Enlarge/Download Table]
YEAR ENDED NINE MONTHS YEAR ENDED
MARCH 31, ENDED DECEMBER 31, DECEMBER 31,
1998 1998 1999
----------- ------------------ ------------
Net loss
As reported......................... $(6,529,841) $ (7,916,964) $(13,171,425)
=========== ============ ============
Pro forma for SFAS 123.............. $(6,672,210) $ (8,220,878) $(13,678,749)
=========== ============ ============
Net loss applicable to common
stockholders
As reported......................... $(9,041,365) $(10,897,728) $(18,022,393)
=========== ============ ============
Pro forma for SFAS 123.............. $(9,183,734) $(11,201,642) $(18,529,717)
=========== ============ ============
Basic and diluted net loss per common
share
As reported......................... $ (3.16) $ (3.77) $ (6.12)
=========== ============ ============
Pro forma for SFAS 123.............. $ (3.21) $ (3.88) $ (6.30)
=========== ============ ============
Pro forma basic and diluted net loss
per common share (unaudited)
As reported......................... $ (1.21)
============
Pro forma for SFAS 123.............. $ (1.25)
============
The fair value of each option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants:
[Download Table]
Year ended March 31, 1998: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 5.782%,
and expected life of 7 years.
Nine months ended December 31, 1998: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 5.196%,
and expected life of 7 years.
Year ended December 31, 1999: Dividend yield of 0%, expected volatility
of 0%, average risk-free rate of 6.086%,
and expected life of 7 years.
Because the determination of the fair value of all options granted includes
the factors described in the preceding paragraph, and because additional option
grants are expected to be made each year, the above pro forma disclosures are
not representative of pro forma effects of net income or loss for future years.
F-21
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The schedule below reflects the number and weighted average exercise price
of outstanding and exercisable options as of December 31, 1999 segregated by
exercise price ranges:
[Download Table]
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OF EXERCISE REMAINING LIFE OF EXERCISE
EXERCISE PRICE OPTIONS PRICE (YRS) OPTIONS PRICE
-------------- --------- -------- -------------- ------- --------
$0.60................. 58,850 $0.60 1.02 43,500 $0.60
$3.00................. 426,400 $3.00 6.59 303,860 $3.00
$4.00................. 1,005,850 $4.00 8.13 117,094 $4.00
$5.00................. 245,450 $5.00 9.82 15,000 $5.00
--------- -------
1,736,550 $3.78 7.75 479,454 $3.09
========= =======
11. COMMITMENTS AND CONTINGENCIES:
Operating Leases:
The Company leases its facility and certain office equipment under
operating lease agreements expiring at various dates through March 2003. The
facility lease is subject to price escalations tied to the consumer price index.
Future minimum lease payments under operating leases for each of the years
ending December 31 are as follows:
[Download Table]
2000........................................................ $272,328
2001........................................................ 272,328
2002........................................................ 118,461
2003........................................................ 2,139
--------
$665,256
========
Rental expense related to operating leases for the year ended March 31,
1998, the nine months ended December 31, 1998, and the year ended December 31,
1999 was $226,068, $186,066 and $255,080 respectively.
Employee Benefit Plan:
In fiscal 1996, the Company adopted the Masimo Retirement Savings Plan (the
"Plan") which is a 401(k) plan covering all of the Company's full-time employees
who meet certain eligibility requirements. The Company may contribute to the
Plan on a discretionary basis. As of December 31, 1999, the Company has never
contributed to the Plan.
Employment Agreements:
In May 1996, the Company revised existing employment agreements with two of
its officers. These agreements initially provided for aggregate annual base
salaries of $295,000, plus other benefits, with annual increases at the
discretion of the Board of Directors or its Compensation Committee. As of
December 31, 1999, aggregate annual base salaries were $392,000. The agreements
provide for annual bonuses based on the Company's attainment of certain
operating income. The agreements had an initial term of three years, with
automatic renewal, and may be terminated by the Company with or without cause as
defined in the agreements. If either of these agreements is terminated by the
Company without cause, the Company's severance liability is two years of base
salary. If such termination occurs on or after
F-22
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
June 30, 1998, the Company shall immediately vest all of the individual's then
outstanding stock options and issue such related stock to the individual as
additional compensation.
