-----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, T3vO+kz7uGUB/NU3ARCC2VJLS5X6qPl8zch4SEfXzb5IjFkMeCrOp7qb4GmWk/jQ rGMWeKJMM7yUaNeSVxFcrQ== 0000950135-00-000197.txt : 20000202 0000950135-00-000197.hdr.sgml : 20000202 ACCESSION NUMBER: 0000950135-00-000197 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20000121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ASPECT MEDICAL SYSTEMS INC CENTRAL INDEX KEY: 0000886235 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 042985553 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-86295 FILM NUMBER: 510660 BUSINESS ADDRESS: STREET 1: TWO VISION DRIVE CITY: NATICK STATE: MA ZIP: 01760 BUSINESS PHONE: 5086530603 MAIL ADDRESS: STREET 1: TWO VISION DRIVE CITY: NATICK STATE: MA ZIP: 01760 S-1/A 1 AMENDMENT 5 TO THE S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 2000 REGISTRATION NO. 333-86295 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 5 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ASPECT MEDICAL SYSTEMS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 3845 04-2985553 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
------------------------ TWO VISION DRIVE NATICK, MASSACHUSETTS 01760 (508) 653-0603 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ NASSIB G. CHAMOUN PRESIDENT AND CHIEF EXECUTIVE OFFICER ASPECT MEDICAL SYSTEMS, INC. TWO VISION DRIVE NATICK, MASSACHUSETTS (508) 653-0603 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: SUSAN W. MURLEY, ESQ. LESLIE E. DAVIS, ESQ. HALE AND DORR LLP TESTA, HURWITZ & THIBEAULT, LLP 60 STATE STREET 125 HIGH STREET BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110 TELEPHONE: (617) 526-6000 TELEPHONE: (617) 248-7000 TELECOPY: (617) 526-5000 TELECOPY: (617) 248-7100
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [ ] __________ If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS (Subject to Completion) Issued January , 2000 3,000,000 Shares [Aspects Medical Systems Logo] COMMON STOCK ------------------------ ASPECT MEDICAL SYSTEMS, INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $11.00 AND $13.00 PER SHARE. ------------------------ WE HAVE BEEN APPROVED TO LIST OUR COMMON STOCK ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ASPM." ------------------------ INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 9. ------------------------ PRICE $ A SHARE ------------------------
UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC COMMISSIONS ASPECT -------- ------------- ----------- Per Share...................................... $ $ $ Total.......................................... $ $ $
Aspect has granted the underwriters the right to purchase up to an additional 450,000 shares to cover over-allotments. The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers on , 2000. ------------------------ MORGAN STANLEY DEAN WITTER DEUTSCHE BANC ALEX. BROWN U.S. BANCORP PIPER JAFFRAY , 2000. 3 [Aspect logo] [Photograph depicting Aspect's A-2000 BIS Monitor and the BIS Sensor affixed to the forehead of a model of a human head] The following words are to the right of the photograph: The A-2000 BIS Monitor is a compact, portable monitor that displays the BIS index and supporting information and includes Aspect's digital signal converter. [Photograph depicting Aspect's BIS Sensor affixed to the forehead of a woman] The following words are to the right of the photograph: The BIS Sensor is a single-piece, single-use disposable product for use with the A-2000 BIS Monitor, the A-1050 Monitor and the BIS Module Kit. The BIS Sensor is applied to a patient's forehead to acquire the EEG, a measure of the electrical activity of the brain. [Photograph depicting Aspect's BIS Sensor, BIS Module Kit and digital signal converter products] The following words are to the right of the photograph: In 1996, Aspect introduced the BIS Module Kit, which is designed to facilitate the integration of Aspect's BIS index into monitoring products marketed by third parties that enter into original equipment manufacturer arrangements with us. 4 TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUMMARY.................... 5 RISK FACTORS.......................... 9 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................... 17 USE OF PROCEEDS....................... 18 DIVIDEND POLICY....................... 18 CAPITALIZATION........................ 19 DILUTION.............................. 20 SELECTED CONSOLIDATED FINANCIAL DATA................................ 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS....................... 22
PAGE ---- BUSINESS.............................. 30 MANAGEMENT............................ 45 RELATED-PARTY TRANSACTIONS............ 54 PRINCIPAL STOCKHOLDERS................ 56 DESCRIPTION OF CAPITAL STOCK.......... 59 SHARES ELIGIBLE FOR FUTURE SALE....... 62 UNDERWRITERS.......................... 64 LEGAL MATTERS......................... 66 EXPERTS............................... 66 WHERE YOU CAN FIND MORE INFORMATION... 66 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.......................... F-1
------------------------ You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell shares of common stock and seeking offers to buy shares of common stock only in jurisdictions where offers and sales are permitted. UNTIL , 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTION. 3 5 [THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY] 4 6 PROSPECTUS SUMMARY You should read the following summary together with the more detailed information regarding our company, the common stock being sold in this offering and our consolidated financial statements and related notes appearing elsewhere in this prospectus. ASPECT MEDICAL SYSTEMS, INC. We develop, manufacture and market an anesthesia-monitoring system that we call the BIS system. The BIS system enables anesthesia providers to assess and manage a patient's level of consciousness during surgery. Our proprietary BIS system includes our BIS monitor or BIS Module Kit and our single-use, disposable BIS Sensors. The BIS system is based on our patented core technology, the BIS index, which is the only FDA-cleared, commercially available, direct measure of the effects of anesthetics on the brain. We developed the BIS system over 10 years, and it is the subject of 10 issued and six pending United States patents. Our latest generation monitor, the A-2000 BIS Monitor, was cleared for marketing by the FDA in February 1998. Clinical trials and routine clinical use of the BIS system have shown that patient monitoring with the BIS system results in: - lower drug costs, - faster wake-up from anesthesia, - less patient time in the operating room and the post-anesthesia care unit following surgery, - higher rates of outpatients bypassing the post-anesthesia care unit and proceeding to a less costly step-down recovery area directly from the operating room, - improvements in the quality of recovery, and - improvements in the means to assess the risk of surgical awareness, which is the unintentional regaining of consciousness during surgery. As of December 31, 1999, more than 5,650 BIS monitors have been installed worldwide, including 4,881 BIS monitors in approximately 675 sites in North America. These sites include 35 of the 100 largest hospitals and 32% of all teaching hospitals with anesthesia residency programs. We believe that over 1,000,000 patients have been monitored using the BIS index during surgery. Each year, approximately 29 million patients in the United States and more than 35 million patients in Europe and Japan receive anesthesia for surgical procedures. We estimate that approximately 70% of these surgical patients in the United States, or 20 million patients, receive general anesthesia or deep sedation monitored by an anesthesia provider. Anesthesia providers historically have had no direct means of assessing a patient's level of consciousness during surgery. They have generally relied on recommended drug dosages and on indirect indicators of consciousness, including blood pressure and heart rate. This approach cannot always account for variability in patient responses to anesthesia or changes in anesthetic requirements during the course of surgery. Consequently, traditional approaches to anesthesia may result in patients being undermedicated or overmedicated during surgery. Undermedication may lead to surgical awareness, which is the unintentional regaining of consciousness during surgery. Overmedication may result from an effort to ensure that the patient is rendered unconscious to reduce the risk of surgical awareness. Overmedication contributes to the high cost of surgical care as a result of increased drug costs, prolonged and unpredictable wake-ups from anesthesia and prolonged post-anesthesia recovery in the post-anesthesia care unit. We market the BIS system in the United States primarily through a direct sales organization and internationally through distributors and marketing partners. We have also established original equipment manufacturer relationships with several patient monitoring and anesthesia equipment companies that will incorporate our BIS technology into their equipment using the BIS Module Kit. 5 7 Aspect's objective is to establish the BIS system as a global standard in anesthesia and sedation monitoring. Key elements of our strategy to accomplish this objective are to: - accelerate market penetration through a direct sales force, - educate and promote the use of the BIS system through clinical specialists, - broaden distribution channels through original equipment manufacturer relationships, - maintain market leadership through continuous product improvements and extensions, and - target new product opportunities through technology development. ------------------------ We are a Delaware corporation. Our principal executive offices are located at Two Vision Drive, Natick, Massachusetts 01760 and our telephone number is (508) 653-0603. Our World Wide Web site address is www.aspectms.com. The information in the Web site is not incorporated by reference into this prospectus. BIS, Bispectral Index, A-1050, A-2000 and Zipprep are our trademarks. Aspect is a registered trademark licensed to us on a non-exclusive basis. This prospectus also contains trademarks and trade names of other companies. 6 8 THE OFFERING Common stock offered................................. 3,000,000 shares Common stock to be outstanding after this offering... 15,883,078 shares Over-allotment option................................ 450,000 shares Use of proceeds...................................... For general corporate purposes, including working capital and capital expenditures. For more detailed information, see "Use of Proceeds" on page 18. Dividend policy...................................... We do not intend to pay cash dividends on our common stock. We plan to retain any earnings for use in the operation and expansion of our business. Nasdaq National Market symbol........................ ASPM
------------------------ Unless otherwise specifically stated, the information throughout this prospectus does not take into account the possible issuance of additional shares of common stock to the underwriters pursuant to their rights to purchase additional shares to cover over-allotments. The information in this prospectus reflects the conversion of all outstanding shares of our convertible preferred stock into 11,067,238 shares of common stock. The number of shares of our common stock that will be outstanding immediately after the offering is based on shares outstanding as of December 31, 1999 and excludes 2,695,680 shares issuable upon the exercise of stock options with a weighted average exercise price of $4.60 per share and warrants to purchase 192,902 shares of common stock with an exercise price of $12.50 per share. 7 9 SUMMARY CONSOLIDATED FINANCIAL DATA The following is a summary of financial data included elsewhere in the prospectus. You should read the following data with the more detailed information contained in "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and our consolidated financial statements appearing elsewhere in this prospectus.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1995 1996 1997 1998 1999 -------- ------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue................................... $ 1,067 $ 1,389 $ 3,068 $ 11,238 $27,187 Costs of revenue.......................... 704 1,096 3,602 5,880 9,324 Research and development.................. 2,870 2,338 2,603 4,042 4,847 Sales and marketing....................... 1,285 1,561 4,813 10,354 16,543 General and administrative................ 1,815 1,871 2,358 4,254 4,829 -------- ------- -------- -------- ------- Loss from operations...................... (5,607) (5,477) (10,308) (13,292) (8,356) Interest income, net...................... 61 81 422 459 1,317 Other expense............................. -- -- -- (774) -- -------- ------- -------- -------- ------- Net loss.................................. $ (5,546) $(5,396) $ (9,886) $(13,607) $(7,039) ======== ======= ======== ======== ======= Net loss per share: Basic and diluted....................... $(281.65) $(57.76) $ (15.63) $ (11.70) $ (4.57) ======== ======= ======== ======== ======= Pro forma basic and diluted............. $ (0.56) ======= Shares used in computing net loss per share: Basic and diluted....................... 20 93 632 1,163 1,539 Pro forma basic and diluted............. 12,606
Shares used in computing pro forma basic and diluted net loss per share above exclude unvested shares of common stock subject to repurchase rights, which totaled 116,719 at December 31, 1999, but include 11,067,238 shares of common stock issuable upon conversion of our outstanding convertible preferred stock upon the closing of this offering. The pro forma as adjusted column in the consolidated balance sheet data below gives effect to the conversion of our outstanding convertible preferred stock into common stock upon the closing of this offering and the sale of 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
DECEMBER 31, 1999 ----------------------- PRO FORMA ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities............ $ 14,535 $ 47,568 Working capital............................................. 12,279 44,859 Total assets................................................ 29,402 61,982 Long-term debt.............................................. 3,872 3,872 Total stockholders' equity.................................. 13,079 45,659
8 10 RISK FACTORS You should carefully consider the risks described below before making an investment decision. Our business, financial condition or operating results could be materially adversely affected by any of these risks. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. RISKS RELATED TO OUR BUSINESS WE WILL NOT BE PROFITABLE IF HOSPITALS AND ANESTHESIA PROVIDERS DO NOT BUY AND USE OUR BIS SYSTEM IN SUFFICIENT QUANTITIES. Customers may determine that the cost of the BIS system exceeds cost savings in drugs, personnel and post-anesthesia care recovery resulting from use of the BIS system. In addition, hospitals and anesthesia providers may not accept the BIS system as an accurate means of assessing a patient's level of consciousness during surgery if patients regain consciousness during surgery while being monitored with the BIS system. If extensive or frequent malfunctions occur, these providers may also conclude that the BIS system is unreliable. If hospitals and anesthesia providers do not accept the BIS system as cost-effective, accurate or reliable, they will not buy and use the BIS system in sufficient quantities to enable us to be profitable. WE DEPEND ON OUR BIS SYSTEM FOR SUBSTANTIALLY ALL OF OUR REVENUE, AND IF THE BIS SYSTEM DOES NOT GAIN WIDESPREAD MARKET ACCEPTANCE, THEN OUR REVENUE WILL NOT GROW. We began selling our current BIS system in early 1998. To date, we have not achieved widespread market acceptance of the BIS system. Because we currently depend on our BIS system for substantially all of our revenue and we have no other significant products, if we fail to achieve widespread market acceptance we will not be able to sustain or grow our product revenue. WE EXPECT TO INCUR LOSSES IN THE FUTURE. We have incurred net losses in each year since inception. We expect to increase significantly our research and development, sales and marketing and general and administrative expenses in future periods. We will spend these amounts before we receive any incremental revenue from these efforts. Therefore, our losses will be greater than the losses we would incur if we developed our business more slowly. In addition, we may find that these efforts are more expensive than we currently anticipate, which would further increase our losses. Failure to become and remain profitable may depress the market price of our common stock and our ability to raise capital and continue our operations. CASES OF SURGICAL AWARENESS DURING MONITORING WITH THE BIS SYSTEM COULD LIMIT MARKET ACCEPTANCE OF BIS SYSTEMS AND COULD EXPOSE US TO PRODUCT LIABILITY CLAIMS. Clinicians have reported to us a total of 35 cases of possible surgical awareness during surgical procedures monitored with the BIS system as of December 31, 1999. Not all cases of surgical awareness during surgical procedures monitored with the BIS system may be reported to us, and we have not systematically solicited reports of surgical awareness. Anesthesia providers and hospitals may elect not to purchase and use BIS systems if there is adverse publicity resulting from the report of cases of surgical awareness that were not detected during procedures monitored with the BIS system. If anesthesia providers and hospitals do not purchase and use the BIS system, then we may not sustain or grow our product revenue. Although we do not claim that patient monitoring with the BIS system will reduce the incidence of surgical awareness, we may be subject to product liability claims for cases of surgical awareness during surgical procedures monitored with the BIS system. These claims could require us to spend significant time and money in litigation or to pay significant damages. 9 11 WE MAY NOT BE ABLE TO KEEP UP WITH NEW PRODUCTS OR ALTERNATIVE TECHNIQUES DEVELOPED BY OTHERS, WHICH COULD IMPAIR OUR ABILITY TO REMAIN COMPETITIVE AND ACHIEVE FUTURE GROWTH. The medical industry in which we market our products is characterized by rapid product development and technological advances. Our current or planned products are at risk of obsolescence from: - new monitoring products, based on new or improved technologies, - new products or technologies used on patients or in the operating room during surgery in lieu of monitoring devices, - electrical or mechanical interference from new or existing products or technologies, - alternative techniques for evaluating the effects of anesthesia, - significant changes in the methods of delivering anesthesia, and - the development of new anesthetic agents. We may not be able to improve our products or develop new products or technologies quickly enough to maintain a competitive position in our markets and continue to grow our business. IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE ENHANCED OR NEW PRODUCTS WE COULD LOSE REVENUE OPPORTUNITIES AND CUSTOMERS. As the market for our BIS system matures, we need to develop and introduce new products for anesthesia monitoring or other applications. We face at least the following risks: - we may not successfully adapt the BIS system to function properly in the intensive care unit, for procedural sedation, when used with anesthetics we have not tested or with patient populations we have not studied, such as infants and young children, and - our technology is complex, and we may not be able to develop it further for applications outside anesthesia monitoring. If we do not successfully adapt the BIS system for new products and applications both within and outside the field of anesthesia monitoring, then we could lose revenue opportunities and customers. IF WE DO NOT DEVELOP AND IMPLEMENT A SUCCESSFUL SALES AND MARKETING STRATEGY, WE WILL NOT EXPAND OUR BUSINESS. Our current sales and marketing operation is not sufficient to achieve the level of market awareness and sales we need to expand our business. We have only limited sales and marketing experience both in the United States and internationally and may not be successful in developing and implementing our strategy. We need to: - provide or assure that distributors and original equipment manufacturers provide the technical and educational support customers need to use the BIS system successfully, - promote frequent use of the BIS system so that sales of our disposable BIS Sensors increase, - encourage our customers to purchase our products prior to availability of products that are made by original equipment manufacturers incorporating our technology, - manage geographically dispersed operations, and - modify our products for foreign markets. 10 12 IN ORDER TO REACH THE LEVEL OF SALES WE NEED TO ACHIEVE PROFITABILITY, WE NEED TO FURTHER DEVELOP OUR DIRECT AND INDIRECT SALES CHANNELS. In order to increase our sales, we need to add domestic and international distributors, original equipment manufacturers and other sales channels and increase sales through these channels. In addition, we need to hire and train more sales persons and clinical specialists. If we do not further develop our direct and indirect sales channels, we will not reach the level of sales necessary to achieve profitability. OUR THIRD-PARTY DISTRIBUTION AND ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS COULD NEGATIVELY AFFECT OUR PROFITABILITY, CAUSE SALES OF OUR PRODUCTS TO DECLINE AND BE DIFFICULT TO TERMINATE IF WE ARE DISSATISFIED. Sales through distributors could be less profitable than direct sales. Sales of our products through multiple channels could also confuse customers and cause the sale of our products to decline. We do not control our original equipment manufacturers and distribution partners. Our partners could sell competing products and may devote insufficient sales efforts to our products. Our partners are generally not required to purchase minimum quantities. As a result, even if we are dissatisfied with the performance of our partners, we may be unable to terminate our agreements with these partners or enter into alternative arrangements. WE MAY NOT BE ABLE TO GENERATE ENOUGH ADDITIONAL REVENUE FROM OUR PLANNED INTERNATIONAL EXPANSION TO OFFSET THE COSTS ASSOCIATED WITH ESTABLISHING AND MAINTAINING FOREIGN OPERATIOns. A component of our growth strategy is to expand our presence in foreign markets. We conduct international business primarily in Europe and we are attempting to increase the number of countries in which we do business. It will be costly to establish international facilities and operations and to promote the BIS system in international markets. In addition, we have little experience in marketing and distributing products for these markets. Revenue from international activities may not offset the expense of establishing and maintaining these foreign operations. WE MAY NOT BE ABLE TO MEET THE UNIQUE OPERATIONAL, LEGAL AND FINANCIAL CHALLENGES THAT WE WILL ENCOUNTER IN OUR INTERNATIONAL OPERATIONS, WHICH MAY LIMIT THE GROWTH OF OUR BUSINESS. We are increasingly subject to a number of challenges which specifically relate to our international business activities. These challenges include: - failure of local laws to provide the same degree of protection against infringement of our intellectual property, - protectionist laws and business practices that favor local competitors, which could slow our growth in international markets, - less acceptance by foreign anesthesia providers of the use of disposable products similar to the BIS Sensor, - longer sales cycles to sell products like the BIS system to hospitals and outpatient surgical centers, which could slow our revenue growth from international sales, and - longer accounts receivable payment cycles and difficulties in collecting accounts receivable. If we are unable to meet and overcome these challenges, our international operations may not be successful which would limit the growth of our business. WE MAY EXPERIENCE CUSTOMER DISSATISFACTION AND OUR REPUTATION COULD SUFFER IF WE FAIL TO MANUFACTURE ENOUGH PRODUCTS TO MEET OUR CUSTOMERS' DEMANDS. We rely on third-party manufacturers to assemble and manufacture the components of our BIS monitors and a portion of our BIS Sensors. We manufacture substantially all BIS Sensors in our own manufacturing facility. We have only one manufacturing facility and we expect to move our manufacturing facility to a new 11 13 location in the first quarter of 2000. If we fail to produce enough products at our own manufacturing facility or at a third-party manufacturing facility, if we experience delays in moving to our new facility or if we experience a termination or modification of any manufacturing arrangement with a third party, we may be unable to deliver products to our customers on a timely basis. Our failure to deliver products on a timely basis could lead to customer dissatisfaction and damage our reputation. OUR RELIANCE ON SOLE SUPPLIERS COULD ADVERSELY AFFECT OUR ABILITY TO MEET OUR CUSTOMERS' DEMANDS FOR OUR PRODUCTS IN A TIMELY MANNER OR WITHIN BUDGET. Some of the components that are necessary for the assembly of our BIS system, including some of the components used in the BIS Sensor, are currently provided to us by separate sole suppliers or a limited group of suppliers. We purchase components through purchase orders rather than long-term supply agreements and generally do not maintain large volumes of inventory. We have experienced shortages and delays in obtaining some of the components of our BIS systems in the past, and we may experience similar delays or shortages in the future. The disruption or termination of the supply of components could cause a significant increase in the costs of these components, which could affect our profitability. A disruption or termination in the supply of components could also result in our inability to meet demand for our products, which could lead to customer dissatisfaction and damage our reputation. Furthermore, if we are required to change the manufacturer of a key component of the BIS system, we may be required to verify that the new manufacturer maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The delays associated with the verification of a new manufacturer could delay our ability to manufacture BIS systems in a timely manner or within budget. WE MAY BE REQUIRED TO BRING LITIGATION TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN SUBSTANTIAL EXPENSE AND MAY DIVERT OUR ATTENTION FROM THE IMPLEMENTATION OF OUR BUSINESS STRATEGY. We believe that the success of our business depends, in part, on obtaining patent protection for our products, defending our patents once obtained and preserving our trade secrets. We rely on a combination of contractual provisions, confidentiality procedures and patent, trademark and trade secret laws to protect the proprietary aspects of our technology. These legal measures afford only limited protection and competitors may gain access to our intellectual property and proprietary information. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of our proprietary rights. Any litigation could result in substantial expense and diversion of our attention from the growth of the business and may not be adequate to protect our intellectual property rights. WE DO NOT OWN THE TRADEMARK "ASPECT" AND ANY COMPETITIVE ADVANTAGE WE DERIVE FROM THE NAME MAY BE IMPAIRED BY THIRD-PARTY USE. We are a party to a license agreement with a third party under which we have obtained the nonexclusive right to make, use or sell products under the name "Aspect." The licensor of the Aspect name markets products for use in the health care industry. There may be confusion in the market between the licensor and us and this confusion would compromise the competitive advantage, if any, we derive from our name. WE MAY BE SUED BY THIRD PARTIES WHICH CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, PARTICULARLY BECAUSE THERE IS SUBSTANTIAL UNCERTAINTY ABOUT THE VALIDITY AND BREADTH OF MEDICAL DEVICE PATENTS. We may be exposed to future litigation by third parties based on claims that our products infringe the intellectual property rights of others. This risk is exacerbated by the fact that the validity and breadth of claims covered in medical technology patents involve complex legal and factual questions for which important legal principles are unresolved. Any litigation or claims against us, whether or not valid, could result in substantial costs, could place a significant strain on our financial resources and could harm our reputation. In addition, intellectual property litigation or claims could force us to do one or more of the following: - cease selling, incorporating or using any of our products that incorporate the challenged intellectual property, which would adversely affect our revenue, 12 14 - obtain a license from the holder of the infringed intellectual property right, which license may not be available on reasonable terms, if at all, and - redesign our products, which would be costly and time-consuming. WE COULD BE EXPOSED TO SIGNIFICANT PRODUCT LIABILITY CLAIMS WHICH COULD DIVERT MANAGEMENT ATTENTION AND ADVERSELY AFFECT OUR CASH BALANCES, OUR ABILITY TO OBTAIN AND MAINTAIN INSURANCE COVERAGE AT SATISFACTORY RATES OR IN ADEQUATE AMOUNTS AND OUR REPUTATION. The manufacture and sale of our products expose us to product liability claims and product recalls, including those which may arise from misuse or malfunction of, or design flaws in, our products or use of our products with components or systems not manufactured or sold by us. Product liability claims or product recalls, regardless of their ultimate outcome, could require us to spend significant time and money in litigation or to pay significant damages. We currently maintain insurance; however, it might not cover the costs of any product liability claims made against us. Furthermore, we may not be able to obtain insurance in the future at satisfactory rates or in adequate amounts. FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS COULD CAUSE OUR STOCK PRICE TO DECREASE. Our operating results have fluctuated significantly from quarter to quarter in the past and are likely to vary in the future. These fluctuations are due to several factors relating to the sale of our products, including the timing and volume of customer orders for our BIS system, customer cancellations, reductions in orders by our distribution partners and the timing and amount of our expenses. Because of these fluctuations, it is likely that in some future quarter or quarters our operating results could fall below the expectations of securities analysts or investors. If so, the market price of our stock would likely decrease. In addition, because we do not have a significant backlog of customer orders for our BIS system, revenue in any quarter depends on orders received in that quarter. Our quarterly results may also be adversely affected because some customers may have inadequate financial resources to purchase our products or may fail to pay for our products after receiving them. In particular, hospitals are increasingly experiencing financial constraints, consolidations and reorganizations as a result of cost containment measures and declining third- party reimbursement for services, which may result in decreased product orders or an increase in bad debts in any quarter. WE MAY NOT RESERVE AMOUNTS ADEQUATE TO COVER PRODUCT OBSOLESCENCE, CLAIMS AND RETURNS, WHICH COULD RESULT IN UNANTICIPATED EXPENSES AND FLUCTUATIONS IN OPERATING RESULTS. Depending on factors such as the timing of our introduction of new products which utilize our BIS technology, as well as warranty claims and product returns, we may need to reserve amounts in excess of those currently reserved for product obsolescence, excess inventory, warranty claims and product returns. These reserves may not be adequate to cover all costs associated with these items. If these reserves are inadequate, we would be required to incur unanticipated expenses which could result in unexpected fluctuations in quarterly operating results. WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY, WHICH COULD RESULT IN PRICE REDUCTIONS AND DECREASED DEMAND FOR OUR PRODUCTS. We expect to face substantial competition from larger medical device companies that may have greater financial, technical, marketing and other resources than we do. We may not be able to compete effectively with these potential competitors. For example, we may face substantial competition from companies developing sensor products that compete with our proprietary BIS Sensors for use with our BIS monitors or with third-party monitoring systems or anesthesia delivery systems that incorporate the BIS index. We also expect to face competition from companies currently marketing conventional electroencephalogram, or EEG, monitors using standard and novel signal-processing techniques. Other companies may develop anesthesia-monitoring systems that perform better than the BIS system and/or sell for less. In addition, one or more of our competitors may develop products that are substantially equivalent to our FDA-approved products, in which case they may be able to use our products as predicate devices to more quickly obtain FDA approval of 13 15 their competing products. Competition in the sale of anesthesia-monitoring systems could result in price reductions, fewer orders, reduced gross margins and loss of market share. OUR ABILITY TO MARKET AND SELL OUR PRODUCTS AND GENERATE REVENUE DEPENDS UPON RECEIPT OF DOMESTIC AND FOREIGN REGULATORY APPROVAL OF OUR PRODUCTS AND MANUFACTURING OPERATIONS. Before we can market new products in the United States we must obtain clearance from the United States Food and Drug Administration, or FDA. If the FDA concludes that any of our products do not meet the requirements to obtain clearance of a premarket notification under Section 510(k) of the Food, Drug and Cosmetic Act, then we would be required to file a premarket approval application. The approval process for a premarket approval application is lengthy, expensive and typically requires extensive preclinical and clinical trial data. We may not obtain clearance of a 510(k) notification or approval of a premarket approval application with respect to any of our products on a timely basis, if at all. If we fail to obtain timely clearance or approval for our products, we will not be able to market and sell our products, which will limit our ability to generate revenue. We may also be required to obtain clearance of a 510(k) notification from the FDA before we can market certain previously marketed products which we modify after they have been cleared. We have made certain enhancements to our currently marketed products which we have determined do not necessitate the filing of a new 510(k) notification. However, if the FDA does not agree with our determination, it will require us to file a new 510(k) notification for the modification and we may be prohibited from marketing the modified device until we obtain FDA clearance. The FDA also requires us to adhere to current Good Manufacturing Practices regulations, which include production design controls, testing, quality control, storage and documentation procedures. The FDA may at any time inspect our facilities to determine whether adequate compliance has been achieved. Compliance with current Good Manufacturing Practices regulations for medical devices is difficult and costly. In addition, we may not continue to be compliant as a result of future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. If we do not achieve continued compliance, the FDA may withdraw marketing clearance or require product recall. When any change or modification is made to a device or its intended use, the manufacturer may be required to reassess compliance with current Good Manufacturing Practices regulations, which may cause interruptions or delays in the marketing and sale of our products. Sales of our products outside the United States are subject to foreign regulatory requirements that vary from country to country. The time required to obtain approvals from foreign countries may be longer or shorter than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements. The Federal, state and foreign laws and regulations regarding the manufacture and sale of our products are subject to future changes, as are administrative interpretations of regulatory agencies. If we fail to comply with applicable federal, state or foreign laws or regulations, we could be subject to enforcement actions, including product seizures, recalls, withdrawal of clearances or approvals and civil and criminal penalties. IF WE DO NOT RETAIN OUR SENIOR MANAGEMENT AND OTHER KEY EMPLOYEES, WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY. Our President and Chief Executive, Nassib Chamoun, joined Aspect at its inception in 1987. Our Chairman, J. Breckenridge Eagle, began serving as a director of Aspect in 1988. Many other members of our management and key employees have extensive experience with Aspect and other companies in the medical device industry. Our success is substantially dependent on the ability, experience and performance of these members of our senior management and other key employees. Because of their ability and experience, if we lose one or more of the members of our senior management or other key employees, our ability to successfully implement our business strategy could be seriously harmed. IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS. Our products are based on complex signal-processing technology. Accordingly, we require skilled personnel to develop, manufacture, sell and support our products. Our future success will depend largely on 14 16 our ability to continue to hire, train, retain and motivate additional skilled personnel, particularly sales representatives and clinical specialists who are responsible for customer education and training and post-installation customer support. We continue to experience difficulty in recruiting and retaining skilled personnel because the pool of experienced persons is small and we compete for personnel with other companies, many of which have greater resources than we do. Consequently, if we are not able to attract and retain skilled personnel, we will not be able to expand our business. FAILURE OF USERS OF THE BIS SYSTEM TO OBTAIN ADEQUATE REIMBURSEMENT FROM THIRD-PARTY PAYORS COULD LIMIT MARKET ACCEPTANCE OF THE BIS SYSTEM, WHICH COULD PREVENT US FROM ACHIEVING PROFITABILITY. Anesthesia providers are generally not reimbursed separately for patient monitoring activities utilizing the BIS system. For hospitals and outpatient surgical centers, when reimbursement is based on charges or costs, patient monitoring with the BIS system may reduce reimbursements for surgical procedures, because charges or costs may decline as a result of monitoring with the BIS system. Failure by hospitals and other users of the BIS system to obtain adequate reimbursement from third-party payors, or any reduction in the reimbursement by third-party payors to hospitals and other users as a result of using the BIS system could limit market acceptance of the BIS system, which could prevent us from achieving profitability. OUR SOFTWARE PRODUCTS AND THOSE OF OUR SUPPLIERS COULD FAIL AS A RESULT OF THE YEAR 2000 PROBLEM, WHICH COULD CAUSE DISRUPTIONS IN OUR BUSINESS, CAUSE US TO INCUR UNANTICIPATED EXPENSES, DAMAGE OUR REPUTATION AND CAUSE DELAYS IN PRODUCT SHIPMENTS OR IN CUSTOMER PURCHASES FROM US. The year 2000 problem refers to the potential for system and processing failures as a result of software using two digits rather than four to define the applicable year. For example, computer programs may recognize a date represented as "00" as the year 1900 rather than the year 2000. This year 2000 problem could result in miscalculations, data corruption, system failures or disruptions of operations. Our products, our internal systems, our customers' systems, our distributors' systems and our suppliers' systems may experience year 2000 problems, any of which could cause disruptions to our business. Under the reasonably likely worst case scenario, our suppliers, including our sole and limited source suppliers, may not be able to supply us with critical components needed to make our products. Year 2000 errors or defects in the internal systems of our suppliers could require us to incur significant unanticipated expenses to remedy any problems or replace affected vendors and could cause cancellations or delays in product shipments. Year 2000 errors or defects in our products could give rise to warranty and other claims by our customers. In addition, year 2000 errors or defects could be discovered in our internal software systems and, if errors or defects are present, the costs of making these systems year 2000 compliant could be material. We have determined that some older versions of our products are not year 2000 compliant. Some of our other products or internal systems may contain undetected errors or defects. Additionally, if we are unable to make our products and internal systems year 2000 compliant in a timely manner, then we may experience disruptions in our business operations, our reputation may suffer and customers may delay or cancel purchases from us, which would decrease our product revenue. Changing purchasing patterns of customers impacted by year 2000 issues may result in reduced purchases of our products. In addition, any year 2000 errors or defects in our distributors' systems or the products of our original equipment manufacturer partners could cause a reduction in their orders from us. Any reduction in purchases of our products could decrease our product revenue. RISKS RELATED TO THIS OFFERING OUR STOCK PRICE WILL FLUCTUATE AFTER THIS OFFERING WHICH MAY CAUSE YOUR INVESTMENT IN OUR STOCK TO SUFFER A DECLINE IN VALUE. After this offering, an active trading market in our stock might not develop or continue. If you purchase shares of our common stock in the offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that we negotiated with the representatives of the underwriters based 15 17 upon an assessment of the valuation of our stock. The public market may not agree with or accept this valuation, in which case you may not be able to sell your shares at or above the initial offering price. See "Underwriters" on page 64. The market price of our common stock may fluctuate significantly in response to factors which are beyond our control. In addition, the stock market in general has recently experienced extreme price and volume fluctuations. In addition, the market prices of securities of technology and medical device companies have been extremely volatile, and have experienced fluctuations that often have been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations could result in extreme fluctuations in the price of our common stock, which could cause a decline in the value of your shares. WE MAY INCUR SIGNIFICANT COSTS FROM CLASS ACTION LITIGATION DUE TO OUR EXPECTED STOCK VOLATILITY. Our stock price may fluctuate for many reasons, including addition or departure of key Aspect personnel, variations in our quarterly operating results and changes in market valuations of medical device companies. Recently, when the market price of a stock has been volatile as our stock price may be, holders of that stock have occasionally instituted securities class action litigation against the company that issued the stock. If any of our stockholders were to bring a lawsuit of this type against us, even if the lawsuit is without merit, we could incur substantial costs defending the lawsuit. The lawsuit could also divert the time and attention of our management. WE MAY NEED ADDITIONAL FINANCING TO EXPAND OUR BUSINESS WHICH COULD BE DIFFICULT TO OBTAIN. We expect that the net proceeds from this offering and our existing capital resources will be sufficient to fund our operations at least through 2000. However, our future capital requirements will depend upon a number of factors, including: - the availability of capital resources required to fund future operating losses, further develop our marketing and sales organization domestically and internationally, expand manufacturing capacity, finance our sales-type lease program, and meet market demand for our BIS systems, - the progress of our research and development programs, including clinical trials, - the receipt of and the time required to obtain regulatory clearances and approvals, - the resources we devote to developing, manufacturing and marketing our BIS systems, and - the resources, if any, we may devote to the expansion of our business, including through the possible acquisition of businesses, technologies or other intellectual property rights. We may require additional funds, and we cannot be certain that additional funding will be available when needed or on terms acceptable to us. Further, if we issue additional equity securities, stockholders may experience additional dilution, or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock. If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products, take advantage of future opportunities, grow our business or respond to competitive pressures or unanticipated requirements. OUR STOCK PRICE COULD BE DEPRESSED BY SHARES BECOMING AVAILABLE FOR SALE. Once a trading market develops for our common stock, many of our stockholders will have an opportunity to sell their stock for the first time. Sales of a substantial number of shares of our common stock in the public market after this offering could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. For a more detailed description, see "Shares Eligible for Future Sale" on page 62. 16 18 INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER ASPECT AFTER THIS OFFERING AND COULD DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL. After this offering, our directors, executive officers and principal stockholders, together with their affiliates, will beneficially own, in the aggregate, approximately 26.9% of our outstanding common stock. As a result, these stockholders, if acting together, would have the ability to exercise control over all corporate actions requiring stockholder approval irrespective of how our other stockholders may vote, including: - the election of directors, - the amendment of charter documents, - the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets, or - the defeat of any non-negotiated takeover attempt that might otherwise benefit the public stockholders. ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE LAW COULD PREVENT OR DELAY TRANSACTIONS THAT STOCKHOLDERS MAY FAVOR. Provisions of our restated certificate of incorporation and amended and restated by-laws may discourage, delay or prevent a merger or acquisition that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions include: - authorizing the issuance of "blank check" preferred stock without any need for action by stockholders, - providing for a classified board of directors with staggered three-year terms, - requiring supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and amended and restated by-laws, - eliminating the ability of stockholders to call special meetings of stockholders, - prohibiting stockholder action by written consent, - establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings, and - providing for the automatic acceleration of the vesting of stock options upon a change of control of Aspect. PURCHASERS IN THIS OFFERING WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF THEIR INVESTMENT. We expect that the initial public offering price per share will significantly exceed the net tangible book value per share of the outstanding common stock. Accordingly, purchasers of common stock in this offering will suffer immediate and substantial dilution of their investment. In the past, we have issued options to acquire common stock at prices below the initial public offering price. To the extent these outstanding options are ultimately exercised, there will be further dilution to investors in this offering. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements that involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "should," "will" and "would" or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other forward-looking information. We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control. The factors listed above in the section captioned "Risk Factors," as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, results of operations and financial position. 17 19 USE OF PROCEEDS We estimate that our net proceeds from the sale of the 3,000,000 shares of common stock will be approximately $32,580,000, assuming an initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $37,602,000. The principal purposes of this offering are to establish a public market for our common stock, to increase our visibility in the marketplace, to facilitate future access to public capital markets, to provide liquidity to existing stockholders and to obtain additional working capital. We currently intend to use a portion of the net proceeds from this offering for general corporate purposes, including working capital, product development, increasing our sales and marketing capabilities and expanding our international operations. We may also use a portion of the net proceeds to acquire or invest in complementary businesses or products or to obtain the right to use complementary technologies. We have no specific understandings, commitments or agreements relating to an acquisition or investment. Pending these uses, we plan to invest the net proceeds of this offering in short-term, interest-bearing, investment-grade securities. DIVIDEND POLICY We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain all future earnings, if any, for use in the operation and expansion of our business. Payment of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. We have a loan agreement with a bank which prohibits the declaration or payment of cash dividends without the consent of the lender. 18 20 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1999. The as adjusted information gives effect to the conversion of all of our outstanding convertible preferred stock into common stock upon the closing of this offering and assumes the filing of our restated certificate of incorporation after the closing of this offering authorizing 5,000,000 shares of preferred stock and 60,000,000 shares of common stock. The as adjusted information also gives effect to the issuance and sale of the 3,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
DECEMBER 31, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Long-term debt.............................................. 3,872 $ 3,872 Stockholders' equity: Preferred stock, $.01 par value; no shares authorized, issued or outstanding (actual); 5,000,000 shares authorized, no shares issued or outstanding (as adjusted).............................................. -- -- Convertible preferred stock, $.01 par value; 22,363,224 shares authorized (actual); 11,067,238 issued and outstanding (actual); (liquidation preference -- $58,962,591 (actual)); no shares authorized, issued or outstanding (as adjusted); (liquidation preference -- $0 (as adjusted))........... 67,560 -- Common stock, $.01 par value; 17,030,000 shares authorized (actual); 1,815,840 shares issued and outstanding (actual); 60,000,000 shares authorized (as adjusted); 15,883,078 shares issued and outstanding (as adjusted).............................................. 18 159 Additional paid-in capital................................ 1,274 101,273 Warrants.................................................. 146 146 Notes receivable from employees and directors............. (305) (305) Deferred compensation..................................... (225) (225) Accumulated deficit....................................... (55,389) (55,389) ======== ======== Total stockholders' equity........................ 13,079 45,659 ======== ======== Total capitalization......................... $ 16,951 $ 49,531 ======== ========
The outstanding share information excludes 2,695,680 shares of common stock issuable upon exercise of outstanding options as of December 31, 1999 with a weighted average exercise price of $4.60 and warrants to purchase 192,902 shares of common stock with an exercise price of $12.50 per share. 19 21 DILUTION Our pro forma net tangible book value as of December 31, 1999, after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock upon the closing of this offering, was approximately $12.6 million, or $.98 per share of common stock. Pro forma net tangible book value per share represents our total assets less total liabilities and intangibles, divided by the 12,883,078 shares of common stock outstanding after giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock. Net tangible book value dilution per share to new investors is the difference between the amount per share paid by purchasers of common stock in this offering and the pro forma net tangible book value per share immediately following the offering. After giving effect to the issuance and sale of the 3,000,000 shares of common stock in this offering, at an assumed offering price of $12 per share and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 1999 would have been $45.7 million, or $2.87 per share. This represents an immediate increase in pro forma net tangible book value to existing stockholders of $1.89 per share. The initial public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase common stock in this offering will suffer an immediate dilution of their investment of $9.13 per share. The following table illustrates this per share dilution: Assumed initial public offering price per share............. $12.00 Pro forma net tangible book value per share as of December 31, 1999.................................................... $ .98 Increase in pro forma net tangible book value per share attributable to new investors.......................... 1.89 Pro forma net tangible book value per share after this offering.................................................. 2.87 Dilution per share to new investors......................... $ 9.13 ======
The following table summarizes, on a pro forma basis, giving effect to the conversion of all outstanding shares of convertible preferred stock into common stock upon the closing of this offering, as of December 31, 1999, the difference between the number of shares of common stock purchased from Aspect, the total consideration paid to Aspect and the average price per share paid by existing stockholders and by new investors. In accordance with the following table, new investors will contribute 34.4% of the total consideration for, and own 18.9% of the outstanding shares of, the common stock of Aspect. The calculation below is based on an assumed initial public offering price of $12 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE --------------------- ----------------------- PRICE PER NUMBER PERCENT AMOUNT PERCENT SHARE ---------- ------- ------------ ------- --------- Existing stockholders................ 12,883,078 81.1% $ 68,503,012 65.6% $ 5.32 New investors........................ 3,000,000 18.9 36,000,000 34.4 $12.00 ---------- ----- ------------ ------ Total...................... 15,883,078 100.0% $104,503,012 100.0% ========== ============
The table above assumes no exercise of stock options or warrants outstanding at December 31, 1999. As of December 31, 1999, there were outstanding options to purchase 2,695,680 shares of common stock with a weighted average exercise price of $4.60 per share and warrants to purchase 192,902 shares of common stock with an exercise price of $12.50 per share. To the extent all of these outstanding options and warrants had been exercised as of December 31, 1999, pro forma net tangible book value per share after this offering would be $60 million and total dilution per share to new investors would be $8.78. If the underwriters' over-allotment option is exercised in full, the number of shares held by new investors will increase to 3,450,000 shares, or 21.1% of the total number of shares of common stock outstanding after this offering. 20 22 SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes and other financial information included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data as of December 31, 1998 and 1999 are derived from our audited consolidated financial statements included in this prospectus. The consolidated statements of operations data for the years ended December 31, 1995 and 1996 and the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 are derived from our audited consolidated financial statements not included in this prospectus. The historical results presented here are not necessarily indicative of future results.
YEAR ENDED DECEMBER 31, -------------------------------------------------- 1995 1996 1997 1998 1999 -------- ------- -------- -------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Revenue................................... $ 1,067 $ 1,389 $ 3,068 $ 11,238 $27,187 Costs and expenses: Costs of revenue........................ 704 1,096 3,602 5,880 9,324 Research and development................ 2,870 2,338 2,603 4,042 4,847 Sales and marketing..................... 1,285 1,561 4,813 10,354 16,543 General and administrative.............. 1,815 1,871 2,358 4,254 4,829 -------- ------- -------- -------- ------- Total costs and expenses............. 6,674 6,866 13,376 24,530 35,543 Loss from operations...................... (5,607) (5,477) (10,308) (13,292) (8,356) Interest income, net...................... 61 81 422 459 1,317 Other expense............................. -- -- -- (774) -- -------- ------- -------- -------- ------- Net loss.................................. $ (5,546) $(5,396) $ (9,886) $(13,607) $(7,039) ======== ======= ======== ======== ======= Net loss per share: Basic and diluted....................... $(281.65) $(57.76) $ (15.63) $ (11.70) $ (4.57) ======== ======= ======== ======== ======= Pro forma basic and diluted............. $ (0.56) ======= Shares used in computing net loss per share: Basic and diluted....................... 20 93 632 1,163 1,539 Pro forma basic and diluted............. 12,606
DECEMBER 31, ------------------------------------------------ 1995 1996 1997 1998 1999 ------ ------ ------ ------- ------- (IN THOUSANDS) CONSOLIDATED BALANCE SHEET DATA: Cash, cash equivalents and marketable securities................................ $3,329 $2,231 $4,981 $21,273 $14,535 Working capital............................. 3,054 1,334 3,572 19,104 12,279 Total assets................................ 4,552 3,973 7,603 28,589 29,402 Long-term debt.............................. 333 270 118 1,441 3,872 Total stockholders' equity.................. 3,028 1,066 4,067 19,688 13,079
21 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis of financial condition and results of operations together with our financial statements and related notes appearing elsewhere in this prospectus. OVERVIEW We develop, manufacture and market an anesthesia monitoring system that we call the BIS system. The BIS system enables anesthesia providers to assess and manage a patient's level of consciousness during surgery. Our proprietary BIS system includes our BIS monitor or BIS Module Kit and our disposable BIS Sensors. The BIS system is based on our patented core technology, the Bispectral Index, which we refer to as the BIS index. The BIS index is the only FDA-cleared, commercially available, direct measure of the effects of anesthetics on the brain. Our latest generation monitor, the A-2000 BIS Monitor, was cleared for marketing by the FDA in February 1998. Our other monitor products are the A-1000 Monitor, the A-1050 EEG Monitor with BIS and the BIS Module Kit. After the introduction of the A-2000 BIS Monitor, we ceased active marketing of the A-1050 Monitor domestically. In addition to the disposable BIS Sensor, we offer the Zipprep EEG Electrode. We follow a system of fiscal months as opposed to calendar months. Under this system, the first eleven months of each fiscal year end on a Saturday and the last month of the fiscal year always ends on December 31. We offer customers the option either to purchase the BIS monitors outright or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby the customer contractually commits to purchase a minimum number of BIS Sensors per BIS monitor per year. Under this agreement, customers purchase BIS Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an additional charge per BIS Sensor to pay for the purchase price of the BIS monitor and related financing costs over the term of the agreement. The customer is granted an option to purchase the BIS monitor at the end of the term of the agreement, which is typically three to five years. Revenue related to BIS monitors sold pursuant to sales-type leases is recognized at the time of shipment of the BIS monitors. Sales-type leases accounted for approximately 10%, 27% and 15% of revenue in 1997, 1998 and 1999, respectively. We derive our revenue primarily from sales of monitors, including related accessories and BIS Module Kits, and sales of disposable sensors. In 1997, 1998 and 1999 revenue from the sale of monitors represented approximately 80%, 67% and 53%, respectively, of our revenue, and revenue from the sale of disposable sensors represented approximately 20%, 33% and 47%, respectively, of our revenue. We expect that revenue from the sale of single-use disposable sensors will continue to increase as a percentage of revenue as the installed base of monitors continues to grow. Revenue from domestic sales in 1997, 1998 and 1999 was approximately $1.9 million, $10.3 million and $24.6 million, respectively, which represented approximately 61%, 92% and 91%, respectively, of our revenue. Revenue from international sales in 1997, 1998 and 1999 was approximately $1.2 million, $942,000 and $2.6 million, respectively, which represented approximately 39%, 8% and 9%, respectively, of our revenue. Effective July 1, 1998, our agreement with Spacelabs Medical, Inc. to distribute our monitors internationally, except in Japan, was terminated pursuant to the terms of the agreement. Sales to Spacelabs represented substantially all of our revenue from international sales in 1997 and 1998. In the year ended December 31, 1999, sales to Spacelabs represented approximately 3% of our international revenue. In December 1998 and March 1999, we established subsidiaries in The Netherlands and the United Kingdom, respectively, to facilitate our entry into the international market. The sales and marketing efforts of these subsidiaries resulted in the majority of the international sales for the year ended December 31, 1999. We are developing our international sales and distribution program through a combination of distributors and marketing partners, including companies with which we have entered into original equipment manufacturer relationships. We expect to enhance our international third-party distribution program through direct sales efforts and to support our customers with clinical specialists. In January 1998, we entered into a three-year 22 24 distribution agreement with Nihon Kohden Corporation to distribute BIS monitors in Japan. During 1998 and 1999, sales to Nihon Kohden represented approximately 3% of international revenue. As a result of our move into the international market, we anticipate that international sales will increase in absolute dollars. RESULTS OF OPERATIONS The following table presents, for the periods indicated, information expressed as a percentage of revenue. This information has been derived from our consolidated statements of operations included elsewhere in this prospectus. You should not draw any conclusions about our future results from the results of operations for any period.
YEAR ENDED DECEMBER 31, ------------------------- 1997 1998 1999 ---- ---- ---- Revenue..................................................... 100% 100% 100% Costs and expenses: Costs of revenue.......................................... 117 52 34 Research and development.................................. 85 36 18 Sales and marketing....................................... 157 92 61 General and administrative................................ 77 38 18 ---- ---- --- Total costs and expenses............................... 436 218 131 Loss from operations........................................ (336) (118) (31) Interest income, net........................................ 14 4 5 Other expense............................................... -- (7) -- ---- ---- --- Net loss.................................................... (322)% (121)% (26)% ==== ==== ===
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 Revenue. Our revenue increased to approximately $27.2 million in 1999 from approximately $11.2 million in 1998, an increase of approximately 143%. Revenue from the sale of monitors increased to approximately $14.3 million in 1999 from approximately $7.5 million in 1998, an increase of approximately 91%. Revenue from the sale of disposable sensors increased to approximately $12.9 million in 1999 from approximately $3.7 million in 1998, an increase of approximately 249%. The growth in revenue from the sale of monitors was primarily attributable to an increase of approximately 108% in the number of monitors sold, which resulted from the growth of our direct sales force and the contribution of our international organization. In addition, sales of the BIS Module Kit, which was introduced in the second half of 1998, contributed to the increase in monitor revenue. The increase in revenue from the sale of disposable sensors was primarily attributable to growth in the installed base of monitors, which resulted in an increase of approximately 223% in the number of disposable sensors sold. An increase of approximately 8% in the average selling price of the disposable sensors also contributed to the increase in revenue. Our gross profit was approximately 66% of revenue in 1999 as compared to a gross profit of approximately 48% of revenue in 1998. The increase in the gross profit percentage in 1999 as compared to 1998 was primarily attributable to an increase in sales of disposable sensors as a percentage of revenue. Disposable sensors have a higher profit margin than monitors and contributed approximately 62% of the increase in gross profit. The increase in the gross profit percentage in 1999 also resulted from improved manufacturing efficiencies. We expect that sales of higher margin disposable sensors will continue to increase as a percentage of revenue as the installed base of monitors continues to grow. Research and Development. Research and development expenses increased to approximately $4.8 million in 1999 from approximately $4.0 million in 1998, an increase of approximately 20%. Research and development expenses decreased as a percentage of revenue. The increase in absolute dollars was primarily attributable to an increase in research and development personnel and related payroll and other expenses, which represented approximately 65% of the increase. These expenses were incurred in connection with the 23 25 continued product development efforts related to the A-2000 BIS Monitor, BIS Sensor and BIS Module Kit and the development of products for use outside the operating room in the intensive care unit and for procedural sedation. We expect research and development expenses to increase in absolute dollars as we continue to invest in product improvements, product extensions and technology development. Sales and Marketing. Sales and marketing expenses increased to approximately $16.5 million in 1999 from approximately $10.4 million in 1998, an increase of approximately 59%. Sales and marketing expenses decreased as a percentage of revenue. The increase in absolute dollars in 1999 was primarily attributable to an increase in sales and marketing personnel and related payroll and other expenses, which represented approximately 84% of the increase, the establishment of our international subsidiaries, and an increase in professional education programs, customer support and clinical education initiatives, development of sales materials and participation at trade shows. We expect sales and marketing expenses to increase in absolute dollars as we continue to expand our international operations, increase our direct sales force and clinical specialists in the United States and engage in activities to further educate and promote the use of the BIS system by our customers. General and Administrative. General and administrative expenses increased to approximately $4.8 million in 1999 from approximately $4.3 million in 1998, an increase of approximately 12%. General and administrative expenses decreased as a percentage of revenue. The increase in absolute dollars was primarily attributable to an increase in general and administrative personnel to support our growth and related payroll and other expenses. We expect general and administrative expenses to increase in absolute dollars as we increase the number of personnel and related resources required to support our growth. Interest Income, Net. Interest income, net, increased to approximately $1.3 million in 1999 from approximately $459,000 in 1998, an increase of approximately 183%. Interest income increased to approximately $1.5 million in 1999 from approximately $553,000 in 1998, an increase of approximately 171%. The increase in interest income was primarily attributable to a higher average outstanding balance of cash and investments resulting from the sale of our convertible preferred stock in February 1998 and December 1998, which resulted in approximately 31% of the increase, and an increase in our investment in sales-type leases, which resulted in approximately 69% of the increase. Interest expense increased to approximately $204,000 in 1999 from approximately $94,000 in 1998, an increase of approximately 117%, as a result of higher average outstanding debt obligations under an equipment loan in the second half of 1998 and debt obligations related to the sale of a portion of our investments in sales-type leases in the second half of 1999. We expect interest income to increase in absolute dollars because of higher cash and investments balances resulting from our initial public offering. Other Expense. Other expense in 1998 primarily related to the costs incurred in our proposed initial public offering, which was terminated in August 1998. Net Loss. Our net loss decreased to approximately $7.0 million in 1999 from approximately $13.6 million in 1998, a decrease of approximately 49%, as a result of the factors discussed above. YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 Revenue. Our revenue increased to approximately $11.2 million in 1998 from approximately $3.1 million in 1997, an increase of approximately 261%. Revenue from the sale of monitors increased to approximately $7.5 million in 1998 from approximately $2.5 million in 1997, an increase of approximately 200%. Revenue from the sale of disposable sensors increased to approximately $3.7 million in 1998 from approximately $606,000 in 1997, an increase of approximately 511%. The increase in revenue from the sale of monitors was primarily attributable to an increase of approximately 195% in the number of monitors sold, primarily resulting from the commercial introduction of the A-2000 BIS Monitor. The introduction of the BIS Module Kit in 1998 and the growth of the direct sales force in 1998 also contributed to the growth in monitor revenue. The increase in revenue from the sale of disposable sensors was primarily attributable to the growth in the installed base of monitors, which resulted in an increase of approximately 309% in the number of disposable sensors sold. An increase of approximately 49% in the average selling price of the disposable sensors also contributed to the increase in revenue. 24 26 In 1998, gross profit was approximately 48% of revenue as compared to a gross loss (revenue less costs of revenue) of approximately 17% of revenue in 1997. The increase in gross profit in 1998 as compared to the gross loss in 1997 was primarily attributable to the introduction of the A-2000 BIS Monitor in 1998 which has a lower per unit cost compared to the A-1050 Monitor, and an increase in sales of disposable sensors as a percentage of revenue. Disposable sensors have a higher profit margin than monitors. The increase in gross profit in 1998 also resulted from a higher provision for excess and obsolete inventory in 1997 due to the transition from the A-1050 Monitor to the A-2000 BIS Monitor and improved manufacturing efficiencies in 1998. Research and Development. Research and development expenses increased to approximately $4.0 million in 1998 from approximately $2.6 million in 1997, an increase of approximately 54%. Research and development expenses decreased as a percentage of revenue. The increase in absolute dollars in 1998 was primarily attributable to an increase in research and development personnel and related payroll and other expenses, which represented approximately 30% of the increase, an increase in consultants expense, which represented approximately 28% of the increase, and an increase in expenses related to clinical studies, which represented approximately 15% of the increase. These expenses were incurred in connection with the continued product development efforts related to the A-2000 BIS Monitor and the BIS Module Kit, development of products for use outside of the operating room, in the intensive care unit and for procedural sedation. Sales and Marketing. Sales and marketing expenses increased to approximately $10.4 million in 1998 from approximately $4.8 million in 1997, an increase of approximately 117%. Sales and marketing expenses decreased as a percentage of revenue. The increase in absolute dollars in 1998 was primarily attributable to an increase in sales and marketing personnel and related payroll and other expenses, which represented approximately 68% of the increase, and an increase in professional education and trade show activities, which together represented approximately 10% of the increase. General and Administrative. General and administrative expenses increased to approximately $4.3 million in 1998 from approximately $2.4 million in 1997, an increase of approximately 79%. General and administrative expenses decreased as a percentage of revenue. The increase in absolute dollars in 1998 was primarily attributable to an increase in general and administrative personnel and related payroll and other expenses to support our growth, which represented approximately 37% of the increase, an increase in leased space, which represented approximately 17% of the increase, and an increase in professional services, which represented approximately 21% of the increase. Interest Income, Net. Interest income, net, increased to approximately $459,000 in 1998 from approximately $422,000 in 1997, an increase of approximately 9%. Interest income increased to approximately $553,000 in 1998 from approximately $500,000 in 1997, an increase of approximately 11%, due to an increase in the average outstanding balance of cash and investments resulting from the sale of our convertible preferred stock in February 1998 and December 1998. Interest expense increased to approximately $94,000 in 1998 from approximately $78,000 in 1997, an increase of approximately 21%, as a result of higher average outstanding debt obligations in 1998 related to borrowings under an equipment loan in the second half of 1998. Other Expense. Other expense in 1998 primarily related to the costs incurred in our proposed initial public offering, which was terminated in August 1998. Net Loss. Our net loss increased to approximately $13.6 million in 1998 from approximately $9.9 million in 1997, an increase of approximately 37%, as a result of the factors discussed above. QUARTERLY RESULTS OF OPERATIONS The following table sets forth unaudited selected operating results for each of the eight fiscal quarters in the two years ended December 31, 1999. We believe that the following selected quarterly information includes all adjustments (consisting only of normal, recurring adjustments) that we consider necessary to present this information fairly. This financial information should be read in conjunction with the financial statements and related notes appearing elsewhere in this prospectus. Our results of operations have fluctuated in the past and 25 27 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.
QUARTER ENDED ----------------------------------------------------------------------------------------------- APRIL 4, JULY 4, OCTOBER 3, DECEMBER 31, APRIL 3, JULY 3, OCTOBER 2, DECEMBER 31, 1998 1998 1998 1998 1999 1999 1999 1999 -------- ------- ---------- ------------ -------- ------- ---------- ------------ Revenue.............. $ 1,733 $ 2,687 $ 3,082 $ 3,736 $ 5,327 $ 6,385 $ 7,126 $ 8,349 Gross margin......... 522 1,236 1,620 1,980 3,274 4,202 4,800 5,587 Operating expenses... 3,463 5,109 4,830 5,248 5,674 6,531 6,773 7,241 Net loss............. (2,817) (3,700) (3,942) (3,148) (2,120) (1,964) (1,630) (1,325)
LIQUIDITY AND CAPITAL RESOURCES Since our inception, we have financed our operations primarily from the sale of our convertible preferred stock. Through December 31, 1999, we raised approximately $67.6 million from equity financings and have received approximately $3.4 million in equipment financing and approximately $1.9 million of financing related to our investments in sales-type leases. We have received approximately $2.8 million of financing under a term loan in 1999. At December 31, 1999, we had approximately $1.1 million primarily committed to the purchase of equipment related to the expansion of our automated BIS Sensor production line. Working capital at December 31, 1999 was approximately $12.3 million compared to approximately $19.1 million at December 31, 1998. The decrease in working capital from December 31, 1998 to December 31, 1999 was primarily attributable to continued operating losses of approximately $7.0 million and an increase in accounts payable and accrued liabilities of approximately $3.0 million, offset by increases in net accounts receivable of approximately $2.4 million, investment in sales-type leases of approximately $2.1 million and inventory of approximately $1.2 million. We used approximately $7.9 million of cash for operations in 1999. Cash used for operations during this period was primarily driven by operating losses, increases in net accounts receivable, investment in sales-type leases and inventory offset by increases in accounts payable, accrued liabilities and deferred revenue. We used approximately $29.7 million for operations during the three years ended December 31, 1999. Cash used for operations during this period was also primarily driven by operating losses, increases in net accounts receivable, investment in sales-type leases and other current assets, offset by increases in accounts payable, accrued liabilities and deferred revenue. We received approximately $523,000 of cash from investing activities in 1999. We sold approximately $3.1 million, net, of marketable securities and invested approximately $2.6 million primarily in manufacturing equipment and information systems. We used approximately $5.5 million for investing activities during the three years ended December 31, 1999. We invested approximately $123,000, net, in marketable securities and approximately $5.4 million in manufacturing equipment, leasehold improvements and new information systems. We received approximately $3.8 million of cash from financing activities in 1999 primarily as a result of approximately $2.8 million of borrowings under our term loan and the sale of approximately $1.9 million of our investments in sales-type leases offset by approximately $900,000 of debt repayments. We received approximately $47.4 million of cash from financing activities during the three years ended December 31, 1999. Cash provided by financing activities during this period was primarily the result of the sale of our convertible preferred stock and proceeds from our equipment loan and term loan and the sale of a portion of our investments in sales-type leases in the three year period ended December 31, 1999. In December 1999, we renegotiated our loan agreement with Imperial Bank. Borrowings outstanding at December 31, 1999 of approximately $1.4 million under the equipment portion of the new loan agreement are payable in monthly installments of approximately $60,000 plus interest through December 31, 2001. The working capital portion of the original June 1998 loan agreement was replaced with a term loan portion. Borrowings under the term loan portion outstanding at December 31, 1999 of approximately $2.8 million are 26 28 payable in 36 monthly installments of approximately $79,000 plus interest commencing January 2000. Interest on both the equipment portion and the term loan portion of the new loan agreement is at the prime rate plus 1.0% through the closing date of our initial public offering of common stock. After the closing of our initial public offering, the interest rate becomes the prime rate plus 0.5%. The new loan agreement contains restrictive covenants that require us to maintain liquidity and borrowing base ratios. The new loan agreement also restricts us from declaring and paying cash dividends. The new loan agreement is secured by substantially all of our assets. At December 31, 1999, no additional amounts may be borrowed under the equipment portion or term loan portion of the new loan agreement. Approximately $1.5 million is available under the standby letter of credit portion of the new loan agreement. In July 1999, we entered into an agreement under which we can sell a portion of our existing and future investments in sales-type leases to AmeriCorp Financial, Inc. In the second half of 1999, we sold approximately $1.9 million of our investments in sales-type leases. In accordance with Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the proceeds from these sales are classified as debt. Payments on the outstanding principal under this debt match the timing of the payments due on the underlying investments in sales-type leases. We anticipate that capital expenditures for 2000 will be approximately $5.8 million. These funds will primarily be used for the purchase of manufacturing equipment and for the preparation of and move to our new facility, which we anticipate occupying in the first quarter of 2000. We believe that the financial resources available to us, including our current working capital, any future availability under the working capital portion of our loan agreement, proceeds from selling our investments in sales-type leases, together with the net proceeds of this offering, will be sufficient to finance our planned operations and capital expenditures at least through 2000. However, our future liquidity and capital requirements will depend upon numerous factors, including the resources required to further develop our marketing and sales organization domestically and internationally, to expand manufacturing capacity, to finance our sales-type lease program and to meet market demand for our products. INCOME TAXES We have net operating loss and research and development tax credit carryforwards for federal income tax purposes of approximately $47,254,000 and $1,953,000, respectively, at December 31, 1999 that will expire commencing in the year 2002 through the year 2019 if not utilized. The net operating loss and research and development tax credit carryforwards are subject to review by the Internal Revenue Service. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of these tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on our value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. YEAR 2000 COMPLIANCE The year 2000 problem refers to the potential for system and processing failures as a result of software using two digits rather than four to define the applicable year. For example, computer programs may recognize a date represented as "00" as the year 1900 rather than the year 2000. As a result, computer software and/or hardware used by many companies and governmental agencies may need to be upgraded to comply with year 2000 requirements or risk system failure or miscalculations causing disruptions to normal business activities. We have defined year 2000 compliant or year 2000 readiness as the ability to: - correctly handle date information needed for dates after December 31, 1999, - function according to the product documentation provided for these date changes, without changes in operation, assuming correct configuration, - where appropriate, respond to two-digit date input in a way that resolves the ambiguity as to century in a disclosed, defined and predetermined manner, 27 29 - store and provide output of date information in ways that are unambiguous as to century if the date elements in interfaces and data storage specify the century, and - recognize year 2000 as a leap year. We have described below steps taken by us to assess our year 2000 readiness. As of January 19, 2000, customers have not reported to us any year 2000 related problems or disruptions with any of our systems or products. In addition, we are not aware of any year 2000 related problems with any of our equipment, facilities, material suppliers or sub-contract manufacturers. State of Readiness. We have assessed the year 2000 readiness of our operating, financial and administrative systems, including the hardware and software that support our systems. This review included assessing, validating, testing and, where necessary, remediating, upgrading and replacing noncompliant systems, hardware or software, as well as evaluating the need for contingency planning. For our currently marketed products, we have completed our year 2000 compliance testing efforts and believe that our current products are year 2000 compliant in all material respects. We have tested the older versions of our products for year 2000 compliance and have determined that some older versions of our products are not year 2000 compliant. We have made available to our customers a description of the year 2000 readiness of these older versions of our products. We have made available to our customers who are using older versions of our products which are not year 2000 compliant the option to upgrade the software to current versions. The upgrades are easy and quick to perform and require no special skills or tools. For all other material internal information technology systems, our year 2000 task force has conducted an inventory of and test procedures for all software and related systems believed to be affected by year 2000 issues. Since third parties developed and currently support many of the systems that we use, a significant part of this effort was to ensure that these third-party systems are year 2000 compliant. The internal evaluation has determined that all our critical hardware and software are year 2000 compliant. We identified a small number of desktop computers and workstations with operating systems that are not year 2000 compliant. The hardware and operating systems on this equipment were upgraded. Our current scientific software has been transferred and validated. We assessed our non-information technology systems. Some aspects of our facilities and manufacturing equipment include embedded technology, such as microcontrollers. The year 2000 problem could cause a system failure or miscalculation in such facilities or manufacturing equipment which could disrupt our operations. Affected areas include security systems, voice mail and telephone systems and computer-based production and test equipment. We identified the potential problem areas and developed a remediation plan to correct any issues. This plan included contacting vendors to obtain year 2000 compliance certification for the equipment provided by them as well as executing date forwarding test protocols to validate the equipment. We completed distribution of a survey of our material suppliers and sub-contract manufacturers. All but one survey was returned. Two of the eighteen material suppliers and sub-contract manufacturers who completed our survey have indicated that they have year 2000 activities to complete. Overall, based upon their responses to our survey, we believe our material suppliers and sub-contract manufacturers are taking the necessary steps to ensure that their systems are year 2000 compliant so that they will be able to continue providing us with material and services without interruption or delay. We did not contact or survey our customers to determine whether their systems are year 2000 compliant. We do not use electronic data interchange software with our customers and believe that our risk resulting from our customer's year 2000 non-compliance is not significant. Costs. Our costs associated with assessment, remediation and testing activities concerning the year 2000 problem have not been material. Costs incurred for year 2000 compliance for our products were included in the continuing costs of research and development. We do not expect that we will incur material additional costs in connection with identifying, evaluating and addressing year 2000 compliance issues. It is not possible for us to completely estimate the costs we have incurred to date or expect to incur in coming months as most of our expenses are related to, and are expected to continue to relate to, the operating costs associated with time spent by employees and consultants in the evaluation process and year 2000 compliance matters 28 30 generally. We have funded and will continue to fund all year 2000 compliance activities principally through cash provided by our financing activities. Worst Case Scenario. Our reasonably likely worst case year 2000 scenario would be that a material third-party vendor or supplier, such as a limited or sole source supplier, would, as a result of its own year 2000 difficulties, fail to successfully remediate year 2000 problems in hardware, software or equipment which is material to our business and operations. If this scenario occurred, we may be required to seek out new vendors and suppliers, which may not be available to us on a timely basis, if at all. Furthermore, we would be required to certify certain new limited or sole source suppliers. If we are required to seek out or certify new vendors or suppliers, it will be costly and divert management's attention, which could have a material adverse effect on our business and operating results. Contingency Plan. We have no specific contingency plan to address the effect of year 2000 compliance failures. If, in the future, it comes to our attention that certain of our products need modifications or certain of our third party hardware, software and equipment are not year 2000 compliant or certain vendors are not year 2000 compliant, then we will seek to make the necessary modifications or substitutions. In such cases, we expect these modifications or substitutions to be made on a timely basis. However, we may not be able to modify our products, services, systems and equipment or find alternative vendors in a timely and successful manner to comply with year 2000 requirements, which could have a material adverse effect on our business, financial condition and results of operations. CONVERSION TO EURO Eleven of the 15 members of the European Union have agreed to adopt the Euro as their legal currency. Our current information systems allow us to currently process Euro-denominated transactions. We are also assessing the business implications of the conversion to the Euro, including long-term competitive implications and the effect of market risk with respect to financial instruments. Substantially all of our international sales are denominated in United States dollars. We do not believe the Euro will have a significant effect on our business, financial condition or results of operations. We will continue to assess the impact of Euro conversion issues as the applicable accounting, tax, legal and regulatory guidance evolves. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Most of our revenue, expenses and capital spending are transacted in U.S. dollars. However, the expenses and capital spending of our international subsidiaries are transacted in local currency. As a result, changes in foreign currency exchange rates or weak economic conditions in foreign markets could affect our financial results. We do not use derivative instruments to hedge our foreign exchange risk. Our exposure to market risk for changes in interest rates relates primarily to our cash and cash equivalent balances, marketable securities, investment in sales-type leases and loan agreement. The majority of our investments are in short-term instruments and subject to fluctuations in U.S. interest rates. Due to the nature of our short-term investments, we believe that there is no material risk exposure. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 133, or SFAS 133, "Accounting for Derivatives and Hedging Activities," which establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Accounting for Derivatives and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS 133 to be effective for all fiscal quarters beginning after June 15, 2000. The adoption of SFAS 133, as amended, is not expected to have a material effect on our financial condition and results of operations as we do not currently hold any derivative instruments or engage in hedging activities. 29 31 BUSINESS OVERVIEW We develop, manufacture and market an anesthesia-monitoring system that we call the BIS system. The BIS system enables anesthesia providers to assess and manage a patient's level of consciousness during surgery. Our proprietary BIS system includes our BIS monitor or BIS Module Kit and our single-use, disposable BIS Sensors. The BIS system is based on our patented core technology, the Bispectral Index, which we refer to as the BIS index. The BIS index is the only FDA-cleared, commercially available, direct measure of the effects of anesthetics on the brain. We developed the BIS system over 10 years, and it is the subject of 10 issued and six pending United States patents. As of December 31, 1999, more than 5,650 BIS monitors have been installed worldwide, including 4,881 BIS monitors in approximately 675 sites in North America. These sites include 35 of the 100 largest hospitals and 32% of all teaching hospitals with anesthesia residency programs. We believe that over 1,000,000 patients have been monitored using the BIS index during surgery. Our latest generation monitor, the A-2000 BIS Monitor, was cleared for marketing by the FDA in February 1998. We market the BIS system in the United States primarily through a direct sales organization and internationally through distributors and marketing partners. We have also established original equipment manufacturer relationships with several patient monitoring and anesthesia equipment companies to incorporate our BIS technology into their equipment using the BIS Module Kit. Clinical trials and routine clinical use of the BIS system have shown that patient monitoring with the BIS system results in: - a reduction in the amount of anesthetics used, - faster wake-up from anesthesia, - less patient time in the operating room and the post-anesthesia care unit following surgery, - higher rates of outpatients bypassing the post-anesthesia care unit and proceeding to a less costly step-down recovery area directly from the operating room, - improvements in the quality of recovery, and - improvements in the means to assess the risk of surgical awareness, which is the unintentional regaining of consciousness during surgery. MARKET OPPORTUNITY Each year, approximately 29 million patients in the United States and more than 35 million patients in Europe and Japan receive anesthesia for surgical procedures. We estimate that approximately 70% of these surgical patients in the United States, or 20 million patients, receive general anesthesia or deep sedation monitored by an anesthesia provider. In the United States, there are more than 34,000 operating rooms in hospitals and 5,000 operating rooms in outpatient surgical centers. We believe that the aggregate number of operating rooms in Europe and Japan exceeds the number of operating rooms in the United States. Operating rooms represent our initial market opportunity for the sale of BIS monitors, and surgical procedures utilizing general anesthesia or deep sedation represent our initial market opportunity for annual sales of BIS Sensors. When administering general anesthesia, providers use a combination of drugs to accomplish three basic objectives: - to render the patient unconscious, - to prevent response to pain, and - to ensure the patient will not move during surgery. Anesthesia providers historically have had no direct means of assessing a patient's level of consciousness during surgery. They have generally relied on recommended drug dosages and on indirect indicators of consciousness, including blood pressure and heart rate. This approach cannot always account for variability in 30 32 patient responses to anesthesia or changes in anesthetic requirements during the course of surgery. Furthermore, indirect measures such as blood pressure and heart rate are not reliable indicators of a patient's level of consciousness. Consequently, historical approaches to anesthesia may result in patients being undermedicated or overmedicated during surgery. Undermedication may lead to surgical awareness, which is the unintentional regaining of consciousness during surgery. Surgical awareness may be undetected during surgery because anesthetized patients who have received muscle relaxants may be unable to communicate that they are conscious. Published reports estimate that surgical awareness occurs in approximately 0.2% of procedures requiring general anesthesia per year. In the United States 0.2% is equal to approximately 35,000 cases of surgical awareness per year. Overmedication may result from an effort to ensure that the patient is rendered unconscious to reduce the risk of surgical awareness. Overmedication contributes to the high cost of surgical care as a result of increased drug costs, prolonged and unpredictable wake-ups from anesthesia and prolonged post-anesthesia recovery in the post-anesthesia care unit. These factors, in turn, lead to inefficiencies in operating room and post-anesthesia care unit scheduling and increased personnel costs. Additional market opportunities outside the operating room for patient monitoring with the BIS system include sedation in intensive care units and for diagnostic and therapeutic procedures. Sedation of patients is achieved through the use of anesthetic or sedative drugs to affect the level of consciousness. During sedation, the desired level of consciousness may range from a relaxed but awake state to a deep state approaching a general anesthetic level. In the United States, there are more than 83,000 beds in intensive care units and over 23 million patient days per year are spent in the intensive care unit. In Western Europe and Japan, we believe that there are approximately 91,000 intensive care unit beds, and over 22 million patient days per year are spent in the intensive care unit. We believe that approximately one-third of patients in the intensive care unit could benefit from consciousness monitoring. Currently, the assessment of a patient's level of sedation in the intensive care unit is subjective and is conducted only on an intermittent basis during the patient's stay. This assessment relies on indirect measures and is usually carried out by several different medical personnel, many of whom are not trained in anesthesia. As a result, we believe that both overmedication and undermedication occur in patients in the intensive care unit, both of which may extend the patient's length of stay. Extending the patient's length of stay in the intensive care unit may contribute to additional medical complications and increased costs of care. In addition, undermedication of patients can lead to patient discomfort and agitation, which may contribute to dangerous complications for the patient. Each year, approximately 200 million patients undergo diagnostic and therapeutic procedures outside the operating room and intensive care unit. We estimate that sedation is used in approximately 15% of these procedures. We refer to diagnostic and therapeutic procedures done under sedation as procedural sedation. We estimate that in the United States there are more than 46,000 rooms in hospitals, outpatient surgical centers, doctors' offices and dentists' offices where these procedures are performed. Overmedication during procedural sedation may cause a patient to lose consciousness and fall into a state of general anesthesia resulting in the loss of protective reflexes, including the ability to breath without mechanical assistance. Undermedication during procedural sedation may cause a patient to experience significant unnecessary discomfort. We believe that an effective tool for monitoring a patient's level of consciousness will address the problems of overmedication and undermedication in anesthesia and sedation monitoring and will contribute to improving the quality, safety and cost effectiveness of anesthesia and sedation. THE ASPECT SOLUTION: PATIENT MONITORING WITH THE BIS SYSTEM We have developed the BIS monitoring system that is based on our proprietary BIS index, the only FDA-cleared, commercially available, direct measure of the effects of anesthetics on the brain. Our BIS system is comprised of our BIS monitor or BIS Module Kit and our single-use, disposable BIS Sensors. The BIS Sensor is applied to a patient's forehead to acquire the EEG, a measure of the electrical activity of the brain. The EEG is then analyzed by the BIS monitor or BIS Module Kit to produce the BIS index. The BIS index is a numerical index that correlates with levels of consciousness and is displayed as a number ranging between 100, indicating that the patient is awake, and zero, indicating an absence of brain activity. In October 1996, the 31 33 FDA cleared the BIS index for marketing for use as a direct measure of anesthetic effect on the brain, and in February 1998, the FDA cleared for marketing our A-2000 BIS Monitor. Our clinically validated BIS index assists anesthesia providers in assessing levels of consciousness during surgery and minimizing the risk of unintentional overmedication or undermedication. Clinical trials and routine clinical use of the BIS system have shown that patient monitoring with the BIS system results in: - a reduction in the amount of anesthetics used, - faster wake-up from anesthesia, - less patient time in the operating room and the post-anesthesia care unit following surgery, - higher rates of outpatients bypassing the post-anesthesia care unit and proceeding to a less costly step-down recovery area directly from the operating room, - improvements in the quality of recovery, and - improvements in the means to assess the risk of surgical awareness. Aspect and others have conducted numerous studies to evaluate the clinical utility of the BIS system. For example, we conducted a 302-patient multicenter, prospective, randomized, controlled clinical utility trial that demonstrated the following benefits from using the BIS system: - Cost-Effective Dosing of Anesthetic Drugs. Patients monitored with the BIS system during surgery received 23% less anesthetic than patients who were not monitored with the BIS system. Accordingly, based upon the average cost of the anesthetic drugs used in this utility trial, the use of the BIS system could result in drug cost savings of up to $18 per surgical procedure. - Faster and More Predictable Recovery From Anesthesia. Patients monitored with the BIS system during surgery emerged from unconsciousness 35% to 40% faster than patients who were not monitored with the BIS system. Only 5% of patients monitored with the BIS system required more than 15 minutes to emerge from anesthesia compared with 16% of patients who were not monitored with the BIS system. Moreover, patients who were monitored with the BIS system were eligible for discharge from the post-anesthesia care unit 16% faster than patients who were not monitored with the BIS system. - Improved Quality of Recovery. Patients received better clinical assessments of their recovery in post-anesthesia care units when the BIS system was used. In addition, 43% of patients monitored with the BIS system were alert and oriented when admitted to the post-anesthesia care unit, as compared to 23% of patients not monitored with the BIS system during surgery. STRATEGY Our objective is to establish the BIS system as a global standard in anesthesia and sedation monitoring. Key elements of our strategy to accomplish our objective include the following: - Accelerate Market Penetration Through a Direct Sales Force. We will continue to capitalize on our first-to-market position by utilizing a direct sales force in the United States to further penetrate the market. We believe that a direct sales force is best able to convey to anesthesia providers and administrators the clinical benefits and potential cost savings achievable when patients are monitored with the BIS system. We also intend to continue to complement our direct sales force with medical products distributors in selected markets, the sales organizations of our original equipment manufacturers and contracts with hospital group purchasing organizations. In North America, we had installed 1,926 monitors in approximately 270 sites as of December 31, 1998 and we had installed 4,881 monitors in approximately 675 sites as of December 31, 1999. - Educate and Promote the Use of the BIS System Through Clinical Specialists. We intend to establish and maintain a ratio of approximately 1.5 clinical specialists for each of our direct sales representatives. The principal responsibilities of these clinical specialists are to provide education, training and support 32 34 for the installed base and to promote use of BIS systems. As of December 31, 1999, we estimate that more than 1,000,000 patients have been monitored using the BIS system. As a result of the growth in the installed base and the efforts of our clinical specialists, revenue from the sales of BIS Sensors increased from 33% of revenue for the year ended December 31, 1998 to 47% of revenue for the year ended December 31, 1999. We expect that clinical specialists will also play a key role in expanding patient monitoring with the BIS system outside the operating room, including in the intensive care unit and procedural sedation markets. - Broaden Distribution Channels Through Original Equipment Manufacturer Relationships. We have entered into original equipment manufacturer agreements with Agilent Technologies, Inc., formerly part of Hewlett-Packard Company, Drager Medizintechnik GmbH, GE Marquette Medical Systems, Inc., Nihon Kohden Corporation and Spacelabs Medical, Inc. Under these agreements, our original equipment manufacturers integrate the BIS Module Kit into their patient-monitoring or anesthesia delivery systems. These systems will require the use of our BIS Sensor to generate the BIS index. We believe that original equipment manufacturer relationships will accelerate market penetration of the BIS technology and provide us with access to a large installed base of patient monitoring and anesthesia equipment. We expect to enter into additional original equipment manufacturer relationships over the next several years to expand the channels for distribution of the BIS system, particularly in international markets. - Maintain Market Leadership Through Continuous Product Improvements and Extensions. We intend to adapt the BIS technology for use in the intensive care unit and for procedural sedation. We also plan to utilize our core expertise in EEG signal processing and sensor technology to continuously improve the performance of the BIS index in the presence of noise and motion artifacts. We are developing a BIS Sensor that will contain an electronic memory device and a smaller BIS Sensor that can be used with children between the ages of two and eight years. We believe that these improvements and extensions of the BIS technology will strengthen our competitive position while providing our customers with improved products. - Target New Market Opportunities Through Technology Development. We intend to continue to focus on new applications for our core technology, including other neuromonitoring applications, such as the diagnosis of Alzheimer's disease, and other uses, such as analysis of electrocardiograms. Continued innovation and commercialization of new proprietary products are essential elements in our long-term growth strategy. We intend to protect our technology leadership position and maintain our competitive advantage through product innovation, acquisitions of new technologies, by defending our current patents and other proprietary rights, and by seeking to obtain additional patents and other proprietary rights. PRODUCTS The following chart summarizes our proprietary product offerings, all of which have received clearance from the FDA:
