-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G6oFASbenbYiOafMxp1ZHubnNENHK69PD+kPWHyiJuKJo5nKT/yEY7rXF1c6MFRi 7rclcNKeeetVyRNVjGVf8Q== 0000891020-00-001021.txt : 20000515 0000891020-00-001021.hdr.sgml : 20000515 ACCESSION NUMBER: 0000891020-00-001021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VITALCOM INC CENTRAL INDEX KEY: 0001006026 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-FACILITIES SUPPORT MANAGEMENT SERVICES [8744] IRS NUMBER: 330538926 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27588 FILM NUMBER: 629456 BUSINESS ADDRESS: STREET 1: 15222 DEL AMO AVE CITY: TUSCAN STATE: CA ZIP: 92680 BUSINESS PHONE: 7145460147 MAIL ADDRESS: STREET 1: 15222 DEL AMO AVENUE CITY: TUSTIN STATE: CA ZIP: 92680 10-Q 1 FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to ___________________ Commission file number 0-27588 VITALCOM INC. (Exact name of registrant as specified in its charter) DELAWARE 3662 33-0538926 (State or other jurisdiction (Primary Standard (I.R.S. Employer of incorporation or Industrial Classification Identification Number) organization) Code Number) 15222 DEL AMO AVENUE TUSTIN, CALIFORNIA 92780 (714) 546-0147 (Address and telephone number of principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.0001 PER SHARE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: As of May 10, 2000, there were 8,003,605 shares outstanding of the issuer's common stock. 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VITALCOM INC. BALANCE SHEETS
-------------------------- MARCH 31, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) (AUDITED) ASSETS Current assets Cash and cash equivalents $10,105,761 $ 7,107,420 Short-term investments -- 5,273,037 Accounts receivable, net 2,104,126 2,309,392 Inventories 1,350,753 1,504,952 Prepaid expenses 436,318 530,833 ----------- ----------- Total current assets 13,996,958 16,725,634 Property Machinery and equipment 1,624,796 1,560,013 Office furniture and computer equipment 2,632,948 2,558,815 Leasehold improvements 199,469 181,778 ----------- ----------- 4,457,213 4,300,606 Less accumulated amortization and depreciation (2,971,881) (2,831,090) ----------- ----------- Property, net 1,485,332 1,469,516 Other assets 66,707 68,237 Goodwill, net 414,890 423,025 ----------- ----------- Total assets $15,963,887 $18,686,412 =========== ===========
2 3 VITALCOM INC. BALANCE SHEETS - (CONTINUED)
--------------------------- MARCH 31, DECEMBER 31, 2000 1999 ----------- ------------ (UNAUDITED) (AUDITED) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 383,429 $ 508,322 Accrued payroll and related costs 633,894 959,862 Accrued warranty costs 500,746 516,297 Other accrued liabilities 782,061 568,336 Current portion of capital lease obligations 21,408 28,796 ----------- ----------- Total current liabilities 2,321,538 2,581,613 Stockholders' equity: Common stock, including paid-in capital, $0.0001 par value; 25,000,000 shares authorized; 8,318,515 shares issued and 7,954,965 shares outstanding at March 31, 2000; 8,281,112 shares issued and 7,917,562 shares outstanding at December 31, 1999 37,779,461 37,665,468 Note receivable for common stock sales (30,590) (30,590) Treasury stock, at cost (740,154) (740,154) Accumulated deficit (23,366,368) (20,789,925) ----------- ----------- Total stockholders' equity 13,642,349 16,104,799 ----------- ----------- Total liabilities and stockholders' equity $15,963,887 $18,686,412 =========== ===========
3 4 VITALCOM INC. STATEMENTS OF OPERATIONS
----------------------------- THREE MONTHS ENDED MARCH 31, 2000 1999 ----------- ---------- (UNAUDITED) Revenues $ 3,102,884 $4,810,100 Cost of revenues 1,838,126 2,025,326 ----------- ---------- Gross profit 1,264,758 2,784,774 Operating expenses: Sales and marketing 1,611,526 1,571,321 Research and development 1,808,503 1,125,474 General and administrative 578,487 590,895 ----------- ---------- Total operating expenses 3,998,516 3,287,690 ----------- ---------- Operating loss (2,733,758) (502,916) Other income, net 166,315 183,796 ----------- ---------- Loss before provision for income taxes (2,567,443) (319,120) Provision for income taxes 9,000 9,000 Net loss $(2,576,443) $(328,120) =========== ========== Net loss per basic and diluted common share $ (0.32) $ (0.04) =========== ========== Weighted average basic and diluted common shares 7,934,416 8,182,828 =========== ==========
4 5 VITALCOM INC. STATEMENTS OF CASH FLOWS
----------------------------- THREE MONTHS ENDED MARCH 31, 2000 1999 ----------- ----------- (UNAUDITED) Cash flows from operating activities: Net loss $(2,576,443) $ (328,120) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 174,434 179,228 Loss on disposal of property -- 939 Changes in operating assets and liabilities: Accounts receivable 205,266 (171,965) Inventories 154,199 245,655 Prepaid expenses and other assets 96,046 (13,432) Accounts payable (124,893) 129,992 Accrued payroll and related costs (325,968) (174,813) Accrued warranty costs (15,551) (7,352) Accrued liabilities 213,725 (128,953) ----------- ----------- Net cash used in operating activities (2,199,185) (268,821) Cash flows from investing activities: Purchases of property (182,115) (139,696) Proceeds from sale of short-term investments 5,273,037 2,904,313 ----------- ----------- Net cash provided by investing activities 5,090,922 2,764,617 Cash flows from financing activities: Repayment of capital lease obligation and long-term debt (7,388) (6,641) Net proceeds from issuance of common stock 113,992 71,665 ----------- ----------- Net cash provided by financing activities 106,604 65,024 Net increase in cash and cash equivalents 2,998,341 2,560,820 Cash and cash equivalents, beginning of period 7,107,420 10,460,810 ----------- ----------- Cash and cash equivalents, end of period $10,105,761 $13,021,630 =========== =========== Supplemental disclosures of cash flow information: Interest paid $ 624 $ 1,312 =========== =========== Income taxes paid $ 4,900 $ 2,180 =========== ===========
5 6 VITALCOM INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The interim condensed financial statements included herein have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures, normally included in the financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such SEC rules and regulations; nevertheless, the management of the Company believes that the disclosures herein are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1999 filed with the SEC. In the opinion of management, the condensed financial statements included herein reflect all normal, recurring adjustments necessary to present fairly the financial position of the Company as of March 31, 2000, and the results of its operations and its cash flows for the three-month periods ended March 31, 2000 and 1999. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. 2. NET LOSS PER SHARE Net loss per share is computed by dividing net loss by the weighted average number of common and common equivalent shares outstanding. For the three-month periods ended March 31, 2000 and 1999, the diluted weighted average shares were equal to the basic weighted average shares due to the anti-dilutive effect the conversion of options would have given the Company's net loss for the period. 3. STOCK PLANS AND STOCKHOLDERS' EQUITY Stock Option Plans - The following is a summary of stock option transactions under the 1993 Stock Option Plan (the "1993 Plan") and 1996 Stock Option Plan (the "1996 Plan") for the three months ended March 31, 2000:
NUMBER OF NUMBER OF PRICE PER OPTIONS SHARES SHARE EXERCISABLE --------- -------------- ----------- Balance, December 31, 1999 1,680,116 $0.60 to $6.00 601,094 Granted 17,500 $2.38 Exercised (37,403) $3.00 to $4.00 Canceled (61,764) $1.50 to $6.00 --------- Balance, March 31, 2000 1,598,449 $0.60 to $6.00 659,196 =========
At March 31, 2000, 727,436 options were available for grant under the 1993 Plan and 1996 Plan. There were no stock transactions under the 1996 Director Option Plan (the "Director Plan") for the three months ended March 31, 2000. At March 31, 2000, 60,000 options were available for grant under the Director Plan and no options were exercisable. The Company has reserved an aggregate of 300,000 shares of Common Stock for issuance under its 1996 Employee Stock Purchase Plan (the "ESPP"). The ESPP was adopted by the Board of Directors in January 1996 and approved by the Company's stockholders prior to the consummation of the Company's initial public offering in February 1996. The ESPP is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended, and permits eligible employees of the Company to purchase Common Stock through payroll deductions of up to 10% of their compensation provided that no employee may purchase more than $25,000 worth of stock in any calendar year. The ESPP was implemented by an offering period commencing on February 14, 1996 and ending on the last business day in the period ending October 31, 1996. Each subsequent offering period (an "Offering Period") commences on the day following the end of the prior Offering Period and 6 7 has a duration of six months. The price of Common Stock purchased under the ESPP is 85% of the lower of the fair market value of the Common Stock on the first or last day of each offering period. The ESPP will expire in the year 2006. In the years ended December 31, 1997, 1998 and 1999 the Company issued 47,359, 52,703 and 74,334 shares of Common Stock, under the ESPP for $191,218, $145,264 and $88,240 respectively. At March 31, 2000, $45,385 has been withheld from employee earnings for stock purchases under the ESPP. 4. SEGMENT REPORTING Utilizing the management approach, the Company has broken down its business based upon sales through its two distribution channels. The Company does not allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only net sales, cost of sales and gross profit. Selected information regarding the Company's product sectors is as follows:
OEM Enterprise-wide Products Products Total ----------- --------------- ---------- Three months ended March 31, 2000 Revenues............................... $2,354,675 $ 748,209 $3,102,884 Cost of Revenues....................... 1,296,174 541,952 1,838,126 ---------- ---------- ---------- Gross Profit........................... $1,058,501 $ 206,257 $1,264,758 ========== ========== ========== Three months ended March 31, 1999 Revenues............................... $2,649,615 $2,160,485 $4,810,100 Cost of Revenues....................... 1,379,520 645,806 2,025,326 ---------- ---------- ---------- Gross Profit........................... $1,270,095 $1,514,679 $2,784,774 ========== ========== ==========
5. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for derivatives used for hedging activities. It requires that all derivatives be recognized at fair value in the statement of financial position, and that the corresponding gains or losses be reported either as an asset or liability and measured at fair value. SFAS 133 is required to be adopted in fiscal year 2001. The Company believes that the application of SFAS 133 will not have a material impact on the Company's financial statements. 7 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN STATEMENTS CONTAINED IN THIS QUARTERLY REPORT ON FORM 10-Q CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ACTUAL RESULTS MAY VARY SUBSTANTIALLY FROM THESE FORWARD-LOOKING STATEMENTS FOR MANY REASONS, INCLUDING BUT NOT LIMITED TO THOSE SET FORTH IN "RISK FACTORS". ADDITIONAL INFORMATION IS AVAILABLE IN OTHER COMPANY REPORTS AND OTHER DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. GENERAL VitalCom Inc. provides computer networks and related radio communications products that acquire, interpret and distribute real-time patient monitoring information. The Company's computer and radio networks acquire physiologic data generated by its own proprietary ECG monitors and other manufacturers' bedside equipment located throughout a healthcare facility. The Company's products are sold through a direct sales force to acute care hospitals and integrated healthcare delivery networks ("IHDNs") and on an Original Equipment Manufacturer ("OEM") basis to patient monitoring equipment manufacturers. Revenues from sales of Enterprise-wide systems sold by the Company's direct sales force are recognized upon shipment. The sales cycle for Enterprise-wide systems has historically been from nine to 18 months. The Company has experienced seasonal variations in sales of its Enterprise-wide systems, with sales in the first quarter typically lower than the preceding fourth quarter's sales due to customer budget cycles. This trend continued in the first quarter of 2000, as Enterprise-wide revenues declined 46.5% from the fourth quarter of 1999. Furthermore, a large percentage of a particular quarter's shipments of Enterprise-wide systems has historically been recorded in the last weeks of the quarter. Revenues from sales of OEM products are recognized upon shipment. The selling cycle for OEM products varies depending upon product mix and the extent to which the Company develops customized operating software for a particular OEM customer. In addition, the Company has experienced seasonal variations in sales of its OEM products, with sales in the first quarter typically lower than the preceding fourth quarter's sales. First quarter 2000 OEM sales were $2,364,675 as compared to $2,715,685 in the fourth quarter of 1999. The Company's products are generally shipped as orders are received, and accordingly, the Company typically operates with limited backlog. As a result, sales in any quarter are dependent on orders recorded and shipped the current quarter. RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999 Total Revenues. Total revenues consist of revenue from sales of Enterprise-wide systems and OEM products, together with fees for installation and servicing of products. Total revenues decreased 35.5% to $3.1 million in the first quarter of 2000 compared to $4.8 million in the first quarter of 1999. This decrease was primarily due to a decrease in Enterprise-wide product sales. The Company believes that this decrease in Enterprise-wide revenues in the first quarter of 2000 was due, in part, to customers delaying their capital expenditures to focus their resources on resolving outstanding Year 2000 issues. In addition, uncertainties surrounding the implementation of governmental regulations such as the Balanced Budget Amendment adversely affected revenues during the first quarter. Gross Margins. Cost of goods sold generally includes material, direct labor, overhead and, for Enterprise-wide systems, installation expenses. Gross margin declined to 40.8% in the first quarter of 2000 compared to 57.9% for the first quarter of 1999. The decrease in gross margin in the first quarter of 2000 as compared to the first quarter of 1999 was due to lower margins recognized on Enterprise-wide products sales, due to a shift in the Enterprise-wide products revenue mix to lower margin products in 2000. In addition, OEM sales comprised a greater portion of the sales mix during the first quarter of 2000 which negatively impacted gross margins, as historically OEM products gross margins are lower than Enterprise-wide products gross margins. Sales and Marketing Expenses. Sales and marketing expenses include payroll, commissions and related costs attributable to Enterprise-wide systems and OEM sales and marketing personnel, travel and entertainment expenses, and other promotional 8 9 expenses. Sales and marketing expenses were $1.6 million or 51.9% of total revenue in the first quarter of 2000, as compared to $1.6 million or 32.7% of total revenue in the first quarter of 1999. The $40,205 increase in sales and marketing expenses in the first quarter of 2000 as compared to the first quarter of 1999 was primarily attributable to higher salary and recruiting expenses, partially offset by reduced trade show expenditures. Research and Development Expenses. Research and development expenses include payroll and related costs attributable to research and development personnel, prototyping expenses and other costs. Research and development expenses were $1.8 million or 58.3% of total revenue in the first quarter of 2000, as compared to $1.1 million or 23.4% of total revenue in the first quarter of 1999. The $683,029 increase in the first quarter of 2000 as compared to the first quarter of 1999 was due primarily to increased salaries and benefits, and higher third party contractor expenses related to the Company's development of its new software, wireless and Internet-related technology products, such as PatientBrowser(TM) and Mobile-PatientViewer(TM). General and Administrative Expenses. General and administrative expenses include accounting, finance, MIS, human resources, general administration, executive officers and professional fee costs. General and administrative expenses were $578,487 or 18.6% of total revenue in the first quarter of 2000, as compared to $590,895 or 12.3% of total revenue in the first quarter of 1999. The $12,408 decrease in the first quarter of 2000 as compared to the first quarter of 1999 was attributable to a decreases in salaries and information systems expenses, partially offset by increased professional fees. Other Income, Net. Other income, net consists primarily of interest income earned on proceeds from the Company's initial public offering, net of payments for outstanding indebtedness. Other income, net decreased to $166,315 for the first quarter of 2000 from $183,796 for the first quarter of 1999. The decrease resulted from lower income derived from the Company's short-term investments. Provision for Income Taxes. In the first quarters of 2000 and 1999, the Company recorded minimum state tax provisions of $9,000, respectively. Due to the Company's net loss position, the utilization of its credit carryforwards depends upon future income and may be subject to an annual limitation, required by the Internal Revenue Code of 1986 and similar state provisions. LIQUIDITY AND CAPITAL RESOURCES The Company has financed its operations (including capital expenditures) through net proceeds from the Company's February 1996 initial public offering, cash and cash equivalent balances, a bank line of credit and long-term debt. At March 31, 2000 the Company had $10.1 million in cash, cash equivalents and short-term investments as compared to $12.4 million at December 31, 1999. In the first quarter of 2000, the Company used cash from operating activities of $2,199,185 to fund a $2,576,443 net loss. In addition, $325,968 was used for payroll and related costs, and $124,893 from the decrease in accounts payable. This was partially offset by the $213,725 increase in accrued liabilities, $205,266 reduction in accounts receivable, $174,434 in non-cash adjustments provided by depreciation and amortization of fixed assets and intangible assets, and $154,199 in cash provided from the decrease in inventories. The Company provided $5,090,922 in cash from investing activities of which $5,273,037 was provided by the sale of short-term investments. Cash used for investing activities was $182,115 for the purchase of capital equipment in the first quarter of 2000. In addition, $106,604 in cash was provided by financing activities, principally, $113,992 in net proceeds from the exercise of employee stock options. In the first quarter of 1999 the Company used cash from operating activities of $268,821 to fund a $328,120 net loss. In addition, $174,813 in cash was used for payroll and related costs, $171,965 from the increase in accounts receivable and $128,953 for accrued liabilities. This was partially offset by the $245,655 reduction in inventories, $179,228 in non-cash adjustments provided by depreciation and amortization of fixed assets and intangible assets, and $129,992 in cash provided from the increase in accounts payable. 