Concentrations of Risk:
The Company is exposed to credit loss for the amount of cash deposits with
financial institutions in excess of federally-insured limits. The Company
invests its excess cash deposits in government securities and money market cash
portfolios with major financial institutions.
While the Company and its contract manufacturers rely on sole source
suppliers for certain components, steps have been taken to minimize the impact
of a shortage or stoppage of shipments such as maintaining excess inventory and
designing software that may be easily modified to use a different component.
Revenue from individual customers in excess of 10% of total revenue are as
follows:
[Download Table]
YEAR ENDED NINE MONTHS ENDED YEAR ENDED
MARCH 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
-------------- ----------------- -----------------
Customer A............... 31% 13%
Customer B............... 29% 18%
Customer C............... 20%
Customer D............... 20% 11%
Customer E............... 40%
Four customers represented 87% of net accounts receivable at December 31,
1998 and three customers represented 60% of net accounts receivable at December
31, 1999.
Litigation:
In October 1999, the Company filed a patent infringement lawsuit against
one of its competitors. The complaint seeks a preliminary and permanent
injunction prohibiting the sale of the infringing products as well as damages,
costs, expenses, legal fees, and treble damages for willful infringement. As the
lawsuit is in the early stages, no assurances can be given that the lawsuit will
be successful in limiting or restricting the sale of the competitive products.
If the competitor is allowed to continue to sell its products, such sales could
have a material adverse effect on the Company's future revenue. In response to
this lawsuit, the competitor filed a patent infringement lawsuit against the
Company in November 1999. Management believes that the Company is not violating
any of the competitor's patents. Therefore, the Company intends to vigorously
defend itself with respect to this lawsuit. However, due to the early stage of
the case, no assurances can be given that the Company will be successful in its
defense and an unfavorable outcome would likely have a material adverse effect
on the financial position, results of operations, and cash flows of the Company.
In addition, we have incurred and expect to continue to incur substantial legal
and other litigation related expenses.
12. SEGMENT INFORMATION AND ENTERPRISE REPORTING
The Company follows SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." The Company operates in one reportable
segment as it has one family of pulse oximetry related products. The Company
does not disaggregate financial information by product or geographically, other
than export sales by region and sales by product, for management purposes.
Substantially all of the Company's assets are located within the U.S. All of the
Company's products are manufactured in the U.S.
F-23
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Product sales by geographic destination and as a percentage of total
product sales are as follows:
[Enlarge/Download Table]
YEAR NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED ENDED
MARCH 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1998 1999 2000
-------------- ---------------- ---------------- -------------------
(UNAUDITED)
Geographic Area by
Destination
United States...... $152,158 20% $ 840,090 50% $4,494,588 68% $7,643,787 80%
Japan.............. 375,086 50% 550,063 33% 1,233,921 19% 645,263 7%
Europe............. 218,030 29% 271,268 16% 812,771 12% 1,059,871 11%
Other.............. 8,604 1% 16,546 1% 107,856 1% 157,716 2%
-------- ---------- ---------- ----------
Total Product Sales.. $753,878 100% $1,677,967 100% $6,649,136 100% $9,506,637 100%
======== === ========== === ========== === ========== ===
13. INCOME TAXES:
The following table presents the current and deferred provision for income
taxes:
[Download Table]
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
---------- ------------ ------------
Current:
Federal.................................
State................................... $823 $800 $800
---- ---- ----
823 800 800
Deferred:
Federal.................................
State...................................