- ------------------------------------------------------------------------------------------------------- INITIAL COMMERCIAL PRODUCT SHIPMENT DESCRIPTION - ------------------------------------------------------------------------------------------------------- A-2000 BIS Monitor 1998 Small, lightweight third-generation BIS monitor BIS Sensor 1997 Disposable product for use with A-2000, A-1050 and BIS Module Kit BIS Module Kit 1998 Components of BIS monitoring technology to be integrated into monitors sold by original equipment manufacturers A-1050 EEG Monitor with BIS 1996 Second-generation monitor with BIS index and simplified user interface Zipprep EEG Electrode 1995 EEG electrode with our Zipprep technology - -------------------------------------------------------------------------------------------------------
33 35 A-2000 BIS MONITOR We began commercial distribution of the A-2000 BIS Monitor, our third-generation monitor, in February 1998. The A-2000 is a compact, lightweight, portable monitor designed to accommodate the space limitations and positioning requirements of surgical settings. The A-2000 displays the BIS index and supporting information and includes our proprietary digital signal converter. This converter is a palm-sized module that serves as the interface between the BIS monitor and the BIS Sensor. The digital signal converter acquires the EEG signal from the BIS Sensor and converts the EEG signal to digital format. The EEG signal is then processed and the BIS index is displayed on the A-2000. The current list price for the A-2000 is $8,900. BIS SENSOR We commenced commercial distribution of the BIS Sensor in January 1997. The BIS Sensor is a single-use, disposable product for use with the A-2000, the A-1050 and the BIS Module Kit. Our BIS monitors and BIS Module Kits require the use of the BIS Sensor to generate the BIS index. The BIS Sensor provides a reliable and simple means of acquiring the EEG signal needed to generate the BIS index. The one-piece design allows quick and accurate placement on the patient's forehead. The BIS Sensor connects to the monitor by a single-point proprietary connector. The current list price for the BIS Sensor is $15. Our Zipprep self-prepping technology is a key feature of the BIS Sensor. The technology minimizes patient set-up time and establishes effective electrical contact with the patient which enables consistent, accurate readings of the EEG signal. Prior to our development of the Zipprep technology, to obtain an EEG signal the user prepared a patient's skin by rubbing an abrasive cream over the forehead 10 to 20 times in order to remove the top layer of skin prior to applying the electrode. BIS MODULE KIT In 1996, we introduced our BIS Module Kit, which is designed to facilitate the integration of the BIS index into monitoring products marketed by our original equipment manufacturers. The BIS Module Kit consists of two pieces, our proprietary digital signal converter and a small circuit board that resides in the original equipment manufacturer's system. The digital signal converter acquires the EEG signal from the BIS Sensor and converts the EEG signal to digital format. The circuit board then processes the EEG signal and outputs the BIS index to the original equipment manufacturer's system. The common architecture of the BIS Module Kit facilitates integration of the BIS index into the original equipment manufacturer's system and simplifies any future software updates of the BIS index technology. Each original equipment manufacturer is required to obtain FDA and other appropriate regulatory clearance of its BIS module product. TECHNOLOGY We developed the BIS system, including our proprietary BIS index, over 10 years. The BIS index is a numerical index that correlates with levels of consciousness and is derived from an analysis of the EEG signal. In general, an EEG signal changes from a small-amplitude, high-frequency signal while a person is awake to a large-amplitude, low-frequency signal while a person is deeply anesthetized. Historically, researchers have used observations about these changes in the EEG signal to create mathematical algorithms to track the effects of anesthetics on the brain. However, these algorithms have not been widely adopted because studies have indicated that they generally do not provide sufficient clinically useful information to assess levels of consciousness with commonly used anesthetics and doses. In developing the BIS index, we sought to improve these early EEG analyses in two ways. First, by using bispectral analysis, a mathematical tool that examines signals such as the EEG, we can extract new information from the EEG signal. Second, we developed proprietary processing algorithms that extract information from bispectral analysis, power spectral analysis and time domain analysis. Geophysicists originally used bispectral analysis in the early 1960s to study ocean wave motion, atmospheric pressure 34 36 changes and seismic activity. The advent of high-speed, low-cost digital signal processors has enabled the use of bispectral analysis for other applications. By using bispectral analysis, we are able to extract a distinctive fingerprint of the underlying signal structure of the EEG and represent it as a three-dimensional mathematical model. We created the BIS index to describe changes in the EEG that relate to the effects of anesthetics on the brain in order to assess levels of consciousness. Over a number of years, Aspect and others collected a large database of high fidelity EEG recordings and clinical assessments from patients and volunteers receiving a wide variety of anesthetics. Researchers used clinical assessments such as a sedation rating scale, picture or word recall memory tests and response to stimuli to define levels of consciousness. Using statistical methods, we identified features within the EEG that correlated with sedation and loss of consciousness. We then used proprietary statistical methods to combine these features to generate an interpretive numerical index, which we refer to as the BIS index. The BIS index ranges from 100, indicating that the patient is awake, to zero, indicating an absence of electrical brain activity. CLINICAL DEVELOPMENT Our clinical research and regulatory affairs group is responsible for: - establishing collaborative relationships with leading clinical researchers, - encouraging publications related to the BIS index in the scientific literature, - coordinating with the FDA and other regulatory agencies, - conducting clinical research with the goal of extending the application of patient monitoring with the BIS system to other settings and clinical uses, and - collecting data for new product development. We have a clinical database of over 5,000 cases for use in algorithm development and product validation based on trials that we conducted or sponsored or that third parties undertook. In 1996, the FDA cleared the BIS index for marketing as a measure of anesthetic effect on the brain. The regulatory process involved studies we conducted on over 900 subjects. These studies characterized the relationships between the BIS index value and various clinical endpoints, including movement, response to incision, response to verbal command as a measure of consciousness in volunteers and patients, memory function, drug utilization and speed of patient recovery following surgery. We conducted two clinical trials in which we evaluated the use of patient monitoring with the BIS system as a measure of sedation, consciousness and memory function. In a multicenter study involving approximately 100 volunteers, we demonstrated that the BIS index correlated with the level of responsiveness and memory function and tracked the loss of consciousness. In a second trial involving 40 patients, the BIS index reliably correlated with the return to consciousness after a single injection of either propofol or thiopental, two anesthetics often used to induce unconsciousness. Several studies conducted by third parties, some of which we partially funded, have generally confirmed these results. Our multicenter, prospective, randomized, controlled clinical utility trial of 302 patients demonstrated the outcome benefits of patient monitoring with the BIS system. This trial compared clinical outcomes of a group of patients monitored with the BIS system to a similar group of patients who were monitored under standard clinical practice without the BIS system. The principal efficacy endpoints were the amounts of anesthetic given and the speed of recovery following surgery. Patients monitored with the BIS system: - received 23% less of the anesthetic drug propofol, - woke up earlier after surgery in the operating room, - were more likely, 43% versus 23%, to arrive at the post-anesthesia care unit fully alert and oriented, - were judged by post-anesthesia care unit nurses to have had better recovery, and 35 37 - met criteria for discharge from the post-anesthesia care unit sooner. Following FDA clearance of the BIS index, there have been at least five additional prospective, randomized, clinical studies of patient monitoring with the BIS system. These studies, one of which we conducted and others of which we partially funded, evaluated the effectiveness of patient monitoring with the BIS system in conjunction with various commonly used anesthetics on nearly 300 patients. Each of the five studies indicated that patient monitoring with the BIS system led to a statistically significant reduction, ranging from 15% to 38%, in the amount of anesthetic per patient. One of the third-party studies, which we partially funded, evaluated whether patients monitored with the BIS system were more likely to bypass the post-anesthesia care unit and proceed directly to the step-down recovery unit following surgery. In this 60-patient study, approximately 90% of patients monitored with the BIS system were eligible to bypass the post-anesthesia care unit as compared to 63% of patients who were not monitored with the BIS system. In 1997, our clinical study of 1,552 patients documented the clinical impact and cost-effectiveness of routine monitoring with the BIS system in all operating rooms of a high-acuity teaching hospital located in Atlanta, Georgia. Patients received a wide variety of anesthetics typically used in general practice. We collected comprehensive data on all patients who received general anesthesia for at least one hour. The results of this clinical study demonstrated that maintaining BIS index values within a recommended target range during general anesthesia was associated with improved outcomes in terms of drug utilization, operating room and post-anesthesia care unit recovery and associated costs. In 1999, a teaching hospital located in Boston, Massachusetts conducted a clinical study of over 5,000 patients that documented the clinical impact on patient recovery of routine monitoring with the BIS system in its outpatient surgery unit. This study compared both the length of stay in the post-anesthesia care unit and the eligibility of patients to bypass the post-anesthesia care unit and proceed directly to the step-down recovery area following surgery, both before and after the installation of BIS monitors in the hospital's outpatient surgery unit. Overall, the length of stay in the post-anesthesia care unit was reduced by 16% after the installation of BIS monitors. In addition, 43% of patients monitored with the BIS system were eligible to bypass the post-anesthesia care unit and proceed directly to the step-down recovery area following surgery compared to 24% of patients prior to monitoring with the BIS system. By the end of the study, the hospital implemented a formal bypass program which allowed 35% of general anesthesia patients monitored with the BIS system to bypass the post-anesthesia care unit and to proceed directly to the step-down recovery area following surgery. Prior to the implementation of monitoring with the BIS system, the hospital did not permit patients who received general anesthesia to bypass the post-anesthesia care unit. This hospital is one of our customers. We sold or gave some of the products used in this study to the hospital. There are more than 385 scientific articles and abstracts reporting the results of BIS index performance in studies conducted by us and third parties. In addition, we collaborate with over 50 clinical research sites. Several of the studies described above have also shown that patient monitoring with the BIS system can assist anesthesia providers in assessing the risk of surgical awareness. Estimates of the frequency of surgical awareness indicate that awareness occurs in only two patients for every 1,000 surgical procedures requiring general anesthesia. As of December 31, 1999, we believe that more than 1,000,000 patients have been monitored with the BIS system during surgery. Although we have not systematically solicited reports of surgical awareness, only 35 cases of possible surgical awareness during BIS monitoring had been reported to us as of December 31, 1999. These reports may not include all cases of surgical awareness that might have occurred during patient monitoring with the BIS system. In most of the 35 cases that were reported to us, when BIS index values were recorded at the time of awareness, high BIS index values were noted, indicating that the BIS index correctly identified the increased risk of awareness in these patients. However, in a small number of these reported cases, surgical awareness may not have been detected by monitoring with the BIS system. We have not conducted a prospective, randomized, controlled study to evaluate whether or not monitoring with the BIS system reduces the incidence of surgical awareness. A controlled study to evaluate 36 38 the ability of monitoring with the BIS system to reduce the frequency of surgical awareness would require a sample size of up to 50,000 patients, which is not practicable. Because these studies have not been undertaken, we cannot and do not claim that patient monitoring with the BIS system will reduce the incidence of surgical awareness. Although our experience suggests that surgical awareness is more likely to occur when BIS values are high, we do not believe that our experience proves that patient monitoring with the BIS system will reduce the frequency of awareness. SALES, MARKETING AND CUSTOMERS DOMESTIC Our customers include anesthesia providers, hospitals, outpatient surgical centers and individual practitioners in office-based practice. The key customers that we have initially targeted include larger hospitals with a high ratio of outpatient surgical procedures to total surgical procedures and outpatient surgical centers, at or near capacity. Through December 31, 1999, BIS systems have been installed in approximately 675 sites in North America. We market our BIS system in the United States primarily through a direct sales force. As of December 31, 1999, our domestic sales force was comprised of 22 sales professionals and 32 clinical specialists. We have developed a financial model which is used by sales representatives to assist administrators in evaluating the economic impact of patient monitoring with the BIS system at their hospital. We believe that our clinical specialists play a key role in the ongoing process of developing support for the BIS technology both before and after the sale of BIS systems. The principal responsibilities of clinical specialists are clinical training and education at the time the equipment is installed. Clinical specialists also make follow-up visits at each customer site at regularly scheduled intervals. These visits allow clinical specialists to monitor customer satisfaction and provide feedback to our marketing and research and development staffs. We also believe that these visits may help to establish patient monitoring with the BIS system as a standard in anesthesia monitoring and to extend patient monitoring with the BIS system into other settings in the hospital, such as the intensive care unit and procedural sedation rooms. Clinical specialists generally have nursing backgrounds and have experience in anesthesia, perioperative care or critical care. We currently expect to establish and maintain a ratio of approximately 1.5 clinical specialists for each of our sales representatives. We have begun to complement our direct sales force with medical products distributors in selected markets, including Canada and locations in the United States not currently targeted by our direct sales force. We have also begun to market our products through the sales organizations of our original equipment manufacturers and contracts with hospital group purchasing organizations. We entered into a distribution agreement, effective October 1, 1999, with Agilent Technologies, Inc., formerly part of Hewlett-Packard Company, under which Agilent has agreed to act as a nonexclusive distributor of our A-2000 BIS Monitor and related products in some territories. Unless earlier terminated in accordance with the terms of the agreement, this agreement extends for a two-year term. We have entered into an agreement, dated August 13, 1998, with Novation, the supply cost management company for VHA Inc. and the University Hospital Consortium, two national health care alliances. Under this agreement, the approximately 1,900 member healthcare organizations of VHA and the University Hospital Consortium will have the right to purchase BIS monitors and BIS Sensors under the pricing terms contained in the agreement. The member healthcare organizations of the VHA and the University Hospital Consortium represent 30% of the teaching and community hospitals in the United States and perform 33% of the surgical procedures in the United States. Novation's field force will work with our sales force to facilitate the adoption of BIS technology by their member healthcare organizations. We offer customers the option either to purchase the BIS monitors outright or to acquire the BIS monitors pursuant to a sales-type lease agreement whereby the customer contractually commits to purchase a minimum number of BIS Sensors per BIS monitor per year. Under this agreement, customers purchase the BIS Sensors and the BIS monitor for the purchase price of the BIS Sensors plus an additional charge per BIS Sensor to pay for the purchase price of the BIS monitor and related financing costs over the term of the 37 39 agreement. The customer is granted an option to purchase the BIS monitor at the end of the term of the agreement, which is typically three to five years. We believe that the sales-type lease arrangement in some cases reduces the time required for customers to adopt the BIS system because it provides them with an option to utilize their operating budget to fund the purchase. We conduct several activities for the different constituencies that may be involved in the decision-making process. For clinical audiences, we exhibit at tradeshows, sponsor speakers at professional meetings and develop articles for publication in conjunction with industry experts. In addition, we work with hospitals to publicize their adoption of patient monitoring with the BIS system in an effort to assist them in communicating their commitment to improving the quality and efficiency of patient care. For the fiscal years ended December 31, 1998 and 1999, sales to Spacelabs accounted for approximately 13% and 2%, respectively, of our total revenue. For the fiscal year ended December 31, 1999, no one customer accounted for 10% or more of our total revenue. INTERNATIONAL In late 1998, we established our international operations and opened our international headquarters in Leiden, The Netherlands. We are developing our international sales and distribution program through a combination of distributors and marketing partners, including companies with which we have entered into original equipment manufacturer relationships. We expect to complement our international third-party distribution program through direct sales to select customers and to support these customers with clinical specialists. As of December 31, 1999, we employed 13 persons in our international organization. Substantially all international sales are denominated in United States dollars. See Note 16 of notes to our consolidated financial statements for domestic and international financial information. ORIGINAL EQUIPMENT MANUFACTURER RELATIONSHIPS We have entered into agreements with four patient monitoring companies, Agilent Technologies, Inc., formerly part of Hewlett-Packard Company, GE Marquette Medical Systems, Inc., Nihon Kohden Corporation and Spacelabs Medical, Inc. and one anesthesia equipment company, Drager Medizintechnik GmbH, that provide for the integration of our BIS technology into their equipment. Spacelabs introduced a BIS module for its patient monitoring systems in October 1998. We currently expect that BIS modules for our other four original equipment manufacturers will be available within the next several years. Under an OEM Development and Purchase Agreement, dated August 6, 1999, between Aspect and Agilent, we have agreed with Agilent to integrate our BIS technology with Agilent's patient monitors. Unless terminated sooner if milestones are not achieved by October 31, 2001, this agreement expires on August 6, 2005. The term of the agreement automatically renews for one-year periods unless either party provides written notice of termination to the other party, at least 60 days prior to expiration of the agreement. Under an OEM Development and Purchase Agreement, dated December 22, 1999, between Aspect and GE Marquette Medical Systems, Inc., we have agreed with GE Marquette to integrate our BIS technology with GE Marquette's patient monitors. Unless terminated sooner if milestones are not achieved by October 31, 2001, in the case of GE Marquette, or December 31, 2000, in the case of Aspect, the agreement expires three years following the introduction of a GE Marquette patient monitor which integrates Aspect's BIS technology. Under an International License Agreement, dated January 21, 1998, between Aspect and Nihon Kohden, we have licensed our technology to Nihon Kohden on a worldwide non-exclusive basis. Nihon Kohden has the right to incorporate our technology into its patient monitoring systems. Unless terminated sooner, the agreement expires four years following approval by the Japanese Ministry of Health and Welfare of a Nihon Kohden patient monitor which integrates Aspect's BIS technology. 38 40 Pursuant to the terms of a Distribution and License Agreement, dated April 1, 1996, between Aspect and Spacelabs Medical, Inc., we have granted to Spacelabs a worldwide, non-exclusive license to the BIS index to develop, manufacture, market and sell Spacelabs monitoring equipment that incorporates the BIS index. Spacelabs also has the right to distribute BIS Sensors on a non-exclusive basis throughout the world with the exception of the United States. Unless earlier terminated, the license expires in April 2006. Under a Product Agreement with Drager Medizintechnik GmbH, dated May 5, 1999, we have agreed to integrate our technology with Drager's patient therapy and monitoring technology. Unless terminated sooner, this agreement will expire on December 31, 2005. This agreement automatically renews for successive one- year periods thereafter unless either party provides written notice of termination to the other party, at least twelve months prior to expiration of the renewal period. For the fiscal years ended December 31, 1997, 1998 and 1999, sales to Spacelabs accounted for approximately 35%, 13% and 2%, respectively, of our total revenue. RESEARCH AND DEVELOPMENT Our research and development efforts focus primarily on continuing to improve the function and features of the BIS system and enhancing our technical leadership in signal-processing technology for use in patient care. We intend to leverage the BIS technology for the development of new monitoring products and proprietary disposable sensors for new applications and to take advantage of new opportunities such as the intensive care unit and procedural sedation markets. During the fiscal years ended December 31, 1997, 1998 and 1999, we spent approximately $2.6 million, $4.0 million and $4.8 million, respectively, in our research and development efforts, including clinical and regulatory expenses. We expect research and development expenses to increase in the future as we seek to enhance our existing products and develop additional products. Our research and development department has four primary areas of responsibility: - algorithm research, - product development, - pre-production quality assurance, and - clinical engineering. Algorithm research involves developing signal-processing techniques to analyze the EEG and other electrical signals generated by the body. Our product development activities include developing and maintaining the hardware and software, including signal-processing software employed in the BIS systems, and coordinating with external resources, particularly with respect to mechanical engineering and industrial design. Disposable-product research and development combines expertise in materials science, disposable-products design, electrode technology and design for manufacturing to develop our disposable products, including the BIS Sensor products. Pre-production quality-assurance activities include testing our products to ensure that they meet FDA guidelines, other applicable regulatory and international quality standards and internal verification and validation protocols. Our clinical engineering activities include optimizing products for use in the clinical environment. We are developing a BIS Sensor with improved signal processing for detection and filtration of electrical interference. We also continue to explore new signal-processing techniques to improve the quality of the BIS index. We are developing a new version of the BIS Sensor that will contain an electronic memory device. This memory device will allow information about the sensor, such as lot code, expiration date and type of sensor, to be stored on the sensor and to be retrieved by the BIS monitor when used. In addition, we are developing a smaller BIS Sensor that can be used with children between the ages of two and eight years. We are exploring the development of other BIS Sensors which offer advantages in cases where patients may require extended monitoring with the BIS system, such as in the intensive care unit. 39 41 We are also investigating other product areas that utilize our expertise in anesthesia delivery and monitoring. Specifically, we are exploring the application of the BIS index to provide additional information about other effects of anesthetics on the patient. We are evaluating the application of the BIS index to measure additional states of the brain, including dementia, which may apply to detection of Alzheimer's disease, sleep cycles, seizure detection, and/or other neurological states. We believe that bispectral analysis may provide a means for extracting and quantifying subtle physiological information contained in the electrocardiogram, or ECG, and thus has the potential to enhance the diagnostic accuracy of many ECG applications, including the early diagnosis and assessment of coronary artery disease, a more rapid assessment of heart attacks and monitoring for advanced perioperative ischemia, which is inadequate blood flow to the heart during surgery, for patients at risk for heart attacks. Additional studies, some of which we sponsored, are being conducted to assess the performance of the BIS index in the presence of certain anesthetics, such as ketamine, and patient populations such as infants and young children, not included in the clinical development of the BIS algorithms. MANUFACTURING We have a 7,000 square foot manufacturing facility located in our Natick, Massachusetts headquarters. In this facility we assemble all of our BIS monitors, and we produce substantially all of our BIS Sensors on a semi-automated production line. Prior to 1998, we outsourced all BIS Sensor manufacturing. We currently outsource to third parties the production of our Zipprep EEG Electrodes. In the first quarter of 2000, we expect to move into approximately 61,000 square feet of development, production and administrative space. Our production process for our BIS monitors consists of final assembly, integration and testing of standard and custom components. Our production process for our BIS Sensor consists of several manufacturing and assembly processes using custom components. Qualified sub-contractors, who have met our supplier certification process and are placed on an approved vendors list, produce certain custom components. We maintain a quality-assurance program covering our manufacturing operations. Suppliers of purchased components are required to meet stated specifications. We certify suppliers prior to use by conducting audits and product inspections. We engage in ongoing evaluations of the performance of our suppliers by evaluating the results of inspections and tests as well as the timeliness of product deliveries. We employ numerous quality-assurance procedures during our in-house manufacturing processes to ensure finished products meet specification. Quality assurance procedures include operator training, process validation, equipment calibration, inspection and testing. All manufacturing procedures and processes are formally approved and updated using established revision control procedures. Documentation of in-process and final testing results is maintained in device history records for every unit. We maintain an ongoing post-sale performance-monitoring program. COMPETITION The medical device industry is subject to intense competition. We believe that competition will initially come from companies, including patient monitoring companies, currently marketing conventional EEG monitors utilizing standard signal-processing techniques such as spectral edge frequency analyses and median frequency analyses. We also believe that competition will come from companies that market EEG monitors utilizing novel signal-processing technologies, including at least two companies that are currently conducting clinical trials on products under development. Several potential competitive products are currently being marketed outside the United States although we do not believe that these products provide any significant advantages relative to the BIS technology. Additionally, a number of academic researchers worldwide are studying the potential use of other techniques to measure the effects of anesthetics. These other products and techniques include the use of auditory evoked potentials, heart rate variability, pupillary reflexes and skin blood flow measurement techniques. 40 42 We believe that the principal competitive factors in the market for anesthesia-monitoring products include: - improved patient outcomes, - cost effectiveness, - acceptance by leading anesthesia providers, - ease of use for anesthesia providers, - the publication of peer reviewed clinical studies, - sales and marketing capability, - timing and acceptance of product innovation, - patent protection, and - product quality. PATENTS AND PROPRIETARY RIGHTS Our policy is to prosecute and enforce our patents and proprietary technology. We intend to continue to file United States and foreign patent applications to protect technology, inventions and improvements that are considered important to the development of our business. We also rely upon trade secrets, know how, continuing technological innovation and licensing opportunities to develop and maintain our competitive position. We have established a substantial proprietary position with respect to our products and our core signal processing technology, bispectral analysis, and its application to biological signals. As of December 31, 1999, we held 10 United States patents and had filed six additional United States patent applications. We also have numerous corresponding patents and pending patent applications in certain major industrial countries, including Canada, the major European market countries, Australia and Japan. The following chart summarizes our United States patents and patent applications: - -------------------------------------------------------------------------------------------------------- NUMBER NUMBER PATENT OF ISSUED OF PATENT EXPIRATION PATENTS APPLICATIONS TECHNOLOGY COVERED DATE - -------------------------------------------------------------------------------------------------------- 4 -- Application of Bispectral and higher order March 13, 2007 analysis and various statistical modeling April 30, 2008 technologies to EEG signals June 14, 2011 October 17, 2012 1 1 Methods of ensuring the reliability of the computed values December 24, 2016 -- 1 Method of evaluating BIS information to facilitate clinical decision making 2 -- Application of bispectral and higher order May 15, 2007 analysis to electrocardiogram signals June 4, 2008 1 -- Zipprep self-prepping disposable electrode April 26, 2011 technology 1 1 Technology relating to the interface between the BIS Sensor and the BIS monitor October 20, 2015 -- 3 BIS Sensor technology 1 -- Signal acquisition technology for digital signal ------ ------ converter October 15, 2012 10 6 ------ ------ ------ ------ - --------------------------------------------------------------------------------------------------------
41 43 We have also been granted a perpetual, royalty-free, non-exclusive license by Siemens Medical Systems, Inc. to a United States patent covering signal acquisition technology for digital signal converters. GOVERNMENT REGULATION The manufacture and sale of medical diagnostic devices intended for commercial distribution and use are subject to extensive government regulation in the United States and in other countries. Our existing products are regulated in the United States as medical devices by the FDA under the Federal Food, Drug, and Cosmetic Act, or FDC Act. Pursuant to the FDC Act, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, record keeping, advertising, distribution and production of medical devices. Noncompliance with applicable regulations can result in refusal of the government to grant clearance for devices, withdrawal of prior clearances or approvals, total or partial suspension of production, fines, injunctions, civil penalties, recall or seizure of products and criminal prosecution. Generally, before we can introduce a new product in the United States, we must obtain FDA clearance of a premarket notification under Section 510(k) of the FDC Act, referred to as a 510(k) notification, or approval of a premarket approval application under Section 515 of the FDC Act. To date, we have received clearance of 510(k) notification from the FDA with respect to the following products: - Zipprep EEG Electrodes (June 1994), - A-1050 EEG Monitor with BIS (January 1996), - BIS Sensor (October 1996), - BIS Clinical Utility Indication (October 1996), and - A-2000 BIS Monitor (February 1998). Once we have received clearance of a 510(k) notification, any products we manufacture or distribute are subject to extensive and continuing regulation by the FDA, including compliance with current Good Manufacturing Practices regulations, recordkeeping requirements, reporting of adverse experience with the use of the device, post-market surveillance, and other actions deemed necessary by the FDA. A new 510(k) notification is also required when a medical device manufacturer makes a change or modification to a legally marketed device that could significantly affect the safety or effectiveness of the device, or where there is a major change or modification in the intended use of the device. When any change or modification is made to a device or its intended use, the manufacturer must make the initial determination whether the change or modification is of a kind that would necessitate the filing of a new 510(k) notification. The FDA's regulations provide only limited guidance for making this determination. The FDC Act regulates our quality control and manufacturing procedures by requiring us to demonstrate and maintain compliance with current Good Manufacturing Practices regulations, including quality systems regulations, as specified by the FDA. This regulation requires, among other things, that: - we use written procedures to control our product development and manufacturing process, - we validate, by extensive and detailed testing of every aspect of the process, our ability to produce devices which meet our manufacturing specifications, - we investigate any deficiencies in the manufacturing process or in the products produced, and - we maintain detailed record keeping. The current Good Manufacturing Practices regulations are applicable to manufacturers that produce components specifically for use in a medical device, and require design controls and maintenance of service records. The FDA monitors compliance with current Good Manufacturing Practices regulations by conducting periodic inspections of manufacturing facilities. If violations of applicable regulations are noted during FDA inspections of our manufacturing facilities, the continued marketing of our products may be adversely affected. In August 1996, the FDA conducted a routine inspection of our manufacturing facility to ensure compliance 42 44 with current Good Manufacturing Practices regulations. The FDA noted no adverse observations during this inspection. We believe that we have continued to maintain manufacturing facilities and procedures that are fully compliant with all applicable government quality systems regulations and guidelines. In June 1998, we obtained ISO 9001/EN 46001 international quality systems registration, a certification showing that our procedures and manufacturing facilities comply with standards for quality assurance and manufacturing process control. Our compliance with this registration has been confirmed since June 1998 in semi-annual surveillance audits. The ISO 9001 certification, along with the EN 46001, the European Medical Device Directive certification, signifies compliance with the requirements enabling us to affix the CE Mark to our current products. The CE Mark denotes conformity with European standards for safety and allows certified devices to be placed on the market in all European Union countries. After June 1998, medical devices may not be sold in European Union countries unless they display the CE Mark. We have established a dedicated regulatory and quality assurance group to maintain regulatory compliance and manage all of our quality-assurance activities. This group is responsible for the following activities: - all regulatory submissions and communications, - scheduling and performing company-wide audits, - coordinating product update procedures and corrective actions, - maintaining adherence to appropriate procedures and applicable requirements related to the FDA's quality systems regulations, and - coordinating appropriate documentation for FDA and ISO 9001/EN 46001 review and audits. THIRD-PARTY REIMBURSEMENT Third-party payors, including Medicare, Medicaid, private health insurance carriers, managed care organizations, health care administration authorities in foreign countries and other organizations, may affect the pricing or demand for our products by regulating the maximum amount of reimbursement provided for by these payors to the anesthesia providers, hospitals, outpatient surgical centers or physicians' offices where surgical procedures are performed. We expect that anesthesia providers will not be separately reimbursed for patient-monitoring activities utilizing the BIS system. When providers, such as hospitals or outpatient surgical centers, are reimbursed a fixed fee calculated on a per case, per stay, or per capita basis, the cost of monitoring with the BIS system will not be recovered by these providers unless the incremental costs of this monitoring are offset by savings in other costs, such as the costs of anesthetics or costs of the operating room or post-anesthesia care unit. This type of reimbursement policy is typical for inpatient hospital procedures and procedures performed in outpatient surgical centers and we expect it will become typical for all outpatient surgeries beginning in the year 2000. Patient monitoring with the BIS system may not result in sufficient savings to offset these costs. When reimbursement is based on charges or costs, patient monitoring with the BIS system may have the effect of reducing reimbursement because the charges or costs for surgical procedures, including operating room and post-anesthesia care unit charges and costs, may decline as a result of monitoring with the BIS system. EMPLOYEES As of December 31, 1999, we had 184 full-time employees, of which: - 21 persons were engaged in research and development activities, - 37 persons were engaged in manufacturing and engineering, - 11 persons were engaged in clinical and regulatory affairs, - 90 persons were engaged in sales and marketing and clinical support, and 43 45 - 25 persons were engaged in general and administrative functions. None of our employees is covered by a collective bargaining agreement. We consider relations with our employees to be good. SCIENTIFIC ADVISORS We seek advice from a number of leading scientists and physicians on scientific and medical matters, including experts in EEG monitoring, pharmacology and anesthesia management. These individuals advise us concerning a number of matters, including: - our research and development programs, - the design and implementation of our clinical research program, - our publication strategies, - the identification of market opportunities from the clinical perspective, and - specific scientific and technical issues. FACILITIES We currently lease approximately 23,000 square feet of development, production, and administrative space in Natick, Massachusetts pursuant to a lease which expires on October 31, 2000. We have entered into a seven-year lease of approximately 61,000 square feet of development, production and administrative space in Newton, Massachusetts beginning in the first quarter of 2000. We expect to move our operations to this space in the first quarter of 2000. Our international organization is based in approximately 2,800 square feet of office space in Leiden, The Netherlands, which is expected to be sufficient to meet our needs for the next 18 months. We believe our current facilities, including the space to be occupied in the first quarter of 2000, will be sufficient to meet our needs through mid-2001 and that additional space will be available at a reasonable cost to meet our space needs thereafter. INSURANCE Our business entails the risk of product liability and product recall claims and any claims of these types could have an adverse impact on us. We have taken and will continue to take what we believe are appropriate precautions, including maintaining general liability and commercial liability insurance policies which include adequate coverage for product liability and product recall claims. We evaluate our insurance requirements on an ongoing basis to enable us to maintain adequate level of coverage. However, product liability or product recall claims could exceed our insurance coverage limits and our insurance may not be available on commercially reasonable terms or at all. LITIGATION We are not a party to any material threatened or pending legal proceedings. 44 46 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The executive officers and directors of Aspect, their respective ages as of December 31, 1999 and their positions with Aspect are as follows:
NAME AGE POSITION - ---- --- -------- Nassib G. Chamoun.................... 37 Chief Executive Officer, President and Director J. Breckenridge Eagle................ 50 Chairman of the Board of Directors J. Neal Armstrong.................... 61 Vice President, Chief Financial Officer and Secretary Jeffrey L. Barrett................... 36 Vice President of Manufacturing and Operations Philip H. Devlin..................... 43 Vice President of Research and Development Steven H. Kane....................... 47 Vice President of Sales and Field Operations Paul J. Manberg, Ph.D................ 45 Vice President of Clinical, Regulatory and Quality Assurance Jean M. Nelson....................... 40 Vice President of Marketing Helgert van Raamt.................... 51 Vice President and Managing Director -- International Boudewijn L.P.M. Bollen.............. 53 Director Stephen E. Coit...................... 51 Director Edwin M. Kania, Jr................... 42 Director Lester John Lloyd.................... 63 Director Terrance G. McGuire.................. 43 Director Donald R. Stanski, M.D............... 49 Director
Nassib G. Chamoun is a founder of Aspect and has served as a director of Aspect since 1987. Mr. Chamoun has served as President of Aspect since 1996 and Chief Executive Officer since 1995. Mr. Chamoun served as Chairman of the Board of Directors from 1987 to 1996 and as Chief Scientific Officer from 1991 to 1995. Mr. Chamoun also served as President and Chief Executive Officer prior to 1995 at various times since founding Aspect in 1987. From 1984 to 1987, Mr. Chamoun was a fellow in cardiovascular physiology at the Lown Cardiovascular Laboratory of the Harvard School of Public Health. Mr. Chamoun earned a bachelors degree in Electrical Engineering from Northeastern University and a masters degree in Computer Engineering from Boston University. J. Breckenridge Eagle has served as a director of Aspect from 1988 to 1991 and from 1996 to the present. Mr. Eagle has served as Chairman of the Board of Directors since November 1996. He served as President and Chief Operating Officer of Aspect in 1996 and served as a consultant to Aspect in 1995. From 1989 to 1995, he served as President of ECS, Inc., a medical practice management company, which he founded in 1989. From 1981 to 1988, he served as Chief Financial Officer, Vice President and General Manager of The Health Data Institute, Inc., a health care services company, which he co-founded. Mr. Eagle earned a bachelors degree in Psychology and a masters degree in Public Health from Yale University and received a masters degree in Business Administration from Harvard Business School. J. Neal Armstrong has served as Vice President, Chief Financial Officer and Secretary of Aspect since 1996. From 1990 to 1996, he served as Vice President of Finance, Chief Financial Officer and a director of Haemonetics, Inc., a manufacturer of blood processing systems. From 1985 to 1990, he served as Vice President of Finance and Administration, Treasurer and Chief Financial Officer at BTU International, a manufacturer of thermal processing systems. He previously served for 14 years in senior operating and financial positions at Texas Instruments, Inc., an electronics company. Mr. Armstrong holds a bachelors degree in Business Administration from the University of Texas and is a certified public accountant. Jeffrey L. Barrett has served as Vice President of Manufacturing and Operations of Aspect since 1997. From 1996 to 1997, he served as Vice President of Manufacturing at Aksys, Ltd., a developer of dialysis equipment. From 1989 to 1996, Mr. Barrett served in a variety of manufacturing and operating positions at Haemonetics, Inc., serving most recently as its Vice President of Operations. Mr. Barrett received a bachelors 45 47 degree in Economics and Industrial Engineering from Rutgers University and a masters degree in Business Administration from Boston University. Philip H. Devlin has served as Vice President of Research and Development of Aspect since 1994 and served as Director of Product Development of Aspect from 1990 to 1994. From 1984 to 1985 and 1986 to 1990, he served as Software Engineer and Manager of Software Engineering at Lifeline Systems, Inc., a medical products and communications company. From 1980 to 1984, he served as Chief Biomedical Engineer at Beth Israel Hospital in Boston, Massachusetts and from 1985 to 1986, he served as Technical Marketing Engineer in the Medical Product Group of Hewlett-Packard Company, a manufacturer of computers and medical devices. Mr. Devlin holds a bachelors and masters degree in Electrical Engineering from Northeastern University. Steven H. Kane has served as Vice President of Sales and Field Operations of Aspect since 1997. From 1990 to 1997, he was employed by Pyxis Corp., a medical technology company, serving as Area Vice President, Sales and Operations, Northeast United States, from 1992 to 1997. From 1983 to 1990, he was employed by IVAC Corporation, a manufacturer of infusion therapy and vital signs monitoring technology owned by Eli Lilly and Company, serving as Regional Manager, Northeastern United States, from 1988 to 1990. Paul J. Manberg has served as Vice President of Clinical, Regulatory and Quality Assurance of Aspect since 1991. From 1984 to 1990, he served in a variety of clinical research positions at Serono Laboratories, a pharmaceutical company, most recently as Vice President, Research and Development. From 1979 to 1984, he served as a Clinical Research Scientist at Burroughs -- Wellcome Company, a pharmaceutical company, and served as an Adjunct Research Scientist at the University of North Carolina. Dr. Manberg received a bachelors degree in Biological Sciences from the State University of New York at Binghamton and a doctorate in Pharmacology from the University of North Carolina at Chapel Hill. Jean M. Nelson has served as Vice President of Marketing of Aspect since 1995 and served as Director of Marketing of Aspect from 1992 to 1995. From 1988 to 1992, she was employed by Nellcor Incorporated, a medical device company, serving from 1990 to 1992 as Manager of Advanced Technologies, from 1989 to 1990 as Multi-Function Monitor Group Manager and from 1988 to 1989 as New Products Manager. From 1984 to 1988, Ms. Nelson served as a consultant with Bain and Company, Inc., a strategic management consulting firm. Ms. Nelson earned a bachelors degree in Metallurgy and Materials Engineering from Lehigh University and a masters degree in Business Administration from the University of Chicago Graduate School of Business. Helgert van Raamt has served as Vice President and Managing Director -- International of Aspect since November 1998. From April 1990 to October 1998, Mr. van Raamt held several positions with Mallinckrodt, Inc., a specialty chemicals and healthcare company, and its predecessor entities, Nellcor Puritan Bennett, Inc. and Nellcor Incorporated. From February 1998 to October 1998, Mr. van Raamt served as Mallinckrodt's Vice President and Managing Director, Europe and as a member of Mallinckrodt's General Management Committee. From August 1996 to February 1998, Mr. van Raamt served as Vice President and Managing Director of Nellcor Puritan Bennett. From July 1995 to August 1996, Mr. van Raamt was Director of Sales and Marketing at Nellcor Puritan Bennett, and from April 1990 to July 1995, he held a variety of positions at Nellcor Incorporated, including General Manager Europe North, Middle East, and Africa and Director of Sales and Marketing. Mr. van Raamt studied mechanical engineering at the Technical University of Twente in The Netherlands. Boudewijn L.P.M. Bollen has served as a director of Aspect since November 1998. Since November 1998, he has been a self-employed consultant. From June 1998 to October 1998, Mr. Bollen served as President -- International of Aspect. From 1986 to June 1998, Mr. Bollen held several positions with Mallinckrodt, Inc. and predecessor entities, including Executive Vice President for Worldwide Sales, Service and Distribution, Vice President of European Sales and Marketing and Vice President and Managing Director for Europe. From 1981 to 1986, Mr. Bollen served as Vice President of Marketing and Sales in Europe for Bentley Laboratories, Inc., a manufacturer of specialized monitoring and medical equipment. Mr. Bollen 46 48 holds the equivalent of a bachelors degree in Hotel Business Management from the Hotel Business School in Maastricht, Holland. Stephen E. Coit has served as a director of Aspect since 1987. He has been a self-employed artist since 1997. From 1995 to 1997, Mr. Coit served as a general partner of Charles River Ventures, a venture capital firm. From 1984 to 1994, Mr. Coit served as a general partner of Merrill, Pickard, Anderson & Eyre, a venture capital firm. Since 1989, Mr. Coit has also served as a director of International Data Group, a provider of media research and conferences to the information technology industry. Edwin M. Kania, Jr. has served as a director of Aspect since 1995. Mr. Kania is a founding general partner of OneLiberty Ventures, a venture capital firm. Previously, he was a general partner at a predecessor firm, Morgan Holland Ventures, which he joined in 1985. Lester John Lloyd has served as a director of Aspect from 1991 to April 1995 and from November 1995 to the present. He served as President and Chairman of Aradigm, Inc., a medical device company, from 1992 to 1997. Mr. Lloyd was a founder and served as Chief Executive Officer of Nellcor Incorporated from 1981 to 1990. Terrance G. McGuire has served as a director of Aspect since 1997. He was a founder and has been a general partner of Polaris Venture Partners, Inc., a venture capital firm, since June 1996. Since 1992, Mr. McGuire has served as general partner of Burr, Egan, Deleage & Co., a venture capital firm, and since 1988, he has served as general partner of Beta Partners, a venture capital firm. Mr. McGuire is also a director of Akamai Technologies, Inc. and deCode Genetics, Inc. Donald R. Stanski has served as a director of Aspect since 1996. Dr. Stanski has been a professor of anesthesia and medicine (Clinical Pharmacology) at Stanford University since 1979 and is an anesthesiologist/clinical pharmacologist. He served as Chair of the Department of Anesthesia at Stanford University from 1992 to 1997. Dr. Stanski received his medical degree from the University of Calgary, Canada, and his anesthesiology training at the Massachusetts General Hospital. Pursuant to the terms of a voting agreement, certain stockholders of Aspect have the right to nominate persons as their representatives on the board of directors. Each of the current directors has been nominated to serve as a director pursuant to this agreement. This agreement will terminate concurrently with the closing of this offering. BOARD OF DIRECTORS The board of directors is currently fixed at eight members. Following this offering, the board of directors will be divided into three classes, each of whose members will serve for a staggered three-year term. The board of directors will consist of three Class I Directors (Messrs. Coit and McGuire and Dr. Stanski), three Class II Directors (Messrs. Bollen, Eagle and Kania) and two Class III Directors (Messrs. Chamoun and Lloyd). At each annual meeting of stockholders, a class of directors will be elected for a three-year term to succeed the directors of the same class whose terms are then expiring. The terms of the Class I Directors, Class II Directors and Class III Directors expire upon the election and qualification of successor directors at the annual meeting of stockholders held during the calendar years 2000, 2001 and 2002, respectively. In addition, Aspect's by-laws provide that the authorized number of directors may be changed only by resolution of the board of directors or by the stockholders. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes, so that, as nearly as possible, each class will consist of one-third of the total number of directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of Aspect. Each executive officer is elected by, and serves at the discretion of, the board of directors. Each of Aspect's officers and directors, other than nonemployee directors, devotes his or her full time to the affairs of Aspect. There are no family relationships among any of the directors or officers of Aspect. 47 49 COMPENSATION OF DIRECTORS We reimburse non-employee directors for reasonable out-of-pocket expenses incurred in attending meetings of the board of directors or of any committee of the board of directors. No director who is also an employee of Aspect receives separate compensation for services rendered as a director. In addition, Aspect's non-employee directors are eligible to receive stock options under Aspect's 1998 Director Stock Option Plan. On June 15, 1998, Mr. Bollen received a stock option to purchase 40,000 shares of common stock in connection with his employment with Aspect. In November 1998, Mr. Bollen ceased to be an employee of Aspect and was elected to the board of directors. In accordance with the original terms of his stock option agreement, the option will continue to vest monthly over four years for so long as Mr. Bollen continues to serve as a director of Aspect. The option has an exercise price of $4.20. 1998 Director Stock Option Plan. Our 1998 Director Stock Option Plan was initially adopted by our board of directors and stockholders in February 1998. Under the terms of the director plan, our directors who are not our employees are eligible to receive nonstatutory options to purchase shares of common stock. A total of 100,000 shares of common stock may be issued upon exercise of options granted under the director plan. On October 5, 1999, our board of directors approved an amendment, subject to stockholder approval, to increase to 200,000 shares of common stock the number of shares that may be issued upon exercise of options granted under the director plan. The amendment was approved by our stockholders in December 1999. As of December 31, 1999, options to purchase an aggregate of 55,000 shares of common stock at a weighted average exercise price of $4.94 were outstanding under the director plan. Pursuant to the director plan, on April 14, 1998, each non-employee director (other than Messrs. Bollen and Lloyd and Dr. Stanski) received an initial option to purchase 10,000 shares of our common stock. Each person who first becomes a non-employee director after that initial grant date is eligible to receive an option to purchase 10,000 shares of our common stock on the date of his or her initial election to the board of directors. In addition, on May 3, 1999, the following non-employee directors received additional options to purchase 5,000 shares of our common stock: Messrs. Coit, Kania, Lloyd and McGuire and Dr. Stanski. Upon completion of this offering, each non-employee director will be eligible to receive an additional option to purchase 5,000 shares of our common stock on the date of each annual meeting of stockholders, commencing with the 2000 annual meeting of stockholders. Each non-employee director will be eligible to receive additional options if he or she is serving as a director immediately prior to the annual meeting of stockholders and continues to serve immediately following that annual meeting of stockholders and if the grant date of that additional option is at least six months after the non-employee director receives an initial option. In July 1998, the board of directors adopted an amendment to the director plan to provide that options held by non-employee directors would vest and become fully exercisable upon a change of control event or acquisition event of Aspect, each as defined in the director plan. In August 1998, our stockholders approved this amendment. The exercise price per share of initial options that were granted on April 14, 1998 is $2.80 and the exercise price per share of the additional options granted on May 3, 1999 is $7.50. The exercise price of any other initial options and of any additional options will be the closing price per share of our common stock on the date of grant. Initial options are exercisable as to one-half of the shares as of the date of grant and as to one-sixth of the shares on the first, second and third anniversaries of the date of grant, provided that the optionee continues to serve as a director. Additional options are exercisable in three equal annual installments on each of the first, second and third anniversaries of the date of grant, provided that the optionee continues to serve as a director. Options granted under the director plan terminate on the earlier of ten years from the date of grant or sixty days after the optionee ceases to serve as a director (180 days after the optionee ceases to serve as a director if due to death or disability). 48 50 BOARD COMMITTEES Aspect has a standing audit committee and compensation committee of the board of directors. The audit committee reviews the results and scope of audits and other services provided by Aspect's independent accountants. The audit committee also reviews Aspect's system of internal accounting and financial controls. The audit committee consists of Messrs. Lloyd and Kania. The compensation committee of the board of directors reviews and recommends to the Board the compensation and benefits of all executive officers of Aspect, administers Aspect's stock option plan and establishes and reviews general policies relating to compensation and benefits of employees of Aspect. The compensation committee consists of Mr. Coit and Dr. Stanski. No interlocking relationships exist between Aspect's board of directors or compensation committee and the board of directors or compensation committee of any other company. EXECUTIVE COMPENSATION The table below sets forth the total compensation paid or accrued for the fiscal years ended December 31, 1999, 1998 and 1997 for our Chief Executive Officer and each of our four other most highly compensated executive officers, who received annual compensation in excess of $100,000 for the fiscal year ended December 31, 1999, collectively referred to below as our named executive officers. In accordance with the rules of the Securities and Exchange Commission, the compensation set forth in the table below does not include medical, group life or other benefits which are available to all of our salaried employees, and perquisites and other benefits, securities or property which do not exceed the lesser of $50,000 or 10% of the person's salary and bonus shown in the table. In the table below, columns required by the regulations of the SEC have been omitted where no information was required to be disclosed under those columns. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION ------------ ------------------- NUMBER OF SECURITIES NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS - --------------------------- ---- ------ ----- -------------------- Nassib G. Chamoun...................................... 1999 $200,000 50,000 Chief Executive Officer and President 1998 $190,000 $63,250 110,000 1997 $170,000 $40,000 200,000 J. Breckenridge Eagle.................................. 1999 $175,350 25,000 Chairman of the Board of Directors 1998 $167,000 $41,750 74,500 1997 $157,500 $27,565 -- J. Neal Armstrong...................................... 1999 $171,150 25,000 Vice President, Chief Financial Officer 1998 $163,000 $40,750 37,500 and Secretary 1997 $153,750 $26,910 70,000 Steven H. Kane......................................... 1999 $181,125 38,750 Vice President of Sales and Field Operations 1998 $172,000 $80,935 28,750 1997 $127,153 $58,648 180,000 Paul J. Manberg........................................ 1999 $153,300 20,000 Vice President of Clinical, Regulatory 1998 $146,000 $32,850 27,500 and Quality Assurance 1997 $137,500 $24,065 50,000
- ------------ Mr. Kane commenced employment with us on April 1, 1997 and received a salary for only nine months of the year ended December 31, 1997. Annual compensation for 1997 and 1998 includes bonuses paid or accrued for services rendered in those years. Aspect has not yet determined bonuses for services rendered in 1999. 49 51 OPTION GRANTS IN LAST FISCAL YEAR The table below sets forth grants of stock options to our named executive officers. The exercise price per share of each option was equal to the fair market value of the common stock on the date of grant as determined by the board of directors. The potential realizable value is calculated based on the term of the option at its time of grant, which is 10 years. It is calculated assuming that the fair market value of common stock on the date of grant appreciates at the indicated annual rate compounded annually for the entire term of the option and that the option is exercised and sold on the last day of its term for the appreciated stock price. These numbers are calculated based on the requirements of the SEC and do not reflect our estimate of future stock price growth. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS POTENTIAL -------------------------------------------------- REALIZABLE PERCENT OF VALUE AT ASSUMED TOTAL ANNUAL RATES NUMBER OF OPTIONS OF STOCK SECURITIES GRANTED TO PRICE APPRECIATION UNDERLYING EMPLOYEES EXERCISE OR FOR OPTION TERM OPTIONS IN FISCAL BASE PRICE EXPIRATION ------------------- NAME GRANTED YEAR PER SHARE DATE 5% 10% - ---- ---------- ---------- ----------- ---------- -- --- Nassib G. Chamoun............ 50,000 5.2% $10.20 10/5/09 $320,736 $812,809 J. Breckenridge Eagle........ 25,000 2.6% $10.20 10/5/09 $160,368 $406,404 J. Neal Armstrong............ 25,000 2.6% $10.20 10/5/09 $160,368 $406,404 Steven H. Kane............... 12,500 1.3% $ 6.00 3/9/09 $ 47,167 $119,531 6,250 .7% $ 7.50 5/14/09 $ 29,479 $ 74,707 20,000 2.1% $10.20 10/5/09 $128,295 $325,123 Paul J. Manberg.............. 20,000 2.1% $10.20 10/5/09 $128,295 $325,123
- ------------ The dates of exercisability of the options are determined in accordance with their respective vesting schedules. OPTION EXERCISES AND YEAR-END OPTION VALUES The table below sets forth information regarding exercisable and unexercisable stock options held as of December 31, 1999 by our named executive officers. There was no public trading market for our common stock as of December 31, 1999. Accordingly, the value of unexercised in-the-money options at fiscal year end has been calculated by determining the difference between the exercise price per share and the fair market value of our common stock at fiscal year end, $10.20, as determined by our board of directors. FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS SHARES OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- Nassib G. Chamoun........ -- -- 124,583 193,750 $1,030,830 $1,117,500 J. Breckenridge Eagle.... -- -- 32,563 66,937 $ 221,278 $ 277,522 J. Neal Armstrong........ -- -- 43,230 74,687 $ 358,548 $ 387,372 Steven H. Kane........... -- -- 16,771 50,729 $ 116,458 $ 176,667 Paul J. Manberg.......... -- -- 41,563 55,937 $ 355,628 $ 279,372
STOCK PLANS Amended and Restated 1991 Stock Option Plan. Our Amended and Restated 1991 Stock Option Plan was initially adopted by the board of directors and approved by our stockholders in April 1991. As of December 31, 1999, 3,360,000 shares of common stock were authorized for issuance upon exercise of 50 52 outstanding options under this plan and options to purchase an aggregate of 1,521,356 shares of common stock at a weighted average exercise price of $2.05 per share were outstanding under this plan. This plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock and other stock-based awards. Our officers, employees, directors, consultants and advisors are eligible to receive awards under this plan. Under present law, however, incentive stock options may only be granted to employees. No employee may receive any award for more than 200,000 shares in any calendar year. Optionees receive the right to purchase a specified number of shares of common stock at a specified option price and subject to any other terms and conditions specified in connection with the option grant. We may grant options at an exercise price which may be less than, equal to or greater than the fair market value of our common stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise price less than the fair market value of our common stock on the date of grant, or less than 110% of the voting power of all shares of our capital stock. The plan permits the board of directors to determine how optionees may pay the exercise price of their options, including through payment by cash, check or in connection with a "cashless exercise" through a broker, by surrender to us of shares of common stock, by delivery to us of a promissory note, or by any combination of the permitted forms of payment. Our board of directors administers the plan. Our board of directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the plan and to interpret its provisions. It may delegate authority under the plan to one or more committees of the board of directors and, subject to certain limitations, to one or more of our executive officers. Our board of directors has authorized our compensation committee to administer the plan, including the granting of options to our executive officers. Subject to any applicable limitations contained in the plan, our board of directors, our compensation committee or any other committee or executive officer to whom our board of directors delegates authority, as the case may be, selects the recipients of awards and determines: - the number of shares of common stock covered by options and the dates upon which these options become exercisable, - the exercise price of options, - the duration of options, and - the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of these awards, including our conditions for repurchase, issue price and repurchase price. No award may be granted under the plan after April 1, 2001, but the vesting and effectiveness of awards previously granted may extend beyond that date. Our board of directors may at any time amend, suspend or terminate the plan, except that no award granted after an amendment of the plan and designated as subject to Section 162(m) of the Internal Revenue Code by the board of directors will become exercisable, realizable or vested (to the extent that amendment was required to grant that award) unless and until the amendment is approved by our stockholders. 1998 Stock Incentive Plan. Our 1998 Stock Incentive Plan was initially adopted by the board of directors and approved by our stockholders in July 1998. The 1998 Stock Incentive Plan is intended to replace the 1991 plan. Up to 2,100,000 shares of common stock, subject to adjustment in the event of stock splits and other similar events, may be issued pursuant to awards granted under the plan. On October 5, 1999, our board of directors approved an amendment to the plan to increase to 3,000,000 the number of shares that may be issued pursuant to awards granted under this plan. The amendment was approved by our stockholders in December 1999. As of December 31, 1999, options to purchase an aggregate of 1,119,324 shares of common stock at a weighted average exercise price of $8.05 were outstanding under this plan. 51 53 This plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options, restricted stock awards and other stock-based awards. Our officers, employees, directors, consultants and advisors are eligible to receive awards under this plan. Under present law, however, incentive stock options may only be granted to employees. No employee may receive any award for more than 250,000 shares in any calendar year. Optionees receive the right to purchase a specified number of shares of common stock at a specified option price and subject to any other terms and conditions specified in connection with the option grant. We may grant options at an exercise price which may be less than, equal to or greater than the fair market value of our common stock on the date of grant. Under present law, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Internal Revenue Code may not be granted at an exercise price less than the fair market value of our common stock on the date of grant (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of all shares of our capital stock). The plan permits the board of directors to determine how optionees may pay the exercise price of their options, including through payment by cash, check or in connection with a "cashless exercise" through a broker, by surrender to us of shares of common stock, by delivery to us of a promissory note, or by any combination of the permitted forms of payment. Our board of directors administers this plan. Our board of directors has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the plan and to interpret its provisions. It may delegate authority under the plan to one or more committees of the board of directors and, subject to certain limitations, to one or more of our executive officers. Our board of directors has authorized our compensation committee to administer this plan, including the granting of options to our executive officers. Subject to any applicable limitations contained in the plan, our board of directors, our compensation committee or any other committee or executive officer to whom our board of directors delegates authority, as the case may be, selects the recipients of awards and determines: - the number of shares of common stock covered by options and the dates upon which these options become exercisable, - the exercise price of options, - the duration of options and - the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of these awards, including the conditions for repurchase, issue price and repurchase price. The 1998 Stock Incentive Plan provides that, unless otherwise specified, in the event of a merger, liquidation or other acquisition event, as defined in the plan, our board of directors is authorized to: - cause all options to be assumed by the acquiring company, - in the case of a cash acquisition, cause all options to be accelerated and the acquiring company to pay cash to the optionees equal to their spread, and - in the case of stock options and restricted stock that do not become fully exercisable upon an acquisition event, - cause those options to be accelerated in full, and/or - cause all restricted stock awards to become free of all restrictions. No award may be granted under the plan after June 2008, but the vesting and effectiveness of awards previously granted may extend beyond that date. Our board of directors may at any time amend, suspend or terminate the plan, except that no award granted after an amendment of the plan and designated as subject to Section 162(m) of the Internal Revenue Code by the board of directors shall become exercisable, realizable or vested, to the extent that amendment was required to grant that award, unless and until the amendment is approved by our stockholders. 52 54 1998 Director Stock Option Plan. Our 1998 Director Stock Option Plan was adopted by our board of directors and approved by our stockholders in February 1998. Under the terms of the director plan, directors who are not our employees are eligible to receive nonstatutory options to purchase shares of common stock. A total of 100,000 shares of common stock may be issued upon exercise of options granted under the director plan. On October 5, 1999, our board of directors approved an amendment to increase to 200,000 shares of common stock the number of shares that may be issued upon exercise of options granted under the director plan. The amendment was approved by our stockholders in December 1999. As of December 31, 1999, options to purchase an aggregate of 55,000 shares of common stock at a weighted average exercise price of $4.94 were outstanding under the director plan. For more information about the director plan, see "-- Compensation of Directors." 1999 Employee Stock Purchase Plan. Our 1999 Employee Stock Purchase Plan was adopted by our board of directors on October 5, 1999 and was approved by the stockholders in December 1999, to be effective upon the closing of this offering. The purchase plan provides for the issuance of a maximum of 300,000 shares of common stock to participating employees. The purchase plan will be administered by the compensation committee. All of our employees, including our directors who are employees, whose customary employment is for more than 20 hours per week and for more than five months in any calendar year, are eligible to participate in the purchase plan. Employees who would own 5% or more of the total combined voting power or value of our capital stock immediately after the grant may not participate in the purchase plan. To participate in the purchase plan, an employee must authorize us to deduct from one percent to 10 percent of his or her base pay during the offering period. The exercise price for the option granted in each payment period is 85% of the lesser of the last reported sale price of the common stock on the first or last business day of the payment period. No options have been granted to date under the purchase plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of the compensation committee of the board of directors are Mr. Coit and Dr. Stanski. No executive officer of Aspect has served as a director or member of the compensation committee, or other committee serving an equivalent function, of any other entity, any of whose executive officers served as a director of or member of the compensation committee of the board of directors. 53 55 RELATED-PARTY TRANSACTIONS PREFERRED STOCK ISSUANCES Series B-1 Financing. In October 1995, investors, including One Liberty Fund III, L.P., Charles River Partnership VII, Limited Partnership, New Enterprise Associates IV, Limited Partnership and Catalyst Ventures, Limited Partnership, made bridge loans to us in the aggregate amount of $500,000 in exchange for promissory notes. In November 1995 and June 1996, we sold an aggregate of 3,800,428 shares of our Series B-1 preferred stock to a group of existing and new investors, including Messrs. J. Breckenridge Eagle, the Chairman of the Board of Directors, and J. Neal Armstrong, Vice President, Chief Financial Officer and Secretary of Aspect, One Liberty, Charles River, New Enterprise Associates and Catalyst, at a purchase price of $2.00 per share for an aggregate purchase price of approximately $7.6 million. The purchase price was paid, in part, by the cancellation and conversion of the promissory notes. Mr. Kania, a director of Aspect, is a general partner of One Liberty Partners III, L.P., which is the general partner of One Liberty. Mr. Coit, a director of Aspect, served as a general partner of Charles River at the time that Charles River purchased these securities from us. Series C Financing. In February 1997, August 1997 and October 1997, we sold an aggregate of 3,439,949 shares of our Series C preferred stock to a group of existing and new investors, including Messrs. Eagle and Armstrong, Jeffrey L. Barrett, Vice President of Manufacturing and Operations of Aspect, and Stephen H. Kane, Vice President of Sales and Field Operations of Aspect, One Liberty, Charles River, New Enterprise Associates, Orchid & Co., nominee for T. Rowe Price Threshold Fund III, L.P., Merrill, Pickard, Anderson & Eyre IV Limited Partnership, Polaris Venture Partners, L.P. and Polaris Venture Partners Founders' Fund, L.P., at a purchase price of $3.75 per share for an aggregate purchase price of approximately $12.9 million. Mr. Jordan, who served as a director of Aspect until August 1999, is a Vice President of T. Rowe Price Associates, Inc., the general partner of T. Rowe Price. Mr. McGuire, a director of Aspect, is a member of Polaris Venture Management Co., LLC, which is a general partner of Polaris Venture Partners and Polaris Venture Founders' Fund. Series D Financing. In February 1998, we sold an aggregate of 1,666,234 shares of our Series D preferred stock to a group of existing and new investors, including Messrs. Armstrong, Kane, Coit and Lester John Lloyd, a director of Aspect, One Liberty, Charles River, T. Rowe Price, Polaris Venture Partners, Polaris Venture Partners Founders' Fund and Merrill Pickard, at a purchase price of $7.00 per share for an aggregate purchase price of approximately $11.7 million. Series E Financing. In December 1998, we sold an aggregate of 1,753,729 shares of our Series E preferred stock and warrants to purchase an aggregate of 192,902 shares of our common stock to a group of existing and new investors, including a trust for which Mr. Lloyd is a trustee, One Liberty, Charles River, T. Rowe Price, Polaris Venture Partners, Polaris Venture Founders' Fund and QuestMark Partners, L.P., at a purchase price of $10.00 per unit for an aggregate purchase price of approximately $17.5 million. The warrants have an exercise price of $12.50 per share. LOANS TO EXECUTIVE OFFICERS In February 1997, we entered into a pledge agreement with Nassib Chamoun, our Chief Executive Officer and President, pursuant to which we loaned to Mr. Chamoun $68,214, on a full recourse basis, representing 90% of the aggregate exercise price of certain options exercised by Mr. Chamoun. Mr. Chamoun pledged 341,068 of the 378,964 shares of restricted common stock issued upon exercise of these options as collateral for the loan. The loan bears interest at 8% per annum. As of December 31, 1999, $60,634 of the principal amount of the loan plus accrued interest was outstanding. In May 1997, we loaned $80,000 to Mr. Chamoun. The loan is represented by two promissory notes and is secured by a security interest in securities of Aspect owned by Mr. Chamoun. The loan bears interest at 6.42% per annum. As of December 31, 1999, $65,927 of the principal amount of the loan plus accrued interest was outstanding. 54 56 In May 1997, we entered into a pledge agreement with Mr. Kane, pursuant to which we loaned Mr. Kane $60,750, on a full recourse basis, representing 90% of the aggregate exercise price of certain options exercised by Mr. Kane. Mr. Kane pledged the 180,000 shares of restricted common stock issued upon exercise of these options as collateral for the loan. The loan bears interest at 8% per annum. As of December 31, 1999, $54,000 of the principal amount of the loan plus accrued interest was outstanding. In the event that Mr. Kane ceases to be employed by us, we will have the right, for 90 days after that termination of employment, to purchase from Mr. Kane, for a repurchase price equal to the original exercise price of $0.375 per share, up to the number of shares which have not yet vested. As of December 31, 1999, 60,000 shares of common stock were subject to repurchase by us. In September 1997, we loaned $27,000 to Mr. Barrett. The loan is evidenced by a promissory note and bears interest at 8% per annum. As of December 31, 1999, $11,813 of the principal amount of the loan plus accrued interest was outstanding. Pursuant to the terms of the promissory note, on each of September 24, 1998 and 1999 we forgave the payment by Mr. Barrett of $8,152 and that amount was considered and treated as compensation to Mr. Barrett by us. In addition, pursuant to the terms of the promissory note, in the event that Mr. Barrett is employed by us on each of September 24, 2000 and 2001, respectively, we will forgive the payment by Mr. Barrett of $8,152 on each of those date and those amounts will be considered and treated as compensation to Mr. Barrett by us. In April 1998, we entered into a pledge agreement with Mr. Barrett, pursuant to which we loaned to Mr. Barrett $63,000, on a full recourse basis, representing 90% of the aggregate exercise price of certain options exercised by Mr. Barrett. Mr. Barrett pledged the 87,500 shares of restricted common stock issued upon exercise of these options as collateral for the loan. The loan bears interest at 8% per annum. As of December 31, 1999, the entire principal amount of the loan plus accrued interest was outstanding. In the event that Mr. Barrett ceases to be employed by us, we will have the right, for 90 days after that termination of employment, to purchase from Mr. Barrett, for a repurchase price equal to the original exercise price of $0.80 per share, up to the number of shares which have not yet vested. As of December 31, 1999, 36,458 shares of common stock were subject to repurchase by us. In November 1998, we entered into a pledge agreement with Mr. Chamoun, pursuant to which we loaned Mr. Chamoun $33,334, on a full recourse basis. Mr. Chamoun pledged 41,667 shares of common stock as collateral for this loan. The loan bears interest at 8% per annum. As of December 31, 1999, the entire principal amount of the loan plus accrued interest was outstanding. We have adopted a policy providing that all material transactions between us and our officers, directors and other affiliates must be: - approved by a majority of the members of our board of directors and by a majority of the disinterested members of our board of directors, and - on terms no less favorable to us than could be obtained from unaffiliated third parties. 55 57 PRINCIPAL STOCKHOLDERS The following table sets forth information regarding beneficial ownership of our common stock as of December 31, 1999, and as adjusted to reflect the sale of the shares of common stock in this offering, by: - each person who owns beneficially more than 5% of the outstanding shares of our common stock, - each of our directors and the named executive officers, and - all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares. Shares of common stock issuable under stock options that are exercisable within 60 days after December 31, 1999 or issuable pursuant to outstanding warrants that may be exercised upon completion of this offering are deemed outstanding for computing the percentage ownership of the person holding the options or warrants but are not deemed outstanding for computing the percentage ownership of any other person. Unless otherwise indicated below, to our knowledge, all persons named in the table have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under community property laws. Unless otherwise indicated, the address of each person owning more than 5% of the outstanding shares of common stock is c/o Aspect Medical Systems, Inc., Two Vision Drive, Natick, Massachusetts 01760. The percentage of common stock outstanding reflects the conversion, upon the closing of this offering, of all outstanding shares of preferred stock into an aggregate of 11,067,238 shares of common stock. The number of shares of common stock deemed outstanding after this offering includes the 3,000,000 shares of common stock being offered for sale in this offering but assumes no exercise of the underwriters' over-allotment option.