9 10 In the first quarter of 1999, the Company provided $2,764,617 in cash from investing activities of which $2,904,313 was provided by the sale of short-term investments. Cash used for investing activities was $139,696 for the purchase of capital equipment in the first quarter of 1999. In addition, $65,024 in cash was provided by financing activities, principally, $71,665 in net proceeds from the issuance of the Company's Common Stock for the matching contribution to its 401(k) plan. At March 31, 2000, the Company's principal sources of liquidity consisted of $10.1 million of cash, cash equivalents and short-term investments, and $5.0 million of available credit facilities. In March 2000, the Company renewed a secured lending arrangement (the "Agreement") with Silicon Valley Bank, providing for a $5.0 million revolving line of credit agreement bearing interest at the bank's prime rate plus .50%. The bank does not have a security interest in any of the Company's assets until the Company is borrowing under the line of credit. The Agreement expires in March 2001. The Agreement includes financial covenants that requires the Company to maintain minimum liquidity levels and total liabilities to tangible net worth ratios, as well as specified annual and quarterly net loss (after taxes) amounts. At March 31, 2000, the Company was in compliance with all covenants and had no borrowings outstanding under the Agreement, as such the bank held no security interest in any of the Company's assets. The Company's principal commitment at March 31, 2000 consisted of a lease on its office and manufacturing facility. The Company expects to spend approximately $1.0 million for capital expenditures, primarily equipment and computer equipment, during the remaining nine months of 2000. The Company believes that existing cash resources and line of credit facilities will be sufficient to fund the Company's operations for at least the next twelve months. YEAR 2000 COMPUTER SYSTEMS COMPLIANCE On January 1, 2000, many companies faced a potentially serious information technology (IT) systems problem because many software applications and operational programs written in the past did not properly recognize calendar dates beginning in the Year 2000. This problem could have forced computers or machines, which utilize date dependent software to either shut down or provide incorrect data or information. The Company, led by its Y2K Task Force, examined its IT and Non-IT Systems to determine whether its software applications and computer and information systems were compliant with the Year 2000. The Company's remediation efforts for the systems found not to be Year 2000 compliant included, but were not limited to, internal upgrade efforts, vendor provided upgrades, replacement, and decommissioning of obsolete systems and equipment. Based on these efforts the Company considered its critical and non-critical business systems to be Year 2000 compliant as of December 31, 1999. At this time the Company has not experienced any material Year 2000 related problems with its IT systems or software applications, and has not experienced any material problems with key Company suppliers or customers related to Year 2000. There has been no material impact on the Company's business, financial condition or results of operations related to the Year 2000. The Company spent approximately $200,000 on external and internal costs associated with its Year 2000 compliance efforts. These costs were funded through the Company's cash flows from operations and did not have a material effect on results of operations or financial condition. The Company intends to continue to review its IT systems as well as monitor its key suppliers and customers for any undetected Year 2000 issues which may not yet be known. However, the Company does not currently believe that there are any undetected Year 2000 issues that could have a material impact on the Company's business, financial condition or results of operations. RISK FACTORS Dependence on Increased Market Acceptance of Enterprise-wide Monitoring Systems. Since 1995, the Company's sales levels for its Enterprise-wide Monitoring Systems have been lower than expected, which, together with investments and expense levels that are incurred based on the expectation of higher sales, has resulted in net losses in each year since 10 11 1995 and have had a material adverse effect on the Company's business, operating results and financial condition. If the Company is not successful in increasing sales levels of its Enterprise-wide Monitoring Systems in future periods, the Company's business, operating results and financial condition will continue to be materially adversely affected. In addition, although the Company's Enterprise-wide monitoring products have been installed in more than 100 hospitals, there is no assurance that the Company's products will achieve the hospital penetration necessary to increase sales. Customer Concentration; Dependence on Departmental Products. The Company's OEM product sales, which represented approximately 53.7%, 57.9%, 68.6% and 75.9% of the Company's total net revenues in 1997, 1998, 1999 and the first quarter of 2000, respectively, have historically been to a small number of OEM customers. In 1997, Quinton Instrument Company ("Quinton") and Datascope Corporation ("Datascope") accounted for approximately 12.2% and 25.0%, respectively, of the Company's total revenues and in 1998 Quinton and Datascope accounted for approximately 19.7% and 22.6%, respectively, of the Company's total revenues. In 1999, Quinton and Datascope accounted for approximately 24.0% and 34.0%, respectively. In the first quarter of 2000, Quinton and Datascope accounted for approximately 27.3% and 28.9%, respectively. The loss of, or a reduction in sales to, any such OEM customer would have a material adverse effect on the Company's business, operating results and financial condition. Fluctuations in Quarterly Results. The Company's quarterly operating results have fluctuated in the past and may fluctuate significantly from quarter to quarter in the future as a result of a number of factors, including, but not limited to the size and timing of orders; the length of the sales cycle; the Company's success in expanding its sales and marketing programs and the effects of changes in sales force alignment; the ability of the Company's customers to obtain budget allocations for the purchase of the Company's products; changes in pricing policies or price reductions by the Company or its competitors; mix of sales between Enterprise-wide Monitoring Systems and OEM products; the timing of new product announcements and introductions by the Company or its competitors; deferrals of customer orders in anticipation of new products or product enhancements; the Company's ability to develop, introduce and market new products and product enhancements; market acceptance of new products or product enhancements; the Company's ability to control costs; the availability of components; costs associated with responding to software "bugs" or errors; regulatory compliance and timing of regulatory clearances; changes in government regulations and other regulatory developments; and general economic factors. The Company's products are generally shipped as orders are received and, accordingly, the Company has historically operated with limited backlog. As a result, sales in any quarter are dependent on orders booked and shipped in that quarter and are not predictable with any degree of certainty. Further, a large percentage of any quarter's shipments have historically been booked in the last weeks of the quarter. In addition, a significant portion of the Company's expenses are relatively fixed, and the amount and timing of increases in such expenses are based in large part on the Company's expectations for future revenues. If revenues are below expectations in any given quarter, the adverse effect may be magnified by the Company's inability to maintain gross margins and to decrease spending to compensate for the revenue shortfall. This dynamic has contributed to the Company's net losses in the past. Further, the Company has sometimes experienced seasonal variations in operating results, with sales in the first quarter being lower than in the preceding fourth quarter's sales due to customer budget cycles and sales remaining relatively flat during the third quarter. Transfer of Securities from the Nasdaq National Market to the Nasdaq SmallCap Market and Possible Delisting of Securities from the Nasdaq Small Cap Market. The Company's Common Stock historically traded on the Nasdaq National Market and was moved to the Nasdaq Small Cap Market during the third quarter of 1999 as the Company did not meet one National Market continued listing requirement that the market value of publicly held shares must be at least 11 12 $5 million. The Nasdaq Small Cap Market's continued listing standards require the Company to have (i) at least 500,000 shares publicly held; (ii) a market value of publicly held shares of at least $1 million; (iii) net tangible assets of at least $2 million; (iv) at least 300 shareholders of round lots; (v) at least two market makers and (vi) a minimum bid price of at least $1 per share. If the Company fails to comply with the listing standards, it may become delisted from the Nasdaq Small Cap Market which could adversely affect the ability or willingness of investors to purchase the Company's securities and therefore would severely adversely affect the market liquidity for the Company's securities. Lengthy Sales Cycle. The decision by a healthcare provider to replace or substantially upgrade its clinical information systems typically involves a major commitment of capital and an extended review and approval process, and this review and approval process is becoming more complex, more financially oriented and increasingly subject to overall integration into the hospital's information systems planning. The sales cycle for the Company's Enterprise-wide Monitoring