---- ---- ----
$823 $800 $800
==== ==== ====
The temporary differences that give rise to the deferred tax provision
(benefit) consist of:
[Download Table]
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
----------- ------------ ------------
Property, plant and equipment...... $ (67,089) $ (133,070)
Capitalized start-up costs......... $ 78,088 88,927 39,244
Capitalized research and
development costs................ (724,799) (686,886) (477,837)
Tax credits........................ (304,517) (319,779) (428,839)
Deferred revenue................... (59,441) (34,679) (82,209)
Acquired intangibles............... (208,750)
Accrued liabilities................ (122,224) (195,149) (81,580)
Other.............................. (30,451) (26,218) (23,856)
Net operating losses............... (1,701,203) (2,190,490) (4,045,498)
Change in valuation allowance...... 2,864,547 3,431,363 5,442,395
----------- ----------- -----------
$ -- $ -- $ --
=========== =========== ===========
F-24
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The provision (benefit) for income taxes differs from the amount that would
result from applying the federal statutory rate as follows:
[Download Table]
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED
MARCH 31, DECEMBER 31, DECEMBER 31,
1998 1998 1999
--------- ------------ ------------
Statutory regular federal income tax
rate..................................... (34.0)% (34.0)% (34.0)%
Change in federal valuation allowance...... 36.2 35.7 34.5
Other...................................... (2.2) (1.7) (0.5)
----- ----- -----
0.0% 0.0% 0.0%
===== ===== =====
The components of the deferred tax asset are as follows:
[Download Table]
DECEMBER 31, DECEMBER 31,
1998 1999
------------ ------------
Property, plant and equipment..................... $ 106,925 $ 239,995
Capitalized start-up costs........................ 39,244
Capitalized research and development costs........ 3,519,692 3,997,529
Tax credits....................................... 1,045,144 1,473,983
Deferred revenue.................................. 94,120 176,329
Acquired intangibles.............................. 208,750
Net operating losses.............................. 5,681,309 9,726,807
Accrued liabilities............................... 355,837 437,417
Other............................................. 39,198 63,054
------------ ------------
10,881,469 16,323,864
Valuation allowance............................... (10,881,469) (16,323,864)
------------ ------------
$ -- $ --
============ ============
As of December 31, 1999, the Company has federal and state research and
experimentation credit carryforwards of approximately $716,000 and $563,000,
respectively. These carryforwards expire beginning in 2007 for federal purposes
and carry forward indefinitely for state purposes. In addition, the Company has
state manufacturers' investment tax credit carryforwards of approximately
$195,000 which expire beginning in 2006.
As of December 31, 1999, the Company has federal and state net operating
loss carryforwards of approximately $25,335,000 and $12,589,000, respectively,
which expire beginning in 2010 and 2000, respectively.
The utilization of net operating loss and tax credit carryforwards may be
limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.
F-25
MASIMO CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. SUBSEQUENT EVENTS (UNAUDITED):
In March 2000, the Board of Directors approved an increase to the number of
shares reserved for issuance under the 1996 Stock Option Plan to 2,400,000
shares.
In May 2000, the Company sold 909,091 shares of Series F Preferred Stock to
one investor at a price of $11 per share raising gross proceeds of $10,000,001.
In September 2000, the Company sold 454,546 shares of Series F Preferred
Stock to one investor at a price of $11 per share raising gross proceeds of
$5,000,000. The Company also issued 90,909 warrants to purchase common stock at
an exercise price of $11 per share in connection with this transaction.
The Company amended its cross-licensing agreement with Masimo Labs to
extend the funding period from two years to four years and increased the
not-to-exceed amount to $2,500,000, effective March 2000.
F-26
[RADICAL LOGO]
[THE WORDS "SIGNAL EXTRACTION PULSE OXIMETER"]
[THE WORDS, " RADICAL DELIVERS THE ACCURACY AND RELIABILITY OF MASIMO SET
TECHNOLOGY WITH THE ABILITY TO FUNCTION IN DIFFERING CAPACITIES, EASE OF USE AND
A CONVENIENT UPGRADE PATH FOR EXISTING MONITORS."]
[THE WORDS "RADICAL UPGRADES INSTALLED CONVENTIONAL MONITORS
THE UPGRADE CAPABILITY IS ENABLED BY OUR PATENTED SATSHARE FEATURE. SATSHARE
ENABLES A CONVENTIONAL MONITOR TO UPGRADE TO MASIMO SET TECHNOLOGY THROUGH A
SIMPLE CABLE CONNECTION FROM THE BACK OF RADICAL TO THE SENSOR INPUT PORT OF THE
CONVENTIONAL MONITOR."]