SECURITIES BENEFICIALLY OWNED SECURITIES TO BE BENEFICIALLY PRIOR TO OFFERING OWNED AFTER OFFERING ---------------------------------------- ---------------------------------------- NUMBER PERCENT NUMBER PERCENT ------------------------------ ------- ------------------------------ ------- STOCK OPTIONS WARRANTS STOCK OPTIONS WARRANTS --------- ------- -------- --------- ------- -------- 5% STOCKHOLDERS Charles River Partnership VII, Limited Partnership........................... 1,585,953 -- 550 12.3% 1,585,953 -- 550 10.0% 1000 Winter Street, Suite 3300 Waltham, MA 02154 One Liberty Fund III, L.P.(1)........... 1,530,596 -- 275 11.9 1,530,596 -- 275 9.6 OneLiberty Ventures One Liberty Square Boston, MA 02109 Polaris Venture Partners, L.P.(2)....... 1,012,143 -- 549 7.9 1,012,143 -- 549 6.4 Bay Colony Corporate Center 1000 Winter Street, Suite 3350 Waltham, MA 02154 QuestMark Partners, L.P.(3)............. 825,000 -- 90,750 7.1 825,000 -- 90,750 5.7 QuestMark Advisers, LLC One South Street, Suite 800 Baltimore, MD 21202 New Enterprise Associates IV, Limited Partnership(4)........................ 654,493 -- -- 5.1 654,493 -- -- 4.1 1119 St. Paul Street Baltimore, MD 21202 Orchid & Co., Nominee for T. Rowe Price Threshold Fund III, L.P.(5)........... 643,382 -- 2,750 5.0 643,382 -- 2,750 4.1 T. Rowe Price Assoc. Inc. 100 East Pratt Baltimore, MD 21202 DIRECTORS AND NAMED EXECUTIVE OFFICERS Nassib G. Chamoun(6).................... 375,490 145,833 -- 4.0% 375,490 145,833 -- 3.3% J. Breckenridge Eagle(7)................ 210,447 40,347 -- 1.9 210,447 40,347 -- 1.6 Lester John Lloyd(8).................... 47,974 6,667 71 * 47,974 6,667 71 * Stephen E. Coit......................... 3,572 6,666 -- * 3,572 6,666 -- * Edwin M. Kania, Jr.(9).................. 1,530,596 6,666 275 11.9 1,530,596 6,666 275 9.7 Donald R. Stanski....................... 20,000 34,000 -- * 20,000 34,000 -- *
56 58
SECURITIES BENEFICIALLY OWNED SECURITIES TO BE BENEFICIALLY PRIOR TO OFFERING OWNED AFTER OFFERING ---------------------------------------- ---------------------------------------- NUMBER PERCENT NUMBER PERCENT ------------------------------ ------- ------------------------------ ------- STOCK OPTIONS WARRANTS STOCK OPTIONS WARRANTS --------- ------- -------- --------- ------- -------- Terrance McGuire(10).................... 1,012,143 6,666 549 7.9 1,012,143 6,666 549 6.4 J. Neal Armstrong....................... 173,155 51,876 -- 1.7 173,155 51,876 -- 1.4 Steven H. Kane.......................... 210,239 22,084 -- 1.8 210,239 22,084 -- 1.5 Paul J. Manberg(11)..................... 77,636 48,124 -- 1.0 77,636 48,124 -- * Boudewijn L.P.M. Bollen................. -- 17,500 -- * -- 17,500 -- * All current executive officers and directors as a group (15 persons)(12)(13)...................... 3,913,861 496,116 895 33.0 3,913,861 496,116 895 26.9
- ------------ * Less than 1% of the outstanding common stock. (1) Mr. Kania, a director of Aspect, is a general partner of One Liberty Partners III, L.P., a general partner of One Liberty. Mr. Kania disclaims beneficial ownership of the shares held by One Liberty, except to the extent of his pecuniary interest therein. (2) Includes 55,111 shares held by Polaris Venture Partners Founders' Fund and 31 shares of common stock subject to a warrant exercisable by Polaris Venture Partners Founders' Fund upon completion of this offering. North Star Ventures directly or indirectly provides investment advisory services to various venture capital funds, including Polaris Venture Partners and Polaris Venture Partners Founders' Fund. The general partner of these funds exercises sole voting and investment power with respect to the shares held by the funds. The principals of North Star Ventures, including Mr. McGuire, a director of Aspect, are members of Polaris Venture Management Co., L.L.C. (the general partner of both Polaris Venture Partners and Polaris Venture Partners Founders' Fund). As a member of the general partner, Mr. McGuire may be deemed to share voting and investment power for the shares held by the funds. Mr. McGuire disclaims beneficial ownership of all shares held by all of these funds except to the extent of his proportionate pecuniary interests therein. (3) Includes 186,661 shares held by QuestMark Partners Side Fund, L.P. and 20,537 shares of common stock subject to a warrant exercisable by QuestMark Partners Side Fund upon completion of this offering. (4) Includes 154,203 shares held by Catalyst. New Enterprise Associates is a general partner of Catalyst and may be deemed to share voting and investment power with respect to the shares held by Catalyst. (5) Includes 5,000 shares of common stock held by T. Rowe Price Threshold Fund Associates, Inc. Mr. Jordan, a former director of Aspect, is a Vice President of T. Rowe Price Associates, Inc., the general partner of T. Rowe Price. Mr. Jordan disclaims beneficial ownership of the shares by T. Rowe Price, except to the extent of his pecuniary interest therein. (6) Includes 50,000 shares of common stock held by The Nassib G. Chamoun 1998 Irrevocable Trust, of which Mr. Chamoun disclaims beneficial ownership. (7) Includes 35,000 shares of common stock held by Jeanne Warren Eagle as Trustee for the Trust for John Warren Eagle, of which Mr. Eagle disclaims beneficial ownership. (8) Includes 652 shares of common stock held by Lester John Lloyd and/or Lynne Dewar Lloyd, Trustees or Successor Trustees under the Lloyd Trust U/A/D 10/05/88, of which Mr. Lloyd disclaims beneficial ownership. Mr. Lloyd also disclaims beneficial ownership of the warrant, which is held by Lester John Lloyd and/or Lynne Dewar Lloyd, Trustees or Successor Trustees under the Lloyd Trust U/A/D 10/05/88. (9) Includes 1,530,871 shares held by One Liberty. See Note 1 above. (10) Includes 957,550 shares held by Polaris Venture Partners and 55,142 shares held by Polaris Venture Partners Founders' Fund. See Note 2 above. 57 59 (11) Includes 3,571 shares of common stock held by Paul Manberg, as Custodian under the Uniform Transfer to Minors Act, for Shawn Joseph Manberg, and 3,571 shares of common stock held by Paul Manberg, as Custodian under the Uniform Transfer to Minors Act, for Kate Michelle Manberg. (12) The foregoing table includes shares of common stock subject to repurchase by Aspect from certain officers if the officers cease to be employed by or provide services to Aspect as follows:
NAME NUMBER OF SHARES ---- ---------------- J. Neal Armstrong........................................... 15,000 Steven H. Kane.............................................. 60,000
(13) The foregoing table does not include shares of common stock underlying stock options held by certain officers and directors which will not become exercisable within 60 days of December 31, 1999 as follows:
NAME NUMBER OF SHARES ---- ---------------- Nassib G. Chamoun........................................... 172,500 J. Breckenridge Eagle....................................... 59,153 Lester John Lloyd........................................... 8,333 Stephen E. Coit............................................. 8,334 Edwin M. Kania, Jr. ........................................ 8,334 Donald R. Stanski........................................... 16,000 Terrance McGuire............................................ 8,334 J. Neal Armstrong........................................... 66,041 Steven H. Kane.............................................. 45,416 Paul J. Manberg............................................. 49,376 Boudewijn L.P.M. Bollen..................................... 22,500
58 60 DESCRIPTION OF CAPITAL STOCK After this offering, we will be authorized to issue 60,000,000 shares of common stock, $.01 par value per share, and 5,000,000 shares of preferred stock, $.01 par value per share. As of December 31, 1999, we had outstanding: - 1,815,840 shares of common stock held by 179 stockholders of record; - 11,067,238 shares of preferred stock held by 95 stockholders of record; - options to purchase 2,695,680 shares of common stock; and - warrants to purchase 192,902 shares of common stock. Upon the closing of this offering, all outstanding shares of preferred stock will automatically convert into 11,067,238 shares of common stock, which will result in an aggregate of 15,883,078 shares of common stock outstanding, based on shares outstanding as of December 31, 1999. The options and warrants will remain outstanding. The following summary is qualified by reference to the provisions of applicable law and to our restated certificate of incorporation and amended and restated by-laws included as exhibits to the registration statement of which this prospectus is a part. COMMON STOCK Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Holders of our common stock do not have cumulative voting rights. Directors are elected by a plurality of the votes of the shares present in person or by proxy at the meeting. Holders of common stock are entitled to receive proportionately any lawful dividends as may be declared by our board of directors. However, all dividends are subject to preferences that may be applicable to the holders of any outstanding shares of preferred stock. In the event of a liquidation, dissolution or winding up of the affairs of Aspect, whether voluntarily or involuntarily, the holders of common stock will be entitled to receive proportionately all of our remaining assets available for distribution to stockholders. This distribution would be subject to the rights of the holders of any outstanding shares of preferred stock. Holders of common stock have no preemptive, redemption, conversion or subscription rights. Our outstanding shares of common stock are fully paid and non-assessable. The shares of common stock offered by us in this offering will also be, when issued and paid for, fully paid and non-assessable. The rights, powers, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock which we may designate and issue in the future. Upon the closing of this offering, there will be no shares of preferred stock outstanding. PREFERRED STOCK Our board of directors is authorized, without further stockholder approval, to issue up to an aggregate of 5,000,000 shares of preferred stock, in one or more series. Our board of directors is also authorized, subject to the limitations prescribed by Delaware law, to establish the number of shares to be included in each series and to fix the voting powers, preferences, qualifications and special or relative rights or privileges of each series. Our board of directors is authorized to issue preferred stock with voting, conversion and other rights and preferences that could adversely affect the voting power or other rights of the holders of common stock. The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. However, the issuance of preferred stock or of rights to purchase preferred stock could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of our outstanding common stock. We have no current plans to issue any preferred stock. 59 61 WARRANTS The warrants have an exercise price of $12.50. The warrants have net exercise provisions under which the holder may, instead of paying the exercise price in cash, surrender the warrant and receive a net amount of shares, based on the fair market value of our shares of common stock at the time of exercise of the warrant, after deducting the exercise price. These warrants expire on the third anniversary of the date of this offering. However, if our common stock is traded on a national exchange or trading system and the average closing price of our common stock equals or exceeds $25.00 for 25 consecutive trading days, then we have the right to require the holders to exercise their warrants. If the holders do not exercise their warrants, the warrants will be automatically exercised according to the net exercise provisions described above. REGISTRATION RIGHTS Pursuant to the terms of a registration rights agreement, the holders of 11,067,238 shares of common stock are entitled to rights with respect to the registration of those shares under the Securities Act of 1933. The holders of warrants to purchase 192,902 shares of common stock are also party to the registration rights agreement and entitled to these registration rights. Under that agreement, if we propose to register any of our securities under the Securities Act of 1933, either for our own account or for the account of other security holders, the holders of registration rights are entitled to notice of the registration and to include their registrable shares in the registration. However, in the event of a registration pursuant to an underwritten public offering of our common stock, the underwriters have the right to limit the number of shares included in the registration. The holders of registration rights may, at any time after one year following the date of the closing of this offering and upon the request of holders of not less than 35% of the registrable shares then outstanding, require us to prepare and file a registration statement under the Securities Act of 1933 with respect to their registrable shares. We are required to effect only three of these demand registrations. In addition, at any time after we become eligible to file a registration statement on Form S-3 (or any successor form), holders of registration rights may request us to effect a registration on Form S-3 of registrable shares having an aggregate offering price of at least $250,000. These rights terminate six years following the date of this prospectus. DELAWARE LAW AND OUR CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS Upon the closing of this offering, our restated certificate of incorporation will provide that: - the board of directors be divided into three classes, with staggered three-year terms, - directors may be removed only for cause by the vote of the holders of at least two-thirds of the shares of our capital stock entitled to vote, and - any vacancy on the board of directors, however occurring, including a vacancy resulting from an enlargement of the board, may only be filled by vote of a majority of the directors then in office. These provisions could discourage, delay or prevent a change in control of Aspect or an acquisition of Aspect at a price which many stockholders may find attractive. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of common stock. These provisions may also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or attempting to change the composition or policies of our board of directors. Upon the closing of this offering, our restated certificate of incorporation and amended and restated by-laws will also provide that: - stockholder action may be taken only at a duly called and convened annual or special meeting of stockholders and then only if properly brought before the meeting, - stockholder action not be taken by written action in lieu of a meeting, - special meetings of stockholders may be called only by our Chairman of the Board, our Chief Executive Officer or by our board of directors, and 60 62 - in order for any matter to be considered "properly brought" before a meeting, a stockholder must comply with requirements regarding providing certain information and advance notice to us. These provisions could delay, until the next stockholders' meeting, actions which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because a person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder only at a duly called stockholders' meeting, and not by written consent. The Delaware General Corporation Law provides that the vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or by-laws, unless a corporation's certificate of incorporation or by-laws, as the case may be, requires a greater percentage. Our restated certificate of incorporation will require the vote of the holders of at least 75% of our capital stock entitled to vote to amend or repeal any of the foregoing provisions. The 75% stockholder vote would be in addition to any separate class vote that might be required pursuant to the terms of any series of preferred stock that might be then outstanding. Aspect is subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. LIMITATION OF LIABILITY AND INDEMNIFICATION Our certificate of incorporation provides that our directors will not be personally liable to us or to our stockholders for monetary damages for breach of fiduciary duty as a director, except that the limitation will not eliminate or limit liability to the extent that the elimination or limitation of this liability is not permitted by the Delaware General Corporation Law as it exists or may later be amended. Our certificate of incorporation further provides for the indemnification of our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Boston EquiServe L.P. 61 63 SHARES ELIGIBLE FOR FUTURE SALE Sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock. Furthermore, since some shares of common stock will not be available for sale shortly after this offering because of the contractual and legal restrictions on resale described below, sales of substantial amounts of common stock in the public market after these restrictions lapse could adversely affect the prevailing market price and our ability to raise equity capital in the future. Prior to this offering, there has been no public market for our common stock. Upon completion of this offering, we will have outstanding an aggregate of 15,917,425 shares of our common stock assuming no exercise of outstanding options or warrants. Of these shares, the 3,000,000 shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, unless those shares are purchased by "affiliates" as that term is defined in Rule 144 under the Securities Act of 1933. The remaining 12,917,425 shares of common stock held by existing stockholders are "restricted securities" as that term is defined in Rule 144 under the Securities Act of 1933 or are subject to the contractual restrictions described below. Of these remaining securities: - 71,496 shares which are not subject to the 180-day lock-up period described below may be sold immediately after completion of this offering, - 13,868 additional shares which are not subject to the 180-day lock up period described below may be sold beginning 90 days after the effective date of this offering, and - 12,832,061 additional shares may be sold upon expiration of the 180-day lock-up period described below. Restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act of 1933, which rules are summarized below. LOCK-UP AGREEMENTS Our officers and directors and stockholders holding an aggregate of 12,832,061 shares of common stock have signed lock-up agreements under which they agreed not to transfer or dispose of, directly or indirectly, any shares of common stock or any securities convertible into or exercisable or exchangeable for shares of common stock, for a period ending 180 days after the date of this prospectus. Transfers or dispositions by our officers, directors and stockholders can be made sooner: - with the written consent of Morgan Stanley & Co. Incorporated, - as a bona fide gift, - to immediate family members, or - to a trust, the beneficiaries of which are immediate family members. RULE 144 In general, under Rule 144, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: - 1% of the number of shares of common stock then outstanding, which will equal approximately shares immediately after this offering, or - the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. 62 64 RULE 144(k) Shares eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering. Under Rule 144(k), a person may sell shares acquired from us immediately upon completion of this offering, without regard to manner of sale, the availability of public information or volume, if: - the person is not one of our affiliates at any time during the three months preceding a sale, and - the person has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate. RULE 701 In general, under Rule 701 of the Securities Act of 1933, any of our employees, consultants or advisors who purchases shares from us in connection with a compensatory stock plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with various restrictions, including the holding period, contained in Rule 144. REGISTRATION RIGHTS Upon completion of this offering, the holders of 11,067,238 shares of our common stock, or their transferees, will be entitled to rights with respect to the registration of those shares under the Securities Act of 1933. The holders of warrants to purchase 192,902 shares of our common stock will also be entitled to these registration rights. See "Description of Capital Stock -- Registration Rights" on page 60. STOCK OPTIONS Immediately after the 180-day lock-up period expires, we intend to file a registration statement under the Securities Act of 1933 covering 6,860,000 shares of common stock reserved for issuance under our Amended and Restated 1991 Stock Option Plan, 1998 Stock Incentive Plan, 1999 Employee Stock Purchase Plan and 1998 Director Stock Option Plan. That registration statement is expected to become effective as soon as it is filed. Accordingly, shares registered under that registration statement will, subject to vesting provisions and limitations as to the volume of shares that may be sold by our affiliates under Rule 144 described above, be available for sale in the open market immediately after the 180-day lock-up period expires. As of December 31, 1999, options to purchase 2,695,680 shares of common stock were issued and outstanding. Upon the expiration of the lock-up period described above, at least 1,380,762 shares of common stock will be subject to vested options, based on options outstanding as of December 31, 1999. WARRANTS Upon completion of this offering, there will be warrants outstanding to purchase 192,902 shares of common stock at an exercise price of $12.50 per share. Any shares purchased pursuant to the "cashless exercise" feature of outstanding warrants may be sold approximately 90 days after completion of this offering, subject to the requirements of Rule 144. EFFECT OF SALES OF SHARES Prior to this offering, there has been no public market for our common stock, and no prediction can be made as to the effect, if any, that market sales of shares of common stock or the availability of shares for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of significant numbers of shares of our common stock in the public market could adversely affect the market price of the common stock and could impair our future ability to raise capital through an offering of our equity securities. 63 65 UNDERWRITERS Under the terms and subject to the conditions contained in an underwriting agreement dated the date of this prospectus, the underwriters named below, for whom Morgan Stanley & Co. Incorporated, Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc. are acting as representatives, have severally agreed to purchase, and Aspect has agreed to sell to the underwriters, the respective number of shares of common stock set forth opposite the names of the underwriters below:
NUMBER NAME OF SHARES - ---- --------- Morgan Stanley & Co. Incorporated........................... Deutsche Bank Securities Inc................................ U.S. Bancorp Piper Jaffray Inc.............................. --------- Total............................................. 3,000,000 =========
The underwriters are offering the shares of our common stock subject to their acceptance of the shares from us and subject to prior sale. The underwriting agreement provides that the obligations of the several underwriters to pay for and accept delivery of the shares of our common stock offered in this offering are subject to the approval of legal matters by their counsel and to customary closing conditions. The underwriters are obligated to take and pay for all of the shares of our common stock offered by this prospectus if any shares are taken. However, the underwriters are not required to take or pay for the shares covered by the over-allotment options described below. The underwriters initially propose to offer part of the shares of our common stock directly to the public at the initial public offering price listed on the cover page of this prospectus and part to dealers at a price that represents a concession not in excess of $ a share under the public offering price. Any underwriters may allow, and these dealers may reallow, a concession not in excess of $ a share to other underwriters or to other dealers. After the initial offering of the shares of our common stock, the offering price and other selling terms may from time to time be varied by the representatives. We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 450,000 additional shares of our common stock at the public offering price set forth on the cover page of this prospectus, less underwriting discounts and commissions. The underwriters may exercise this option solely for the purpose of covering over-allotments, if any, made in connection with the offering of the shares of our common stock offered by this prospectus. To the extent the option is exercised, each underwriter will become obligated, subject to certain conditions, to purchase approximately the same percentage of the additional shares of our common stock as the number set forth next to the names of all underwriters in the preceding table. If the underwriters' over-allotment option is exercised in full, the total price to the public would be $ , the total underwriters' discounts and commissions would be $ , and the total proceeds to us would be $ . Each of Aspect and our directors and executive officers and substantially all other stockholders has agreed that, without the prior written consent of Morgan Stanley & Co. Incorporated on behalf of the underwriters, during the period ending 180 days after the date of this prospectus, he, she or it will not directly or indirectly: - offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock, or - enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of our common stock, whether any transaction described above is to be settled by delivery of our common stock or other securities, in cash or otherwise. 64 66 The restrictions described in this paragraph do not apply to: - the sale of shares to the underwriters, - transactions by any person other than Aspect relating to shares of common stock or other securities acquired in open market transactions after the completion of the offering of the shares, or - the sale or transfer of shares of common stock to an acquiror in connection with the sale of Aspect pursuant to a merger, sale of stock or otherwise. The underwriters have informed us that they do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered by them. Our common stock has been approved for listing on the Nasdaq National Market under the symbol "ASPM." In order to facilitate the offering of our common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the price of our common stock. Specifically, the underwriters may over-allot in connection with the offering, creating a short position in our common stock for their own account. In addition, to cover over-allotments or to stabilize the price of our common stock, the underwriters may bid for, and purchase, shares of our common stock in the open market. Finally, the underwriting syndicate may reclaim selling concessions allowed to an underwriter or a dealer for distributing our common stock in the offering, if the syndicate repurchases previously distributed shares of our common stock in transactions to cover syndicate short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain the market price of our common stock above independent market levels. The underwriters are not required to engage in these activities and may end any of these activities at any time. We and the underwriters have agreed to indemnify each other against liabilities in connection with this offering, including liabilities under the Securities Act of 1933. At our request, the underwriters have reserved for sale, at the initial public offering price, up to shares of common stock offered in this offering for our directors, officers, employees and related persons. Individuals purchasing these shares must have a retail account with Morgan Stanley & Co. Incorporated. No offer to buy any shares will be accepted and no part of the purchase price will be received by Morgan Stanley & Co. Incorporated prior to the date of this prospectus. Individuals purchasing these shares must commit to the purchase within one day after the date of this prospectus. The number of shares of common stock available for sale to the general public will be reduced to the extent these persons purchase reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered in this prospectus. PRICING OF THE OFFERING Prior to this offering, there has been no public market for our shares of common stock. Consequently, the initial public offering price for our shares of common stock will be determined by negotiations between us and the representatives of the underwriters. Among the factors to be considered in determining the initial public offering price will be: - our record of operations, our current financial position and future prospects, - the experience of our management, - sales, earnings and other financial and operating information in recent periods, and - the price-earnings ratios, price-sales ratios, market prices of securities and financial and operating information of companies engaged in activities similar to ours. The estimated initial public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. 65 67 LEGAL MATTERS The validity of the shares of common stock we are offering will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in connection with this offering will be passed upon for the underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. EXPERTS The audited consolidated financial statements as of December 31, 1998 and 1999 and for each of the three years in the period ended December 31, 1999 included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said report. WHERE YOU CAN FIND MORE INFORMATION We have filed with the Securities and Exchange Commission a Registration Statement on Form S-1 (including the exhibits and schedules to the registration statement) under the Securities Act of 1933 with respect to the common stock we propose to sell in this offering. This prospectus, which is part of the registration statement, does not contain all the information set forth in the registration statement. For further information about us and the common stock we propose to sell in this offering, we refer you to the registration statement. Statements contained in this prospectus as to the contents of any contract, agreement or other document referred to, are not necessarily complete, and in each instance reference is made to the copy of each contract, agreement or other document filed as an exhibit to the registration statement, each statement being qualified by this reference. You may read and copy all or any portion of the registration statement or any reports, statements or other information we file at the Securities and Exchange Commission's public reference room at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request copies of these documents upon payment of a duplicating fee, by writing to the Securities and Exchange Commission. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Aspect's Securities and Exchange Commission filings, including the registration statement, will also be available to you on the Securities and Exchange Commission's website (http://www.sec.gov). We intend to distribute to our stockholders annual reports containing audited consolidated financial statements. We also intend to make available to our stockholders, within 45 days after the end of each of the first three fiscal quarters of each fiscal year, reports containing interim unaudited financial information. 66 68 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999........................................................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998 and 1999 ......................... F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1997, 1998 and 1999.............. F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998 and 1999.......................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 69 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Aspect Medical Systems, Inc.: We have audited the accompanying consolidated balance sheets of Aspect Medical Systems, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1999, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Aspect Medical Systems, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP Boston, Massachusetts January 20, 2000 F-2 70 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
PRO FORMA DECEMBER 31, DECEMBER 31, DECEMBER 31, 1999 1998 1999 (NOTE 2) ------------ ------------ ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................ $ 17,122,993 $ 13,535,364 $ 13,535,364 Marketable securities............................ 4,150,336 1,000,000 1,000,000 Accounts receivable, net of allowance of $200,000 and $407,000 at December 31, 1998 and 1999, respectively.................................. 2,108,944 4,300,235 4,300,235 Current portion of investment in sales-type leases........................................ 776,275 1,689,585 1,689,585 Inventory........................................ 270,189 1,514,702 1,514,702 Other current assets............................. 316,773 1,006,023 1,006,023 ------------ ------------ ------------ Total current assets..................... 24,745,510 23,045,909 23,045,909 Property and equipment, net........................ 2,121,915 3,449,252 3,449,252 Long-term investment in sales-type leases.......... 1,721,825 2,906,447 2,906,447 ------------ ------------ ------------ Total assets............................. $ 28,589,250 $ 29,401,608 $ 29,401,608 ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of capital lease obligations..... $ 126,775 $ -- $ -- Current portion of long-term debt................ 720,670 2,125,526 2,125,526 Accounts payable................................. 891,943 1,569,093 1,569,093 Accrued liabilities.............................. 3,663,407 5,937,554 5,937,554 Deferred revenue................................. 239,159 1,135,225 1,135,225 ------------ ------------ ------------ Total current liabilities................ 5,641,954 10,767,398 10,767,398 ------------ ------------ ------------ Deferred revenue................................... 1,817,734 1,682,509 1,682,509 Long-term debt..................................... 1,441,339 3,872,484 3,872,484 ------------ ------------ ------------ Commitments and contingencies (Note 13) Stockholders' equity: Preferred Stock, $.01 par value; (pro forma 5,000,000 shares authorized, no shares issued or outstanding)............................... -- -- -- Convertible Preferred Stock, $.01 par value; 22,363,224 shares authorized, 11,067,238 shares issued and outstanding at December 31, 1998 and 1999 (pro forma - no shares authorized, issued or outstanding)............ 67,560,365 67,560,365 -- Common Stock, $.01 par value; 17,030,000 shares authorized, 1,778,692 and 1,815,840 shares issued and outstanding at December 31, 1998 and 1999, respectively (pro forma - 60,000,000 shares authorized, 12,883,078 shares issued and outstanding).............................. 17,787 18,158 128,831 Additional paid-in capital....................... 933,467 1,273,725 68,723,417 Warrants......................................... 146,606 146,606 146,606 Notes receivable from employees and directors.... (306,182) (305,324) (305,324) Deferred compensation............................ (317,564) (225,111) (225,111) Accumulated other comprehensive income........... 3,641 -- -- Accumulated deficit.............................. (48,349,897) (55,389,202) (55,389,202) ------------ ------------ ------------ Total stockholders' equity............... 19,688,223 13,079,217 13,079,217 ------------ ------------ ------------ Total liabilities and stockholders' equity................................. $ 28,589,250 $ 29,401,608 $ 29,401,608 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. F-3 71 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Revenue........................................... $ 3,067,573 $ 11,238,205 $27,187,650 Costs and expenses: Costs of revenue................................ 3,601,569 5,880,288 9,324,111 Research and development........................ 2,603,117 4,041,753 4,847,237 Sales and marketing............................. 4,813,505 10,354,411 16,543,112 General and administrative...................... 2,357,695 4,253,712 4,829,266 ------------ ------------ ----------- Total costs and expenses................ 13,375,886 24,530,164 35,543,726 ------------ ------------ ----------- Loss from operations.............................. (10,308,313) (13,291,959) (8,356,076) Interest income................................... 500,485 553,365 1,520,480 Interest expense.................................. (78,027) (94,137) (203,709) Other expense (Note 19)........................... -- (774,502) -- ------------ ------------ ----------- Net loss.......................................... $ (9,885,855) $(13,607,233) $(7,039,305) ============ ============ =========== Net loss per share: Basic and diluted............................... $ (15.63) $ (11.70) $ (4.57) ============ ============ =========== Pro forma basic and diluted..................... $ (0.56) =========== Shares used in computing net loss per share: Basic and diluted............................... 632,377 1,162,695 1,538,653 Pro forma basic and diluted..................... 12,605,891
The accompanying notes are an integral part of these consolidated financial statements. F-4 72 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK CONVERTIBLE -------------------- PREFERRED STOCK ADDITIONAL COMPREHENSIVE ------------------------- PAR PAID-IN LOSS SHARES AMOUNT SHARES VALUE CAPITAL ------------- ----------- ----------- ---------- ------- ---------- Balance, December 31, 1996.......................... $ -- 4,207,326 $25,891,270 93,424 $ 934 $ 31,096 Issuance of Series C convertible preferred stock, net of issuance costs of approximately $61,000... -- 3,439,949 12,834,800 -- -- -- Issuance of common stock upon exercise of common stock options.................................... -- -- -- 1,454,603 14,546 307,874 Comprehensive loss: Net loss........................................... (9,885,855) -- -- -- -- -- Other comprehensive income - Unrealized gain on marketable securities......... 3,260 -- -- -- -- -- ------------ Comprehensive loss................................. (9,882,595) -- -- -- -- -- ----------- ----------- ---------- ------- ---------- Balance, December 31, 1997.......................... 7,647,275 38,726,070 1,548,027 15,480 338,970 Issuance of Series D convertible preferred stock, net of issuance costs of approximately $73,000... -- 1,666,234 11,573,816 -- -- -- Issuance of Series E convertible preferred stock and warrants, net of issuance costs of approximately $130,000........................... -- 1,753,729 17,260,479 -- -- -- Issuance of common stock upon exercise of common stock options.................................... -- -- -- 230,665 2,307 180,595 Deferred compensation related to stock options..... -- -- -- -- -- 758,152 Reversal of unamortized deferred compensation related to canceled stock options................ -- -- -- -- -- (344,250) Payments on notes receivable....................... -- -- -- -- -- -- Amortization of deferred compensation related to stock options.................................... -- -- -- -- -- -- Comprehensive loss: Net loss........................................... (13,607,233) -- -- -- -- -- Other comprehensive income - Unrealized gain on marketable securities......... 543 -- -- -- -- -- ------------ Comprehensive loss................................. (13,606,690) -- -- -- -- -- ----------- ----------- ---------- ------- ---------- Balance, December 31, 1998.......................... 11,067,238 67,560,365 1,778,692 17,787 933,467 Issuance of common stock upon exercise of common stock options.................................... -- -- -- 37,148 371 46,924 Payments on notes receivable from employees and directors........................................ -- -- -- -- -- -- Deferred compensation related to stock options..... -- -- -- -- -- 293,334 Amortization of deferred compensation related to stock options.................................... -- -- -- -- -- -- Comprehensive loss: Net loss........................................... (7,039,305) -- -- -- -- -- Other comprehensive loss - Unrealized loss on marketable securities......... (3,641) -- -- -- -- -- ------------ Comprehensive loss................................. $ (7,042,946) -- -- -- -- -- ----------- ----------- ---------- ------- ---------- Balance, December 31, 1999.......................... 11,067,238 $67,560,365 1,815,840 $18,158 $1,273,725 =========== =========== ========== ======= ========== NOTES RECEIVABLE ACCUMULATED FROM OTHER EMPLOYEES DEFERRED COMPREHENSIVE ACCUMULATED WARRANTS AND DIRECTORS COMPENSATION INCOME(LOSS) DEFICIT -------- ------------- ------------ ------------- ------------ Balance, December 31, 1996.......................... $ -- $ -- $ -- $ (162) $(24,856,809) Issuance of Series C convertible preferred stock, net of issuance costs of approximately $61,000... -- -- -- -- -- Issuance of common stock upon exercise of common stock options.................................... -- (273,579) -- -- -- Comprehensive loss: Net loss........................................... -- -- -- -- (9,885,855) Other comprehensive income - Unrealized gain on marketable securities......... -- -- -- 3,260 -- Comprehensive loss................................. -- -- -- -- -- -------- --------- --------- ------- ------------ Balance, December 31, 1997.......................... -- (273,579) -- 3,098 (34,742,664) Issuance of Series D convertible preferred stock, net of issuance costs of approximately $73,000... -- -- -- -- -- Issuance of Series E convertible preferred stock and warrants, net of issuance costs of approximately $130,000........................... 146,606 -- -- -- -- Issuance of common stock upon exercise of common stock options.................................... -- (63,001) -- -- -- Deferred compensation related to stock options..... -- -- (758,152) -- -- Reversal of unamortized deferred compensation related to canceled stock options................ -- -- 344,250 -- -- Payments on notes receivable....................... -- 30,398 -- -- -- Amortization of deferred compensation related to stock options.................................... -- -- 96,338 -- -- Comprehensive loss: Net loss........................................... -- -- -- -- (13,607,233) Other comprehensive income - Unrealized gain on marketable securities......... -- -- -- 543 -- Comprehensive loss................................. -- -- -- -- -- -------- --------- --------- ------- ------------ Balance, December 31, 1998.......................... 146,606 (306,182) (317,564) 3,641 (48,349,897) Issuance of common stock upon exercise of common stock options.................................... -- -- -- -- -- Payments on notes receivable from employees and directors........................................ -- 858 -- -- -- Deferred compensation related to stock options..... -- -- (293,334) -- -- Amortization of deferred compensation related to stock options.................................... -- -- 385,787 -- -- Comprehensive loss: Net loss........................................... -- -- -- -- (7,039,305) Other comprehensive loss - Unrealized loss on marketable securities......... -- -- -- (3,641) -- Comprehensive loss................................. -- -- -- -- -- -------- --------- --------- ------- ------------ Balance, December 31, 1999.......................... $146,606 $(305,324) $(225,111) $ -- $(55,389,202) ======== ========= ========= ======= ============ TOTAL STOCKHOLDERS' EQUITY ------------- Balance, December 31, 1996.......................... $ 1,066,329 Issuance of Series C convertible preferred stock, net of issuance costs of approximately $61,000... 12,834,800 Issuance of common stock upon exercise of common stock options.................................... 48,841 Comprehensive loss: Net loss........................................... (9,885,855) Other comprehensive income - Unrealized gain on marketable securities......... 3,260 Comprehensive loss................................. -- ------------ Balance, December 31, 1997.......................... 4,067,375 Issuance of Series D convertible preferred stock, net of issuance costs of approximately $73,000... 11,573,816 Issuance of Series E convertible preferred stock and warrants, net of issuance costs of approximately $130,000........................... 17,407,085 Issuance of common stock upon exercise of common stock options.................................... 119,901 Deferred compensation related to stock options..... -- Reversal of unamortized deferred compensation related to canceled stock options................ -- Payments on notes receivable....................... 30,398 Amortization of deferred compensation related to stock options.................................... 96,338 Comprehensive loss: Net loss........................................... (13,607,233) Other comprehensive income - Unrealized gain on marketable securities......... 543 Comprehensive loss................................. -- ------------ Balance, December 31, 1998.......................... 19,688,223 Issuance of common stock upon exercise of common stock options.................................... 47,295 Payments on notes receivable from employees and directors........................................ 858 Deferred compensation related to stock options..... -- Amortization of deferred compensation related to stock options.................................... 385,787 Comprehensive loss: Net loss........................................... (7,039,305) Other comprehensive loss - Unrealized loss on marketable securities......... (3,641) Comprehensive loss................................. -- ------------ Balance, December 31, 1999.......................... $ 13,079,217 ============
The accompanying notes are an integral part of these consolidated financial statements. F-5 73 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Cash flows from operating activities: Net loss.......................................... $ (9,885,855) $(13,607,233) $(7,039,305) Adjustments to reconcile net loss to net cash used for operating activities - Depreciation and amortization................ 192,571 623,133 1,296,296 Provision for doubtful accounts.............. 14,333 146,500 212,100 Compensation expense related to stock options.................................... -- 96,338 385,787 Changes in assets and liabilities - Increase in accounts receivable............ (437,525) (1,536,272) (2,403,392) Decrease (increase) in inventory........... 763,483 117,290 (1,244,513) Increase in other current assets........... (108,343) (70,811) (689,250) Increase in investment in sales-type leases.................................. (345,466) (2,152,634) (2,097,932) Increase (decrease) in accounts payable.... 459,778 (227,112) 677,150 Increase in accrued liabilities............ 776,260 2,162,816 2,274,147 (Decrease) increase in deferred revenue.... (180,000) 1,413,893 760,841 ------------ ------------ ----------- Net cash used for operating activities............................ (8,750,764) (13,034,092) (7,868,071) ------------ ------------ ----------- Cash flows from investing activities: Acquisition of property and equipment........... (958,271) (1,821,489) (2,623,633) Purchases of marketable securities.............. (65,379,625) (42,947,415) (1,810,895) Proceeds from sales of marketable securities.... 61,647,164 43,410,084 4,957,593 ------------ ------------ ----------- Net cash (used for) provided by investing activities.................. (4,690,732) (1,358,820) 523,065 ------------ ------------ ----------- Cash flows from financing activities: Principal payments on capital lease obligations.................................. (427,558) (145,811) (126,775) Proceeds from term loan......................... -- -- 2,827,399 Proceeds from equipment loan.................... -- 2,162,009 -- Principal payments on equipment loan............ -- -- (720,672) Proceeds from sale of investment in sales-type leases....................................... -- -- 1,852,092 Principal payments on debt related to investment in sales-type leases......................... -- -- (122,820) Proceeds from issuance of convertible preferred stock and warrants, net of issuance costs.... 12,834,800 28,980,901 -- Proceeds from issuance of common stock.......... 48,841 119,901 47,295 Payments received on notes receivable from employees and directors...................... -- 30,398 858 ------------ ------------ ----------- Net cash provided by financing activities............................ 12,456,083 31,147,398 3,757,377 ------------ ------------ ----------- Net (decrease) increase in cash and cash equivalents..................................... (985,413) 16,754,486 (3,587,629) Cash and cash equivalents, beginning of period.... 1,353,920 368,507 17,122,993 ------------ ------------ ----------- Cash and cash equivalents, end of period.......... $ 368,507 $ 17,122,993 $13,535,364 ============ ============ =========== Supplemental disclosure of cash flow information: Interest paid................................... $ 78,027 $ 94,137 $ 203,709 ============ ============ ===========
The accompanying notes are an integral part of these consolidated financial statements. F-6 74 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) DESCRIPTION OF OPERATIONS Aspect Medical Systems, Inc. and its subsidiaries (the "Company") develops, manufactures and markets an anesthesia monitoring system that enables anesthesia providers to assess and manage a patient's level of consciousness. The BIS system incorporates the Company's proprietary disposable BIS Sensors and the Company's BIS monitor or BIS Module Kit. The Company's latest generation BIS monitor, the A-2000 BIS Monitor, was cleared for marketing by the United States Food and Drug Administration in February 1998. The BIS system is based on the Company's patented core technology, the BIS index, which is the only FDA- cleared, commercially available, direct measure of the effects of anesthetics on the brain. The Company incurred net losses of $9,885,855, $13,607,233 and $7,039,305 for the years ended December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, the Company had an accumulated deficit of $55,389,202. Principal risks that may affect the business, results of operations and financial condition of the Company include the Company's ability to raise sufficient capital to fund operations, market acceptance of the Company's technology and products, limited sales and marketing experience, the reliance on a single product family, manufacturing risks, the dependence on single source or limited suppliers, technological risks and other risks. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of the significant accounting policies used by the Company in the preparation of its financial statements are as follows: UNAUDITED PRO FORMA PRESENTATION Under the terms of the Company's restated certificate of incorporation, all outstanding preferred stock will be converted automatically into shares of common stock upon the closing of the Company's initial public offering. Also, upon the closing of the Company's initial public offering, the authorized capital stock of the Company will consist of 60,000,000 shares of common stock and 5,000,000 shares of preferred stock, the terms of which will not be designated. The unaudited pro forma balance sheet information at December 31, 1999 reflects the conversion of all series of preferred stock into 11,067,238 shares of common stock as if the conversion occurred on December 31, 1999. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and all wholly-owned subsidiaries. All material intercompany accounts and transactions have been eliminated. FOREIGN CURRENCY TRANSLATION Financial statements of international subsidiaries are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for revenue and expenses. The functional currency of the Company's international subsidiaries is the U.S. dollar; therefore, translation adjustments are recorded in the consolidated statements of operations and have not been material. CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES The Company invests its excess cash in money market accounts, certificates of deposit, U.S. Treasury bills, high-grade commercial paper and debt obligations of various government agencies. The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. F-7 75 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for its investments in accordance with Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. In accordance with SFAS No. 115, the Company has classified all of its investments as available-for-sale at December 31, 1998 and 1999. The securities are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as other comprehensive income. REVENUE RECOGNITION Revenue from equipment sales, disposable product sales and sales-type leases are recognized at the time of shipment. Payments received prior to shipment are recorded as deferred revenue. The Company has entered into certain licensing and distribution agreements for which payments received in advance are recorded as deferred revenue. Revenue is recognized as earned per the terms of the respective agreements. The Company provides for the cost of warranty at the time of product shipment. RESEARCH AND DEVELOPMENT COSTS The Company charges research and development costs to operations as incurred. INVENTORY Inventory is valued at the lower of cost or estimated market, cost being determined on a first-in, first-out basis. ADVERTISING COSTS Advertising costs are expensed as incurred. These costs are included in sales and marketing expense in the consolidated statements of operations. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the related equipment. Equipment held under capital leases is stated at the lower of the fair market value of the equipment or the present value of the minimum lease payments at the inception of the lease and is amortized on a straight-line basis over the shorter of the lives of the related assets or the term of the leases. Maintenance and repair expenditures are charged to expense as incurred. INCOME TAXES The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences, utilizing currently enacted tax rates, of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred tax assets are recognized, net of any valuation allowance, for the estimated future tax effects of deductible temporary differences and tax operating loss and credit carryforwards. CONCENTRATION OF CREDIT RISK, SIGNIFICANT CUSTOMER AND SINGLE OR LIMITED SOURCE SUPPLIERS Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of trade accounts receivable, investment in sales-type lease receivables and investments. To minimize the risk with respect to accounts receivable and investment in sales-type lease receivables, the Company maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management's expectations. The Company maintains cash, cash equivalents and investments with various financial institutions. The Company performs periodic evaluations of the relative credit quality of investments F-8 76 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and Company policy is designed to limit exposure to any one institution or type of investment. The primary objective of the Company's investment strategy is the safety of the principal invested. At December 31, 1998 and 1999, accounts receivable from one of the Company's international distributors accounted for approximately 14% and less than 1%, respectively, of the total amounts due to the Company. For the years ended December 31, 1997, 1998 and 1999, sales to this customer accounted for approximately 35%, 13% and 2%, respectively, of the Company's total revenue. Effective July 1, 1998, this customer no longer distributes the Company's monitors. The Company currently obtains certain key components of its products from single or limited sources. The Company purchases components pursuant to purchase orders rather than long-term supply agreements. The Company has experienced shortages and delays in obtaining certain components of its products in the past. There can be no assurance that the Company will not experience similar delays or shortages in the future. The disruption or termination of the supply of components or a significant increase in the costs of these components from these sources could have a material adverse effect on the Company's business, financial condition and results of operations. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of SFAS No. 130 did not have a material effect on the Company's financial statements, as the only element of comprehensive income impacting the Company is the unrealized gain (loss) on marketable securities. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair market values of the Company's financial instruments, which include marketable securities, accounts receivable, investment in sales-type leases, accounts payable, bank loans and capital lease obligations, approximate their carrying values. RECLASSIFICATIONS Certain amounts in the prior years' financial statements have been reclassified to conform with current year presentation. F-9 77 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (3) CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash and cash equivalents consist of the following:
DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- Cash...................................................... $11,122,993 $13,535,364 Certificates of deposit................................... 6,000,000 -- ----------- ----------- $17,122,993 $13,535,364 =========== ===========
Available-for-sale securities included in marketable securities at December 31, 1998 and 1999 consist of the following:
AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- December 31, 1998 -- Corporate debt securities.................. $3,136,075 $ 241 $ -- $3,136,316 Municipal notes............................ 1,010,620 3,400 -- 1,014,020 ---------- ------ ----- ---------- $4,146,695 $3,641 $ -- $4,150,336 ========== ====== ===== ========== December 31, 1999 -- U.S. Government debt securities............ $1,000,000 $ -- $ -- $1,000,000 ---------- ------ ----- ---------- $1,000,000 $ -- $ -- $1,000,000 ========== ====== ===== ==========
The amortized cost and estimated fair value of investments in debt securities at December 31, 1999, by contractual maturity, were as follows:
ESTIMATED FAIR COST VALUE ----------- ---------- Maturing in one to two years................................ $1,000,000 $1,000,000 ---------- ---------- $1,000,000 $1,000,000 ========== ==========
The cost of securities sold is determined based on the specific identification method for purposes of recording realized gains and losses. Gross realized gains and losses on the sales of investments have not been material to the Company's financial statements. (4) INVESTMENT IN SALES-TYPE LEASES The Company leases equipment to customers under sales-type leases. The components of the Company's net investment in sales-type leases are as follows:
DECEMBER 31, ------------------------ 1998 1999 ---------- ---------- Total minimum lease payments receivable............. $3,300,533 $5,737,674 Less -- unearned interest........................... 802,433 1,141,642 ---------- ---------- Net investment in sales-type leases................. 2,498,100 4,596,032 Less -- current portion........................... 776,275 1,689,585 ---------- ---------- $1,721,825 $2,906,447 ========== ==========
F-10 78 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments due under non-cancelable leases as of December 31, 1999 are as follows:
YEAR ENDING ----------- 2000........................................................ $2,202,273 2001........................................................ 1,624,736 2002........................................................ 1,055,141 2003........................................................ 683,694 2004........................................................ 171,830 ---------- $5,737,674 ==========
(5) INVENTORY Inventory consists of the following:
DECEMBER 31, ---------------------- 1998 1999 -------- ---------- Raw materials............................................... $165,682 $ 421,117 Work-in-progress............................................ -- 100,586 Finished goods.............................................. 104,507 992,999 -------- ---------- $270,189 $1,514,702 ======== ==========
(6) PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, USEFUL LIFE -------------------------- IN YEARS 1998 1999 ---------------------------- ----------- ----------- Computer equipment...................... 3 $ 1,626,676 $ 2,173,878 Construction in progress................ -- 98,866 1,456,784 Machinery and equipment................. 3 to 5 887,046 1,467,425 Furniture and fixtures.................. 3 308,656 387,431 Shorter of the life of the lease or the estimated Leasehold improvements.................. remaining useful life 273,313 298,198 ----------- ----------- 3,194,557 5,783,716 Accumulated depreciation and amortization.......................... (1,072,642) (2,334,464) ----------- ----------- $ 2,121,915 $ 3,449,252 =========== ===========
At December 31, 1998 and 1999, property and equipment held under capital leases totaled approximately $86,944. Accumulated depreciation of these assets totaled approximately $67,850 and $86,944 at December 31, 1998 and 1999, respectively. F-11 79 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (7) INCOME TAXES Deferred income tax assets consist of the following:
DECEMBER 31, ---------------------------- 1998 1999 ------------ ------------ Net operating loss carryforwards........................ $ 16,693,000 $ 16,895,000 Tax credit carryforwards................................ 1,292,000 1,953,000 Other................................................... 1,507,000 2,125,000 ------------ ------------ Gross deferred tax assets............................. 19,492,000 20,973,000 Valuation allowance................................... (19,492,000) (20,973,000) ------------ ------------ Net deferred tax asset................................ $ -- $ -- ============ ============
The Company has provided a full valuation allowance against its gross deferred tax assets at December 31, 1998 and 1999 because the future realizability of such asset is uncertain. Should the Company achieve profitability in the future, various components of the gross deferred tax assets would be available to offset future income tax liabilities and expenses. The Company has net operating loss and research and development tax credit carryforwards for federal income tax purposes of approximately $47,254,000 and 1,953,000, respectively, at December 31, 1999 that will expire commencing in the year 2002 through the year 2019 if not utilized. The net operating loss and research and development tax credit carryforwards are subject to review by the Internal Revenue Service. Ownership changes, as defined in the Internal Revenue Code, may limit the amount of these tax attributes that can be utilized annually to offset future taxable income or tax liabilities. The amount of the annual limitation is determined based on the Company's value immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. (8) STOCKHOLDERS' EQUITY AUTHORIZED CAPITAL STOCK As of December 31, 1999, the Company's authorized capital stock consisted of 17,030,000 shares of common stock, $.01 par value, and 22,363,224 shares of preferred stock, $.01 par value. Of the 22,363,224 shares of preferred stock, 406,898 shares are designated Series A-1 convertible preferred stock, 3,800,428 shares are designated Series B-1 convertible preferred stock, 3,500,000 shares are designated Series C convertible preferred stock, 1,714,286 shares are designated Series D convertible preferred stock, 1,760,000 shares are designated Series E convertible preferred stock, 406,898 shares are designated Series A-2 convertible preferred stock, 3,800,428 shares have been designated Series B-2 convertible preferred stock, 3,500,000 shares have been designated Series C-2 convertible preferred stock, 1,714,286 shares have been designated Series D-2 convertible preferred stock and 1,760,000 shares have been designated Series E-2 convertible preferred stock. 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. F-12 80 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONVERTIBLE PREFERRED STOCK Convertible preferred stock outstanding consists of the following:
DECEMBER 31, -------------------------- 1998 1999 ----------- ----------- Series A-1 convertible preferred stock; 406,898 shares issued and outstanding, at issuance price, net of issuance costs..................................................... $18,384,462 $18,384,462 Series B-1 convertible preferred stock; 3,800,428 shares issued and outstanding, at issuance price, net of issuance costs....................................................... 7,506,808 7,506,808 Series C convertible preferred stock; 3,439,949 shares issued and outstanding, at issuance price, net of issuance costs..................................................... 12,834,800 12,834,800 Series D convertible preferred stock; 1,666,234 shares issued and outstanding, at issuance price, net of issuance costs..................................................... 11,573,816 11,573,816 Series E convertible preferred stock; 1,753,729 shares issued and outstanding, at issuance price, net of issuance costs..................................................... 17,260,479 17,260,479 ----------- ----------- $67,560,365 $67,560,365 =========== ===========
In 1995 and 1996, the Company sold 2,075,042 and 1,725,386 shares, respectively, of Series B-1 convertible preferred stock in a private placement, for total net proceeds of $7,506,808 including the conversion of $500,000 of notes payable to certain stockholders that were issued in 1995. As a result of anti-dilution provisions associated with this transaction and an associated recapitalization of the Company, certain preferred stockholders received an additional 357,761 shares of Series A-1 convertible preferred stock. In 1997, the Company issued 3,439,949 shares of Series C convertible preferred stock for net proceeds of $12,834,800. In February 1998, the Company issued 1,666,234 shares of Series D convertible preferred stock for net proceeds of $11,573,816. In December 1998, the Company issued 1,753,729 shares of Series E convertible preferred stock and warrants to purchase 192,902 shares of common stock for net proceeds of $17,407,085. The warrants are fully exercisable with an exercise price of $12.50 per share and expire on the earlier of the third anniversary of the Company's initial public offering or December 2008. However, if the common stock is traded on a national exchange or trading system and the average closing market price per share of common stock over 25 consecutive trading days equals or exceeds $25.00, the Company has the right to require the exercise of the warrants. The Company has allocated the proceeds received between the Series E convertible preferred stock and the warrants based on the estimated fair market value of the convertible preferred stock and the warrants. The rights and preferences of the Company's convertible preferred stock are as follows: VOTING RIGHTS Except as set forth in the restated certificate of incorporation, the holders of the convertible preferred stock are entitled to vote, together with the holders of common stock, as a single class on all matters. Each preferred stockholder is entitled to the number of votes equal to the number of whole shares of common stock into which such stockholder's shares are convertible. CONVERSION Each share of convertible preferred stock is convertible into common stock at the option of the stockholder or automatically upon the closing of a public offering of the Company's common stock which occurs either (i) prior to June 30, 2000 and which results in gross proceeds of at least $20,000,000 or (ii) after F-13 81 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 30, 2000 and in which the price per common share equals or exceeds $14.00, resulting in gross proceeds of at least $20,000,000. The number of shares of common stock into which holders of convertible preferred stock shall be entitled upon conversion is one-for-one, subject to adjustment for certain dilutive events. Upon the automatic conversion of the Company's convertible preferred stock into common stock at the time of an initial public offering, the number of authorized but unissued shares of convertible preferred stock will be reduced to zero. LIQUIDATION, DISSOLUTION OR WINDING UP OF THE COMPANY In the event of any liquidation, dissolution or winding up of the Company, the holders of Series E convertible preferred stock will receive an amount equal to the greater of (i) $10.00 per share plus any dividends declared and/or accrued but unpaid on such shares or (ii) the amount per share that would have been payable had all series of Preferred Stock been converted into common stock. If the remaining assets of the Company available for distribution are insufficient to pay the Series E preferred stockholders the full amount they are entitled to, the holders of Series E stock shall share ratably in any distribution of the assets. Thereafter, the remaining assets shall be distributed ratably as follows: the Series A-1 convertible preferred stockholders will receive $22.76 per share, the Series B-1 convertible preferred stockholders will receive $2.00 per share, the Series C convertible preferred stockholders will receive $3.75 per share and the Series D convertible preferred stockholders will receive $7.00 per share. In the case where the remaining assets of the Company available for distribution are insufficient to pay the preferred stockholders the full amount they are entitled to, the holders of convertible preferred stock (other than Series E convertible preferred stock) shall share ratably in any distribution of the assets. Any amounts available after these distributions are to be distributed to the holders of common stock. DIVIDENDS The holders of convertible preferred stock are entitled to dividends when and if declared by the Board of Directors. COMMON STOCK At December 31, 1999, the Company has reserved 11,067,238 shares of common stock for issuance upon conversion of the preferred stock, 4,831,164 shares of common stock for issuance under the Company's stock option plans, and 192,902 for issuance upon the exercise of outstanding warrants. (9) STOCK OPTION PLANS At December 31, 1999, the Company's stock option plans provided for the granting, at the discretion of the Board of Directors, of options for the purchase of up to 6,560,000 shares of common stock to employees, directors and advisors. Option prices are determined by the Board of Directors. At December 31, 1999, 2,135,484 shares were available for future grant under the Company's stock option plans. F-14 82 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of stock option activity is as follows:
WEIGHTED AVERAGE OPTION NUMBER OF OPTION PRICE PRICE PER SHARES PER SHARE SHARE ---------- ------------ -------------- Outstanding, December 31, 1996...................... 1,556,073 $ .20-45.83 $ .28 Granted............................................. 1,046,532 .20-.80 .66 Exercised......................................... (1,454,603) .20-.375 .22 Canceled.......................................... (77,376) .20-.375 .20 ---------- ----------- ----- Outstanding, December 31, 1997...................... 1,070,626 .20-45.83 .74 Granted........................................... 1,613,632 .80-11.05 6.18 Exercised......................................... (230,665) .20-4.20 1.32 Canceled.......................................... (616,577) .20-45.83 10.07 ---------- ----------- ----- Outstanding, December 31, 1998...................... 1,837,016 .20-45.83 2.31 Granted........................................... 961,415 6.00-11.05 8.84 Exercised......................................... (37,148) .20-6.00 1.27 Canceled.......................................... (65,603) .375-11.05 4.66 ---------- ----------- ----- Outstanding, December 31, 1999...................... 2,695,680 $.20-$45.83 $4.60 ========== =========== ===== Exercisable, December 31, 1997...................... 170,747 $.20-$45.83 $ .96 Exercisable, December 31, 1998...................... 406,706 $.20-$45.83 $ .83 Exercisable, December 31, 1999...................... 989,572 $.20-$45.83 $2.27
On September 17, 1998, the Company's Board of Directors authorized the repricing of 480,698 stock options previously granted under the Company's stock option plans. The repricing provided for the exercise price of the options to be reduced from $11.05 per share to $4.20 per share, the estimated fair market value of the Company's common stock at that time. During 1997 and 1998, the Company accelerated the vesting of certain employees' and directors' stock options. These employees and directors exercised options to acquire 1,495,470 shares of common stock. The shares of common stock are subject to a repurchase right by the Company and the number of shares subject to the repurchase provision decreases over time in accordance with the vesting schedule of the original option grant. The option exercise price was paid in the form of cash of $45,735 and by delivery to the Company of full recourse promissory notes of $336,580. In the event that any holder of shares of common stock which remain subject to the repurchase provision ceases to be employed by the Company, the Company has the right to repurchase such shares for 90 days at a price equal to the original exercise price. The shares generally vest over two to four years from the initial grant date, provided that the holder continues to be employed by the Company. As the shares of restricted common stock vest, they cease to be subject to the repurchase provision. As of December 31, 1999, an aggregate of 116,719 shares remain subject to repurchase. Stock options and restricted common stock generally vest over two to four years and provide for the acceleration of vesting upon a change of control of the Company. F-15 83 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of outstanding and exercisable options as of December 31, 1999 is as follows:
WEIGHTED AVERAGE REMAINING EXERCISE NUMBER CONTRACTUAL NUMBER PRICE OUTSTANDING LIFE EXERCISABLE -------- ----------- ----------- ----------- $0.20 186,085 6.36 169,539 0.375 99,604 7.39 65,407 0.80 570,051 7.79 308,364 2.80 185,257 8.28 96,792 4.20 719,706 7.91 272,740 6.00 212,219 9.15 49,051 7.50 127,791 8.01 18,459 10.20 575,747 9.78 9,000 11.05 19,000 9.55 -- 16.67 207 .63 207 45.83 13 4.25 13 --------- ----- ------- $0.20-$45.83 2,695,680 8.30 989,572
In 1998, the Company recorded deferred compensation in connection with certain stock option grants, of approximately $506,250, which represents the aggregate difference between the estimated fair market value of the common stock and the exercise price of the stock options. In connection with an employee termination, an option to purchase 85,000 shares of common stock was canceled, and the related unamortized deferred compensation of $344,250 was reversed. In 1998 and 1999, the Company recorded additional deferred compensation of approximately $252,000 and $293,300, respectively, which represents the estimated fair value of stock options granted to non-employees. The remaining unamortized deferred compensation of $225,111 at December 31, 1999 will be recognized as compensation expense over the vesting term of the related options. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 requires the measurement of the fair value of stock options or warrants to be included in the statement of income or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS No. 123. The Company has computed the value of options granted in 1997, 1998 and 1999 using the Black-Scholes option-pricing model prescribed by SFAS No. 123. The following table shows the weighted average assumptions used in the applicable periods and the weighted average fair market value of the options granted in each period.
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1998 1999 ----------- ------- -------------- Risk-free interest rate................................... 6.5%-6.75% 5.47% 4.34%-5.91% Expected dividend yield................................... -- -- -- Expected life............................................. 7 years 7 years 7 years Expected volatility....................................... 60% 60% 60% Weighted average fair market value of options granted..... $0.48 $1.92 $6.29
F-16 84 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had compensation cost for these options been determined consistent with SFAS No. 123, the Company's net loss and pro forma net loss per common share would have been increased to the following pro forma amounts:
YEAR ENDED DECEMBER 31, ------------------------------------------- 1997 1998 1999 ------------ ------------ ----------- Net loss As reported....................................... $ (9,885,855) $(13,607,233) $(7,039,305) ============ ============ =========== Pro forma....................................... $(10,073,236) $(13,842,377) $(7,901,550) ============ ============ =========== Basic and diluted net loss per common share As reported..................................... $ (15.63) $ (11.70) $ (4.57) ============ ============ =========== Pro forma....................................... $ (16.54) $ (11.91) $ (5.14) ============ ============ =========== Pro forma basic and diluted net loss per common share As reported..................................... $ (.56) =========== Pro forma....................................... $ (.63) ===========
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. Also, because options vest over several years and the Company expects to grant options in future years, the above pro forma results of applying the provisions of SFAS No. 123 are not necessarily representative of the pro forma results in future years. 1991 AMENDED AND RESTATED STOCK OPTION PLAN The Company's 1991 Amended and Restated Stock Option Plan (the "1991 Plan") provides for the granting, at the discretion of the Board of Directors, of options for the purchase of up to 3,360,000 shares of common stock to employees, directors and advisors. Option prices are determined by the Board of Directors. 1998 STOCK INCENTIVE PLAN The Company's 1998 Stock Incentive Plan (the "Incentive Plan") was adopted by the Board of Directors on July 8, 1998 and is intended to replace the 1991 Plan. The Board of Directors has authorized the Compensation Committee to administer the Incentive Plan, including the granting of options to executive officers. At December 31, 1999, the Incentive Plan provided for the granting, at the discretion of the Compensation Committee, of options for the purchase of up to 3,000,000 shares of common stock (subject to adjustment in the event of stock splits and other similar events) to employees, directors and advisors. Option prices are determined by the Compensation Committee, but cannot be less than 100% of fair market value for incentive stock options (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). 1998 DIRECTOR STOCK OPTION PLAN In February 1998, the Company adopted the 1998 Director Stock Option Plan ("Director Plan"). Under the terms of this plan, directors of the Company who are not employees of the Company are eligible to receive F-17 85 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) nonstatutory options to purchase shares of common stock. At December 31, 1999, a total of 200,000 shares of common stock could be issued upon exercise of options under this plan. The initial options granted under the Director Plan are exercisable as to 50% of the option as of the date of grant and as to one-sixth of the shares on the first, second and third anniversaries of the date of grant, provided that the optionee continues to serve as a director and provide for the acceleration of vesting upon a change of control of the Company. Additional options granted will be exercisable in three equal annual installments on each of the first, second and third anniversaries of the date of grant, provided that the optionee continues to serve as a director. Options granted under the Director Plan terminate on the earlier of (i) ten years from the date of grant, or (ii) sixty days after the optionee ceases to serve as a director. 1999 EMPLOYEE STOCK PURCHASE PLAN In December 1999, the Company adopted its 1999 Employee Stock Purchase Plan (the "Purchase Plan"), subject to the closing of its initial public offering. The Purchase Plan allows eligible employees the right to purchase shares of common stock at the lower of 85% of the closing price per share of common stock on the first or last day of an offering period. Each offering period is six months. An aggregate of 300,000 shares of common stock have been reserved for issuance pursuant to the Purchase Plan. (10) NET LOSS PER SHARE The Company follows Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. Basic net loss per share represents net loss available to common stockholders divided by the weighted average number of common shares outstanding. The Company has excluded all shares of restricted common stock that are subject to repurchase by the Company from the weighted average number of common shares outstanding. Diluted net loss per share is the same as basic net loss per share as the inclusion of common stock issuable pursuant to the exercise of stock options, warrants and the conversion of convertible preferred stock would be antidilutive. The Company evaluated the requirements of the Securities and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98"), and concluded that there are no nominal issuances of common stock or common stock equivalents which would be required to be shown as outstanding for all periods as outlined in SAB 98. Pro forma net loss per share includes the weighted average common shares outstanding and reflects the automatic conversion of all convertible preferred stock into common stock upon completion of the Company's initial public offering based on the original issuance date using the "if-converted" method. (11) DISTRIBUTION AND LICENSING AGREEMENTS The Company has entered into various distribution, licensing and royalty agreements relating to its products with distributors covering both the domestic and the international markets. These agreements have terms ranging from two to ten years. In connection with these agreements, approximately $1,770,000 and $2,674,000 in revenue was deferred as of December 31, 1998 and 1999, respectively. The deferred revenue relates to prepayments for monitoring systems under minimum purchase obligations and also includes prepaid license and royalty fees. The deferred revenue will be recognized upon product shipment and as license and royalty fees are earned. License and royalty fees are related to future technological developments and will be recognized upon shipment of units incorporating the technology. (12) 401(k) SAVINGS PLAN The Company has a 401(k) savings plan in which substantially all employees can participate. Employer contributions are at the discretion of the Board of Directors and vest ratably over five years. The Company made no contributions to the plan during the years ended December 31, 1997, 1998 and 1999. F-18 86 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) COMMITMENTS AND CONTINGENCIES LEASES The Company leases office space under operating leases that expire in October 2000. Rent expense was approximately $346,000, $414,000 and $440,000 in 1997, 1998 and 1999, respectively. The Company has entered into a seven-year lease of approximately 61,000 square feet of development, production and administrative space beginning in the first quarter of 2000. Future gross minimum lease commitments for all operating leases as of December 31, 1999 are as follows: 2000..................................................... $1,156,541 2001..................................................... 996,171 2002..................................................... 1,021,197 2003..................................................... 996,180 2004..................................................... 952,306 Thereafter............................................... 1,848,597 ---------- Total minimum lease payments............................. $6,970,992 ==========
SUBLEASES During 1997, the Company had a sublease agreement whereby a portion of existing office space was leased to a third party under an operating lease. Rental income for 1997 approximated $113,000. This agreement expired in 1997. (14) OTHER RELATED PARTY TRANSACTIONS In addition to the transactions discussed in Note 9, during 1997 and 1998, the Company loaned a total of $107,000 and $53,000, respectively, to certain employees of the Company. The loans are evidenced by promissory notes bearing interest with rates ranging from 6.42% to 8% per annum. The outstanding balance on these notes at December 31, 1998 and 1999 was approximately $138,000 and $131,000, respectively. (15) ACCRUED LIABILITIES Accrued liabilities consist of the following:
DECEMBER 31, ------------------------ 1998 1999 ---------- ---------- Payroll and payroll-related......................... $1,220,000 $2,390,343 Clinical studies.................................... 254,000 255,500 Warranty............................................ 599,037 1,348,000 Other............................................... 1,590,370 1,943,711 ---------- ---------- $3,663,407 $5,937,554 ========== ==========
(16) SEGMENT INFORMATION AND ENTERPRISE REPORTING The Company has adopted the FASB's Statements of Financial Accounting Standards No. 131, or SFAS 131, Disclosures about Segments of an Enterprise and Related Information, effective for fiscal years beginning after December 31, 1997. The Company operates in one reportable segment as it has one family of anesthesia monitoring systems. The Company does not disaggregate financial information by product or geographically, other than export sales by region and sales by product, for management purposes. Substantially all of the Company's assets are located within the United States. All of the Company's products are manufactured in the United States. F-19 87 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue by geographic destination and as a percentage of total revenue is as follows:
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1998 1999 ---------- ----------- ----------- GEOGRAPHIC AREA BY DESTINATION Domestic..................................... $1,881,409 $10,296,424 $24,629,484 International.............................. 1,186,164 941,781 2,558,166 ---------- ----------- ----------- $3,067,573 $11,238,205 $27,187,650 ========== =========== ===========
YEAR ENDED DECEMBER 31, ---------------------------------------- 1997 1998 1999 ---------- ----------- ----------- GEOGRAPHIC AREA BY DESTINATION Domestic..................................... 61% 92% 91% International.............................. 39 8 9 --- --- --- 100% 100% 100% === === ===
(17) VALUATION AND QUALIFYING ACCOUNTS The following table sets forth activity in the Company's allowance for doubtful accounts:
BALANCE AT BALANCE AT BEGINNING OF CHARGES TO END OF PERIOD EXPENSES DEDUCTIONS PERIOD ------------ ---------- ---------- ---------- Year Ended -- December 31, 1997........................... $ 50,000 $ 14,333 $1,933 $ 62,400 December 31, 1998......................... 62,400 146,500 8,900 200,000 December 31, 1999......................... 200,000 212,100 5,100 407,000
(18) LOAN AGREEMENTS In June 1998, the Company entered into a loan agreement with a commercial bank. Under the terms of this loan agreement, the Company could borrow up to $5.0 million for working capital and equipment. At December 31, 1998, the Company had outstanding approximately $2,162,000 under the equipment portion of the loan agreement and there were no borrowings under the working capital portion of the loan agreement. In December 1999, the Company renegotiated its loan agreement with the bank. Borrowings outstanding at December 31, 1999 of approximately $1.4 million under the equipment portion of the new loan agreement are payable in monthly installments of approximately $60,000 plus interest through December 31, 2001. The working capital portion of the original loan agreement was replaced with a term loan portion. Borrowings under the term loan portion outstanding at December 31, 1999 of approximately $2.8 million are payable in 36 monthly installments of approximately $79,000 plus interest commencing January 2000. Interest on both the equipment portion and the term loan portion of the new loan agreement is at the prime rate plus 1.0% (9.5% at December 31, 1999) up to and including the closing date of the Company's initial public offering. After the closing of the Company's initial public offering, the interest rate becomes the prime rate plus 0.5%. At December 31, 1999, no additional amounts may be borrowed under the equipment portion or term loan portion of the new loan agreement. Approximately $1.5 million is available under the standby letter of credit portion of the new loan agreement. The new loan agreement contains restrictive covenants that require the Company to maintain liquidity and borrowing base ratios. The new loan agreement also restricts the Company from declaring and paying cash dividends. The new loan agreement is secured by substantially all of the Company's assets. F-20 88 ASPECT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) In July 1999, the Company entered into an agreement under which it can sell a portion of its existing and future investments in sales-type leases to a third-party finance company. In the second half of 1999, the Company sold approximately $1.9 million of investments in sales-type leases. In accordance with Statement of Financial Accounting Standards No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, the proceeds from these sales are classified as debt. Payments on the outstanding principal under this debt match the timing of the payments due on the underlying investments in sales-type leases. Future principal payments under the Company's debt agreements are as follows: 2000..................................................... $2,125,526 2001..................................................... 2,146,209 2002..................................................... 1,345,792 2003..................................................... 315,224 2004..................................................... 65,259 ---------- Total principal payments................................. $5,998,010 ==========
(19) OTHER EXPENSE In 1998, the Company incurred approximately $775,000 in one-time charges related to a proposed initial public offering that was terminated in August 1998. F-21 89 [Aspect Medical Systems LOGO] 90 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the various expenses, all of which will be borne by the Registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee, the NASD filing fee and the Nasdaq National Market listing fee. SEC registration fee........................................ $ 12,405 NASD filing fee........................................ 4,985 Nasdaq National Market listing fee..................... 95,000 Blue Sky fees and expenses............................. 15,000 Transfer Agent and Registrar fees...................... 2,000 Accounting fees and expenses........................... 250,000 Legal fees and expenses................................ 350,000 Printing and mailing expenses.......................... 150,000 Miscellaneous.......................................... 20,610 -------- Total............................................. $900,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article EIGHTH of the Registrant's Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") provides that no director of the Registrant shall be personally liable for any monetary damages for any breach of fiduciary duty as a director, except to the extent that the Delaware General Corporation Law prohibits the elimination or limitation of liability of directors for breach of fiduciary duty. Article NINTH of the Registrant's Restated Certificate of Incorporation provides that a director or officer of the Registrant (a) shall be indemnified by the Registrant against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement incurred in connection with any litigation or other legal proceeding (other than an action by or in the right of the Registrant) brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful and (b) shall be indemnified by the Registrant against all expenses (including attorneys' fees) and amounts paid in settlement incurred in connection with any action by or in the right of the Registrant brought against him by virtue of his position as a director or officer of the Registrant if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Registrant, except that no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the Registrant, unless a court determines that, despite such adjudication but in view of all of the circumstances, he is entitled to indemnification of such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful, on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, he is required to be indemnified by the Registrant against all expenses (including attorneys' fees) incurred in connection therewith. Expenses shall be advanced to a director or officer at his request, provided that he undertakes to repay the amount advanced if it is ultimately determined that he is not entitled to indemnification for such expenses. Indemnification is required to be made unless the Registrant determines that the applicable standard of conduct required for indemnification has not been met. In the event of a determination by the Registrant that the director or officer did not meet the applicable standard of conduct required for indemnification, or if the Registrant fails to make an indemnification payment within 60 days after such payment is claimed by such person, such person is permitted to petition the court to make an independent determination as to whether II-1 91 such person is entitled to indemnification. As a condition precedent to the right of indemnification, the director or officer must give the Registrant notice of the action for which indemnity is sought and the Registrant has the right to participate in such action or assume the defense thereof. Article NINTH of the Registrant's Restated Certificate of Incorporation further provides that the indemnification provided therein is not exclusive, and provides that in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors or officers the Registrant must indemnify those persons to the fullest extent permitted by such law as so amended. Section 145 of the Delaware General Corporation Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification shall be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Under Section 7 of the Underwriting Agreement, the Underwriters are obligated, under certain circumstances, to indemnify directors and officers of the Registrant against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Set forth below is information regarding shares of Common Stock and Preferred Stock issued, and options and warrants granted, by the Registrant within the past three years. Further included is the consideration, if any, received by the Registrant for such shares, options and warrants and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission under which exemption from registration was claimed. Some of the transactions described below involved directors, officers and 5% stockholders of the Registrant. See "Related-Party Transactions." Certain Sales of Securities. Within the past three years, the Registrant has issued the following securities that were not registered under the Securities Act. (a) Issuances of Capital Stock and Warrants. 1. On February 26, 1997, August 8, 1997 and October 7, 1997, the Registrant issued and sold an aggregate of 3,439,949 shares of its Series C Convertible Preferred Stock to a group of investors at a purchase price of $3.75 per share. 2. On February 13, 1998, the Registrant issued and sold an aggregate of 1,666,234 shares of its Series D Convertible Preferred Stock to a group of investors at a purchase price of $7.00 per share. 3. On December 17, 1998, the Registrant issued and sold an aggregate of 1,753,729 shares of its Series E Convertible Preferred Stock, coupled with Warrants to purchase an aggregate of 192,902 shares of Common Stock, to a group of investors at a purchase price of $10.00 per share. (b) Stock Option Grants. The Registrant's Amended and Restated 1991 Stock Option Plan was adopted by the Board of Directors and approved by the stockholders of the Registrant in April 1991. As of December 31, 1999, options to purchase 1,719,466 shares of Common Stock had been exercised for an aggregate consideration of $649,969 and options to purchase 1,521,356 shares of Common Stock, at a weighted average exercise price of $2.05 per share, were outstanding under the plan. II-2 92 The Registrant's 1998 Stock Incentive Plan was adopted by the Board of Directors and approved by the stockholders of the Registrant in July 1998. As of December 31, 1999, options to purchase 4,370 shares of Common Stock had been exercised for an aggregate consideration of $21,533 and options to purchase 1,119,324 shares of Common Stock, at a weighted average exercise price of $8.05 per share, were outstanding under the plan. The Registrant's 1998 Director Stock Option Plan was adopted by the Board of Directors and approved by the stockholders of the Registrant in February 1998. As of December 31, 1999, options to purchase 5,000 shares of Common Stock had been exercised for an aggregate consideration of $14,000 and options to purchase 55,000 shares of Common Stock, at a weighted average exercise price of $4.94 per share, were outstanding under such plan. No underwriters were involved in the foregoing sales of securities. The sales were made in reliance upon exemptions from the registration provisions of the Securities Act set forth in Sections 3(b) and 4(2) thereof relative to sales by an issuer not involving any public offering or the rules and regulations thereunder or, in the case of options to purchase Common Stock, Rule 701 of the Securities Act. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) Exhibits:
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1** Form of Underwriting Agreement. 3.1** Restated Certificate of Incorporation of the Registrant. 3.2** Form of Restated Certificate of Incorporation to be in effect upon the closing of the offering. 3.3** By-Laws of the Registrant, as amended. 3.4** Form of Amended and Restated By-laws of the Registrant to be in effect upon the closing of the offering. 4.1** Specimen common stock certificate. 4.2** See Exhibits 3.2 and 3.4 for provisions of the Registrant's certificate of incorporation and by-laws defining the rights of holders of common stock. 5.1** Opinion of Hale and Dorr LLP. 10.1** 1998 Director Stock Option Plan, as amended. 10.2+ International Distribution Agreement, dated as of January 21, 1998, by and between the Registrant and Nihon Kohden Corporation. 10.3+ International License Agreement, dated as of January 21, 1998, by and between the Registrant and Nihon Kohden Corporation. 10.4** Trademark License Agreement, dated May 25, 1994, by and between the Registrant and Aspect Electronics, Inc. 10.5** License Agreement, dated as of October 31, 1995, by and between the Registrant and Siemens Medical Systems, Inc. 10.6+ Product Agreement, dated May 5, 1999, by and between the Registrant and Drager Medizintechnik GmbH. 10.7+ OEM Development and Purchase Agreement, dated August 6, 1999, by and between the Registrant and Agilent Technologies, Inc. (formerly part of Hewlett-Packard Company). 10.8+ Letter Agreement, dated August 27, 1999, by and between the Registrant and Agilent Technologies, Inc. (formerly part of Hewlett-Packard Company).
II-3 93
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.9+ Distribution and License Agreement, dated as of April 1, 1996, between SpaceLabs Medical, Inc. and the Registrant. 10.10** Property Lease at 2 Vision Drive, by and between the Registrant and Vision Drive, Inc., successor in interest to Natick Executive Park Trust No. 2, dated September 8, 1994, as amended, together with Subordination, Non-Disturbance and Attornment Agreement, by and between the Registrant and Teachers Insurance Association of America, dated June 15, 1995. 10.11** Lease Extension Agreement, dated as of August 7, 1997, by and between the Registrant and Vision Drive, Inc. 10.12** Loan and Security Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank; together with an Intellectual Property Security Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank and a Securities Account Control Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank. 10.13** Promissory Note, dated February 18, 1997, as amended on April 14, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of February 18, 1997, as amended on April 14, 1997, by and between the Registrant and Nassib G. Chamoun. 10.14** Promissory Note, dated May 1, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of May 1, 1997, by and between the Registrant and Nassib G. Chamoun. 10.15** Promissory Note, dated May 1, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of May 1, 1997, by and between the Registrant and Nassib G. Chamoun. 10.16** Form of Promissory Note made in favor of the Registrant by certain directors and executive officers, together with Form of Pledge Agreement, by and between the Registrant and certain directors and executive officers, together with a schedule of material terms. 10.17** Promissory Note, dated September 24, 1997, made in favor of the Registrant by Jeffrey Barrett. 10.18** Promissory Note, dated April 10, 1998, made in favor of the Registrant by Jeffrey Barrett, together with Pledge Agreement, dated as of April 10, 1998, by and between the Registrant and Jeffrey Barrett. 10.19** Series E Convertible Preferred Stock and Warrant Purchase Agreement, dated December 17, 1998, by and among the Registrant and the several purchasers named on Schedule I thereto. 10.20** Fourth Amended and Restated Right of First Refusal and Co-Sale Agreement, dated December 17, 1998, by and among the Registrant and the several parties named on Schedules I, II and III thereto. 10.21** Fourth Amended and Restated Registration Rights Agreement, dated December 17, 1998, by and among the Registrant and the several purchasers named on the signature pages thereto. 10.22** Fourth Amended and Restated Voting Agreement, dated December 17, 1998, by and among the Registrant and the several parties named on Schedules I, II and III thereto. 10.23** Form of Warrant to purchase the Registrant's common stock, together with schedule of Warrantholders. 10.24+ Supplier Agreement, dated August 13, 1999, between Novation, LLC and the Registrant. 10.25+ Medical Products Distribution Agreement, dated October 1, 1999, between Hewlett-Packard Company and the Registrant.
II-4 94
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.26+ OEM Development and Purchase Agreement, dated December 22, 1999, by and between the Registrant and GE Marquette Medical Systems, Inc. 23.1** Consent of Hale and Dorr LLP (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 24.1** Power of Attorney. 27.1** Financial Data Schedule for fiscal year end December 31, 1998. 27.2 Financial Data Schedule for fiscal year end December 31, 1999.
- ------------ + Confidential treatment has been requested as to certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such portions have been omitted and filed separately with the Securities and Exchange Commission. ** Previously filed. Schedules have been omitted because they are not required or because the required information is presented in the Company's consolidated financial statements or related notes. ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions contained in the Registrant's Restated Certificate of Incorporation, the Underwriting Agreement, the laws of the State of Delaware, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel that the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 95 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 5 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Natick, Massachusetts on January 20, 2000. ASPECT MEDICAL SYSTEMS, INC. By: /s/ J. NEAL ARMSTRONG ------------------------------------ J. Neal Armstrong Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 5 to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ NASSIB G. CHAMOUN* President, Chief Executive January 20, 2000 - --------------------------------------------------- Officer and Director Nassib G. Chamoun (Principal Executive Officer) /s/ J. BRECKENRIDGE EAGLE* Chairman of the Board of January 20, 2000 - --------------------------------------------------- Directors J. Breckenridge Eagle /s/ J. NEAL ARMSTRONG Vice President and Chief January 20, 2000 - --------------------------------------------------- Financial Officer (Principal J. Neal Armstrong Financial and Accounting Officer) /s/ BOUDEWIJN L.P.M. BOLLEN* Director January 20, 2000 - --------------------------------------------------- Boudewijn L.P.M. Bollen /s/ STEPHEN E. COIT* Director January 20, 2000 - --------------------------------------------------- Stephen E. Coit /s/ EDWIN M. KANIA* Director January 20, 2000 - --------------------------------------------------- Edwin M. Kania /s/ LESTER J. LLOYD* Director January 20, 2000 - --------------------------------------------------- Lester J. Lloyd /s/ TERRANCE MCGUIRE* Director January 20, 2000 - --------------------------------------------------- Terrance McGuire /s/ DONALD STANSKI* Director January 20, 2000 - --------------------------------------------------- Donald Stanski *By: /s/ J. NEAL ARMSTRONG --------------------------------------------- J. Neal Armstrong Attorney-In-Fact
II-6 96 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- ----------- 1.1** Form of Underwriting Agreement. 3.1** Restated Certificate of Incorporation of the Registrant. 3.2** Form of Restated Certificate of Incorporation to be in effect upon the closing of the offering. 3.3** By-Laws of the Registrant, as amended. 3.4** Form of Amended and Restated By-laws of the Registrant to be in effect upon the closing of the offering. 4.1** Specimen common stock certificate. 4.2** See Exhibits 3.2 and 3.4 for provisions of the Registrant's certificate of incorporation and by-laws defining the rights of holders of common stock. 5.1** Opinion of Hale and Dorr LLP. 10.1** 1998 Director Stock Option Plan, as amended. 10.2+ International Distribution Agreement, dated as of January 21, 1998, by and between the Registrant and Nihon Kohden Corporation. 10.3+ International License Agreement, dated as of January 21, 1998, by and between the Registrant and Nihon Kohden Corporation. 10.4** Trademark License Agreement, dated May 25, 1994, by and between the Registrant and Aspect Electronics, Inc. 10.5** License Agreement, dated as of October 31, 1995, by and between the Registrant and Siemens Medical Systems, Inc. 10.6+ Product Agreement, dated May 5, 1999, by and between the Registrant and Drager Medizintechnik GmbH. 10.7+ OEM Development and Purchase Agreement, dated August 6, 1999, by and between the Registrant and Agilent Technologies, Inc. (formerly part of Hewlett-Packard Company). 10.8+ Letter Agreement, dated August 3, 1999, by and between the Registrant and Agilent Technologies, Inc. (formerly part of Hewlett-Packard Company). 10.9+ Distribution and License Agreement, dated as of April 1, 1996, between SpaceLabs Medical, Inc. and the Registrant. 10.10** Property Lease at 2 Vision Drive, by and between the Registrant and Vision Drive, Inc., successor in interest to Natick Executive Park Trust No. 2, dated September 8, 1994, as amended, together with Subordination, Non-Disturbance and Attornment Agreement, by and between the Registrant and Teachers Insurance Association of America, dated June 15, 1995. 10.11** Lease Extension Agreement, dated as of August 7, 1997, by and between the Registrant and Vision Drive, Inc. 10.12** Loan and Security Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank; together with an Intellectual Property Security Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank and a Securities Account Control Agreement, dated as of December 10, 1999, by and between the Registrant and Imperial Bank. 10.13** Promissory Note, dated February 18, 1997, as amended on April 14, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of February 18, 1997, as amended on April 14, 1997, by and between the Registrant and Nassib G. Chamoun.
97
EXHIBIT NO. DESCRIPTION - ------- ----------- 10.14** Promissory Note, dated May 1, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of May 1, 1997, by and between the Registrant and Nassib G. Chamoun. 10.15** Promissory Note, dated May 1, 1997, made in favor of the Registrant by Nassib G. Chamoun, together with Pledge Agreement, dated as of May 1, 1997, by and between the Registrant and Nassib G. Chamoun. 10.16** Form of Promissory Note made in favor of the Registrant by certain directors and executive officers, together with Form of Pledge Agreement, by and between the Registrant and certain directors and executive officers, together with a schedule of material terms. 10.17** Promissory Note, dated September 24, 1997, made in favor of the Registrant by Jeffrey Barrett. 10.18** Promissory Note, dated April 10, 1998, made in favor of the Registrant by Jeffrey Barrett, together with Pledge Agreement, dated as of April 10, 1998, by and between the Registrant and Jeffrey Barrett. 10.19** Series E Convertible Preferred Stock and Warrant Purchase Agreement, dated December 17, 1998, by and among the Registrant and the several purchasers named on Schedule I thereto. 10.20** Fourth Amended and Restated Right of First Refusal and Co-Sale Agreement, dated December 17, 1998, by and among the Registrant and the several parties named on Schedules I, II and III thereto. 10.21** Fourth Amended and Restated Registration Rights Agreement, dated December 17, 1998, by and among the Registrant and the several purchasers named on the signature pages thereto. 10.22** Fourth Amended and Restated Voting Agreement, dated December 17, 1998, by and among the Registrant and the several parties named on Schedules I, II and III thereto. 10.23** Form of Warrant to purchase the Registrant's common stock, together with schedule of Warrantholders. 10.24+ Supplier Agreement, dated August 13, 1999, between Novation, LLC and the Registrant. 10.25+ Medical Products Distribution Agreement, dated October 1, 1999, between Hewlett-Packard Company and the Registrant. 10.26+ OEM Development and Purchase Agreement, dated December 22, 1999, by and between the Registrant and GE Marquette Medical Systems, Inc. 23.1** Consent of Hale and Dorr LLP (contained in Exhibit 5.1). 23.2 Consent of Arthur Andersen LLP. 24.1** Power of Attorney. 27.1** Financial Data Schedule for fiscal year end December 31, 1998. 27.2 Financial Data Schedule for fiscal year end December 31, 1999.