Systems has typically been nine to 18 months from initial contact to receipt of a purchase order. During this period, the Company expends substantial time, effort and funds preparing a contract proposal and negotiating a purchase order without any guarantee that the Company will complete the transaction. Any significant or ongoing failure to reach definitive agreements with customers has in the past and may in the future have a material adverse effect on the Company's business, operating results and financial condition. Competition. The Company's Enterprise-wide Monitoring Systems compete with systems offered by a number of competitors, including Agilent, SpaceLabs, Inc. and GE Marquette Medical Systems, Inc., all of which have significantly greater financial, technical, research and development and marketing resources than the Company. In addition, many of these competitors have longstanding relationships with acute care hospitals and IHDNs. There can be no assurance that the Company will be able to sell to such hospitals or IHDNs or that the Company will be able to compete successfully with such vendors, and any inability to do so could have a material adverse effect on the Company's business, operating results and financial condition. While the Company is not aware of any competitive open system multi-parameter Enterprise-wide Monitoring Systems currently available, the Company's OpenNet applications may face significant competition in the future from HCIS providers, patient monitoring companies, life support device companies and general purpose data network providers. Such potential competitors may elect to enter this market and compete with the Company using significantly greater financial, technical, research and development and marketing resources than are available to the Company. In addition, the Company's success in selling its multi-parameter OpenNet networks to hospitals and IHDNs will depend to a large extent on its ability to interface with patient monitoring and life support devices of other vendors. Any action on the part of such other vendors to make such interfacing more difficult or impossible could have a material adverse effect on the Company's business, operating results and financial condition. The market for the Company's OEM products is also intensely competitive. The Company sells to a range of patient monitoring and life support device companies, many of which have significantly greater financial, technical, research and development and marketing resources than the Company. There can be no assurance that current OEM customers will not elect to design and manufacture patient monitoring and system components currently supplied by the Company or elect to contract with other OEM suppliers. Any such election by one or more of such companies could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company may in the future elect to incorporate in its OEM products the hardware and software for larger networks and expand the number of OEM customers with the hardware and software required for real-time redistribution of information to Remote Viewing Stations for use in specialty departments of hospitals for which the Company's OEM customers design and sell their products. Although the Company believes that its OEM customers would not compete with its Enterprise-wide Monitoring Systems because the Enterprise-wide Monitoring Systems are sold to hospitals and IHDNs who elect to install larger, more dispersed systems, the Company could face competition with its OEM customers to the extent hospitals forego purchasing the Company's facility-wide Enterprise-wide Monitoring Systems for the smaller departmental systems of its OEM customers. Technological Change; Need to Develop New Products. Many aspects of the medical equipment industry are undergoing rapid technological change, changing customer needs, frequent new product introductions and evolving industry standards. Historically, the Company derived substantially all of its revenue from sales of its Enterprise-wide Monitoring Systems and OEM products. The Company believes that as the market for these products matures, the Company's future success will depend upon its ability to develop and introduce on a timely basis new products and product enhancements that keep pace with technological developments and that address the increasingly sophisticated 12 13 needs of acute care hospitals and IHDNs. In addition, the introduction of competing products embodying new technologies and the emergence of new industry standards could render the Company's existing products unmarketable or obsolete. If the Company is unable to develop and introduce product enhancements and new products in a timely and cost-effective manner in response to changing market conditions or customer requirements, or if the Company's new products or product enhancements, such as SiteLink, do not achieve market acceptance, the Company's business, operating results and financial condition will be materially adversely affected. Uncertainty and Consolidation in Healthcare Industry. The healthcare industry is subject to changing political, economic and regulatory influences that may affect the procurement practices and operation of healthcare providers. Many healthcare providers are consolidating to create larger hospitals and IHDNs. This consolidation reduces the number of potential customers for the Company's products, and the increased bargaining power of these organizations could lead to reductions in the amounts paid for the Company's products. These larger hospitals and IHDNs may concentrate their purchases on a small number of preferred vendors with whom they have had longstanding relationships. There can be no assurance that the Company will be able to sell to such hospitals or IHDNs or that the Company will be able to compete successfully with such vendors. The impact of these developments in the healthcare industry is difficult to predict and could have a material adverse effect on the Company's business, operating results and financial condition. Government Regulation. The manufacturing, marketing and sales of medical devices, including the Company's products, are subject to extensive regulation by numerous governmental authorities. In the United States, the Company's products are regulated by the Food and Drug Administration. The Company has received clearance from the FDA to market its current products through the 510(k) premarket notification process. There can be no assurance that a similar 510(k) clearance for any future product or enhancement of an existing product will be granted or that the process will not be lengthy. If the Company cannot establish that a product is "substantially equivalent" to certain legally marketed devices, or if FDA regulatory changes currently under consideration with respect to arrhythmia software are adopted, the 510(k) clearance procedure will be unavailable and Company will be required to utilize the longer and more expensive premarket approval ("PMA") process. Failure to receive or delays in receipt of FDA clearances or approvals, including the need for extensive clinical trials or additional data as a prerequisite to clearance or approval, could have a material adverse effect on the Company's business, operating results and financial condition. Sales of medical devices and components outside of the United States are subject to international regulatory requirements that vary from country to country. There can be no assurance that the Company will be able to obtain further clearance or approvals for its products or components on a timely basis or at all, and delays in receipt of, loss of or failure to receive such approvals or clearances could have a material adverse effect on the Company's business, operating results and financial condition. The Company's radio frequency transmitter devices are subject to regulation by the Federal Communication Commission ("FCC"), and applicable approvals must be obtained before shipment of such products. The Company believes that all of its products designated for sale in the United States meet applicable Federal Communications Commission (FCC) regulations, including US FCC Part 15 for electromagnetic emissions. The FCC approval process starts with the collection of test data that demonstrates that a product meets the requirements stated in Part 15 of the FCC regulations. This data is then included as part of a report and application that is submitted to the FCC requesting approval. The FCC may grant or request additional information or withhold approval. Any failure of the Company's products to conform to governmental regulations or any delay or failure to obtain required FCC approvals in the future, if any, could cause the delay or loss of sales of the Company's products and therefore have a material adverse effect on the Company's business, financial condition and result of operations. The Company's proprietary radio frequency (RF) communication products transmit real-time physiologic information from the patient to the central surveillance station. These communication products currently operate in three radio bands: VHF (174 MHz to 216 MHz, shared with TV channels 7-13); UHF (450 MHz to 470 MHz, shared with land mobile users); and the 900 MHz radio band (902 MHz to 928 MHz licensed for Spread Spectrum operation). The majority of the Company's RF products use the vacant television frequencies in the VHF band. The FCC is requiring all television stations to implement digital broadcasting transmission for High Definition Television (HDTV). Major metropolitan areas were required to implement HDTV by December 31, 1998 and other markets will be required to implement by December 31, 2006. In order to implement HDTV the FCC has granted each TV channel an additional 6 MHz channel for digital broadcasting until the transition period ends, at which time the broadcaster would return one of 13 14 the two channels. As TV stations use the additional 6 MHz