[THE WORD "UPGRADE" AND A PHOTOGRAPH OF A RADICAL UPGRADE TO THE RIGHT OF THE
ABOVE NOTED WORDS]
[THE WORDS "RADICAL IS A STANDALONE PULSE OXIMETER
IN ITS MOST BASIC CONFIGURATION, RADICAL CAN BE USED AS A STANDALONE PULSE
OXIMETER FOR BEDSIDE MONITORING. THE RADICALSCREEN FEATURE AUTOMATICALLY
RECONFIGURES THE DISPLAY FOR A VERTICAL OR HORIZONTAL ORIENTATION.]
[THE WORD "STANDALONE" AND A PHOTOGRAPH OF A RADICAL STANDALONE UNIT TO THE
RIGHT OF THE ABOVE NOTED WORDS]
[THE WORDS, "RADICAL IS A BATTERY OPERATED HANDHELD PULSE OXIMETER
RADICAL HAS A DETACHABLE MODULE WHICH FUNCTIONS AS A BATTERY OPERATED HANDHELD
PULSE OXIMETER. THE HANDHELD MODULE CAN BE CONNECTED INTO ANY OTHER RADICAL BASE
STATION, WHICH ALLOWS RADICAL TO STAY WITH THE PATIENT, ENABLING CONTINUOUS AND
RELIABLE ARTERIAL OXYGEN SATURATION MONITORING AS PATIENTS ARE TRANSPORTED AND
MOVED WITHIN THE HOSPITAL."]
[THE WORD "HANDHELD" AND A PHOTOGRAPH OF A RADICAL HANDHELD UNIT TO THE RIGHT OF
THE ABOVE NOTED WORDS]
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN
THIS PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR THE SALE OF COMMON
STOCK MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE
DATE OF THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION
OF AN OFFER TO BUY THESE SHARES IN ANY CIRCUMSTANCES UNDER WHICH THE OFFER OR
SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
[Download Table]
PAGE
-----
Summary............................. 1
Risk Factors........................ 5
Special Note Regarding Forward-
Looking Statements and Industry
Data.............................. 16
Use of Proceeds..................... 17
Dividend Policy..................... 17
Capitalization...................... 18
Dilution............................ 19
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 32
Management.......................... 46
Certain Transactions................ 56
Principal Stockholders.............. 58
Description of Capital Stock........ 61
Shares Eligible for Future Sale..... 64
Underwriting........................ 66
Legal Matters....................... 68
Experts............................. 68
Where You Can Find More
Information....................... 69
Index to Financial Statements....... F-1
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade in these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
[MASIMO LOGO]
5,000,000 SHARES
COMMON STOCK
DEUTSCHE BANC ALEX. BROWN
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
PRELIMINARY PROSPECTUS
, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Set forth below are the expenses in connection with the issuance and
distribution of the securities being registered hereby other than the
underwriting discounts and commissions. All amounts are estimated except the
Securities and Exchange Commission registration fees, the NASD filing fees and
the Nasdaq National Market listing fee.
[Download Table]
Securities and Exchange Commission registration fee......... $ 18,216
Nasdaq National Market listing fee.......................... 90,000
NASD filing fee............................................. 7,400
Legal fees and expenses (other than Blue Sky fees and
expenses)................................................. 450,000
Blue Sky fees and expenses.................................. 5,000
Printing and engraving expenses............................. 200,000
Accounting fees and expenses................................ 400,000
Transfer Agent and Registrar fees and expenses.............. 2,500
Miscellaneous............................................... 26,884
----------
Total.................................................. $1,200,000
==========
Masimo will bear all of the foregoing fees and expenses.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation and bylaws provide a right to
indemnification to the fullest extent permitted by law for expenses, attorney's
fees, damages, punitive damages, judgments, penalties, fines and amounts paid in
settlement actually and reasonably incurred by any person whether or not the
indemnified liability arises or arose from any threatened, pending or completed
proceeding by or in our right by reason of the fact that such person is or was
serving as a director or officer at our request, as a director, officer,
partner, venturer, proprietor, employee, agent, or trustee of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise. Our certificate of incorporation and bylaws provide for the
advancement of expenses to an indemnified party upon receipt of an undertaking
by the party to re-pay those amounts if it is finally determined that the
indemnified party is not entitled to indemnification. In addition, we have
entered into indemnification agreements with each of our directors and executive
officers.