- ------------ + Confidential treatment has been requested as to certain portions of this Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such portions have been omitted and filed separately with the Securities and Exchange Commission. ** Previously filed. EX-10.2 2 INTERNATIONAL DISTRIBUTION AGREEMENT,DATED 1/21/98 1 Exhibit 10.2 Aspect Medical Systems, Inc. has requested that the marked portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. INTERNATIONAL DISTRIBUTION AGREEMENT THIS AGREEMENT is made and entered into as of January 21, 1998, by and between ASPECT MEDICAL SYSTEMS, INC. ("Aspect"), a Delaware, U.S.A. corporation having offices at 2 Vision Drive, Natick, Massachusetts 01760-2059, U.S.A., Attention: J. Breckenridge Eagle, Telecopy No.: 1-508-647-2059, and NIHON KOHDEN CORPORATION ("NK"), a Japanese company having offices at 31-4 Nishiochiai, 1-chome, Shinjuku-ku, Tokyo 161 Japan, Attention: Yuzuru Nagamitsu, Telecopy No.: 81-3-5996-8101. WITNESSETH: In consideration of the mutual covenants and conditions herein contained, and intending to be legally bound hereby, Aspect and NK (the "Parties") mutually agree as follows: 1. PRODUCTS AND TERRITORY (a) Aspect hereby appoints NK on an exclusive basis (except as provided in (i) below) as its sole distributor in Japan (the "Territory") for the products listed on Exhibit A hereto (the "Products") during the term of this Agreement; PROVIDED, HOWEVER, that: (i) NK acknowledges that Aspect has an existing bispectral index ("BIS") module license and sensor distribution arrangement with SpaceLabs Medical, Inc. ("SMI"); and (ii) if any non-Japanese patient monitoring companies other than SMI develop a bispectral index ("BIS") module for the Japanese market, NK shall supply BIS sensors (as described in Exhibit A hereto) to such companies' distributors (including such companies' branches and Affiliates) in the Territory at a reasonable price. If such non-Japanese patient monitoring companies' distributor in the Territory prefers to purchase BIS sensors from such non-Japanese patient monitoring companies out of Japan, they may do so, provided, however, that Aspect shall not directly sell BIS sensors to such companies' distributors in Japan. (b) NK shall not solicit orders for any Product from any prospective purchaser outside the Territory. If NK receives an order for any Product from a prospective purchaser outside the Territory, NK shall immediately refer that order to Aspect. NK shall not accept any such orders. NK may not deliver or tender (or cause to be delivered or tendered) any Product outside of the Territory. NK shall not sell any Product to a purchaser in the Territory if NK knows or has reason to believe that such purchaser intends to remove that Product from the Territory. If Aspect receives any order or inquiry for any Product from a prospective purchaser in the Territory, Aspect shall immediately refer such order or inquiry to NK. 2 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 2. PRICES AND PAYMENT. (a) NK shall order Products from Aspect by submitting a written purchaser order identifying the Products ordered, requested delivery date(s) and any export/import information required to enable Aspect to fill the order. All orders for Products are subject to written acceptance by Aspect's Controller. (b) If a purchase order is accepted in accordance with Section 2(a) above, the transfer prices for Products covered by such purchase order shall be as follows: (i) FOR MONITORS: (A) the transfer price for demonstration units of the A-1050 monitor shall be US[**], but such units may not be resold; (B) prior to introduction of the A-2000 monitor in the Territory, the transfer price for A-1050 monitors will be US[**]; after introduction of the A-2000 monitor in the Territory (which will occur no later than one year after the introduction of the A-2000 monitor in the United States), the transfer price for the A-1050 monitor shall be reevaluated by the Parties; (C) the transfer price for the A-2000 monitor shall be set by Aspect at such time as it is introduced in the Territory. Aspect agrees that the transfer price for the A-2000 will be no more than US[**]; (D) Aspect shall extend volume discounts for monitor sales when hospital customers agree to purchase more than one monitor at the same time. To administer this provision, NK shall inform Aspect from time to time (but no less frequently than quarterly) of the names, addresses, and key contacts of hospitals purchasing monitors. In the event a hospital purchases more than one monitor at the same time, Aspect will provide NK a credit applicable to NK's next monitor purchase from Aspect. These volume discounts shall be as follows: -2- 3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Percentage Volume Purchased by a Specific Hospital Discount --------------------------------------- ---------- [**] monitors [**] [**] monitors [**] [**] monitors [**] [**] monitors [**] (E) In addition, and in its discretion, Aspect shall consider, at NK's request, whether to provide a volume discount for hospitals that purchase more than one monitor at different times (E.G., hospital purchases one monitor and then agrees to purchase two more the following month) (ii) FOR SENSORS AND OTHER ACCESSORIES: (A) The transfer price for BIS sensors shall be US[**], except where BIS sensors are being used for training, demonstrations and customer evaluations, in which case the transfer price shall be US[**]. Transfer prices for accessories are listed in Exhibit B attached hereto; and (B) During the first 12 month after the date on which the Japanese Ministry of Health and Welfare ("MHW") approves the A-1050 monitor (the "MHW Approval Date" and such 12-month period hereafter referred to as a "Contract Year"), NK shall be granted a discount of [**] for all BIS sensor purchases in excess of [**]. Thereafter, the Parties shall discuss the basis for additional sensor volume discounts. Aspect's transfer prices shall be FCA (FREE CARRIER) Natick, Massachusetts, U.S.A. Notwithstanding anything contained in this Agreement to the contrary, starting with the second (2nd) Contract Year, Aspect may change those transfer prices; PROVIDED, HOWEVER, that: (i) such change may be made only once a year effective as of the first day of April with the prior written notice to be given by Aspect no later than the last day of December of the preceding year, after consulting with NK; (ii) the annual increase shall be no more than [**], except that, effective the first day of second April after the introduction of the A-2000 in the Territory, Aspect reserves the right to increase the transfer price of the A-1050 by up to[**], on a one-time basis, after consulting with NK; and (iii) no price -3- 4 change shall affect purchase orders offered by NK and accepted by Aspect prior to the date such price change becomes effective. (c) NK shall be free to establish its own pricing for Products which it resells. NK shall notify Aspect of its list prices and average selling prices to its customers as in effect from time to time. (d) The ultimate shipment of orders to NK shall be subject to the right and ability of Aspect to make such sales, and obtain required licenses and permits, under all decrees, statutes, rules and regulations of the government of the United States and agencies or instrumentalities thereof presently in effect or which may be in effect hereafter. (e) NK hereby agrees: (i) to assist Aspect in obtaining any such required licenses or permits by supplying such documentation or information as may be requested by Aspect; (ii) to comply with such decrees, statutes, rules and regulations of the government of the United States and agencies or instrumentalities thereof; (iii) to maintain the necessary records to comply with such decrees, statues, rules and regulations; (iv) to obtain all Japanese governmental approvals and licenses necessary to import the Products into the Territory; (v) not to sell, transfer or otherwise dispose of Products in violation of the export laws of the United States; and (vi) to indemnify and hold harmless Aspect from any and all fines, damages, losses, costs and expenses (including reasonable attorneys' fees) incurred by Aspect as a result of any breach of this Section 2(e) by NK. (f) Unless NK requests otherwise, all Products ordered by NK shall be packed for shipment and storage in accordance with Aspect's standard commercial practices. It is NK's obligation to notify Aspect of any special packaging requirements (which shall be at NK's expense). Aspect shall deliver Products into the possession of a common carrier designated by NK in Natick, Massachusetts, U.S.A. Risk of loss and damage to a Product shall pass to NK upon the delivery of such Products to the common carrier designated by NK. If NK does not designate a common carrier by the specified delivery date, then Aspect may do so on NK's behalf. All claims for non-conforming shipments must be made in writing to Aspect within ten days of the passing of risk of loss and damage. -4- 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (g) DELIVERY TIMES AND PAYMENT FOR PRODUCTS (i) Within fifteen (15) days after the MHW Approval Date, but in no event later than July 1, 1998 (unless through no fault of NK, the MHW Approval Date has been delayed), NK shall pay Aspect US[**] as pre-payment for the first 50 A-1050 monitors to be purchased by NK pursuant to this Agreement. Within 90 days after making such payment, NK will deliver a purchase order to Aspect for 50 monitors at a price of US[**]. Aspect agrees to deliver those monitors FCA (FREE CARRIER) Natick, Massachusetts, U.S.A. to NK in accordance with a delivery schedule to be agreed upon by the Parties, such that all of the 50 prepaid monitors are delivered to NK within six months after the MHW Approval Date. In the event Aspect is unable to deliver those 50 monitors pursuant to such schedule, Aspect agrees to refund to NK the prepayments for those monitors it is unable to deliver, until such time as those monitors are delivered. (ii) NK shall pay Aspect an additional US[**] as pre-payment for the second group of 50 A-1050 and/or A-2000 monitors to be purchased by NK pursuant to this Agreement. Such additional pre-payment shall be paid to Aspect on the earlier of: (A) the date on which the first 50 monitors have been resold by NK; or (B) the end of the first (1st) Contract Year. NK shall deliver a purchase order to Aspect for these second 50 monitors at price of US[**] at such time. Aspect agrees to deliver those monitors FCA (FREE CARRIER) Natick, Massachusetts, U.S.A. to NK in accordance with a delivery schedule to be agreed upon by the Parties, such that all of the second 50 prepaid monitors are delivered to NK within six months after receiving this purchase order. In the event Aspect is unable to deliver that second group of 50 monitors pursuant to such schedule, Aspect agrees to refund to NK the prepayments for those monitors it is unable to deliver, until such time as the monitors are delivered. (iii) For all other purchase orders of Products, Aspect agrees to deliver such Products within 90 days after accepting such orders. A purchase order placed by NK shall be deemed accepted by Aspect, unless notified in writing to the contrary within ten (10) days after Aspect receives it. (iv) For any Product not pre-paid in accordance with Section 2(g)(i) and (ii) above, all amounts due and payable with respect to such Product delivered by Aspect in accordance with Section 2(f) hereof shall be paid in full within 30 days after the date of Aspect's invoice therefor. All such amounts shall be paid in U.S. Dollars by wire transfer, to such bank or account as Aspect may from time to time designate in writing. All costs incurred in connection with such wire transfer shall be the -5- 6 responsibility of NK. Whenever any amount hereunder is due on a day which is not a day on which banks in Natick, Massachusetts, U.S.A. are open for business (a "Business Day"), such amount shall be paid on the next such Business Day. Amounts hereunder shall be considered to be paid as of the day on which funds are received by Aspect's bank. No part of any amount payable to Aspect hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which NK might have or assert against Aspect, any other party or otherwise. (h) All amounts due and owing to Aspect hereunder but not paid by NK on the due date thereof shall bear interest (in U.S. Dollars) at the rate 18 per cent per annum. Such interest shall accrue on the balance of unpaid amounts from time to time outstanding from the date on which portions of such amounts become due and owing until payment thereof in full. (i) In the event of any discrepancy between any purchase order accepted by Aspect and this Agreement, the terms of this Agreement shall govern. 3. NK'S OTHER OBLIGATIONS (a) NK covenants that all of its activities under or pursuant to this Agreement shall comply with all applicable laws, rules and regulations. NK shall be responsible for obtaining all licenses, permits and approvals which are necessary or advisable for the importation and sale of the Products in the Territory and for the performance of its duties hereunder; PROVIDED, HOWEVER, that NK shall not be responsible for obtaining, and shall not obtain, an Import Approval (I.E., Yunyu Shonin) for any Product. For each Product for which the approval of the MHW is required (I.E., for which a Shonin is necessary), Aspect shall obtain a Foreign Manufacturing Approval (I.E., Gaikoku Seizo Shonin) and NK shall be Aspect's In-Country Caretaker (I.E., Kokunai Kanrinin, as this term is defined in 19-2 of Japan's Pharmaceutical Affairs Law). NK shall develop and submit to the MHW (in Aspect's name and on Aspect's behalf) the application dossier which is necessary for Aspect to obtain each such Foreign Manufacturing Approval. NK shall use its best efforts to ensure that each such application is submitted to and approved by the MHW at the earliest possible time. Except as specifically provided for in Article 4 hereof, NK shall be responsible for all costs and expenses related to the development, submission and approval of all such applications. (b) NK shall pay all of its expense, including without limitation all travel, lodging and entertainment expenses, incurred in connection with its activities hereunder, except as otherwise provided herein and/or agreed between the Parties. Aspect shall not reimburse NK for any of those expenses. -6- 7 (c) NK shall translate, at its own expense, all user and technical manuals and advertising and marketing information with respect to the Products into Japanese and provide Aspect with copies of all such materials. NK and Aspect shall jointly own all copyrights in all translations. Aspect shall not be liable for translation errors made by NK or at NK's direction or for the non-conformance of such translations with the laws and regulations in force from time to time in the Territory. NK shall indemnify and hold Aspect harmless to the extent that a third party brings claims against Aspect based on such errors or non-conformance. (d) NK shall provide Aspect with written quarterly reports, which shall include business trends, production planning of NK's primary customers, market forecasts and other reports requested by Aspect. (e) NK shall promptly give Aspect written notice of the MHW Approval Date. (f) NK confirms that it has not previously, directly or indirectly, marketed or manufactured monitoring equipment, either as stand-alone monitors or as modules for monitors, which were designed to monitor the depth of anesthesia. NK confirms that it has not previously, directly or indirectly, developed monitoring equipment, either as stand-alone monitors or as modules for monitors, which was designed to: (i) monitor the depth or effects of anesthesia being administered to patients; and (ii) indicate any index of the depth or effects of anesthesia to assist anesthesiologists to evaluate the depth or effects of anesthesia using EEG (electroencephalogram). Until the first (1st) anniversary of the termination or expiration of this Agreement, as the case may be, NK shall not, directly or indirectly, develop, market or manufacture monitoring equipment, either as stand-alone monitors or as modules for monitors which is designed to (x) monitor the depth or effects of anesthesia being administered to patients; and (y) indicate any index of the depth or effects of anesthesia to assist anesthesiologists to evaluate the depth or effects of anesthesia; PROVIDED, HOWEVER, that: (I) NK shall be permitted, at any time, to develop monitoring equipment designed to monitor the depth or effects of anesthesia using physiological measures other than EEG; (II) NK shall be permitted, at any time, to market and manufacture monitoring equipment designed to monitor the depth or effects of anesthesia using physiological measures other than EEG, so long as such equipment has been developed and manufactured by NK; (III) NK shall be permitted after the expiration or termination of this Agreement to manufacture and market monitoring equipment developed and manufactured by NK or by any third party that is designed to monitor the depth or effects of anesthesia using physiological measures other than EEG; and (IV) NK shall be permitted to continue to market and improve its existing EEG monitors and modules. Specifically, it will not be considered a violation of this Section 3(f) for NK to market and improve its existing EEG monitors or modules that display any of the following parameters of brain function: EEG, EEG trends, CSA, DSA, EP, EMG, or NCV, subject to the terms and conditions of this Section 3(f). (g) NK agrees that any publicity or advertising which shall be released by it in which Aspect is identified in connection with the Products shall be in accordance with the terms of this Agreement and with any information or data which Aspect has furnished in connection with this Agreement. Copies of all such publicity and advertising shall be forwarded promptly to Aspect. (h) NK may not customize, modify or have customized or modified any Product unless it obtains the prior written consent of Aspect, which consent may be withheld in the sole discretion of Aspect. Any unauthorized customizing or modification of any Product by NK or any third party shall relieve Aspect from any obligation it would otherwise have had with respect to such Product under the warranties described in Exhibit C attached hereto and made a part hereof. (i) NK shall engage in the market development activities described in its proposal dated July 1997 (a copy of which is attached as Exhibit D hereto), including without limitation participation in trade shows, advertising, sponsorship of BIS lectures, establishing dedicated marketing/sales/and clinical specialists, supporting BIS clinical investigators in Japan, and paying for the translation of sales materials and users manuals required to make the Product suitable for the use in the Territory. -7- 8 (j) The Products include circuitry and software programs in binary code form which are designed for use with such Products (the "Circuitry and Software"). Aspect hereby grants to NK a non-exclusive and non-transferable license, without the right to sublicense (except to purchasers of such Products), in the Territory during the term of this Agreement to use the Circuitry, the Software and related documentation provided by Aspect (the "Documentation") solely in connection with operation of the Products. NK shall not disclosure, furnish, transfer or otherwise make available the Circuitry, the Software, the Documentation or any portion thereof in any form to any third party (other than to a purchaser of the Products for use solely in connection with the operation of the Products) and shall not duplicate the Circuitry, the Software, the Documentation or any part thereof. Title to and ownership of and all proprietary rights in or related to the Circuitry, the Software, the Documentation and all partial or complete copies thereof shall at all times remain with Aspect or its licensor(s). This Agreement shall not be construed as a sale of any rights in the Circuitry, the Software, the Documentation, any copies thereof or any part thereof. All references in this Agreement to sale, resale or purchase of the Products, or references of like effect, shall, with respect to the Circuitry, the Software and the Documentation mean licenses or sublicenses of the Circuitry, the Software and the Documentation pursuant to this Section 3(j). Distributor shall not disassemble, decompile or reverse engineer the Circuitry, the Software or any part thereof. NK shall retain and shall not alter or obscure any notices, markings or other insignia which are affixed to the Software, the Documentation or any part thereof at the time of delivery of such Software or such Documentation. (k) NK shall bear all expenses incurred in connection with obtaining new reimbursement authorization for BIS monitoring. 4. ASPECT'S OBLIGATIONS (a) Aspect shall develop and host up to three (3) three-day sales and BIS training programs in the United States for key marketing/sales/and clinical specialist personnel of NK. In addition, Aspect agrees to offer one or two technical training programs of up to three days each in the United States for NK technical service representatives. Such programs shall be scheduled at dates that are mutually acceptable to the Parties (but in no event later than June 30, 1999). The travel, lodging and related costs of NK personnel attending these programs in the United States shall be borne by NK. (b) From time to time, Aspect personnel or advisers scheduled to travel to Japan shall make themselves available to provide additional training for NK personnel in Japan. The travel, lodging and related costs of Aspect personnel in connection with such visits shall be borne by Aspect. -8- 9 (c) All reasonable costs of any new clinical studies required to obtain marketing approvals for A-1050 and A-2000 monitors as EEG and BIS monitors will be shared equally by the Parties. To defray its share of the cost of such clinical studies, Aspect shall provide, free of charge, all monitors and BIS sensors reasonably needed to performance such clinical studies. NK shall bear all other costs of such clinical studies; PROVIDED, HOWEVER, that the total cost of such clinical studies shall be divided equally between the Parties. The Parties shall jointly develop strategies and acceptable timelines for these submissions. (d) Aspect shall provide NK with all relevant clinical trial data used in comparable submissions by Aspect to the U.S. Food and Drug Administration. (e) Aspect shall provide NK with copies of all marketing, sales, and promotional materials developed by Aspect with respect to the Products for the U.S. market to the extent such materials may be useful for NK's introduction of the Products in the Territory. (f) In the event that Aspect modifies, alters, changes or discontinues any Product, Aspect shall provide NK with at least four (4) months prior written notice. -9- 10 . (g) Aspect shall (i) fully comply with any applicable law, regulation and rule of the government of the United States and agencies or instrumentalities thereof; (ii) maintain all U.S. governmental approvals and licenses necessary to produce and export Products; and (iii) indemnify and hold harmless NK from reasonable costs and damages actually incurred by NK as a result of any breach of this Section 4(g) by Aspect. (h) Aspect shall immediately provide NK with a written notice upon Aspect becoming aware of the occurrence of any of the following events: (i) Aspect recalls any Product, or ceases or suspends the sale of any Product due to any problem which relates to such Product's efficacy and patient safety, in any country outside Territory; (ii) any defect of any Product, which relates to such Product's efficacy or patient safety, is published, reported or made known to the public by any third party, or found by Aspect; or (iii) any Product contributed to or caused a death or serious injury, or any Product malfunctioned and if that malfunction occurred again, it would be likely to contribute or cause a death or serious injury. 5. RELATIONSHIP OF THE PARTIES. (a) NK shall be considered to be an independent contractor. The relationship between Aspect and NK shall not be construed to be that of employer and employee, nor to constitute a partnership, joint venture or agency of any kind. Neither Party shall have any right to enter into any contracts or commitments in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever. (b) NK shall not obligate or purport to obligate Aspect by issuing or making any affirmations, representations, warranties or guaranties with respect to Products to any third party, other than the warranties described in Exhibit C hereto. 6. MINIMUM PURCHASE REQUIREMENTS. (a) NK shall purchase a sufficient amount of Products from Aspect so as to meet or exceed both the minimum purchase requirement for monitors set forth in Section 6(a)(i) below and the minimum purchase requirement for sensors set forth in Section 6(a)(ii) below. -10- 11 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (i) PURCHASES OF MONITORS: (A) For the first (1st) Contract Year, NK's minimum purchase requirement shall be the greater of: (i) [**] monitors, [**] monitors or any combination thereof; and (ii) [**] monitors in the United States in the immediately preceding [**]. (B) For the second (2nd) Contract Year, NK's minimum purchase requirement shall be the greater of: (i) [**] monitors, [**] monitors or any combination thereof; and (ii) [**] monitors in the United States in the immediately preceding [**]. (C) For the third (3rd) Contract Year, NK's minimum purchase requirement shall be the greater of: (i) [**] monitors, [**] monitors or any combination thereof; and (ii) [**] the United States in the immediately preceding [**]. For the purposes of this provision, a "purchase" of monitors within a specified time period shall mean paying Aspect for such monitors on or before the last day of such period. (ii) PURCHASES OF SENSORS. After MHW Approval Date, NK's minimum purchase of sensors from Aspect per year shall be[**] for each monitor resold to NK's customers. For the purpose of this provision, such one year period for the minimum purchase of sensors for each monitor shall separately commence on the first day of the month following the month when NK resells such monitor to NK's customers. To administer this provision, NK shall inform Aspect from time to time (but no less frequently than quarterly) of the names and addresses of hospitals purchasing monitors. The sensors purchased by NK at US[**] under Section 2(b)(ii) herein shall not be counted toward this minimum purchase of sensors. For the purpose of this provision, a "purchase" of sensors within a Contract Year shall mean paying Aspect for such sensors on or before the last day of such Contract Year. (b) For the purposes of determining Aspect's A-1050 monitor and A-2000 monitor sales in the United States during the relevant periods, monitors that are placed by Aspect free-of-charge for any reason shall not be considered a sale. Aspect hereby gives NK the right to audit Aspect's reports of monitor sales in a reasonable manner to confirm the accuracy of such reports. (c) Failure to meet either of the minimum purchase requirements described in Sections 6(a)(i) and (ii) above shall constitute a material breach of this Agreement for the purposes of Section 11(a) below. Termination shall be the only consequence of NK failing to satisfy either of these minimum purchase requirements. -11- 12 7. TRADEMARKS, SERVICE MARKS AND TRADE NAMES. (a) NK may use Aspect's trademarks, service marks and trade names listed in Exhibit E hereto (the "Trademarks") on a non-exclusive basis in the Territory only for the duration of this Agreement and solely for display or advertising purposes in connection with selling and distributing the Products in accordance with this Agreement. NK shall not at any time do or permit any act to be done which may in any way impair the rights of Aspect in the Trademarks. (b) In order to comply with Aspect's quality control standards, NK shall: (i) use the Trademarks in compliance with all relevant laws and regulations; (ii) accord Aspect the right to inspect during normal business hours, without prior advance notice, NK's facilities used in connection with efforts to sell Products in order to confirm that NK's use of such Trademarks is in compliance with this Section; and (iii) not modify any of the Trademarks in any way and not use any of the Trademarks on or in connection with any goods or services other than the Products. 8. LIMITED WARRANTY. (a) Aspect makes the warranties set forth in Exhibit C hereto. Under no circumstances shall the warranties set forth in Exhibit C apply to any Product which has been customized, modified, damaged or misused by NK or any third party without Aspect's authorization. NK's sole remedy for a non-conforming Product is, at Aspect's election, the repair or replacement of such Product. (b) THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF MERCHANT ABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. 9. INDEMNIFICATIONS. (a) NK hereby agrees to indemnify, defend and hold harmless Aspect, its Affiliates and all officers, directors, employees and agents thereof from all liabilities, claims, damages, losses, costs, expenses, demands, suits and actions (including without limitation attorneys' fees, expenses and settlement costs) (collectively, "Damages") arising out of: (i) NK's failure to comply with relevant laws and regulations; and (ii) NK's making representations or warranties which are not authorized by Aspect hereunder. (b) Aspect hereby agrees to indemnify, defend and hold harmless NK, its Affiliates and all officers, directors, employees and agents thereof from all Damages arising out of: (i) NK's selling of the Products infringing on the intellectual property -12- 13 rights of third parties; or (ii) personal injuries and/or property damages resulting from the Products; PROVIDED, HOWEVER, that: (i) Aspect shall have no obligation for any claim of infringement arising from: (i) any combination by NK of the Products with any other product not supplied or approved in writing by Aspect, where such infringement would not have occurred but for such combination; (ii) the adaptation or modification of the Products not performed or not authorized by Aspect, where such infringement would not have occurred but for such adaptation or modification; (iii) the misuse of the Products or the use of the Products in an application for which they were not designed, where such infringement would not have occurred but for such use or misuse, unless instructed or authorized by Aspect; or (iv) a claim based on intellectual property rights owned by NK or any of its Affiliates. (ii) In the event that any of the Products are held in a suit or proceeding to infringe any intellectual property rights of a third party, and the use of such Products is enjoined or Aspect reasonably believes that it is likely to be found to infringe or likely to be enjoined, Aspect shall, at its sole cost and expense, either (i) procure for NK the right to continue selling such Products, or (ii) replace such Products with non-infringing Products of equivalent functionality. If neither (i) or (ii) are practicable, either Party may terminate this Agreement, effective immediately, upon giving the other party written notice. Upon such termination, Aspect shall refund to NK any unused portions of the prepayments made under Section 2(g)(i) and (ii) above. (iii) This Section 9(b) constitutes NK's exclusive remedy in the event that the Products infringe on the intellectual property rights of third parties. (c) The Party benefitting from any indemnity hereunder (the "indemnified party") hereby agrees that: (A) the other Party (the "indemnifying Party") shall have sole control and authority with respect to the defense or settlement of any such claim; and (B) the indemnified Party and its Affiliates, officers, directors, employees and agents thereof shall cooperate fully with the indemnifying Party, at the indemnifying Party's sole cost and expense, in the defense of any such claim. Any settlement of any such claims that imposes any liability or limitation on the indemnifying Party shall not be entered into without the prior written consent of the indemnifying Party. (d) In the event a claim is based partially on an indemnified claim described in Sections 9(a) and/or 9(b) above and partially on a non-indemnified claim, or is based partially on a claim described in Section 9(a) above and partially on a claim described in Section 9(b) above, any payments and reasonable attorney fees incurred in connection with such claims are to be apportioned between the Parties in accordance with the degree of cause attributable to each Party. -13- 14 10. LIMITATIONS OF LIABILITY. (a) EXCEPT AS PROVIDED IN SECTION 9 HEREIN, ASPECT'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF THE PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL PURCHASE PRICE PAID BY NK FOR THE PRODUCTS. (b) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR LOSS OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF THE PRODUCTS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES. 11. TERMINATION AND TERM. (a) Upon the occurrence of a material breach or default as to any obligation hereunder by either party and the failure of the breaching party to promptly pursue (within thirty (30) days after receiving written notice thereof from the non-breaching party) a reasonable remedy designed to cure (in the reasonable judgment of the non- breaching party) such material breach or default, this Agreement may be terminated by the non-breaching party by giving written notice of termination to the breaching party, such termination being immediately effective upon the giving of such notice of termination. (b) The initial term of this Agreement shall begin on the date first indicated above and shall (unless terminated earlier pursuant to the terms of Section 11(a) above) expire at the end of the third (3rd) Contract Year or any renewal period. The term of this Agreement shall be automatically renewed for additional periods of one (1) Contract Year each unless either Party gives the other Party a written notice not to renew this Agreement at least three (3) months before the expiration of the original term or any such renewal of this Agreement. If such three (3) months notice has not been given, then both Parties shall agree in writing on mutually acceptable terms for such renewed Contract Year. (c) Upon termination or expiration of this Agreement, neither party shall have any obligation to the other party, or to any employee of the other party, for compensation or for damages of any kind, whether on account of the loss by the other party or such employee of present or prospective sales, investments, compensation, goodwill or otherwise. Each party, for itself and on behalf of each of its employees, hereby waives any rights which may be granted to it or them under the laws and regulations of the Territory or otherwise which are not granted to it or them by this Agreement. Each party hereby indemnifies and holds the other party harmless from and against -14- 15 any and all claims, costs, damages and liabilities whatsoever asserted by any of its employees, agents or representatives under any applicable termination, labor, social security or other similar laws or regulations. (d) Notwithstanding Section 11(c) above or any other provision of this Agreement, termination of this Agreement shall not affect the obligation of NK to pay Aspect all amounts owing or to become owing as a result of Products delivered on or before the date of such termination, as well as interest thereon to the extent any such amounts are paid after the date they became or will become due pursuant to this Agreement. (e) Notwithstanding anything else in this Agreement to the contrary, the parties agree that Sections 2(e)(vi), 3(c) and (f), 8, 9, 10, 11(c), (d) and (e), 12 and 13 shall survive the termination or expiration of this Agreement, as the case may be. (f) Before or upon termination or expiration of this Agreement, the Parties shall discuss the rights and obligations of the Parties after such termination regarding NK's inventories of Products not resold to any customers at the time of such termination or expiration (including NK's right to sell, or Aspect's obligation to repurchase, such inventories), and regarding the after-service for Products resold to the customers in the Territory by NK before such termination or expiration (including Aspect's responsibility for taking over such after-service or for supplying NK with any parts that are necessary for such after-service). (g) After termination or expiration of this Agreement, Aspect or its designee shall continue to supply NK with BIS sensors to use with BIS monitors sold by NK before such termination or expiration. 12. CONFIDENTIALITY MAINTAINED. (a) Each Party (the "disclosing Party") has a proprietary interest in information which it discloses to the other Party (the "receiving Party"), whether in connection with this Agreement or otherwise, which is (i) a trade secret, confidential or proprietary information, (ii) not publicly known, and (iii) annotated by a legend, stamp or other written identification as confidential or proprietary information, or if disclosed orally, is identified as confidential or proprietary by a written instrument within 30 days of such disclosure (hereinafter referred to as "Proprietary Information"). The receiving Party shall disclose the Proprietary Information of the disclosing Party only to those of its agents and employees to whom it is necessary in order properly to carry out their duties as limited by the terms and conditions hereof. Both during and after the term of this Agreement, all disclosures by the receiving Party to its agents and employees shall be held in strict confidence by such agents and employees. During and after the term of this Agreement, the receiving Party, its agents and employees shall not use the Proprietary Information for any purpose other than in connection with discharging its duties pursuant to this Agreement. The -15- 16 receiving Party shall, at its expense, return to the disclosing Party the Proprietary Information of the disclosing Party as soon as practicable after the termination or expiration of this Agreement. During the term of this Agreement and thereafter, all such Proprietary Information shall remain the exclusive property of the disclosing Party. This Section 12 shall also apply to any consultants or subcontractors that the receiving Party may engage in connection with its obligations under this Agreement. (b) Notwithstanding anything contained in this Agreement to the contrary, the receiving Party shall not be liable for a disclosure of the Proprietary Information of the disclosing Party if the information so disclosed: (i) was in the public domain at the time of disclosure without breach of this Agreement; or (ii) was known to or contained in the records of the receiving Party from a source other than the disclosing Party at the time of disclosure by the disclosing Party to the receiving Party and can be so demonstrated; or (iii) becomes known to the receiving Party from a source other than the disclosing Party without breach of this Agreement by the receiving Party and can be so demonstrated; or (iv) was disclosed pursuant to court order or as otherwise compelled by law. 13. MISCELLANEOUS. (a) This Agreement and the rights and obligations hereunder may not be assigned, delegated or transferred by either Party without the prior written consent of the other Party; PROVIDED, HOWEVER, that the other Party's consent shall not be required with respect to any assignment, delegation or transfer by a Party to (i) an Affiliate of such Party; or (ii) the purchaser of all or substantially all of the assets or stock of such Party, through merger, consolidation or otherwise. To the extent permitted by this Agreement, this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of both Parties. (b) This Agreement shall be construed and governed according to, and any arbitration shall be conducted in accordance with, the laws of the Commonwealth of Massachusetts, U.S.A. excluding its conflicts of laws principles. (c) Any dispute, controversy or claim arising out of or relating to this Agreement or to a breach hereof, including its interpretation, performance or termination, shall be finally resolved by arbitration. The arbitration shall be conducted by three (3) arbitrators, one to be appointed by Aspect, one to be appointed by NK and a third being nominated by the two arbitrators so selected or, if they cannot agree on a third arbitrator, by the President of the American Arbitration Association. The arbitration shall be conducted in English and in accordance with the commercial arbitration rules of the United Nations Commission on International Trade Law. The arbitration, including the rendering of the award, shall take place in Los Angeles, California, U.S.A. and shall be the exclusive forum for resolving such dispute, controversy or claim. The decision of the arbitrators shall be binding upon the parties hereto, and -16- 17 the expense of the arbitration (including without limitation the award of attorneys' fees to the prevailing party) shall be paid as the arbitrators determine. The decision of the arbitrators shall be executory, and judgment thereon may be entered by any court of competent jurisdiction. Notwithstanding anything contained in this Section to the contrary, each Party shall have the right to institute judicial proceedings against the other Party or anyone acting by, through or under such other Party, in order to enforce the instituting Party's rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief. (d) This Agreement supersedes and cancels any previous agreements or understandings, whether oral, written or implied, heretofore in effect and sets forth the entire agreement between Aspect and NK with respect to the subject matter hereof. No modification or change may be made in this Agreement except by written instrument duly signed by a duly authorized representative of each Party. (e) All notices given under this Agreement shall be in writing and shall be addressed to the Parties at their respective addresses and telecopy numbers, and to the attention of the individuals set forth above. Either Party may change its address, telecopy number and contact person for purposes of this Agreement by giving the other Party written notice of its new address, telecopy number or contact person. Any such notice if given or made by registered or recorded delivery international air mail letter shall be deemed to have been received on the earlier of the date actually received and the date fifteen (15) calendar days after the same was posted (and in proving such it shall be sufficient to prove that the envelope containing the same was properly addressed and posted as aforesaid) and if given or made by telecopy transmission shall be deemed to have been received at the time of dispatch, unless such date of deemed receipt is not a day on which banks in the receiving party's home city are open for business, in which case the date of deemed receipt shall be the next day on which banks in the receiving party's home city are open for business. (f) None of the conditions or provisions of this Agreement shall be held to have been waived by any act or knowledge on the part of either Party, except by an instrument in writing signed by a duly authorized officer or representative of such Party. Further, the waiver by either Party of any right hereunder or the failure to enforce at any time any of the provisions of this Agreement, or any rights with respect thereto, shall not be deemed to be a waiver of any other rights hereunder or any breach or failure of performance of the other Party. (g) No rights or licenses with respect to the Products or the Trademarks are granted or deemed granted hereunder or in connection herewith, other than those rights expressly granted in this Agreement. -17- 18 (h) Taxes now or hereafter imposed with respect to the transactions contemplated hereunder (with the exception of income taxes or other taxes imposed upon Aspect and measured by the gross or net income of Aspect) shall be the responsibility of NK, and if paid or required to be paid by Aspect, the amount thereof shall be added to and become a part of the amounts payable by NK hereunder. (i) If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court. The Parties shall consult and use their best efforts to agree upon a valid and enforceable provision which shall be a reasonable substitute for such invalid or unenforceable provision in light of the intent of this Agreement. (j) This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (k) For the purposes of this Agreement, an "Affiliate" of a Party shall mean any entity controlling, controlled by or under common control with such Party. IN WITNESS WHEREOF, the parties hereto have signed this Agreement under seal. ASPECT MEDICAL SYSTEMS, INC. By: /s/ J. Breckenridge Eagle ----------------------------------------- Name: J. Breckenridge Eagle Title: Chairman NIHON KOHDEN CO., LTD. By: /s/ Kazuo Ogino ----------------------------------------- Name: Kazuo Ogino Title: President & Chief Executive Officer -18- 19 EXHIBIT A: PRODUCTS MONITORING SYSTEM COMPONENTS A-1050(TM) MONITOR WITH THE BISPECTRAL INDEX(TM) (BIS(TM)) Includes: (1) A-1050 BIS(TM) (Bispectral Index(TM)) Monitor with power cord (1) Digital Signal Converter (DSC-2) with cable (1) A-1050 Operator's Manual-English MONITOR AND DIGITAL SIGNAL CONVERTER INCLUDE ONE YEAR WARRANTY A-1050 DIGITAL SIGNAL CONVERTER (DSC-2) INCLUDES ONE YEAR WARRANTY A-2000(TM) MONITOR WITH THE BISPECTRAL INDEX(TM) (BIS(TM)) Includes: (1) A-2000 BIS(TM) (Bispectral Index(TM)) Monitor with power cord (1) Digital Signal Converter (DSC-2) with cable (1) A-2000 Operator's Manual-English MONITOR AND DIGITAL SIGNAL CONVERTER INCLUDE ONE YEAR WARRANTY A-2000 DIGITAL SIGNAL CONVERTER (DSC-2) INCLUDES ONE YEAR WARRANTY ACCESSORIES BIS SENSOR(TM): 1 CASE 1 case contains 50 sensors (25/box, 2 boxes/case) BIS SENSOR PATIENT INTERFACE CABLE (PIC-S) ZIPPREP(TM) SELF-PREPPING, DISPOSABLE ELECTRODES: 1 CASE 1 case contains 60 packs (15/box, 4 boxes/case) 2-CHANNEL BIPOLAR PATIENT INTERFACE CABLE For use with Zipprep electrodes PRINTREX INKLESS, NON-IMPACT THERMAL PRINTER WITH INTEGRAL ROLL PAPER Compatible for use with the A-1050. Includes one Centronics parallel port interface cable. INCLUDES ONE YEAR WARRANTY -19- 20 ACCESSORIES CONTINUED: PRINTER INTERFACE CABLE: DB25 parallel port, Centronics 36, shielded PERMANENT THERMAL PAPER: 4 ROLLS/CASE 100 feet per roll For use with Printrex printer PERMANENT THERMAL PAPER: 8 ROLLS/CASE 100 feet per roll For use with Printrex printer A-1050 OPERATOR'S MANUAL - ENGLISH A-1050 SERVICE MANUAL - ENGLISH GCX POLYMOUNT ROLL STAND FOR THE A-1050 MONITOR Includes: Baseweight for added stability Roll stand handle 12" X 8" X 3.5" basket GCX POLYMOUNT ROLL STAND ADAPTER FOR THE PRINTREX PRINTER Includes: 6" utility basket -20- 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B: PRICE LIST MONITORING SYSTEM COMPONENTS PRICE ---------------------------- ----- A-1050(TM) MONITOR WITH THE BISPECTRAL INDEX(TM) (BIS(TM)) [**] Includes: (1) A-1050 BIS(TM) (Bispectral Index(TM)) Monitor with power cord (1) Digital Signal Converter (DSC-2) with cable (1) A-1050 Operator's Manual-English MONITOR AND DIGITAL SIGNAL CONVERTER INCLUDE ONE YEAR WARRANTY A-1050 DIGITAL SIGNAL CONVERTER (DSC-2) [**] INCLUDES ONE YEAR WARRANTY A-2000(TM) MONITOR WITH THE BISPECTRAL INDEX(TM) (BIS(TM)) TO BE DETERMINED Includes: (1) A-2000 BIS(TM) (Bispectral Index(TM)) Monitor with power cord (1) Digital Signal Converter (DSC-2) with cable (1) A-2000 Operator's Manual-English MONITOR AND DIGITAL SIGNAL CONVERTER INCLUDE ONE YEAR WARRANTY A-2000 DIGITAL SIGNAL CONVERTER (DSC-2) TO BE DETERMINED INCLUDES ONE YEAR WARRANTY ACCESSORIES BIS SENSOR(TM): 1 CASE [**] 1 case contains 50 sensors (25/box, 2 boxes/cases) BIS SENSOR PATIENT INTERFACE CABLE (PIC-S) [**] ZIPPREP(TM) SELF-PREPPING, DISPOSABLE ELECTRODES: 1 CASE [**] 1 case contains 60 packs (15/box, 4 boxes/case) 2-CHANNEL BIPOLAR PATIENT INTERFACE CABLE [**] For use with Zipprep electrodes PRINTREX INKLESS, NON-IMPACT THERMAL PRINTER WITH INTEGRAL ROLL PAPER Compatible for use with the A-1050. Includes one Centronics parallel port interface cable. -21- 22 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. INCLUDES ONE YEAR WARRANTY PRINTER INTERFACE CABLE: [**] DB25 parallel port, Centronics 36, shielded PERMANENT THERMAL PAPER: 4 ROLLS/CASE [**] 100 feet per roll For use with Printrex printer PERMANENT THERMAL PAPER: 8 ROLLS/CASE [**] 100 feet per roll For use with Printrex printer A-1050 OPERATOR'S MANUAL - ENGLISH [**] A-1050 SERVICE MANUAL - ENGLISH [**] GCX POLYMOUNT ROLL STAND FOR THE A-1050 MONITOR [**] Includes: Baseweight for added stability Roll stand handle 12" x 8" x 3.5" basket GCX POLYMOUNT ROLL STAND ADAPTER FOR THE PRINTREX PRINTER [**] Includes: 6" utility basket -22- 23 EXHIBIT C: WARRANTY Aspect warrants to the initial Purchaser that the A-1050 EEG monitor, the A-2000 monitor, and the Digital Signal Converter ("Warranted Product") will be free from defects in workmanship or materials, when given normal, proper, and intended usage for a period of 18 months from the date of its initial shipment to Purchaser or 12 months from the date of resale by Purchaser, whichever period first expires. Excluded from this warranty are expendable components and supply items such as, but not limited to, electrodes, cables, and prep solutions. Aspect's obligations under this warranty are to repair or replace any Warranted Product or part thereof that Aspect reasonably determines to be covered by this warranty and to be defective in workmanship or materials provided that the Purchaser has given notice of such warranty claim within the Warranty Period and the Warranted Product is returned to the factory with freight prepaid. Repair or replacement of Products under this warranty does not extend the Warranty Period. To request repair or replacement under this warranty, Purchaser should contact Aspect at 2 Vision Drive, Natick, Massachusetts 01760, 800-442-2051 or 508-647-2088. Aspect will authorize Purchaser to return the Warranted Product (or part thereof) to Aspect. Aspect shall determine whether to repair or replace Products and parts covered by this warranty and all Products or parts replaced shall become Aspect's property. In the course of warranty service, Aspect may but shall not be required to make engineering improvements to the Warranted Product or part thereof. If Aspect reasonably determines that a repair or replacement is covered by the warranty, Aspect shall bear the costs of shipping the repaired or replacement Product to Purchaser. All other shipping costs shall be paid by Purchaser. Risk of loss or damage during shipments under this warranty shall be borne by the party shipping the Product. Products shipped by Purchaser under this warranty shall be packaged in the original shipping container or equivalent packaging to protect the Product. If Purchaser ships a Product to Aspect in unsuitable packaging, any physical damage present in the Product on receipt by Aspect (and not previously reported) will be presumed to have occurred in transit and will be the responsibility of Purchaser. Unless authorized or instructed by Aspect in advance, this warranty does not extend to any Warranted Products or part thereof: that have been subject to misuse, neglect or accident; that have been damaged by causes external to the Warranted Product, including but not limited to failure of or faulty electrical power; that have been used in violation of Aspect's instructions; that have been affixed to any nonstandard accessory attachment; on which the serial number has been removed or made illegible; that have been modified by anyone other than Aspect; or that have been disassembled, serviced, or reassembled by anyone other than Aspect, unless authorized by Aspect. Aspect shall have no obligation to make repairs, replacements, -23- 24 or corrections which result, in whole or in part, from normal wear and tear. Aspect makes no warranty (a) with respect to any products that are not Warranted Products, (b) with respect to any products purchased from a person other than Aspect or an Aspect-authorized distributor or (c) with respect to any product sold under a brand name other than Aspect. -24- 25 EXHIBIT D Proposal of Partnership between Aspect Medical Systems & Nihon Kohden July 1997 Market Development(1) Before MHW Approval - - Medical Conventions - - Invited Lectures - - Invite Key Japanese Anesthesiologists to ASPECT Booth at ASA - - Sales & Service Training for Specialists and Engineers - - Catalog, Sales Manual, Operation Manual, Service Manual Market Development(2) After MHW Approval - - Demonstrations to all University hospitals - - Promote/Support Key Anesthesiologists to publish clinical Data and Efficacy - - Advertisements - - Sales & Service Training for Field reps. Medical Conventions - - Japan Society of Anesthesiology (April) - - The Japan Society for Clinical Anesthesia (November) - - The Japanese Association for Clinical Monitoring (March) - - International Symposium on Computing in Anesthesia and Intensive Care (March '98) - - Japanese Association for Acute Medicine (November) - - Local meetings for Anesthesiology SALES AND MARKETING STAFF IN IMPORT DIVISION Marketing Manager Clinical Specialist Sales Specialist - - Start with 3 dedicated members with support from our Service section - - Sales promotion will be made through 650 direct sales representatives Advertisement Plan 1. The Japanese Journal of Anesthesiology 2. The Journal of Japan Society for Clinical Anesthesia 3. Lisa (Journal for Anesthesiologist) 4. Japanese Journal of Clinical Monitor 5. Program of Each Medical Convention 26 EXHIBIT E: U.S. TRADEMARK LISTING FOR ASPECT MEDICAL SYSTEMS, INC. 11/6/97 TRADEMARK --------- ASPECT(R) ZIPPREP(TM) ZIPPREP(TM) A-1050(TM) A-1000(TM) A-2000(TM) BISPECTRAL INDEX(TM) BIS(TM) [GRAPHIC DEPICTION OF BIS LOGO](TM) EX-10.3 3 INTERNATIONAL LICENSE AGREEMENT,DATED 1/21/98 1 EXHIBIT 10.3 Aspect Medical Systems, Inc. has requested that the marked portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. INTERNATIONAL LICENSE AGREEMENT THIS AGREEMENT is made and entered into as of January 21, 1998 (the "Effective Date"), by and between ASPECT MEDICAL SYSTEMS, INC. ("Aspect"), a Delaware, U.S.A. corporation having offices at 2 Vision Drive, Natick, Massachusetts 01760-2059, U.S.A., Attention: J. Breckenridge Eagle, Telecopy No.: 1-508-647-2059, and NIHON KOHDEN CORPORATION ("NK"), a Japanese company having offices at 31-4 Nishiochiai, 1-chome, Shinjuku-ku, Tokyo 161 Japan, Attention: Hajime Yasuda, Telecopy No.: 81-3-5996-8097. WHEREAS, Aspect possesses certain intellectual and industrial property rights; and WHEREAS, Aspect is willing to grant, and NK desires to acquire, non-exclusive worldwide rights to use such rights in accordance with the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the premises and mutual promises, terms and conditions hereinafter set forth, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Aspect and NK (the "Parties") do hereby agree as follows: 1. DEFINITIONS As used herein, the following terms shall have the following definitions. 1.1 AFFILIATES. "Affiliates" of a Party hereto shall mean companies which are controlled by, control or under common control with such Party. A company shall be considered an "Affiliate" for only so long as such control exists. For the purposes of this definition, partnerships or similar entities where a majority-in-interest of its partners or owners are a Party hereto and/or Affiliates of such Party shall also be deemed to be Affiliates of such Party. 1.2 AGREEMENT TERM. "Agreement Term" shall mean the period beginning on the Effective Date and ending on the date of termination or expiration of this Agreement, as the case may be. 1.3 BIS. "BIS"(TM) shall mean the Bispectral Index,(TM) which is Aspect's proprietary processed EEG parameter that directly measures the hypnotic effects of anesthetic and sedative agents on the brain. 2 1.4 BUSINESS DAY. "Business Day" shall mean a day on which banks are open for business in Natick, Massachusetts, U.S.A. 1.5 COMMENCEMENT DATE. "Commencement Date" shall mean the earlier of: (a) May 1, 1999 (unless through no fault of NK, the MHW Approval has been delayed); and (b) the MHW Approval Date. 1.6 CONTRACT YEAR. "Contract Year" shall mean the 12-month period commencing on the Commencement Date, and then each 12-month period thereafter. 1.7 KIT. "Kit" shall mean Aspect's BIS Module Kit, as further described in Exhibit A attached hereto and made a part hereof. 1.8 LICENSED TECHNOLOGY. "Licensed Technology" shall mean the Rights, the Products and the Technical Information. 1.9 LICENSE TERM. "License Term" shall mean the period beginning on the Commencement Date and ending on the date of termination or expiration of this Agreement, as the case may be. 1.10 MHW APPROVAL DATE. "MHW Approval Date" shall mean the date on which NK receives the approval of the Japanese Ministry of Health and Welfare to market the Product in Japan. 1.11 PRODUCT. "Product" shall mean a BIS module. 1.12 RIGHTS. "Rights" shall mean: (a) the patents listed on Exhibit B attached hereto and made a part hereof, and all continuations, divisions, extensions and reissues thereof; (b) the patent applications listed on Exhibit B hereto, and all continuations, divisions, extensions and reissues thereof; (c) any and all continuations, divisions, reissues, extensions and other filings that Aspect may file with the governmental agency which issues patents in any jurisdiction with respect to such patents and/or patent applications described in parts (a) and (b) above of this definition; and (d) all relevant copyrights and circuitry relating to the Software (as defined in Section 2.6 below) or the Kits; and -2- 3 (e) any and all patents, patent applications, copyrights, mask work rights and other intellectual property rights with respect to any inventions, which patents, patent applications, copyrights, mask work rights and other rights (i) are granted or to be granted to Aspect (either directly or through its Affiliates, successors, assigns, agents or employees) and (ii) with respect to which Aspect (either directly or through its Affiliates, successors, assigns, agents or employees) shall have the right to grant licenses, sublicenses and rights of the type described in Article 2 below; PROVIDED, HOWEVER, that with respect to this definition, if any patents, copyrights, mask work rights or other intellectual property rights have been or are in the future issued, granted or registered based on or embodied in any Product or any part of the Technical Information, such patents, copyrights, mask work rights and other rights shall be deemed included in this definition. 1.13 TECHNICAL INFORMATION. "Technical Information" shall mean all trade secrets, know-how, computer programs (including copyrights in said software), knowledge, technology, means, methods, processes, practices, formulas, techniques, procedures, technical assistance, designs, drawings, apparatus, written and oral rectifications of data, specifications, assembly procedures, schematics and other valuable information of whatever nature, whether confidential or not, and whether proprietary or not, which is now in (or hereafter, during the Agreement Term, comes into) the possession of Aspect and which is necessary to the manufacture, assembly, sale, distribution, use, installation, servicing or testing of the Product. 1.14 U.S. DOLLARS. "U.S. Dollars" shall mean lawful money of the United States of America, in immediately available funds. -3- 4 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 2. GRANT OF RIGHTS AND LICENSES Subject to all of the terms and conditions set forth in this Agreement: 2.1 USE OF RIGHTS. (a) Aspect hereby grants to NK a non-exclusive, worldwide right and license during the Agreement Term to practice the Rights in order to manufacture, use and sell the Product as a component of multi-parameter module patient monitoring systems manufactured by or for NK. Specifically, but without limitation, the Rights may not be used to make, use or distribute the Product for incorporation into stand-alone EEG/BIS monitors. (b) During the Agreement Term, Aspect shall not grant, directly or indirectly, the right and license described in Section 2.1(a) above [**]. (c) For the rights and licenses granted hereunder, NK shall pay Aspect a license fee of [**] within thirty (30) days of the execution of this Agreement. NK may [**] of said license fee in order to pay withholding tax levied by the Government of Japan. NK agrees to send to Aspect tax payment certificates indicating payment of such withholding tax so that Aspect can be allowed by the tax authorities of the United States a tax credit in the amount of such withholding tax deducted in Japan. 2.2 USE OF TECHNICAL INFORMATION. (a) Aspect grants to NK a non-exclusive worldwide right and license during the Agreement Term to use the Technical Information in connection with NK's exercise of its rights and licenses granted in Section 2.1, and for no other purpose. (b) As soon as practical after the Effective Date, Aspect shall provide to NK, at no additional cost to NK, all of the Technical Information. 2.3 TRADEMARKS, SERVICE MARKS AND TRADE NAMES. (a) NK shall be required to mark the Products with Aspect's trademarks, service marks and trade names listed in Exhibit C hereto (the "Trademarks"). Aspect hereby grants NK the right to use the Trademarks on a non-exclusive basis only for the License Term and solely for display or advertising purposes in connection with the Products manufactured and sold in accordance with this Agreement. During the License Term, NK may use, without Aspect's prior written consent, trademarks, service marks and trade names in connection with the Products other than the Trademarks; PROVIDED, HOWEVER, that the Trademarks are always used in a manner which makes them at least as large and at least as prominent as any other such trademarks, service marks or trade names appearing on any such label, display or advertisement. Any use by NK of the Trademarks shall be deemed to be a use of the same by Aspect. NK shall not at any time do or permit any act to be done (including -4- 5 without limitation registering any of the Trademarks in its own name or the name of any entity other than Aspect) which may in any way impair the rights of Aspect in the Trademarks. Except as provided above, NK has no rights in the Trademarks or of any goodwill associated therewith and NK agrees that, except as expressly provided in this Agreement, it shall not acquire any rights in respect thereof and that all such rights and goodwill are, and shall remain, vested in Aspect. (b) In order to comply with Aspect's quality control standards, NK shall: (i) whenever it uses the Trademarks, include a statement that the Trademarks are trademarks of Aspect; (ii) use the Trademarks in compliance with all relevant laws and regulations; (iii) at Aspect's request, provide Aspect with samples of the Products, so that Aspect can confirm that such Products are being manufactured hereunder in a manner consistent with the quality standards which Aspect applies in manufacturing BIS modules itself; and (iv) not modify any of the Trademarks in any way and not use any of the Trademarks on or in connection with any goods or services other than the Products. 2.4 RIGHT TO SUBLICENSE. NK shall not have the right to sublicense any of the rights or licenses granted hereunder without Aspect's prior written consent, which consent shall be withheld in Aspect's absolute discretion; PROVIDED, HOWEVER, it is understood that NK shall have the right to grant sublicenses to NK's Affiliates without Aspect's prior written consent. All sublicenses shall not become effective until the sublicensee confirms in writing to Aspect that it agrees to be bound by all of the terms and conditions contained in this Agreement. 2.5 NO RIGHTS BY IMPLICATION. No rights or licenses with respect to Licensed Technology are granted or deemed granted hereunder or in connection herewith, other than those rights or licenses expressly granted in this Agreement. 2.6 SOFTWARE AND COMPUTER PROGRAMS. The Product includes circuitry and software programs in binary code form which are designed for use with the Product (the "Circuitry" and the "Software"). For the purpose of this Agreement, the Circuitry and the Software shall not include any portion of the Product which is proprietary to NK or which is developed by or licensed to NK, independently of Rights and Technical Information provided by Aspect hereunder. Aspect hereby grants to NK a non-exclusive and non-transferable worldwide license, without the right to sublicense (except to purchasers of the Product and NK's Affiliates which become sublicensees pursuant to Section 2.4 above), during the Agreement Term to use the Circuitry, the Software and related documentation provided by Aspect (the "Documentation") solely in connection with operation of the Product. NK shall not disclose, furnish, transfer or otherwise make available the Circuitry, the Software, the Documentation or any portion thereof in any form to any third party (other than to purchasers of the Product and NK's Affiliates which becomes sublicensees pursuant to Section 2.4 above) and shall not duplicate the Circuitry, the Software, the Documentation or any -5- 6 part thereof, except in connection with NK's manufacture and assembly of the Product in accordance with this Agreement. Title to and ownership of and all proprietary rights in or related to the Circuitry, the Software, the Documentation and all partial or complete copies thereof shall at all times remain with Aspect or its licensor(s). This Agreement shall not be construed as a sale of any rights in the Circuitry, the Software, the Documentation, any copies thereof or any part thereof. All references in this Agreement to sale, resale or purchase of the Products, or references of like effect, shall, with respect to the Circuitry, the Software and the Documentation mean licenses or sublicenses of the Circuitry, the Software and the Documentation pursuant to this Section 2.6. NK shall not disassemble, decompile or reverse engineer the Circuitry, the Software or any part thereof (except in the European Union and Norway, and only to the extent that it has the right to do so pursuant to applicable law in order to ensure interoperability with other software programs). NK shall retain and shall not alter or obscure any notices, markings or other insignia which are affixed to the Software, the Documentation or any part thereof at the time of delivery of such Software or such Documentation. 2.7 NON-COMPETITION. NK confirms that is has not previously, directly or indirectly, marketed or manufactured monitoring equipment, either as stand-alone monitors or as modules for monitors, which were designed to monitor the depth of anesthesia. NK confirms that it has not previously, directly or indirectly, developed monitoring equipment, either as stand-alone monitors or as modules for monitors, which was designed to: (i) monitor the depth or effects of anesthesia being administered to patients; and (ii) indicate any index of the depth or effects of anesthesia to assist anesthesiologists to evaluate the depth or effects of anesthesia using EEG (electroencephalogram). Until the first (1st) anniversary of the termination or expiration of this Agreement, as the case may be, PROVIDED, HOWEVER that: (I) NK shall be permitted, at any time, to develop monitoring equipment designed to monitor the depth or effects of anesthesia using physiological measures other than EEG; (II) NK shall be permitted, at any time, to market and manufacture monitoring equipment designed to monitor the depth or effects of anesthesia using physiological measures other than EEG, so long as such equipment has been developed and manufactured by NK; (III) NK shall be permitted after the expiration or termination of this Agreement to manufacture and market monitoring equipment developed and manufactured by NK or by any third party that is designed to monitor the depth or effects of anesthesia using physiological measures other than EEG; and (IV) NK shall be permitted to continue to market and improve its existing EEG monitors and modules. Specifically, it will not be considered a violation of this Section 3(f) for NK to market and improve its existing EEG monitors or modules that display any of the following parameters of brain function: EEG, EEG trends, CSA, DSA, EP, EMG, or NCV, subject to the terms and conditions of this Section 2.7. 2.8 CHANGES TO KITS AND PRODUCTS. (a) From time to time during the Agreement Term, Aspect may introduce improvements and modifications to the Kit. Aspect shall promptly deliver to NK one reproducible copy of manufacturing drawings and engineering specifications relating to such modification and improvement. NK may use, at its sole discretion, each such modification or improvement under the terms and conditions of this Agreement, without paying any additional amounts to Aspect. If NK determines not to use such modification or improvement, Aspect shall continue to supply NK with the Kit, but not as so modified or improved. (b) Notwithstanding anything contained in this Agreement to the contrary, Aspect reserves the right from time to time during the License Term to require NK, after consulting with NK, to modify or improve the Product (including without limitation the software programs used in connection with the Product) if the modification or improvement reasonably relates to efficacy or patient safety. NK shall implement those changes to the Products being manufactured or to be manufactured and to modify and improve Products previously manufactured and shipped to customers in -6- 7 order to incorporate such changes. In that event, Aspect agrees to repair or replace Kits previously provided to NK or collected by NK from its customers, free of charge, whether or not such repair or replacement occurs during the relevant Warranty Period. (c) Aspect shall immediately provide NK with a written notice upon Aspect becoming aware of the occurrence of any of the following events: (i) Aspect recalls any Kit, or ceases or suspends the sale of any Kit due to any problem which relates to such Kit's efficacy or patient safety in any country outside Japan; (ii) any defect of any Kit or the Licensed Technology, which relates to such Kit's efficacy or patient safety, is published, reported or made known to the public by any third party, or found by Aspect; or (iii) any Kit or the Licensed Technology contributed to or caused a death or serious injury, or any Kit or the Licensed Technology malfunctioned and if that malfunction occurred again, it would be likely to contribute or cause a death or serious injury. 2.9 INTELLECTUAL PROPERTY MAINTENANCE FEES. Aspect shall keep current all Rights relevant to the Products, and shall pay all fees and expenses in connection therewith promptly as such fees and expenses become due and payable. 2.10 NO KNOWLEDGE OF THIRD PARTY CLAIMS. Aspect represents and warrants to NK that Aspect knows of no claim by any third party of infringement by Aspect on such party's patent, trademark, copyright, trade secret or other intellectual property rights. 2.11 DISCLAIMER OF LIABILITY. ASPECT MAKES NO EXPRESS OR IMPLIED WARRANTY, STATUTORY OR OTHERWISE, CONCERNING THE LICENSED TECHNOLOGY OR ANY OTHER INFORMATION COMMUNICATED TO NK, INCLUDING WITHOUT LIMITATION NO WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, OR NO WARRANTIES AS TO QUALITY OR THE USEFULNESS OF THE LICENSED TECHNOLOGY FOR ITS INTENDED PURPOSE; PROVIDED, HOWEVER, if Aspect or NK shall discover any errors in the Licensed Technology during the License Term, Aspect shall use commercially reasonable efforts to correct such errors in the Licensed Technology without cost to NK. IN NO EVENT, HOWEVER, SHALL ASPECT BE LIABLE TO NK FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, EXEMPLARY OR INDIRECT LOSSES OR DAMAGES RESULTING FROM SUCH ERRORS IN THE LICENSED TECHNOLOGY. -7- 8 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3. SALES BY ASPECT TO NK 3.1 OFFER AND ACCEPTANCE; PRICING. (a) NK shall have the right to purchase from Aspect Kits at a transfer price of US[**] per Kit. For each proposed purchase by NK from Aspect, NK shall present a purchase order to Aspect (a "Purchase Order"). Each Purchase Order shall be deemed an offer to purchase and, unless NK is notified in writing to the contrary within five (5) Business Days after Aspect receives it, such Purchase Order shall be deemed accepted by Aspect. (b) Aspect's transfer prices shall be FCA (FREE CARRIER) Natick, Massachusetts, U.S.A. Starting with the second (2nd) Contract Year, Aspect may change those transfer prices; PROVIDED, HOWEVER, that: (i) such change may be made only once a year effective as of the first day of April with the prior written notice to be given by Aspect no later than the last day of December of the preceding year, after consulting with NK; (ii) the annual increase shall be no more than [**]; and (iii) no price change shall affect purchase orders offered by NK and accepted by Aspect prior to the date such price change becomes effective. 3.2 DELIVERY. Unless NK requests otherwise, all Kits ordered by NK shall be packed for shipment and storage in accordance with Aspect's standard commercial practices. It is NK's obligation to notify Aspect of any special packaging requirements (which shall be at NK's expense if such requirement is in excess of the scope of normal and necessary packaging for export). Aspect shall deliver Kits into the possession of a common carrier designated by NK in Natick, Massachusetts, U.S.A. no later than the date specified for such delivery on the relevant purchase order. Risk of loss and damage to a Kit shall pass to NK upon the delivery thereof to the common carrier designated by NK. If NK does not designate a common carrier by the specified delivery date, then Aspect may do so on NK's behalf. All claims for non-conforming shipments must be made in writing to Aspect within thirty (30) days of the passing of risk of loss and damage. 3.3 METHOD OF PAYMENT (a) All amounts due and payable with respect to Kits delivered by Aspect in accordance with this Article 3 shall be paid in full within 30 days after the date of Aspect's invoice therefor. All such amounts shall be paid in U.S. Dollars by wire transfer, to such bank or account as Aspect may from time to time designate in writing. All costs incurred in connection with such wire transfer shall be the -8- 9 responsibility of NK. Whenever any amount hereunder is due on a day which is not a day on which banks in Natick, Massachusetts, U.S.A. are open for business (a "Business Day"), such amount shall be paid on the next such Business Day. Amounts hereunder shall be considered to be paid as of the day on which funds are received by Aspect's bank. No part of any amount payable to Aspect hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which NK might have or assert against Aspect, any other party or otherwise. (b) All amounts due and owing to Aspect hereunder but not paid by NK on the due date thereof shall bear interest (in U.S. Dollars) at the rate 18 per cent per annum. Such interest shall accrue on the balance of unpaid amounts from time to time outstanding from the date on which portions of such amounts become due and owing until payment thereof in full. 3.4 LIMITED WARRANTY. (a) With respect to the Kit, Aspect makes the warranties set forth in Exhibit D attached hereto and made a part hereof. Under no circumstances shall the warranties set forth in Exhibit D hereto apply to a Kit which has been customized, modified, damaged or misused by NK or any third party without Aspect's authorization. NK's sole remedy for a non-conforming Kit is, at Aspect's election, the repair or replacement thereof. (b) THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). (c) EXCEPT AS PROVIDED IN SECTION 5.2 HEREIN, ASPECT'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF KITS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL PURCHASE PRICE PAID BY NK FOR SUCH KITS. (d) After expiration of the Warranty Period, Aspect shall undertake repairs of Kits or shall provide parts for repairs by NK, at reasonable cost to NK. Both parties shall agree on the charge for such repairs and parts. 3.5 PRIORITY OF AGREEMENT. In the event of any discrepancy between any Purchase Order and this Agreement, the terms of this Agreement shall govern. -9- 10 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3.6 MINIMUM PURCHASE REQUIREMENTS WITH RESPECT TO BIS SENSORS. (a) NK' s minimum purchase of BIS sensors from Aspect under the international distribution agreement between the Parties dated as of the date hereof for the first (1st) Contract Year (as defined in this Agreement) shall be [**] per year for each Product sold by NK hereunder. For the purpose of this provision, such one year period for the minimum purchase of BIS sensors for each Product shall separately commence on the first day of the month following the month when NK resells such Product to NK's customers. To administer this provision, NK shall inform Aspect from time to time (but no less frequently than quarterly), to the extent such information is available to NK, of the names and addresses of hospitals purchasing Products from NK and the number of Products sold by NK. On or before the end of the first (1st) Contract Year, the Parties shall review minimum sensor usage based on the actual experience during such Contract Year, and shall adjust this requirement accordingly for subsequent Contract Years. For the purposes of this provision, a "purchase" of sensors within a Contract Year shall mean paying Aspect for such sensors on or before the last day of such Contract Year. (b) Failure to meet the minimum purchase requirement described in Section 3.6(a) above shall constitute a material breach of this Agreement for the purposes of Section 6.2 below. Termination shall be the only consequence of NK failing to satisfy this minimum purchase requirement. 4. CONFIDENTIAL INFORMATION 4.1 CONFIDENTIALITY OBLIGATIONS. Each Party (the "disclosing Party") has a proprietary interest in information which it discloses to the other Party (the "receiving Party"), whether in connection with this Agreement or otherwise, which is (a) a trade secret, confidential or proprietary information, (b) not publicly known, and (c) annotated by a legend, stamp or other written identification as confidential or proprietary information, or if disclosed orally, is identified as confidential or proprietary by a written instrument within 30 days of such disclosure (hereinafter referred to as "Proprietary Information"). The receiving Party shall disclose the Proprietary Information of the disclosing Party only to those of its agents and employees to whom it is necessary in order properly to carry out their duties as limited by the terms and conditions hereof. Both during and after the Agreement Term, all disclosures by the receiving Party to its agents and employees shall be held in strict confidence by such agents and employees. During and after the Agreement Term, the receiving Party, its agents and employees shall not use the Proprietary Information for any purpose other than in connection with discharging its duties pursuant to this Agreement. The receiving Party shall, at its expense, return to the -10- 11 disclosing Party the Proprietary Information of the disclosing Party as soon as practicable after the termination or expiration of this Agreement. During the Agreement Term and thereafter, all such Proprietary Information shall remain the exclusive property of the disclosing Party. This Article 4 shall also apply to any consultants or subcontractors that the receiving Party may engage in connection with its obligations under this Agreement. 4.2 EXCEPTIONS. Notwithstanding anything contained in this Agreement to the contrary, the receiving Party shall not be liable for a disclosure of the Proprietary Information of the disclosing Party if the information so disclosed: (a) was in the public domain at the time of disclosure without breach of this Agreement; or (b) was known to or contained in the records of the receiving Party from a source other than the disclosing Party at the time of disclosure by the disclosing Party to the receiving Party and can be so demonstrated; or (c) becomes known to the receiving Party from a source other than the disclosing Party without breach of this Agreement by the receiving Party and can be so demonstrated; or (d) was disclosed pursuant to court order or as otherwise compelled by law. 5. INDEMNIFICATIONS 5.1 IN FAVOR OF ASPECT. NK hereby agrees to indemnify, defend and hold harmless Aspect, its Affiliates and all officers, directors, employees and agents thereof from all liabilities, claims, damages, losses, costs, expenses, demands, suits and actions (including without limitation attorneys' fees, expenses and settlement costs) (collectively, "Damages") arising out of: (i) NK's failure to comply with relevant laws and regulations; (ii) personal injuries and/or property damages resulting from the Product which relate to the portion of the Product developed and manufactured by NK or which relate to the failure of NK to incorporate the Kit within the Product in accordance with the Technical Information provided by Aspect hereunder; or (iii) NK's making representations or warranties with respect to the Kits which are not authorized by Aspect hereunder. 5.2 IN FAVOR OF NK. Aspect hereby agrees to indemnify, defend and hold harmless NK, its Affiliates and all officers, directors, employees and agents thereof from all Damages arising out of: (i) the Products or the Kits infringing on the intellectual property rights of third parties; (ii) use of the Trademarks in accordance with Section 2.3(a) above which infringes on the trademark, service mark or trade name rights of third parties; or (iii) personal injuries and/or property damages resulting from the Product which relate to the portion of the Product developed and manufactured by Aspect or which relate to NK's incorporation of the Kit within the Product in accordance with the Technical Information provided by Aspect hereunder; PROVIDED, HOWEVER, that: -11- 12 (a) Aspect shall have no obligation for any claim of infringement arising from: (i) any combination by NK of the Product and/or the Kits with any other product not supplied or approved in writing by Aspect (unless such combination is a normal combination with other monitoring equipment or any part thereof), where such infringement would not have occurred but for such combination; (ii) the adaptation or modification of the Product and/or the Kits not performed or not authorized by Aspect, where such infringement would not have occurred but for such adaptation or modification; (iii) the misuse of the Product and/or the Kits or the use of the Product and/or the Kits in an application for which they were not designed by Aspect, where such infringement would not have occurred but for such use or misuse; or (iv) a claim based on intellectual property rights owned by NK or any of its Affiliates. (b) In the event that the Products are held in a suit or proceeding to infringe any intellectual property rights of a third party, and the use of the Product or the Kits is enjoined or Aspect reasonably believes that it is likely to be found to infringe or likely to be enjoined, Aspect shall, at its sole cost and expense, either (i) procure for NK the right to continue manufacturing, using and selling the Products and/or using and selling the Kits, or (ii) replace the Product and/or the Kits with non-infringing Products of equivalent functionality. If neither (i) or (ii) are practicable, either party may terminate this Agreement, effective immediately, upon giving the other party written notice. Upon such termination, Aspect shall refund to NK the Unused Portion of the license fee described in Section 2.1(c) above, according to Section 6.6 below. (c) This Section 5.2 constitutes NK's exclusive remedy in the event that the Product, the Kits and/or the Trademarks infringe on the intellectual property rights of third parties. 5.3 INDEMNIFICATION PROCEDURES. The Party benefitting from an indemnity hereunder (the "indemnified party") hereby agrees that: (a) the other Party (the "indemnifying Party") shall have sole control and authority with respect to the defense or settlement of any such claim; and (b) the indemnified Party and its Affiliates, officers, directors, employees and agents thereof shall cooperate fully with the indemnifying Party, at the indemnifying Party's sole cost and expense, in the defense of any such claim. Any settlement of any such claims that imposes any liability or limitation on the indemnifying Party shall not be entered into without the prior written consent of the indemnifying Party. 5.4 PARTIAL INDEMNIFICATION. In the event a claim is based partially on an indemnified claim described in Sections 5.1 and/or 5.2 above and partially on a non-indemnified claim, or is based partially on a claim described in Section 5.1 above and partially on a claim described in Section 5.2 above, any payments and reasonable attorney fees incurred in connection with such claims are to be apportioned between the Parties in accordance with the degree of cause attributable to each Party. -12- 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 6. TERMINATION OR EXPIRATION 6.1 EXPIRATION OF AGREEMENT. Unless it is terminated earlier pursuant to this Article, this Agreement shall continue in full force and effect until it automatically expires on the fourth (4th) anniversary of the Commencement Date. Both parties shall discuss the renewal of this Agreement at least six (6) months prior to such expiration of this Agreement. 6.2 TERMINATION FOR CAUSE. Upon the occurrence of a material breach or default as to any obligation hereunder by either Party and the failure of the breaching Party to promptly pursue (within thirty (30) days after receiving written notice thereof from the non-breaching Party) a reasonable remedy designed to cure (in the reasonable judgment of the non-breaching Party) such material breach or default, this Agreement may be terminated by the non-breaching Party by giving written notice of termination to the breaching Party, such termination being immediately effective upon the giving of such notice of termination. 6.3 AFTER TERMINATION OR EXPIRATION. The Parties agree that, once this Agreement is terminated or expires, NK shall immediately cease: (a) any use or practice of the Licensed Technology; and (b) any development, manufacture, use or sale of the Product; PROVIDED, HOWEVER, that: (i) NK shall have the right to manufacture Products using the Kits which are in NK's possession at the time of such termination or expiration; (ii) NK shall have the right to sell Products which are in NK's possession at the time of such termination or expiration, and manufactured by NK under 6.3(a) above, for a period of three (3) months after such termination or expiration; PROVIDED, HOWEVER, that NK may, at its option, within ten (10) days after the end of such three (3) month period, notify Aspect that it has elected to extend this period for nine (9) additional months, in which case NK shall pay Aspect US [**] for each module sold during such nine (9) month period; (iii) Aspect or any third party designated by Aspect shall sell to NK the parts necessary to repair the Products and shall grant to NK the right to repair Products, for a period reasonably deemed that Products are used by the customers; and (iv) Aspect or any third party designated by Aspect shall continue to supply NK with BIS sensors to use with Products, for a period reasonably deemed that Products are used by the customers. 6.4 PAYMENT OBLIGATIONS CONTINUE. Upon termination or expiration of this Agreement, nothing shall be construed to release NK from its obligations to pay Aspect any and all amounts accrued but unpaid pursuant to Article 3 above prior to the date of such termination or expiration. -13- 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 6.5 NO DAMAGES FOR TERMINATION. The Parties agree that if either Party terminates the other Party pursuant to this Article 6, then the terminating Party shall not be liable for damages or injuries suffered by the other Party as a result of that termination, unless otherwise expressly provided herein. 6.6 REFUND OF LICENSE FEE. In the event that this Agreement is terminated for any reason (other than based on a material breach or default of NK in accordance with Section 6.2 above), the Unused Portion of the license fee paid to Aspect by NK under Section 2.1(c) of this Agreement shall be refunded to NK by Aspect. For the purpose of this Agreement, "Unused Portion" shall mean the amount which equals US [**] multiplied by a fraction, the numerator of which [**] in which this Agreement is [**] in the period in which this Agreement is effective after the [**] and the denominator of which is [**]. In no event may this fraction be less than [**]. In the event that this Agreement is terminated before Commencement Date (other than based on a material breach or default of NK in accordance with Section 6.2 above), the full amount of such license fee [**] shall be refunded to NK. 7. MISCELLANEOUS 7.1 NO INDIRECT DAMAGES. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS OR LOSS OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, USE, SALE OR SUPPLYING OF THE PRODUCT OR KITS, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES OR LOSSES. 7.2 ASSIGNMENTS. This Agreement and the rights and obligations hereunder may not be assigned, delegated or transferred by either Party without the prior written consent of the other Party; PROVIDED, HOWEVER, that the other Party's consent shall not be required with respect to any assignment, delegation or transfer by a Party to (i) an Affiliate of such Party; or (ii) the purchaser of all or substantially all of the assets or stock of such Party, through merger, consolidation or otherwise. To the extent permitted by this Agreement, this Agreement shall be binding upon and inure to the benefit of the permitted successors and assigns of both Parties. 7.3 GOVERNING LAW. This Agreement shall be construed and governed according to, and any arbitration shall be conducted in accordance with, the laws of the Commonwealth of Massachusetts, U.S.A., excluding its conflicts of laws principles. 7.4 DISPUTE RESOLUTION. Any dispute, controversy or claim arising out of or relating to this Agreement or to a breach hereof, including its interpretation, performance or termination, shall be finally resolved by arbitration. The arbitration shall be conducted by three (3) arbitrators, one to be appointed by Aspect, one to be appointed by NK and a third being nominated by the two arbitrators so selected or, if they cannot agree on a third arbitrator, by the President of the American Arbitration Association. The arbitration shall be conducted in English and in accordance with the commercial arbitration rules of the United Nations Commission -14- 15 on International Trade Law. The arbitration, including the rendering of the award, shall take place in Los Angeles, California, U.S.A. and shall be the exclusive forum for resolving such dispute, controversy or claim. The decision of the arbitrators shall be binding upon the parties hereto, and the expense of the arbitration (including without limitation the award of attorneys' fees to the prevailing party) shall be paid as the arbitrators determine. The decision of the arbitrators shall be executory, and judgment thereon may be entered by any court of competent jurisdiction. Notwithstanding anything contained in this Section to the contrary, each Party shall have the right to institute judicial proceedings against the other Party or anyone acting by, through or under such other Party, in order to enforce the instituting Party's rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief. 7.5 ENTIRE AGREEMENT. This Agreement supersedes and cancels any previous agreements or understandings, whether oral, written or implied, heretofore in effect and sets forth the entire agreement between Aspect and NK with respect to the subject matter hereof. No modification or change may be made in this Agreement except by written instrument duly signed by a duly authorized representative of each Party. 7.6 NOTICES. All notices given under this Agreement shall be in writing and shall be addressed to the Parties at their respective addresses and telecopy numbers, and to the attention of the individuals set forth above. Either Party may change its address, telecopy number and contact person for purposes of this Agreement by giving the other Party written notice of its new address, telecopy number or contact person. Any such notice if given or made by registered or recorded delivery international air mail letter shall be deemed to have been received on the earlier of the date actually received and the date fifteen (15) calendar days after the same was posted (and in proving such it shall be sufficient to prove that the envelope containing the same was properly addressed and posted as aforesaid) and if given or made by telecopy transmission shall be deemed to have been received at the time of dispatch, unless such date of deemed receipt is not a day on which banks in the receiving party's home city are open for business, in which case the date of deemed receipt shall be the next day on which banks in the receiving party's home city are open for business. 7.7 WAIVERS. None of the conditions or provisions of this Agreement shall be held to have been waived by any act or knowledge on the part of either Party, except by an instrument in writing signed by a duly authorized officer or representative of such Party. Further, the waiver by either Party of any right hereunder or the failure to enforce at any time any of the provisions of this Agreement, or any rights with respect thereto, shall not be deemed to be a waiver of any other rights hereunder or any breach or failure of performance of the other Party. -15- 16 7.8 RESPONSIBILITY FOR TAXES. Taxes now or hereafter imposed with respect to the transactions contemplated hereunder (with the exception of income taxes or other taxes imposed upon Aspect and measured by the gross or net income of Aspect, and with the exception of withholding tax set forth in Section 2.1(c) above) shall be the responsibility of NK, and if paid or required to be paid by Aspect, the amount thereof shall be added to and become a part of the amounts payable by NK hereunder. 7.9 SEVERABILITY. If any provision of this Agreement is declared invalid or unenforceable by a court having competent jurisdiction, it is mutually agreed that this Agreement shall endure except for the part declared invalid or unenforceable by order of such court. The Parties shall consult and use their best efforts to agree upon a valid and enforceable provision which shall be a reasonable substitute for such invalid or unenforceable provision in light of the intent of this Agreement. 7.10 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 7.11 RELATIONSHIP OF THE PARTIES. (a) The relationship between Aspect and NK shall not be construed to be that of employer and employee, nor to constitute a partnership, joint venture or agency of any kind. Neither Party shall have any right to enter into any contracts or commitments in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever. (b) NK shall not obligate or purport to obligate Aspect by issuing or making any affirmations, representations, warranties or guaranties with respect to Kits to any third party, other than the warranties described in Exhibit D hereto. 7.12 LANGUAGE. All written material, correspondence, Technical Information, notices and oral assistance supplied by either Party hereunder shall be in the English language. 7.13 SURVIVAL OF CONTENTS. Notwithstanding anything else in this Agreement to the contrary, the parties agree that Sections 2.7, 2.11, 3.3 and 3.4 and Articles 4, 5, 6 and 7 shall survive the termination or expiration of this Agreement, as the case may be. -16- 17 7.14 COMPLIANCE WITH LAWS. NK covenants that all of its activities under or pursuant to this Agreement shall comply with all applicable laws, rules and regulations. NK shall be responsible for obtaining all licenses, permits and approvals which are necessary or advisable for sales of Products in all jurisdictions and for the performance of its duties hereunder. In particular, but without limitation, NK shall be responsible for all submissions to the MHW which may be required to obtain marketing approval of the Product. NK shall use its best efforts to obtain such MHW approvals as expeditiously as possible. NK shall promptly give Aspect written notice of the MHW Approval Date. Aspect shall: (i) fully comply with any applicable law, regulation and rule of government of the United States and agencies or instrumentalities thereof; and (ii) maintain all U.S. governmental approvals and licenses necessary to produce and export the Kit. -17- 18 7.15 HEADINGS. Any headings contained herein are for directory purposes only, do not constitute a part of this Agreement, and shall not be employed in interpreting this Agreement. IN WITNESS WHEREOF, the parties hereto have signed this Agreement under seal. ASPECT MEDICAL SYSTEMS, INC. By /s/ J. B. Eagle ----------------------------------- Name: J. B. Eagle Title: Chairman NIHON KOHDEN CORPORATION By /s/ Kazuo Ogino ----------------------------------- Name: Kazuo Ogino Title: Prsident and Chief Executive EXHIBIT A Description of BIS Module Kit EXHIBIT B Patents and Patent Applications EXHIBIT C Trademarks, Service Marks and Trade Names EXHIBIT D Warranties for Kit -18- 19 EXHIBIT A DESCRIPTION OF BIS MODULE KIT The BIS `Module Kit' is designed specifically for OEM applications and allows the integration of Aspect's BIS monitoring technology into OEM patient monitoring systems. The BIS Engine will interface to the patient via the Aspect BIS sensor and to the OEM equipment utilizing a serial (RS-232) 3-wire interface and the necessary power connections. The BIS module kits consists of a Digital Signal Converter (DSC-2) that is placed in proximity to the patient and a small circuit board that resides in the OEM equipment. The DSC-2 is a small (palm sized) front-end to the BIS Engine circuit board that provides the patient interface and performs the high performance analog to digital conversion of the EEG signals. The EEG signals are transmitted in digital format from the DSC-2 to the BIS engine circuit board via a 20 foot cable that is hard wired connected at the DSC-2. The BIS Engine circuit board measures 3 x 4 inches. This board performs digital signal processing on the digitized EEG signal and outputs the Bispectral Index to the OEM system via the RS-232 serial connection. The board is constructed using double sided surface mount techniques. The connections to the BIS Engine circuit board are a serial interface (RS-232) and power. Detailed Technical Specifications: Digital Output: RS-232 Serial Output (8 data, 1 stop, no parity 115 kBaud) Parameters: BIS, Suppression Ratio, EMG, Raw EEG Electrical Safety: Conforms to UL 544, IEC-601-1 Power: 3.5 Watts Maximum +5V (500 mA) +12V (77 mA) Artifact Rejection: Automatic -19- 20 Bispectral Index: 0-100 Scale Digital Signal Converter (DSC-2) Description: The DSC amplifies and digitizes the signal close to the patient to minimize electrical interference. Weight: 4.7 oz (0.13 kg) Dimensions: 2.6 x 1.0 x 4.3 inches (6.6 x 2.5 x 10.8 cm) Cable Length: 23 ft (7.0 m) integral DSC cable, 1.5 ft (0.45) patient interface cable. BIS Engine PCB Physical: 3x4 inch SMT PCB Processing Power: 50 MFlops Software Upgrades The BIS engine software is stored in reprogrammable FLASH memory. Software upgrades can be accomplished on-site or remotely via the serial interface. Serial Identifier Each BIS engine is given a unique serial identifier. This allows for electronic identification of every BIS Engine. -20- 21 EXHIBIT B PATENTS AND PATENT APPLICATIONS
- -------------- -------------------- -------------------------------------------- ------- US PATENT # PATENT DESCRIPTION - -------------- -------------------- -------------------------------------------- ------- 4,907,597 EEG BIS #1 Cerebral Bio-Potential Analysis Patents - -------------- -------------------- covering adaption of bispectral analysis ------- 5,010,891 EEG BIS #2 and means for extracting information for - -------------- -------------------- diagnostic and monitoring applications ------- 5,320,109 EEG BIS #3 - -------------- -------------------- ------- 5,458,117 EEG BIS #4 - -------------- -------------------- -------------------------------------------- ------- 5,381,804 A1000/A1050/DSC Interface to biopotential signal acquisition - -------------- -------------------- -------------------------------------------- ------- 5,305,746 ZipPrep Electrode Self-prepping electrode technology - -------------- -------------------- -------------------------------------------- ------- pending BIS Sensor System Interface to BIS Disposable Sensor/Electrode - -------------- -------------------- -------------------------------------------- ------- pending BIS Sensor Disposable BIS (Zip Prep) Sensor - -------------- -------------------- -------------------------------------------- -------
-21- 22 EXHIBIT C TRADEMARKS Aspect(R) ZIPPREP(TM) Zipprep(TM) A-1050(TM) A-1000(TM) A-2000(TM) Bispectral Index(TM) BIS(TM) BIS(TM) -22- 23 EXHIBIT D WARRANTY Aspect warrants to the initial Purchaser that the BIS MODULE KIT ("Warranted Product") will be free from defects in workmanship or materials, when given normal, proper, and intended usage for a period of 18 months from the date of its initial shipment to Purchaser, or 12 months from the date of resale by Purchaser, whichever period first expires. Excluded from this warranty are expendable components and supply items such as, but not limited to, electrodes, cables, and prep solutions. Aspect's obligations under this warranty are to repair or replace any Warranted Product or part thereof that Aspect reasonably determines to be covered by this warranty and to be defective in workmanship or materials provided that the Purchaser has given notice of such warranty claim within the Warranty Period and the Warranted Product is returned to the factory with freight prepaid. Repair or replacement of Products under this warranty does not extend the Warranty Period. To request repair or replacement under this warranty, Purchaser should contact Aspect at 2 Vision Drive, Natick, Massachusetts 01760, 800-442-2051 or 508-647-2088. Aspect will authorize Purchaser to return the Warranted Product (or part thereof) to Aspect. Aspect shall determine whether to repair or replace Products and parts covered by this warranty and all Products or parts replaced shall become Aspect's property. In the course of warranty service, Aspect may but shall not be required to make engineering improvements to the Warranted Product or part thereof. If Aspect reasonably determines that a repair or replacement is covered by the warranty, Aspect shall bear the costs of shipping the repaired or replacement Product to Purchaser. All other shipping costs shall be paid by Purchaser. Risk of loss or damage during shipments under this warranty shall be borne by the party shipping the Product. Products shipped by Purchaser under this warranty shall be packaged in the original shipping container or equivalent packaging to protect the Product. If Purchaser ships a Product to Aspect in unsuitable packaging, any physical damage present in the Product on receipt by Aspect (and not previously reported) will be presumed to have occurred in transit and will be the responsibility of Purchaser. Unless authorized or instructed by Aspect in advance, this warranty does not extend to any Warranted Products or part thereof: that have been subject to misuse, neglect or accident; that have been damaged by causes external to the Warranted Product, including but not limited to failure of or faulty electrical power; that have been used in violation of Aspect's instructions; that have been affixed to any nonstandard accessory attachment; on which the serial number has been removed or made illegible; that have been modified by anyone other than Aspect; or that have been disassembled, serviced, or reassembled by anyone other than Aspect, unless authorized by Aspect. Aspect shall have no obligation to make repairs, replacements, or corrections which result, in whole or in part, from normal wear and tear. Aspect -23- 24 makes no warranty (a) with respect to any products that are not Warranted Products, (b) with respect to any products purchased from a person other than Aspect or an Aspect-authorized distributor or (c) with respect to any product sold under a brand name other than Aspect. -24- 25 THIS WARRANTY IS THE SOLE AND EXCLUSIVE WARRANTY FOR ASPECT'S PRODUCTS, EXTENDS ONLY TO THE PURCHASER AND IS EXPRESSLY IN LIEU OF ANY OTHER EXPRESS OR IMPLIED WARRANTIES INCLUDING WITHOUT LIMITATION ANY WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE PROVIDED HEREIN, ASPECT'S MAXIMUM LIABILITY ARISING OUT OF THE SALE OF THE PRODUCTS OR THEIR USE, WHETHER BASED ON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE ACTUAL PAYMENTS RECEIVED BY ASPECT IN CONNECTION THEREWITH. ASPECT SHALL NOT BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL LOSS, DAMAGE OR EXPENSE (INCLUDING WITHOUT LIMITATION LOST PROFITS) DIRECTLY OR INDIRECTLY ARISING FROM THE SALE, INABILITY TO SELL, USE OR LOSS OF USE OF ANY PRODUCT. EXCEPT AS SET FORTH HEREIN, ALL PRODUCTS ARE SUPPLIED "AS IS" WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESS OR IMPLIED. -25- EX-10.6 4 PRODUCT AGREEMENT 1 Drager/Aspect Product Agreement Drager-Aspect Vers1.doc 20.04.99 Exhibit 10.6 Aspect Medical Systems, Inc. has requested that the marked portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. 2 Vision Drive Natick MA 01760-2059 USA - hereinafter called "Aspect" - and Drager Medizintechnik GmbH Moislinger Allee 53 - 55 23558 Lubeck Germany - hereinafter called "Drager" - - Aspect and Drager together hereinafter called "the Parties" - 2 Drager/Aspect Product Agreement 20.04.99 - 2 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Whereas Aspect has a long-standing tradition of designing, manufacturing and distributing neuromonitors including the BIS (Bispectral Index) and Sensors for neuromonitors. Whereas Drager has a long-standing tradition of designing, manufacturing and distributing medical equipment. Whereas Drager is in the process of designing a new anesthesia workplace. Whereas Drager wishes to integrate Aspect's BIS technology and to offer a Drager-BIS-Module as an option into this and other workplace solutions for the [**] and [**] Whereas Aspect desires to sell and Drager desires to purchase, on the terms and conditions set forth below in this Agreement, certain quantities of Aspect BIS Module Kits and the required Sensors manufactured by Aspect. Now, therefore, in consideration of the mutual covenants, terms and conditions hereinafter expressed, the Parties agree as follows: 1. DEFINITIONS 1.1 The term "Aspect BIS Module Kits" shall mean Aspect's BIS Module Kits as further defined in the specifications in Exhibit A. The Parties hereto may change Exhibit A, to the extent it may then be necessary to reflect a subsequent modification made pursuant to Clause 7 of this Agreement. 1.2 The term "Drager-BIS-Module" shall mean an Aspect BIS Module Kit that is integrated by Drager into a Drager Workplace. 3 Drager/Aspect Product Agreement 20.04.99 - 3 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1.3 The term "Aspect BIS Sensor" shall mean a single use disposable sensor for the use with the Aspect BIS Module Kits or the Aspect stand-alone BIS monitor. 1.4 The term [**] shall mean a [**] that has been [**] in accordance with [**] to [**] with the [**] Drager shall own all right, title, and interest in any modifications (the "[**]" made to the [**] to [**] the [**] for use in the [**]. The [**] will [**] Aspect BIS Module Kits sold by Aspect [**]. The [**] may [**] in [**] depending upon negotiations between the Parties (See Exhibit A, Section 1.5). 1.5 The term "Products" shall mean the Aspect BIS Module Kits, the Drager-BIS-Modules, the Aspect's BIS Sensors,[**]. 1.6 The term "Drager Workplace" shall mean a combination of devices for [**] and [**] with a [**] and [**] to all [**]. The definition Drager Workplace includes a [**] and a [**] for [**]. 2. DRAGER'S RIGHTS TO PURCHASE AND SELL AND ASPECT'S RESPONSIBILITIES 2.1 Drager shall have the non-exclusive right during the term of this Agreement to purchase the Aspect BIS Module Kit for the sole purpose of integrating the Aspect BIS Module Kit into a Drager Workplace and reselling the finished Drager-BIS-Module worldwide. Subject to Clause 2.2 Drager shall have the exclusive right during the term of this Agreement to purchase the [**] for the [**] of [**] the [**] except in the USA. Aspect shall not have the right to manufacture or distribute the [**] to [**]. Drager shall have the non-exclusive right during the term of this Agreement to purchase the Aspect BIS Sensor for the non-exclusive resale worldwide except in the USA. 2.2 Drager will sell the Drager-BIS-Module, the [**] and the Aspect BIS Sensor through its designated distribution network, and Aspect shall not with respect to the Drager-BIS-Module and the [**] make any sales promotion, shall not establish any branch, shall not have any supply depot or supply the Drager-BIS-Module or [**] to any party other than Drager. 4 Drager/Aspect Product Agreement 20.04.99 - 4 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. It is understood, however, that in the event that Drager distributes [**] and [**] customers using [**] of the number of [**] used by [**]. Drager shall then grant Aspect a non-exclusive royalty-free right and license under its rights to the [**] to [**] Aspect BIS Sensors that have been [**] for use with [**] to [**]. 2.3 Aspect agrees to provide all reasonable help for Drager with respect to the design and/or integration of the Aspect BIS Module Kit into a new Drager Workplace. 2.4 Drager agrees [**] the [**] for an [**] equipment. 2.5 Aspect shall obtain any official approvals, permits, licenses and other consent required to sell Aspect's BIS Module Kit and Aspect's BIS Sensor worldwide, at such time and in such manner as determined by Aspect or required by Drager to serve reasonable commercial purposes of both companies. Drager shall receive copies of any such documents. Drager shall obtain any official approvals, permits, licenses and other consent required to sell Drager products worldwide, in such time and in such manner as determined by Drager. If necessary, Aspect shall receive copies of any such documents belonging to the Drager-BIS-Module and the [**]. Aspect will provide any reasonable support required by Drager to obtain the necessary approvals for the Drager-BIS-Module and the [**]. 2.6 The parties intend to agree on a co-marketing concept for the Products. 3. PRICES 3.1 The prices for Aspect BIS Module Kits and BIS Sensors shall be as set forth in Exhibit B hereto. The price per product is FOB, Boston as per Incoterms 1990. All prices for Aspect BIS Module Kits and BIS Sensors are exclusive of all taxes, levies and assessments imposed on such products purchased hereunder, excluding taxes based on Aspect's possession thereof prior to the originally scheduled delivery and taxes on Aspect's net income from the transaction. Drager intends to introduce the new Drager anesthesia workplace to the market [**]. 5 Drager/Aspect Product Agreement 20.04.99 - 5 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3.2 Prices, billing and all payments due hereunder shall be in US$. 3.3 September of each year with effect on 1st January of the following year, the prices for Aspect's BIS Module Kit set forth in Exhibit B may be adjusted by mutual Agreement. The first adjustment of prices may be made prior to October 1, 2002 with effect on January 1, 2003. The prices for Aspect's BIS Sensor will be based on the Sensor Price Schedule set forth in Exhibit B applied to the prevailing List Price of the BIS Sensor in the U.S. Any adjustments to BIS Sensor prices may only be made prior to October 1 of each year for effect on January 1 of the following year. [**] are [**] by [**] will be based on the [**] set forth in Exhibit B for the [**] to which will be [**] to [**] the [**] (See also Exhibit A, Section 1.5). 4. PURCHASE 4.1 All Products shall be ordered in writing, specifying the product type, number of units, desired delivery date and means of shipment. Purchase orders may be sent by facsimile machine. Such orders shall be considered to have been accepted by Aspect only upon Aspect's issuance of written acknowledgment confirming its acceptance of the purchase order. Aspect's acknowledgment may be sent by facsimile machine and shall state delivery date. 4.2 Ownership of, title to, and risk of loss with respect to any product sold to Drager hereunder shall pass to Drager upon delivery to carrier in Boston packed and ready for shipment to Drager. Aspect shall ship products in a manner consistent with Aspect's usual shipping practices. Transportation and shipping charges from Boston, including costs incurred by Aspect relating to packing, storage, documentation and similar items which result from special shipping instructions of Drager, and the cost of any insurance which Drager may request in connection with the products, shall be added to the price stated on invoices and shall be paid by Drager at the time that payment of the purchase price for such products is due and payable. 6 Drager/Aspect Product Agreement 20.04.99 - 6 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 4.3 Drager shall have the right to handle the purchase of Products via another company belonging to the Drager Group. Drager will inform Aspect in writing with respect to such decision. Drager will further ensure that this company will adhere to the provisions of this Agreement. 5. FORECAST, DELIVERY TIME 5.1 Drager shall provide a non-binding quarterly rolling forecast for a minimum of the successive two quarters. 5.2 Aspect shall ship the Products in lots of [**] units. 5.3 Aspect shall ship Aspect BIS Module Kits within (eight) 8 weeks of its receipt of purchase orders therefore, assuming the quantity ordered is reasonably consistent with the forecast. 5.4 Aspect shall ship [**] within (four) 4 weeks of its receipt of purchase orders therefore, assuming the quantity ordered is reasonably consistent with the forecast. 5.5 In the event of cancellation of any purchase order, Drager will be liable to Aspect for the payment of reasonable cancellation charges. 6. PAYMENT; INSPECTIONS; RETURNS 6.1 All purchases hereunder shall be paid within thirty (30) days from date of invoice to Drager. 6.2 All Products received by Drager shall conform in all material respects to the specifications set forth in Exhibit A. Receiving inspection by Drager may be performed on a sampling basis which shall be in accordance with the Testing Specifications as established in Exhibit C. Exhibit C will be negotiated later. 7 Drager/Aspect Product Agreement 20.04.99 - 7 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Acceptance by Drager on a sampling basis shall not prejudice or restrict the right of Drager to accumulate and return at Aspect's expense for full credit or replacement (freight and insurance prepaid to Drager) non-conforming Products discovered during Drager's inspection process, which in no event shall extend beyond the warranty period provided in Clause 8. Any such return must be made within 30 days of discovery of any such Products' nonconformance by Drager. Aspect must be given the opportunity to inspect and/or correct Products for which Drager shall request credit or replacement to enable Aspect to determine for itself that said Products do not meet specifications, and such credit or replacement shall be made by Aspect only if and when it determines that Products do not meet specifications. No Product may be returned without Aspect's approval, which, subject to the last sentence of the preceding Paragraph under this Clause 6.2, shall not be unreasonably withheld. 7. MODIFICATION OF PRODUCTS 7.1. Aspect shall inform Drager (a) about planned modifications of Aspect's BIS Module Kit, Aspect's BIS Sensors, [**] and modifications relating to BIS of Aspect's stand alone Monitor, (b) of any modification which will affect the approval of the Products or the Drager Workplace and /or the proper function within the Drager Workplace. In case (b), Aspect shall not be allowed to modify Aspect's BIS Module Kit, Aspect's BIS Sensor or [**] sold to Drager without Drager's prior written consent. Additionally Drager shall have the right to decide if Drager wishes to take over the modification. If Drager refuses to take over the modification, Aspect shall be obliged to deliver the unmodified Aspect BIS Module Kit, Aspect's BIS Sensors and [**] for a period of eighteen (18) months beginning with the date Drager announces its decision. After this eighteen-months period Aspect can cease to deliver the unmodified Aspect BIS Module Kit, Aspect's BIS Sensors or [**]. In the event that Aspect believes that a modification or improvement relates to patient safety, Drager will accept these modifications under the condition that Aspect will agree to repair or replace Aspect's BIS Module Kits, Aspect's BIS Sensors or [**] previously provided to Drager or Drager customers at no charge. 8 Drager/Aspect Product Agreement 20.04.99 - 8 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 7.2. Drager shall promptly inform Aspect of any proposed modification which will affect Aspect product approval. 7.3 Aspect agrees in principle to [**] of the [**] and [**] the [**] is [**]. Aspect and Drager must agree on a mutually-acceptable time schedule and on a mutually-acceptable price for the [**] Aspect shall own all right title and interest in any [**] to the Aspect BIS Module Kit pursuant to this Section 7.3. 8. WARRANTY 8.1 Subject to Exhibit E, Aspect hereby warrants to Drager that for a period of twelve (12) months after each Product is sold by Drager, or an authorized Drager Distributor and delivered to an end user, or eighteen (18) months after such Products are received from Aspect by Drager, whichever period shall be shorter, that such Products will conform in all material respects to the specifications set forth in Exhibit A and be free from any defects in workmanship and materials. In the event of a breach of the warranty under this Section, Aspect's responsibility and Drager's remedy shall first be repair or replacement of the Product, at Aspect's option. In the event that, after Aspect has attempted to repair or replace the product, the Product does not conform to the warranty provided in this Section 8.1, Aspect will refund the purchase price for such Product. This paragraph summarizes Aspect's responsibility and Drager's sole remedy with respect to the warranty set forth in this Section 8.1. 8.2 Notwithstanding the foregoing, Aspect's warranty as set forth above does not cover: (i) defects emanating from improper or unauthorized use or maintenance of such products by Drager or any subsequent purchaser thereof; (ii) normal deterioration or normal wear and tear; (iii) disposable items such as the [**] Aspect BIS Sensor after the expiration date marked on the Sensor packaging (iv) catastrophe, fault or negligence of Drager or anyone claiming through or on behalf of Drager; or (v) subject to Exhibit A, causes external to the Products including without limitation power or air conditioning failure. 9 Drager/Aspect Product Agreement 20.04.99 - 9 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 8.3 THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). 9. QUALITY ASSURANCE Aspect shall adhere to a quality assurance system in accordance with the Quality Assurance Agreement as established in Exhibit D. 10. SERVICE 10.1 Drager assumes full responsibility to render service with respect to the maintenance, repair, or replacement of Products, accessory items, or parts therefor sold by Drager. 10.2 Aspect agrees to supply Drager, at Drager's expense, with any and all special tools and equipment reasonably required for Drager to service, maintain or test the Products sold hereunder. Drager agrees to make payment for such items to Aspect within thirty (30) days from the date of invoice. 10.3 Aspect shall adhere to the Service Agreement as per Exhibit E. Exhibit E will be negotiated later. 11. TRAINING AND DOCUMENTS Aspect personnel shall be made available free of charge for a reasonable number of training sessions reasonably required by Drager with respect to the sales and application know-how, the maintenance, repair or replacement of the Products, or parts therefore. Aspect will supply Drager free of charge with a reasonable quantity of technical, sales and application materials for internal purposes in English and German (if available) such as manuals and other technical materials relating to the Aspect BIS Module Kits and Aspect's BIS Sensors. Aspect will supply Drager at cost price with a reasonable quantity of catalogues and literature relating to the Aspect BIS Module Kits and Aspect's BIS Sensors. 10 Drager/Aspect Product Agreement 20.04.99 - 10 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Drager agrees to provide, at its own expense, and subject to Aspect's prior written approval, translation and printing of technical, sales, operation and service materials in the language(s) commonly used in the areas where Drager will sell the Products. Drager Lubeck will coordinate training and flow of information for all Drager participants. Training will be held in English language. 12. REPLACEMENT PARTS Subject to Exhibit E, Aspect agrees to supply Drager with replacement parts for the Aspect BIS Module Kits sold hereunder for a period of ten (10) years after the date of the last sale of Aspect BIS Module Kits by Aspect to Drager hereunder. Prices for the replacement parts will be set by Aspect in accordance with Clause 3. Drager shall make payment of the replacement parts supplied hereunder within thirty (30) days from the date of invoice. 13. PATENT INDEMNITY 13.1 (a) Except as provided below, Aspect shall defend and indemnify Drager from and against any damages, liabilities, costs and expenses (including reasonable attorneys' fees) arising out of any claim that the Aspect BIS Module, the Aspect BIS Sensor or the [**] infringe a valid patent or copyright or misappropriates a trade secret of a third party, provided that (i) Drager shall have promptly provided Aspect written notice thereof and reasonable cooperation, information, and assistance in connection therewith, and (ii) Aspect shall have sole control and authority with respect to the defense, settlement, or compromise thereof. Should any Product become or, in Aspect's opinion, be likely to become the subject of an injunction preventing its use as contemplated herein, Aspect may, at its option, (1) procure for Drager the right to continue using such product, (2) replace or modify such product so that it becomes non-infringing, or, if (1) and (2) are not reasonably available to Aspect after consultation in good faith with Drager, then (3) terminate Drager's rights to the allegedly infringing product and refund to Drager the amount which Drager has paid to Aspect for such products which are in the possession of Drager or its subdistributors. Drager will immediately inform Aspect as soon as Drager becomes aware of any threatened or actual liability claim by a third party relating to the Aspect BIS Module, the [**] and the Aspect BIS Sensor. 