channel for the digital broadcasting transition, which may take years, they may overlap into the radio spectrum which has been used for medical RF applications. Customers of the Company's lower power RF communication products may begin seeing more interference in the future. This interference may result in the Company's hospital biomedical personnel having to re-tune the Company's RF transmitters to other channels in order to reduce interference. In the event of high interference the Company's customers may need to purchase equipment to transmit in the UHF frequency range. In 1998 the FCC expanded the usable UHF frequencies for medical RF from the licensed 450 MHz to 470 MHz band to the previously unlicensed 470 MHz to 668 MHz frequency range. With VHF frequency ranges available for medical RF use potentially becoming more limited and the UHF frequency ranges expanding, the Company's competitors who have historically focused their RF products in what was the more limited UHF band, may now have a competitive advantage as compared to the Company, until such time as the Company expands its UHF RF product offerings. Any such competitive advantage of the Company's competitors and any additional development costs associated with expanding the Company's UHF RF product offerings could have a material adverse effect on the Company's business, operating results and financial condition. During 1998 the Company joined a task force created by the American Hospital Association (AHA) and the FDA called the Medical Telemetry Task Force (the "Task Force") along with other medical RF users, organizations, and vendors, including its competitors. The purpose of the Task Force was to respond to potential interference problems from HDTV, land mobile users and low power television to wireless patient monitoring devices by recommending both rule making language and specific spectrum allocation to the FCC. The Task Force's mission was to identify protected spectrum candidates for future medical telemetry use, evaluate use and make recommendations to the FCC. As such the Task Force petitioned the FCC to allocate the UHF 608 MHz to 614 MHz band, currently reserved for radio astronomy, for medical use on a primary basis. The Task Force submitted its recommendations to the FCC which then filed a Notice of Proposed Rule Making (NPRM, FCC docket # 99-182). Once the FCC approves the rulemaking, which the Company believes is probable, the Company may be at a disadvantage in the marketplace if one or some of its competitors develop and introduce RF products in this new band before the Company introduces products in the new band, resulting in lost or delayed revenues. In addition, the costs of developing RF transmitter and receiver products is expensive and is diverting research and development resources from other projects resulting in higher costs and delayed projects. Any such competitive advantage of the Company's competitors and any additional development costs associated with expanding the Company's UHF RF product offerings could have a material adverse effect on the Company's business, operating results and financial condition. Additionally, future regulatory changes could significantly affect the Company's operations by diverting the Company's development efforts, making current products obsolete or increasing the opportunity for additional competition which could have a material adverse effect on the Company's business, operating results and financial condition. Limited Intellectual Property Protection. The Company relies on a combination of copyright, trade secret and trademark laws, confidentiality procedures and contractual provisions to protect its intellectual property. The Company seeks to protect its software, circuitry documentation and other written materials under trade secret and copyright laws, which afford only limited protection. The Company cannot assure that its protective measures for proprietary rights will be adequate or that the Company's competitors will not independently develop similar or superior technology, duplicate the Company's products or otherwise circumvent its intellectual property rights. Although the Company has never received a claim that its products infringe a third party's intellectual property rights, there can be no assurance that third parties will not in the future claim infringement by the Company with respect to current or future products or proprietary rights. Any such claims, regardless of their merit, could be time consuming, result in costly litigation, delay or prevent product shipments or require the Company to enter into costly royalty or licensing agreements. The impact of any of these developments could have a material adverse effect on the Company's business, operating results and financial condition. Risk of Product Liability Claims. Certain of the Company's products provide applications that relate to patient physiologic status or other clinically critical information. Any failure by the Company's products to provide accurate and timely information could result in product liability and warranty claims against the Company by its customers or their patients. The Company maintains insurance against claims associated with the use of its products, but there can be no assurance that its insurance coverage would adequately cover any claim asserted against the Company. A successful claim brought against the Company in excess of its insurance coverage or outside the scope of the Company's insurance 14 15 coverage could have a material adverse effect on the Company's business, operating results and financial condition. The Company in the past had to incur warranty expenditures for upgrades that had adverse expenses to the periods. Even unsuccessful claims could result in the expenditure of funds in litigation and diversion of management time and resources. Dependence on Sole Source Components; Component, Assembly & Systems Obsolescence. Certain of the Company's products utilize components that are available in the short term only from a single or a limited number of sources, have been available only on an allocation basis in the past and could be in scarce supply again in the future. Any inability to obtain components in the amounts needed on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Company's business, operating results and financial condition until alternative sources could be developed or design and manufacturing changes could be completed. In addition, from time to time, certain components, subassemblies and systems used by the Company are discontinued by manufacturers, requiring the Company to replace the components, subassembly or system with an equivalent product or if no such equivalent can be identified to modify and re-validate the product design. Any inability to obtain such components on a timely basis or at commercially reasonable prices or to redesign the product in a timely manner could have a material adverse effect on the Company's business, operating results and financial condition until alternative sources could be developed or design and manufacturing changes could be completed. Risks Associated With Recent Management Changes. In recent years, the Company has had a number of changes in its management team. These changes included the Company's Chief Executive Officer in 1997, Vice President, Research and Development in 1998, and Vice President, Sales and Chief Financial Officer in 1999. These management changes have caused disruptions in the Company's day-to-day operations, have interrupted continuity in customer relationships and have created delays in sales cycles and product release schedules. Although the Company believes that its existing senior management will be successful in improving the Company's business, operating results and financial condition, there can be no assurance that such changes will not have a material adverse effect on the Company's business, operating results and financial condition in future periods. Dependence on Key Personnel. The Company's success depends to a large extent on its ability to attract and retain key personnel. The loss of the services, either temporarily or permanently, of any of the members of senior management or other key employees, particularly in sales and marketing and research and development, could have a material adverse effect on the Company's business, operating results and financial condition. In addition, the Company's future success depends to a large extent on its ability to attract and retain additional key management, sales and marketing and research and development personnel. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel, and the failure to do so could have a material adverse effect on the Company's business, operating results and financial condition. Volatility of Stock Price. Due to all of the foregoing factors, it is likely that without advance warning or notice, in some future quarter the Company's operating results will be below the expectations of market analysts and investors. This may cause the market price of the Company's common stock to fall. These risks are impossible to fully determine at present, and should be considered in evaluating the financial prospects and future growth of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's financial instruments include cash and cash equivalents, trade accounts receivable, accounts payable and accrued liabilities. At March 31, 2000, the carrying values of the Company's financial instruments approximated their fair values based on current market prices and rates. It is the Company's policy not to enter into derivative financial instruments. The Company does not currently have any significant foreign currency exposure since it does not transact business in foreign currencies. Due to this, the Company does not have significant overall currency exposure at March 31, 2000. 