Our bylaws authorize us to take steps to ensure that all persons entitled
to the indemnification are properly identified, indemnified, including, if the
board of directors so determines, purchasing and maintaining insurance.
We have entered into indemnification agreements with each of our directors
and officers. Pursuant to the indemnification agreements, we have agreed to
indemnify each director officer, to the maximum extent provided by applicable
law, from claims, liabilities, damages, expenses, losses, costs, penalties or
amounts paid in settlement incurred by each director officer in or arising out
of such person's capacity as our director, officer employee and/or agent or any
other corporation of which such person is a director or officer at our request.
In addition, each director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
To the extent that our board of directors or the stockholders may in the
future wish to limit or real our ability to provide indemnification as set forth
in the certificate of incorporation, such repeal or limitation may not be
effective as to directors and officers who are parties to the
II-1
indemnification agreements, because their rights to full protection would be
contractually assured by the indemnification agreements. We anticipate entering
similar contracts, from time to time, with out future directors.
In addition, the Form of Underwriting Agreement filed as Exhibit 1.1 to
this registration statement provides for indemnification by the underwriters of
us and our officers and directors, and by us of the underwriters, for certain
liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 1, 1997, the Registrant has sold the following securities:
1. In December 1997, January 1998 and April 1998, the Registrant issued and
sold an aggregate of 1,056,737, 964,446, and 33,333 shares of its Series
E Preferred Stock, respectively, in each case to a group of private
investors at a purchase price of $9.00 per share.
2. In September and October 1999, the Registrant issued and sold an
aggregate of 1,420,328 and 213,184 shares of its Series F Preferred
Stock, respectively, in each case to a group of private investors at a
purchase price of $11 per share.
3. In December 1999, the Registrant issued and sold 45,455 shares of its
Series F Preferred Stock to Vital Insite, Inc. in exchange for
intangible assets valued at $500,000.
4. In May 2000, the Registrant issued and sold 909,091 shares of its Series
F Preferred Stock to funds associated with Franklin Templeton at a
purchase price of $11 per share.
5. On September 7, 2000, the Registrant issued and sold 454,546 shares of
its Series F Preferred Stock and warrants to purchase 90,909 shares of
its Common Stock to GE Marquette Medical Systems, Inc. at a purchase
price of $11 per share.
6. Between January 1, 1997 and June 30, 2000, we granted options to
purchase an aggregate of 2,076,020 shares of common stock at exercise
prices ranging from $3.00 to $8.00 per share with a weighted exercise
price of $4.59 per share.
The sales and issuance of common stock made pursuant to the exercise of
stock options granted to our officers, directors and employees as described in
paragraph 6 above were made in reliance on Rule 701 as promulgated under Section
3(b) of the Securities Act, as transactions pursuant to compensatory benefit
plans and contracts relating to compensation.
The sales and issuance as described above were made in reliance upon
exemptions from registration under the Securities Act of 1933 in reliance on
Section 4(2) of such act as transactions by an issuer not involving any public
offering. The recipients in the above transactions represented their intention
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the share certificates and instruments issued in such transactions. The
Company did not engage in any general solicitation in connection with such sales
and, other than Rule 701 issuances, believe that each acquirer qualifies as an
"accredited investor" under Rule 501. The purchasers were sophisticated with
access, through employment or other relationship with the Company, to the kind
of information registration would provide. All of the foregoing securities are
deemed restricted securities for purposes of the Securities Act.
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
[Download Table]
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as
currently in effect.
3.3** Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering.
3.4** Amended and Restated Bylaws, as currently in effect.
3.5** Amended and Restated Bylaws to be effective upon the closing
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Arter & Hadden LLP as to legality of securities
being registered.