11 Drager/Aspect Product Agreement 20.04.99 - 11 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (b) Aspect shall have no liability or obligation to Drager hereunder with respect to any patent, copyright or trade secret infringement or claim thereof based upon (i) use of the Products by Drager in combination with devices or products other than the Drager Workplace, (ii) use of the Products in an application or environment for which such Products were not designed or contemplated, (iii) modifications, alterations or enhancements of the Products not created by or for Aspect, or (iv) any claims of infringement of a patent, copyright or trade secret in which Drager or any affiliate of Drager has an interest. Drager shall indemnify and hold Aspect harmless from all costs, damages and expenses (including reasonable attorneys' fees) arising from any claim enumerated in clauses (i) through (iv) above, provided that (i) Aspect shall have promptly provided Drager written notice thereof and reasonable cooperation, information, and assistance in connection therewith, and (ii) Drager shall have sole-control and authority with respect to the defense, settlement or compromise thereof. Aspect will immediately inform Drager as soon as Aspect becomes aware of any threatened or actual liability claim by a third party relating to Clause (iv) above. (c) the foregoing states the entire liability of the Parties with respect to infringement of patents, copyrights and trade secrets by the Products or any part thereof or by their operation. 13.2 The obligation of the Parties hereto as set forth in this Clause 13 shall continue notwithstanding the termination of this Agreement. 14. TRADEMARK Any Drager-BIS-Module or [**] sold by Drager under this Agreement shall bear the trademark of Drager. Drager is required to mark the Drager-BIS-Module and [**] additionally to the Drager trademark with the Aspect BIS(TM) trademark as approved by Aspect and in accordance with the following provisions: (a) Ownership. Drager acknowledges and agrees that Aspect is the sole and exclusive owner of all right, title and interest in and to the following trademarks (the "Aspect Trademarks"): "Aspect", "BIS", "BIS Sensor". Drager recognizes the value of the Aspect Trademarks and the good will associated with the Aspect Trademarks. Drager agrees that its use of the 12 Drager/Aspect Product Agreement 20.04.99 - 12 - Aspect Trademarks and any good will arising therefrom shall inure to the benefit of Aspect. Nothing contained herein shall create, nor shall be construed as an assignment of, any right, title or interest in or to the Aspect Trademarks to Drager, other than the grant of a license in Section 14(c) below; it being acknowledged and agreed that all other right, title and interest in and to the Aspect Trademarks is expressly reserved by Aspect. Drager shall keep the Aspect Trademarks free from all liens, mortgages or other encumbrances. Drager agrees that it will not attack or otherwise challenge the title, validity or any other rights of Aspect in or to the Aspect Trademarks. (b) Notice. All Products that use the Aspect Trademarks shall be accompanied, where reasonable and appropriate, by a proprietary notice with respect to Aspect consisting of the following elements: 1. The statement "[insert trademark(s)] is a proprietary trademark(s) of Aspect." 2. Drager will include the "(TM)" or "(R)" symbol, as instructed by Aspect, a reasonable time before the first prominent use of the Aspect Trademark in the Products. 3. Drager shall reproduce copyright and trademark notices of Aspect in the relating documents. (c) License. Aspect hereby grants to Drager a nonexclusive, worldwide, royalty-free license (without the right to sublicense) to use the Aspect Trademarks to designate and promote Products. Drager shall have no other right to use, display or utilize the Aspect Trademarks for any other purpose or in any other manner. (d) Quality Standards. Upon reasonable notice and request, Aspect may inspect copies of the Products, advertising and promotional materials on which the Aspect Trademarks are used so that Aspect may monitor compliance with this Agreement. Quality standards are further described in Exhibit D to this Agreement. (e) Protection and Infringement. Drager agrees to cooperate with and assist Aspect in obtaining, maintaining, protecting, enforcing and defending Aspect proprietary rights in and to the Aspect Trademarks. In the event that Drager learns of any infringement, threatened infringement or passing-off of the Aspect Trademarks, or that any third party claims or alleges that the Aspect Trademarks infringe the rights of the third party or are otherwise liable to 13 Drager/Aspect Product Agreement 20.04.99 - 13 - cause deception or confusion to the public, Drager shall be required to notify Aspect giving the particulars thereof, and Drager shall provide necessary information and assistance to Aspect in the event that Aspect decides that proceedings should be commenced. (f) Termination. In addition to the termination rights set forth in Section 21 hereof, in the event that Drager is in material breach of any provision of this Section 14, Aspect may, upon 30 days written notice, terminate the license granted in Section 14(c) if Drager does not cure such breach or default within such 30-day period. The parties recognize that curing such breach or default may require development of a new version of the Product. If this is the case, then Drager will be deemed to have cured such breach or default if, within the 30-day cure period, Drager presents to Aspect a plan for revision of the Product that will cure such breach or default, such plan is reasonably acceptable to Aspect, and such revision is released and distributed within three months following written notice of such breach or default. In addition to the provisions of Section 21 hereof, upon termination of the license granted in Section 14(c), or upon termination of this Agreement, for whatever cause except Sections 21.5, 21.6 and 21.7: 1. Drager shall immediately cease and desist from any further use of the Aspect Trademarks and any trademarks confusingly similar thereto, either directly or indirectly; 2. All rights in the Aspect Trademarks granted to Drager hereunder shall immediately revert to Aspect; 3. In the event that this Agreement is terminated for any reason other than a material breach or material default by Drager, Drager shall have a period of 30 days thereafter to dispose of all of the unsold Products bearing the Aspect Trademarks and advertising and promotional materials relating thereto which had been completed by it prior to such termination, provided such Products and materials were in the process of manufacture more than 30 days before such termination. 14 Drager/Aspect Product Agreement 20.04.99 - 14 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 15. PRODUCT RECALL PROGRAM In the event of any recall of the Product by Aspect or required by Drager for safety or efficacy reasons resulting from Aspect's failure to supply any BIS Module Kits, Aspect BIS Sensors, or [**] that (1) conform in all material respects to the specifications set forth in Exhibit A or (2) are free from defects in workmanship and materials, Aspect agrees to repair or replace all recalled Products previously supplied to Drager at no expense to Drager. Aspect also agrees to consult with Drager to establish a reasonable process for managing the recall. Drager will maintain all necessary sales records to facilitate the recall. 16. PRODUCT LIABILITY 16.1 Aspect will indemnify, protect, and save Drager harmless from all claims, demands, suit, or actions for damages to property or person which may be sustained by any third party, and which are caused by any defect or deficiency in the design or manufacture of any of the Products sold to Drager under this Agreement. The foregoing indemnity shall survive the expiration or termination of this Agreement, but Aspect shall not be responsible for any loss or damage caused by acts or omissions of Drager. Aspect shall have no liability or responsibility of any kind to Drager under this Clause 16 for any claims, demands, suits, or actions unless Aspect shall have been notified within 30 days time following notification to Drager of any such claims, demands, suits, or actions and shall have an adequate opportunity to defend. Aspect shall have the sole control and authority with respect to the defense, settlement or compromise thereof. Should Drager desire to have its own counsel participate in any such action or suit, the cost of such counsel shall be borne exclusively by Drager. The obligation of the Parties set forth in this Clause 16 shall continue notwithstanding the termination of this Agreement. 15 Drager/Aspect Product Agreement 20.04.99 - 15 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 16.2 Drager will indemnify, protect, and save Aspect harmless from all claims, demands, suit, or actions for damages to property or person which may be sustained by any third party and which are caused by any defect or deficiency in the design or manufacture of the Drager Workplace or of that portion of the Drager-BIS-Module developed or manufactured by Drager, or which relate to the failure of Drager to incorporate the Aspect BIS Module Kit within the Drager-BIS-Module in accordance with the technical information provided by Aspect, or Drager's activities in connection with use or sale of the Products. The foregoing indemnity shall survive the expiration or termination of this Agreement, but Drager shall not be responsible for any loss or damage caused by acts or omissions of Aspect. Drager shall have no liability or responsibility of any kind to Aspect under this Clause 16 for any claims, demands, suits, or actions unless Drager shall have been notified within [**] time following notification to Aspect of any such claims, demands, suits, or actions and shall have an adequate opportunity to defend. Drager shall have sole control and authority with respect to the defense, settlement or compromise thereof. Should Aspect desire to have its own counsel participate in any such action or suit, the cost of such counsel shall be borne exclusively by Aspect. The obligation of the Parties set forth in this Clause 16 shall continue notwithstanding the termination of this Agreement. 17. [**] PROJECT 17.1 It is Drager's intention that the Product will become the [**] for monitoring the level of hypnosis in Drager anesthesia Workplaces and it is [**] of the [**]. However, Drager shall be free to provide alternative technology in the event that (i) necessary regulatory approvals for the Products are withdrawn and will not be granted during a [**] period after withdrawn, (ii) approvals have not been granted within a period of [**] following the completion of the Drager-BIS-Module and submission of the necessary requests for approvals to the appropriate regulatory agencies (iii) Aspect is unable to supply Aspect BIS Module Kits in accordance with the specifications and is unable to reinstitute supply within [**] days of written notification 16 Drager/Aspect Product Agreement 20.04.99 - 16 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (iv) Aspect's market share worldwide for monitoring the effect of anesthesia on the brain with BIS [**]. (v) Aspect stops or reduces marketing and product improvement activities materially below the level currently performed. 17.2 Drager may offer in Drager anesthesia workplaces and in other Drager products complementary parameters [**] to Aspect's Bispectral Index. Any parameter claimed to be a measure of the hypnotic effect of anesthetics based on processing of the continuous EEG, is considered to be [**] will only be [**] to the BIS. Notwithstanding the foregoing, Drager is free to offer EEG parameters based on the continuous EEG such as median frequency, spectral edge frequency, compressed spectral array (CSA) and/or density spectral array (DSA), and may also offer evoked potentials, in addition to the BIS. 17.3 In the event that the Aspect's BIS Module Kit sold to Drager contains applications unique to Drager Aspect shall for the term of this Agreement and for [**] after its termination refrain from selling similar products to any third party. 18. FORCE MAJEURE Neither Aspect nor Drager shall be liable for any delay in, or failure of, performance hereunder due to any contingency reasonably beyond its control, rendering performance commercially unreasonable including, but not limited to, an act of God, war (declared or undeclared), mobilization, riot, strike, labor dispute, fire, flood, shortages, or failure or delays of energy, materials, supplies or equipment, unavailability of transportation, goods or services, transportation embargoes or delays, or breakdowns in machinery or equipment, governmental restrictions or actions but shall not include any royalty or other payment imposed or agreed to by Aspect or Drager resulting from a third party claim of intellectual property right infringement or violation as further described in Clause 13; provided, however, that the Party affected shall exert its reasonable best efforts to eliminate or cure or overcome any of such causes and to resume performance of its covenants. 17 Drager/Aspect Product Agreement 20.04.99 - 17 - 19. SECRECY 19.1 If marked as "Confidential Information", Drager and Aspect are each obliged to preserve in strict confidence any trade secrets, confidential information and technical information of the other Party and to refrain from disclosing, during the period of this Agreement and any time after expiration of this Agreement, any such information to third parties. Notwithstanding the foregoing, information which is orally or visually disclosed to the recipient by the disclosing party, or is disclosed in writing without an appropriate letter, proprietary stamp or legend, shall constitute Confidential Information if the disclosing party, within thirty (30) days after such disclosure, delivers to the recipient a written document or documents describing such Confidential Information and referencing the place and date of such oral, visual or written disclosure and the names of the employees or officers of the recipient to whom such disclosure was made. Both Parties represent and warrant that they have exercised, and will continue to exercise the same standard of due care in hiring, supervising and selecting those employees to whom they disclose such confidential information, so that the confidentiality of all such information is protected. No such confidential information disclosed by either party to the other in connection with this Agreement shall be disclosed to any person or entity other than the recipient's employees and contractors directly involved with the recipient's use of such information who are bound by written agreement to protect the confidentiality of such information, and such information shall be otherwise protected by the recipient from disclosure to others with the same degree of care accorded to its own proprietary information. 19.2 The Parties' obligation of non-disclosure shall not apply with respect to such information, which (1) is already known to the receiving Party before disclosure by the divulging Party, providing that the receiving Party has written records to substantiate its knowledge; or (2) is in the public domain at the time of disclosure to the receiving Party or, after such disclosure, enters into the public domain through no fault of the receiving Party; (3) is independently developed by the receiving Party without reference to or reliance on the Confidential Information; or 18 Drager/Aspect Product Agreement 20.04.99 - 18 - (4) is lawfully disclosed to the receiving Party by a third party under circumstances permitting its unrestricted disclosure by the receiving party. Upon termination of this Agreement, each party shall promptly deliver to the other all confidential information of the other party in the possession or control of such party and all copies thereof. The obligations under this Section 19 shall continue for both parties for a period of 3 years after delivery by Aspect to Drager of the last Product under this Agreement. 20. RELATIONSHIP BETWEEN THE PARTIES During the term hereof, the relationship of the Parties is that of seller (Aspect) and buyer (Drager). Nothing herein contained shall be deemed to authorize or empower either Party, its affiliates, its agents or employees, to act as agent for the other Party or conduct business in the name, or for the account of the other Party or any of its affiliates or otherwise bind it or them in any manner. 21. TERM AND TERMINATION 21.1 This Agreement shall come into force when it has been duly signed by both Parties and shall remain in force until December 31, 2005, unless earlier terminated in accordance with the provisions hereof. It shall be automatically renewed thereafter for additional periods of one (1) calendar year each unless one Party gives at least twelve (12) calendar months prior to the end of the original term hereof and each one (1) year period thereafter a written notice to the other Party of its intention to terminate. First notice of termination may not be given until [**]. 19 Drager/Aspect Product Agreement 20.04.99 - 19 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 21.2 Aspect shall have the right to terminate this Agreement, effective upon the delivery of written notice to Drager, in the event Drager fails to make any payment when due to Aspect pursuant to this Agreement or any invoice for Products. Aspect will [**] to Drager after Drager's receipt of Aspect's written demand for payment, provided Aspect has submitted proof of delivery in order to rectify any payment problem or discrepancy and has stated that the Agreement will be terminated if Drager fails to make the due payment within the [**]. 21.3 Furthermore, either Party may terminate this Agreement if the other Party commits any material breach of its obligations hereunder (other than payment defaults addressed in Clauses 21.2 hereof) and such breach is not resolved within [**] after written notice thereof is given to the Party in breach of this Agreement. 21.4 Should Drager or Aspect at any time during the period of this Agreement be adjudged bankrupt or insolvent, or have a Receiver appointed in respect of its assets or shall make any arrangement or composition with its creditors or shall be wound up, whether voluntarily or compulsorily, or make a general assignment for the benefit of creditors, then in such event the other Party may, at its option, terminate this Agreement effective upon giving notice thereof in writing to the other. In the event either Drager or Aspect exercises this option, said Party shall incur no liability or obligation with respect to said termination. 21.5 In the event of the merger, consolidation or sale of substantially all assets of Aspect to a competitor of Drager, Drager may, at its option, terminate Section 17 of this Agreement effective upon giving notice thereof in writing to Aspect. In the event Drager wishes to exercise this option, Drager shall do so within 30 days following written notice from Aspect of the merger, consolidation or sale of substantially all assets of Aspect, and neither Aspect (or its successors) or Drager shall incur liability or obligation with respect to said termination. In the event of the merger, consolidation or sale of substantially all assets of Drager to a company outside of the Drager-Group, Aspect may, at its option, terminate this Agreement effective upon giving notice thereof in writing to Drager. In the event Aspect exercises this option, Aspect shall do so within 30 days following written notice from Drager of the merger, consolidation or sale of substantially all assets of Drager, and neither Drager (or its successors) or Aspect shall incur liability or obligation with respect to said termination. 20 Drager/Aspect Product Agreement 20.04.99 - 20 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 21.6 Subject to the second paragraph of this Section 21.6, in the event of termination the Parties agree that Drager shall have the right to purchase the Aspect BIS Module Kit and the [**] for [**] following termination of the Agreement or Aspect BIS Sensors for [**] following termination of the Agreement. In the event of termination of the Agreement as a result of a material breach of the Agreement by Drager in accordance with Sections 21.2 or Section 21.3, Drager shall not be permitted to continue to purchase [**] Aspect BIS Sensors beyond [**] termination of the Agreement. If Aspect intends to [**] of the [**] the Parties shall [**] in good faith. 21.7 In the event of termination, the Parties further agree to finalize current sales projects. A complete list of these sales projects has to be exchanged by the Parties no later than fourteen (14) days after the termination. 21.8 Due to the fact that some Exhibits of this Agreement will be negotiated later each Party shall have the right to terminate this Agreement if the parties cannot reasonably agree on the content of one of these Exhibits. 22. MISCELLANEOUS 22.1 This Agreement shall not be assignable either in whole or in part without the prior written consent of the other Party except, subject to Section 21.5, to a party that acquires all or substantially all of either Parties' business by merger, sale of assets, or otherwise. 22.2 Subject to Clause 21.1 hereof, this Agreement shall inure to the benefit of and be binding upon the Parties hereto. 22.3 The headings used herein are for ease of reference only and are not to be used in interpretation or construction of this Agreement. 22.4 The provisions of this Agreement and its Exhibits shall not be extended, varied, changed, modified or supplemented other than by agreement in writing signed by the Parties hereto. 22.5 In the event of any inconsistency or conflict between the provisions of this Agreement and any Purchase Order or other document, the provisions of this Agreement shall prevail. 21 Drager/Aspect Product Agreement 20.04.99 - 21 - 22.6 All notices or other communications which shall or may be given pursuant to this Agreement shall be in writing in the English language and shall be delivered by personal delivery, certified mail, or telefax at the address set forth below, or at such other address as such party may hereafter designate in writing as the appropriate address for the receipt of such notice. To Aspect at: Aspect Medical Systems, Inc. 2 Vision Drive Natick MA 01760-2059 USA Tel.: 508-647-2072 Fax: 508-647-2059 Attention: J.Breckenridge Eagle To Drager at: Drager Medizintechnik GmbH Moislinger Allee 53 - 55 D-23558 Lubeck Federal Republic of Germany Tel.: 451-882-2295 Fax: 451-882-2793 Attention: Business Unit Anaesthesia, Swen Grunitz-Post All notices shall be deemed served on the day on which personally served, or of by certified mail, or telefax on the date of actual receipt. 21.7 The waiver by either Party hereto of any default hereunder or of any breach of any covenant, agreement or condition contained herein shall not be construed to constitute a waiver of any other default or breach hereof whether similar or otherwise. 22.8 If any provision of this Agreement should be held unenforceable, or illegal with respect to any jurisdiction, it (i) shall be deemed severable from the other provisions which shall remain valid and enforceable; and (ii) shall remain in effect in other jurisdiction where such provision is otherwise enforceable and legal. 22 Drager/Aspect Product Agreement 20.04.99 - 22 - This Agreement may be executed simultaneously in multiple counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same agreement. 22.10 Neither party shall have the right to sublicense any of the rights or licenses granted under this agreement outside the company group without the other's prior written consent. 21.11 Compliance with Laws. Drager shall comply with all laws, legislation, rules, regulations, governmental requirements and industry standards with respect to the Products, and the performance by Drager of its obligations hereunder, existing in any jurisdiction into which Drager directly or indirectly distributes the Products. Aspect shall inform Drager if export of Aspect's BIS Module Kit or Aspect's Sensors are restricted to any country or require certain permission in any country. 21.12 IN THE EVENT THAT U.S. LAW IS APPLIED TO THIS AGREEMENT, ASPECT OR DRAGER SHALL NOT BE LIABLE FOR ANY LOSS OF DATA, LOSS OF PROFITS OR LOSS OF USE OF THE PRODUCTS OR FOR ANY INDIRECT DAMAGES OF ANY KIND (WHETHER SPECIAL, INCIDENTAL, CONSEQUENTIAL OR OTHER INDIRECT DAMAGES) IN CONNECTION WITH THE USE OR PERFORMANCE OF THE PRODUCTS. 23. APPLICABLE LAW This Agreement shall be governed, construed and interpreted in accordance with the laws of Switzerland, without regard to its conflict of laws principles. The United Nations Convention on contracts for the International Sale of Goods shall not apply. 24. DISPUTE SETTLEMENT, PLACE OF JURISDICTION 24.1 The Parties shall try to settle any dispute arising in connection with this present Agreement amicably. In case of a local sales conflict a task force of Drager and Aspect consisting of the persons named under Clause 22.6 will take care of such dispute settlement. 24.2 In the event disputes cannot be settled amicably according to Clause 24.1, in connection with this present Agreement shall be exclusively and finally settled by the courts of Zurich. Natick, ......April 29, 1999..... Lubeck, .......May 5, 1999.............. J. Breckenridge Eagle [Illegible] ................................. ........................................ Aspect Medical Systems, Inc. Drager Medizintechnik GmbH 23 Drager/Aspect Product Agreement 20.04.99 - 23 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT A of the Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. and Drager Medizintechnik GmbH Products 1.1 The Drager-BIS-Module will incorporate Aspect's BIS Module Kit. Aspect's BIS 'Module Kit' is designed specifically for OEM applications and allows the integration of Aspect's BIS monitoring technology into OEM equipment. The BIS Engine will interface to the patient via the Aspect BIS sensor and to the OEM equipment utilizing a serial (RS-232) 3-wire interface and the necessary power connections. The BIS Module Kit consists of a Digital Signal Converter (DSC-2) that is placed in proximity to the patient and a small circuit board that resides in the OEM equipment. The DSC-2 is a small (palm sized) front-end to the BIS Engine circuit board that provides the patient interface and performs the high performance analog to digital conversion of the EEG signals. The EEG signals are transmitted in digital format from the DSC-2 to the BIS engine circuit board via a 12 foot cable that is hard wired connected at the DSC-2. The BIS Engine circuit board measures 3 x 4 inches. This board performs digital signal processing on the digitized EEG signal and outputs the Bispectral Index to the OEM system via the RS-232 serial connection. The board is constructed using double sided surface mount techniques. The connections to the BIS Engine circuit board are a serial interface (RS-232), power, and DSC connections. 24 Drager/Aspect Product Agreement 20.04.99 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. - 24 - Detailed Technical Specifications: Digital Output: [**] Main Parameters: [**] Electrical Safety: [**] Power: [**] Artifact Rejection: [**] Bispectral Index: [**] Digital Signal Converter (DSC-2) Description: [**] to the [**] Weight: [**] Dimensions: [**] Cable Length: [**] BIS Engine PCB Physical: [**] Processing Power: [**] Software Upgrades [**] software is stored in [**]. Software upgrades can be accomplished [**] via the [**]. Serial Identifier Each [**] serial identifier. This allows for [**]. 25 Drager/Aspect Product Agreement 20.04.99 - 25 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. [Graphic of Aspect BIS Module Kit and Sensor] 1.2 In addition to the main parameters indicated in Exhibit A, Section 1.1, the Aspect BIS Module Kit shall also provide the [**]. When the Drager-BIS-Module is in use in a Drager Workplace System, there will be a possibility to display each of the following [**] as well as the [**] in the [**] when used for [**] and in [**]. 1.3 Aspect shall ensure that all BIS enhancements that Aspect develops for Aspect's stand alone BIS monitor will be available in the BIS Module Kit sold to Drager as appropriate and as soon as reasonably possible. Drager will agree to distribute a modified BIS Sensor in the event Aspect determines that an enhancement to the BIS Module Kit requires the use of a modified Sensor. All conditions, prices and so on won't be changed for the new sensors. If this occurs, and if [**] in accordance with Section 1.5 of Exhibit A, [**] to provide a [**] of the [**] for the [**] use of [**]. Possible additional costs will be incorporated in the transfer price for the [**] and reasonable volumes will be required. In the event that Aspect develops a different product involving a different type of index, patient sensor, or application, Aspect and Drager will develop a mutually-satisfactory new, or amended, agreement. 1.4 For integration into a Drager Workplace, Drager will design an Drager Workplace specific Drager-BIS-Module. Aspect will grant all reasonable help to Drager designing the Drager-BIS-Module. 1.5 On the [**]. The possibility to use [**] the original Aspect BIS monitor will be negotiated later. Possible additional costs [**] will be incorporated in the transfer price and [**] will be required. 1.6 Both Parties agree to work out a common technical requirement specification for the Products. The latest version of this technical requirement specification signed by both Parties will be the specification of the Product to be manufactured by Aspect for Drager. Natick, .....4/29/99............. Lubeck, .........May 5, 1999 ........... J. Breckenridge Eagle [illegible] ................................. ........................................ Aspect Medical Systems, Inc. Drager Medizintechnik GmbH 26 Drager/Aspect Product Agreement 20.04.99 - 26 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B of the Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. and Drager Medizintechnik GmbH PRICES AND DISCOUNTS The price for one Aspect BIS Module Kit is US$[**]. The components consists of a [**] and [**] and a [**] and [**]. Drager shall have the right to manufacture on a royalty free basis the circuit board based on design specifications provided by Aspect. In this case the price for the remaining components is US$[**] for one Aspect BIS Module Kit. The Parties will agree in the future on the terms of a manufacturing license. The price of the Aspect BIS Module Kit always includes 5 Sensors. Drager agrees to supply these Sensors together with each Drager-BIS-Module to its customers. The Parties agree that Aspect will grant to Drager an additional discount on the price of the Aspect BIS Module Kit depending on a certain yearly quantity : Aspect will grant an additional discount of [**] for a yearly quantity of more than [**] Aspect BIS Module Kits. Aspect [**] the [**] subsequent to the date of this agreement, for products sold by Aspect [**] to other customers of Aspect [**]. Aspect will provide Drager with a [**] to [**] that [**] by other Aspect customers. The price to Drager for the Aspect-BIS-Sensor will be as follows: The transfer price to Drager for the Aspect BIS Sensor will vary between[**] of the List Price of the Aspect BIS Sensor in the United States. This is equivalent to a discount off of Aspect's List price in the United States for the BIS Sensor between [**]. 27 Drager/Aspect Product Agreement 20.04.99 - 27 - Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. As of January 1, 1999, the List Price for Aspect's BIS Sensor is US$15.00 The actual amount of the discount off the U.S. List Price will depend upon the volume of Aspect BIS Sensors shipped by Drager for use with Drager-BIS-Modules. Prior to the shipment by Drager of the first [**]Drager-BIS-Modules, the discount available to Drager for purchase of the Aspect BIS Sensors will be set at [**] of Aspect's List Price for the BIS Sensor in the United States. Following the shipment of the first [**] Drager-BIS-Modules, the discount available to Drager will depend upon the volume of Aspect BIS Sensors shipped each quarter divided by the number of documented Drager-BIS-Modules installed minus the first [**] Drager-BIS-Modules installed. Using this formula, the Aspect BIS Sensor price schedule is as follows: Sensor Shipments per module per quarter-Note 1 Discount off US List price - ---------------------------------------------- -------------------------- up [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] or more [**] [**] Note 1: Sensor consumption rate calculated based on total Aspect BIS Sensors shipped during the quarter divided by the average Drager-BIS Module installed base during the quarter minus [**]. In the event that Drager requests that Aspect develop the Drager-BIS-Sensor, Aspect will sell Drager-BIS-Sensors to Drager in accordance with the same discount schedule as above, with possible additional costs as noted in Section 1.5 of Exhibit A. According to Clause 2.1 of the Agreement Drager shall not distribute Sensors in the USA. Therefore, Aspect will pay a commission to Drager of [**] of the amounts paid by the customer for each Sensor shipped for use with a Drager-BIS-Module in the USA. Natick, .......4/29/99 ............ Lubeck, ......May 5, 1999 ...... J. Breckenridge Eagle [illegible] ................................... ................................. Aspect Medical Systems, Inc. Drager Medizintechnik GmbH 28 Drager/Aspect Product Agreement 20.04.99 - 28 - EXHIBIT C of the Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. and Drager Medizintechnik GmbH TESTING SPECIFICATIONS FOR THE PRODUCTS (to be negotiated later) Natick, .......4/29/99 ................ Lubeck, ......May 5, 1999 ....... J. Breckenridge Eagle [illegible] ....................................... .................................. Aspect Medical Systems, Inc. Drager Medizintechnik GmbH 29 Drager/Aspect Product Agreement 20.04.99 - 29 - EXHIBIT D of the Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. and Drager Medizintechnik GmbH QUALITY ASSURANCE AGREEMENT (to be negotiated later) Natick, .......4/29/99 ................. Lubeck, ......May 5, 1999 .... J. Breckenridge Eagle [illegible] ........................................ ............................... Aspect Medical Systems, Inc. Drager Medizintechnik GmbH 30 Drager/Aspect Product Agreement 20.04.99 - 30 - EXHIBIT E of the Drager/Aspect Product Agreement between Aspect Medical Systems, Inc. and Drager Medizintechnik GmbH SERVICE AGREEMENT (to be negotiated later) Natick, .......4/29/99 ................. Lubeck, ......May 5, 1999 .... J. Breckenridge Eagle [illegible] ........................................ ............................... Aspect Medical Systems, Inc. Drager Medizintechnik GmbH EX-10.7 5 OEM DEVELOPMENT & PURCHASE AGREEMENT 8/6/1999 1 Aspect Medical Systems, Inc. has requested that the marked portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. Exhibit 10.7 ASPECT MEDICAL SYSTEMS, INC. OEM DEVELOPMENT AND PURCHASE AGREEMENT Agreement dated this Sixth day of August, 1999 , by and between Aspect Medical Systems, Inc, a Delaware corporation with its principal offices located at Two Vision Drive, Natick, Massachusetts ("Aspect") and Hewlett-Packard GmbH ("HP"), a German corporation with its principal offices located in Germany at 71034 Boblingen, Herrenberger Str. 110-140, for the purchase and/or license by HP of products under the terms and conditions contained in this Agreement. 1. BACKGROUND. (a) Aspect is a developer, manufacturer and distributor of medical devices, equipment, accessories and related hardware, software and related products and accessories. (b) HP is a manufacturer of medical equipment, in particular of multiparameter patient monitors. (c) Aspect and HP intend to make available to HP customers a solution to integrate Aspect's BIS technology with HP's patient monitors. In a first phase of the cooperation Aspect and HP will develop appropriate components in a joint project (the "BIS Project"). In the second phase of the cooperation, HP intends to purchase and/or license specified products for integration with its own systems and products. Aspect agrees to sell and/or license to HP the products described below, subject to the terms and conditions contained in this Agreement. (d) It is the intention of both Parties to negotiate a separate, independent distribution agreement (the "Distribution Agreement") under which HP will also sell the Aspect 2000 BIS Monitor and Aspect BIS Sensors in certain geographies. 2. DEFINITIONS. "Aspect's Bispectral Index" or "BIS" is Aspect's proprietary processed EEG parameter that measures the hypnotic effects of anesthetic and sedative agents on the brain during surgery. "HP Patient Monitors" means a family of multi-parameter modular patient monitoring systems manufactured by or for HP. When the HP BIS System is complete, HP Patient Monitors will display BIS data (waveforms, numerics, status info), and provide setup and operation information (user interface), alarming, and network connectivity. "HP BIS System" is the sum of all components involved in integrating the BIS with HP Patient Monitors. 1 2 "HP BIS Module" is a standard size parameter module for HP Patient Monitors to convert the data as delivered by the HP BIS Engine from the BIS Protocol to the HP Patient Monitor's internal format. "Module Cable" is a cable used to connect the HP BIS Engine to the HP BIS Module. "DSC Cable" is a cable used to connect the Digital Signal Converter to the HP BIS Engine. "HP BIS Engine" is the processing unit for deriving the BIS data from the raw EEG signal and consists of Aspect's "BIS Engine" board modified for HP and built into a housing with appropriate connectors to connect to the DSC Cable and the Module Cable. "Digital Signal Converter" (or "DSC") is used to amplify the analog EEG signals as acquired by the BIS sensors and convert it from analog to digital signals. "Aspect BIS Module Kit" means the bundle of all components of the HP BIS System that are developed and manufactured by Aspect and licensed/sold to HP under this Agreement: DSC, DSC Cable, HP BIS Engine, and Module Cable. "Aspect BIS Sensor" means a single use disposable sensor manufactured by Aspect for use with the Aspect A2000 BIS monitor or with the Aspect BIS Module Kit and that is required to generate Aspect's Bispectral Index. "Sensor Startup Kit" is a set of Aspect BIS Sensors that may be part of each HP BIS System sale by HP in selected geographies outside North America. "A2000" means Aspect's stand-alone BIS monitor for use with the Aspect BIS Sensor and that generates Aspect's Bispectral Index. "Aspect Products" means Aspect BIS Module Kits and any other product that can be ordered by HP as listed in Exhibit A (Aspect Products and Purchase Prices). "Software" means Aspect software programs in binary code form which are designed for use with the Aspect BIS Module Kit. "BIS Protocol" is Aspect's proprietary communication protocol provided for purposes of communication between the HP BIS Engine, the HP BIS Module and HP Patient Monitors "Documentation" means the BIS Engine Serial Interface Specification. "Territory" shall mean all countries in which HP is permitted under this Agreement to distribute Aspect Products. "Party" or "Parties" shall mean Aspect and HP each individually or jointly. 2 3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3. BIS MODULE DEVELOPMENT PROJECT. 3.1. PROJECT SCOPE (a) Aspect and HP will be performing activities to develop a HP BIS System. Aspect will modify Aspect's standard BIS Engine product described in Exhibit B to create a HP BIS Engine. HP will develop a HP BIS Module to interface with Aspect's modified BIS Engine. (b) The following specifications/documents will be created and agreed upon by both parties prior to completion of Phase 1 of the Module Development Project: - Functional Technical Specification (FTS): This is a specification that defines the interface between the HP BIS Engine and the HP BIS Module. This document is an HP specification that is derived principally from specifications and materials from Aspect. - System Hazard Analysis: To be performed in Phase 1 of the project. - External Specification: Specification describing the HP BIS Module and the Aspect BIS Module Kit as a system from the customer's viewpoint. - Project Plan: The project plan will include a detailed project schedule, detailed project description, and other information not included in the FTS. 3.2. PROJECT TIMING The overall project duration is expected to be approximately [**]. The product introduction is planned for [**]. The expected major project milestones are described below: [**] [**] 3.3. PROJECT PHASE DESCRIPTIONS The following phases of the project closely correlate with the standard internal project phases of the HP development process. 3 4 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. PHASE 1: PROJECT DEFINITION Phase 1 defines the project at a high level. The principal technical issues to resolve are the [**] requirements and the [**] requirements for the [**]. At the end of Phase 1 the following documents are created: External Specification (preliminary), Functional Technical Specification (preliminary), an initial Hazard Analysis, and a detailed Project Schedule., In addition, HP shall create internal Functional Plans, including a development plan, verification and validation plan, manufacturing plan, marketing plan,and regulatory plan. PHASE 2A: SPECIFICATION In Phase 2A the detailed design specifications are created: External Specification (Final), Technical Specification (Final), Hazard Analysis (Final) and definition of Aspect's Qualification Test Procedure (verification and validation plan for all items identified under the Functional Technical Specification). PHASE 2B: DESIGN (IMPLEMENTATION) The actual electrical, circuit schematics, and mechanical design and implementation is performed in Phase 2B. The output of Phase 2B is a functional prototype. This functional prototype is intended to be a faithful representation of the product, including actual molded materials, electronics and software. During this phase, the Outgoing Inspection Procedure from Aspect is also defined. PHASE 3: VERIFICATION Design verification testing of software, electronics and mechanical components is performed in Phase 3. Additionally EMI testing of the system is performed in this phase of the project. Aspect will perform an [**] of the [**] as a [**] with the BIS Module. Clinical field trials are started in Phase 3. It is anticipated that field trials of the BIS Module System will be conducted in [**] hospitals in Europe and [**] hospitals in the US. The completion of field trials occurs by the end of Phase 4. During this phase, results of the Qualification Tests and Outgoing Inspection will also be reviewed for all prototypes. PHASE 4: VALIDATION The following tasks are accomplished during Phase 4: Software Validation: Formal validation testing of the BIS Module System. 4 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Manufacturing Pilot Build: It is expected that [**] systems will be built, of which [**] units will be required at the beginning of Phase 3 for clinical field trials. The systems will be used for clinical trials, engineering test, and for sales demos. Final Test Procedure: Used to 100% test the Aspect BIS Module Kit and HP BIS Module as a final test in manufacturing. 3.4 PROJECT MANAGEMENT. (a) Each party shall appoint a "Project Manager" who oversees and manages the joint project on a day-to-day basis. (b) The Project Managers shall meet regularly based on the project needs to assess the project status and discuss and resolve any issues or problems. These meetings may be held face-to-face or as telephone or video conferences. (c) Both Parties' project teams shall conduct project meetings from time to time as deemed useful. (d) Each Party shall bear its own communication and travel costs. (e) All communication in conjunction with this Agreement shall be directed to the appropriate person and address as listed in Exhibit C (Contact Persons/Addresses). 3.5. JOINT RESPONSIBILITIES. (a) Both Parties will actively work together in performing a joint Hazard Analysis for the HP BIS System at the beginning of the BIS Project. (b) Both Parties will generate a joint External Specification of the HP BIS System. (c) The parties will jointly develop and agree on a Verification and Validation Plan for testing the performance and safety of the entire BIS System prior to its release to shipment. (d) The verification and validation of the HP BIS System will be performed under HP's overall responsibility at HP's Boeblingen premises. Aspect agrees to support this effort as defined in the Verification and Validation Plan and as may be required in case of problems. Verification and validation of Aspect's BIS Module Kit will be performed by Aspect in Aspect's Natick facility. After successful validation by HP of the HP BIS System, Aspect will also validate the HP BIS System output and confirm in a written certificate that the BIS value as displayed on the HP Patient Monitor is equivalent to Aspect's BIS implementation. (e) Both parties will inform each other of any planned change in its products that may affect compatibility of the HP BIS System components or the available regulatory approvals. The Change Notification Agreement Form (attached as Exhibit D) will be used for this purpose. 5 6 (f) Both parties will provide each other reasonable engineering consultation free of charge. (g) Aspect and HP will provide each other free of charge with certain number of prototypes and product samples for development, verification and validation, and getting regulatory approvals. 3.6. HP RESPONSIBILITIES. (a) HP shall develop the HP BIS Module according to the mutually agreed Functional Technical Specification and External Specification at HP's own cost. (b) HP will take responsibility for the development, design and performance of the HP BIS Module and for the combination of the Aspect components (BIS Module Kit) with the HP components (HP BIS Module, HP Patient Monitor) of the HP BIS System. 3.7. ASPECT RESPONSIBILITIES. (a) Aspect shall develop the HP BIS Engine, the DSC Cable and the Module Cable according to the mutually agreed specifications at Aspect's own cost. (b) Aspect will take responsibility for the development, design and performance of the Aspect BIS Module Kit. (c) Aspect shall make available the BIS Protocol specification to HP for implementation into the HP BIS Module or otherwise into HP Patient Monitors. (d) Aspect will undertake reasonable efforts to maintain backward compatibility for future versions of the BIS Protocol, however no guarantee is given. (e) Aspect will inform HP of future changes to the BIS Protocol as early as possible and make available such changed BIS Protocol specification to HP. The Change Notification Agreement Form (attached as Exhibit D) will be used for this purpose. Notwithstanding anything to the contrary in the Change Notification Agreement Form, HP shall not withhold its approval of any future changes to the BIS Protocol as provided in Section 3.7 (d). 4. PURCHASE AND SALE OBLIGATIONS; LICENSES. (a) General. Subject to the terms and conditions of this Agreement, Aspect agrees to sell to HP the Aspect Products listed on Exhibit A (Aspect Products and Purchase Prices). For these products, Aspect grants to HP or HP's subdistributors a non-exclusive, worldwide distribution right for the term of this Agreement. HP represents and warrants that the components of the Aspect BIS Module Kits purchased from Aspect under this Agreement shall be used as components in, incorporated into, or integrated with, systems and products which HP sells or leases to third-party users in the regular course of business. HP further certifies that the components of the Aspect BIS Module Kits will only be resold, leased, rented, licensed or otherwise transferred to third parties for use as a part of an HP BIS System or as replacement parts used in HP BIS Systems. 6 7 (b) BIS Sensors. Apart from section 4.a., Aspect hereby grants HP the right to distribute Aspect BIS Sensors solely to HP's customers outside North America and solely for use with HP BIS Systems. (c) Sensor Startup Kit. Aspect hereby grants HP the right to sell the Sensor Startup Kit for use with the HP BIS System in geographies outside North America. (d) Software License. Aspect hereby grants to HP a non-exclusive and non-transferable worldwide license, without the right to sublicense (except to purchasers of HP BIS Systems and to HP's subdistributors), during the term of the Agreement to use the Software and related Documentation provided by Aspect solely in connection with operation of the components of Aspect BIS Module Kit in the HP BIS System. Thereafter, Aspect grants to HP a right to use the Software and related Documentation used in conjunction with the HP BIS Systems being sold by HP on the date of termination with respect to service and support of installed HP BIS Systems for a period of 10 years, after termination of the Agreement. All rights granted to HP customers to use the HP BIS System shall be irrevocable as long as such customers are in compliance with the terms of use for such HP BIS Systems and does not cure such non-compliant use within 90 days of being notified. HP shall not disclose, furnish, transfer, distribute or otherwise make available the Software, the Documentation or any portion thereof in any form to any third party (other than to purchasers of HP BIS Systems and to HP's subdistributors) and shall not duplicate the Software, the Documentation or any part thereof (other than for HP's internal use). Title to and ownership of and all proprietary rights in or related to the Software, the Documentation and all partial or complete copies thereof shall at all times remain with Aspect or its licensor(s). This Agreement shall not be construed as a sale of any rights in the Software, the Documentation, any copies thereof or any part thereof. All references in this Agreement to sale, resale or purchase of the BIS Module Kits or the components thereof, or references or like effect, shall, with respect to the Software and the Documentation mean licenses or sublicenses of the Software and the Documentation pursuant to this Section 4. HP shall not disassemble, decompile or otherwise reverse engineer the Software or any part thereof, except if Aspect is required under applicable law to permit HP to reverse engineer any Software. In such event, HP may reverse engineer the Software but only to the extent Aspect is required to permit such reverse engineering. HP shall retain and shall not alter or obscure any notices, markings or other insignia which are affixed to the Software, the Documentation or any part thereof at the time it receives such Software or such Documentation. (e) BIS Protocol License. Aspect hereby grants to HP a non-exclusive, worldwide, irrevocable, royalty-free license to implement Aspect's proprietary BIS Protocol and sell it to HP's end customers as part of its products for use solely with the Aspect BIS Module Kit. 7 8 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 5. ROYALTIES. (a) For each BIS Module Kit that HP is purchasing from Aspect HP shall pay a purchase price for the BIS Module Kit and a royalty fee as specified in Exhibit A (Aspect Products and Purchase Prices). (b) Within 30 days after the Effective Date, HP shall pay Aspect an amount of [**] US$ as prepaid royalties, which will be credited against the actual royalty component of the purchase price that is due for the sale of the first [**] Aspect BIS Module Kits. It is understood that [**] of this amount to [**] in connection with the [**]. (c) In the event that the Agreement is terminated by HP because Aspect is unable to deliver a HP BIS Engine before October 31st,[**](in accordance with Section 23.2, paragraph b), or in the event Aspect fails to deliver the first [**] Aspect BIS Module Kits for whatever reason, excluding breach by HP or failure to order then Aspect shall refund HP according to the following rules: (i) Aspect shall refund to HP that part of the prepayment that is not yet consumed by unit royalties, however not more than [**] US$. (ii) Aspect shall [**] of the [**] that is [**] for the [**]. For purposes of [**] it is [**]. (d) Aspect agrees to [**] a [**] in accordance with the terms outlined in [**] in accordance with Section 5 (c) in the event that [**] as determined on a [**] and [**] following the [**] of [**]. HP agrees to [**] for [**] in connection with [**]. At such time as Aspect completes an initial public offering of its common stock, the requirement to [**] will terminate. 6. SCOPE OF DELIVERY (a) Purchase Orders. Purchase orders (via Fax, e-mail, other electronic transmission or paper) for Aspect Products to be purchased under this Agreement (the "Orders") must be received by Aspect during the term of this Agreement and must specify a delivery date in accordance with the lead-time schedule outlined below under Section 6, paragraph e) All HP Purchase Orders will make reference to the appropriate engineering drawing or manufacturing reference numbers. (b) Order Acknowledgements. HP purchase orders will be acknowledged by Aspect within 5 days after receipt of the order, provided that the order is technically correct and that the requested delivery time is within the agreed lead time and that the latest forecast provided by HP is not exceeded by more than [**] and the quantity ordered does not exceed by more than [**] the quantity ordered in the preceding month. If the requested delivery time is lower than the agreed lead time, or if HP's latest forecast is exceeded by more than [**], Aspect shall use reasonable efforts to complete the order requirements and to acknowledge the order within 10 days of its receipt. Order acknowledgements shall not be unreasonably withheld. (c) Forecasts. HP shall furnish to Aspect a non-binding monthly forecast during the term of this Agreement with the number and type of Aspect Products for which HP expects to submit orders for the following twelve months. Existing open purchase orders are not usually reflected in these forecast numbers. 8 9 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (d) Cancellation Charges. In the event of the cancellation of any Order by HP, HP shall be liable for the payment of cancellation charges based on the number of days prior to scheduled delivery that written notice of cancellation is received by Aspect, as outlined below:
> 10 weeks prior to acknowledged delivery [**] 6 - 10 weeks prior to acknowledged delivery [**] of order value 4 - 6 weeks prior to acknowledged delivery [**] of order value 2 - 4 weeks prior to acknowledged delivery [**] of order value < 2 weeks prior to acknowledged delivery [**] of order value
(e) Lead Times. Lead times for the Aspect BIS Module Kit are expected to be 12 weeks. 7. PRICES. (a) Purchase Prices. The prices of Aspect Products purchased by HP hereunder (the "Purchase Prices") which are ordered during the term of the Agreement shall be as set forth in Exhibit A (Aspect Products and Purchase Prices). (b) Purchase Price Changes. In consideration of the market situation and after consultation with HP, the Purchase Prices set forth in Exhibit A (Aspect Products and Purchase Prices) will be reviewed 12 months after first delivery of production units and annually thereafter. Any price increase will become effective only after mutual agreement between both Parties, subject to the following: (i) In the event the materials cost for the Aspect BIS Module Kit increases by more than [**]. Aspect shall have the right no more than once per year during the term of this Agreement to increase the Purchase Price of the Aspect BIS Module Kit by an equivalent amount by giving HP written notice of such increase not less than [**] days prior to the date upon which the increased Purchase Price is to become effective. No Purchase Price increase shall apply to Orders for Aspect Products accepted by Aspect prior to or during such [**] - day period which are to be delivered within [**] days of the date of such notice. (c) Aspect may reduce the Purchase Price of any Aspect Product at any time. Such reduction shall be applicable to all Aspect Products not shipped at the time of the reduction. (d) [**] the Purchases Prices [**] the [**] for [**] and based on similar terms and conditions [**] that has entered into a [**] the date of this agreement. (e) Taxes. All prices for Aspect Products are exclusive of all federal, state and local taxes, levies and assessments, and HP shall be responsible for the payment of all such taxes, levies and/or assessments imposed on Aspect Products purchased and/or licensed by HP hereunder, excluding taxes based on Aspect's net income 9 10 from the transaction. HP shall be responsible for providing in a timely manner all documentation, in the nature of exemption certificates or otherwise, necessary to allow Aspect to refrain from collections, such as sales tax, which it would otherwise be obligated to make 8. TERMS OF PAYMENT. (a) Invoices. HP shall pay to Aspect the Purchase Price of all Aspect Products shipped hereunder within 30 days after the receipt of Aspect's invoice. Nothing herein shall affect Aspect's right to withhold shipment or otherwise exercise its rights under Section 24 (Termination) hereof in the event of HP's failure to make payment when due for Aspect Products delivered to HP. Aspect's invoices to HP for Aspect Products purchased under this Agreement shall be addressed to: Hewlett-Packard GmbH Department ASC-AP Postfach 1430 D-71004 Boeblingen Germany Late Payment Charge. Subject to applicable law, service and/or interest charges not exceeding the lesser of 1-1/2% per month or the highest amount permitted by law may, at the election of Aspect, be assessed on amounts past due more than 30 days. 9. SHIPMENT AND DELIVERY. (a) Delivery Location. Each shipment must indicate the exact address of the recipient on the outside of the packaging as follows: Hewlett-Packard GmbH HSG-E Healthcare Solution Group Europe c/o Js. Mueller Spedition GmbH Eugen Zeyer Str. 1 D-75382 Althengstett Germany (b) All shipments hereunder shall be freight collect, F.C.A. point of origin (Incoterms 1990). All Aspect Products shall be deemed delivered and subject to HP's dominion and control when placed in the possession of the carrier, packed and ready for shipment to HP.. Aspect shall cooperate with HP in the documentation and proof of loss claims promptly presented by HP to the appropriate carrier and/or insurer. (c) Delivery and Packaging Instructions Delivery and Packaging requirements will need to conform to the standards outlined in the HP Delivery and Packaging Standard (attached as Exhibit E) 10 11 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (d) Delivery Date and Date of Dispatch. The requested delivery date will be specified on the HP Purchase Order. Aspect will utilize reasonable efforts to ensure that the order is delivered in accordance with Aspect's order acknowledgement and that the the date of dispatch is 10 days prior to the delivery date. 10. ACCEPTANCE. Any Aspect Product shipped hereunder may be subjected to inspection and performance testing by HP, in accordance with applicable product specifications in effect at the time of delivery of such Aspect Products to HP. HP shall provide written notice to Aspect of the rejection of any such Aspect Product within [**] days of the date of receipt of any Aspect Product; if more than [**]% of Aspect Products received in any single shipment do not pass HP's inspection or performance testing HP may reject the entire shipment lot. Aspect shall have [**] days from receipt of a notice from HP rejecting an Aspect Product either, at its option, to make any necessary repairs to the defective Aspect Product or to replace it. If Aspect replaces an Aspect Product, HP shall dispose of the replaced Aspect Product in accordance with Aspect's instructions and at Aspect's expense. HP's sole remedy for rejected Aspect Products shall be limited to repair or replacement of such Aspect Products. 11. WARRANTY. (a) General. Aspect warrants solely to HP that Aspect Products (including Software) delivered hereunder shall perform substantially in accordance with the specifications in Exhibit B (Aspect's Standard Module Kit) or other applicable product specifications as published by Aspect in effect at the time of delivery of such Aspect Product (including Software), and shall be free from defects in materials and workmanship, when given normal, proper and intended usage, for twelve months from the date of installation of the HP BIS System at HP's end customer site, or eighteen months from the date of shipment by Aspect to HP, whichever is less . Aspect agrees, during the applicable warranty period, to repair or replace (at Aspect's option) all defective Aspect Products within 30 days after date of return to Aspect and without cost to HP. This warranty shall not apply to expendable components and supply items, such as, but not limited to, cables (except for failures occurring within 180 days of receipt of shipment), fuses and bulbs (or disposable items such as an Aspect BIS Sensor after the expiration date marked on the Sensor packaging); nor shall Aspect have any obligation under this Agreement to make repairs or replacements which are required by normal wear and tear, or which result, in whole or in part, from catastrophe, fault or negligence of HP, or anyone claiming through or on behalf of HP, or from improper or unauthorized use of Aspect Products, or use of Aspect Products in a manner for which they were not designed, or by causes external to Aspect Products such as, but not limited to, power or air conditioning failure. 11 12 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (b) Warranty Procedures. HP shall notify Aspect of any Aspect Products which it believes to be defective during the applicable warranty period and which are covered by the warranties set forth in paragraph (a). At Aspect's option, such Aspect Products shall be returned by HP to Aspect's designated facility for examination and testing, or may be repaired on site by Aspect. Aspect shall either repair or replace, within 30 days of receipt by Aspect, any such Aspect Product found to be so defective and promptly return such Aspect Products to HP. Transportation and insurance costs, and/or risk of loss or damage during shipments, shall be borne by Aspect. Should Aspect's examination and testing not disclose any defect covered by the foregoing warranty, Aspect shall so advise HP and dispose of or return the Aspect Product in accordance with HP's instructions and at HP's sole expense. (c) Repair Warranty. Aspect warrants its repair work and/or replacement parts for the duration of the original warranty period as set forth in paragraph (a) or at least 6 months whichever is longer. (d) LIMITATION. THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE). THE FOREGOING WARRANTIES EXTEND TO HP ONLY AND SHALL NOT BE APPLICABLE TO ANY OTHER PERSON OR ENTITY INCLUDING, WITHOUT LIMITATION, CUSTOMERS OF HP. 12. SERVICE AND SUPPORT. (a) Service and Support. HP shall be responsible for providing installation, customer training, service and support (including repair) to its end customers for the Aspect Products sold hereunder and HP shall bear all related costs incurred for labor, parts, or travel to perform such service. (b) Central Repair Service. For the term of this Agreement, Aspect agrees to provide central repair service to HP for Aspect Products sold hereunder at a charge and as further detailed in Exhibit F (Service/Repair). (c) Excessive Failure Rate. If the Annual Failure Rate of Aspect's BIS Module Kit excluding out-of-box failures and cables exceeds the value as specified in Exhibit B (Aspect's Standard Module Kit) by more than [**] then Aspect shall reimburse HP for any additional cost (including material and labor, ) incurred by HP for repairing the units in excess of the above limit. (d) Service Period. For a period of [**] following the last delivery to HP of the applicable Aspect Product ordered by HP hereunder, Aspect shall make available repair service (or at Aspect's sole discretion, exchange units for the Aspect Products) for purchase by HP and third party users of the Aspect products at 12 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect's then-current prices for such repair services and exchange units. After expiry of this [**] period, Aspect may, in its sole discretion, continue to supply repair services (and/or exchange units for the Aspect Products) subject to the mutual written agreement of the Parties. (e) Service Reporting. Aspect shall maintain a complete record of all repair activities performed on any Aspect products received for repair, and will provide HP with a monthly report on all service actions including failure and repair statistics at a sub- assembly levelas laid down in Exhibit F (Service/Repair). Service Reports for each product shall be sent electronically by email to responsible procurement and technical marketing engineer (Contact Persons shown in Exhibit C, Contact Persons / Addresses). Rootcause analysis is to be performed and reported by Aspect in case of abnormal failures, incidents and malfunctions. 13. QUALITY ASSURANCE. (a) Both parties agree to maintain ISO900x, EN460x, European directive 93/42/EEC Annex II ("MDD AX-II") certification status and compliance with the U.S. Food and Drug Administration's ("FDA") Quality System Regulation ("QSR"), the European Medical Device Directive ("MDD"), and other appropriate regulations pertinent to the development, manufacturing and marketing of this kind of medical product. (b) All Products developed under this Agreement shall fully comply with the above quality requirements and guidelines (MDD AX-II, FDA QSR, etc.) (c) If the actual Annual Failure Rate ("AFR") of the BIS Module Kit or subcomponents thereof exceeds the expected value specified in Exhibit B (Aspect's Standard Module Kit) by more than [**] then Aspect agrees to investigate the root cause of the problem and take the appropriate corrective actions to bring the AFR back into the specified range. 14. REGULATORY MATTERS. (a) Aspect shall assume full regulatory responsibility for the Aspect Products, including obtaining and maintaining all applicable governmental authorizations and regulatory approvals required to distribute the BIS Module Kit. Both Parties will work together to develop a regulatory plan during phase 1 of the Project which defines precisely what these regulatory and localization requirements are for all countries where the HP BIS System is intended to be sold. In particular, Aspect shall be responsible for generating its own Device Master Record for the BIS Module Kit and obtaining the CE-mark. It is understood that the BIS Module Kit will be a component of the HP BIS System for which HP assumes full regulatory responsibility as provided in Section 14 (c). 13 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (b) HP shall assume full regulatory responsibility for the HP Products, including obtaining and maintaining all applicable governmental authorizations and regulatory approvals required to distribute the HP Patient Monitors and the HP BIS Module in all countries in the Territory. (c) HP shall assume the regulatory responsibility for the combination of the Aspect and HP components in the HP BIS System. Aspect shall fully support HP as required in the process of obtaining regulatory approvals by making available to HP any required information, data, certificates, or technical files in the requested formats. (d) For bringing the Aspect Products into the market in countries affected by the European Medical Device Directive ("MDD"), Aspect is the legally responsible manufacturer under the MDD as named in detail in Exhibit C (Contact Persons/Addresses). The Aspect Products shall be marked accordingly. (e) HP and Aspect shall inform each other in writing immediately about any event that may require incident reporting in any country of the Territory. (f) In the event of any recall of an Aspect Product required by a governmental agency for safety or efficacy reasons, or requested by Aspect at its sole discretion, which is the result of Aspect's failure to supply Aspect Products that (1) conform in all material respects to the applicable published specifications (including the specifications set forth in Exhibit B (Aspect's Standard Module Kit)) or (2) are free from defects in material and workmanship (when given normal, proper and intended usage), Aspect agrees to repair or replace at its own costs all Aspect Products subject to the recall and previously delivered to HP. Aspect also agrees to consult with HP to establish a reasonable process for managing the recall and Aspect shall be [**] (including, but not limited to [**] that are consistent with the recall process agreed to by the Parties. In the event the recall is not required by a governmental agency for safety or efficacy reasons, but is instead requested by Aspect at its sole discretion, Aspect will be responsible for determining the scope of the recall, including the number of units, timeframe for the recall, and criteria for completion. HP agrees to maintain all necessary sales records to facilitate the recall. (g) HP may at its sole discretion delegate some of the obligations under this Section 14 to its subdistributors. (h) For the purpose of facilitating product traceability, all Products purchased from Aspect by HP will require identification of an internal order number and tracking code. 15. PRODUCT CHANGES; DISCONTINUED PRODUCTS; FUTURE PRODUCTS; CONTINUED SUPPLY. (a) Product Changes. Aspect shall have the right, at any time and from time to time, to make substitutions and modifications to Aspect Products, provided that such substitutions or modifications will not materially affect form, fit or function of Aspect 14 15 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Products. In the event that any proposed substitution or modification affects, in Aspect's reasonable judgment, the form, fit or function of a Aspect Product, Aspect shall give HP written notice of such proposed substitution or modification at least [**] days prior to its taking effect and HP shall have the right, during such [**] -day period and for [**] days thereafter, to order Aspect Products without such substitution or modification for delivery within [**] days after such substitution or modification takes effect. Aspect shall give written notice of any proposed change to the Aspect Products using the Supplier Change Notification Agreement Form (attached as Exhibit D) and provide the appropriate verification and validation information evaluating the affect on the HP BIS System. Notwithstanding anything to the contrary in the Change Notification Agreement Form, HP shall not unreasonably withhold its approval of any such changes. (b) Discontinued Products. Aspect agrees to notify HP in writing not less than [**] in advance of the discontinuance of any Aspect Product. HP shall be able to place orders for at least [**] after receipt of the written notice in any case. In addition, HP shall be entitled to determine its lifetime-buy quantities and place a corresponding last purchase order. (c) Future Products. The Aspect Products are designed for use in measuring the effects of anesthetic and sedative agents on the brain during surgery. In the event that Aspect develops a product involving a different type of index, patient sensor, or application, Aspect and HP agree to discuss a new agreement for the purchase of such new product or products by HP. (d) Continued Supply. In the event that (a) Aspect makes an assignment for the benefit of creditors, or a receiver, trustee in bankruptcy or similar officer is appointed to take charge of any or all of Aspect's property, or Aspect files a voluntary petition under federal bankruptcy laws or similar state statutes or such a petition is filed against Aspect and is not dismissed within sixty (60) days, and (b) Aspect fails to deliver Aspect Products ordered by HP under this Agreement within [**] of the delivery date specified on a purchase order complying with Section 4 and accepted by Aspect in accordance with Section 4, upon request of HP, Aspect shall grant to HP, a nonexclusive license to use the Manufacturing Materials to make and have made the Aspect Products for use in the HP BIS System, until [**] after Aspect is ready and able to deliver Aspect Products to HP under the terms of this Agreement and has notified HP thereof. This includes a non-exclusive license to use any tools, design documentation, or any other manufacturing materials which may be necessary. The manufacturing materials supplied by Aspect shall include a list of the Aspect suppliers of parts for Aspect Products. Upon exercise by HP of the manufacturing license set forth above, HP shall pay Aspect a "Manufacturing License Fee" equal to the royalty specified on Exhibit A (Aspect's Products and Purchase Prices). 15 16 16. OWNERSHIP AND PROTECTION OF RESULTS. (a) It is expressly agreed that neither Aspect nor HP will transfer to any Party any patent rights, copyrights or intellectual property of any kind that either Party owns at the effective date of this agreement. (b) Aspect shall retain the title to and possession of any models, patterns, dies, molds, jigs, fixtures, and other tools made for or obtained in connection with this Agreement and solely related to the Aspect Products, even if made for, obtained by or paid for by HP. (c) If there are developments (including patentable inventions) conceived, created or reduced to practice as part of the joint development project then the rights to such developments shall be retained (a) by Aspect if conceived, created or reduced to practice solely by Aspect, or (b) by HP, if solely conceived, created or reduced to practice by HP, or (c) jointly by HP and Aspect (without any duty to account to the other) if jointly developed by HP and Aspect provided that: HP shall assign to Aspect all rights to any development relating to Aspect's BIS Module Kit and Aspect shall assign to HP all rights to any development relating to the HP Patient Monitor or HP BIS Module subject to Aspect's retained rights to the BIS Protocol. 17. DOCUMENTATION AND TRAINING. Aspect agrees to provide HP with such product literature, operations and maintenance manuals, other information and training (including training to avoid possible misrepresentation of Aspect's Bispectral Index) as is mutually agreed, to enable HP properly to sell and maintain Aspect Products, provided that in no event shall the source code or source listings of Aspect Software be required to be disclosed or provided by Aspect to HP pursuant to this Section 17 or otherwise. Such training needs to begin at least three months prior to introduction of the HP BIS System and will be defined as part of the Project's marketing plan. 18. CONFIDENTIALITY. No confidential information disclosed by either party to the other in connection with this Agreement shall be disclosed to any person or entity other than the recipient party's employees and contractors directly involved with the recipient party's use of such information who are bound by written agreement to protect the confidentiality of such information, and such information shall otherwise be protected by the recipient party from disclosure to others with the same degree of care accorded to its own confidential information of like importance. In addition, each party and its representatives shall use the confidential information only for the purposes specified under this Agreement and such information shall not be used for any other purpose without the prior written consent of the disclosing party. To be subject to this provision, information must be delivered in writing and designated as proprietary or, if initially delivered orally, must be confirmed 16 17 in writing as confidential within 30 days after the oral disclosure. Information will not be subject to this provision if it is or becomes a matter of public knowledge without the fault of the recipient party, if it was a matter of written record in the recipient party's files prior to disclosure to it by the other party, or if it was or is received by the recipient party from a third person under circumstances permitting its unrestricted disclosure by the recipient party. Upon termination of this Agreement, each party shall promptly deliver to the other all confidential information of the other party in the possession or control of such party and all copies thereof, provided that each party may retain a copy thereof for archival purposes. The obligations under this Section 18 shall continue for both parties for a period of 10 years after delivery by Aspect to HP of the last Aspect Product under this Agreement. HP is entitled to transmit confidential information of Aspect to Hewlett-Packard Company and to its subsidiaries and affiliated companies. In this case these companies may only use such information to the same extent as HP is entitled to under this Agreement. HP will be responsible that these companies comply with the confidentiality provisions of this Agreement. 19. INDEMNITIES. 19.1. INDEMNITIES BY ASPECT. (a) Except as provided below, Aspect shall defend and indemnify HP from and against any damages, liabilities, costs and expenses (including reasonable attorneys' fees and court costs) arising out of any claim that Aspect Products purchased and/or licensed hereunder infringe any patent or copyright or misappropriate a trade secret of a third party, provided that (i) HP shall have promptly provided Aspect written notice thereof and reasonable cooperation, information, and assistance in connection therewith, and (ii) Aspect shall have sole control and authority with respect to the defense, settlement, or compromise thereof. Should any Aspect Products delivered hereunder become or, in Aspect's opinion, be likely to become the subject of such a claim, Aspect may, at its option, either (x) procure for HP the right to continue purchasing and using such Aspect Products, or (y) replace or modify such Aspect Products so that they become non-infringing or if (x) and (y) are not reasonably available to Aspect, then (z) terminate HP's rights under this Agreement to purchase the allegedly infringing Product and refund to HP the amount which HP has paid to Aspect for such Products which are in the possession of HP, upon return of such Products in their unopened packages to Aspect at its principal facility in the United States (freight and insurance at Aspect's expense). In such event, Aspect may withhold further shipments of infringing or potentially infringing Aspect Products. Aspect shall have no liability or obligation to HP hereunder with respect to any patent, copyright infringement or trade secret misappropriation or claim thereof based upon (i) compliance with designs, plans or specifications of HP, (ii) use of Aspect Products by HP in combination with devices or products not purchased and/or licensed hereunder where the Aspect Products would not themselves be infringing, 17 18 (iii)use of the Aspect Products by HP in an application or environment for which such Aspect Products were not designed or contemplated, or (iv) modifications of the Aspect Products by HP (b) Aspect's liability hereunder shall not exceed the purchase and/or license price paid by HP for the Aspect Products found to be infringing. The foregoing states the entire liability of Aspect with respect to infringement or misappropriation of patents, copyrights and trade secrets by the Products or any part thereof or by their operation. (c) In the event that any claim is brought against HP as a result of personal injuries and/or property damages resulting from that portion of the HP BIS System developed and manufactured by Aspect, and provided further that such claims do not arise as a result of the misuse of the HP BIS System , or the use of the HP BIS System in an application for which it was not designed by Aspect, where such claim would not have occurred but for such misuse or use, Aspect agrees that it shall indemnify and hold HP harmless from and against any damages, liabilities, costs and expenses arising out of such claim, provided that HP shall promptly provide Aspect written notice thereof and reasonable cooperation, information and assistance in connection therewith and Aspect shall have sole control and authority with respect to the defense, settlement or compromise. 19.2. INDEMNITIES BY HP. (a) Except as provided below, HP shall defend and indemnify Aspect from and against any damages, liabilities, costs and expenses (including reasonable attorneys' fees and court costs) incurred by Aspect as a result of or arising from HP's activities under this Agreement, including, without limitation, product liability, customer warranty and service claims, provided that (i) Aspect shall have promptly provided HP written notice thereof and reasonable cooperation, information and assistance in connection therewith, and (ii) HP shall have sole control and authority with respect to the defense, settlement or compromise thereof, and provided further that (iii) HP shall not be liable to Aspect under this Section 19.2 to the extent that such damages, liabilities, costs and expenses arise from Aspect's negligence or a breach of any representation or warranty by Aspect hereunder. 20. TRADEMARKS. 20.1. ASPECT TRADEMARKS. (a) Ownership. HP acknowledges and agrees that Aspect is the sole and exclusive owner of all right, title and interest in and to the trademarks (the "Aspect Trademarks") identified on Exhibit H (Aspect Trademarks). HP recognizes the value of the Aspect Trademarks and the good will associated with the Aspect Trademarks. HP agrees that its use of the Aspect Trademarks and any good will 18 19 arising therefrom shall inure to the benefit of Aspect. Nothing contained herein shall create, nor shall be construed as an assignment of, any right, title or interest in or to the Aspect Trademarks to HP, other than the grant of a license in Section 20.1 (c) below; it being acknowledged and agreed that all other right, title and interest in and to the Aspect Trademarks is expressly reserved by Aspect. HP shall keep the Aspect Trademarks free from all liens, mortgages or other encumbrances. HP agrees that it will not attack or otherwise challenge the title, validity or any other rights of Aspect in or to the Aspect Trademarks. (b) Notice. All HP BIS Systems that use the Aspect Trademarks shall be accompanied, where reasonable and appropriate, by a proprietary notice consisting of the following elements: (i) The statement "[insert trademark(s)] is a trademark(s) of Aspect Medical Systems, Inc." (ii) HP will include the "(TM)" or "(R)" symbol, as instructed by Aspect, after the first prominent use of the Aspect Trademark in the HP Patient Monitor and related materials. HP shall have a period of 30 days in which to begin to use the "(R)" symbol in replacement of the "(TM)" symbol upon receiving instruction to do so by Aspect. HP may continue to deliver stocked literature before the change becomes effective. (iii) HP shall reproduce copyright and trademark notices of Aspect on the "splash screen" or in the same location where HP reproduces its own copyright notices . (c) License. Aspect hereby grants to HP a nonexclusive, worldwide, royalty-free license (without the right to sublicense) to use the Aspect Trademarks to designate and promote Aspect Products in HP BIS Systems. HP shall have no other right to use, display or utilize the Aspect Trademarks for any other purpose or in any other manner. (d) Quality Standards. (i) Upon reasonable notice and request, and at a mutually acceptable date and location, Aspect may inspect the advertising and promotional materials on which the Aspect Trademarks are used so that Aspect may monitor compliance with this Agreement. (ii) Compliance. Aspect acknowledges the high standards of quality and excellence established by HP with respect to products bearing HP's trademarks. HP acknowledges the high standards of quality and excellence established by Aspect with respect to products bearing the Aspect Trademarks. HP agrees that HP Patient Monitors with which the Aspect Trademarks are used shall be of such quality so as to maintain such high standards and to reflect well upon Aspect. HP agrees to adhere to HP's own or the following quality standards (whichever may be more rigorous) for use of the Aspect Trademarks by HP: - In order to ensure that Aspect Products and HP Patient Monitors distributed under the Aspect Trademarks comply with the consistent quality standards of Aspect, all Aspect Products and HP Patient Monitors distributed by or for HP 19 20 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. which bear an Aspect Trademark shall conform to those standards which Aspect provides to HP in writing. HP shall cause each major new release of such HP Patient Monitors to comply with such standards or remove the Aspect Trademark(s) from any such new release, which does not comply with such standards. HP shall have a period of 30 days in which to bring newly shipped HP Patient Monitors into compliance with any standard provided to it by Aspect following the date of this Agreement. - HP acknowledges that if Aspect Products or HP Patient Monitor products bearing the Aspect Trademarks fail to satisfy the quality standards set forth above, the substantial good will which Aspect have built and now possess in the Aspect Products and in the Aspect Trademarks will be impaired. (e) Protection and Infringement. HP agrees to cooperate with and assist Aspect in obtaining, maintaining, protecting, enforcing and defending Aspect' proprietary rights in and to the Aspect Trademarks. In the event that HP learns of any infringement, threatened infringement or passing-off of the Aspect Trademarks, or that any third party claims or alleges that the Aspect Trademarks infringe the rights of the third party or are otherwise liable to cause deception or confusion to the public, HP shall notify Aspect giving the particulars thereof, and HP shall provide necessary information and assistance to Aspect in the event that Aspect decides that proceedings should be commenced. (f) Termination. In addition to the termination rights set forth in Section 23 hereof, in the event that HP is in material breach of any provision of this Section 20, Aspect may, upon [**] written notice, terminate the license granted in Section 20.1 (c) if HP does not cure such breach or default within such [**] period. The parties recognize that curing such breach or default may require development of a new version of HP BIS System. If this is the case, then HP will be deemed to have cured such breach or default if, within the [**] cure period, HP presents to Aspect a plan for revision of HP Product that will cure such breach or default, such plan is reasonably acceptable to Aspect, and such revision is released and distributed within three months following written notice of such breach or default. In addition to the provisions of Section 23 hereof, upon termination of the license granted in Section 20.1 (c), or upon termination of this Agreement, for whatever cause: (i) HP shall immediately cease and desist from any further use of the Aspect Trademarks and any trademarks confusingly similar thereto, either directly or indirectly; (ii) All rights in the Aspect Trademarks granted to HP hereunder shall immediately revert to Aspect; (iii) In the event that this Agreement is terminated for any reason other than a material breach or material default by HP, HP shall have a period of 30 days thereafter to dispose of all of the unsold HP BIS Systems bearing the 20 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Trademarks and advertising and promotional materials relating thereto which had been completed by it prior to such termination, provided such HP BIS Systems and materials were in the process of manufacture more than [**] before such termination. (g) Promotional Claims. The general form of any promotional claims by HP regarding Aspect's Bispectral Index technology and/or the integration of this technology in HP Patient Monitors, and the specific form of the use of Aspect's trade names and trademarks, and of intended use claims regarding Aspect's Bispectral Index technology, in promotional material, advertisement, and/or in written technical literature shall be subject to review and approval by Aspect prior to its publication or display. 20.2. HP TRADEMARKS. (a) The general form of any potential claim by Aspect that HP uses Aspect's Bispectral Index technology as part of the HP Patient Monitors, and the specific form of the use of HP's trade names and trademarks in promotional material, advertisement, and/or in written technical literature shall be subject to review and approval by HP prior to its publication or display. (b) Upon termination of this Agreement any reference to HP and it's trademarks must be immediately removed from any literature or other display and must no longer be distributed. 21. EXPORT. HP shall not export, directly or indirectly, HP BIS Systems or other products, information or materials provided by Aspect hereunder, to any country for which the United States requires any export license or other governmental approval at the time of export without first obtaining such license or approval. It shall be HP's responsibility to comply with the latest United States export regulations, and HP shall defend and indemnify Aspect from and against any damages, fines, penalties, assessments, liabilities, costs and expenses (including reasonable attorneys' fees and court costs) arising out of any claim that HP BIS Systems or other products, information or materials provided by Aspect hereunder were exported or otherwise shipped or transported in violation of applicable laws and regulations. 22. CO-MARKETING PROGRAM. (a) HP and Aspect may agree to undertake co-marketing programs in certain geographies. (b) HP and Aspect have agreed on a co-marketing program in North America as described in Exhibit G (Co-Marketing Program) to this Agreement. 21 22 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 23. TERM; DEFAULT AND TERMINATION. 23.1. TERM AND RENEWAL. The initial term of this Agreement shall commence on the date first specified above (the "Effective Date") and shall continue for a period of 6 years. The term of this Agreement shall be automatically renewed for successive 12 month periods unless either party provides written notice of termination to the other party at least 60 days prior to expiration of the Agreement. 23.2. TERMINATION FOR GOOD CAUSE. (a) The Agreement may be terminated by Aspect giving 30 days written notice to HP in the event HP has not commercially introduced an HP BIS System by October 31st 2001. (b) The Agreement may be terminated by HP giving 30 days written notice to Aspect if Aspect has failed to provide a BIS Module Kit with the necessary regulatory approvals to HP by [**]. (c) Events of Default. The following shall constitute events of default under this Agreement: (i) if either Party assigns this Agreement or any of its rights or obligations hereunder except in connection with the sale of such Party's business to which this Agreement relates (the word "assign" to include, without limiting the generality thereof, a transfer of a majority interest in the Party) without the prior written consent of the respective other Party. Notwithstanding the foregoing, it is understood that this Agreement shall be assigned to Agilent Technologies GmbH, at Herrenberger Strasse 110 - 130, D-71034 Boeblingen, Germany and that Aspect consents to such assignment.; or (ii) if either Party shall neglect or fail to perform or observe any of its obligations to the other Party hereunder, including, without limiting the generality thereof, the timely payment of any sums dueor Aspect's inability to deliver Aspect Products, and such failure is not cured within [**] in the event of a default in the payment of amounts owed the other Party) after written notice thereof from the other Party; or (iii) if there is (w) a dissolution, termination of existence, liquidation, insolvency or business failure of either Party, or the appointment of a custodian or receiver of any part of either Party's property, if such appointment is not terminated or dismissed within thirty (30) days; (x) a composition or an assignment or trust mortgage for the benefit of creditors by either Party; (y) the commencement by either Party of any bankruptcy proceeding under 22 23 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally; or (z) the commencement against either Party of any proceeding under the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, which proceeding is not dismissed within thirty (30) days. (d) Remedies. Upon any event of default, and in addition to any other remedies either Party may have at law or in equity, the non-defaulting Party may cancel any outstanding Order, refuse to make or take further Orders or deliveries, cancel any discount given, and declare all obligations immediately due and payable. The non-defaulting Party shall have all the remedies of a secured party under the Uniform Commercial Code and any other applicable law. The defaulting Party shall be liable for the other Party's expense of retaking, holding, preparing for sale, selling and the like, including reasonable attorneys' fees and legal expenses in the event of default. Cancellation fees shall not be due and payable. 23.3. INSURANCE. Upon request, Aspect shall provide evidence of product liability, general liability and property damage insurance against an insurable claim or claims which might or could arise regarding Aspect products purchased from Aspect. Such insurance will contain a minimum limit of liability for bodily injury and property damage of not less than 2,000,000 (two million) US$. 24. GENERAL PROVISIONS. (a) Force Majeure. In the event that either Party is prevented from performing, or is unable to perform, any of its obligations under this Agreement due to any act of God, fire, casualty, flood, war, strike, lock out, failure of public utilities, injunction or any act, exercise, assertion or requirement of governmental authority, epidemic, destruction of production facilities, insurrection, inability to procure materials, labor, equipment, transportation or energy sufficient to meet manufacturing needs, or any other cause beyond the reasonable control of the Party invoking this provision, and if such Party shall have used its best efforts to avoid such occurrence and minimize its duration and has given prompt written notice to the other Party, then the affected Party's performance shall be excused and the time for performance shall be extended for the period of delay or inability to perform due to such occurrence. (b) Publicity. Neither Party shall originate any publicity, news release or other public announcement relating to this Agreement or the existence of an arrangement between the Parties without the prior written approval of the other Party, except as otherwise required by law. 23 24 (c) Waiver. The waiver by either Party of a breach or a default of any provision of this Agreement by the other Party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right, power or privilege that it has, or may have hereunder, operate as a waiver of any right, power or privilege by such Party. (d) No Agency. Nothing contained in this Agreement shall be deemed to constitute either Party as the agent or representative of the other Party, or both Parties as joint ventures or partners for any purpose. Neither Party shall be responsible for the acts or omissions of the other Party, and neither Party will have authority to speak for, represent or obligate the other Party in any way without prior written authority from the other Party. (e) Survival of Obligations. All obligations of either Party which, by their nature, require performance after the expiration or termination of this Agreement, namely the sections on Royalties (5.(c)), Warranty (11), Service and Support (12), Regulatory Matters (14), Ownership and Protection of Results (16), Confidentiality (18), Indemnities (19), Trademarks (20) shall survive the expiration or termination of this Agreement and continue to be enforceable. (f) LIMITATION ON LIABILITY. EXCEPT AS PROVIDED IN SECTION 19.1, ASPECT'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF ASPECT PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE AMOUNT OF 2,000,000.00 (TWO MILLION) US$. IN NO EVENT SHALL ASPECT BE LIABLE TO HP OR ANY OTHER PERSON OR ENTITY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER INDIRECT DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF ASPECT PRODUCTS. (g) Severability. In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected and the rights and obligations of the Parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be unenforceable. (h) Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. (i) Notices. Any notice or communication with regard to the termination of or changes to this Agreement from one Party to the other shall be in writing and either personally delivered or sent via certified mail, postage prepaid and return receipt requested addressed, to such other Party at the address of such Party specified in this Agreement or such other address as either Party may from time to 24 25 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. time designate by notice hereunder. (j) Entire Agreement. This Agreement constitutes the entire agreement between the Parties. No waiver, consent, modification or change of terms of this Agreement shall bind either Party unless in writing signed by both Parties, and then such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. There are no understandings, agreements, representations or warranties, expressed or implied, not specified herein regarding this Agreement or the Aspect Products purchased and/or licensed hereunder. Only the terms and conditions contained in this Agreement shall govern the transactions contemplated hereunder, notwithstanding any additional, different or conflicting terms which may be contained in any Order or other document provided by one Party to the other. Failure of Aspect to object to provisions contained in any Order or other document provided by HP shall not be construed as a waiver of the terms and conditions of this Agreement nor an acceptance of any such provision. Retention by HP of Aspect Products delivered hereunder shall be conclusively deemed to be a confirmation of the terms and conditions hereof. (k) Headings. Captions and headings contained in this Agreement have been included for ease of reference and convenience and shall not be considered in interpreting or construing this Agreement. (l) Exhibits: The following Exhibits shall be part of this Agreement: Exhibit A: Aspect Products and Purchase Prices Exhibit B: Aspect's Standard Module Kit Exhibit C: Contact Persons/Addresses Prices Exhibit D: Change Notification Agreement Exhibit E: Delivery and Packaging Standard Exhibit F: Service/Repair Exhibit G: Co-Marketing Program Exhibit H: Aspect Trademarks Exhibit I: [**] IN WITNESS WHEREOF, this Agreement has been duly executed as a sealed instrument as of the date specified above. Aspect Medical Systems, Inc. Hewlett-Packard GmbH By: /s/ J. Breckenridge Eagle By: /s/ Anthony [illegible] -------------------------- ------------------------------ Title: Chairman Title: General Manager ----------------------- --------------------------- Patient Monitoring Division 25 26 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT (A):ASPECT'S PRODUCTS AND PURCHASE PRICES
ORDERABLE ASPECT HP UNITS (EA) Aspect HP ROYALTIES PARTS / PRODUCTS PART NO. ID Number CASES (PK) List Price Base Price (US$) (US$) (US$) - Note A - ---------------------------------- -------- --------- ---------- ---------- --------------- --------- BIS MODULE KIT (new unit, includes tbd tbd 1 ea [**] [**] [**] DSC, DSC Cable, HP BIS Engine, Module Cable, User Manual) Sensor Startup Kit 5 ea [**] [**] DSC (replacement) [**] [**] DSC Cable (replacement) [**] [**] HP BIS Engine (replacement) [**] [**] Module Cable (replacement) [**] [**] User Manual [**] [**] Service Manual [**] [**] BIS Application Note (english) [**] [**] BIS Application Note (french) [**] [**] ... [**] BIS Brochure [**] [**] [**]
Note A: The HP Purchase Price is the sum of the [**] (based on [**] and the [**] (based on [**]. In addition to the [**] specified above, HP shall pay to Aspect for each BIS Module Kit purchased an additional sum to allow Aspect to recover the incremental costs for Aspect to provide the [**] (including the [**] in lieu of [**]. It is currently estimated that these incremental costs will be [**] per module kit. 26 27 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT (B): ASPECT'S STANDARD MODULE KIT ASPECT'S STANDARD BIS MODULE KIT. Aspect's BIS 'Module Kit' is designed specifically for [**] and allows the [**] and to the [**] and the necessary power connections. The BIS Module Kit consists of a [**] that is placed in [**] that provides the [**] the high performance analog to [**] of the [**] from the [**] that is [**] at the [**]. The BIS Engine [**] on the [**] to the [**] via the [**] is constructed [**] to the [**] are a [**] Detailed Technical Specifications: ---------------------------------- Digital Output: [**] [**] Main Parameters: [**] [**] Electrical Safety: [**] Power: [**] [**] [**] Artifact Rejection: [**] Bispectral Index: [**] Digital Signal Converter (DSC-2) -------------------------------- Description: [**] 27 28 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Weight: [**] Dimensions: [**] [**] Cable Length: [**] BIS Engine PCB Physical: [**] Processing Power: [**] Software Upgrades [**] software is stored in [**]. Software upgrades can be [**] via the [**]. Serial Identifier [**] is given a [**]. This allows for [**] of every [**]. Annual Failure Rate The current [**] rate for the [**] and the [**] of the Project, this information will need to be [**] 28 29 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Exhibit (C): Contact Persons/Addresses Contact Persons and responsibilities at HP: ------------------------------------------ -------------- ------------- ---------------------- -------------------- Person Title Responsibility E-mail Phone Number/ Fax Number -------------- ------------- ---------------------- -------------------- [**] [**] [**] [**] -------------- ------------- ---------------------- -------------------- MAILING ADDRESS: Hewlett-Packard GmbH [**] PHONE: [**] INVOICE ADDRESS: Hewlett-Packard GmbH 29 30 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Exhibit (C): Contact Persons/Addresses Contact Persons and responsibilities at Aspect: ----------------------------------------------- -------------- ------------- ---------------------- -------------------- Person Title Responsibility E-mail Phone Number/ Fax Number -------------- ------------- ---------------------- -------------------- [**] [**] [**] [**] -------------- ------------- ---------------------- -------------------- MAILING ADDRESS: Aspect Medical Systems, Inc. 2 Vision Drive Natick, MA 01760-2059 USA 30 31 EXHIBIT (D): CHANGE NOTIFICATION AGREEMENT FORM 31 32 - -------------------------------------------------------------------------------- Hewlett-Packard Medical Products Group - -------------------------------------------------------------------------------- MPG SUPPLIER CHANGE NOTIFICATION AGREEMENT FORM ------------------------------------------------------------------- NOTICE UNCONTROLLED IN PRINTED FORM UNLESS STAMPED IN RED ------------------------------------------------------------------- DOCUMENT The document owner is listed below: OWNERSHIP --------------------------------- --------------------------------- FUNCTION TITLE --------------------------------- --------------------------------- MPG Quality Department Quality System Engineer --------------------------------- --------------------------------- ---------- ------------------ ------------------------- REVISION HISTORY ---------- ------------------ ------------------------- REV. # CHANGE ORDER # CHANGE SUMMARY ---------- ------------------ ------------------------- A 2920-1998-01-00009 ---------- ------------------ ------------------------- B 2920-1998-01-00019 Revise footer to read "HP Proprietary". Separate "Contact for Questions" and Return To". ---------- ------------------ ------------------------- 32 Rev. B Document Number: A-Q2920-00142 GRS#MF502 Page 1 of 2 Title: MPG Supplier Change Notification Agreement Form For HP Internal Use Only 33 - -------------------------------------------------------------------------------- Hewlett-Packard Medical Products Group - -------------------------------------------------------------------------------- MPG SUPPLIER CHANGE NOTIFICATION AGREEMENT FORM, continued - -------------------------------------------------------------------------------- TO: FROM: - -------------------------------------- ---------------------------------------- SUPPLIER NAME: DATE: - -------------------------------------- ---------------------------------------- SUPPLIER FAX # OR ADDRESS: ---------------------------------------------------- ---------------------------------------------------- ---------------------------------------------------- - -------------------------------------------------------------------------------- DEAR SUPPLIER, CONTRACTOR, OR CONSULTANT: Hewlett Packards's Medical Products Group (MPG) manufactures in a regulated environment, and is required to maintain procedures to ensure that all purchased products and services conform to specified requirements. MPG has determined that the product or service you supply to MPG impacts, directly or indirectly, the quality of our finished devices. We ask that you agree to notify MPG of any changes in the product or service, so that we can determine whether the change may affect the quality of our finished devices. Although HP's standard purchase order terms and conditions include this provision, the intent of this document is to ensure direct supplier recognition and acceptance of this requirement. TO ENSURE THAT MPG HAS YOUR AGREEMENT ON THIS REQUIREMENT, WE ASK THAT YOU REVIEW AND SIGN THE AGREEMENT BELOW. IT IS REQUESTED THAT THE SIGNATORY BE THE QUALITY MANAGER AND THE GENERAL MANAGER (OR DESIGNEE) DIRECTLY INVOLVED WITH THE MANUFACTURER OF OUR PRODUCT. - -------------------------------------------------------------------------------- CHANGE NOTIFICATION AGREEMENT ----------------------------- Changes to product, components or services supplied to Hewlett Packard Medical Products Group (MPG) will not be made without prior written notification to, and written approval from, MPG. This includes, but is not limited to, the following types of changes: * Product or service design changes * Production process changes that affect design and/or production specifications * Change of manufacturing or service facility location * Changes that have a significant impact upon your quality system * Other ----------------------------------------------------------------------- Notification must be made to each MPG purchasing location affected by this change. - -------------------------------------------------------------------------------- SUPPLIER COMMENTS: ------------------------------------------------------------ ------------------------------------------------------------ - -------------------------------------------------------------------------------- QUALITY MGR: GENERAL MGR (OR DESIGNEE): - -------------------------------------- ---------------------------------------- SIGNATURE: SIGNATURE: DATE: DATE: TITLE: - -------------------------------------- ---------------------------------------- CONTACT FOR QUESTIONS: TELE: - -------------------------------------- ---------------------------------------- RETURN TO: - -------------------------------------------------------------------------------- STREET: CITY/STATE/ZIP: TELE: FAX: - -------------------------------------------------------------------------------- 33 34 EXHIBIT (E): DELIVERY AND PACKAGING STANDARD 34 35 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- ORIGINATOR: HP/CPDE-ENGINEERING, G-BOBLINGEN TABLE OF CONTENTS PAGE ----------------- ---- 1. GENERAL 1.1. Applicability 2 1.2. Place of delivery 2 2. DEFINITIONS 2 3. IDENTIFICATION REQUIREMENTS 3 3.1. Delivery Note 3 3.2. Load Unit Label 4 3.3. Product Identification Label 5 3.4. Customs Declaration 5 3.5. Transport Declaration (Dangerous Goods) 5 4. PACKAGING REQUIREMENTS 6 4.1. Delivery Mode 6 4.2. Packages (Boxes) 6 4.3. Load Carriers (Pallets) 6 4.4. Dimensions 7 4.5. Load Unit Protection 7 4.6. Environmental Requirements 7 4.7. Transport Regulations (Dangerous Goods) 7 4.8. Treatment of Inconsistencies 8 5. REVISION CONTROL 8 35 36 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 1. GENERAL - ---------------- 1.1. APPLICABILITY This specification is applicable to all goods delivered to the premises of Hewlett-Packard Businesses in Boblingen and Waldbronn with according production plants and distribution centers in Europe. Practices other than those stipulated herein must be ratified on a case-by-case basis by the purchasing department concerned. Hewlett-Packard reserves the right to reject deliveries that do not comply with this specification. 1.2. PLACE OF DELIVERY Since HP has several receiving locations in Europe it is essential that goods be delivered to the address specified on the purchase order or in the purchasing agreement. 2. DEFINITIONS - -------------------- [Graphic depiction of track, load units, product labels, load carrier/pallet, package/box and mother/box] 36 37 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 3. IDENTIFICATION REQUIREMENTS - ------------------------------------ 3.1. DELIVERY NOTE: no deliveries without a delivery note delivery note has to be fixed on the outside of the load or handed out by the freight forwarder - -------------------------------------------------------------------------------- DELIVERY NOTE / LIEFERSCHEIN Supplier: Fa Meler u Sohne Kaakonbachatr 34 8000 Monehen Tel: (089) 2804-1999 - -------------------------------------------------------------------------------- SUPPLIER CODE 0055885 - -------------------------------------------------------------------------------- - -------------------------------------- ---------------------------------------- DELIVERY NOTE NO.: 349812 DATE: 16.01.1999 - -------------------------------------- ---------------------------------------- SHIP TO: Hewlett-Packard GmbH c/o Logistic Group International Waldbronn Gebaude 5 Herronbarger Str. 124 71034 Boblingen - -------------------------------------------------------------------------------- RECEIVING ENTITY/NAME: CPOE / Hohenstein - -------------------------------------------------------------------------------- DESTINATION CODE BB14-4500 - -------------------------------------------------------------------------------- LOAD UNIT: 12 boxes on 3 pallets - -------------------------------------------------------------------------------- BOX NO'S: 6016-XX001 - 6016-XXX12 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- POS. HP ORDER NO. SECTION ITEM HP PART NO. QUALITY UNIT MEASURED (9 digits) (3 digits) (4 digits) (shipped) (shipped) - ---- ------------ ---------- ---------- ------------- ----------- -------------- [Graphic depiction of bar codes] - ---- --------------------------------------------------------------------------- 01 N81853921 010. 0100 8120-6809 1000 EA - ---- ------------ ---------- ---------- ------------- ----------- -------------- DESCRIPTION: Powercord: UK version - -------------------------------------------------------------------------------- [Graphic depiction of bar codes] - ---- --------------------------------------------------------------------------- 02 N81853821 0100 010 5964-6108 1200 EA - ---- ------------ ---------- ---------- ------------- ----------- -------------- DESCRIPTION: Software & Accessories Broschore - -------------------------------------------------------------------------------- COUNTRY OF ORIGIN Germany [Graphic depiction of bar codes] - -------------------------------------------------------------------------------- OPTIONAL DATA PER BUSINESS ----------- Legend: MUST DATA ----------- 37 38 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 32. LOAD UNIT LABELS (unique products only) An adhesive label shall be affixed to each load unit. If a delivery is consisting of multiple, separate load units, the individual load unit shall be numbered consecutively (e.g., 1 of 7, 2 of 7, etc.) - -------------------------------------------------------------------------------- LOAD UNIT LABEL/LADEENIHEITENAUSZEICHUNG (UNIQUE PRODUCTS ONLY NUR SORTENREINE WARE) Supplier: Fa Meler u Sohne Kaakonbachatr 34 8000 Monehen Tel: (089) 2804-1999 - -------------------------------------------------------------------------------- SUPPLIER CODE 0055865 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- DELIVERY NOTE NO.: 349912 DATE: 15.01.1999 - -------------------------------------- ---------------------------------------- SHIP TO: Hewlett-Packard GmbH c/o Logistic Group International Waldbronn Gebaude 5 Herronbarger Str. 124 71034 Boblingen - -------------------------------------------------------------------------------- RECEIVING ENTITY/NAME: CPOE / Josef Hohenstein - -------------------------------------------------------------------------------- DESTINATION CODE B614-4500 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (p) HP PRODUCT TOTAL WEIGHT (kg) NO. - ----------------- ----------------- ----------------- ------------------ [Graphic depiction of bar codes] - -------------------------------------------------------------------------------- C2530-84430 283 - ----------------- ----------------- ----------------- ------------------ - ----------------- ----------------- ----------------- ------------------ (q) QUANTITY: LOAD UNIT NO: SUPPLIER LOT NO. - -------------------------------------------------------------------------------- [Graphic depiction of bar codes - -------------------------------------------------------------------------------- Q6000 T12345878 987654 - ----------------- ----------------- ----------------- ------------------ - ----------------- ----------------- ----------------- ------------------ HP ORDER NO: SECTION: ITEM: COUNTRY OF ORIGIN: (9-digits) (3-digits) (4-digits) - -------------------------------------------------------------------------------- [Graphic depiction of bar codes] - -------------------------------------------------------------------------------- N820-86975 010 0100 USA - ----------------- ----------------- ----------------- ------------------ Box 1 of 3 - -------------------------------------------------------------------------------- OPTIONAL DATA PER BUSINESS ----------- Legend: MUST DATA ----------- 38 39 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 3.3. PRODUCT IDENTIFICATION LABELS Each smallest package unit (picking unit) of an article must be labeled on the outside and shall contain only parts having the same part number belonging to the same order. - -------------------------------------------------------------------------------- (p) HP PART NO: - ---------------------------------- ------------------ -------------------------- [Graphic depiction of bar codes] - -------------------------------------------------------------------------------- P9Z80-1250 - ---------------------------------- ------------------ -------------------------- DESCRIPTION: Monitor EX300 VGA - ---------------------------------- ------------------ -------------------------- (q) QUANTITY: UNIT MEASURE: VOLUME (cdm) - ---------------------------------- ------------------ -------------------------- [Graphic depiction of bar codes] - -------------------------------------------------------------------------------- Q1 EACH 180 - ---------------------------------- ------------------ -------------------------- COUNTRY OF ORIGIN: SUPPLIER LOT NO: (s) SERIAL NO: (Range) - ---------------------------------- ------------------ -------------------------- [Graphic depiction of bar codes] - ---------------------------------- ------------------ -------------------------- GERMANY T12345678 2323444 - -------------------------------------------------------------------------------- OPTIONAL DATA PER BUSINESS ----------- Legend: MUST DATA ----------- 3.4. CUSTOMS DECLARATION For deliveries from Non-EU countries and customs relevant deliveries from EU countries an Invoice must be attached with all infos for customs declaration (Part number, Oder number, Quantity, Box quantity and Box weight, Box number, Currency, Item-value and invoice-value, Terms of Delivery, CoO, Terms of payment etc.). Customs relevant deliveries must be notified on Boxes and Documents. 3.5. TRANSPORT DECLARATIONS (DANGEROUS GOODS) Dangerous Goods must be notified on Boxes and Documents 39 40 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 4. PACKAGING REQUIREMENTS - ------------------------------- 4.1. DELIVERY MODE Goods shall be delivered on pallets, if -- the volume exceeds 1 m(3)(35 cubic feet) -- the weight exceeds 25 kg (66 lbs) -- or the consignment consists of more than 5 package units maximum weight per consignment unit: 1000 kg (2200 lbs) incl. load carrier 4.2. PACKAGES (BOXES) Individual packages shall not have a handling weight exceeding 15 kg (33 lbs) 4.3. LOAD CARRIERS (PALLETS) All goods shall be delivered on reusable four-way-entry flat pallets made of untreated solid wood. Openings for the handling with pallet jacks have to be kept open on the small sides (base runners lengthwise only). Pallets have to be accessible from four sides by regular material handling devices. Dimensions must be (unless otherwise specified): -- 1200 x 100 mm (industry pallets); -- 1200 x 800 mm Euro pallet In exceptional cases 40 x 48 inches. [Graphic depiction of a load carrier (pallet)] 40 41 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 4.4 DIMENSIONS The goods shall be stacked on the pallet without overhang. A load unit shall not exceed an overall height of 1930 mm (76 inches) - including pallet. Additional restrictions on height may apply depending on the destination, and the purchasing department in question must be consulted regarding these restrictions. 4.5. LOAD UNIT PROTECTION Shipment units shall be secured in such a way the good cannot slip or the unit loose its integrity. This shall be ensured by the use of shrink or stretch wrapping, banding, additional layer sheets, interlocked stacking, etc., but shall not hinder the accessibility with material handling devices (fork lifts or pallet jack). The products shall not be damaged by the LoaD Unit Protection. 4.6. ENVIRONMENTAL REQUIREMENTS FOR PACKAGING GENERAL POINTS Packaging should be kept to the minimum amount required to preserve the security and hygiene of the packaged products. Additionally, any applicable legal norms (see appendix) as well as HP specific regulations concerning environment, workplace safety and workplace security are to be adhered to. (Refer also to HP's GENERAL SPECIFICATION FOR ENVIRONMENT A-5951-1745-1). REQUIREMENTS -- Low material variety per packaging -- Easy separability of the various materials -- Avoidance of composite materials -- Use of standard and reusable packaging -- Material labeling (especially with plastics) -- Handling labeling -- Recommended packaging materials: Paper, cardboard, corrugated cardboard, untreated wood, iron, aluminum, glass, PE, PP, PS, PET, drying agents: silica gel, active clay -- Packaging materials and packaging aids to be avoided: PVC (vinyl), wood chips, compressed fiberboard, wood shavings, straw, loose fill materials, "bio" packaging materials based on plant starch, "popcorn" APPENDIX: EXCERPTS OF THE RELEVANT LEGAL NORMS FOR PACKAGING AND PACKAGING WASTE -- European Waste Guidelines (Europaische Abfallrahmenrichtlinie) 75/442/EWG -- European Packaging Guidelines (Europaische Verpackungsrichtlnie) 94/62/EG -- European Decision 97/129/EG regarding the labeling of packaging material -- Industrial Recycling law (Kreislaufwirtschaftsgesetz) and accompanying Waste Law -- Transport of Hazardous Waste Law (Gefahrgutbeforderungsgesetz) and accompanying Hazardous Waste Law (Gefahrgutrecht/e.g GGVS) -- Packaging Act -- Chemical Law (Chemikaliengesetz) and Hazardous Materials Act (Gefahrstoffverordnung) "BGB" -- CFC-Halon Prohibition Act (FCKW-Halon-Verbots-Verordnung) 4.7. TRANSPORT REGULATIONS (DANGEROUS GOODS) 41 42 - -------------------------------------- ---------------------------------------- HEWLETT-PACKARD GMBH DELIVERY-AND PACKAGING STANDARD HEWLETT-PACKARD EUROPE BV - -------------------------------------- ---------------------------------------- 4.8. TREATMENT OF INCONSISTENCIES In many instances, the packaging is covered by the stipulations of the HP product specification. In the event of inconsistencies arising with the packaging regulations in the product specification or in existing agreements, the supplier shall consult the purchasing department concerned. 5. REVISION CONTROL - ------------------------- - -------------------------------------------------------------------------------- Revision Changes Approved Date - -------------- ---------------------------------- ------------------ ----------- D Completely revised; Peter Klement 28.04.1999 English Edition A-5961-3658-1 German Edition A-5961-3658-2 - -------------- ---------------------------------- ------------------ ----------- - -------------------------------------------------------------------------------- 42 43 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT (F): SERVICE/REPAIR 1. REPAIR STRATEGY: FULL UNIT REPAIR: - - Defective units will be shipped from HP GSL (Global Support Logistics) to Aspect for repair. - - Aspect repairs and ships the units within [**] to HP GSL after receipt. Each repair unit will be labeled with an internal HP order number and tracking number by Aspect. Tracking number and maybe other data must be labeled as barcode on the shipment carton by Aspect. 2. Repair Price Repair consists of [**] To define for each product: [**] Goal for full unit exchange: [**] Right for Aspect to [**] To define: [**] A table detailing the [**] will be defined preliminarily during [**]. 3. Handling of Repair Costs: [**] will pay the then current [**] for any defective unit that is returned to Aspect. On a regular basis HP will determine the number of units under warranty that have been replaced/repaired and [**]. Repaired units with "No trouble found" classification Aspect [**] for the difference between [**] and the following amounts only [**]. 43 44 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT (G): CO-MARKETING PROGRAM ASPECT/HP JOINT MARKETING PROGRAM - NORTH AMERICA Both Parties have agreed on the following outline for a joint marketing program, designed to [**] customers in North America [**] to implementation of an integrated BIS measurement module on HP Viridia patient monitors. PROGRAM DETAILS: Aspect's and HP's sales force in North America will offer the [**] and will agree [**] for the [**] of the [**] of the [**] at a price of [**] the current list price for the [**], unless the Parties agree that [**] that the [**] under this program should be [**]. The current list price for the [**], as outlined below.