15 16 EUROPEAN MONETARY UNION Within Europe, the European Economic and Monetary Union (the "EMU") introduced a new currency, the euro, on January 1, 1999. The new currency is in response to the EMU's policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital, goods and services. On January 1, 1999, the participating countries adopted the euro as their local currency, initially available for currency trading on currency exchanges and non-cash transactions such as banking. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, euro-denominated bills and coins will be issued for cash transactions. For a period of up to six months from this date, both legacy currencies and the euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw all legacy currencies and exclusively use the euro. The Company's transactions are recorded in U.S. Dollars and the Company does not currently anticipate future transactions being recorded in the euro. Based on the lack of transactions recorded in the euro, the Company does not believe that the euro will have a material effect on the financial position, results of operations or cash flows of the Company. In addition, the Company has not incurred and does not expect to incur any significant costs from the continued implementation of the euro, including any currency risk, which could materially affect the Company's business, financial condition or results of operations. The Company has not experienced any significant operational disruptions to date and does not currently expect the continued implementation of the euro to cause any significant operational disruptions. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.5 Silicon Valley Bank Amendment to Loan Agreement 27.1 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the reporting period. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on May 12, 2000. VITALCOM INC. /s/ Frank T. Sample -------------------------------------------- Frank T. Sample President and Chief Executive Officer (Principal Executive and Accounting Officer) 17 EX-10.5 2 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT 1 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT BORROWER: VITALCOM INC., A DELAWARE CORPORATION ADDRESS: 15222 DEL AMO AVENUE TUSTIN, CA 92780 DATE: MARCH 21, 2000 THIS AMENDMENT TO LOAN AGREEMENT is entered into between SILICON VALLEY BANK ("Silicon") and the borrower named above (the "Borrower"). The Parties agree to amend the Loan and Security Agreement between them dated February 26, 1993, as amended by that Amendment to Loan Agreement dated December 21, 1993, as amended by that Amendment to Loan Agreement dated April 27, 1994, as amended by that Amendment to Loan Agreement dated May 5, 1995, as amended by that Amendment to Loan Agreement dated May 30, 1995, as amended by that Amendment to Loan Agreement dated December 27, 1995, as amended by that Amendment to Loan Agreement dated August 6, 1996, as amended by that Amendment to Loan Agreement dated September 25, 1996, as amended by that Amendment to Loan Agreement dated August 6, 1997, as amended by that Amendment to Loan Agreement dated December __, 1998 and as otherwise amended or modified from time to time (the "Loan Agreement": terms defined in the Loan Agreement are used herein as therein defined), as follows, effective as of the date hereof. 1. AMENDED SCHEDULE. The Schedule to the Loan Agreement is amended, effective as of the date hereof, to read as set forth on the Amended Schedule attached hereto. 2. MODIFIED SECTION 2.2. Section 2.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "2.2 GRANT OF SECURITY INTEREST IN COLLATERAL. Upon the making of any Loans, the following shall be considered to be immediately and fully effective, without any further action on the part of Silicon or Borrower: Borrower hereby grants Silicon a continuing security interest in all of Borrower's interest in the Collateral (as defined below in Section 2.2A) as security for all Obligations (such grant of a security interest is referred to herein as the "Grant"). Notwithstanding the foregoing, no Loans shall be made unless and until Silicon has acquired a perfected security interest in the Collateral, including but not limited to the filing of any UCC-1 financing statements as required by Silicon in its discretion: Borrower agrees to take such actions and execute such documentation as Silicon determines is necessary or desirable in order to allow Silicon to perfect its security interest in the Collateral at such time as the Grant becomes effective. 2.2A COLLATERAL. The following is referred to as the "Collateral": (a) All accounts, contract rights, chattel paper, letters of credit, documents, securities, money, and instruments, and all other obligations now or in the future owing to the Borrower; (b) All inventory, goods, merchandise, materials, raw materials, work in process, finished -1- 2 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT - -------------------------------------------------------------------------------- goods, farm products, advertising, packaging and shipping materials, supplies, and all other tangible personal property which is held for sale or lease or furnished under contracts of service or consumed in the Borrower's business, and all warehouse receipts and other documents; and (c) All equipment, including without limitation all machinery, fixtures, trade fixtures, vehicles, furnishings, furniture, materials, tools, machine tools, office equipment, computers and peripheral devices, appliances, apparatus, parts, dies, and jigs; (d) All general intangibles, including, but not limited to, deposit accounts, goodwill, names, trade names, drawings, blueprints, customer lists, security deposits, loan commitment fees, federal, state and local tax refunds and claims, all rights in all litigation presently or hereafter pending for any cause or claim (whether in contract, tort or otherwise), and all judgments now or hereafter arising therefrom, all claims of Borrower against Silicon, all rights to purchase or sell real or personal property, all rights as a licensor or licensee of any kind, all royalties, licenses, processes, telephone numbers, proprietary information, purchase orders, and all insurance policies and claims (including without limitation credit, liability, property and other insurance), and all other rights, privileges and franchises of every kind; (e) All books and records, whether stored on computers or otherwise maintained; and (f) All substitutions, additions and accessions to any of the foregoing, and all products, proceeds and insurance proceeds of the foregoing, and all guaranties of and security for the foregoing; and all books and records relating to any of the foregoing; provided, however, that "Collateral" shall not include Intellectual Property (as defined below). As used herein the term "Intellectual Property" means (a) any and all copyright rights, copyright applications, copyright registrations and like protections; (b) any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections; (c) all patents, patent applications and like protections; and (d) all mask work or similar rights available for the protection of semiconductor chips." 3. SECTION 3.7 OF THE LOAN AGREEMENT. Section 3.7 of the Loan Agreement is hereby amended in its entirety to read as follows: "3.7 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or in the future delivered to Silicon have been, and will be, prepared in conformity with generally accepted accounting principles and now and in the future will completely and accurately reflect the financial condition of the Borrower, at the times and for the periods therein stated subject to normal year-end adjustments. Since the last date covered by any such statement, there has been no material adverse change in the financial condition or business of the Borrower. The Borrower is now and will continue to be solvent. The Borrower will provide Silicon: (i) Within 30 days after the end of each calendar month in which, as of the end of such month, Borrower's Remaining Months Liquidity (as defined in the Schedule hereto) is equal to or less than 12 months, a monthly financial statement prepared by Borrower and a Compliance Certificate in such form as Silicon shall reasonably specify, signed by the Chief Financial Officer of the Borrower, certifying that throughout such month the Borrower was in full compliance with all of the terms and conditions of this Agreement, and setting forth calculations showing compliance with the financial covenants set forth on the Schedule and such other information as Silicon shall reasonably request (a "Compliance Certificate"); (ii) Within 5 days after the earlier of the date the report 10-Q is filed or is required to be filed with the Securities and Exchange Commission ("SEC") with respect to Borrower, such 10-Q report, a quarterly financial statement prepared by Borrower, and a Compliance Certificate for -2- 3 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT - ----------------------------------------------------------------------- Such quarter; (iii) within 5 days after the earlier of the date the report 10-K is filed or is required to be filed with the Securities and Exchange Commission with respect to Borrower, such 10-K report, complete annual financial statements, certified by Deloitte & Touche or other independent certified public accountants acceptable to Silicon, and a Compliance Certificate for the quarter then ended; provided, however, with respect to the 10-Q and 10-K reports referred to above, if (x) Borrower applies for and obtains an extension from the SEC for the delivery of such reports to the SEC, (y) Borrower provides Silicon with evidence of the SEC's grant of such extension, and (z) such extension is not 30 days beyond the regular submission date for such reports, then the required dates for the submission of financial information and reports set forth in this Section 3.7 shall be deemed to be modified to the date of the extension so granted by the SEC*. *; AND, FINALLY, WITHIN 20 DAYS AFTER THE END OF EACH CALENDAR MONTH IN WHICH, AT ANY TIME DURING SUCH MONTH THERE WERE ANY OBLIGATIONS OUTSTANDING, (a) A BORROWING BASE CERTIFICATE SIGNED BY THE CHIEF EXECUTIVE OFFICER, PRESIDENT, CHIEF FINANCIAL OFFICER OR CONTROLLER OF BORROWER IN FORM AND SUBSTANCE ACCEPTABLE TO SILICON, (b) AN ACCOUNTS RECEIVABLE AGING FOR SUCH MONTH, AGED BY INVOICE DATE, (c) AN ACCOUNTS PAYABLE AGING FOR SUCH MONTH, AGED BY INVOICE DATE, AND (d) OUTSTANDING OR HELD CHECK REGISTERS, IF ANY, WITH RESPECT TO SUCH MONTH." 