10.1+ Purchasing and Licensing Agreement, dated September 9, 1997,
between Atom Medical Corporation and Masimo.
10.2+ Restated Purchasing and Licensing Agreement, dated August
19, 1997, between Datascope Corp. and Masimo.
10.3+ Purchasing and Licensing Agreement, dated April 17, 1997,
between Zoll Medical Corporation and Masimo.
10.4** Loan and Security Agreement, dated April 9, 1999, between
Comerica Bank -- California and Masimo.
10.5** Employment Agreement, dated May 4, 1996, between Joe E.
Kiani and Masimo.
10.6** Amendment to Employment Agreement, dated April 2, 1998,
between Joe E. Kiani and Masimo.
10.7** Employment Agreement, dated May 4, 1996, between Mohamed
Diab and Masimo.
10.8** Amendment to Employment Agreement, dated April 2, 1998,
between Mohamed Diab and Masimo.
10.9** Standard Industrial/Commercial Single-Tenant Lease, dated
April 25, 1997, between Hoffman Associates No. 5 and Masimo.
10.10 Cross-Licensing Agreement, dated May 2, 1998, between Masimo
Laboratories and Masimo.
10.11 Amendment to Cross-Licensing Agreement, dated March 20,
2000, between Masimo Laboratories and Masimo.
10.12** Fifth Amended and Restated Registration Rights Agreement,
dated September 14, 1999, between Masimo and the parties on
the signature pages thereto.
10.13** Form of Indemnification Agreement to be entered into between
Masimo and its officers and directors.
10.14** Incentive Stock Option Nonqualified Stock Option and
Restricted Stock Purchase Plan -- 1989.
10.15** Amendment No. 1 to Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan -- 1989.
10.16** Third Amended and Restated 1996 Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase
Plan.
10.17** Amendment Number One to Third Amended and Restated 1996
Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan.
10.18** 2000 Employee Stock Purchase Plan.
II-3
[Download Table]
23.1* Consent of Arter & Hadden LLP (included in their opinion
filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Knobbe, Martens, Olson & Bear LLP
24.1** Power of Attorney (included in signature page hereto)
27.1** Financial Data Schedules
---------------
* To be filed by amendment.
**Previously filed.
+ Confidential treatment has been requested with respect to certain provisions
of this agreement.
II-4
(b) Financial Statement Schedules
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors and Stockholders of
Masimo Corporation
Our audits of the financial statements of Masimo Corporation referred to in
our report dated March 17, 2000 appearing in this registration statement on Form
S-1 also included an audit of the financial statement schedule listed in Item
(16)(b) of this Form S-1. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related financial statements.
PricewaterhouseCoopers LLP
Costa Mesa, California
March 17, 2000
II-5
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
[Download Table]
ADDITIONS
BEGINNING CHARGED TO ENDING
BALANCE EXPENSE DEDUCTIONS BALANCE
--------- ---------- ---------- --------
YEAR ENDED MARCH 31, 1998
Allowance for doubtful accounts....... $ 0 $ 20,000 $ 0 $ 20,000
Inventory valuation allowance......... $ 0 $130,000 $ 0 $130,000
NINE MONTHS ENDED DECEMBER 31, 1998
Allowance for doubtful accounts....... $ 20,000 $203,900 $ (3,900) $220,000
Inventory valuation allowance......... $130,000 $239,311 $(263,430) $105,881
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts....... $220,000 $ 29,363 $(174,991) $ 74,372
Inventory valuation allowance......... $105,881 $521,677 $ (84,928) $542,630
No other financial statement schedules of Masimo Corporation are included
in Part II of this registration statement because the information required to be
set forth therein is not applicable or is shown in the Financial Statements or
the Notes thereto.
II-6
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Masimo pursuant to the foregoing provisions, or otherwise, Masimo has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Masimo of expenses incurred
or paid by a director, officer or controlling person of Masimo in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered
hereunder Masimo will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as a
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by Masimo pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) For purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Masimo has duly caused this Amendment to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on November 14, 2000.