- -------------------------------------------------------------------------------- Qty 1 Qty 2-5 Qty 6-12 Qty 13-19 Qty >20 - -------------------------------------------------------------------------------- List Price $ [**] [**] [**] [**] [**] - -------------------------------------------------------------------------------- [**] $ [**] [**] [**] [**] [**] - --------------------------------------------------------------------------------
1. [**] by this program will be purchased at a [**]. 2. Customers taking advantage of this program will be [**] for the [**] (to be defined) [**] in North America [**], although customer expectations need to be set [**]. There will be [**] to the customer for this [**], although the customer may need to [**] some of his [**] (see below). 3. Aspect and HP will jointly [**] will provide information on the expected cost to the customer of having to [**] in order to be [**] with the [**]. 4. [**] this program and who also purchase [**] under the program, these new [**] will be [**] to the appropriate [**] (if necessary) [**]. 5. Both parties will [**] this program for customers who have recently purchased the [**]. 6. Aspect will [**] and invoice the customer. 44 45 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 7. Aspect will [**] as a result of this program (account details to be defined). 8. Aspect will provide [**] of this program on a [**]. 9. HP will [**] from customers taking advantage of this program. The methodology for the calculation and payment of these [**] will be defined in the Distribution Agreement between the Parties. 10. [**] will be responsible for [**] at those sites under the program. Aspect will be [**] of the [**]. 11. The timing for implementation of this program will be determined by [**], based on their [**] schedule. The current expectation is that this could be done once the project has [**], at which point [**] has been defined and all risks are understood. 12. In the event that the [**], for whatever reason, [**] under this program [**] the customer for any [**] for the [**] the list prices defined above. 13. If development of the [**] such that [**] North American [**], both Parties [**] by both Parties in good faith, [**] determined by reasons for the [**]. 14. In the event that the customer [**] the customer for any [**] made for the [**] the list prices defined above. 45 46 EXHIBIT (H): ASPECT TRADEMARKS 46 47 EXHIBIT (H): ASPECT TRADEMARKS TRADEMARK REFERENCE - --------- --------- Aspect(R) None * A-2000(TM) A-2000 is a trademark of Aspect Medical Systems, Inc. Bispectral Index(R) Bispectral is a registered trademark of Aspect Medical Systems, Inc. BIS(R) BIS is a registered trademark of Aspect Medical Systems, Inc. BIS logo is a registered trademark of Aspect Medical Systems, Inc. [graphic depiction of Aspect's BIS logo] * This trademark is registered as a trademark to another company, and is used under license by Aspect Medical Systems. 47 48 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT (I): [**] [**] WHEREAS We, [**], herewith confirm that we have knowledge that Hewlett-Packard GmbH, Herrenberger Str. 110-140, 71034 Boblingen, Germany ("HP") has granted Aspect Medical Systems, Inc., 2 Vision Drive, Natick, MA 01760-2059, USA ("Aspect") [**] under an "OEM Development and Purchase Agreement" (hereinafter referred to as the "Agreement"), dated August 6th, 1999 and Aspect has certain contingent obligations to refund portions of such prepayment in accordance with Section 5 (c) of this Agreement. THEREFORE We undertake, [**] under the Agreement. We undertake with [**] in accordance with the Agreement, we shall [**]. [**] of the Agreement [**]. It is understood that the [**] of the Agreement. 48 EX-10.8 6 LETTER AGREEMENT 1 Exhibit 10.8 Aspect Medical Systems, Inc. has requested that the market portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended. HEWLETT-PACKARD GMBH Medical Products Group Herrenberger Strasse 110 - 140 D-71034 Boeblingen Germany August 27, 1999 Mr J. Breckenridge Eagle Chairman Aspect Medical Systems, Inc. 2 Vision Drive Natick, MA 01760-2059 USA Dear Breck, As we discussed on Friday, the following is confirmation of our willingness to allow Aspect to set the expectation that customers purchasing the stand-alone A2000 monitor in North America will be able to purchase an exchange to the HP BIS module solution, once it becomes available, at an incremental price of [**]. This interim program is designed to bridge-the-gap until such time that Aspect and HP are able to announce and implement the joint co-marketing program, as defined under our overall agreement. The following conditions need to apply: 1. Orders for this exchange will only be taken once the module is released in North America; 2. Customers need to be made aware that there may be some additional costs for upgrading their existing Viridia CMS and Viridia 24/26 monitors in order to be compatible with the BIS module; 3. Customers ordering this exchange will do so directly from Aspect and Aspect will be responsible for delivering and installing the modules at the customer's site (some basic "knobology" training will need to be provided to the Aspect salesforce by HP's North American operation); 4. Aspect will supply HP with a complete list of all customers (name, address and date of installation) who take advantage of this exchange; 5. These exchange modules can only be offered to customers who purchased an A2000 monitor between the effective date of our agreement and the introduction of the joint co-marketing agreement in North America (a copy of the customer's original purchase order will be required at the time of ordering the modules); 6. HP will supply Aspect with up to a maximum of [**] BIS module systems for this purpose, at a price of [**] each (assumes that all customer ordering, delivery and installation is performed by Aspect, as outlined above). Warranty and after-sales servicing responsibility will remain with HP; 7. Aspect will offer HP the special transfer price of [**] for the HP BIS module kits required to cover module systems sold as part of this program. I think you'll agree that this compromise solution will help to allay any risk of a customer postponing his decision to purchase BIS technology. With best regards /s/ Steve Bebb - -------------------------- Steve Bebb Market Development Manager EX-10.9 7 DISTRIBUTION & LICENSE AGREEMENT, DATED 4/1/96 1 Exhibit 10.9 ASPECT MEDICAL SYSTEMS, INC. has requested that the marked portions of this agreement be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933, as amended." DISTRIBUTION AND LICENSE AGREEMENT BETWEEN SPACELABS MEDICAL, INC. AND ASPECT MEDICAL SYSTEMS, INC. 2 TABLE OF CONTENTS
Page ---- ARTICLE I - DEFINITIONS.....................................................................................1 1.1 "Best Price"....................................................................................1 1.2 "Bispectral Index"..............................................................................1 1.3 "BIS Software"..................................................................................1 1.4 "Digital Signal Converter"......................................................................1 1.5 "Four Channel Digital Signal Converter".........................................................2 1.6 "Fully Burdened Costs"..........................................................................2 1.7 "International Territory".......................................................................2 1.8 "Losses"........................................................................................2 1.9 "Module"........................................................................................2 1.10 "Monitor".......................................................................................2 1.11 "Monitor Products"..............................................................................2 1.12 "Proprietary Information".......................................................................2 1.13 "Sensor"........................................................................................2 1.14 "Sensor Products"...............................................................................2 1.15 "Specifications"................................................................................3 1.16 "United States Territory".......................................................................3 1.17 "ZipPrep Electrode Product".....................................................................3 1.18 "ZipPrep Technology"............................................................................3 ARTICLE II - DISTRIBUTION RIGHTS TO MONITOR..................................................................3 2.1 Appointment.....................................................................................3 2.2 Claims..........................................................................................3 2.3 Approvals.......................................................................................4 2.4 Promotion.......................................................................................4 2.5 Demonstration...................................................................................5 2.6 Installation and Training.......................................................................5 2.7 Service.........................................................................................6 2.8 Training by Aspect..............................................................................6 2.9 Marketing Support in the International Territory................................................6 2.10 Provision of Spare Parts........................................................................6 2.11 Right of Aspect to Contact Customers............................................................7 2.12 Purchase Price..................................................................................7 2.13 International Purchase Requirements.............................................................8 2.14 Forecasts.......................................................................................9 2.15 Orders..........................................................................................9 2.16 Shipment.......................................................................................10 2.17 Labeling.......................................................................................10 2.18 Title and Risk of Loss.........................................................................10 2.19 Payment........................................................................................10 2.20 Warranty.......................................................................................10 2.21 Warranty Claims................................................................................11
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2.22 Customer Complaints............................................................................12 2.23 Recalls........................................................................................12 2.24 Product Liability..............................................................................12 2.25 Claimed Infringement...........................................................................13 2.26 Clinical Testing...............................................................................14 2.27 Restrictive Covenant...........................................................................14 2.28 Improvements...................................................................................14 2.29 Obsolete Products..............................................................................15 ARTICLE III - DISTRIBUTION RIGHTS TO SENSOR PRODUCTS.........................................................15 3.1 Appointment....................................................................................15 3.2 Availability...................................................................................15 3.3 Promotion......................................................................................16 3.4 Purchase Price.................................................................................16 3.5 Additional Payments............................................................................16 3.6 Forecasts......................................................................................17 3.7 Orders.........................................................................................17 3.8 Shipment.......................................................................................17 3.9 Labeling.......................................................................................18 3.10 Title and Risk of Loss.........................................................................18 3.11 Payment........................................................................................18 3.12 Warranty.......................................................................................18 3.13 Warranty Claims................................................................................19 3.14 Customer Complaints............................................................................19 3.15 Recalls........................................................................................19 3.16 Product Liability..............................................................................19 3.17 Claimed Infringement...........................................................................20 3.18 Improvements...................................................................................21 3.19 Failure to Supply..............................................................................21 3.20 Restrictive Covenant...........................................................................22 3.21 Obsolete Products..............................................................................22 ARTICLE IV - RIGHTS TO BISPECTRAL INDEX.....................................................................23 4.1 Licenses.......................................................................................23 4.2 Development Efforts............................................................................23 4.3 BIS Software Maintenance.......................................................................24 4.4 Commercialization Obligation...................................................................24 4.5 Regulatory Process.............................................................................24 4.6 Quality Control................................................................................24 4.7 Royalties......................................................................................25 4.8 License to Manufacture Four Channel Digital Signal Converter...................................25 4.9 Reports and Payment............................................................................25 4.10 Customer Complaints............................................................................25 4.11 Product Liability of SMI.......................................................................26 4.12 Product Liability of Aspect....................................................................26 4.13 Claimed Infringement of SMI Technology.........................................................26
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4.14 Claimed Infringement of Aspect Technology......................................................27 4.15 Digital Signal Converter.......................................................................28 4.16 Restrictive Covenant...........................................................................28 4.17 Right of Aspect to Contact Customers...........................................................29 ARTICLE V - COMMUNICATIONS.................................................................................29 5.1 Communications.................................................................................29 ARTICLE VI - TERMINATION....................................................................................30 6.1 Term...........................................................................................30 6.2 Termination by SMI.............................................................................30 6.3 Termination for Breach.........................................................................30 ARTICLE VII - CONFIDENTIALITY................................................................................31 ARTICLE VIII - MISCELLANEOUS..................................................................................32 8.1 Trademarks and Trade Names.....................................................................32 8.2 Records........................................................................................32 8.3 Publicity......................................................................................32 8.4 Force Majeure..................................................................................33 8.5 Relationship Between Parties...................................................................33 8.6 Notices........................................................................................33 8.7 Entire Agreement...............................................................................34 8.8 Severability...................................................................................34 8.9 Assignments....................................................................................34 8.10 Governing Law..................................................................................34 8.11 Compliance with Laws...........................................................................34 8.12 Waivers and Extensions.........................................................................34 8.13 Counterparts...................................................................................35 8.14 Consents.......................................................................................35 8.15 Limitation of Liability........................................................................35
5 DISTRIBUTION AND LICENSE AGREEMENT THIS DISTRIBUTION AND LICENSE AGREEMENT (the "Agreement") is made as of April 1, 1996 between ASPECT MEDICAL SYSTEMS, INC., a Delaware corporation with its principal place of business at 2 Vision Drive, Natick, Massachusetts 01760-2059 ("Aspect") and SPACELABS MEDICAL, INC., a California corporation with its principal place of business at 15220 NE 40th Street, Redmond, Washington 98073 ("SMI"). A. Aspect has developed certain EEG monitoring technology for measuring the effects of anesthesia on the brain and SMI desires to market and distribute products employing such technology; B. Aspect and SMI desire to enter into an agreement that supersedes all prior agreements between them, including but not limited to the Distribution and License Agreement dated as of June 30, 1994. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained in this Agreement, the parties hereto agree as follows: ARTICLE I - DEFINITIONS As used in this Agreement, the following terms shall have the following meanings: 1.1 "Best Price" means the lowest price on which Aspect charges any other third party for a product for an "unbundled sale" of the product to a third party which is buying similar quantities of such product under similar terms and conditions. An "unbundled sale" means that the product is sold by Aspect without being sold in, as part of, or as a condition to, the sale, lease, loan, consignment or other disposition of any other product. 1.2 "Bispectral Index" means Aspect's index which is incorporated in Aspect's A-1000 and A-1050 monitors used to monitor the hypnotic effects of anesthetics on the brain. 1.3 "BIS Software" means Aspect's software which computes the Bispectral Index. 1.4 "Digital Signal Converter" means an interface device that connects to and accepts input from the Sensor or EEG electrodes, converts the signal into digital form and inputs it into the Monitor or Module. - 1 - 6 1.5 "Four Channel Digital Signal Converter" means a Digital Signal Converter developed by SMI under this Agreement that utilizes four EEG channels for use with the Module. 1.6 "Fully Burdened Costs" means the direct and indirect costs to manufacture a product, which costs are determined in accordance with generally accepted accounting principles. Direct costs shall include direct materials and direct labor costs associated with manufacturing the product. Indirect costs mean the party's allocable overhead expenses which are applicable to the direct costs of manufacturing the product. 1.7 "International Territory" means all countries and territories of the world other than Japan and the United States Territory. 1.8 "Losses" means any claims, liability, suits, judgments, costs and expenses (including but not limited to fines, penalties and reasonable attorneys' fees). 1.9 "Module" means an integral EEG module that (i) can be incorporated into SMI's patient monitoring equipment, and (ii) incorporates the Bispectral Index. The term "Module" specifically excludes interface devices that allow data from any Monitor to be displayed on other patient monitoring equipment. 1.10 "Monitor" means Aspect's EEG monitors which includes the Bispectral Index, and all models of the EEG monitor, including those designated by Aspect as its A-1000, A-1050, and A-2000 monitors (and such other designations as Aspect may give to subsequently developed models of the Monitor). 1.11 "Monitor Products" means the Monitors and the related products listed on Schedule A to this Agreement. 1.12 "Proprietary Information" means all proprietary information and materials of a party, whether or not patentable, which are communicated to, learned of, or otherwise acquired by the other party during the course of this Agreement. 1.13 "Sensor" means Aspect's disposable EEG sensor comprised of an array of electrodes known by Aspect as its ZipPrep disposable EEG sensor. The Sensor is designed and configured to detect EEG signals utilized for purposes of determining the Bispectral Index. The term "Sensor" specifically excludes individual, stand alone electrodes. 1.14 "Sensor Products" means the Sensor and the ZipPrep Electrode Product, collectively. - 2 - 7 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1.15 "Specifications" means the product specifications established from time to time by Aspect for its Monitor Products and Sensor Products. 1.16 "United States Territory" means the United States of America excluding its territories and protectorates. 1.17 "ZipPrep Electrode Product" means the ZipPrep snap electrode configuration that utilizes the ZipPrep Technology. 1.18 "ZipPrep Technology" means the self-prepping electrode technology which is proprietary to Aspect. ARTICLE II - DISTRIBUTION RIGHTS TO MONITOR 2.1 Appointment. Subject to the terms and conditions of this Agreement, Aspect hereby appoints SMI as its exclusive distributor of the Monitor Products for the International Territory. Aspect will refer promptly to SMI all inquiries Aspect receives, including but not limited to orders, E-mail, etc. regarding Monitor Products from within the International Territory. This appointment shall commence on the date of this Agreement [**] of this Agreement, provided, however, that SMI's exclusive rights to distribute the Monitor in the International Territory may be extended for [**] in accordance with the provisions of Section 2.13(b) of the Agreement. 2.2 Claims. Aspect shall provide SMI with the text of any marketing claims which are approved and/or cleared by the FDA; by providing the text of such marketing claims to SMI, Aspect will be deemed to represent to SMI that such claims have been approved and/or cleared by the FDA. Aspect may choose to provide to SMI the text of other marketing claims which Aspect has determined are permitted under applicable federal and state laws and regulations; by providing the text of such other marketing claims to SMI, Aspect will be deemed to represent to SMI that such claims are permitted under all applicable federal and state laws and regulations governing such claims for use in the International Territory. SMI shall have the right in the International Territory (unless additional clearance is needed from applicable international regulatory agencies), but not in the United States Territory, to make claims which are the same or equivalent to the claims provided by Aspect. SMI shall defend, indemnify and hold Aspect harmless from any and all Losses resulting from any breach of its obligations set forth in this Section. In addition and notwithstanding any other provisions of this Agreement, if a party breaches its obligations under this Section, the other party shall have the right to immediately terminate this Agreement in accordance with the provisions of Section 6.3. Aspect shall defend, indemnify and hold SMI harmless from any and all Losses arising from SMI's use of the text of claims which have been provided to SMI by Aspect or from - 3 - 8 SMI's use of the text of claims in marketing materials which have been approved in writing by Aspect as contemplated in this Section. In the event SMI elects to incorporate in SMI's marketing materials the text of claims provided by Aspect hereunder, SMI will provide Aspect copies of such materials for Aspect's approval. Aspect will not unreasonably withhold such approval and will respond to SMI within three business days of its receipt of such materials. If Aspect fails to respond within three business days, such materials will be deemed to approved by Aspect. The text of any claims which are "provided" by Aspect to SMI as contemplated in this Section, must be designated by Aspect in writing as claims which SMI may use in its own marketing materials. 2.3 Approvals. Aspect, at its sole expense, shall be responsible for obtaining the following safety approvals for the Monitors and the Sensor Products, both individually and when used as a system: (a) UL Mark for Canada ("C UL"); (b) Mark for European Countries (compliance with EMC and/or Medical Device Directive as required to sell into all countries in the European Union); and (c) Underwriters Laboratory ("UL"). In connection with obtaining such safety approvals, SMI shall be responsible for any required translation of the human interface contained in the Monitor Products. At SMI's request, Aspect shall work with SMI to implement any required translation of the human interface contained in the Monitor Products, provided that (a) any direct costs incurred by Aspect in translating or coding foreign language translations shall be reimbursed by SMI as long as such costs have been approved in advance in writing by SMI, and (b) SMI shall assist Aspect in validating such translation. SMI, at its sole expense, shall be responsible for obtaining all other regulatory and marketing approvals for the Monitor Products in those countries in the International Territory in which SMI elects to distribute the Monitors. In addition, SMI shall be responsible for obtaining safety approvals in those countries in the International Territory in which SMI elects to distribute the monitors other than those countries covered by the "C UL," the "CE," or the "UL" approvals. If any language translations or product design changes are required in order for SMI to obtain these additional safety, regulatory and marketing approvals, Aspect shall assist SMI with such translations or changes, and SMI shall reimburse Aspect for the reasonable and necessary costs associated with such translations as long as such costs are approved in writing in advance by SMI. Aspect, at its sole expense, shall be responsible for obtaining FDA clearance or approval for the Monitor Products and Sensor Products for the United States Territory. Aspect shall promptly apply for the approvals and clearances for which it is responsible and shall diligently pursue such approvals and clearances. 2.4 Promotion. (a) Promotion of Monitor Products. SMI shall use reasonable efforts to promote the sale of the Monitor Products, and shall do so using the Aspect name. - 4 - 9 Such promotion shall include carrying the Monitor Products in its International Price List. (b) Advertising and Sales Promotional Material. Subject to Section 2.2, Aspect shall provide SMI with reasonable quantities of certain advertising and sales promotional material developed for Aspect's U.S. products at no charge to SMI. At its expense and in its discretion, SMI may translate these materials into the language or languages of its customers and provide Aspect with at least one copy of all such materials. SMI shall be responsible for the printing of all such materials. Aspect will provide SMI, at no charge to SMI, any existing or available backup materials necessary to reproduce the promotional materials of Aspect relating to the Monitor, Bispectral Index, or Sensor, including but not limited to files, disks and artwork. (c) Reimbursement. In no event shall either party be responsible for any punitive, incidental or consequential damages, including lost profits or lost sales, incurred by the other part and relating to the other party's use of the promotional materials created in accordance with Sections 2.2 and 2.4; provided, however, that the foregoing limitation shall not limit or modify a party's obligation under Section 2.2. If SMI receives notice that the FDA intends to assess a fine, fee, assessment or other penalty, or receives any notification from the FDA relating thereto, SMI shall promptly inform Aspect and provide it with copies of all correspondence, notices and other materials received by SMI from the FDA with respect thereto. 2.5 Demonstration. SMI shall keep available at all reasonable times for demonstration purposes sufficient numbers of Monitor Products as are necessary for appropriate sales promotion. Such demonstration Monitor Products shall be in a condition appropriate for sales promotion. 2.6 Installation and Training. At its expense, SMI shall install the Monitor Products on the premises of its customers of the Monitor Products and shall train the employees of such customers to operate the Monitor Products. At no charge to SMI, Aspect shall provide one copy of each user and technical manual for each Monitor it ships to SMI and upon request shall provide SMI with reasonable additional quantities of user and technical manuals. At its expense and in its discretion, SMI may translate all user manuals (and any other manuals required to sell the Monitor Products) into the language or languages of its customers and shall provide Aspect both with copies of all such materials and the master copy required to produce additional manuals. If SMI requests Aspect to translate the human interface contained in the Monitor into a language other than those languages required for the safety approvals listed in clauses (a), (b) and (c) of Section 2.3 of this Agreement, Aspect shall perform such translation at the expense of SMI and SMI shall reasonably cooperate with Aspect in validating such translation. The costs of any such translation shall be approved in writing in advance by SMI. - 5 - 10 2.7 Service. SMI shall render prompt, workmanlike and willing service with respect to the Monitor Products and shall use reasonable efforts to handle satisfactorily all matters relating to the sale and servicing of the Monitor Products in the International Territory. To facilitate timely customer service, SMI may request support from Aspect. If such support is requested and approved in writing by SMI and provided by Aspect, Aspect may, at its sole discretion, bill SMI at Aspect's then current rates offered to similarly situated licensees acquiring such services on similar terms and conditions for field or service time and for reasonable expenses, provided that no charges shall be made for services rendered by telephone (and Aspect hereby agrees to provide commercially reasonable levels of telephone support). Aspect shall provide such support in a prompt, workmanlike and willing manner. In addition, SMI shall use a method for handling customer complaints which is the same or similar to that established by SMI for its own products. SMI shall use reasonable efforts to maintain a supply of spare parts and consumables to service the Monitor Products at levels consistent with those maintained by SMI for its own products. 2.8 Training by Aspect. Aspect shall train designated groups of employees of SMI at times mutually agreeable to the parties (a) in the use, marketing and sale of the Monitor Products at Aspect's facilities, provided that Aspect shall not be required to conduct more than six such training sessions per calendar year, and (b) in the servicing of the Monitor Products at Aspect's facilities, provided that Aspect shall not be required to conduct more than six such training sessions per calendar year. The direct out-of-pocket costs of reasonable and necessary travel, lodging and meals for these training sessions shall be borne by SMI. The internal costs incurred by Aspect for these training sessions shall be borne by Aspect. Additional training sessions shall be conducted with the mutual consent of both parties, and SMI shall be required to reimburse Aspect at Aspect's then current billing rates for all Aspect employees and consultants involved. 2.9 Marketing Support in the International Territory. If SMI requests Aspect to provide extraordinary marketing support (e.g. a lecture in the International Territory by an Aspect representative, or protocol development in the field) in the International Territory, over and above what Aspect is required to provide under the other provisions by this Agreement, and over and above what Aspect customarily provides to its own customers, then SMI will reimburse Aspect for such support. The parties will agree on the costs, scope and schedule for any extraordinary marketing support in advance and in writing prior to Aspect's provision of such support. 2.10 Provision of Spare Parts. Aspect shall provide SMI a reasonable and adequate number of spare parts at no charge and on consignment for servicing of warranty claims on the Monitor Products during the period in which SMI maintains rights to distribute the Monitor. At the end of each calendar quarter, SMI shall account to Aspect for the disposition and use of such spare parts, and shall return to - 6 - 11 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect all parts returned to SMI by its customers which were replaced with the consigned spare parts. SMI's return of such parts to Aspect shall be at Aspect's expense. SMI shall purchase spare parts from Aspect for servicing the non-warranty claims during the period in which SMI maintains rights to distribute the Monitor for the purpose of providing service to its customers. At such time as SMI's rights to distribute the Monitor expire, at SMI's option, Aspect will have the right and responsibility to furnish spare parts for the Monitor Products directly to customers of SMI, provided that SMI shall provide to Aspect promptly at such time all customer records and information necessary for Aspect to provide such customers with spare parts. Alternatively, SMI may elect to purchase spare parts from Aspect for the purpose of servicing non-warranty claims of its customers. 2.11 Right of Aspect to Contact Customers. SMI shall notify Aspect on a quarterly basis of each customer order in the International Territory for any Monitor. Aspect shall have the right to contact the customers of SMI solely for the purpose of assessing and ensuring customer satisfaction with the Monitor Products. Aspect shall advise SMI of all contacts relating to its assessment of customer satisfaction with the Monitor Products on a regular basis. Information provided by SMI to Aspect pursuant to this Section 2.11 shall constitute Proprietary Information of SMI. Aspect shall provide SMI with the information it obtains from each such customer, on an ongoing basis. 2.12 Purchase Price. (a) The purchase price for Monitors, with the exception of (i) purchases of units for demonstration, loaner and similar purposes, and (ii) the [**] Monitors purchased by SMI upon execution of this Agreement, shall be [**] for the [**]; the price of the [**] and any [**] shall be [**] of Aspect's material costs for the [**] or such [**] for such Monitor(s), [**]. The purchase price for the [**] Monitors purchased by SMI upon execution of this Agreement, and for [**] Monitors purchased for demonstration, loaner and similar purposes during the first year of this Agreement, shall be [**] per Monitor. (b) The purchase price for each other Monitor Product (other than Monitors) for the International Territory shall be Aspect's United States list price existing from time to time less that percentage discount as is set forth on Schedule A to this Agreement. The particular purchase price for each order shall be determined at the time of order. Aspect (i) shall [**] and (ii) shall provide SMI with [**] of any - 7 - 12 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. price increase. Aspect's price increases will not be effective on any SMI orders that have been subject to a written price quotation provided to a customer within 60 days of receipt by SMI of the notification of such increase. Aspect shall have the right to review the documentation relating to any such price quotations. (c) Aspect shall provide SMI reasonable sales records, sales reports and cost and pricing information upon request to enable SMI to confirm the accuracy of the prices charged by Aspect under this Section 2.12. SMI shall be entitled to audit such information and records pursuant to Section 8.2. 2.13 International Purchase Requirements. (a) To maintain its exclusive right to distribute the Monitor Products in the International Territory under this Agreement, SMI agrees to purchase for resale to customers in the International Territory the following minimum number of Monitors during the time periods indicated below. Purchases of Monitors for demonstration, loaner, or other similar purposes do not count towards SMI's minimum purchase requirements.
PERIOD NUMBER OF MONITORS First Year (expiring on April 1, 1997, the [**] first anniversary of this Agreement) (Upon execution of this Agreement) [**] (during the remainder of the year.) Second Year [**] Third Year [**]
Note A: SMI will [**] to be purchased by SMI upon execution of this Agreement [**] from the April 1, 1996 effective date of this Agreement through the date SMI executes this Agreement. In the third year, SMI's minimum number of Monitors will [**] for that period. On a quarterly basis, [**]. SMI shall be deemed to have met the minimum Monitor purchase requirements if [**] for that year. In calculating Aspect's sales of Monitors for this purpose, the parties will [**] on an [**] at a [**] then current list [**]. - 8 - 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (b) SMI shall be entitled to an automatic extension, as described in the balance of this paragraph, of its exclusive rights to distribute the Monitors in the International Territory if SMI's purchase of Monitors for distribution in the International Territory are equal to or greater than [**] in the U.S. This extension shall be granted automatically for the [**] if SMI's Monitor purchases for International Territory in the [**] for the [**] and shall continue for the [**] continue to [**] for the [**] if SMI's Monitor purchases for the International Territory during the [**] continue to [**] in the [**]. Prior to the end of [**], Aspect and SMI will in good faith discuss mutually satisfactory, commercially reasonable terms for extending SMI's exclusive rights to distribute the Monitor in the International Territory for an additional period of time under this Agreement. (c) SMI's compliance with the minimum purchase requirements for each year of this Agreement will be jointly confirmed by the parties as soon as practicable following the end of the year, but in no event more than [**] following the end of the year. If SMI fails, with respect to any year, to meet the minimum purchase requirements set forth above, Aspect may, on written notice to SMI, elect to terminate SMI's right to distribute the Monitor. Upon receipt of any such termination notice, SMI will have [**] within which to purchase sufficient quantities of the Monitors to satisfy the minimum purchase requirements. If Aspect elects not to terminate SMI's distribution rights notwithstanding the failure of SMI to meet its total minimum purchase requirements with respect to any year, Aspect shall have the right to terminate such rights if, during the next succeeding year, SMI fails to meet a total minimum purchase requirement equal to the sum of (i) the [**] for the [**] plus (ii) the [**] by which the [**] for the [**] by SMI during the preceding year. 2.14 Forecasts. At least [**] to the [**] of each [**], upon Aspect's request, SMI shall provide Aspect with an estimated forecast of its requirements of Monitor Products for such [**] broken out on a monthly basis and on an area basis. Such forecasts shall be furnished solely for planning purposes and shall not constitute a commitment to purchase. 2.15 Orders. All orders for Monitor Products shall be in writing. Aspect shall fill each order from SMI within [**] after its receipt of the order, provided that the aggregate of all orders placed by SMI during any calendar quarter does not exceed the aggregate of the orders required to be filled by Aspect during the immediately preceding calendar quarter by more than [**]. In any event Aspect shall (i) fill orders during the calendar quarter up to an aggregate of [**] of the aggregate amount of the orders required to be filled by Aspect during the preceding calendar quarter, and (ii) Aspect shall use reasonable efforts to fill the remaining portion of the order(s) as soon as practicable thereafter. All sales of the Monitor Products shall be subject to the terms and conditions of this Agreement, which terms and conditions shall control to the extent that they conflict with the terms of any purchase order or order confirmation. No terms in any purchase order for the Monitor Products shall affect the dealings between the parties except as specifically set forth in this Section 2.15, or as otherwise agreed in a written document signed by both parties. - 9 - 14 2.16 Shipment. Aspect shall ship the Monitor Products from its manufacturing facility to the destinations specified by SMI. Freight and insurance charges prepaid by Aspect shall be added to the purchase price for the Monitor Products or billed separately to SMI. SMI shall be responsible for payment of all export and import duties, local taxes and similar charges with respect to the Monitor Products. 2.17 Labeling. All Monitor Products shall be labeled and packaged in the manner standard for Aspect unless otherwise requested by SMI. SMI will pay any incremental costs incurred by Aspect to modify, at SMI's request, the labeling or packaging of Monitor Products shipped to SMI or its customers, if such costs are approved writing in advance by SMI. 2.18 Title and Risk of Loss. Title and ownership of the Monitor Products shall pass to SMI upon delivery of the Monitor Products to the destination(s) specified by to SMI pursuant to Section 2.16 of this Agreement. Risk of loss to the Monitor Products following delivery of the Monitor Products to a common carrier at Aspect's manufacturing facility shall be borne by SMI, which shall reimburse Aspect for all claims of loss or damage to the Monitor Products in transit. Aspect shall cooperate with and assist SMI in processing all claims for loss or damage to the Monitor Products. 2.19 Payment. Aspect shall invoice SMI for the Monitor Products upon delivery to a common carrier for shipment. The terms of payment granted to SMI shall be net 60 days from the date of invoice. All payments by SMI to Aspect shall be in the currency of the United States. 2.20 Warranty. Aspect warrants to SMI that each Monitor Product (including expendable and supply items such as, but not limited to, electrodes, cables and prep solutions) sold by it to SMI (a) shall be in good working condition and free from defects in material and workmanship when given normal, proper and intended usage and (b) with respect to the Monitor Products listed on Schedule A, shall conform to its Specifications for the period of time set forth on Schedule A to this Agreement for such Monitor Product measured from the date of shipment of such Monitor Product to SMI or other destination designated by SMI. For all other consumable supplies (including expendable and supply items such as, but not limited to, electrodes, cables, and prep solutions) provided by Aspect for use with the Monitor Products which were manufactured by third parties, Aspect shall pass on the manufacturers warranties provided that Aspect has the right to do so. Aspect shall not be responsible for defects which are not due to a breach of Aspect's warranty such as, but not limited to, defects due to fault or negligence on the part of the customer or SMI, or improper or unauthorized use of the Monitor by the customer or SMI. - 10 - 15 EXCEPT AS PROVIDED IN THIS AGREEMENT, ASPECT DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE MONITOR PRODUCTS, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM THE BREACH OF THIS AGREEMENT, INCLUDING A BREACH BY ASPECT OF THE ABOVE STATED WARRANTY. NOTHING IN THIS LIMITATION WILL BE DEEMED TO LIMIT ASPECT'S OBLIGATIONS TO DEFEND, INDEMNIFY AND HOLD HARMLESS SMI IN ACCORDANCE WITH SECTIONS 2.2, 2.4, 2.23, 2.24, 2.25 AND 8.11. SMI shall undertake reasonable and appropriate action permitted or required by the laws and regulations of the International Territory to ensure that Aspect's limits of warranty responsibility as set forth above are valid and enforceable against whomever they are applicable, to the extent permitted by applicable law. 2.21 Warranty Claims. Under its warranty, Aspect shall repair or replace, at its discretion, each demonstrably defective part returned by SMI, provided that such parts shall have been returned to Aspect with all charges prepaid by SMI within the time provided by and substantially in accordance with Aspect's current instructions and procedures relating to returns. The replacement part will come from Aspect's stock and may be new or refurbished. In the case of refurbished parts, the warranty set forth in Section 2.20 of this Agreement shall apply as if such parts were new. Aspect shall respond promptly to any claims by SMI that any Monitor Product fails to conform to the warranty set forth in Section 2.20. For allowed warranty claims, SMI shall pay for transportation of Monitor Products (or components thereof) from the customer's facility to the facility designated by Aspect, and Aspect shall pay for transportation of replacement or repaired parts from Aspect's manufacturing facility to the customer's facility. The party obligated to pay for such transportation shall be responsible for all shipping costs, taxes, export and import duties and other costs associated with the transportation of the parts. If the returned part is not demonstrably defective, Aspect shall return the part to SMI if SMI so requests; in that case, the costs of transportation shall be borne by SMI. All labor costs for replacement of the defective part in the field shall be borne by SMI. 2.22 Customer Complaints. SMI shall provide Aspect, on a quarterly basis, with a written report of all customer complaints which require written notifications to, or follow-up with, any regulatory agency, and follow-up activities conducted by SMI relating to the Monitor Products. SMI shall notify Aspect immediately of any complaints involving death or serious injury (MDR reports) or of any other material complaints relating to the safety or efficacy of the Monitor Products. - 11 - 16 2.23 Recalls. Upon receipt of any information relating to the safety or efficacy of the Monitor Products, Aspect shall consult with SMI in an effort to arrive at a mutually acceptable procedure for taking appropriate action, it being understood that the ultimate decision-making authority shall rest with Aspect, provided, however, that Aspect shall comply with all laws, regulations and FDA and other agency guidelines regarding recalls. SMI agrees to follow any reasonable recall or general corrective action procedures submitted to it by Aspect and Aspect shall indemnify, defend and hold harmless SMI from any Losses arising from any such recall or general corrective action. SMI shall be responsible for maintaining sales records sufficient to effect any required recall or general corrective action. 2.24 Product Liability. Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against Losses arising out of or in connection with the marketing, sale or service of any Monitor Product, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession or use of any such Monitor Product, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which such claim is made, provided that such Losses arise from or are related to (a) a defect in the design, manufacture or repair (to the extent the repair is performed by Aspect or its agents other than SMI and SMI's subdistributors) of a Monitor Product or the use of the Bispectral Index in accordance with its claims or (b) the negligence, recklessness or intentional misconduct of Aspect. If SMI becomes aware of a product liability claim which might give rise to a right or obligation of indemnification and defense as provided herein, SMI shall promptly notify Aspect. Aspect shall control and bear the full expense of the defense against or settlement of such claim. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent shall not be unreasonably withheld. SMI may, in its own discretion, be represented in the defense or settlement of any such claim by counsel of its own choosing at its sole expense. 2.25 Claimed Infringement. (a) Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with any claim by a third party that the manufacture, use or sale of a Monitor Product infringes any intellectual property right claimed by such third party and relating to the intellectual property rights owned by such party. If SMI becomes aware of an infringement allegation which might give rise to a right or obligation of indemnification and defense as provided herein, SMI shall promptly notify Aspect. Aspect shall control, bear the full expense of and retain all proceeds of the defense against or settlement of such allegation. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no - 12 - 17 event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent will not be unreasonably withheld or delayed. SMI may, in its own discretion, be represented in the defense or settlement of any such allegation by counsel of its own choosing at its sole expense. (b) Should any Monitor Product become the subject of an injunction preventing its use or sale as contemplated herein, Aspect shall, at its option (and in addition to its obligations under subsection 2.25(a)), promptly (1) procure for SMI the right to continue to use and sell such Monitor Product, (2) replace or modify such Monitor Product so that it becomes non-infringing or, if options (1) and (2) are not reasonably available to Aspect, then (3) terminate SMI's license to the allegedly infringing Monitor Product and refund to SMI the amounts paid to Aspect for all Monitor Products, parts or supplies in the possession of SMI or its subdistributors, upon the return of the Monitor Products to Aspect. In addition, Aspect may undertake any of the foregoing options (1), (2) and (3) if Aspect determines, in its reasonable opinion, that a Monitor Product is likely to become the subject of an injunction preventing its use or sale as contemplated herein. (c) Aspect shall have no liability or obligation to SMI hereunder with respect to any patent, copyright, trade secret or other intellectual property infringement or claim thereof, to the extent such liability or obligation is based upon (i) use or sale of a Monitor Product in combination with devices or products not provided by Aspect, (ii) use of other than the most recently mandatory released version of any software in a Monitor Product or (iii) modifications, alterations or enhancements of a Monitor Product not created by or for Aspect. SMI shall indemnify and hold Aspect harmless from all costs, damages and expenses (including reasonable attorneys' fees) arising from any claim enumerated in the preceding sentence. The limitations set forth in the foregoing clause (ii) shall only apply to the extent Aspect has made the most recently released version of the software available to SMI at no cost to SMI for incorporation in Monitor Products which are then in SMI's possession or have been previously distributed by SMI and the liability or obligation arises after Aspect makes such revised version available to SMI. SMI will return the PromCards for any such infringing software to Aspect upon receipt of replacement PromCards; if the infringing PromCards are not returned to Aspect within six (6) months of SMI's receipt of the replacement PromCards, Aspect will have the right to charge SMI a reasonable amount for such unreturned PromCards. - 13 - 18 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 2.26 Clinical Testing. If SMI desires to conduct any clinical testing of the Monitor, where the data from such testing is expected to be presented at a public forum or be published, SMI shall advise Aspect and no such clinical testing shall occur unless Aspect shall first have approved the protocols for such clinical testing. Aspect shall not unreasonably delay or withhold its approval of such clinical testing. 2.27 Restrictive Covenant. During the term of the appointment set forth in Section 2.1 of this Agreement, SMI will not directly engage in, and will use good faith and reasonable efforts to prevent its subdistributors from engaging in, the sale of any products competitive with the Monitor, Aspect's Digital Signal Converter(s), or the Bispectral Index (a "Competitive Monitor Product"), except for the Module, an SMI EEG module which does not incorporate technology competitive with the Bispectral Index, or SMI's Four Channel Digital Signal Converters for which SMI has paid Aspect the license fee specified in Article IV of this Agreement. Furthermore, in the event that SMI directly engages in the sale of any Competitive Monitor Product, or fails (within thirty (30) days after notice from Aspect) to use good faith and reasonable efforts to prevent a subdistributor from engaging in the sale of any Competitive Monitor Product, Aspect shall have the right to terminate the right of SMI to distribute Monitor Products, effective thirty (30) days after delivery of written notice to SMI. In the event that SMI fails to prevent a subdistributor from engaging in the sale of any Competitive Monitor Product Aspect shall have the right to terminate the right of SMI to distribute Monitor Products in the country for which the subdistributor is responsible. SMI's obligation to prevent its subdistributors from breaching the foregoing restrictive covenant shall not require SMI to take any action which is illegal under any applicable laws or which could reasonably be expected to expose SMI to liability in damages to the subdistributor or the subdistributor's customers. 2.28 Improvements. In the event that Aspect develops an improved version of the software embedded in the Monitor, Aspect shall supply such upgrades to SMI to meet customer requirements. SMI shall be required to pay for all software upgrades to the Monitor affected through the use of the PromCard and all related shipping charges. The price to SMI of software upgrades will be set at [**]. SMI agrees to use reasonable efforts to make the software upgrades to the Monitor relating to improved performance of the Bispectral Index available to its customers which have purchased the Monitor. If Aspect requests that SMI provide the software upgrade free of charge to SMI customers that have purchased the Monitor, and so informs SMI in writing, SMI agrees to take all reasonable steps to distribute the software upgrade at no cost to the SMI customers which have purchased the Monitor. Aspect shall provide updated software to SMI in the form of a PromCard. Aspect will charge SMI a reasonable cost for each PromCard, but will issue a credit to SMI - 14 - 19 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. for the cost of the PromCard when each old PromCard is returned. In such event, all reasonable shipping expenses incurred by SMI to send the software upgrade to SMI customers will be borne by Aspect. 2.29 Obsolete Products. In the event Aspect elects to discontinue the production of a particular model of Monitor Product because such Monitor Product has been replaced by later models, Aspect shall provide SMI not less than six (6) months prior written notice (the "Notice Period") of such discontinuance, and shall fill such orders for the discontinued Monitor Product(s) as SMI reasonably determines prior to the end of the Notice Period, will be required to enable SMI to meet the requirements of its subdistributors and customers. ARTICLE III - DISTRIBUTION RIGHTS TO SENSOR PRODUCTS 3.1 Appointment. Subject to the terms and conditions of this Agreement, Aspect hereby appoints SMI as (a) a nonexclusive distributor of the Sensor for the International Territory, (b) a nonexclusive distributor of the Sensor for Japan, and (c) a nonexclusive distributor of the ZipPrep Electrode Product in the United States Territory, the International Territory and Japan. SMI shall not distribute the Sensor in the United States Territory; provided, however, that Aspect agrees to sell to SMI (at the same price that Sensors are sold to [**] in the International Territory) a limited number of Sensors that SMI may distribute in the [**]. Aspect shall not be required to sell SMI more than [**] of the expected requirements for Sensors (established by Aspect's consumption rate for Sensors) for new Modules sold by SMI in the [**]. By way of example, if SMI has an installed base of [**] Modules in the [**] at the end of 1996, and sells [**] new Modules in the [**] in 1997 to increase the installed base from [**], and Aspect's consumption rate for Sensors is [**] Sensors/year per system, SMI may distribute [**] Sensors in the [**] in 1997. This appointment shall commence on the date of this Agreement and shall expire on the [**] anniversary of this Agreement. 3.2 Availability. Aspect agrees to use reasonable efforts to pursue and receive 510(K) clearance from the FDA for the Sensor Products and to make the Sensor Products available for commercial distribution by SMI for use with Monitor Products and Modules. Except as provided by law, SMI at its sole expense and in its reasonable discretion, shall be responsible for obtaining the necessary regulatory and marketing approvals for the Sensor for all countries in the International Territory in which the Monitor or Module will be distributed. In the event that SMI is prohibited from obtaining such approvals, SMI shall reimburse Aspect for Aspect's reasonable - 15 - 20 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. costs incurred in assisting SMI to obtain such approvals, provided that SMI shall approve all expenses in writing and advance. 3.3 Promotion. SMI shall use reasonable efforts to promote the sale of the Sensor in the International Territory and Japan under Aspect's ZipPrep trademark. Aspect shall provide SMI with reasonable quantities of its advertising and sales promotion material at no charge to SMI. At its expense and in its discretion, SMI may translate Aspect's advertising and sales promotion material into the language or languages of its customers and provide Aspect with copies of all such materials. Aspect shall not provide copies of such translated material to its other customers, including distributors, nor permit the customers or distributors to use them, but shall own the copyright to such translations (which rights SMI will be deemed to assign to Aspect upon creation of the translations). Aspect hereby grants SMI a royalty free license to use such translations during the term of this Agreement throughout the International Territory. 3.4 Purchase Price. The purchase price for the Sensor Products shall be [**] for the [**] existing from time to time (the "International and Japanese Sensor Purchase Price"), but in no event [**] for the Sensor Products. SMI's purchase price for Sensor Products shall be determined at each anniversary of this Agreement and be based on [**] over the prior [**]. Aspect agrees to provide SMI reasonable sales records and reports upon request to enable SMI to confirm the accuracy of the prices charged by Aspect under this Section 3.4. SMI may audit this information in accordance with Section 8.2. 3.5 Additional Payments. Aspect shall make the following payments to SMI with respect to Net Sales (as defined below) in the United States Territory: (a) During the term of this Agreement, Aspect shall pay to SMI [**] of the [**] in the [**] sold to accounts at which [**], provided that if [**], the payment to SMI shall be [**] and/or [**] to such [**]. By way of illustration, if (i) [**] to Account X in a year, (ii) [**] to Account X, and (iii) [**] has previously [**] to Account X, then the additional payment shall be determined as follows: - 16 - 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Number of Units Sold by [**] [**] Total Number of Unit Sold = [**] by SMI and Aspect to Account X [**] (b) As used in subsection (a), "Net Sales" means the gross revenues realized by Aspect from or on account of the sales of Sensors sold in the United States Territory to the accounts described in subsection (a), less (i) credits or allowances, if any, actually granted on account of price adjustments, rejection or return of items previously sold, (ii) excises, sales taxes, duties or other taxes or franchise taxes imposed upon and paid with respect to such sales (excluding income taxes), and (iii) separately itemized insurance and transportation costs incurred in shipping products. 3.6 Forecasts. Beginning with the quarter in which Aspect and SMI anticipate that the Sensor Products will become commercially available, at least four weeks prior to the commencement of each quarter, upon Aspect's request, SMI shall provide Aspect with a forecast of its requirements of Sensors for such quarter and for the ensuing three quarters broken out on a monthly basis and for the International Territory, United States Territory and Japan. Such forecasts shall be furnished solely for planning purposes and shall not constitute a commitment to purchase. 3.7 Orders. Promptly after the receipt from Aspect of written notification of the availability of the Sensor Products for commercial distribution, SMI shall order Sensor Products from Aspect when and as needed in order to fulfill its responsibilities under this Agreement. All orders shall be in writing. Aspect shall fill each order from SMI within 90 days after receipt of the order, provided that the aggregate of all orders placed by SMI during any calendar quarter does not exceed the aggregate of the orders required to be filled by Aspect during the immediately preceding calendar quarter by more than [**]. In any event, Aspect shall (i) fill orders during the calendar quarter up to an aggregate of [**] of the aggregate amount of the orders required to be filled by Aspect during the preceding calendar quarter, and (ii) Aspect shall use reasonable efforts to fill the remaining portion of the order(s) as soon as practicable thereafter. All sales of the Sensor Products shall be subject to the terms and conditions of this Agreement, which terms and conditions shall control to the extent that they conflict with the terms of any purchase order or order confirmation. - 17 - 22 3.8 Shipment. Aspect shall ship the Sensor Products F.O.B. its manufacturing facility to the destinations specified by SMI. Freight and insurance charges prepaid by Aspect shall be added to the purchase price for the Sensor Products or billed separately to SMI. SMI shall be responsible for payment of all export and import duties, local taxes and similar charges with respect to the Sensor Products. 3.9 Labeling. All Sensor Products shall be labeled and packaged in the manner standard for Aspect unless otherwise requested by SMI. SMI will pay any incremental costs incurred by Aspect to modify, at SMI's request, the labeling or packaging of Sensor Products shipped to SMI or its customers, if such costs are approved in writing in advance by SMI. 3.10 Title and Risk of Loss. Title and ownership of and risk of loss to the Sensor Products shall pass to SMI upon delivery of the Sensor Products to a common carrier at Aspect's manufacturing facility. Aspect shall cooperate with SMI in processing all claims for loss or damage to the Sensor Products. 3.11 Payment. Aspect shall invoice SMI for the Sensor Products upon delivery to a common carrier for shipment. The terms of payment granted to SMI shall be net 60 days from the date of invoice. All payments by SMI to Aspect shall be in the currency of the United States. 3.12 Warranty. Aspect warrants to SMI that each Sensor Product sold by it to SMI (a) shall be in good working condition and free from defects in material and workmanship when given normal, proper and intended usage and (b) shall conform to its Specifications for a period of six (6) months from the date of shipment of the Sensor Products to SMI. For all other consumable supplies provided by Aspect for use with the Monitor Products which were manufactured by third parties, Aspect shall provide the manufacturers warranties to SMI. Aspect shall not be responsible for defects which are not due to a breach of Aspect's warranty such as, but not limited to, defects due to fault or negligence on the part of the customer or SMI, or improper or unauthorized use of the Sensor Products by the customer or SMI. EXCEPT AS PROVIDED IN THIS AGREEMENT, ASPECT DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, WITH RESPECT TO THE SENSOR PRODUCTS, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING FROM THE BREACH OF THIS AGREEMENT, INCLUDING A BREACH BY ASPECT OF THE ABOVE STATED WARRANTY. NOTHING IN THIS LIMITATION WILL BE DEEMED TO LIMIT ASPECT'S OBLIGATIONS TO DEFEND, INDEMNIFY OR - 18 - 23 HOLD HARMLESS SMI IN ACCORDANCE WITH SECTIONS 2.2, 2.25, 3.15, 3.16 AND 8.11. SMI shall undertake all reasonable and appropriate actions permitted or required by laws and regulations of the Territory to ensure that Aspect's limits of warranty responsibility as set forth above are valid and enforceable against whomever they are applicable to the extent permitted by applicable law. 3.13 Warranty Claims. Under its warranty, Aspect shall replace each demonstrably defective Sensor Product and other consumable supplies provided by Aspect for use with the Sensor Product, returned by SMI, provided that such Sensor Products shall have been returned to Aspect with all charges prepaid by SMI (or destroyed by SMI or its customers at Aspect's request) within the time provided by and substantially in accordance with Aspect's current instructions and procedures relating to returns. Aspect shall respond promptly to any claims by SMI that any Sensor Product and consumable supplies fails to conform to the warranty set forth in Section 3.12. For allowed warranty claims, Aspect shall pay for transportation of replacements from Aspect's manufacturing facility to SMI customer. The party obligated to pay for such transportation shall be responsible for all shipping costs, taxes, export and import duties and other costs associated with the transportation of Sensor Products. If the returned Sensor Product is not demonstrably defective, Aspect shall return the Sensor Product if SMI so requests; in that case, the costs of transportation shall be borne by SMI. All labor costs for replacement of the defective Sensor Products in the field shall be borne by SMI. 3.14 Customer Complaints. SMI shall provide Aspect, on a quarterly basis, with a written report of all customer complaints which require written notification to, or follow up with, any regulatory agency, and follow up activities conducted by SMI relating to the Sensor. SMI shall notify Aspect immediately of any complaints involving death or serious injury (MDR reports) or of any other material complaints relating to the safety or efficacy of the Sensor Products. 3.15 Recalls. Upon receipt of any information relating to the safety or efficacy of the Sensor Products, Aspect shall consult with SMI in an effort to arrive at a mutually acceptable procedure for taking appropriate action, it being understood that the ultimate decision-making authority shall rest with Aspect, provided, however, that Aspect shall comply with all laws, regulations and FDA and other agency guidelines regarding recalls. SMI agrees to follow any reasonable recall or general corrective action procedures submitted to it by Aspect and Aspect shall indemnify, defend and hold harmless SMI from any Losses arising from any such recall or general corrective action. SMI shall be responsible for maintaining sales records sufficient to effect any required recall or general corrective action. - 19 - 24 3.16 Product Liability. Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with the marketing or sale of any Sensor Product, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession or use of any such Sensor Product, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which such claim is made, provided that such Losses arise from or are related to (a) a defect in the design or manufacture of the Sensor Product or improper written instructions for use of the Sensor Product provided by Aspect, or (b) the negligence, recklessness or intentional misconduct of Aspect. If SMI becomes aware of a product liability claim which might give rise to a right or obligation of indemnification and defense as provided herein, SMI shall promptly notify Aspect. Aspect shall control and bear the full expense of the defense against or settlement of such claim. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent will not be unreasonably withheld or delayed. SMI may, in its own discretion, be represented in the defense or settlement of any such claim by counsel of its own choosing at its sole expense. 3.17 Claimed Infringement. (a) Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with any claim by a third party that the manufacture, use or sale of a Sensor Product infringes any intellectual property right claimed by such third party and relating to the intellectual property rights owned by such party. If SMI becomes aware of an infringement allegation which might give rise to a right or obligation of indemnification and defense as provided herein, SMI shall promptly notify Aspect. Aspect shall control, bear the full expense of and retain all proceeds of the defense against or settlement of such allegation. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent shall not be unreasonably withheld or delayed. SMI may, in its own discretion, be represented in the defense or settlement of any such allegation by counsel of its own choosing at its sole expense. (b) Should any Sensor Product become the subject of an injunction preventing its use or sale as contemplated herein, Aspect shall (in addition to its obligations under Section 3.17), at its option, promptly (1) procure for SMI the right to continue to use and sell such Sensor Product, (2) replace or modify such Sensor Product so that it becomes non-infringing or, if options (1) and (2) are not reasonably available to Aspect, then (3) terminate SMI's license to the allegedly infringing Sensor Product and refund to SMI the amounts paid to Aspect for all Sensor Products in the - 20 - 25 possession of SMI or its subdistributors, upon the return of the Sensor Products to Aspect. In addition, Aspect may undertake any of the foregoing options (1), (2) and (3) if Aspect determines, in its reasonable opinion, that a Sensor Product is likely to become the subject of an injunction preventing its use or sale as contemplated herein. (c) Aspect shall have no liability or obligation to SMI hereunder with respect to any patent, copyright, trade secret or other intellectual property infringement or claim thereof, to the extent such liability or obligation is based upon (i) use or sale of a Sensor Product in combination with devices or products not provided by Aspect, or (ii) modifications, alterations or enhancements of a Sensor Product not created by or for Aspect. SMI shall indemnify and hold Aspect harmless from all costs, damages and expenses (including reasonable attorneys' fees) arising from any claim enumerated in the preceding sentence. 3.18 Improvements. In the event that Aspect develops an improved version of the Sensor Products, the rights set forth in this Agreement with respect to the Sensor Products shall apply to the improved version of the Sensor Products at such time as the improved version of the Sensor Products first becomes available for commercial distribution. Notwithstanding the foregoing, in the event that Aspect is able to document an increase in the cost to manufacture the improved version of the Sensor Products, Aspect shall be entitled to a commensurate increase in the International and Japanese Sensor Product Purchase Price. 3.19 Failure to Supply. If, at any time during the term of this Agreement, Aspect shall fail to supply SMI with Sensors in accordance with Section 3.7, Aspect and SMI shall meet to discuss the situation promptly following written notice from SMI of Aspect's failure to supply, and shall cooperate in good faith to resolve the reason for the failure to supply. If Aspect and SMI are unable to agree on a resolution within 30 days of Aspect's receipt of SMI's written notice of Aspect's failure to supply, and if Aspect is unable to meet SMI's requirements for Sensors within such period, SMI shall have the right (in addition to its other rights and remedies hereunder) to choose one of the following options for meeting its customers' requirements for Sensors: (a) SMI may elect to manufacture its Sensor requirements. In the event SMI elects this option, SMI will not be required to pay Aspect a royalty during the period in which SMI is manufacturing the Sensor. However, when Aspect is once again able to supply SMI with its requirements for Sensors, Aspect may do so on the same terms that existed prior to the interruption of supply, provided that SMI will be allowed to continue to manufacture Sensors for a sufficiently long period of time to recover its investment in establishing Sensor production. For this purpose, "sufficiently long" means the point at which SMI's investment in tooling and non-recurring engineering costs to establish Sensor production equals SMI's gross - 21 - 26 margin per Sensor (calculated using its Fully Burdened Costs) multiplied by the total quantity of Sensors produced by SMI; or (b) SMI may select an alternative electrode set to provide BIS functionality, provided that the alternative electrode set will maintain the closed nature of the BIS Software system to the reasonable satisfaction of Aspect through a proprietary connector or other means. When Aspect is once again able to supply SMI with its requirements for Sensors, Aspect may do so on the same terms that existed prior to the interruption of supply, provided that SMI will be allowed to continue to utilize the alternative electrode set for up to 60 days. In the event the failure to supply exceeds one year, SMI will have the right to utilize an alternative electrode set of its own choosing on a royalty-free basis in perpetuity. Notwithstanding anything to the contrary in this Agreement, the foregoing rights of SMI shall not apply if Aspect's failure to supply SMI is excused pursuant to Section 8.4 of this Agreement. At any time during the term of this Agreement, Aspect will, at SMI's request, deposit into escrow all drawings, diagrams, schematics, source code and other proprietary information which may be necessary or desirable to enable SMI to exercise its rights under this Section 3.19. The escrow of such material shall be made pursuant to an escrow agreement with an independent third party escrow agent, on terms and conditions which are consistent with this Section 3.19, and which are reasonable and customary for escrow transactions of this type. SMI shall pay the fees of the escrow agent for establishing and maintaining the escrow. 3.20 Restrictive Covenant. Except as provided in Section 3.19, during the term of the appointment set forth in Section 3.1 of this Agreement, SMI will not directly engage in, and will use good faith and reasonable efforts to prevent its subdistributors from engaging in, the sale in the International Territory or Japan or in the United States Territory of any products that are competitive with the Sensor (a "Competitor Sensor Product"). In addition, SMI agrees that it will not promote or market the ZipPrep electrode product for use as an EKG electrode. The restriction set forth in this section shall not apply to the sale of electrode products compatible with SMI's own EEG products or Four Channel Digital Signal Converter, provided that these products are used for EEG monitoring only without the Bispectral Index. Furthermore, in the event that SMI directly engages in the sale of any Competitor Sensor Product, or fails (within thirty (30) days after notice from Aspect) to use good faith and reasonable efforts to prevent a subdistributor from engaging in the sale of any Competitive Sensor Product, Aspect shall have the right to terminate the right of SMI to distribute the Sensor Products, effective thirty (30) days after delivery of written notice to SMI. SMI's obligation to prevent its subdistributors from breaching the foregoing restrictive covenant shall not require SMI to take any action which is illegal under any applicable law or which could reasonably be expected to expose SMI to liability and damages to the subdistributor or the subdistributor's customers. - 22 - 27 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3.21 Obsolete Products. In the event Aspect elects to discontinue the production of a particular model of a Sensor Product because such Sensor Product has been replaced by later models, Aspect shall provide SMI not less than six (6) months prior written notice (the "Notice Period") of such discontinuance, and shall fill such orders for the discontinued Sensor Product(s) as SMI reasonably determines, prior to the end of the Notice Period, will be required to enable SMI to meet the requirements of its subdistributors and customers. ARTICLE IV - RIGHTS TO BISPECTRAL INDEX 4.1 Licenses. Subject to the terms and conditions of this Agreement, Aspect hereby grants to SMI a non-exclusive license to the Bispectral Index for the purposes of developing, manufacturing, marketing and selling the Module worldwide. This license shall commence on the date of this Agreement and shall expire on the tenth anniversary of this Agreement. Prior to the expiration of this license, Aspect and SMI agree to negotiate in good faith concerning commercially reasonable terms under which SMI may elect to renew the license. SMI shall have the right to grant sublicenses to third party distributors for the sole purpose of marketing and selling the Module. Subject to Section 4.16, in the event Aspect obtains PMA approval of the Bispectral Index, Aspect hereby grants to SMI, and SMI accepts, a nonexclusive royalty free license to reference and use information in the Aspect PMA to enable SMI to file for and obtain PMA approval of the Module from the FDA. SMI may continue to reference and use the same PMA information in support of changes or modifications to the Module subsequently proposed by SMI. In addition, in consideration of SMI's payment of a license fee of [**] due upon execution of this Agreement, Aspect hereby grants SMI a fully paid, perpetual and worldwide license to use the source code for low level communication and control interface to the Field Programmable Gate Array ("FPGA"), in accordance with the provisions of Schedule B, and to incorporate such source code in the Module. 4.2 Development Efforts. SMI agrees to use reasonable efforts to develop the Module. The development shall be conducted at and/or coordinated from the facilities of SMI. Aspect agrees to provide such assistance and such information about the Bispectral Index, the ZipPrep Technology and other Aspect technology as SMI reasonably requests in order to develop the Module. SMI shall be responsible for all costs incurred in developing the Module in excess of costs incurred in delivering the items and services set forth in Schedule B, and shall reimburse Aspect for both its internal and reasonable out-of-pocket expenses. The role of Aspect and SMI with respect to the (i) development of modifications to the BIS Software to be incorporated in SMI's Module, (ii) the source code license for the FPGA and low level drivers which control the FPGA, and (iii) for the development of a Four Channel - 23 - 28 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Digital Signal Converter, are set forth in detail in Schedule B. SMI agrees to mark the Four-Channel Digital Signal Converter and the Module in the form of "Licensed under U.S. Pat. No. 5,381,804; 4,907,597; 5,010,891; 5,320,109; 5,458,117; 5,368,041; and other patents pending" at a location and in a manner on the products sufficient to meet the requirements of 35 U.S.C. 287. In addition, [**] that the [**] will contain the following [**] which the [**] between (a) [**] or (b) [**]. The Module will also [**], which the Module [**]. 4.3 BIS Software Maintenance. In addition, SMI will pay Aspect an annual maintenance fee of [**] per year, payable in advance upon execution of this Agreement and on the first and second anniversary of this Agreement. In consideration of this maintenance fee, Aspect shall provide SMI up to [**], shall reasonably assist SMI in debugging and utilizing the software and shall provide software updates to BIS Software. Upon request by SMI, Aspect will, on or about the third anniversary of this Agreement, negotiate in good faith on commercially reasonable terms under which Aspect would agree to continue to provide software maintenance support. SMI shall have the sole responsibility to develop all other software for the Module. 4.4 Commercialization Obligation. Subsequent to development of the Module, SMI agrees to use reasonable efforts to (a) obtain necessary regulatory approvals for the marketing and sale of the Module in the International Territory, in those countries in which it elects to commercially distribute the Module, (b) provide for commercial production of the Module and (c) diligently market the Module after receipt of the necessary regulatory approvals, including, but not limited to, listing the Module in all of SMI's standard price lists and promoting and selling the Module at a level of effort and expense similar to the levels devoted to SMI's own patient monitoring equipment. 4.5 Regulatory Process. SMI shall provide Aspect with an advance copy of any regulatory filing relating to the Modules and Aspect shall have the right to make comments and suggestions on any such regulatory filing, provided that SMI shall only be required to provide portions of such filings describing or relating to the Bispectral Index. Any comments or suggestions made by Aspect shall be given due consideration by SMI in its discretion and changes to the regulatory filings specifically requested by Aspect shall not be unreasonably refused. Aspect agrees to promptly provide such comments (in any event within thirty (30) days of its receipt - 24 - 29 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. of the proposed filing), and agrees that such filings shall be the Proprietary Information of SMI. 4.6 Quality Control. Aspect shall furnish SMI the executable code for the Bispectral Index. SMI shall have no right to the source code for the Bispectral Index and shall have no right to modify the Bispectral Index. Prior to the first commercial sale of a Module, Aspect shall test Modules at the facilities of either Aspect or SMI and Aspect and SMI shall determine and implement the most efficient method for such testing. 4.7 Royalties. SMI shall pay Aspect upon execution of this Agreement, either a prepaid royalty of [**], which shall authorize [**], or a prepaid royalty of [**], which shall authorize [**]; in either case, SMI shall also pay Aspect prepaid royalties of [**] when Aspect completes the modifications to the BIS software in accordance with the Specifications set forth in Schedule B, and prepaid royalties of [**] when the modified BIS software is validated in accordance with Schedule B. At any time after the date of this Agreement through [**] from the date of this Agreement, SMI may, at its election, prepay an additional royalty of [**], which shall authorize SMI to sell an additional [**] Modules. In addition, at any time from the date of this Agreement through the [**] anniversary of the date of this Agreement, SMI may prepay an additional royalty of [**] to Aspect, which shall authorize SMI to sell an additional [**] Modules. For any Module sales in excess of the amounts authorized by the foregoing prepaid royalties, Aspect shall grant SMI commercially reasonable royalty price and payment terms, which terms [**] to any [**], in its product in a [**] to that [**] any and in any event such royalty will not exceed [**] per Module sold by SMI. 4.8 License to Manufacture Four Channel Digital Signal Converter. In consideration of SMI's payment of a prepaid license fee of [**] payable on execution of this Agreement, an additional [**] license fee payable on completion of the electronic and mechanical design reviews between Aspect and SMI, and an additional [**] license fee payable when fully functional prototypes of the Four-Channel Digital Signal Converter are tested and meet the specifications set forth in Schedule B, Aspect hereby grants SMI a worldwide, nonexclusive, fully-paid, perpetual and irrevocable license to develop, manufacture, market and sell the Four Channel Digital Signal Converter. SMI may only use the Four Channel Digital Signal Converter in conjunction with the Module for the EEG and Bispectral Index. 4.9 Reports and Payment. SMI shall deliver to Aspect within 30 days after the end of each quarter a written report showing its sales of Modules during such quarter. All sales shall be segmented in each such report on a country-by-country - 25 - 30 basis. SMI, simultaneously with the delivery of each such report, shall tender payment in United States dollars of all royalties shown to be due thereon. 4.10 Customer Complaints. To the extent related to the Bispectral Index or its performance, SMI shall provide Aspect, on a quarterly basis, with a written report of all customer complaints which require written notification to, or follow up with, any regulatory agency, and follow up activities conducted by SMI relating to the Module. SMI shall notify Aspect immediately of any complaints involving death or serious injury (MDR reports) or any other complaints relating to the safety or efficacy claims of the Bispectral Index. 4.11 Product Liability of SMI. SMI hereby agrees to indemnify, defend and hold harmless Aspect, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with the marketing or sale of any Module, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession or use of any such Module, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which such claim is made, provided that such Losses are due to (a) a defect in the design or manufacture of the Module (excluding defects in the BIS Software, the Bispectral Index or other products provided by Aspect hereunder) or modifications to the BIS Software made by SMI or (b) the negligence, recklessness or intentional misconduct of SMI. If Aspect becomes aware of a product liability claim which might give rise to a right or obligation of indemnification and defense as provided herein, Aspect shall promptly notify SMI. SMI shall control and bear the full expense of the defense against or settlement of such claim. Aspect shall cooperate in such action if reasonably necessary and requested by SMI. In no event shall SMI settle any matter involving Aspect without the prior written consent of Aspect, which consent shall not be unreasonably withheld or delayed. Aspect may, in its own discretion, be represented in the defense or settlement of any such claim by counsel of its own choosing at its sole expense. 4.12 Product Liability of Aspect. Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with the marketing or sale of any Module, including, but not limited to, any actual or alleged injury, damage, death or other consequence occurring to any person as a result, directly or indirectly, of the possession or use of any such Module, whether claimed by reason of breach of warranty, negligence, product defect or otherwise, and regardless of the form in which such claim is made, provided that such Losses arise from or are related to (a) a defect in the design or manufacture of the BIS Software or the Bispectral Index as delivered by Aspect or as modified by Aspect, or (b) the negligent, recklessness or intentional misconduct of Aspect. If SMI becomes aware of a product liability claim which might give rise to a right or obligation of indemnification and defense as - 26 - 31 provided herein, SMI shall promptly notify Aspect. Aspect shall control and bear the full expense of the defense against or settlement of such claim. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent shall not be unreasonably withheld or delayed. SMI may, in its own discretion, be represented in the defense or settlement of any such claim by counsel of its own choosing at its sole expense. 4.13 Claimed Infringement of SMI Technology. SMI hereby agrees to indemnify, defend and hold harmless Aspect, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with any claim by a third party that the manufacture, use or sale of a Module infringes any intellectual property right claimed by such third party and relating to the intellectual property rights owned by such party. Notwithstanding the preceding sentence, SMI will not be required to indemnify, defend or hold Aspect harmless from Losses which arise from the BIS Software, the Bispectral Index or other products provided by Aspect hereunder, except to the extent such Losses result from the use or sale of the BIS Software, Bispectral Index or other Aspect products in combination with products which are provided by parties other than Aspect. If Aspect becomes aware of an infringement allegation which might give rise to a right or obligation of indemnification and defense as provided herein, Aspect shall promptly notify SMI. SMI shall control, bear the full expense of and retain all proceeds of the defense against or settlement of such allegation. Aspect shall cooperate in such action if reasonably necessary and requested by SMI. In no event shall SMI settle any matter involving Aspect without the prior written consent of Aspect, which consent shall not be unreasonably withheld or delayed. Aspect may, in its own discretion, be represented in the defense or settlement of any such allegation by counsel of its own choosing at its sole expense. 4.14 Claimed Infringement of Aspect Technology. (a) Aspect hereby agrees to indemnify, defend and hold harmless SMI, its affiliates, directors, officers, employees and agents, from and against all Losses arising out of or in connection with any claim by a third party that the BIS Software, the Bispectral Index or other products provided by Aspect hereunder infringes any intellectual property right claimed by such third party and relating to the intellectual property rights owned by such party. If SMI becomes aware of an infringement allegation which might give rise to a right or obligation of indemnification and defense as provided herein, SMI shall promptly notify Aspect. Aspect shall control, bear the full expense of and retain all proceeds of the defense against or settlement of such allegation. SMI shall cooperate in such action if reasonably necessary and requested by Aspect. In no event shall Aspect settle any matter involving SMI without the prior written consent of SMI, which consent shall not be unreasonably withheld or delayed. SMI may, in its own discretion, be - 27 - 32 represented in the defense or settlement of any such allegation by counsel of its own choosing at its sole expense. (b) Should any BIS Software or the Bispectral Index become the subject of an injunction preventing its use or sale as contemplated herein, Aspect shall, at its option (and in addition to its obligations under subsection 4.13(a)), promptly (1) procure for SMI the right to continue to use and sell such BIS Software or Bispectral Index, (2) replace or modify such BIS Software or Bispectral Index so that it becomes non-infringing or, if options (1) and (2) are not reasonably available to Aspect, then (3) terminate SMI's license to the allegedly infringing BIS Software or Bispectral Index and refund to SMI the amounts paid to Aspect for all BIS Software or the Bispectral Index in the possession of SMI or its subdistributors, upon the return of the BIS Software or Bispectral Index to Aspect. In addition, Aspect may undertake any of the foregoing options (1)(2) and (3) if Aspect determines, in its reasonable opinion, that the BIS Software or Bispectral Index is likely to become the subject of an injunction preventing its use or sale as contemplated herein. (c) Aspect shall have no liability or obligation to SMI hereunder with respect to any patent, copyright, trade secret or other intellectual property infringement or claim thereof, to the extent such liability or obligation is based upon (i) use or sale of BIS Software or the Bispectral Index in combination with devices or products not provided by Aspect, (ii) use of other than the most recently released version of any software included in the BIS Software or the Bispectral Index or (iii) modifications, alterations or enhancements of the BIS Software or Bispectral Index not created by or for Aspect. SMI shall indemnify and hold Aspect harmless from all costs, damages and expenses (including reasonable attorneys' fees) arising from any claim enumerated in the preceding sentence. The limitations set forth in the foregoing clause (ii) shall only apply to the extent Aspect has made the most recently released version of the software available to SMI at no cost to SMI for incorporation in the BIS Software or Bispectral Index which are then in SMI's possession or have been previously distributed by SMI and the liability or obligation arises after Aspect makes such revised version available to SMI. 4.15 Digital Signal Converter. Aspect agrees to sell to SMI, and SMI agrees to purchase exclusively from Aspect, the Digital Signal Converters (the DSC II, or Aspect's next generation Digital Signal Converter, such as a one-channel Digital Signal Converter, which may take the place of the DSC II) to be used in conjunction with the Module and the Monitor. In addition, SMI at its option may distribute the Four Channel Digital Signal Converter for use with the Module in configurations with Bispectral Index, EEG, or both capabilities enabled. In either case, the Bispectral Index will only be operated through the use of the Sensor except for failure to supply - 28 - 33 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. pursuant to Section 3.20. The price for each Digital Signal Converter manufactured by Aspect shall be [**] of the [**] for such [**] from time to time in effect, or (b) [**]. Aspect's obligation to sell Digital Signal Converters to SMI shall be in effect during the term of the license set forth in Section 4.1 above. The provisions of Sections 2.14 and 2.15 (regarding forecasts and orders) and 2.16, 2.18 and 2.19 (regarding shipment, risk of loss and payments) shall apply with respect to Digital Signal Converters. 4.16 Restrictive Covenant. During the term of the appointment set forth in Section 4.1, SMI will not directly engage in, and will use good faith and reasonable efforts to prevent its sublicensees and subdistributors from engaging in, the sale anywhere in the world of any EEG Module that incorporates the technology that can be used to measure the hypnotic effects of anesthetics on the brain, provided that the foregoing restriction shall not apply to an EEG module that includes spectral edge frequency (SEF) as long as SMI or any sublicensee or subdistributor does not market or promote such SEF product for use in anesthesia monitoring. Furthermore, in the event that SMI directly engages in the sale of such a competitive product, or fails (within thirty (30) days after notice from Aspect) to use good faith and reasonable efforts to prevent a subdistributor or sublicensee from engaging in the sale of any such competitive product), Aspect shall have the right to terminate the right of SMI to distribute the Module, effective thirty (30) days after delivery of written notice to SMI. SMI's obligation to prevent its subdistributors and sublicensees from breaching the foregoing restrictive covenant shall not require SMI to take any action which is illegal under any applicable laws or which could reasonably expected to expose SMI to liability and damages to the subdistributor or sublicensee, or the subdistributor or sublicensee's customers. 