4. SECTION 4.5 OF THE LOAN AGREEMENT. Section 4.5 of the Loan Agreement is hereby amended in its entirety to read as follows: "4.5 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At all reasonable times, and upon *notice, Silicon, or its agents, shall have the right to inspect the Collateral, and the right to audit and copy the Borrower's accounting books and records and Borrower's books and records relating to the Collateral. Silicon shall take reasonable steps to keep confidential all information obtained in any such inspection or audit, but Silicon shall have the right to disclose any such information to its auditors, regulatory agencies, and attorneys, and pursuant to any subpoena or other legal process. The foregoing audits shall be at Silicon's expense, except that the Borrower shall reimburse Silicon for its reasonable out of pocket costs for semi-annual accounts receivable audits by third parties retained by Silicon, and Silicon may debit Borrower's deposit accounts with Silicon for the cost of such semi-annual accounts receivable audits (in which event Silicon shall send notification thereof to the Borrower). Notwithstanding the foregoing, after the occurrence of an Event of Default all audits shall be at the Borrower's expense** *THREE BUSINESS DAYS' **AND MAY BE PERFORMED ON ONE BUSINESS DAY'S NOTICE." 5. REFERENCES IN LOAN AGREEMENT: Until such time as the Grant has become effective, Borrower and Silicon hereby agree that all references to the security interest or lien of Silicon in the Collateral are deemed not to be in effect; provided that, upon the effectiveness of the Grant, such provisions and such references shall immediately be deemed to be in full force and effect, without any further action or notice to any person by Silicon or Borrower or by any other person. 6. FEE. Borrower shall pay to Silicon a fee the amount of $25,000 in connection herewith such amount includes the $5,000 fee Borrower has paid in connection with the letter dated March 15, 2000 from Silicon to Borrower; such fees shall be in addition to interest and to all amounts payable to Silicon under the Loan Agreement. - 3 - 4 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT 7. GENERAL PROVISIONS. This Amendment, the Loan Agreement, any prior written amendments to the Loan Agreement signed by Silicon and the Borrower, and the other written documents and agreements between Silicon and the Borrower set forth in full all of the representations and agreements of the parties with respect to the subject matter hereof and supersede all prior discussions, representations, agreements and understandings between the parties with respect to the subject hereof. Except as herein expressly amended, all of the terms and provisions of the Loan Agreement, and all other documents and agreements between Silicon and the Borrower shall continue in full force and effect and the same are hereby ratified and confirmed. This Amendment shall be controlling in the event of any conflicts between any prior written agreements and amendments between Silicon and the Borrower, on the one hand, and this Amendment. Borrower: Silicon: VITALCOM INC. SILICON VALLEY BANK By: /s/ FRANK T. SAMPLE By: /s/ [Signature Illegible] ------------------------------ ---------------------------------- President or Vice President Title: VP By: /s/ JOHN ROBERT GRAHAM ------------------------------ Secretary or Ass't Secretary - 4 - 5 SILICON VALLEY BANK AMENDED SCHEDULE TO LOAN AND SECURITY AGREEMENT BORROWER: VITALCOM INC., A DELAWARE CORPORATION ADDRESS: 15222 DEL AMO AVENUE TUSTIN, CA 92780 DATE: MARCH 21, 2000 CREDIT LIMIT (Section 1.1): An amount not to exceed the lesser of (and subject to the proviso that follows): (1) $5,000,000 at any one time outstanding; or (2) the sum of: (a) Loans (the "Formula Loans") in an amount not to exceed 80% of the Net Amount of Borrower's accounts, which Silicon in its discretion deems eligible for borrowing; plus (b) If the Liquidity Covenant (as defined in section 4.1 of this Schedule below) is satisfied, and only during such period that the Liquidity covenant remains satisfied including after taking into account the amount of any and all contemplated Non-Formula Loans, the following Loans will also be made available to the Borrower: Loans (referred to herein as the "Non-Formula Loans") in an aggregate amount not to exceed at any time the sum of $5,000,000 minus the aggregate amount of Formula Loans outstanding from time to time; PROVIDED in no event shall the aggregate amount of Loans outstanding plus the aggregate face amount of all outstanding Letters of Credit exceed $5,000,000. "Net Amount" of an account means the gross amount of the account, minus all applicable sales, use, excise and other similar taxes and minus all discounts, credits and allowances of any nature granted or claimed. Without limiting the fact that the determination of which accounts are eligible for borrowing is a matter of Silicon's discretion, the following will not be deemed eligible for borrowing: accounts outstanding for more than 90 days from the invoice date, accounts subject to any contingencies, accounts owing from any government agency (unless, with 6 SILICON VALLEY BANK AMENDMENT TO LOAN AGREEMENT - -------------------------------------------------------------------------------- respect to United States or any department, agency or instrumentality thereof, there has been compliance, to Silicon's satisfaction, with the United States Assignment of Claims Act), accounts owing from an account debtor outside the United States (unless pre-approved by Silicon in its discretion, or backed by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to Silicon), accounts owing from one account debtor to the extent they exceed 25%* of the total eligible accounts outstanding, accounts owing from an affiliate of Borrower, and accounts owing from an account debtor to whom Borrower is or may be liable for goods purchased from such account debtor or otherwise. In addition, if more than 50% of the accounts owing from an account debtor are outstanding more than 90 days from the invoice date or are otherwise not eligible accounts, then all accounts owing from that account debtor will be deemed ineligible for borrowing. *provided that in the case of Datascope Instruments and Quinton Instrument Company as account debtors, this percentage figure shall be 40%. LETTERS OF CREDIT Silicon, in its reasonable discretion, will from time to time during the term of this Agreement issue letters of credit for the account of the Borrower ("Letters of Credit"), in an aggregate amount at any one time outstanding not to exceed $500,000, upon the request of the Borrower, provided that, on the date the Letters of Credit are to be issued, Borrower has available to it Loans in an amount equal to or greater than the face amount of the Letters of Credit to be issued. Prior to the issuance of any Letters of Credit, Borrower shall execute and deliver to Silicon Applications for Letters of Credit and such other documentation as Silicon shall specify (the "Letter of Credit Documentation"). Fees for the Letters of Credit shall be as provided in the Letter of Credit Documentation. The Loans available under this Agreement at any time shall be reduced by the face amount of Letters of Credit from time to time outstanding. INTEREST RATE (Section 1.2): A rate equal to the "Prime Rate" in effect from time to time plus .50%. Interest shall be calculated on the basis of a 360-day year for the actual number of days elapsed. "Prime Rate" means the rate announced from time to time by Silicon as its "prime rate;" it is a base rate upon which other rates charged by Silicon are based, and it is not necessarily the best rate available at Silicon. The interest rate applicable to the Obligations shall change on each date there is a change in the Prime Rate. MATURITY DATE (Section 5.1): March __, 2001 PRIOR NAMES OF BORROWER (Section 3.2): ACCUCORE, Inc., Pacific Communications, Inc. 2 7 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT - -------------------------------------------------------------------------------- TRADE NAMES OF BORROWER (Section 3.2): Accucore OTHER LOCATIONS AND ADDRESSES (Section 3.3): None MATERIAL ADVERSE LITIGATION (Section 3.10): None NEGATIVE COVENANTS-EXCEPTIONS (Section 4.6): Without Silicon's prior written consent, Borrower may do the following, provided that, after giving effect thereto, no Event of Default has occurred and no event has occurred which, with notice or passage of time or both, would constitute an Event of Default, and provided that the following are done in compliance with all applicable laws, rules and regulations; (i) repurchase shares of Borrower's stock, provided that the total amount paid by Borrower for such stock does not exceed $500,000 in any fiscal year. FINANCIAL COVENANTS (Section 4.1): Borrower shall comply with all of the following covenants. Compliance shall be determined as of the end of each required period for the delivery of a compliance certificate as set forth in section 3.7 of the Loan Agreement, except as otherwise specifically provided below: LIQUIDITY COVENANT: Borrower shall maintain the greater of (i) at least Six (6) months Remaining Months Liquidity or (ii) cash on hand, cash equivalents and marketable securities less restricted cash of at least two multiplied times the principal amount of the Non-Formula Loans outstanding (collectively being referred to herein as the "Liquidity Covenant"). "Remaining Months