MASIMO CORPORATION
By: /s/ JOE E. KIANI
------------------------------------
Joe E. Kiani
President, Chief Executive Officer
and
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed on the 14th day of
November, 2000, below by or on behalf of the following persons in the capacities
indicated.
[Enlarge/Download Table]
SIGNATURE TITLE
--------- -----
/s/ JOE E. KIANI Chairman of the Board, Chief Executive Officer
--------------------------------------------------- and President (Principal Executive Officer)
Joe E. Kiani
* Chief Technical Officer and Director
---------------------------------------------------
Mohamed Diab
* Executive Vice President, Finance (Chief
--------------------------------------------------- Financial Officer and Secretary)
Bradley Langdale
* Director
---------------------------------------------------
Robert Coleman, Ph.D.
* Director
---------------------------------------------------
Jack Lasersohn
* Director
---------------------------------------------------
H.J.C. Swan, M.D., Ph.D.
* Director
---------------------------------------------------
Edward Cahill
* Director
---------------------------------------------------
Frederick A. Robertson, M.D.
*By: /s/ JOE E. KIANI
--------------------------------------------
Joe E. Kiani
Attorney-in-Fact
II-8
EXHIBIT INDEX
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
1.1* Form of Underwriting Agreement.
3.1** Amended and Restated Certificate of Incorporation, as
currently in effect.
3.2** Certificate of Amendment of Certificate of Incorporation, as
currently in effect.
3.3** Form of Amended and Restated Certificate of Incorporation,
to be filed upon the closing of this offering.
3.4** Amended and Restated Bylaws, as currently in effect.
3.5** Amended and Restated Bylaws to be effective upon the closing
of this offering.
4.1* Form of Common Stock Certificate.
5.1* Opinion of Arter & Hadden LLP as to legality of securities
being registered.
10.1+ Purchasing and Licensing Agreement, dated September 9, 1997,
between Atom Medical Corporation and Masimo.
10.2+ Restated Purchasing and Licensing Agreement, dated August
19, 1997, between Datascope Corp. and Masimo.
10.3+ Purchasing and Licensing Agreement, dated April 17, 1997,
between Zoll Medical Corporation and Masimo.
10.4** Loan and Security Agreement, dated April 9, 1999, between
Comerica Bank -- California and Masimo.
10.5** Employment Agreement, dated May 4, 1996, between Joe E.
Kiani and Masimo.
10.6** Amendment to Employment Agreement, dated April 2, 1998,
between Joe E. Kiani and Masimo.
10.7** Employment Agreement, dated May 4, 1996, between Mohamed
Diab and Masimo.
10.8** Amendment to Employment Agreement, dated April 2, 1998,
between Mohamed Diab and Masimo.
10.9** Standard Industrial/Commercial Single-Tenant Lease, dated
April 25, 1997, between Hoffman Associates No. 5 and Masimo.
10.10 Cross-Licensing Agreement, dated May 2, 1998, between Masimo
Laboratories and Masimo.
10.11 Amendment to Cross-Licensing Agreement, dated March 20,
2000, between Masimo Laboratories and Masimo.
10.12** Fifth Amended and Restated Registration Rights Agreement,
dated September 14, 1999, between Masimo and the parties on
the signature pages thereto.
10.13** Form of Indemnification Agreement to be entered into between
Masimo and its officers and directors.
10.14** Incentive Stock Option Nonqualified Stock Option and
Restricted Stock Purchase Plan -- 1989.
10.15** Amendment No. 1 to Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan -- 1989.
10.16** Third Amended and Restated 1996 Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase
Plan.
10.17** Amendment Number One to Third Amended and Restated 1996
Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan.
10.18** 2000 Employee Stock Purchase Plan.
[Download Table]
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1* Consent of Arter & Hadden LLP (included in their opinion
filed as Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers, LLP
23.3 Consent of Knobbe, Martens, Olson & Bear LLP
24.1** Power of Attorney (included in signature page hereto)
27.1** Financial Data Schedules
---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment has been requested with respect to certain provisions
of this agreement.
Dates Referenced Herein and Documents Incorporated by Reference
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