4.17 Right of Aspect to Contact Customers. After the first Sensor shipment, SMI shall notify Aspect on a monthly basis of each customer order in the United States territory for any Module. Aspect shall have the right to contact the customers of SMI solely for the purpose of selling the Sensor in the United States territory. All information provided by SMI to Aspect pursuant to this Section 4.17 shall constitute Proprietary Information of SMI. ARTICLE V - COMMUNICATIONS 5.1 Communications: Aspect and SMI agree that during the first 3 years of this Agreement, a working group composed of senior personnel at Aspect and at SMI will meet on a quarterly basis to discuss the relationship between the parties and to review issues relating to the Agreement including, but not limited to the following: - 29 - 34 (a) to review the extent to which the Agreement has met the objectives of the parties; (b) to monitor performance measures (such as the number of units sold, the number on consignment, average selling prices, Sensor consumption rates, etc.); (c) to monitor compliance with the terms of the Agreement on the part of both Aspect and SMI; (d) to identify steps that might be taken to improve the Agreement, or the way in which the Agreement is administered, to better meet the objectives of both parties; and (e) to coordinate joint and separate market development activities, and to plan new initiatives designed to accelerate development of the market. It is expected that the composition of the working group may change over time (for example, development personnel will be included initially during the period in which the Module is under development), but SMI and Aspect agree to identify at least one senior member of their respective organizations who will have primary oversight responsibility for the Agreement and who will attend all of the quarterly meetings to provide continuity over time. It is understood that the parties will identify mutually convenient times and locations to hold the quarterly meetings to minimize the cost and the time required of company personnel, and that a preliminary schedule of quarterly meetings will be established within ninety (90) days after this Agreement is signed. ARTICLE VI - TERMINATION 6.1 Term. This Agreement shall commence on the date first set forth above and shall continue for a term of ten (10) years, subject to earlier termination as provided herein. 6.2 Termination by SMI. SMI shall have the right, at any time following the second anniversary of this Agreement, to terminate this Agreement in its entirety or to terminate the provisions of any of Articles II, III or IV of this Agreement, on six months prior written notice to Aspect. 6.3 Termination for Breach. (a) If SMI breaches the provisions of this Agreement relating to the making or promotion of claims, Aspect shall have the right to terminate this Agreement immediately upon written notice to SMI. Aspect shall be entitled to - 30 - 35 terminate this Agreement by written notice to SMI in the event that SMI shall fail to make any required payment, and shall fail to remedy such default within 30 days after notice thereof by Aspect. SMI shall be entitled to terminate this Agreement by written notice to Aspect if Aspect shall fail to fill an order for Monitor Products or Sensor Products in accordance with the terms of Sections 2.15 or 3.7 and shall fail to remedy such default within 30 days after notice of default from SMI; provided, however, if SMI elects to use the remedies provided by Section 3.19, such remedies will be in lieu of SMI's right to terminate this Agreement for Aspect's failure to supply the Sensor Products. In addition, except for a breach by SMI of its minimum purchase requirements set forth in Sections 2.12 of this Agreement, which breach will be governed by the provisions of that Section 2.12, either party shall be entitled to terminate this Agreement by written notice to the other party in the event that the other party shall be in material default of any of its other obligations hereunder, and shall fail to remedy any such default within 90 days after notice thereof by the non-breaching party. Notwithstanding the foregoing provisions of this Section 6.3 relating to payment or other breaches by SMI of this Agreement, (a) if such breach relates to Monitor Products, the provisions of Article II shall terminate and the distribution rights of SMI to the Sensor shall continue, but the other provisions of this Agreement shall remain in effect; (b) if such breach relates to the Sensor the provisions of Article III shall terminate, but the other provisions of this Agreement shall remain in effect; and (c) if such breach relates to the Modules, the provisions of Article IV shall terminate, but the other provisions of this Agreement shall remain in effect. (b) Effect of Expiration or Termination. Upon any expiration or termination of this Agreement, neither party shall be relieved of any obligations incurred prior to such expiration or termination. In the event of any expiration or termination of this Agreement, each party shall return to the other party all tangible Proprietary Information of the other party, provided that SMI shall be entitled to retain one copy of any such tangible Proprietary Information as is necessary to service its customers of Monitor Products, Sensor Products and Modules. ARTICLE VII - CONFIDENTIALITY Each party shall maintain the Proprietary Information of the other party in confidence, and shall not disclose, divulge or otherwise communicate such Proprietary Information to others, or use it for any purpose, except pursuant to, and in order to carry out, the terms and objectives of this Agreement, and hereby agrees to exercise every reasonable precaution to prevent and restrain the unauthorized disclosure of such Proprietary information by any of its directors, officers, employees, consultants, subcontractors, sublicensees or agents. Without limiting the generality of the foregoing, neither party shall, without the prior written consent of the other party, (i) make any disclosures to any third party concerning the Module development program conducted under this Agreement, or (ii) provide advance - 31 - 36 notice, whether written or oral, concerning product introductions to sales representatives or customers that is inconsistent with its policies and procedures for introducing its own new products. The foregoing provisions shall not apply to any Proprietary Information disclosed hereunder which: (a) was known or used by the receiving party prior to its date of disclosure to the receiving party, as evidenced by the prior written records of the receiving party; (b) either before or after the date of the disclosure to the receiving party is lawfully disclosed to the receiving party by an independent, unaffiliated third party rightfully in possession of the Proprietary Information; (c) either before or after the date of the disclosure to the receiving party becomes published or generally known to the public through no fault or omission on the part of the receiving party; or (d) is required to be disclosed by the receiving party to comply with applicable laws, to defend or prosecute litigation or to comply with governmental regulations, provided that the receiving party provides prior written notice of such disclosure to the other party and takes reasonable and lawful actions to avoid and/or minimize the degree of such disclosure. This Section shall survive the expiration or termination of this Agreement. ARTICLE VIII - MISCELLANEOUS 8.1 Trademarks and Trade Names. SMI shall not use the Aspect name or any other trademark or trade name used or claimed by Aspect (all of which names or marks shall hereinafter be referred to as "Aspect Proprietary Marks") in connection with any business conducted by SMI other than in dealing with the Monitor Products, the Sensor Products and the Module or unless otherwise approved in writing by Aspect. In the event the Module bears Aspects's trademarks, the Module must meet Aspect's reasonable quality standards; Aspect acknowledges that SMI's current line of monitor products meets such quality standards, and the Module will be deemed to meet Aspect's quality standards if it is of a quality substantially equivalent to the current quality standards for SMI's monitor products. Aspect shall not use the SMI name or any other trademark or trade name used or claimed by SMI (all of which names or marks shall hereafter be referred to as the "SMI Proprietary Marks"). The "Aspect Proprietary Marks" and "SMI Proprietary Marks" shall hereinafter be referred to as the "Proprietary Marks". Each party agrees that its use of the Proprietary Marks of the other party shall not create in its favor any right, title or interest therein and acknowledges the other party's exclusive right, title and interest in the Proprietary Marks of the other party. Each party shall use the trademarks of the other party in compliance with all relevant laws and regulations and not modify any of the other party's trademarks in any way. Neither party shall take any action calculated or likely to prejudice, affect, impair or destroy the title and interest of the other party in the Proprietary Marks. 8.2 Records. Each party shall keep, and shall require all affiliates to keep, full, true and accurate books of accounts and other records containing all information and data which may be necessary to ascertain and verify the data required to be - 32 - 37 maintained or furnished pursuant to the terms of this Agreement. During the term of this Agreement and for a period of one year following its termination, each party shall have the right from time to time (not to exceed once during each calendar year) to have an accounting firm inspect such books, records and supporting data of the other party during reasonable business hours at such time as is approved in advance by the other party, provided that such accounting firm executes a standard nondisclosure agreement in a form reasonably acceptable to the other party. 8.3 Publicity. Neither party shall originate any publicity, news release or other public announcement, written or oral, relating to this Agreement or the existence of an arrangement between the parties, without the prior written consent of the other party except as otherwise required by law (in which case, such party shall use reasonable efforts to provide a copy of such information to the other party prior to the required legal disclosure and provide a reasonable opportunity for review and comment). 8.4 Force Majeure. In the event that either party is prevented from performing, or is unable to perform, any of its obligations under this Agreement due to any act of God, acts or omissions of any government or any agency thereof, compliance with request, recommendations, rules, regulations or orders of any international government or agency thereof, fire, storm, flood, earthquake, accident, war, rebellion, insurrection, riots, sabotage, invasion, quarantine, strikes, lockouts, disputes or differences with workers, transportation embargoes or failure of public facilities, and if such party shall have used reasonable efforts to avoid such occurrence and minimize its duration and shall have given proper written notice to the other party, then the affected party's performance shall be excused and the time for performance shall be extended for the period of delay or inability to perform due to such occurrence. 8.5 Relationship Between Parties. The relationship between the parties is that of independent contractors, and nothing in this Agreement shall be construed to constitute either party as an employee, partner or agent of the other party. Without limiting the foregoing, neither party shall have authority to act for or to bind the other party in any way, to make representations or warranties or to execute agreements on behalf of the other party or to represent that the other party is in any way responsible for the acts or omissions of such party. 8.6 Notices. All notices, demands, requests, consents, approvals or other communications required or permitted to be given hereunder or which are given with respect to this Agreement shall be in writing and may be personally served, deposited in certified mail postage prepaid, or deposited with an overnight courier service, or sent via facsimile transmission, addressed as follows: - 33 - 38 If to Aspect: Aspect Medical Systems, Inc. 2 Vision Drive Natick, MA 01760-2059 Telecopy: (508) 653-6788 Attn: President If to SMI: SpaceLabs Medical, Inc. 15220 NE 40th Street P.O. Box 97013 Redmond, WA 98073 Telecopy: (206) 883-7091 Attn: James W. Bowra, Director, Business Development Copy to: Eugene V. DeFelice General Counsel or to such other address or person as either party shall have specified most recently by written notice provided in accordance with this Section 8.6. Notice shall be deemed given on the date of service if personally served. Notice mailed as provided herein shall be deemed given on the fifth business day following the date so mailed. Notice deposited with an overnight courier service shall be deemed given on the next business day following the date so deposited. Notice sent via facsimile transmission shall be deemed given when acknowledged by the recipient. 8.7 Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes all prior agreements of the parties, including but not limited to the Distribution and License Agreement between them dated as of June 30, 1994, which is hereby terminated in its entirety. No waiver, consent, modification, amendment or change of the terms of this Agreement shall bind either party unless in writing and signed by both parties. 8.8 Severability. In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be unenforceable. 8.9 Assignments. Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written consent of the other party, except to a party who acquires all or substantially all of the business of the assigning party by merger, sale of assets or otherwise. - 34 - 39 8.10 Governing Law. This Agreement shall be governed by and construed as a sealed instrument in accordance with the laws of the Commonwealth of Massachusetts. 8.11 Compliance with Laws. Each party agrees to comply with all laws and regulations that may be applicable to such party's performance hereunder, including but not limited to the Food, Drug and Cosmetics Act and good manufacturing practices regulations. Each party (the "Indemnitor") agrees to defend, indemnify and hold harmless the other party from all Losses arising out of the Indemnitor's failure to comply with any applicable law or regulation. 8.12 Waivers and Extensions. No waiver of any breach of any agreement or provision herein contained shall be deemed a waiver of any preceding or succeeding breach thereof or of any other agreement or provision herein contained. No extension of time for performance of any obligations or acts shall be deemed an extension of the time for performance of any other obligations or acts. 8.13 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which taken together shall constitute but one and the same instrument. 8.14 Consents. Whenever any provision of this Agreement requires one party to seek the prior approval or consent of the other party, the parties agree that such consents or approvals will not be withheld unreasonably. 8.15 Limitation of Liability. Neither party shall be responsible to the other party for any punitive, incidental or consequential damages, including lost profits or lost sales, arising from or related to a breach of this Agreement; provided, however, that nothing herein shall be deemed to limit or modify either party's obligations to indemnify the other party from any Losses asserted by third parties, to the extent such indemnity is contractually required hereunder. IN WITNESS WHEREOF, the parties hereto have set their hand and seal as of July 24, 1996. ASPECT MEDICAL SYSTEMS, INC. By: /s/J. Breckenridge Eagle Its: President SPACELABS MEDICAL, INC. By: /s/James W. Bowra James W. Bowra Its: Director, Business Development - 35 - 40 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE A SpaceLabs Pricing
Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect's SpaceLabs Prod. No. Product Description U.S. Price Intl. Price - ----------------- --------------------------------------------------------- --------------- --------------- Monitoring System Components A-1000(TM) 4-channel EEG monitoring system. Supplied with one A-1000 4-channel EEG monitor, one A-1000 4-channel EEG digital signal converter, one power cord, one digital signal converter cable, and one electrode starter kit. (Monitor and digital signal converter include 15 months warranty.) 186-0026 A-1000 4-channel EEG monitoring system, German [**] language, UL/cUL, TUV, CEemc, 50 Hz 186-0039 A-1000 4-channel EEG monitoring [**] system, English language, UL/cUL, TUV, CEemc, 60 Hz 186-0040 A-1000 4-channel EEG monitoring system, French [**] language, UL/cUL, TUV, CEemc, 60 Hz 186-0041 A-1000 4-channel EEG monitoring system, French [**] language, UL/cUL, TUV, CEemc, 50 Hz 186-0042 A-1000 4-channel EEG monitoring system, English [**] language, UL/cUL, TUV, CEemc, 50 Hz 186-0051 A-1000 4-channel EEG monitoring system, [**] ENGLISH language, CE, 50 Hz 186-0058 A-1000 4-channel EEG monitoring system, French [**] language, CE, 50 Hz
- 36 - 41
Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect's SpaceLabs Prod. No. Product Description U.S. Price Intl. Price - ----------------- --------------------------------------------------------- --------------- --------------- 186-0060 A-1000 4-channel EEG monitoring system, German [**] language, CE, 50 Hz 186-0053 A-1050(TM) 2-channel EEG Brain Monitor system, [**] English language, UL/cUL, TUV, CEemc, 60Hz Supplied with one A-1050 2-channel EEG monitor, one A-1050 2-channel EEG digital signal converter (DSC-2), one power cord. (Monitor and digital signal converter include 15 months warranty.) *Discount % 186-0008 A-1000 4-channel EEG digital signal converter (DSC). For use with A-1000 4-channel EEG monitor only. (Includes 15 months warranty). 186-0045 A-1050 2-channel EEG digital signal converter [**] [**] (DSC-2) (includes 15 months warranty.) 186-0009 Digital Signal Converter cable (20 feet) to connect [**] [**] A-1000 EEG monitor to A-1000 4-channel EEG digital signal converter. 186-0025 Female Snap EEG Lead Wires with safety [**] [**] connector 24" long, 10 leads per set 186-0055 A-1050 Two channel Referential patient Interface [**] [**] Cable (PIC) 186-0014 Printrex printer (115V) compatible for use with the [**] [**] A-10xx. 186-0011 Printer interface cable (6 feet), DB25 parallel port. [**] [**] Centronics 36, isolated ground, shield. 186-0015 Permanent thermal paper for use with Printrex [**] [**] printer. Provided in 100 feet rolls. (4 rolls/case) 186-0016 Permanent thermal paper for use with Printrex [**] [**] printer. Provided in 100 feet rolls. (8 rolls/case) 186-0043 Starter kit with Zipprep(TM)Self-Prepping [**] [**] Disposable Electronics; 1 case containing 300 electrodes (75 box, 4 boxes/case)
- 37 - 42
Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect's SpaceLabs Prod. No. Product Description U.S. Price Intl. Price - ----------------- --------------------------------------------------------- --------------- --------------- 185-0043 Starter kit with Zipprep(TM)Self-Prepping [**] [**] Disposable Electrodes: * 1 Box (75) electrodes * 15 alcohol swaps * 1 Set (5) leadwires * 15 gaude pads
*Discount Off Prevailing U.S.A. Price List - 38 - 43 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. SCHEDULE B Aspect Development Activities for the SMI BIS Module BIS SOFTWARE DEVELOPMENT Scope. Aspect shall provide to SMI the standard Aspect BIS Software (in binary form) along with suitable documentation in a form reasonably acceptable to SMI and sufficient to enable SMI to use the BIS Software for execution in the Module. In addition, Aspect shall provide FPGA source code, and source code which controls the following elements of the Digital Signal Converter (the "Low Level Interface Source Code"): Digital Signal Converter interface code including acquisition and control (impedance checking, self test initiation and termination). [**] The design of this [**] has been provided to [**] in the form of [**]. This will be the [**] as shown below: [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**] [**]. This field [**] contains much of the [**] to the [**] and other [**]. [**] for the [**] in the [**]. [**]. This is the [**] which executes the [**]. [**]. This is an [**] which contains both the [**] and the code for the [**]. [**]. [**] is required. [**]. between the [**] and the [**] in the [**] which provides [**] to the [**] per second. [**]. These are the same [**] in the [**] also provides the [**], including software [**]. [**]. provides a working [**] for support of [**] on the [**] and can be [**] using the [**] provides a [**] to the [**] which would be required to [**] in the [**] in the event that the [**]. [**]. shall be done in accordance to a [**] in consultation with Aspect. [**]. for the [**] will be [**], subject to [**] of such [**]. DELIVERABLE ITEMS. Aspect wiLl deliver the following items to SMI on the dates indicated: [**] [**] [**] [**] on a [**]. [**] report from [**] after receipt [**] - Procedures and specifications for required equipment and fixtures for production line testing of [**] - Procedures for [**] in the event of a [**] - Updates to procedures and specifications for the above as reasonably required for the development effort; PROVIDED, HOWEVER, that if the provision of such updates would require Aspect to expend a material amount of additional labor (a "Significant Update") and the Significant Update is not the result of a defect in the deliverables provided by Aspect, then Aspect and SMI must agree on reasonable additional fees to be paid by SMI for the Significant Update before Aspect will be required to provide it. - Other documents as may be needed for implementation of the above items; PROVIDED, HOWEVER, that if the provision of such documents would require Aspect to expend a material amount of additional labor (a "Significant Document"), and the need for the Significant Document [**] provided by Aspect, then Aspect and SMI must agree on reasonable additional fees to be paid by SMI for the Significant Document before Aspect will be required to provide it. [**] SCOPE. Aspect will provide up to [**] for the design of the [**] during the first year of the Agreement. [**] of such [**] shall have the right to [**] regarding [**] shall have the burden of [**]. TASKS. - [**] to serve as a [**]. - Consulting on the [**]. - [**] of the [**] of the [**]. [**] will be [**], subject to [**] of such [**]. [**]. The following will be provided to [**] on the dates indicated: - [**] for the [**] - [**] for the [**] - [**] including a list of [**] - [**] current [**] [**] Aspect warrants that the engineering support services to be provided by it under this Attachment B shall be performed in a willing and workmanlike manner, and that the deliverables it provides hereunder will be free from defects in design, material and workmanship. Aspect shall, at its costs and expense, repair or replace any services or deliverables which breach the foregoing warranty. It is understood that the foregoing warranties do not apply to the BIS Software (which is subject to the warranty set forth in Section 2.20, [**] Source Code [**] Low Level Interface [**]. EXCEPT AS SET FORTH HEREIN, ASPECT DISCLAIMS ALL OTHER WARRANTIES WITH RESPECT TO SUCH SERVICES AND DELIVERABLES, WHETHER EXPRESS OR IMPLIED, ORAL OR WRITTEN, INCLUDING, WITHOUT LIMITATION, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. - 39 - EX-10.24 8 SUPPLIER AGREEMENT 1 EXHIBIT 10.24 ASPECT MEDICAL SYSTEMS, INC. has requested that the marked portions of this agreements be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933 FOR PURCHASES DIRECT FROM SUPPLIER NOT SUBJECT TO COMPETITIVE BID PROCESS SUPPLIER AGREEMENT BETWEEN NOVATION, LLC AND ASPECT MEDICAL -------------- ("SUPPLIER") MS90690 -------- (CONTRACT NUMBER GOES HERE) --------------------------- 2 TABLE OF CONTENTS
PAGE ---- 1. INTRODUCTION............................................................................................1 a. Purchasing Opportunities for Members....................................................................1 b. Supplier................................................................................................1 c. Contract Prices; Non-Price Specifications; Committed Programs...........................................1 2. BASIC TERMS.............................................................................................1 a. Purchase of Products....................................................................................1 b. Optional Purchasing Arrangement.........................................................................1 c. Market Competitive Terms................................................................................2 d. Changes in Contract Prices..............................................................................2 e. Notification of Changes in Pricing Terms................................................................2 f. Underutilized Businesses................................................................................2 3. TERM AND TERMINATION....................................................................................2 a. Term....................................................................................................2 b. Termination by Novation.................................................................................3 c. Termination by Supplier.................................................................................3 4. PRODUCT SUPPLY..........................................................................................3 a. Delivery and Invoicing..................................................................................3 b. Product Fill Rates; Confirmation and Delivery Times.....................................................3 c. Bundled Terms...........................................................................................3 d. Discontinuation of Products; Changes in Packaging.......................................................4 e. Replacement or New Products.............................................................................4 f. Member Services.........................................................................................4 g. Product Deletion........................................................................................4 h. Return of Products......................................................................................5 i. Failure to Supply.......................................................................................5 5. PRODUCT QUALITY.........................................................................................5 a. Free From Defects.......................................................................................5 b. Product Compliance......................................................................................5 c. Patent Infringement.....................................................................................6 d. Product Condition.......................................................................................6 e. Recall of Products......................................................................................6 f. Shelf Life..............................................................................................6 6. CENTURY COMPLIANCE......................................................................................6 a. Definitions.............................................................................................6 b. Representations.........................................................................................7 c. Remedies................................................................................................7 d. Noncompliance Notice....................................................................................7 e. Survival................................................................................................8
3
7. REPORTS AND OTHER INFORMATION REQUIREMENTS...............................................................8 a. Report Content..........................................................................................8 b. Report Format and Delivery..............................................................................8 c. Other Information Requirements..........................................................................9 8. OBLIGATIONS OF NOVATION..................................................................................9 a. Information to Members..................................................................................9 b. Marketing Services......................................................................................9 9. MARKETING FEES...........................................................................................9 a. Calculation.............................................................................................9 b. Payment.................................................................................................9 10. ADMINISTRATIVE DAMAGES..................................................................................10 11 NONPAYMENT OR INSOLVENCY OF A MEMBER....................................................................11 12. INSURANCE...............................................................................................11 a. Policy Requirements....................................................................................11 b. Self-Insurance.........................................................................................11 c. Amendments, Notices and Endorsements...................................................................11 13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION................................................11 a. Compliance With Law....................................................................................11 b. Government Program Participation.......................................................................12 14. RELEASE AND INDEMNITY...................................................................................12 15. BOOKS AND RECORDS; FACILITIES INSPECTIONS...............................................................12 16 USE OF NAMES, ETC.......................................................................................13 17. CONFIDENTIAL INFORMATION................................................................................13 a. Nondisclosure..........................................................................................13 b. Definition.............................................................................................13 18 MISCELLANEOUS...........................................................................................13 a. Choice of Law..........................................................................................13 b. Not Responsible........................................................................................14 c. Third Party Beneficiaries..............................................................................14 d. Notices................................................................................................14 e. No Assignment..........................................................................................14 f. Severability...........................................................................................14 g. Entire Agreement.......................................................................................15
4 INDEX OF DEFINED TERMS
PAGE ---- Agreed Percentage......................................................................................10 Calendar-Related........................................................................................7 Century Noncompliance...................................................................................7 Clients.................................................................................................1 Confidential Information...............................................................................14 Contract Prices.........................................................................................1 Effective Date..........................................................................................2 FDA....................................................................................................12 Federal health care program............................................................................12 Gregorian calendar......................................................................................7 Guidebook...............................................................................................9 Indemnitees............................................................................................12 Legal Requirements.....................................................................................12 Marketing Fees..........................................................................................9 Members.................................................................................................1 Non-Price Specifications................................................................................1 Novation................................................................................................1 Novation Database.......................................................................................1 Products................................................................................................1 Reporting Month.........................................................................................8 Special Conditions......................................................................................1 Supplier................................................................................................i Systems.................................................................................................7 Term....................................................................................................3 timely..................................................................................................8
5 NOVATION, LLC SUPPLIER AGREEMENT 1. INTRODUCTION. a. PURCHASING OPPORTUNITIES FOR MEMBERS. Novation, LLC ("Novation") is engaged in providing purchasing opportunities with respect to high quality products and services to participating health care providers ("Members"). Members are entitled to participate in Novation's programs through their membership or other participatory status in any of the following client organizations: VHA Inc., University HealthSystem Consortium, and HealthCare Purchasing Partners International, LLC (collectively, "Clients"). Novation is acting as the exclusive agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), with respect to this Agreement. A current listing of Members is maintained by Novation in the electronic database described in the Guidebook referred to in Subsection 7.c below ("Novation Database"). A provider will become a "Member" for purposes of this Agreement at the time Novation adds the provider to the Novation Database and will cease to be a "Member" for such purposes at the time Novation deletes the provider from the Novation Database. b. SUPPLIER. Supplier is the manufacturer of products listed on Exhibit A, the provider of installation, training and maintenance services for such products, and the provider of any other services listed on Exhibit A (such products and/or services are collectively referred to herein as "Products"). c. CONTRACT PRICES; NON-PRICE SPECIFICATIONS; COMMITTED PROGRAMS. A description of the Products and pricing therefor ("Contract Prices") is attached hereto as Exhibit A, the other specifications are attached hereto as Exhibit B ("Non-Price Specifications"), and the Special Conditions are attached hereto as Exhibit C ("Special Conditions"). 2. BASIC TERMS. a. PURCHASE OF PRODUCTS. Novation and Supplier hereby agree that Supplier will make the Products available for purchase by the Authorized Distributors at the Contract Prices for resale to the Members in accordance with the terms of this Agreement; provided, however, that this Agreement will not constitute a commitment by any person to purchase any of the Products. b. OPTIONAL PURCHASING ARRANGEMENT. Novation and Supplier agree that each Member will have the option of purchasing the Products under the terms of this Agreement or under the terms of any other purchasing or pricing arrangement that may exist between such Member and Supplier at any time during the Term; provided, however, that, regardless of the arrangement, Supplier will comply with Sections 7 and 9 below. If any Member uses any other purchasing or pricing arrangement with Supplier when ordering products covered by any contract between Supplier and Novation, Supplier will notify such Member of the pricing and other significant terms of the applicable Novation contract. 6 c. MARKET COMPETITIVE TERMS. Supplier agrees that the prices, quality, value and technology of all Products purchased under this Agreement will remain market competitive at all times during the Term. Supplier agrees to provide prompt written notice to Novation of all offers for the sale of the Products made by Supplier during the Term on terms that are more favorable to the offeree than the terms of this Agreement. Supplier will lower the Contract Prices or increase any discount applicable to the purchase of the Products as necessary to assure market competitiveness. If at any time during the Term Novation receives information from any source suggesting that Supplier's prices, quality, value or technology are not market competitive, Novation may provide written notice of such information to Supplier, and Supplier will, within five (5) business days for Novation's private label Products and within ten (10) business days for all other Products, advise Novation in writing of and fully implement all adjustments necessary to assure market competitiveness. d. CHANGES IN CONTRACT PRICES. Unless otherwise expressly agreed in any exhibit to this Agreement, the Contract Prices will not be increased and any discount will not be eliminated or reduced during the Term. In addition to any changes made to assure market competitiveness, Supplier may lower the Contract Prices or increase any discount applicable to the purchase of the Products at any time. e. NOTIFICATION OF CHANGES IN PRICING TERMS. Supplier will provide not less than sixty (60) days' prior written notice to Novation and not less than forty-five (45) days' prior written notice to all Members of any change in pricing terms permitted or required by this Agreement. For purposes of the foregoing notification requirements, a change in pricing terms will mean any change that affects the delivered price to the Member, including, without limitation, changes in list prices, discounts or pricing tiers or schedules. Such prior written notice will be provided in such format and in such detail as may be required by Novation from time to time, and will include, at a minimum, sufficient information to determine line item pricing of the Products for all affected Members. f. UNDERUTILIZED BUSINESSES. Certain Members may be required by law, regulation and/or internal policy to do business with underutilized businesses such as Minority Business Enterprises (MBE), Disadvantaged Business Enterprises (DBE), Small Business Enterprises (SBE), Historically Underutilized Businesses (HUB) and/or Women-owned Business Enterprises (WBE). To assist Novation in helping Members meet these requirements, Supplier will comply with all Novation policies and programs with respect to such businesses and will provide, on request, Novation or any Member with statistical or other information with respect to Supplier's utilization of such businesses as a vendor, distributor, contractor or subcontractor. 3. TERM AND TERMINATION. a. TERM. This Agreement will be effective as of the effective date set forth in Exhibit D attached hereto ("Effective Date"), and, unless sooner terminated, will continue in full force and effect for the initial term set forth in the Non-Price Specifications and for any renewal terms set forth in the Non-Price Specifications by Novation's delivery of written notice of renewal to Supplier not less than ten (10) days prior to the end of the initial term or any renewal term, as 7 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. applicable. The initial term, together with the renewal terms, if any, are collectively referred to herein as the "Term." b. TERMINATION BY NOVATION. Novation may terminate this Agreement at any time for any reason whatsoever by delivering not less than [**] prior written notice thereof to Supplier. In addition, Novation may terminate this Agreement immediately by delivering written notice thereof to Supplier upon the occurrence of either of the following events: (1) Supplier breaches this Agreement; or (2) Supplier becomes bankrupt or insolvent or makes an unauthorized assignment or goes into liquidation or proceedings are initiated for the purpose of having a receiving order or winding up order made against Supplier, or Supplier applies to the courts for protection from its creditors. Novation's right to terminate this Agreement due to Supplier's breach in accordance with this Subsection is in addition to any other rights and remedies Novation, the Clients or the Members may have resulting from such breach, including, but not limited to, Novation's and the Clients' right to recover all loss of Marketing Fees resulting from such breach through the date of termination and for [**] thereafter. c. TERMINATION BY SUPPLIER. Supplier may terminate this Agreement at any time for any reason whatsoever by delivering not less than [**] prior written notice thereof to Novation. 4. PRODUCT SUPPLY. a. DELIVERY AND INVOICING. On and after the Effective Date, Supplier agrees to deliver Products ordered by the Members to the Members, FOB destination, and will direct its invoices to the Members in accordance with this Agreement. Supplier agrees to prepay and absorb charges, if any, for transporting Products to the Members. Payment terms are [**]. Supplier will make whatever arrangements are reasonably necessary with the Members to implement the terms of this Agreement; provided, however, Supplier will not impose any purchasing commitment on any Member as a condition to the Member's purchase of any Products pursuant to this Agreement. b. PRODUCT FILL RATES; CONFIRMATION AND DELIVERY TIMES. Supplier agrees to provide product fill rates to the Members of greater than [**], calculated as line item orders. Supplier will provide confirmation of orders from Members via the electronic data interchange described in the Guidebook referred to in Subsection 7.c below within two (2) business days after placement of the order and will deliver the Products to the Members within ten (10) business days after placement of the order. 8 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. c. BUNDLED TERMS. Supplier agrees to give Novation prior written notice of any offer Supplier makes to any Member to sell products that are not covered by this Agreement in conjunction with Products covered by this Agreement under circumstances where the Member has no real economic choice other than to accept such bundled terms. d. DISCONTINUATION OF PRODUCTS; CHANGES IN PACKAGING. Supplier will have no unilateral right to discontinue any of the Products or to make any changes in packaging which render any of the Products substantially different in use, function or distribution. Supplier may request Novation in writing to agree to a proposed discontinuation of any Products or a proposed change in packaging for any Products at least [**] prior to the proposed implementation of the discontinuation or change. Under no circumstances will any Product discontinuation or packaging changes be permitted under this Agreement without Novation's agreement to the discontinuation or change. In the event Supplier implements such proposed discontinuation or change without Novation's agreement thereto in writing, in addition to any other rights and remedies Novation or the Members may have by reason of such discontinuation or change, (i) Novation will have the right to terminate any or all of the Product(s) subject to such discontinuation or change or to terminate this Agreement in its entirety immediately upon becoming aware of the discontinuation or change or any time thereafter by delivering written notice thereof to Supplier; (ii) the Members may purchase products equivalent to the discontinued or changed Products from other sources and Supplier will be liable to the Members for all reasonable costs in excess of the Contract Prices plus any other damages which they may incur; and (iii) Supplier will be liable to Novation and the Clients for any loss of Marketing Fees resulting from such unacceptable discontinuation or change plus any other damages which they may incur. e. REPLACEMENT OR NEW PRODUCTS. Supplier will have no unilateral right to replace any of the Products listed in Exhibit A with other products or to add new products to this Agreement. Supplier may request Novation in writing to agree to a replacement of any of the Products or the addition of a new product that is closely related by function or use to an existing Product at least [**] prior to the proposed implementation of the replacement or to the new product introduction. Under no circumstances will any Product replacement or new product addition to this Agreement be permitted without Novation's agreement to the replacement or new product. f. MEMBER SERVICES. Supplier will consult with each Member to identify the Member's policies relating to access to facilities and personnel. Supplier will comply with such policies and will establish a specific timetable for sales calls by sales representatives to satisfy the needs of the Member. Supplier will promptly respond to Members' reasonable requests for verification of purchase history. If requested by Novation or any Members, Supplier will provide, at Supplier's cost, on-site inservice training to Members' personnel for pertinent Products. g. PRODUCT DELETION. Notwithstanding anything to the contrary contained in this Agreement, Novation may delete any one or more of the Products from this Agreement at any time, at will and without cause, upon not less than [**] prior written notice to Supplier. 9 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. h. RETURN OF PRODUCTS. Any Member, in addition to and not in limitation of any other rights and remedies, will have the right to return Products to Supplier under any of the following circumstances: (1) the Product is ordered or shipped in error; (2) the Product is no longer needed by the Member due to deletion from its standard supply list or changes in usage patterns, provided the Product is returned at least [**] prior to its expiration date and is in a re-salable condition; (3) the Product is received outdated or is otherwise unusable; (4) the Product is received damaged, or is defective or nonconforming; (5) the Product is one which a product manufacturer or supplier specifically authorizes for return; and (6) the Product is recalled. Supplier agrees to accept the return of Products under these circumstances without charge and for full credit. i. FAILURE TO SUPPLY. In the event of Supplier's failure to perform its supply obligations in accordance with the terms of this Section 4, the Member may purchase products equivalent to the Products from other sources and Supplier will be liable to the Member for all reasonable costs in excess of the Contract Prices plus any other damages which they may incur. In such event, Supplier will also be liable to Novation and the Clients for any loss of Marketing Fees resulting from such failure plus any other damages which they may incur. The remedies set forth in this Subsection are in addition to any other rights and remedies Novation, the Clients or the Members may have resulting from such failure. 5. PRODUCT QUALITY. a. FREE FROM DEFECTS. Supplier warrants the Products against defects in material, workmanship, design and manufacturing. Supplier will make all necessary arrangements to assign such warranty to the Members. Supplier further represents and warrants that the Products will conform to the specifications, drawings, and samples furnished by Supplier or contained in the Non-Price Specifications and will be safe for their intended use. If any Products are defective and a claim is made by a Member on account of such defect, Supplier will, at the option of the Member, either replace the defective Products or credit the Member. Supplier will bear all costs of returning and replacing the defective Products, as well as all risk of loss or damage to the defective Products from and after the time they leave the physical possession of the Member. The warranties contained in this Subsection will survive any inspection, delivery, acceptance or payment by a Member. In addition, if there is at any time wide-spread failure of the Products, the Member may return all said Products for credit or replacement, at its option. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier. b. PRODUCT COMPLIANCE. Supplier represents and warrants to Novation, the Clients and the Members that the Products are, if required, registered, and will not be distributed, sold or priced by Supplier in violation of any federal, state or local law. Supplier represents and warrants that as of the date of delivery to the Members all Products will not be adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act and will not violate or cause 10 a violation of any applicable law, ordinance, rule, regulation or order. Supplier agrees it will comply with all applicable Good Manufacturing Practices and Standards contained in 21 C.F.R. Parts 210, 211, 225, 226, 600, 606, 610, 640, 660, 680 and 820. Supplier represents and warrants that it will provide adequate warnings and instructions to inform users of the Products of the risks, if any, associated with the use of the Products. Supplier's representations; warranties and agreements in this Subsection will survive the expiration or earlier termination of this Agreement. c. PATENT INFRINGEMENT. Supplier represents and warrants that sale or use of the Products will not infringe any United States patent. Supplier will, at its own expense, defend every suit which will be brought against Novation or a Member for any alleged infringement of any patent by reason of the sale or use of the Products and will pay all costs, damages and profits recoverable in any such suit. This Subsection and the obligations contained herein will survive the expiration or earlier termination of this Agreement. The remedies set forth in this Subsection are in addition to and not a limitation on any other rights or remedies that may be available against Supplier. d. PRODUCT CONDITION. Unless otherwise stated in the Non-Price Specifications or unless agreed upon by a Member in connection with Products it may order, all Products will be new. Products which are demonstrators, used, obsolete, seconds, or which have been discontinued are unacceptable unless otherwise specified in the Non-Price Specifications or the Member accepts delivery after receiving notice of the condition of the Products. e. RECALL OF PRODUCTS. Supplier will reimburse Members for any cost associated with any Product corrective action, withdrawal or recall requested by Supplier or required by any governmental entity. In the event a product recall or a court action impacting supply occurs, Supplier will notify Novation in writing within twenty-four (24) hours of any such recall or action. Supplier's obligations in this Subsection will survive the expiration or earlier termination of this Agreement. f. SHELF LIFE. Sterile Products and other Products with a limited shelf life sold under this Agreement will have the longest possible shelf life and the latest possible expiration dates. Unless required by stability considerations, there will not be less than an eighteen (18) month interval between a Product's date of delivery by Supplier to the Member and its expiration date. 6. CENTURY COMPLIANCE. a. DEFINITIONS. For purposes of this Section, the following terms have the respective meanings given below: (1) "Systems" means any of the Products, systems of distribution for Products and Product manufacturing systems that consist of or include any computer software, computer firmware, computer hardware (whether general or special purpose), documentation, data, and other similar or related items of the automated, computerized, and/or software systems that are provided by or through Supplier or utilized to manufacture or distribute the Products provided by or through Supplier pursuant to this Agreement, or any component part thereof, and any services provided by or through Supplier in connection therewith. 11 (2) "Calendar-Related" refers to date values based on the "Gregorian calendar" (as defined in the Encyclopedia Britannica, 15th edition, 1982, page 602) and to all uses in any manner of those date values, including without limitation manipulations, calculations, conversions, comparisons, and presentations. (3) "Century Noncompliance" means any aspects of the Systems that fail to satisfy the requirements set forth in Subsection 6.b below. b. REPRESENTATIONS. Supplier warrants, represents and agrees that the Systems satisfy the following requirements: (1) In connection with the use and processing of Calendar-Related data, the Systems will not malfunction, will not cease to function, will not generate incorrect data, and will not produce incorrect results. (2) In connection with providing Calendar-Related data to and accepting Calendar-Related data from other automated, computerized, and/or software systems and users via user interfaces, electronic interfaces, and data storage, the Systems represent dates without ambiguity as to century. (3) The year component of Calendar-Related data that is provided by the Systems to or that is accepted by the Systems from other automated, computerized, and/or software systems and user interfaces, electronic interfaces, and data storage is represented in a four-digit CCYY format, where CC represents the two digits expressing the century and YY represents the two digits expressing the year within that century (e.g., 1996 or 2003). (4) Supplier has verified through testing that the Systems satisfy the requirements of this Subsection including, without limitation, testing of each of the following specific dates and the transition to and from each such date: September 9, 1999; September 10, 1999; December 31, 1999; January 1, 2000; February 28, 2000; February 29, 2000; March 1, 2000; December 31, 2000; January 1, 2001; December 31, 2004; and January 1, 2005. c. REMEDIES. In the event of any Century Noncompliance in the Systems in any respect, in addition to any other remedies that may be available to Novation or the Members, Supplier will, at no cost to the Members, promptly under the circumstances (but, in all cases, within thirty (30) days after receipt of a written request from any Member, unless otherwise agreed by the Member in writing) eliminate the Century Noncompliance from the Systems. d. NONCOMPLIANCE NOTICE. In the event Supplier becomes aware of (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standard (proposed or adopted) regarding Calendar-Related data and/or processing, or Supplier begins any significant effort to conform the Systems to any such standard, Supplier will promptly provide the Members with all relevant information in writing and will timely provide the Members with updates to such information. Supplier will respond promptly and fully to inquiries by the Members, and timely provide updates to any responses provided to the Members, 12 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. with respect to (i) any possible or actual Century Noncompliance in the Systems or (ii) any international, governmental, industrial, or other standards. In the foregoing, the use of "timely" means promptly after the relevant information becomes known to or is developed by or for Supplier. e. SURVIVAL. Supplier's representations, warranties and agreements in this Section will continue in effect throughout the Term and will survive the expiration or earlier termination of this Agreement. 7. REPORTS AND OTHER INFORMATION REQUIREMENTS. a. REPORT CONTENT. Within [**] after the end of each full and partial month during the Term ("Reporting Month"), Supplier will submit to Novation a report in the form of a diskette containing the following information in form and content reasonably satisfactory to Novation: (1) the name of Supplier, the Reporting Month and year and the Agreement number (as provided to Supplier by Novation); (2) with respect to each Member (described by LIC number (as provided to Supplier by Novation), health industry number (if applicable), full name, street address, city, state, zip code and, if applicable, tier and committed status), the number of units sold and the amount of net sales for each Product on a line item basis, and the sum of net sales and the associated Marketing Fees for all Products purchased by such Member directly or indirectly from Supplier during the Reporting Month, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Member and Supplier; (3) the sum of the net sales and the associated Marketing Fees for all Products sold to all Members during the Reporting Month; and b. REPORT FORMAT AND DELIVERY. The reports required by this Section will be submitted electronically in Excel Version 7 or Access Version 7 and in accordance with other specifications established by Novation from time to time and will be delivered to: Novation Attn: SRIS Operations 220 East Las Colinas Boulevard Irving, TX 75039 c. OTHER INFORMATION REQUIREMENTS. In addition to the reporting requirements set forth in Subsections 7.a and 7.b above, the parties agree to facilitate the administration of this Agreement by transmitting and receiving information electronically and by complying with the information requirements set forth in Exhibit E attached hereto. Supplier further agrees that, 13 except to the extent of any inconsistency with the provisions of this Agreement, it will comply with all information requirements set forth in the Novation Information Requirements Guidebook ("Guidebook"). On or about the Effective Date, Novation will provide Supplier with a current copy of the Guidebook and will thereafter provide Supplier with updates and/or revisions to the Guidebook from time to time. 8. OBLIGATIONS OF NOVATION. a. INFORMATION TO MEMBERS. After the execution of this Agreement, Novation, in conjunction with the Clients, will deliver a summary of the purchasing arrangements covered by this Agreement to each Member and will, from time to time, at the request of Supplier, deliver to each Member reasonable and appropriate amounts and types of materials supplied by Supplier to Novation which relate to the purchase of the Products. b. MARKETING SERVICES. Novation, in conjunction with the Clients, will market the purchasing arrangements covered by this Agreement to the Members. Such promotional services may include, as appropriate, the use of direct mail, contact by Novation's field service delivery team, member support services, and regional and national meetings and conferences. As appropriate, Novation, in conjunction with the Clients, will involve Supplier in these promotional activities by inviting Supplier to participate in meetings and other reasonable networking activities with Members. 9. MARKETING FEES. a. CALCULATION. Supplier will pay to Novation, as the authorized collection agent for each of the Clients and certain of each Client's subsidiaries and affiliates, respectively (and not collectively), marketing fees ("Marketing Fees") belonging to any of the Clients or certain of their subsidiaries or affiliates equal to the Agreed Percentage of the aggregate gross charges of all net sales of the Products to the Members directly or indirectly from Supplier, whether under the pricing and other terms of this Agreement or under the terms of any other purchasing or pricing arrangements that may exist between the Members and Supplier. Such gross charges will be determined without any deduction for uncollected accounts or for costs incurred in the manufacture, provision, sale or distribution of the Products, and will include, but not be limited to, charges for the sale of products, the provision of installation, training and maintenance services, and the provision of any other services listed on Exhibit A. The "Agreed Percentage" will be defined in the Non-Price Specifications. b. PAYMENT. On or about the Effective Date, Novation will advise Supplier in writing of the amount determined by Novation to be Supplier's monthly estimated Marketing Fees. Thereafter, Supplier's monthly estimated Marketing Fees may be adjusted from time to time upon written notice from Novation based on actual purchase data. No later than the tenth (10th) day of each month, Supplier will remit the monthly estimated Marketing Fees for such month to Novation. Such payment will be adjusted to reflect the reconciliation between the actual Marketing Fees payable for the second month prior to such month with the estimated Marketing Fees actually paid during such prior month. Supplier will pay all estimated and adjusted Marketing Fees by check made payable to "Novation, LLC." All checks should reference the 14 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. Agreement number. Supplier will include with its check the reconciliation calculation used by Supplier to determine the payment adjustment, with separate amounts shown for each Client's component thereof. Checks sent by first class mail will be mailed to the following address: Novation 75 Remittance Dr., Suite 1420 Chicago, IL 60675-1420 Checks sent by courier (Federal Express, United Parcel Service or messenger) will be addressed as follows: The Northern Trust Company 801 S. Canal St. 4th Floor Receipt & Dispatch Chicago, IL 60607 Attn: Novation, Suite 1420 Telephone: (312) 630-8100, #9 10. ADMINISTRATIVE DAMAGES. Novation and Supplier agree that Novation would incur additional administrative costs if Supplier fails to provide notice of change in pricing terms as required in Subsection 2.e above, fails to provide reports as required in Section 7 above, or fails to pay Marketing Fees as required in Section 9 above, in each case within the time and manner required by this Agreement. Novation and Supplier further agree that the additional administrative costs incurred by Novation by reason of any such failure to Supplier is uncertain, and they therefore agree that the following schedule of administrative damages constitutes a reasonable estimation of such costs and were determined according to the principles of just compensation: 1st failure................................................................[**] 2nd failure:...............................................................[**] 3rd failure:...............................................................[**] 4th failure:...............................................................[**] 5th failure:...............................................................[**] 6th & each subsequent failure:.............................................[**] Novation's right to recover administrative damages in accordance with this Section is in addition to any other rights and remedies Novation or the Clients may have by reason of Supplier's failure to pay the Marketing Fees or provide the reports or notices within the time and manner required by this Agreement. 11. NONPAYMENT OR INSOLVENCY OF A MEMBER. If a Member fails to pay Supplier for Products, or if a Member becomes bankrupt or insolvent or makes an assignment for the benefit of creditors or goes into liquidation, or if proceedings are initiated for the purpose of having a 15 Confidential Materials omitted and filed separately with the Securities and Exchange commission. Asterisks denote omissions. receiving order or winding up order made against a Member, or if a Member applies to the court for protection from its creditors, then, in any such case, this Agreement will not terminate, but Supplier will have the right, upon prior written notice to Novation and the Member, to discontinue selling Products to that Member. 12. INSURANCE. a. POLICY REQUIREMENTS. Supplier will maintain and keep in force during the Term product liability, general public liability and property damage insurance against any insurable claim or claims which might or could arise regarding Products purchased from Supplier. Such insurance will contain a minimum combined single limit of liability for bodily injury and property damage in the amounts of not less than 2,000,000 per occurrence and [**] in the aggregate; will name Novation, the Clients and the Members, as their interests may appear, as additional insureds, and will contain an endorsement providing that the carrier will provide directly to all named insured copies of all notices and endorsements. Supplier will provide to Novation, within fifteen (15) days after Novation's request, an insurance certificate indicating the foregoing coverage, issued by an insurance company licensed to do business in the relevant states and signed by an authorized agent. b. SELF-INSURANCE. Notwithstanding anything to the contrary in Subsection 12.a above, Supplier may maintain a self-insurance program for all or any part of the foregoing liability risks, provided such self-insurance policy in all material respects complies with the requirements applicable to the product liability, general public liability and property damage insurance set forth in Subsection 12.a. Supplier will provide Novation, within fifteen (15) days after Novation's request: (1) the self-insurance policy; (2) the name of the company managing the self-insurance program and providing reinsurance, if any; (3) the most recent annual reports on claims and reserves for the program; and (4) the most recent annual actuarial report on such program. c. AMENDMENTS, NOTICES AND ENDORSEMENTS. Supplier will not amend, in any material respect that affects the interests of Novation, the Clients or the Members, or terminate said liability insurance or self-insurance program except after thirty (30) days' prior written notice to Novation and will provide to Novation copies of all notices and endorsements as soon as practicable after it receives or gives them. 13. COMPLIANCE WITH LAW AND GOVERNMENT PROGRAM PARTICIPATION. a. COMPLIANCE WITH LAW. Supplier represents and warrants that to the best of its knowledge, after due inquiry, it is in compliance with all federal, state and local statutes, laws, ordinances and regulations applicable to it ("Legal Requirements") which are material to the operation of its business and the conduct of its affairs, including Legal Requirements pertaining to the safety of the Products, occupational health and safety, environmental protection, nondiscrimination, antitrust, and equal employment opportunity. During the Term, Supplier will: (1) promptly notify Novation of any lawsuits, claims, administrative actions or other proceedings 16 asserted or commenced against it which assert in whole or in part that Supplier is in noncompliance with any Legal Requirement which is material to the operation of its business and the conduct of its affairs and (2) promptly provide Novation with true and correct copies of all written notices of adverse findings from the U.S. Food and Drug Administration ("FDA") and all written results of FDA inspections which pertain to the Products. b. GOVERNMENT PROGRAM PARTICIPATION. Supplier represents and warrants that it is not excluded from participation, and is not otherwise ineligible to participate, in a "Federal health care program" as defined in 42 U.S.C. ss. 1320a-7b(f) or in any other government payment program. In the event Supplier is excluded from participation, or becomes otherwise ineligible to participate in any such program during the Term, Supplier will notify Novation in writing within three (3) days after such event, and upon the occurrence of such event, whether or not such notice is given to Novation, Novation may immediately terminate this Agreement upon written notice to Supplier. 14. RELEASE AND INDEMNITY. SUPPLIER WILL RELEASE, INDEMNIFY, HOLD HARMLESS, AND, IF REQUESTED, DEFEND NOVATION, THE CLIENTS AND THE MEMBERS, AND THEIR RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS, SUBSIDIARIES, AFFILIATES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND AGAINST ANY CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY KIND OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS AGREEMENT; (2) THE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL, WORKMANSHIP, DESIGN OR MANUFACTURING; OR (3) THE WARNINGS AND INSTRUCTIONS ASSOCIATED WITH ANY PRODUCT. SUCH OBLIGATION TO RELEASE, INDEMNIFY, HOLD HARMLESS AND DEFEND WILL APPLY EVEN IF THE CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES ARE CAUSED BY THE NEGLIGENCE, GROSS NEGLIGENCE OR OTHER CULPABLE CONDUCT OF INDEMNITEES; PROVIDED, HOWEVER, THAT SUCH INDEMNIFICATION, HOLD HARMLESS AND RIGHT TO DEFENSE WILL NOT BE APPLICABLE WHERE THE CLAIM, LIABILITY, DAMAGE, ACTION, COST OR EXPENSE ARISES SOLELY AS A RESULT OF AN ACT OR FAILURE TO ACT OF INDEMNITEES. THIS SECTION AND THE OBLIGATIONS CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST SUPPLIER. 15. BOOKS AND RECORDS; FACILITIES INSPECTIONS.. Supplier agrees to keep, maintain and preserve complete, current and accurate books, records and accounts of the transactions contemplated by this Agreement and such additional books, records and accounts as are necessary to establish and verify Supplier's compliance with this Agreement. All such books, records and accounts will be available for inspection and audit by Novation representatives at any time during the Term and for two (2) years thereafter, but only during reasonable business hours and upon reasonable notice. Novation agrees that its routine audits will not be conducted more frequently than twice in any consecutive twelve (12) month period, subject to Novation's right to conduct 17 special audits whenever it deems it to be necessary. In addition, Supplier will make its manufacturing and packaging facilities available for inspection from time to time during the Term by Novation representatives, but only during reasonable business hours and upon reasonable notice. The exercise by Novation of the right to inspect and audit is without prejudice to any other or additional rights or remedies of either party. 16. USE OF NAMES, ETC. Supplier agrees that it will not use in any way in its promotional, informational or marketing activities or materials (i) the names, trademarks, logos, symbols or a description of the business or activities of Novation or any Client or Member without in each instance obtaining the prior written consent of the person owning the rights thereto; or (ii) the existence or content of this Agreement without in each instance obtaining the prior written consent of Novation. 17. CONFIDENTIAL INFORMATION. a. NONDISCLOSURE. Supplier agrees that it will: (1) keep strictly confidential and hold in trust all Confidential Information, as defined in Subsection 17.b below, of Novation, the Clients and the Members; (2) not use the Confidential Information for any purpose other than the performance of its obligations under this Agreement, without the prior written consent of Novation; (3) not disclose the Confidential Information to any third party (unless required by law) without the prior written consent of Novation; and (4) not later than thirty (30) days after the expiration or earlier termination of this Agreement, return to Novation, the Client or the Member, as the case may be, the Confidential Information. b. DEFINITION. "Confidential Information," as used in Subsection 17.a above, will consist of all information relating to the prices and usage of the Products (including all information contained in the reports produced by Supplier pursuant to Section 7 above) and all documents and other materials of Novation, the Clients and the Members containing information relating to the programs of Novation, the Clients or the Members of a proprietary or sensitive nature not readily available through sources in the public domain. In no event will Supplier provide to any person any information relating to the prices it charges the Members for Products ordered pursuant to this Agreement without the prior written consent of Novation. 18. MISCELLANEOUS. a. CHOICE OF LAW. This Agreement will be governed by and construed in accordance with the internal substantive laws of the State of Texas and the Texas courts will have jurisdiction over all matters relating to this Agreement; provided, however, the terms of any agreement between Supplier and a Member will be governed by and construed in accordance with the choice of law and venue provisions set forth in such agreement. 18 b. NOT RESPONSIBLE. Novation and the Clients and their subsidiaries and affiliates will not be responsible or liable for any Member's breach of any purchasing commitment or for any other actions of any Member. In addition, none of the Clients will be responsible or liable for the obligations of another Client or its subsidiaries or affiliates or the obligations of Novation or Supplier under this Agreement. c. THIRD PARTY BENEFICIARIES. All Clients and Members are intended third party beneficiaries of this Agreement. All terms and conditions of this Agreement which are applicable to the Clients will inure to the benefit of and be enforceable by the Clients and their respective successors and assigns. All terms and conditions of this Agreement which are applicable to the Members will inure to the benefit of and be enforceable by the Members and their respective successors and assigns. d. NOTICES. Except as otherwise expressly provided herein, all notices or other communications required or permitted under this Agreement will be in writing and will be deemed sufficient when mailed by United States mail, or delivered in person to the party to which it is to be given, at the address of such party set forth below: If to Supplier: To the address set forth by Supplier on the signature page of this Agreement If to Novation: Novation Attn: General Counsel 220 East Las Colinas Blvd. Irving, TX 75039 or such other address as the party will have furnished in writing in accordance with the provisions of this Subsection. e. NO ASSIGNMENT. No assignment of all or any part of this Agreement may be made without the prior written consent of the other party; except that Novation may assign its rights and obligations to any affiliate of Novation. Any assignment of all or any part of this Agreement by either party will not relieve that party of the responsibility of performing its obligations hereunder to the extent that such obligations are not satisfied in full by the assignee. This Agreement will be binding upon and inure to the benefit of the parties' respective successors and assigns. f. SEVERABILITY. Whenever possible, each provision of this Agreement will be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Agreement will be prohibited by or invalid under applicable law, such provision will be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provisions of this Agreement. Each party will, at its own 19 expense, take such action as is reasonably necessary to defend the validity and enforceability of this Agreement and will cooperate with the other party as is reasonably necessary in such defense. g. ENTIRE AGREEMENT. This Agreement, together with the exhibits listed below, will constitute the entire agreement between Novation and Supplier. This Agreement, together with the exhibits listed below and each Member's purchase order will constitute the entire agreement between each Member and Supplier. In the event of any inconsistency between this Agreement and a Member's purchase order, the terms of this Agreement will control, except that the Member's purchase order will supersede Sections 4 and 5 of this Agreement in the event of any inconsistency with such Sections. No other terms and conditions in any document, acceptance, or acknowledgment will be effective or binding unless expressly agreed to in writing. The following exhibits are incorporated by reference in this Agreement: Exhibit A Product and Service Description and Pricing Exhibit B Non-Price Specifications Exhibit C Special Conditions Exhibit D Effective Date Exhibit E Other Information Requirements [Other Exhibits Listed, if any] EXHIBIT F SUPPLIER: Aspect Medical Systems, Inc. ADDRESS: 2 Vision Dr Natick, MA 01760 SIGNATURE: /s/ J. Neal Armstrong TITLE: VP & CFO DATE: 8/13/99 NOVATION, LLC SIGNATURE: /s/ Edward Peterson TITLE: Group Sr. Vice President DATE: 8/10/99 20 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT A ASPECT MEDICAL SYSTEMS, INC. 1999 Sales Options A-2000 Revenue Units Only Novation A-2000 Monitor $[**] Sensors $[**] per case (case of [**] at $[**] each) - -------------------------------- ------------------------------------------------------------------------------ Price Per Monitor Sensor Contract Pricing Schedule* - -------------------------------- Annual Volume Unit Total Cost Per per Monitor Price Number of OR's Monitor ------------- ----- - -------------- -------------- Pricing Without Sensor Purchase Agreement 1 - 251 $[**] ------------------------------------------------------------------------------ 1 OR $[**] 2-5 OR's $[**] Pricing With Sensor Purchase Agreement 252 - 299 $[**] 6-12 OR's $[**] 300 - 359 $[**] 13-29 OR's $[**] 360 - 407 $[**] 20" OR's $[**] 408 - 455 $[**] - -------------------------------- 456 - 503 $[**] > 504 $[**] ------------------------------------------------------------------------------
1. SENSOR CONTRACT PRICING SCHEDULE * Customers must issue a P.O. which commits to a 12 month minimum purchase volume of a minimum of [**]. Sensor shipments must be rounded up to the nearest multiple of 25. Customers who use more sensors than contracted for during the 12 month period, which begins and has its anniversary on the date of the contract, will receive a year-end rebate from Aspect. For example: Customer who signs an agreement to purchase 300 sensors per year at $[**] but uses 456 sensors for the year will receive a rebate equal to $[**] (i.e. the difference Between $[**] and $[**] per sensor times the total sensors used). [Illegible Text] 2. RENTAL AGREEMENT OPTION: (a) $[**] per month monitor rental (b) $[**] per Sensor (c) [**] Months minimum rental 21 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1999 Fee For Use Pricing Schedule Assumes Monthly Purchases FOR INTERNAL USE ONLY LIST PRICING A-2000 Monitor $[**] Sensors @ $[**] per case of [**] ($[**]/sensor)
- ------------------------------------------------------------------------------ Total Value Per Monitor: $[**] Number of Monitors: [**] Number of Sensor Purchases/Year: [**] ---------------------------------------------------------------- 12 Months 24 Months 36 Months 48 Months 60 Months Annual Sensor --------- --------- --------- --------- --------- Usage Per Monitor Unit Price Unit Price Unit Price Unit Price Unit Price - ------------- ---------- ---------- ---------- ---------- ---------- [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------ Total Value Per Monitor: $[**] Number of Monitors: $[**] Number of Sensor Purchases/Year: $[**] ---------------------------------------------------------------- 12 Months 24 Months 36 Months 48 Months 60 Months Annual Sensor --------- --------- --------- --------- --------- Usage Per Monitor Unit Price Unit Price Unit Price Unit Price Unit Price - ------------- ---------- ---------- ---------- ---------- ---------- [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] - -------------------------------------------------------------------------------
22 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1999 Fee For Use Pricing Schedule Assumes Monthly Purchases FOR INTERNAL USE ONLY LIST PRICING A-2000 Monitor $[**] Sensors @ $[**] per case of [**] ($[**]/sensor)
- ------------------------------------------------------------------------------ Total Value Per Monitor: $[**] Number of Monitors: [**] Number of Sensor Purchases/Year: [**] ---------------------------------------------------------------- 12 Months 24 Months 36 Months 48 Months 60 Months Annual Sensor --------- --------- --------- --------- --------- Usage Per Monitor Unit Price Unit Price Unit Price Unit Price Unit Price - ------------- ---------- ---------- ---------- ---------- ---------- [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------ Total Value Per Monitor: $[**] Number of Monitors: [**] Number of Sensor Purchases/Year: [**] ---------------------------------------------------------------- 12 Months 24 Months 36 Months 48 Months 60 Months Annual Sensor --------- --------- --------- --------- --------- Usage Per Monitor Unit Price Unit Price Unit Price Unit Price Unit Price - ------------- ---------- ---------- ---------- ---------- ---------- [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] [**] $[**] $[**] $[**] $[**] $[**] - -------------------------------------------------------------------------------
23 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 1999 Fee For Use Pricing Schedule Assumes Monthly Purchases FOR INTERNAL USE ONLY LIST PRICING A-2000 Monitor $[**] Sensors @ $[**] per case of [**] ($[**]/sensor) USAGE AGREEMENTS: - - Customer will be invoiced for [**] sensors per month per monitor to meet minimum commitment of [**] sensors per monitor per year. Sensor shipments must be rounded up to the nearest multiple of [**]. - - Warranty and software upgrades are included with each usage agreement for the life of the agreement. - - After the minimum commitment is met, pricing reverts to the then current Sensor Pricing Schedule. 24 Confidential materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B Non-Price Specifications The term of the contract is three (3) years, commencing on September 01, 1999 through August 30, 2002, with [**] one-year renewals. Pricing will be firm from [**]. Aspect Medical agrees to pay Novation a marketing fee to be defined as [**} on all Novation contracted sales. Warranty as expressed in 5(a) is valid from one [**] from the date purchase. 25 EXHIBIT C SPECIAL CONDITIONS N/A 26 EXHIBIT D EFFECTIVE DATE This Agreement will be effective on September 01, 1999 Through August 30, 2002. 27 EXHIBIT E OTHER INFORMATION REQUIREMENTS Novation and Supplier desire to facilitate contract administration transactions ("Transactions") by electronically transmitting and receiving data in agreed formats in substitution for conventional paper-based documents and to assure that such Transactions are not legally invalid or unenforceable as a result of the use of available electronic technologies for the mutual benefit of the parties. The parties agree as follows: 1. PREREQUISITES. a.a DOCUMENTS; STANDARDS. Each party will electronically communicate to or receive from the other party all of the required documents listed in the Novation Electronic Communication Requirements Schedule attached hereto (collectively "Documents"). All Documents will be communicated in accordance with the standards set forth in the applicable sections of the Novation Information Requirements Guidebook ("Guidebook"). Supplier agrees that the Guidebook is the Confidential Information of Novation and will not disclose information contained therein to any other party. a.b. THIRD PARTY SERVICE PROVIDERS. Document swill be communicated electronically to each party, as specified in the Guidebook, through any third party service provider ("Provider") with which either party may contract or VHAseCure.net(TM). Either party may modify its election to use, not use or change a Provider upon thirty (30) days' prior written notice. Each party will be responsible for the costs of any Provider with which it contracts, unless the parties otherwise mutually agree in writing. a.c. SIGNATURES. Each party will adopt as its signature an electronic identification consisting of symbol(s) or code(s) which are to be affixed to or contained in each Document transmitted by such Party ("Signatures"). Each party agrees that any Signature of such party affixed to or contained in any transmitted Document will be sufficient to verify such party originated and intends to be bound by such Document. Neither party will disclose to any unauthorized person the Signatures of the other party. 2. TRANSMISSIONS. b.a. VERIFICATION. Upon proper receipt of any Document, the receiving party will promptly and properly transmit a functional acknowledgement in return, unless otherwise specified in the Guidebook. b.b. ACCEPTANCE. If acceptance of a Document is required by the Guidebook, any such Document which has been properly received will not give rise to any obligation unless and until the party initially transmitting such Document has properly received in return an Acceptance Document (as specified in the Guidebook). 28 b.c. GARBLED TRANSMISSION. If any properly transmitted Document is received in an unintelligible or garbled form, the receiving party will promptly notify the originating party (if identifiable from the received Document) in a reasonable manner. In the absence of such a notice, the originating party's records of the contents of such Document will control. 3. TRANSACTION TERMS. c.a. CONFIDENTIALITY. No information contained in any Document or otherwise exchanged between the parties will be considered confidential, except to the extent provided by written agreement between the parties, or by applicable law. c.b. VALIDITY; ENFORCEABILITY. Any Document properly transmitted pursuant to this Agreement will be considered, in connection with any Transaction, to be a "writing" or "in writing" and any such Document when containing, or to which there is affixed, a Signature ("Signed Documents") will be deemed for all purposes to have been "signed" and to constitute an "original" when printed from electronic files or records established and maintained in the normal course of business. 4. STANDARDS. ASC x 12 - Novation Information Requirements Guidebook 5. THIRD PARTY SERVICE PROVIDERS. (If the parties will be transmitting Documents directly, insert "NONE")
COMPANY VAN NAME ADDRESS TELEPHONE - ------- -------- ------- --------- NUMBER ------ Novation AT&T 12976 Hollander Drive 800/624-5672 Bridgeton, MO 63044
6. CONTRACT PRICING (PHARMACY). Supplier will transmit contract pricing information electronically, to include new contracts, contract renewals and any changes to a current contract. This will be sent in a timely manner and in compliance with ANSI ASC X12-845 (Price Authorization) and Novation Contract Pricing Guidelines. Contract pricing information will include the following: -2- 29 Supplier Identification Number HIN (Health Industry Number if Supplier is a HIN subscriber) DEA Number (if HIN is not available) Supplier Assigned Number (if HIN and DEA are not available) Supplier Name Supplier Contract Number MFG Contract Number Contract Effective Date Contract Expiration Date Member(s) (Member name, HIN or DEA number, Member start/stop dates) Product Identifier NDC UPC (if NDC is not available) Trade Name Package Count Package UOM Selling Unit Price Item Contract Effective Date Item Contract Expiration Date 7. CONTRACT PRICING (MEDICAL/SURGICAL). Supplier will communicate contract pricing information electronically, to include new contracts, contract renewals and any changes to the current contract. This will be sent in a timely manner and in compliance with the Guidebook. -3- 30 NOVATION ELECTRONIC COMMUNICATION REQUIREMENTS SCHEDULE This form is being completed by: Date: - -------------------------------- ---------------- (Your Name) Your Company Name: Your Title: - -------------------------------- ---------------- Phone: E-mail: ---------------------- ----------------- Fax: ------------------------ Please complete the following questionnaire. Your answers to the following will be used for planning purposes by the Novation Information Services staff. If your company can already send the listed electronic information, please note this in the date field.
WHEN WILL YOUR COMPANY MEET THIS REQUIREMENT NOVATION REQUIREMENT NOVATION EXPECTATION (MM/DD/YY) - --------------------- ---------------------------------- ----------------------------- REQUIREMENT 1: This only applies to new contracts, Your Novation product manager New Contract Launch unless your company never provided will address this as new this information. If needed, your contracts are negotiated. See Section 4.2 Novation product manager will contact you. DUE AT CONTRACT SIGNING - ----------------------------------------------------------------------------------------------- REQUIREMENT 2: Novation must receive contract item Date: ____/____/____ Ongoing Contract and pricing updates as prices change, Maintenance and when items are added or deleted Will send information via from contract. (check one): See Section 4.3 DUE 60 DAYS PRIOR TO THE EFFECTIVE ( ) EDI 832 DATE OF THE LINE ITEM ( ) Novation Interim File ADD/DELETE/CHANGE Format - ----------------------------------------------------------------------------------------------- REQUIREMENT 3A: Current paper reports must be Date: ____/____/____ Summary Sales converted to electronic reporting Reporting IMMEDIATELY. This will not be needed You will report sales by once your company can report line ( ) LIC or ( ) HIN See Section 4.4.2 item sales. See Requirement 3B. One or the other MUST BE USED Due at the first contract reporting period. - ----------------------------------------------------------------------------------------------- REQUIREMENT 3B: Instead of monthly summary reports, Date: ____/____/____ Detailed Line Item detailed line item reports will be You will report sales by Sales Reporting sent electronically. Plan for a 90- ( ) LIC Number or ( ) HIN day testing period before stopping ( ) Interim File or See Section 4.4.3 Requirement 3A. ( ) EDI 867 BEGIN TESTING WITHIN 120 DAYS OF If using Interim file, CONTRACT EFFECTIVE DATE proposed date for converting to EDI. Date: ____/____/____ One or the other MUST BE USED - ----------------------------------------------------------------------------------------------- REQUIREMENT 4: You must be able to receive and Date: ____/____/____ Membership process periodic membership updates. DUE IMMEDIATELY See Section 4.5 - ----------------------------------------------------------------------------------------------- REQUIREMENT 5: Details which members have and have Date: ____/____/____ Commitment Forms not signed your contract enrollment forms, if needed. DUE IMMEDIATELY, IF APPLICABLE See Section 4.6 - ----------------------------------------------------------------------------------------------- REQUIREMENT 6: Able to update Sale Representative Date: ____/____/____
31
- --------------------- ---------------------------------- ----------------------------- Sales Representative information from a Business Partner Contact Information Repository System download. DUE WITHIN 30 DAYS OF CONTRACT See Section 4.7 SIGNING - ----------------------------------------------------------------------------------------------- REQUIREMENT 7: Able to update the items on contract Date: ____/____/____ Product Cross- with competitive cross-reference referencing information DUE WITHIN 90 DAYS OF CONTRACT See Section 4.8 SIGNING - ----------------------------------------------------------------------------------------------- Business Partner Able to connect to Novation BPRS Date: ____/____/____ Repository System via the VHAseCURE.neta. How many of your company (BPRS) Access DUE WITHIN 60 DAYS OF CONTRACT employees need access to your SIGNING Novation BPRS site? ______ See Section 3.0 - -----------------------------------------------------------------------------------------------
RETURN WITHIN 30 DAYS TO: Bill King, Manager, Supply Partner Operations, Novation LLC, 220 East Las Colinas Blvd., Irving, TX 75039 Telephone: (972) 581-5022, Fax: (972) 581-5154, E-mail: bking@novationco.com 32 Exhibit F Exceptions SUPPLIER NAME: ASPECT MEDICAL SYSTEMS, INC. ----------------------------------------------------------------- PRINTED NAME: J. Neal Armstrong ----------------------------------------------------------------- AUTHORIZED SIGNATURE: /s/ J. Neal Armstrong ---------------------------------------------------------- TITLE: Vice President and Chief Financial Officer ------------------------------------------------------------------------- DATE: 6/15/99 --------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------ Page Paragraph Exception No. No. - ------------------------------------------------------------------------------------------------------------------------ 1 2. a. Is changed to read as follows: PURCHASE OF PRODUCTS. Novation and Supplier hereby agree that Supplier will make the Products available for purchase by the Members at the Contract Prices in accordance with the terms of this Agreement; provided, however, that this Agreement will not constitute a commitment by any person to purchase any of the Products. 1 2.b. Is changed to read as follows: OPTIONAL PURCHASING ARRANGEMENT. Novation and Supplier agree that each Member will have the option of purchasing the Products under the terms of this Agreement or under the terms of any other purchasing or pricing arrangement that may exist between such Member and Supplier at any time during the Term; Supplier will use its best efforts to report to Novation sales of Products to Members in accordance with Sections 7 and 9 below. If any Member uses any other purchasing or pricing arrangement with Supplier when ordering products covered by any contract between Supplier and Novation, Supplier will notify any such Member included in the most recent database supplied by Novation of the pricing and other significant terms of the applicable Novation contract. - ------------------------------------------------------------------------------------------------------------------------
Page 1 of 7 Pages 33 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.
- ------------------------------------------------------------------------------------------------------------------------ 2 2.c. Is changed to read as follows: MARKET COMPETITIVE TERMS. Supplier agrees that the prices, quality, value and technology of all Products purchased under this Agreement will remain market competitive at all times during the Term. Supplier will [**] applicable to the purchase of the Products as necessary to assure market competitiveness. During the term of this Agreement, Supplier agrees to offer Products under this Agreement [**]. If at any time during the Term Novation receives information from any source suggesting that Supplier's prices, quality, value or technology are not market competitive, Novation may provide written notice of such information to Supplier, and Supplier will, within [**] advise Novation in writing of and fully implement all adjustments necessary to assure market competitiveness. - ------------------------------------------------------------------------------------------------------------------------ 2 2.d. Is changed to read as follows: CHANGES IN CONTRACT PRICES. Subject to Subsection 2.e. below, unless otherwise expressly agreed in any exhibit to this Agreement, the Contract Prices will not be increased and any discount will not be eliminated or reduced during the Term. In addition to any changes made to assure market competitiveness, Supplier may lower the Contract Prices or increase any discount applicable to the purchase of the Products at any time. - ------------------------------------------------------------------------------------------------------------------------ 2 2.f. Is changed to read as follows: UNDERUTILIZED BUSINESSES. Certain Members may be required by law, regulation and/or internal policy to do business with underutilized businesses such as Minority Business Enterprises (MBE), Disadvantaged Business Enterprises (DBE), Small Business Enterprises (SBE), Historically Underutilized Businesses (HUB) and/or Women-owned Business Enterprises (WBE). To assist Novation in helping Members meet these requirements, Supplier will use its best efforts to comply with all Novation policies and programs with respect to such businesses and will use its best efforts to provide, on request, Novation or any Member with statistical or other information with respect to Supplier's utilization of such businesses as a vendor, distributor, contractor or subcontractor. - ------------------------------------------------------------------------------------------------------------------------ 3 3.b. Is changed to read as follows: TERMINATION BY NOVATION. Novation may terminate this Agreement at any time for any reason whatsoever by delivering not less than [**] prior written notice thereof to Supplier. In addition, Novation may terminate this Agreement immediately by delivering written notice thereof to Supplier upon the occurrence of either of the following events: (0)1 Supplier breaches this Agreement and any such breach, except for a monetary breach or breach of Section 13, which will warrant immediate termination, is not cured within [**] after written notice from Novation to Supplier; or (0)2 Supplier becomes insolvent or goes into liquidation or proceedings are initiated by Supplier or against Supplier for the purpose of having a receiving order or winding up order made against Supplier, or Supplier applies to the courts for protection from its creditors. Novation's right to terminate this Agreement due to Supplier's breach in accordance with this Subsection is in addition to any other rights and remedies Novation, the Clients or the Members may have resulting from such breach, including, but not limited to, Novation's and the Clients' right to recover all loss of Marketing Fees resulting from such breach through the date of termination. - ------------------------------------------------------------------------------------------------------------------------ 3 3.c. Is changed to read as follows: TERMINATION BY SUPPLIER. Supplier may terminate this Agreement at any time for any reason whatsoever by delivering not less than [**] prior written notice thereof to Novation. In addition, Supplier may terminate this agreement immediately by delivering written notice thereof to Novation upon the occurrence of either of the following events: (1) Novation breaches this Agreement and any such breach, except for a breach of Section 13, which will warrant immediate termination, is not cured within [**] after written notice from Supplier to Novation; or (2) Novation becomes insolvent or goes into liquidation or proceedings are initiated by Novation or against Novation for the purpose of having a receiving order or winding up order made against Novation, or Novation applies to the courts for protection from its creditors. - ------------------------------------------------------------------------------------------------------------------------
Page 2 of 7 Pages 34 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.