Liquidity" is defined as cash on hand, cash equivalents and marketable securities less restricted cash, divided by Cash Burn. "Cash Burn" is defined as cash (prior period) minus cash (current period) plus increases in short and long term borrowings plus increases in equity (or subordinated debt) on a mean monthly average basis with respect to the immediately preceding three month to month periods. DEBT TO TANGIBLE NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to tangible net worth of not more than 1.00 to 1. PROFITABILITY: Borrower shall not incur a net loss (after taxes) for: (i) the fiscal quarter ending March 31, 2000 in excess of $2,600,000; (ii) the fiscal quarter ending June 30, 2000 in excess of $2,000,000; (iii) the fiscal quarter ending September 30, 2000 in excess of $1,000,000; and 3 8 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT - -------------------------------------------------------------------------------- (iv) the fiscal year ending December 31, 2000 in excess of $4,800,000. Thereafter, Borrower shall not incur a loss (after taxes in any fiscal year. DEFINITIONS: "Current assets" and "current liabilities" shall have the meaning ascribed thereto in accordance with generally accepted accounting principles. "Tangible net worth" means the excess of total assets over total liabilities, determined in accordance with generally accepted accounting principles, excluding however all assets which would be classified as intangible assets under generally accepted accounting principles, including without limitation goodwill, licenses, patents, trademarks, trade names, copyrights and franchises. SUBORDINATED DEBT: "Liabilities", for purposes of the foregoing covenants, do not include indebtedness which is subordinated to the indebtedness to Silicon under a subordination agreement in form specified by Silicon or by language in the instrument evidencing the indebtedness which is acceptable to Silicon." "Net loss", for purposes of the foregoing covenants, shall not include no-cash charges incurred in connection with any acquisitions by Borrower of another corporation and up to $250,000 in write-offs relating to goodwill. OTHER COVENANTS (Section 4.1): Borrower shall at all times comply with all of the following additional covenants: 1. BANKING RELATIONSHIP; MUTUAL FUND ACCOUNT. Borrower shall at all times maintain its primary operating banking relationship with Silicon. Further, Borrower shall maintain with Silicon or with a Silicon-designated institution a money market mutual fund account having a minimum balance of $2,500,000 at all times. 2. INDEBTEDNESS. Without limiting any of the foregoing terms or provisions of this Agreement, Borrower shall not in the future incur indebtedness for borrowed money, except for (i) indebtedness to Silicon, (ii) indebtedness incurred in the future for the purchase price of or lease of equipment and (iii) trade debt incurred in the ordinary course of business. 3. UCC-1 FINANCING STATEMENTS. Borrower is concurrently herewith delivering to Silicon UCC-1 financing statements, and it is understood and agreed that such financing statements shall not be considered effective unless and until the Grant becomes effective. At such time Silicon shall be permitted to file such financing statements immediately. 4. COLLATERAL EXAMINATION. Prior to the making of the initial Formula Loan hereunder, Silicon shall (A) conduct a collateral examination and audit under section 4.5 of the Loan 9 SILICON VALLEY BANK SCHEDULE TO LOAN AGREEMENT - ------------------------------------------------------------------------------- Agreement and (B) determine that the results thereof are acceptable to Silicon for loan purposes in its discretion. BORROWER: VITALCOM INC. By /s/ FRANK T. SAMPLE ---------------------------------------- President or Vice President By /s/ JOHN ROBERT GRAHAM ---------------------------------------- Secretary or Ass't Secretary SILICON: SILICON VALLEY BANK By [SIGNATURE ILLEGIBLE] ---------------------------------------- Title VP ------------------------------------- 10 SILICON VALLEY BANK CERTIFIED RESOLUTION BORROWER: VITALCOM INC., A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE ADDRESS: 15222 DEL AMO AVENUE TUSTIN, CA 92780 DATE: MARCH __, 2000 I, the undersigned, Secretary or Assistant Secretary of the above-named borrower, a corporation organized under the laws of the state set forth above, do hereby certify that the following is a full, true and correct copy of resolutions duly and regularly adopted by the Board of Directors of said corporation as required by law, and by the by-laws of said corporation, and that said resolutions are still in full force and effect and have not been in any way modified, repealed, rescinded, amended or revoked. RESOLVED, that this corporation borrow from Silicon Valley Bank ("Silicon"), from time to time, such sum or sums of money as, in the judgment of the officer or officers hereinafter authorized hereby, this corporation may require. RESOLVED FURTHER, that any of the Chairman, President, Chief Executive Officer, Chief Financial Officer or Secretary of this corporation be, and he or she is hereby authorized, directed and empowered, in the name of this corporation, to execute and deliver to Silicon, and Silicon is requested to accept, the loan agreements, security agreements, notes, financing statements, and other documents and instruments providing for such loans and evidencing and/or securing such loans, with interest thereon, and said authorized officers are authorized from time to time to execute renewals, extensions and/or amendments of said loan agreements, security agreements, and other documents and instruments. RESOLVED FURTHER, that said authorized officers be and they are hereby authorized, directed and empowered, as security for any and all indebtedness of this corporation to Silicon, whether arising pursuant to this resolution or otherwise, to grant, transfer, pledge, mortgage, assign, or otherwise hypothecate to Silicon, or deed in trust for its benefit, any property of any and every kind, belonging to this corporation, including, but not limited to, any and all real property, accounts, inventory, equipment, general intangibles, instruments, documents, chattel paper, notes, money, deposit accounts, furniture, fixtures, goods, and other property of every kind, and to execute and deliver to Silicon any and all grants, transfers, trust receipts, loan or credit agreements, pledge agreements, mortgages, deeds of trust, financing statements, security agreements and other hypothecation agreements, which said instruments and the note or notes and other instruments referred to in the proceeding paragraph may contain such provisions, covenants, recitals and agreements as Silicon may require and said authorized officers may approve, and the execution thereof by said authorized officers shall be conclusive evidence of such approval. -1- 11 The undersigned further certifies that the following persons are the duly elected and acting officers of the corporation named above as borrower and that the following are their actual signatures:
NAME OFFICE(S) ACTUAL SIGNATURES ---- --------- ----------------- Frank T. Sample Chairman, President, CEO & Acting CFO /s/ FRANK T. SAMPLE - ---------------------- ------------------------------------- ------------------------- John Robert Graham V.P. Corporate Alliances, Secretary /s/ JOHN ROBERT GRAHAM - ---------------------- ------------------------------------- ------------------------- - ---------------------- ------------------------------------- ------------------------- - ---------------------- ------------------------------------- -------------------------
IN WITNESS WHEREOF, I have hereunto set my hand as such Secretary or Assistant Secretary on the date set forth above. /s/ JOHN ROBERT GRAHAM ---------------------------------------- Secretary or Assistant Secretary 12 NEGATIVE PLEDGE AGREEMENT This Negative Pledge Agreement is made as of March 21, 2000 by and between Vitalcom Inc. ("Borrower") and Silicon Valley Bank ("Silicon"). In connection with, among other documents, the Loan and Security Agreement between Borrower and Silicon dated February 26, 1993 (as amended, the "Loan Agreement"; the Loan Agreement and all related instruments, documents and agreements may be collectively referred to herein as the "Loan Documents"), and without limitation of the terms and provisions of the Loan Documents, Borrower agrees it will not sell, transfer, assign, mortgage, pledge, lease, grant a security interest in, or encumber any of Borrower's Intellectual Property (as defined below), provided that the foregoing shall not restrict licenses of Borrower's Intellectual Property in the ordinary course of business consistent with past business practices. As used herein the term "Intellectual Property" means (a) any and all copyright rights, copyright applications, copyright registrations and like protections; (b) any trademark and servicemark rights, whether registered or not, applications to register and registrations of the same and like protections; (c) all patents, patent applications and like protections; and (d) all mask work or similar rights available for the protection of semiconductor chips. It shall be an event of default under the Loan Documents between Borrower and Silicon if there is a breach of any term of this Negative Pledge Agreement. BORROWER: VITALCOM INC. By: /s/ FRANK T. SAMPLE -------------------------- Name: Frank T. Sample ------------------------ Title: CEO ----------------------- SILICON: SILICON VALLEY BANK By: /s/ GARY REAGAN -------------------------- Name: Gary Reagan ------------------------ Title: VP ----------------------- EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 10,106 0 2,450 346 1,351 13,997 4,457 2,972 15,964 2,322 0 37,779 0 0 (24,137) 15,964 3,103 3,103 1,838 1,838 3,999 0 166 (2,567) 9 (2,576) 0 0 0 (2,576) (0.32) (0.32)
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