- ------------------------------------------------------------------------------------------------------------------------ 3 4.a. Is changed to read as follows: DELIVERY AND INVOICING. On and after the Effective Date, Supplier agrees to deliver Products ordered by the Members to the Members, FOB destination, and will direct its invoices to the Members in accordance with this Agreement. Supplier agrees to prepay and add to the invoice charges, if any, for transporting Products to the Members. Payment terms are Net 30 days. Supplier will make whatever arrangements are reasonably necessary with the Members to implement the terms of this Agreement; provided, however, Supplier will not impose any purchasing commitment on any Member as a condition to the Member's purchase of any Products pursuant to this Agreement, unless Member enters into an Agreement with Supplier that requires minimum purchases. - ------------------------------------------------------------------------------------------------------------------------ 3 4.b. Is changed to read as follows: PRODUCT FILL RATES; CONFIRMATION AND DELIVERY TIMES. Supplier agrees to provide product fill rates to the Members of greater than ninety-five percent (95%), calculated as line item orders. All products shall be ordered in writing, specifying the product type, number of units, desired delivery date and means of shipment. Purchase orders may be sent by fascimile machine. Such orders shall be considered to have been accepted by Supplier unless Supplier otherwise notifies Member. Supplier's notification may be verbal or sent by fascimile machine. - ------------------------------------------------------------------------------------------------------------------------ 4 4.d. Is changed to read as follows: DISCONTINUATION OF PRODUCTS; CHANGES IN PACKAGING. Supplier will have no unilateral right to discontinue any of the Products or to make any changes in packaging which render any of the Products substantially different in use, function or distribution. Supplier shall [**] any Products which may [**] any of the Products [**] to the [**]. In the event Supplier [**] in addition to any other rights and remedies Novation or the Members may have by reason of such [**], (i) Novation will have the [**] any or all of the Product(s) subject to such [**] any of the products [**] this Agreement [**] of the [**] which may [**] any of the Products [**] or any time thereafter [**] to Supplier. - ------------------------------------------------------------------------------------------------------------------------ 4 4.e. Is changed to read as follows: REPLACEMENT OR NEW PRODUCTS. Supplier will have no unilateral right to replace any of the Products listed in Exhibit A with other products or to add new products to this Agreement. Supplier may [**], and such agreement shall [**] of any of the Products or the [**] product that is [**] to the [**] of the [**] or to the [**]any Product [**] product [**] to this Agreement be [**] agreement, and such agreement shall [**] to the [**] product. - ------------------------------------------------------------------------------------------------------------------------ 5 4.g. This subsection is deleted in its entirety. - ------------------------------------------------------------------------------------------------------------------------ 5 4.h. Is changed to read as follows: RETURN OF PRODUCTS. Any Member, in addition to and not in limitation of any other rights and remedies, will have the right to return Products to Supplier under any of the following circumstances: (1) the Product is [**]; (2) the Product is [**] or is [**]; (3) the Product is [**], or is [**]; (4) the Product is [**] or the [**]; and (5) the Product is [**]. Supplier agrees to accept the return of Products under these circumstances without charge and for full credit. - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ 5 4.i. Is changed to read as follows: FAILURE TO SUPPLY. In the event of Supplier's failure to perform its supply obligations in accordance with the terms of this Section 4, Novation may terminate this Agreement in accordance with the terms of Subsection 3.b. The remedies set forth in this Subsection are in addition to any other rights and remedies Novation, the Clients or the Members may have resulting from such failure. - ------------------------------------------------------------------------------------------------------------------------ 5 5.a. This subsection is deleted in its entirety and replaced with the following: WARRANTY. Subject to the limitations set forth in this Section 5, Supplier warrants to the Members that all Products purchased from Supplier shall be free from defects in materials and workmanship, when given normal, proper and intended usage and maintenance, for a period of one year from the date of shipment to Member. Supplier agrees during the warranty period to replace or repair all defective Products to proper operating condition in accordance with Supplier's published specifications for such Products. All defective parts must be returned, transportation prepaid, to Supplier's offices in Natick, MA. All replaced parts shall become Supplier's property on an exchange basis. Replacement parts may be new or refurbished, at the election of Supplier. The foregoing warranties shall not apply to expendable components, nor shall Supplier have any obligation under this Agreement to make repairs or replacements which are required by normal wear and tear, or which result, in whole or in part, from catastrophe, fault or negligence, or from improper or unauthorized use or repair of the Products, or use of the Products in a manner for which they were not designed, or by causes external to the Products such as, but not limited to, power or air conditioning failure. EXCEPT AS STATED ABOVE, SUPPLIER DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO THE PRODUCTS, INCLUDING WITHOUT LIMITATION ALL IMPLIED WARRANTIES OF FITNESS FOR ANY PARTICULAR PURPOSE. SUPPLIER'S LIABILITY FOR DAMAGES TO MEMBER FOR ANY CAUSE WHATSOEVER, REGARDLESS OF THE FORM OF ANY CLAIM OR ACTION, SHALL NOT EXCEED THE AGGREGATE PRICE PAID FOR PRODUCTS UNDER THIS AGREEMENT. SUPPLIER SHALL IN NO EVENT BE LIABLE FOR ANY LOSS OF DATA, PROFITS OR USE OF THE PRODUCTS OR FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING HEREUNDER. IN NO EVENT WILL SUPPLIER BE LIABLE TO MEMBERS OR OTHER THIRD PARTIES FOR ANY DAMAGES, INCLUDING BUT NOT LIMITED TO: (i) DAMAGES CAUSED BY MEMBER'S FAILURE TO PERFORM ITS COVENANTS AND RESPONSIBILITIES; (ii) DAMAGES CAUSED BY REPAIRS OR ALTERATIONS DONE WITHOUT SUPPLIER'S WRITTEN APPROVAL; (iii) DAMAGES DUE TO DETERIORATION DURING PERIODS OF STORAGE BY MEMBER OR ITS CUSTOMERS; OR (iv) LOSS OF DATA, PROFITS OR USE OF THE PRODUCTS OR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN CONNECTION WITH THE USE OR PERFORMANCE OF THE PRODUCTS. NOVATION WARRANTIES. Novation acting on its own behalf only, shall extend a written warranty at least as favorable to its customers as the warranty extended to it by Supplier above, in connection with each sale or license of Products. Novation shall perform and fulfill all of the terms and conditions of each such warranty. All labor costs for warranty work shall be borne by Novation and shall not be passed on to customers. Novation shall promptly notify Supplier of all warranty claims. INDEMNIFICATION BY NOVATION. To the extent a claim or action is brought against Supplier based on or related to Novation's failure to observe or perform its obligations under this Agreement, including its obligation to notity customers of limitations and disclaimers of warranties and liabilities, Novation shall defend and hold Supplier harmless from and against any and all damages, costs and expenses, including reasonable attorneys' fees, suffered by or awarded against Supplier. - ------------------------------------------------------------------------------------------------------------------------ 6 5.c. This subsection is deleted in its entirety and replaced with the following: INFRINGEMENT INDEMNIFICATION BY SUPPLIER. Upon prompt notification in writing of any action (and all prior related claims) brought against Novation based on a claim that the Products infringe any valid United States patent, trademark, copyright or trade secret, Supplier shall defend such action at its expense and pay all costs and damages finally awarded in such action or settlement which are attributable to such claim, provided that the failure to so notify the Supplier shall not relieve it from any obligation which it may have hereunder or otherwise, except to the extent such failure prejudices the Supplier's rights in any way. Supplier shall have sole control of the defense of any such action and all negotiations for its settlement or compromise. Novation shall cooperate fully with Supplier in the defense, settlement or compromise of any such action. In the event that a final injunction is obtained against Novation's use of the Product by reason of infringement of a valid United States patent, copyright or trade secret, or if in the opinion of Supplier the Product is likely to become the subject of a successful claim of such infringement, Supplier may, at its option and expense, (i) procure for Novation the right to continue using the Product, (ii) replace or modify the Product so that it becomes non-infringing (so long as its functionality is essentially unchanged), or (iii) if neither (i) or (ii) are reasonably available to Supplier, terminate the AGREEMENT FOR THE PRODUCT. Notwithstanding the foregoing, Supplier shall have no liability to Novation to the extent that any infringement or claim thereof is based upon (i) use of any Product in combination with equipment or software not supplied by Supplier where the Product would not itself be infringing, (ii) compliance with designs, specifications or instructions of Novation or any or its Members (while it is understood by the parties that Novation does not currently and does not intend to provide designs, specifications or instructions), (iii) use of any Product in an application or environment for which it was not designed or not contemplated hereunder, (iv) modifications of the Products by anyone other than Supplier, or (v) any claims of infringement of any patent, copyright or trade secret in which Novation or any affiliate or customer of Novation has an interest or license. THE FOREGOING INDEMNIFICATION PROVISIONS STATE THE ENTIRE LIABILITY OF SUPPLIER WITH RESPECT TO INFRINGEMENT OR ALLEGED INFRINGEMENT OF PATENTS, COPYRIGHTS, TRADEMARKS, TRADE SECRETS AND OTHER INTELLECTUAL PROPERTY OR PROPRIETARY RIGHTS BY THE PRODUCTS. INFRINGEMENT INDEMNIFICATION BY NOVATION. Novation shall indemnify, defend and hold harmless Supplier against all claims, liabilities, damages, expenses, judgments and losses (including reasonable attorneys' fees) arising from (i) infringement or alleged infringement of any patent, copyright, trade secret, trademark or other intellectual property or proprietary right as a result of compliance by Supplier with the designs, specifications or instructions of Novation or any of its Members (while it is understood by the parties that Novation does not currently and does not intend to provide designs, specifications or instructions), (ii) Novation's breach of any of its obligations hereunder, and (iii) Novation's use and/or misuse of the Products (while it is understood by the parties that Novation does not currently and does not intend to use the Product). OWNERSHIP OF PATENT AND TRADEMARKS. All patents, trademarks, trade names, copyrights and designs in relation to the Products and the literature supplied in connection therewith shall be and remain the property of Supplier and no rights to duplicate such property shall accrue to Novation, the Clients or Members as a result of this Agreement unless expressly provided herein or unless written permission is granted by Supplier. Supplier represents and warrants that, to the best of its knowledge, the products do not infringe any United States patent, trademark, copyright or trade secret of any third party. - ------------------------------------------------------------------------------------------------------------------------ 6 5.f. Is changed to read as follows: SHELF LIFE. Sterile Products and other Products with a limited shelf life sold under this Agreement will have the longest possible shelf life and the latest possible expiration dates. Unless required by stability considerations, there will not be less than a [**] interval between a Product's date of delivery by Supplier to the Member and its expiration date. - -----------------------------------------------------------------------------------------------------------------------
Page 3 of 7 Pages 35 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.
- ------------------------------------------------------------------------------------------------------------------------ 6 6.a. through e. Is changed to read as follows: a. DEFINITIONS. FOR PURPOSES OF THIS SECTION, THE FOLLOWING TERMS HAVE THE RESPECTIVE MEANINGS GIVEN BELOW: (1) "SYSTEMS" MEANS ANY OF THE PRODUCTS, SYSTEMS OF DISTRIBUTION FOR PRODUCTS [**] THAT CONSIST OF OR INCLUDE ANY [**] (WHETHER GENERAL OR SPECIAL PURPOSE), THAT ARE PROVIDED BY OR THROUGH SUPPLIER PURSUANT TO THIS AGREEMENT, OR ANY [**] PROVIDED BY OR THROUGH SUPPLIER IN CONNECTION THEREWITH. (2) "CALENDAR-RELATED" REFERS TO DATE VALUES BASED ON THE "GREGORIAN CALENDAR" (AS DEFINED IN THE ENCYCLOPEDIA BRITANNICA, 15TH EDITION, 1982, PAGE 602) AND TO ALL USES IN ANY MANNER OF THOSE DATE VALUES, INCLUDING WITHOUT LIMITATION MANIPULATIONS, CALCULATIONS, CONVERSIONS, COMPARISONS, AND PRESENTATIONS. (3) "CENTURY NONCOMPLIANCE" MEANS ANY ASPECTS OF THE SYSTEMS THAT FAIL TO SATISFY THE REQUIREMENTS SET FORTH IN SUBSECTION 6.B BELOW. b. REPRESENTATIONS. SUPPLIER WARRANTS, REPRESENTS AND AGREES THAT THE SYSTEMS SATISFY THE FOLLOWING REQUIREMENTS: (1) IN CONNECTION WITH THE USE AND PROCESSING OF CORRECTLY ENTERED AND FORMATTED CALENDAR-RELATED DATA, THE SYSTEMS WILL NOT MALFUNCTION, WILL NOT CEASE TO FUNCTION, WILL NOT GENERATE INCORRECT DATA, AND WILL NOT PRODUCE INCORRECT RESULTS. (2) IN CONNECTION WITH PROVIDING CALENDAR-RELATED DATA TO AND ACCEPTING CORRECTLY ENTERED AND FORMATTED CALENDAR-RELATED DATA FROM OTHER AUTOMATED, COMPUTERIZED, AND/OR SOFTWARE SYSTEMS AND USERS VIA USER INTERFACES, ELECTRONIC INTERFACES, AND DATA STORAGE, THE SYSTEMS REPRESENT DATES WITHOUT AMBIGUITY AS TO CENTURY. (3) THE YEAR COMPONENT OF CALENDAR-RELATED DATA THAT IS PROVIDED BY THE SYSTEMS TO OR THAT IS ACCEPTED BY THE SYSTEMS FROM OTHER AUTOMATED, COMPUTERIZED, AND/OR SOFTWARE SYSTEMS AND USER INTERFACES, ELECTRONIC INTERFACES, AND DATA STORAGE IS REPRESENTED IN A FOUR-DIGIT CCYY FORMAT, WHERE CC REPRESENTS THE TWO DIGITS EXPRESSING THE CENTURY AND YY REPRESENTS THE TWO DIGITS EXPRESSING THE YEAR WITHIN THAT CENTURY (E.G., 1996 OR 2003). (0)3 SUPPLIER HAS VERIFIED THROUGH TESTING THAT THE SYSTEMS SATISFY THE REQUIREMENTS OF THIS SUBSECTION INCLUDING, WITHOUT LIMITATION, TESTING OF EACH OF THE FOLLOWING SPECIFIC DATES AND THE TRANSITION TO AND FROM EACH SUCH DATE: SEPTEMBER 9, 1999; SEPTEMBER 10, 1999; DECEMBER 31, 1999; JANUARY 1, 2000; FEBRUARY 28, 2000; FEBRUARY 29, 2000; MARCH 1, 2000; DECEMBER 31, 2000; JANUARY 1, 2001; DECEMBER 31, 2004; AND JANUARY 1, 2005. c. REMEDIES. IN THE EVENT OF ANY CENTURY NONCOMPLIANCE IN THE SYSTEMS IN ANY RESPECT, IN ADDITION TO ANY OTHER REMEDIES THAT MAY BE AVAILABLE TO NOVATION OR THE MEMBERS, SUPPLIER WILL, AT NO COST TO THE MEMBERS, PROMPTLY UNDER THE CIRCUMSTANCES (BUT, IN ALL CASES, WITHIN THIRTY (30) DAYS AFTER RECEIPT OF A WRITTEN REQUEST FROM ANY MEMBER, UNLESS OTHERWISE AGREED BY THE MEMBER IN WRITING) ELIMINATE THE CENTURY NONCOMPLIANCE FROM THE SYSTEMS. d. NONCOMPLIANCE NOTICE. IN THE EVENT SUPPLIER BECOMES AWARE OF (i) ANY POSSIBLE OR ACTUAL CENTURY NONCOMPLIANCE IN THE SYSTEMS OR (ii) ANY INTERNATIONAL, - ------------------------------------------------------------------------------------------------------------------------
Page 4 of 7 Pages 36 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.
- ------------------------------------------------------------------------------------------------------------------------ 9 7.b. IS CHANGED TO READ AS FOLLOWS: REPORT FORMAT AND DELIVERY. THE REPORTS REQUIRED BY THIS SECTION WILL BE SUBMITTED ELECTRONICALLY IN EXCEL 97 OR ACCESS 97 AND IN ACCORDANCE WITH OTHER SPECIFICATIONS ESTABLISHED BY NOVATION FROM TIME TO TIME AND WILL BE DELIVERED TO: NOVATION ATTN: SRIS OPERATIONS 220 EAST LAS COLINAS BOULEVARD IRVING, TX 75039 - ------------------------------------------------------------------------------------------------------------------------ 9 7.c. IS CHANGED TO READ AS FOLLOWS: OTHER INFORMATION REQUIREMENTS. IN ADDITION TO THE REPORTING REQUIREMENTS SET FORTH IN SUBSECTIONS 7.a AND 7.b ABOVE, THE PARTIES AGREE, TO THE EXTENT PRACTICAL, TO FACILITATE THE ADMINISTRATION OF THIS AGREEMENT BY TRANSMITTING AND RECEIVING INFORMATION ELECTRONICALLY. - ------------------------------------------------------------------------------------------------------------------------ 9 9.a. IS CHANGED TO READ AS FOLLOWS: CALCULATION. SUPPLIER WILL PAY TO NOVATION, AS THE AUTHORIZED COLLECTION AGENT FOR EACH OF THE CLIENTS AND CERTAIN OF EACH CLIENT'S SUBSIDIARIES AND AFFILIATES, RESPECTIVELY (AND NOT COLLECTIVELY), MARKETING FEES ("MARKETING FEES") BELONGING TO ANY OF THE CLIENTS OR CERTAIN OF THEIR SUBSIDIARIES OR AFFILIATES EQUAL TO THE AGREED PERCENTAGE OF THE AGGREGATE GROSS CHARGES OF ALL NET SALES OF THE PRODUCTS TO THE MEMBERS DIRECTLY OR INDIRECTLY FROM SUPPLIER, WHETHER UNDER THE PRICING AND OTHER TERMS OF THIS AGREEMENT OR UNDER THE TERMS OF ANY OTHER PURCHASING OR PRICING ARRANGEMENTS THAT MAY EXIST BETWEEN THE MEMBERS AND SUPPLIER.[**] WILL BE DETERMINED [**] OF THE PRODUCTS [**] AND THE PROVISION OF ANY OTHER SERVICES LISTED ON EXHIBIT A. [**] THE DUE DATE OF THE INVOICE. THESE [**] WILL BE MADE [**] WILL BE [**]. THE "AGREED PERCENTAGE" WILL BE DEFINED IN THE NON-PRICE SPECIFICATIONS. - ------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------ 10 10 IS CHANGED TO READ AS FOLLOWS: ADMINISTRATIVE DAMAGES. NOVATION AND SUPPLIER AGREE THAT NOVATION WOULD INCUR ADDITIONAL ADMINISTRATIVE COSTS IF SUPPLIER FAILS TO PROVIDE NOTICE OF CHANGE IN PRICING TERMS AS REQUIRED IN SUBSECTION 2.e ABOVE, FAILS TO PROVIDE REPORTS AS REQUIRED IN SECTION 7 ABOVE, OR FAILS TO PAY MARKETING FEES AS REQUIRED IN SECTION 9 ABOVE, IN EACH CASE WITHIN THE TIME AND MANNER REQUIRED BY THIS AGREEMENT. NOVATION AND SUPPLIER FURTHER AGREE THAT THE ADDITIONAL ADMINISTRATIVE COSTS INCURRED BY NOVATION BY REASON OF ANY SUCH FAILURE TO SUPPLIER IS UNCERTAIN, AND THEY THEREFORE AGREE THAT THE FOLLOWING SCHEDULE OF ADMINISTRATIVE DAMAGES CONSTITUTES A REASONABLE ESTIMATION OF SUCH COSTS AND WERE DETERMINED ACCORDING TO THE PRINCIPLES OF JUST COMPENSATION: 1ST FAILURE: [**] 2ND FAILURE: [**] 3RD FAILURE: [**] 4TH FAILURE: [**] 5TH FAILURE: [**] 6TH & EACH SUBSEQUENT FAILURE: [**] NOVATION'S RIGHT TO RECOVER ADMINISTRATIVE DAMAGES IN ACCORDANCE WITH THIS SECTION IS IN ADDITION TO ANY OTHER RIGHTS AND REMEDIES NOVATION OR THE CLIENTS MAY HAVE BY REASON OF SUPPLIER'S FAILURE TO PAY THE MARKETING FEES OR PROVIDE THE REPORTS OR NOTICES WITHIN THE TIME AND MANNER REQUIRED BY THIS AGREEMENT. - ------------------------------------------------------------------------------------------------------------------------
Page 5 of 7 Pages 37 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions.
- ------------------------------------------------------------------------------------------------------------------------ 11 12.a. IS CHANGED TO READ AS FOLLOWS: POLICY REQUIREMENTS. SUPPLIER WILL MAINTAIN AND KEEP IN FORCE DURING THE TERM PRODUCT LIABILITY, GENERAL PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE AGAINST ANY INSURABLE CLAIM OR CLAIMS WHICH MIGHT OR COULD ARISE REGARDING PRODUCTS PURCHASED FROM SUPPLIER. SUCH INSURANCE WILL CONTAIN A MINIMUM COMBINED SINGLE LIMIT OF LIABILITY FOR BODILY INJURY AND PROPERTY DAMAGE IN THE AMOUNTS OF [**]. SUPPLIER WILL PROVIDE TO NOVATION, WITHIN FIFTEEN (15) DAYS AFTER NOVATION'S REQUEST, AN INSURANCE CERTIFICATE INDICATING THE FOREGOING COVERAGE, ISSUED BY AN INSURANCE COMPANY LICENSED TO DO BUSINESS IN THE RELEVANT STATES AND SIGNED BY AN AUTHORIZED AGENT. - ------------------------------------------------------------------------------------------------------------------------ 12 12.c. IS CHANGED TO READ AS FOLLOWS: AMENDMENT, NOTICES AND ENDORSEMENTS. SUPPLER WILL NOT AMEND, IN ANY MATERIAL RESPECT THAT AFFECTS THE INTERESTS OF NOVATION, THE CLIENTS OR THE MEMBERS, OR TERMINATE SAID LIABILITY INSURANCE OR SELF-INSURANCE PROGRAM EXCEPT AFTER THIRTY (30) DAYS' PRIOR WRITTEN NOTICE TO NOVATION. - ------------------------------------------------------------------------------------------------------------------------ 12 14 Is changed to read as follows: RELEASE AND INDEMNITY. SUPPLIER WILL RELEASE, INDEMNIFY, HOLD HARMLESS, AND, IF REQUESTED, DEFEND NOVATION AND THE CLIENTS AND THEIR RESPECTIVE OFFICERS, DIRECTORS, REGENTS, AGENTS, SUBSIDIARIES, AFFILIATES AND EMPLOYEES (COLLECTIVELY, THE "INDEMNITEES"), FROM AND AGAINST ANY CLAIMS, LIABILITIES, DAMAGES, ACTIONS, COSTS AND EXPENSES (INCLUDING, WITHOUT LIMITATION, REASONABLE ATTORNEYS' FEES, EXPERT FEES AND COURT COSTS) OF ANY KIND OR NATURE, WHETHER AT LAW OR IN EQUITY, INCLUDING CLAIMS ASSERTING STRICT LIABILITY, ARISING FROM OR CAUSED IN ANY PART BY (1) THE BREACH OF ANY REPRESENTATION, WARRANTY, COVENANT OR AGREEMENT OF SUPPLIER CONTAINED IN THIS AGREEMENT; (2) THE CONDITION OF ANY PRODUCT, INCLUDING A DEFECT IN MATERIAL, WORKMANSHIP, DESIGN OR MANUFACTURING; OR (3) THE INSTRUCTIONS ACCOMPANYING ANY PRODUCT. SUCH OBLIGATION TO RELEASE, INDEMNIFY, HOLD HARMLESS AND DEFEND WILL APPLY UNLESS SUCH INDEMNIFICATION, HOLD HARMLESS AND RIGHT TO DEFENSE WILL NOT BE APPLICABLE TO THE EXTENT THE CLAIM, LIABILITY, DAMAGE, ACTION, COST OR EXPENSE ARISES AS A RESULT OF AN ACT OR FAILURE TO ACT OF INDEMNITEES. THIS SECTION AND THE OBLIGATIONS CONTAINED HEREIN WILL SURVIVE THE EXPIRATION OR EARLIER TERMINATION OF THIS AGREEMENT. THE REMEDIES SET FORTH IN THIS SECTION ARE IN ADDITION TO AND NOT A LIMITATION ON ANY OTHER RIGHTS OR REMEDIES THAT MAY BE AVAILABLE AGAINST SUPPLIER. SUPPLIER SHALL HAVE THE SOLE CONTROL AND AUTHORITY WITH RESPECT TO THE DEFENSE, SETTLEMENT OR COMPROMISE THEREOF. NOVATION WILL PROMPTLY NOTIFY SUPPLIER OF ANY CLAIM UNDER THIS SECTION 14, PROVIDED THAT THE FAILURE TO SO NOTIFY THE SUPPLIER SHALL NOT RELIEVE IT FROM ANY OBLIGATION IT MAY HAVE UNDER THIS SECTION 14 OR OTHERWISE, EXCEPT TO THE EXTENT SUCH FAILURE PREJUDICES THE SUPPLIER'S RIGHTS IN ANY WAY. - ------------------------------------------------------------------------------------------------------------------------ 13 17.a. THROUGH THIS SECTION IS DELETED IN ITS ENTIRETY AND REPLACED WITH THE FOLLOWING: b. CONFIDENTIALITY. a. PROPRIETARY INFORMATION. EACH PARTY AGREES AND ACKNOWLEDGES THAT IN ORDER TO FURTHER THE PERFORMANCE OF THIS AGREEMENT, THEY WILL BE REQUIRED TO DISCLOSE TO EACH OTHER CERTAIN CONFIDENTIAL INFORMATION WHICH WILL BE IDENTIFIED AS SUCH IN WRITING ("CONFIDENTIAL INFORMATION"), INCLUDING BUT NOT LIMITED TO THE PRICES AND USAGE OF THE PRODUCTS. IN NO EVENT WILL SUPPLIER PROVIDE TO ANY PERSON ANY INFORMATION RELATING TO THE PRICES IT CHARGES THE MEMBERS FOR PRODUCTS ORDERED PURSUANT TO THIS AGREEMENT WITHOUT THE PRIOR WRITTEN CONSENT OF NOVATION. b. PROTECTION OF PROPRIETARY INFORMATION. THE RECEIVING PARTY AGREES TO PROTECT THE CONFIDENTIALITY OF THE DISCLOSING PARTY'S CONFIDENTIAL INFORMATION WITH AT LEAST THE SAME DEGREE OF CARE THAT IT UTILIZES WITH RESPECT TO ITS OWN SIMILAR PROPRIETARY INFORMATION, INCLUDING WITHOUT LIMITATION AGREEING: (i) NOT TO DISCLOSE OR OTHERWISE PERMIT ANY OTHER PERSON OR ENTITY ACCESS TO, IN ANY MANNER, THE CONFIDENTIAL INFORMATION, OR ANY PART THEREOF IN ANY FORM WHATSOEVER, EXCEPT THAT SUCH DISCLOSURE OR ACCESS SHALL BE PERMITTED TO AN EMPLOYEE OF THE RECEIVING PARTY REQUIRING ACCESS TO THE CONFIDENTIAL INFORMATION IN THE COURSE OF HIS OR HER EMPLOYMENT IN CONNECTION WITH THIS AGREEMENT AND WHO HAS SIGNED AN AGREEMENT OBLIGATING THE EMPLOYEE TO MAINTAIN THE CONFIDENTIALITY OF THE CONFIDENTIAL INFORMATION OF THIRD PARTIES IN THE RECEIVING PARTY'S POSSESSION; (ii) TO NOTIFY THE DISCLOSING PARTY PROMPTLY AND IN WRITING OF THE CIRCUMSTANCES SURROUNDING ANY SUSPECTED POSSESSION, USE OR KNOWLEDGE OF THE CONFIDENTIAL INFORMATION OR ANY PART THEREOF AT ANY LOCATION OR BY ANY PERSON OR ENTITY OTHER THAN THOSE AUTHORIZED BY THIS AGREEMENT; AND (iii) NOT TO USE THE CONFIDENTIAL INFORMATION FOR ANY PURPOSE OTHER THAN AS EXPLICITLY SET FORTH HEREIN. c. EXCEPTIONS. NOTHING IN THIS SECTION 17 SHALL RESTRICT THE RECEIVING PARTY WITH RESPECT TO INFORMATION OR DATA, WHETHER OR NOT IDENTICAL OR SIMILAR TO THAT CONTAINED IN THE CONFIDENTIAL INFORMATION, IF SUCH INFORMATION OR DATA: (i) WAS RIGHTFULLY POSSESSED BY THE RECEIVING PARTY BEFORE IT WAS RECEIVED FROM THE DISCLOSING PARTY; (ii) IS INDEPENDENTLY DEVELOPED BY THE RECEIVING PARTY WITHOUT REFERENCE TO THE DISCLOSING PARTY'S INFORMATION OR DATA; (iii) IS SUBSEQUENTLY FURNISHED TO THE RECEIVING PARTY BY A THIRD PARTY NOT UNDER ANY OBLIGATION OF CONFIDENTIALITY WITH RESPECT TO SUCH INFORMATION OR DATA, AND WITHOUT RESTRICTIONS ON USE OR DISCLOSURE; OR (iv) IS OR BECOMES PUBLIC OR AVAILABLE TO THE GENERAL PUBLIC OTHERWISE THAN THROUGH ANY ACT OR DEFAULT OF THE RECEIVING PARTY. - ------------------------------------------------------------------------------------------------------------------------ 14 18.a. IS CHANGED TO READ AS FOLLOWS: CHOICE OF LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF DELAWARE. - ------------------------------------------------------------------------------------------------------------------------
Page 6 of 7 Pages 38
- ------------------------------------------------------------------------------------------------------------------------ 14 18.c. IS CHANGED TO READ AS FOLLOWS: THIRD PARTY BENEFICIARIES. SUBJECT TO THE PROVISION OF THIS AGREEMENT ALL CLIENTS AND MEMBERS ARE INTENDED THIRD PARTY BENEFICIARIES OF THIS AGREEMENT. ALL SECTIONS OF THIS AGREEMENT WHICH BY THEIR TERMS SPECIFICALLY APPLY TO CLIENTS WILL INURE TO THE BENEFIT OF AND BE ENFORCEABLE BY THE CLIENTS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. ALL SECTIONS OF THIS AGREEMENT WHICH BY THEIR TERMS SPECIFICALLY APPLY TO MEMBERS WILL INURE TO THE BENEFIT OF AND BE ENFORCEABLE BY THE MEMBERS AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS. - ------------------------------------------------------------------------------------------------------------------------ 15 18.e. IS CHANGED TO READ AS FOLLOWS: NO ASSIGNMENT. IN THE EVENT OF ANY ASSIGNMENT OR PROPOSED ASSIGNMENT OF THIS AGREEMENT BY SUPPLIER, OR ANY SUCCESSOR OF SUPPLIER, SUPPLIER SHALL NOTIFY NOVATION IN WRITING (THE "NOTICE") AND REQUEST THAT NOVATION NOTIFY SUPPLIER, OR ANY SUCCESSOR OF SUPPLIER, IN WRITING WITHIN 20 DAYS OF RECEIPT OF THE NOTICE THAT NOVATION DOES NOT CONSENT TO THE ASSIGNMENT. NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, THE SOLE REMEDY OF NOVATION FOR ANY ASSIGNMENT OR PROPOSED ASSIGNMENT OF THIS AGREEMENT WITHOUT THE CONSENT OR APPROVAL OF NOVATION SHALL BE TO TERMINATE THIS AGREEMENT, WITHOUT PENALTY OR PREJUDICE TO SUPPLIER OF ANY KIND. ANY ASSIGNMENT OF ALL OR ANY PART OF THIS AGREEMENT BY EITHER PARTY WILL NOT RELIEVE THAT PARTY OF THE RESPONSIBILITY OF PERFORMING ITS OBLIGATIONS HEREUNDER TO THE EXTENT THAT SUCH OBLIGATIONS ARE NOT SATISFIED IN FULL BY THE ASSIGNEE. THIS AGREEMENT WILL BE BINDING UPON AND INURE TO THE BENEFIT OF THE PARTIES' RESPECTIVE SUCCESSORS AND ASSIGNS. - ------------------------------------------------------------------------------------------------------------------------ 15 18.g. IS CHANGED TO READ AS FOLLOWS: ENTIRE AGREEMENT. THIS AGREEMENT, TOGETHER WITH THE EXHIBITS LISTED BELOW, WILL CONSTITUTE THE ENTIRE AGREEMENT BETWEEN NOVATION, MEMBERS AND SUPPLIER. THIS AGREEMENT, TOGETHER WITH THE EXHIBITS LISTED BELOW AND EACH MEMBER'S PURCHASE ORDER WILL CONSTITUTE THE ENTIRE AGREEMENT BETWEEN EACH MEMBER AND SUPPLIER. IN THE EVENT OF ANY INCONSISTENCY BETWEEN THIS AGREEMENT AND A MEMBER'S PURCHASE ORDER, THE TERMS OF THIS AGREEMENT WILL CONTROL UNLESS AGREED UPON IN WRITING BY SUPPLIER. NO OTHER TERMS AND CONDITIONS IN ANY DOCUMENT, ACCEPTANCE, OR ACKNOWLEDGMENT WILL BE EFFECTIVE OR BINDING UNLESS EXPRESSLY AGREED TO IN WRITING. THE FOLLOWING EXHIBITS ARE INCORPORATED BY REFERENCE IN THIS AGREEMENT: EXHIBIT A PRODUCT AND SERVICE DESCRIPTION AND PRICING EXHIBIT B NON-PRICE SPECIFICATIONS EXHIBIT C SPECIAL CONDITIONS EXHIBIT D EFFECTIVE DATE EXHIBIT E OTHER INFORMATION REQUIREMENTS EXHIBIT F EXCEPTIONS [OTHER EXHIBITS LISTED, IF ANY] - ------------------------------------------------------------------------------------------------------------------------
Page 7 of 7 Pages EX-10.25 9 MEDICAL PRODUCT DISTRIBUTION AGREEMENT 1 EXHIBIT 10.25 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT ASPECT MEDICAL SYSTEMS, INC. has requested that the marked portions of this agreements be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933 _______________________________________________________________ _______________________________________________________________ MEDICAL PRODUCTS DISTRIBUTION AGREEMENT BETWEEN ASPECT MEDICAL SYSTEMS AND HEWLETT-PACKARD COMPANY Effective Date: Oct 01, 1999 Confidential Agreement # CP-99-00004 Page 1 of 21 2 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT GENERAL This Distribution Agreement between Aspect Medical Systems (referred to herein as "AMS"), with its principal offices at 2 Vision Drive, Natick, MA 01760-2059 and Hewlett-Packard Company (referred to herein as "HP") with its offices at 3000 Minuteman Rd. Andover, MA 01810 (the "Parties") is effective Oct 01, 1999 ("Effective Date"). WHEREAS AMS manufactures medical products and seeks to establish a distribution channel in certain territories, and, WHEREAS HP manufactures and distributes medical products and seeks to distribute additional products to its customers; and, WHEREAS AMS desires to appoint HP as an authorized Distributor in certain territories of certain medical products, accessories and related goods to be supplied by AMS and HP desires to accept such appointment. THEREFORE HP agrees to purchase and AMS agrees to sell such Products upon the following terms and conditions: ARTICLE 1. DEFINITIONS The following terms have the meaning indicated here when used in this Agreement: "AFFILIATE": Any person, firm, corporation, other legal entity which controls or is controlled by or under common control with either AMS or HP. "DISTRIBUTOR": HP. "EXHIBITS": Documents attached to, incorporated by reference in, or added to this Agreement at a later date. "PRICES": Net US$ prices at which AMS shall sell Products to HP as set forth in EXHIBIT 1. "PRODUCTS": All medical products, supplies, accessories, parts and related goods listed in EXHIBIT 1 as well as any and all updates, enhancements, follow-on or related products that the parties mutually agree to add to Exhibit 1. "TERRITORIES": Countries and locations as set forth in EXHIBIT 2. ARTICLE 2. APPOINTMENT 2.1 AMS hereby appoints HP as a non-exclusive Distributor for the Products in the Territories. 2.2 Distributor may make sales outside the Territories if, and only if, prior written permission is given by AMS, which shall not be unreasonably withheld, and the product meets the regulatory requirements of the Territory. 2.3 AMS agrees and confirms that Distributor may sub-contract any or all of its obligations hereunder pursuant to ARTICLE 7. Confidential Agreement # CP-99-00004 Page 2 of 21 3 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 2.4 Distributor agrees to exert its reasonable commercial efforts to promote, sell and support the Products to ultimate users of the Products. 2.5 The obligations set forth herein are in lieu of any "best efforts" or similar obligation. ARTICLE 3. RELATIONSHIP 3.1 The relationship of Distributor to AMS shall be that of an independent contractor engaged in purchasing Products from AMS for resale to Distributor's customers. 3.2 Nothing contained in this Agreement shall be deemed to create a partnership or joint venture between the Parties. Neither the making nor the performance of this Agreement shall be construed in any manner to have established a joint venture or partnership. 3.3 Neither Party shall hold itself out as the agent of the other, nor shall they incur any indebtedness or obligations in the name of, or which shall be binding on the other, without the prior written consent of the other. Each Party assumes full responsibility for its own personnel under laws and regulations of the governmental authorities of the competent jurisdiction. ARTICLE 4. AGREEMENT PRECEDENCE AND DOCUMENTS 4.1 This Agreement supersedes any previous communication, representations, or agreements between the Parties, whether oral or written, regarding transactions hereunder. 4.2 All Exhibits attached to the Agreement shall be deemed a part of this Agreement and incorporated herein. Terms that are defined in this Agreement, and used in any Exhibit, have the same meaning in the Exhibit as in this Agreement. The following Exhibits are hereby made a part of this Agreement: Exhibit 1 - Products and Prices Exhibit 2 - Territories Exhibit 3 - General Provisions Exhibit 4 - Product Support Requirements ARTICLE 5. TERM OF AGREEMENT The term of this Agreement shall be for the period October 01, 1999 to September 30, 2001 inclusive. This Agreement will remain in effect until expiry unless terminated earlier as provided in ARTICLE 6. In the event of such expiration or any early termination, this Agreement shall continue to apply to all orders previously accepted by AMS unless cancelled by Distributor pursuant to ARTICLE 6. ARTICLE 6. TERMINATION 6.1 Not withstanding ARTICLE 5 above, this Agreement is terminable by either party at any time after the expiry of the first year with or without cause upon six months prior written notice. 6.2 To the extent permitted by law, if either Party becomes insolvent, is unable to pay its debts when due, files for bankruptcy, is subject of involuntary bankruptcy, has a receiver appointed, or has its assets assigned, the other Party may terminate this Agreement immediately upon notice to the other party and may cancel any unfulfilled obligations. Confidential Agreement # CP-99-00004 Page 3 of 21 4 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 6.3 If either Party hereto shall fail to perform any of the obligations imposed upon it under the terms of this Agreement, the other Party may terminate the Agreement upon three months written notice. Such termination shall be effective three months after deposit of the notice in the mail unless the other Party cures the breach within such three month period. 6.4 Distributor shall immediately cease to be an authorized AMS distributor upon the effective date of termination of this Agreement. Distributor shall thereafter refrain from representing itself as an authorized AMS distributor and from using any AMS trademark or trade name. 6.5 Upon termination of the Agreement, [**] any or all of the AMS Products which [**] may have [**], are in [**] are on the [**] and are [**] (if there is a [**] the [**] for such Products or the [**] for such Products [**]. ARTICLE 7. ASSIGNMENT AND MODIFICATION OF AGREEMENT 7.1 During the term of this Agreement, the rights of the Distributor under this Agreement shall not be assigned nor shall the performance of Distributor's duties hereunder be delegated, without the other AMS's prior written consent which shall not be unreasonably withheld except either Distributor may assign this Agreement (i) to an Affiliate that is an Affiliate as of date of execution of this Agreement or (ii) to an Affiliate whose assets consist entirely of the assets of an Affiliate or Affiliates that were Affiliates as of the date of execution of this Agreement (collectively the "permitted assignees"). 7.2 An assignment of such rights for purpose of Section 7.1 shall include any transaction including but not limited to, any merger, consolidation or purchase of stock that results in a third party that is not a permitted assignee controlling, directly or indirectly, a legal entity that holds such rights. For purpose of this provision, the term "control" shall mean the beneficial ownership, directly or indirectly, of fifty per cent (50%) or more of voting shares of such entity. In the event of a change in control by AMS, AMS shall give HP prompt notice and this Distribution Agreement shall survive the change in control. 7.3 No sale, assignment or other transfer of any rights of a Party hereunder shall be effective unless the purchaser, assignee or transferee assumes such Party's obligations under this Agreement. Any assignment shall not relieve the assigning Party of its responsibility for obligations hereunder. 7.4 Except as set forth in Article 7.5 below, modifications of this Agreement shall be effective and binding only if agreed in writing and executed by respective duly authorized representative of each of the Parties hereto. 7.5 Distributor may, at its option, delete Products from individual Territories. 7.6 Neither Party's failure to exercise any of its rights under this Agreement will constitute or be deemed a waiver or forfeiture of those rights. 7.7 This Agreement may be assigned by HP to any new company that is formed which essentially contains the elements of HP's measurement businesses. ARTICLE 8. PRICES AND PAYMENTS 8.1 Distributor sets the end user selling prices at the sole judgement of the Distributor. 8.2 Prices, which Distributor shall pay AMS for the Products purchased, shall be the prices appearing in the EXHIBIT 1. Confidential Agreement # CP-99-00004 Page 4 of 21 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT Demonstration Prices for the AS2000 System will be $[**]. Demonstration Prices for the BIS Sensor will be [**] for a maximum quantity of [**]/ Case for quantities from [**] cases. AMS [**] of the [**] to other parties [**] of the [**] in any agreement [**] of this Agreement. If there are additions or changes to Products, Distributor will have the right to purchase these products and prices will be established and Exhibits so revised. 8.3 Prices include the Product, labeling, packaging, freight, duties and insurance to the F.O.B point of Leiden, Netherlands. 8.4 The prices set forth in EXHIBIT 1 may be revised based on market conditions, supplier costs and the expected unit volume of Products purchased under this Agreement. If [**] then [**] to the [**] prices. 8.5 Orders issued by Distributor with requested or acknowledged delivery dates within thirty (30) days after the effective date of any price change will be billed at the lower price. This includes backlog and orders already placed but have not received acknowledged delivery dates. 8.6 Payment shall be in U.S. dollars with a [**] discount if paid within [**] days fully payable without discount in net thirty days, after the later of receipt by Distributor of an invoice or the corresponding Products. Invoices must include details such as HP order number, HP product numbers and quantities as reference. Distributor may deduct from AMS invoices any monies owned to Distributor. 8.7 In competitive situations or as part of a large order, Distributor and AMS may agree on a special price arrangement and split the cost of additional discounts. ARTICLE 9. SHIPMENT AND DELIVERY 9.1 Distributor will submit written (fax or electronic) orders to AMS after receipt from the customer. Acknowledgment of delivery date will be received by Distributor within no more than five work days. Distributor will not be obligated to stock Products. Distributor may without charge postpone, decrease, increase or cancel any order by notice to AMS, if such notice is given at least [**] prior to the delivery date. Distributor may without charge decrease any order by a maximum of [**] by notice to AMS, if such notice is given within ninety days prior to the delivery date. 9.2 AMS will make every reasonable effort to meet delivery within [**] days or the date quoted or acknowledged. AMS shall give Distributor prompt notice of any prospective failure to meet the acknowledged delivery date. If AMS fails to deliver Products for [**] days beyond the agreed delivery date, Distributor may cancel such orders without charge. 9.3 Distributor may request changes in delivery dates, quantity and configuration for Products appearing on its orders at no charge provided written notice of said changes is received by AMS at least [**] working days prior to requested date. 9.4 Upon Distributor's request with the necessary information, AMS shall evaluate special requests for suitability of software or suitability of a particular hardware interface between Products and hardware/software used by Distributor's customers and inform Distributor of the result within a reasonable time. 9.5 AMS shall provide a packing list with Distributor's purchase order number, HP product numbers (the HP equivalent of AMS's part numbers), serial numbers, quantity shipped and date shipped with each unit shipped. If applicable, the packing list should also provide lot number, batch number or any shelf life information (ie. datecode). Confidential Agreement # CP-99-00004 Page 5 of 21 6 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 9.6 AMS shall preserve, package, handle, and pack Products so as to protect the Products from loss or damage, in conformance with good commercial practice, government regulations, and other applicable requirements. AMS shall mark the exterior of the boxes with the associated Product and serial numbers of the contents. AMS shall be responsible for any loss or damage due to its failure to properly preserve, package, handle, or pack Products. Distributor shall not be required to assert any claims for such loss or damage against the common carrier involved. AMS will ship Products in the final packaging as intended to be received by the end user as ordered 9.7 Title to Products and risk of loss or damage will pass to Distributor when Products are delivered to the defined Distributor location specified in EXHIBIT 3- General Provisions. 9.8 Distributor will be the exporter of record and obtains duty drawback rights to Products. If Products delivered under this Agreement are imported, AMS shall when possible allow Distributor to be the importer of record. If Distributor is not the importer of record and AMS obtains duty drawback rights to the Products, AMS shall, upon Distributor's request, provide Distributor with documents required by the customs authorities of the country of receipt to prove importation and transfer duty drawback rights to Distributor 9.9 Items missing in shipment will be promptly replaced and shipped at no charge to Distributor. ARTICLE 10. ADVERTISING, PROMOTIONS, TRADEMARKS AND COPYRIGHTED MATERIAL 10.1 AMS agrees to provide sample quantities of current or new sales literature, artwork, advertising materials, promotional plans and other information or programs reasonably related to this Agreement. Distributor specific literature and advertising will be the responsibility of Distributor. 10.2 AMS together with Distributor will evaluate requirements and define promotional plans to which both will adhere. AMS will also provide recommended reference sites and will actively pursue clinical evaluations and the development of local/country reference sites and clinical trials. 10.3 AMS hereby grants Distributor a revocable license to use any AMS trademark or trade name associated with the Products solely in the advertisement and promotion of the Products during the term of this Agreement. Except as provided in this paragraph, Distributor shall have no right, title or interest in or to any patent, trademark of trade name belonging to AMS. 10.4 AMS hereby grants Distributor a revocable license to reproduce materials provided to Distributor by AMS as is reasonable for promotion, demonstration, sale and support of AMS Products, including but not limited to posting such materials on the Internet, Intranet, or web. ARTICLE 11. SALES AND SUPPORT 11.1 HP will provide AMS with a forecast of [**] projected sales unit volumes. Quantities listed in such correspondence between the Parties are only estimates made as an accommodation for planning purposes and do not constitute a commitment to purchase such quantity. Distributor may revise any forecasts in its sole discretion. The arrangements provided herein are [**] within this Agreement. 11.2 Distributor agrees to purchase demonstration Product and to maintain trained staff capable of demonstrating and selling the Products. AMS agrees to provide, at its costs, reasonable sales training and material and support to the Distributor. Distributor agrees to participate in AMS's sales and marketing meetings, Product and competitive training courses or product launch meetings as mutually Confidential Agreement # CP-99-00004 Page 6 of 21 7 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT agreed upon. AMS agrees to provide sales training in a mutually agreeable location each six (6) months and upon product launch if sooner. 11.3 Distributor agrees to maintain trained staff capable of supporting the Products. AMS agrees to provide, at no charge, reasonable service training and support. Distributor agrees to participate in AMS's service training programs. AMS undertakes to provide initial technical service training prior to the time both Parties agree that distribution into the Territory is to commence. Thereafter Distributor will send technicians to update technical knowledge as mutually agreed upon. 11.4 AMS shall provide documentation to enable Distributor to establish the support plan and deliver support services for the Products and Territories. The product support plan shall prepared by both Parties and agreed upon prior to the time distribution is to commence. AMS shall support the Distributor with service information, parts (as provided in Section 11.5), training and technical and clinical assistance and back-up support by letter, fax, e-mail or telephone as appropriate. 11.5 Distributor agrees to purchase necessary spare parts and test equipment to support systems installed in Territories. Spare parts to support in-warranty repairs will be replaced for Distributor at no cost. Out-of-warranty spare parts are at Distributor's cost. 11.6 Distributor shall use its reasonable efforts to handle and resolve feedback from its customers. AMS shall have ultimate responsibility for resolution of Product related issues. Problems that can not be resolved locally will be escalated in accordance with ARTICLE 26. ARTICLE 12. QUALITY ASSURANCE 12.1 AMS agrees to maintain ISO9001, EN46001 and Directive 93/42/EEC Annex II certification status and compliance with the Food and Drug Administration's (FDA) Quality System Regulation, the Medical Device Directive and/or appropriate regulations that apply to countries within and outside the European Union. As manufacturer, AMS will comply with all applicable regulations and standards that pertain to manufacturers for Products and Territories set forth herein. 12.2 Distributor will, from time to time, inform AMS of applicable regulations in the Territories and AMS shall ensure that Products comply with all such regulations. 12.3 Upon request, AMS agrees to furnish to Distributor any information required to enable the Distributor to comply with all applicable regulations and standards that pertain to distributors for Products and Territories set forth herein. 12.4 If the Products and/or Territories covered in this Agreement are modified, then AMS will maintain compliance with local regulations where Products are manufactured and where Products are sold prior to the time that both Parties agree that the distribution is to commence. ARTICLE 13. MODIFICATION OF PRODUCTS 13.1 All Products marketed by Distributor shall be sold only in the form as packaged by AMS. Distributor shall not alter or change Product or its package, prior to sale. 13.2 AMS shall not, without the Distributor's prior written consent, make any process or design changes affecting regulatory status or Product specifications of Products in the Territories 13.3 AMS will affix "Distributed by Hewlett-Packard" labels as requested by Distributor. Confidential Agreement # CP-99-00004 Page 7 of 21 8 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 13.4 AMS shall provide Distributor written notice of all Product discontinuances [**] months prior to the last order date. 13.5 AMS agrees to [**] for all [**] to the [**]. ARTICLE 14. EXPORT CERTIFICATION, PRODUCT REGISTRATION AND LOCALIZATION 14.1 Upon request, AMS shall provide at its own costs and expenses export certificates issued by US Government and other documents that are necessary for import and sale of the Products in the defined Territories. As required by governments of any Territory, AMS agrees to site inspections of AMS's factory. 14.2 AMS shall obtain and maintain at its costs all such Product registrations that are necessary for demonstration and sale of Products as required by law in the defined Territories. 14.3 AMS shall comply with all applicable regulatory requirements for Product localization, including labeling and documentation as required in countries agreed to by AMS and HP. 14.4 Upon mutual agreement, Distributor may provide Product registration and/or localization assistance. In the case of documentation localization, all master documentation is maintained and controlled, for the purpose of quality system compliance, by AMS. ARTICLE 15. IMPORT LICENSES AND EXPORT CONTROLS 15.1 AMS shall be responsible for obtaining and maintaining any export license(s) required for delivery of the Products to Distributor under this Agreement. 15.2 Upon Distributor's request, AMS shall provide an appropriate certification stating the country of origin for Products, sufficient to satisfy the requirements of (i) the customs authorities of the country of ultimate destination, (ii) any applicable export licensing regulations, including those of the United States, and (iii) requirements for duty drawback. 15.3 AMS shall mark every Product (or the Product's container if there is not room on the Product itself) with the country of origin. AMS shall, in marking the Products, comply with the requirements of the customs authorities of the country of ultimate destination. For each shipment of Products of US origin issue a certificate specifying the US Export Control Classification Number (ECCN number). Products must not be resold, exported or re-exported in violation of the US Export Administration Act. ARTICLE 16. WARRANTY AND LIMITATION OF REMEDIES 16.1. The Products listed on the attached Exhibits are covered by a 14-month written warranty starting from the date of delivery of the Products to Distributor (the "User Warranty"). Such Products shall be referred to as the "Warranty Products". 16.2 Distributor will supply a copy of the User Warranty with each Warranty Product sold herein. 16.3 If Distributor finds that any Product is defective prior to its sale by Distributor, Distributor shall contact an authorized AMS representative and describe the defect. AMS will grant approval, provide the values for customs purposes, and a return authorization number for repair or replacement of the Confidential Agreement # CP-99-00004 Page 8 of 21 9 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT Product. Distributor undertakes to quote the authorization number on all documentation that accompanies Products being returned. Distributor should ensure that equipment is suitably packed for export and that accurate values, as specified by AMS, are used in documentation. These defective units will be promptly replaced at no charge to Distributor. 16.4 After AMS approves the return of the defective units, AMS will inform Distributor as to the return location and send return labels to Distributor or advise all details by electronic means. 16.5 AMS shall be entitled to verify the reason for the return and to determine in its discretion whether to replace (rather than repair) the unit. AMS shall not repair or replace units free of charge if the failure is due to any of the following reasons: i Damage from abuse or misuse; ii Attempted repair by unauthorized service center; or iii Repossession 16.6 For any Product repaired or replaced under warranty, the warranty period will terminate at the end of the original warranty period as provided in Article 16.1 or no less than six (6) months after the repair or replacement. 16.7 AMS warrants that no Product provided hereunder shall be adulterated or misbranded, with the meaning of the Federal Food, Drug, and Cosmetic Act. 16.8 AMS warrants that the Products provided herein will be "Year 2000 Compliant". Year 2000 Compliant Products will perform without error, loss of data or loss of functionality arising from any failure to process, calculate, compare or sequence date data accurately. In addition, Year 2000 Compliant Products will not cause any associated products or systems in which they may be used to fail in any of the ways described above. 16.9 AMS warrants that all Products shall (i) conform strictly to its specifications, (ii) be free from defects in design, material, and workmanship when used for their proper and intended purposes, and (iii) be free from all liens, encumbrances, and other claims against title. 16.10 In addition to warranties specified above, where an exceptionally high failure rate occurs (more than [**] quoted in EXHIBIT 4. Product Support Requirements), AMS undertakes to apply additional resources to return the failure rate to normal as soon as reasonably practicable. AMS shall reimburse Distributor for costs incurred by Distributor in case of such abnormal failures. Failure is defined as a situation where the end user cannot fully utilize the Product. ARTICLE 17. IN-WARRANTY REPAIR 17.1 AMS shall cover parts costs and Distributor shall cover labor costs for field repair during the warranty period as set forth in ARTICLE 16.1. In such case, Distributor may purchase replacement parts for no charge from AMS. 17.2 If Warranty Products are returned to AMS, then parts and labor costs for returned Products are covered by AMS. Distributor or its customer must pay for transportation, insurance and handling charges of shipment of Product to AMS for repair or replacement. Repaired or replaced Warranty Products will be returned to sender at AMS's expense Confidential Agreement # CP-99-00004 Page 9 of 21 10 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 17.3 Distributor shall perform installation services at Distributor's expense. ARTICLE 18. OUT OF WARRANTY REPAIR 18.1 Distributor or its customer shall bear all shipping charges for out-of-warranty repairs. 18.2 Repairs made by AMS outside of the warranty period shall be billed at the AMS repair charge set forth in EXHIBIT 1. Such out-of-warranty repairs will have a six (6) month parts warranty. 18.3. Out of warranty repairs performed by AMS will be formed at AMS's facility set forth in EXHIBIT 3. 18.4 AMS shall provide technical support and make out of warranty repair parts for the Products available to Distributor, at Distributor's cost, for a term of ten years after Distributor ships the last Product. If unable to provide such service and support, AMS shall provide Distributor with a mutually agreeable alternative. In the case of termination of this Agreement on any grounds other than a breach of this Agreement by Distributor, AMS shall at the request of Distributor guarantee a continued supply of Product and its updates or supply sufficient data regarding product reliability to allow for the possible incremental purchase of Product for the Distributor's standard ten year support life. ARTICLE 19. COMPLAINTS, QUALITY RECORDS AND RECALLS 19.1 Distributor will notify, in writing, AMS's quality assurance department of all Product complaints or any regulatory/conformance issues that may affect the marketability of Products. AMS shall notify the appropriate regulatory agent(s) if required and shall conduct any safety investigations or other necessary follow-up activities. Distributor will provide any information essential to such activities. AMS will promptly notify Distributor if corrective action is necessary in the Territory. 19.2 Distributor shall keep records of the names and addresses of customers and Product serial numbers for the active Product life to enable Distributor to notify customers of Product safety information. Distributor shall maintain the following information when distributing AMS's Products: - Name and address of initial consignee - Identification of device and quantity of devices shipped - Date of shipment 19.3 Upon request, Distributor will supply AMS a quarterly report of repairs, maintenance or service activity for Products. The report will include the product number, serial number, fault found, action taken and date of the activity. 19.4 In the event of any recall of a Product required by a governmental agency for safety or efficacy reasons, or requested by Aspect at its sole discretion, which is the result of AMS's failure to supply Products that (1) conform in all material respects to the applicable published specifications or (2) are free from defects in material and workmanship (when given normal, proper and intended usage), AMS agrees to repair or replace at its own costs all Products subject to the recall and previously delivered to Distributor. AMS also agrees to consult with Distributor to establish a reasonable process for managing the recall and Aspect shall be responsible for all reasonable out-of-pocket expenditures incurred by Distributor (including, but not limited to shipping costs, labor and travel costs) that are consistent with the recall process agreed to by the Parties.. In the event the recall is not required by a governmental agency for safety or efficacy reasons, but is instead requested by AMS at its sole discretion, AMS will be responsible for determining the scope of the recall, including the number of units, timeframe for the recall, and criteria for completion. Distributor agrees to maintain all necessary sales records to facilitate the recall. Confidential Agreement # CP-99-00004 Page 10 of 21 11 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT ARTICLE 20. PRODUCT STEWARDSHIP 20.1 AMS shall accept back, free of charge, any material including the Products and packaging returned freight prepaid by Distributor from any country that legally requires product take back from the user at the end of product life. 20.2 AMS shall, upon request, provide available environmentally related information regarding materials included in Products and packaging that AMS ships to Distributor including material safety data sheets. ARTICLE 21. FORCE MAJEURE No Party to this Agreement shall be liable for failure or delay of performance of any of its obligations hereunder if such failure or delay is due to causes beyond its reasonable control including, without limitation, natural disasters, fires, earthquake or storm, strikes, failures of public utilities or common carriers, acts of war, or intervention, acts restraints or regulations of any governmental authority including compliance with any order of any governmental considerations; provided that any such delay or failure shall be remedied by such Party as soon as possible after removal of the cause of such failure. A Party suffering such delay or which expects to suffer such delay shall promptly notify the other Party in writing of the cause and expected duration of such delay. In the event a delay lasts or is expected to last more than sixty (60) days the other Party shall have the option to terminate this Agreement upon written notice. ARTICLE 22. CONFIDENTIALITY Both Parties agree to keep in confidence the terms and conditions of this Agreement. ARTICLE 23. INTELLECTUAL PROPERTY RIGHTS AND INDEMNITY AMS shall, except as otherwise provided below, defend or settle any claim made or any suit proceeding brought against Distributor and its subsidiaries, assigns, subcontractors, and customers so far as it is based on an allegation that any Product furnished herein infringes a patent, utility model, industrial design, copyright, trade secret, mask work of trademark of the United States, or of the country where the Product is sold, if notified promptly in writing and given information, assistance and the sole authority to defend or settle same (at AMS's expense), and AMS shall pay all damages and costs finally awarded in any such suit or proceeding against Distributor. In case said Product is in such suit held to infringe and the use or sale of said Product is enjoined, or in the case of a settlement as referred to above, AMS shall have the option at its own expense, to procure for Distributor the right to continue using or selling said Product, or replace same with a non-infringing Product, or modify same so it becomes non-infringing; in the event that none of the previous options are commercially feasible, then AMS shall grant a refund to Distributor of the price paid by Distributor for any of such Products returned to AMS by Distributor. Notwithstanding anything to the contrary above, in no event shall AMS have any liability under this Section 23 for any such claims resulting from (a) modifications to the Products by anyone other than AMS where the unmodified Products do not infringe, (b) the combination of the Products with other products not provided by AMS, or (c) use of the Products for purposes for which they were not intended. The foregoing states the entire liability of AMS for infringement by Products furnished herein. Confidential Agreement # CP-99-00004 Page 11 of 21 12 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT ARTICLE 24. INDEMNITY AND LIMITATION OF LIABILITY 24.1 AMS shall indemnify Distributor and its Affiliates from and against any and all liabilities, claims, demands, damages, costs and expenses or money judgements (including legal fees) incurred by or rendered against any of them from third party claims or actions for personal injury or property damage which arise out of a defect due to defective design, parts, packaging, labeling, faulty workmanship of Products of which AMS is the manufacturer or is the Party responsible for failure to warn except to the extent that such personal injuries or property damage arise out of Distributor's (or its Affiliates) negligence or breach of this Agreement (as set forth in herein). 24.2 EXCEPT AS PROVIDED HEREIN, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF ANY KIND WHATSOEVER INCLUDING BUT NOT LIMITED TO LOST PROFITS, IN CONJUNCTION WITH OR ARISING OUT OF THE PERFORMANCE UNDER THIS AGREEMENT OR THE USE OR PERFORMANCE OF PRODUCTS AND SUPPORT SERVICES EVEN IF THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. CONSEQUENTIAL LOSS FOR THE PURPOSES OF THIS AGREEMENT SHALL MEAN AND INCLUDE WITHOUT LIMITATION OF THE GENERAL STATEMENT EARLIER APPEARING, IN EACH CASE WHETHER ARISING IN TORT OR CONTRACT AND INCLUDING IN EACH CASE NEGLIGENCE: (a) LOSS OF PROFITS; (b) LOSS OF CONTRACTS; (c) LOSS OF ANTICIPATED SAVINGS; (d) LOSS OF DATA; (e) LOSS OF BUSINESS; (f) LOSS OF GOODWILL; (g) LOSS OF REVENUE; (h) LOSS OF ORDERS; AND LOSSES ARISING PRIOR TO THE COMMENCEMENT OF THE CONTRACT ARE ALSO EXCLUDED. 24.3 The above limitation of liability shall not apply to damages with respect to the indemnity for the infringement of intellectual property rights as provided in Article 23. 24.4 This indemnity shall not be affected or terminated by reason of termination or expiration of this Agreement. ARTICLE 25. INSURANCE Upon request, AMS shall provide evidence of product liability, general liability and property damage insurance against an insurable claim or claims, which might or could arise regarding AMS products purchased from AMS. Such insurance will contain a minimum limit of liability for bodily injury and property damage of not less than [**] US$. ARTICLE 26. CONFLICT RESOLUTION 26.1 The appointed representatives set forth in EXHIBIT 3- General Provisions shall address conflicts that arise relative to this Agreement. If these representatives can not resolve such conflicts, then AMS and the Distributor shall promptly establish a review board comprised of appropriate members of management from AMS and the Distributor to resolve the conflict. Confidential Agreement # CP-99-00004 Page 12 of 21 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT 26.2 In the event that the review board of the Parties does not resolve a dispute within thirty (30) days from the date of escalation, then the Parties agree to consider seriously the use of mediation. Such mediation process shall be non-binding and voluntary. The Parties shall agree on the procedural aspects of the mediation, including the venue, during the time that the mediation is being considered. 26.3 If the Parties do not attempt to resolve a dispute through the foregoing mediation process or upon failure of or withdrawal from such mediation process, then either of the Parties may elect to pursue any remedies available at law. 26.4 The laws of Commonwealth of Massachusetts, USA, will govern any disputes arising in connection with this Agreement. AMS and HP hereby consent to the jurisdiction and venue of the courts located in the Commonwealth of Massachusetts. ARTICLE 27. ADMINISTRATION AND NOTICES Any notices pursuant to this Agreement shall be sent to the address(s) specified Exhibit 3- General Provisions. By signing this document, the Parties below indicate their Agreement with and acceptance of this Agreement, including all Exhibits. ARTICLE 28. Within [**] days following the end of [**], Aspect shall remit to HP a payment equal to [**] of payments received by Aspect for sales of [**] customers in the United States and Canada in the [**]. In the event that Aspect's [**] have also been installed at such sites in addition to [**] will be entitled to a [**] commission [**] sales intended for use with [**]. The Parties will agree upon a reasonable basis for estimating the number of [**] in this event (e.g. a pro rata determination based on the total number of [**] installed at such locations during the period) and will calculate the [**] due to HP accordingly. To facilitate such calculations, HP will be responsible for providing Aspect with documentation, on a [**] basis, of the total number of [**] installed in the U.S. and Canada, the locations of such modules, and the dates of installation. SIGNATURES For Aspect Medical Systems For Hewlett-Packard Company /s/ Neal Armstrong /s/ James A. Cyrier ----------------------------- ------------------------------ Authorized Representative Signature Authorized Representative Signature Name: Neal Armstrong Name: James A. Cyrier Title: Vice President and CFO Title: Vice-President of Medical Products Group Worldwide Sales and Marketing /s/ Jay Mazelsky ------------------------------ Authorized Representative Signature Name: Jay Mazelsky Title: Medical Supplies General Manager. Effective Date Oct 01, 1999 Confidential Agreement # CP-99-00004 Page 13 of 21 14 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT EXHIBIT 1 - PRODUCTS AND PRICES The following Exhibit is attached to and form part of the Distribution Agreement between AMS and Hewlett-Packard Company Technical descriptions of Product are specified in AMS documents numbered: 075-0002 (Operator's Manual) and 070-0015 (Service Manual)
- ---------------------------------------------------------------------------------------------------------------- PART NUMBER PROD NO. DESCRIPTION ESTIMATED YEARLY LEAD PRICE - ---------------------------------------------------------------------------------------------------------------- AMS# 186-0075 A-2000 Monitoring System; [**] [**] [**] - ---------------------------------------------------------------------------------------------------------------- HP# APB-60075 185-0070 A-2000 Bis Monitor [**] [**] [**] 185-0071 A-2000 Signal Converter [**] [**] [**] 185-0092 A-2000 Ship Kit (Pole Clamp Assy, [**] [**] [**] Sensor and Reference Manual) 070-00XX A-2000 Operator's Manual [**] [**] [**] (English, French, German, Spanish, Swedish, Dutch, Portuguese, Italian) 536-00XX Power Cord [**] [**] [**] - ---------------------------------------------------------------------------------------------------------------- AMS# 186-0100 Bis Sensor [**] [**] [**] - ---------------------------------------------------------------------------------------------------------------- HP# APB-60100 Case of [**] Sensors; [**] [**] [**] 2 Boxes of [**] Sensors each. - ----------------------------------------------------------------------------------------------------------------
SERVICE REPAIR PARTS PRICES: (note: boards & displays are needed for support strategy Exh. 4)
PART DESCRIPTION LEAD TIME PRICE - -------------------------------------------------------------------------------------------------------------- 186-0067 BIS Sensor Interface Cable [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 150-0037 Pole Clamp Assy [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 185-0071 A-2000 Signal Converter [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 140-0017 Main PCB Rev 3 Board [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 140-0018 Interconnect Board - Rev 2 [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 195-0020 Power Boards Rev 2 [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 465-0012 Assembly EL Display [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- Replacement Service Manual [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- 070-0015 Replacement Operators Manual [**] [**] ==== ==== - -------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------
Confidential Agreement # CP-99-00004 Page 14 of 21 15 MEDICAL PRODUCTS DISTRIBUTION AGREEMENT EXHIBIT 2 - TERRITORIES The following Exhibit is attached to and form part of the Distribution Agreement between AMS and Hewlett-Packard Company Herein, the Territories are established for the above referenced Agreement. ------------------------------ REGIONS ------------------------------ Europe ====== ------------------------------ Asia Pacific (except Japan) ------------------------------ Latin America ------------------------------ Confidential Agreement # CP-99-00004 Page 15 of 21 16 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT EXHIBIT 3 - GENERAL PROVISIONS The following Exhibit is attached to and form part of the Distribution Agreement between AMS and Hewlett-Packard Company Any notice pursuant to this Agreement should be sent certified mail to the Address(s) below: Hewlett-Packard Company 3000 Minuteman Road Andover, Massachusetts, USA 01810-1099 AMS's address Ship-to address for Products from AMS to HP: Invoice-to address for Products from AMS to HP: For information concerning this Agreement, contact the appropriate person below:
- ---------------------------------------------------------------------------------------------- AMS COMPANY ROLE: NAME: LOCATION: PHONE NUMBER: - ---------------------------------------------------------------------------------------------- SALES MANAGER [**] [**] [**] - ---------------------------------------------------------------------------------------------- QUALITY/ REGULATORY [**] [**] ASSURANCE MANAGER - ---------------------------------------------------------------------------------------------- SERVICE TECHNICAL [**] [**] [**] SUPPORT MANAGER - ----------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------- HP ROLE: NAME: LOCATION: PHONE NUMBER: - ---------------------------------------------------------------------------------------------- ALLIANCE MANAGER [**] [**] [**] - ---------------------------------------------------------------------------------------------- QUALITY/REGULATORY [**] [**] [**] ENGINEER - ---------------------------------------------------------------------------------------------- SERVICE TECHNICAL [**] [**] [**] SUPPORT MANAGER - ---------------------------------------------------------------------------------------------- ORDER FULFILLMENT [**] [**] [**] ENGINEER - ---------------------------------------------------------------------------------------------- PRODUCT MANAGER [**] [**] [**] - ---------------------------------------------------------------------------------------------- PROGRAM MANAGER [**] [**] [**] - ----------------------------------------------------------------------------------------------
Confidential Agreement # CP-99-00004 Page 16 of 21 17 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. MEDICAL PRODUCTS DISTRIBUTION AGREEMENT EXHIBIT 4 - PRODUCT SUPPORT REQUIREMENTS The following Exhibit is attached to and form part of the Distribution Agreement between Aspect Medical Systems and Hewlett-Packard Company The following Exhibit establishes the support requirements for the A-2000 Monitoring System covered by this Agreement. 1. GENERAL SUPPORT STRATEGY: The support strategy consists of "bench repair" by AMS (board swapping or replacement) at the Natick, MA facility or by HP in the field 2. [**] REQUIREMENTS: AMS agrees to provide [**] 3. [**] The expected [**] of the installed base per month for the Monitoring System is [**] and for the Converter is [**]. 4. MEAN TIME TO REPAIR: The average labor time to repair (board swap) a monitor is one (1) hour. 5. AVERAGE PARTS COSTS PER FAILURE: The average parts cost per repair (board swap) is the price of the power board in Exhibit 1. 6. GUARANTEED PARTS AVAILABILITY: AMS will provide spare parts within 48 hours of receipt of order. 7. GUARANTEED RESPONSE TIME: AMS will provide response to escalated customer issues within 24 hours for safety-related issues or 48 hours otherwise. 8. REPAIR PARTS INVENTORY: AMS recommends spare parts stock of 2 boards and 2 displays for every 20 monitors sold. Confidential Agreement # CP-99-00004 Page 17 of 21 EX-10.26 10 OEM DEVELOPMENT & PURCHASE AGREEMENT 12/22/1999 1 Exhibit 10.26 Aspect Medical Systems, Inc. requests that the marked portions of this document be granted confidential treatment pursuant to Rule 406 under the Securities Act of 1933. PRIVILEGED AND CONFIDENTIAL ATTORNEY-CLIENT AND WORK PRODUCT PRIVILEGES FOR GE MARQUETTE ONLY ASPECT MEDICAL SYSTEMS, INC. OEM DEVELOPMENT AND PURCHASE AGREEMENT Agreement dated this 22nd day of December, 1999, by and between Aspect Medical Systems, Inc, a Delaware corporation with its principal offices located at Two Vision Drive, Natick, Massachusetts ("Aspect") and GE Marquette Medical Systems, Inc. ("Marquette"), a Wisconsin corporation with its principal offices located at 8200 W. Tower Ave., Milwaukee, Wisconsin for the purchase and/or license by Marquette of products under the terms and conditions contained in this Agreement. 1. BACKGROUND. 1.1 Aspect is a developer, manufacturer and distributor of medical devices, equipment, related hardware, software and related products and accessories. 1.2 Marquette is a developer, manufacturer and distributor of medical devices, equipment, related hardware, software and related products and accessories, including multiparameter patient monitors. 1.3 Marquette desires to integrate Aspect's BIS and EEG technology into Marquette's multiparameter patient monitors. 1.4 Aspect agrees to sell and/or license to Marquette the products described below, subject to the terms and conditions contained in this Agreement. 2. DEFINITIONS. "ASPECT'S BISPECTRAL INDEX" or "BIS" is Aspect's proprietary processed EEG parameter that measures the hypnotic effects of anesthetic and sedative agents on the brain during surgery. "ASPECT'S EEG PARAMETERS" or "EEG" are Aspect's processed EEG parameters including Spectral Edge frequency, Median Frequency, Suppression Ratio, EMG and SQI (Signal Quality Index). "MARQUETTE PATIENT MONITOR" means any multi-parameter modular patient monitoring systems manufactured by or for Marquette. When the BIS/EEG Module Development 2 Project is complete, the Marquette BIS/EEG module will allow the Marquette Patient Monitor to display BIS and certain EEG data (waveforms, numerics, status info), and provide setup and operation information (user interface), alarming, and network connectivity. "MARQUETTE BIS/EEG MODULE" is the sum of all components involved in integrating the BIS and EEG with Marquette Patient Monitors. "DSC CABLE" is a cable used to connect the DSC-2 or DSC-4 to the Marquette BIS/EEG Engine. "MARQUETTE BIS/EEG ENGINE" is the processing unit for deriving the BIS and EEG data from the raw EEG signal and consists of Aspect's "BIS Engine" board modified for Marquette. "DIGITAL SIGNAL CONVERTER-2" (or "DSC-2") is used to amplify the analog EEG signals as acquired by the BIS sensors and convert it from analog to digital signals. The DSC-2 is used by Marquette BIS/EEG Module customers to obtain the BIS. "DIGITAL SIGNAL CONVERTER-4" (or "DSC-4") is used to amplify the analog EEG signals as acquired by the Zipprep electrodes and convert it from analog to digital signals. The DSC-4 is used by Marquette BIS/EEG Module customers to obtain 2 or 4-channel EEG data only. "ASPECT BIS/EEG MODULE KIT" means the bundle of all components of the Marquette BIS/EEG Module that are developed and manufactured by or for Aspect and licensed/sold to Marquette under this Agreement: DSC-2, DSC-4, DSC Cable, Marquette BIS/EEG Engine, and Module Cable. "ASPECT BIS SENSOR" means a single use disposable sensor manufactured by Aspect for use with the A2000 or with the Aspect BIS/EEG Module Kit and that is required to generate Aspect's Bispectral Index. "A2000" means Aspect's stand-alone BIS monitor for use with the Aspect BIS Sensor and that generates Aspect's Bispectral Index. "ASPECT PRODUCTS" means Aspect BIS/EEG Module Kit and any other product that can be ordered by Marquette as listed in Exhibit A (Aspect Products and Purchase Prices). "SOFTWARE" means Aspect software programs in binary code form which are designed for use with the Aspect BIS/EEG Module Kit. "DOCUMENTATION" means the BIS Engine Serial Interface Specification. "TERRITORY" shall mean all countries in which Marquette is permitted under this Agreement to distribute Aspect Products. "PARTY" or "PARTIES" shall mean Aspect and Marquette each individually or jointly. -2- 3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 3. BIS/EEG MODULE DEVELOPMENT PROJECT. 3.1 PROJECT TIMING. The overall project duration is expected to be at least [**]. The product introduction is targeted for the annual meeting of the [**], but if such target can not be satisfied the product introduction shall be targeted for no later than the annual meeting of [**]. A preliminary outline of the development project is attached to this Agreement as Exhibit C. 3.2 PROJECT MANAGEMENT. (a) Each Party shall appoint a "Project Manager" who shall oversee and manage the joint project on a day-to-day basis. (b) The Project Managers shall meet regularly based on the project needs to assess the project status and discuss and resolve any issues or problems. These meetings may be held face-to-face or as telephone or video conferences. (c) Each Party shall bear its own communication and travel costs. (d) All communication in conjunction with this Agreement shall be directed to the appropriate person and address as listed in Exhibit D (Contact Persons/Addresses). 3.3 MARQUETTE RESPONSIBILITIES. (a) Marquette shall develop the Marquette BIS/EEG Module according to mutually agreed specifications at Marquette's own cost. (b) Marquette shall develop, design and test the modular integration of the components of the Aspect BIS/EEG Module Kit with the Marquette Patient Monitors 3.4 ASPECT RESPONSIBILITIES. (a) Aspect shall design, develop, and test the Aspect BIS/EEG Module Kit according to the mutually agreed specifications. The costs for Aspect to complete this project, for which preliminary estimates are included in Exhibit C, shall be borne by Marquette. [**] of total estimated project costs shown on Exhibit C shall be paid by Marquette within [**] days of the date on which this Agreement is signed by both parties; [**] of total estimated project costs, shown on Exhibit C shall be paid [**] days thereafter, and the final payment of the remaining actual project costs (including labor at Aspect's standard labor rates) shall be paid upon the project's completion. Any [**] the [**] will be [**]; provided, however, that Marquette shall not pay over [**] toward non-recurring engineering ("NRE") and tooling to Aspect. -3- 4 4. PURCHASE AND SALE OBLIGATIONS; LICENSES. 4.1 GENERAL. Subject to the terms and conditions of this Agreement, Aspect agrees to sell to Marquette the Aspect Products listed on Exhibit A (Aspect Products and Purchase Prices). The components of the Aspect BIS/EEG Module Kits purchased from Aspect under this Agreement shall only be used as components in, incorporated into, or integrated with, systems and products which Marquette sells or leases to third-party users in the regular course of business. The components of the Aspect BIS/EEG Module Kits shall only be resold, leased, rented, licensed or otherwise transferred to third parties for use as a part of an Marquette BIS/EEG Module or as replacement parts used in Marquette BIS/EEG Modules and Marquette shall only sell Aspect approved accessories including cables and sensor products in connection with any Marquette BIS/EEG Module. During the term of this Agreement, Marquette agrees that it may offer complementary but not directly competitive products to the Marquette BIS/EEG Module. Marquette products other than the Marquette BIS/EEG Module that display a parameter claiming to be a measure of the hypnotic effect of anesthesia, are considered to be directly competitive products for purposes of this Section 4.1. 4.2 DISTRIBUTION OF ASPECT BIS SENSORS. Aspect hereby grants to Marquette a non-exclusive right to distribute Aspect BIS Sensors solely to Marquette customers outside of North America who have purchased Marquette BIS/EEG Modules. Prices for Aspect BIS Sensors purchased by Marquette hereunder shall be as set forth in Exhibit A (Aspect Products and Purchase Prices). 4.3 ASPECT SOFTWARE LICENSE. Aspect hereby grants to Marquette a non-exclusive and non-transferable worldwide license, without the right to sublicense (except to purchasers of Marquette BIS/EEG Modules), during the term of the Agreement to use the Software and related Documentation provided by Aspect solely in connection with operation of the components of Aspect BIS/EEG Module Kit in the Marquette BIS/EEG Module. Thereafter, Aspect grants to Marquette a right to use the Software and related Documentation used in conjunction with the Marquette BIS/EEG Modules being sold by Marquette on the date of termination with respect to service and support of installed Marquette BIS/EEG Modules for a period of 10 years, after termination of the Agreement. All rights granted to Marquette customers to use the Marquette BIS/EEG Modules shall survive any termination of this Agreement as long as such customers remain in compliance with the terms of use for such Marquette BIS/EEG Modules. Marquette shall not disclose, furnish, transfer, distribute or otherwise make available the Software, the Documentation or any portion thereof in any form to any third party (other than to purchasers of Marquette BIS/EEG Modules and to Marquette's subdistributors) and shall not duplicate the Software, the Documentation or any part thereof (other than for Marquette's internal use as provided above). Title to and ownership of any and all proprietary rights in or related to the Software and the Documentation therefor shall at all times remain with Aspect or its licensor(s). Nothing in this Agreement shall be construed as a sale of any rights in the Software or the Documentation. All references in this Agreement to sale, resale or purchase of the -4- 5 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect BIS/EEG Module Kits or the components thereof, or references of like effect, shall, with respect to the Software and the Documentation mean licenses or sublicenses of the Software and the Documentation pursuant to this Section 4. Marquette shall not disassemble, decompile or otherwise reverse engineer the Software or any part thereof, except if Aspect is required under applicable law to permit Marquette to reverse engineer any Software. In such event, Marquette may reverse engineer the Software but only to the extent Aspect is required to permit such reverse engineering. Marquette shall retain and shall not alter or obscure any notices, markings or other insignia affixed to the Software, the Documentation or any part thereof at the time it receives such Software or such Documentation. 4.4 EXCLUSIVITY. Except to the extent Marquette and Aspect may agree in the future to undertake co-marketing programs pursuant to Section 22, nothing in this Agreement shall be construed to grant Aspect any license to sell, distribute or license to any third party the Marquette BIS/EEG Module, the Marquette BIS/EEG Engine, or the Aspect BIS/EEG Module Kit. It is understood, however, that Aspect sells, distributes, and licenses to other third parties both generic and customized Aspect BIS/EEG Engines and Aspect BIS/EEG Module Kits to meet the needs of other OEM customers, and nothing in this Agreement shall prohibit Aspect from continuing to sell, distribute, or license these products or components thereof to customers other than Marquette. 4.5 STANDARD OF CARE; PRIORITY. In connection with Aspect's performance of its obligations hereunder, Aspect shall use commercially reasonable efforts in the performance of its obligations hereunder and will do so with the same degree of care, skill and prudence customarily exercised when engaged in similar activities for itself. 5. ROYALTIES AND COMMISSIONS. 5.1 ROYALTIES ON PURCHASES OF ASPECT MODULE KITS. For each Aspect BIS/EEG Module Kit that Marquette purchases from Aspect, Marquette shall pay a royalty fee and a price for all components of the Aspect BIS/EEG Module Kit. Royalty fees and component prices are specified in Exhibit A (Aspect Products and Purchase Prices); provided that the prices specified in Exhibit A shall not apply to the [**] for the [**] a [**] in [**] for [**] as part [**] agreement pursuant to [**], as [**] will be [**] to [**] at the [**] described in Exhibit A. Aspect BIS/EEG Module Kits sold by Aspect under this Agreement, [**], will be priced based on the Royalty fees and component prices specified in Exhibit A. 5.2 [**]. For [**] Aspect [**] by Aspect to Marquette [**] in North America for [**] with [**] or with Aspect [**] as part of any [**] pursuant to Section [**], -5- 6 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Aspect shall [**] Marquette a [**] to [**] of the [**] by Aspect for [**] Aspect [**]. Aspect shall [**] such [**] to Marquette on a [**]. With such [**], Aspect shall [**] to Marquette a [**] of Marquette [**] to which such [**], the [**] of [**] in that [**], and the [**] from the [**] of the [**] by Aspect. This [**] shall be [**] to Marquette no later than [**] the end of [**]. In the event that Aspect's standalone BIS monitors and/or the BIS modules of other manufacturers have also been installed at such sites in addition to Marquette BIS modules, [**] will be [**] to a [**] only on [**] for [**] with [**]. The Parties will agree upon a reasonable [**] for [**] the number of [**] with [**] in such an event (e.g. a [**] determination based on the [**] of [**] of [**] at [**] during the period) and [**] the [**] to Marquette accordingly. To facilitate [**], Marquette will be responsible for providing Aspect with [**] of the [**], the [**]. 6. SCOPE OF DELIVERY 6.1 PURCHASE ORDERS. Purchase orders (via Fax, e-mail, other electronic transmission or paper) for Aspect Products to be purchased under this Agreement (the "Orders") must be received by Aspect during the term of this Agreement and must specify a delivery date in accordance with the lead-time schedule outlined below under Section 6(e). All Marquette Purchase Orders shall make reference to the appropriate engineering drawing or manufacturing reference numbers. There is no minimum volume commitment required for each purchase order. 6.2 ORDER ACKNOWLEDGEMENTS. Marquette purchase orders shall be acknowledged by Aspect within 5 days after receipt of the order, provided that the order is technically correct and that the requested delivery time is within the agreed lead time and that the latest forecast provided by Marquette is not exceeded by more than [**] and the quantity ordered does not exceed by more than [**] of the quantity ordered in the preceding month. If the requested delivery time is less than the agreed lead time, or if Marquette's latest forecast is exceeded by more than [**], or if the quantity ordered exceeds by more than [**] the quantity ordered in the preceding month, Aspect shall use reasonable efforts to complete the requirements of such nonconforming orders within seventy (70) days from the date it receives such nonconforming order and to acknowledge such orders within 10 days of its receipt. Order acknowledgements shall not be unreasonably withheld. 6.3 FORECASTS. Marquette shall furnish to Aspect a non-binding quarterly forecast during the term of this Agreement with the number and type of Aspect Products for which Marquette expects to submit orders for the following twelve months. -6- 7 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 6.4 CANCELLATION CHARGES. In the event of the cancellation of any Order by Marquette, Marquette shall be liable for the payment of cancellation charges based on the number of days prior to scheduled delivery date that written notice of cancellation is received by Aspect, as outlined below: [Greater than] 10 weeks prior to acknowledged delivery [**] 6 - 10 weeks prior to acknowledged delivery [**] of order value 4 - 6 weeks prior to acknowledged delivery [**] of order value 2 - 4 weeks prior to acknowledged delivery [**] of order value [Less than] 2 weeks prior to acknowledged delivery [**] of order value
6.5 COMMITMENT. Except as set forth in Section 6.4, Marquette has no commitment to purchase any minimum quantity of Aspect Products or Aspect BIS Sensors pursuant to this Agreement. Except as set forth in Section 6.4, unless agreed otherwise in writing by the parties, Marquette shall not be responsible or in any way liable to Aspect or any third party with respect to any component purchase commitments or production arrangements in excess of the amounts or in advance of the times necessary to meet Marquette's delivery schedules set forth in its Orders. 6.6 LEAD TIMES. Lead times for the Aspect BIS/EEG Module Kit are expected to be [**] days. Late deliveries are subject to late fees of [**] per month (pro-rated daily. In the event of late deliveries by Aspect, Aspect will also promptly reimburse Marquette for expedited shipment charges that Marquette incurs as a direct result of late shipments of the Aspect BIS/EEG Module Kit from Aspect . 7. PRICES. 7.1 PURCHASE PRICES. The prices of Aspect Products purchased by Marquette hereunder (the "Purchase Prices") which are ordered during the term of the Agreement shall be as set forth in Exhibit A (Aspect Products and Purchase Prices). 7.2 PURCHASE PRICE CHANGES. In consideration of the market situation and after consultation with Marquette, the Purchase Prices set forth in Exhibit A (Aspect Products and Purchase Prices) shall be reviewed 12 months after first delivery of production units and annually thereafter. Any price adjustment shall become effective only after mutual agreement between both Parties. [**], Aspect shall have the right [**] during the term of this Agreement to increase the Purchase Price of the Aspect Products without the consent of Marquette by an equivalent amount by delivering reasonable documentation supporting such increase and by giving Marquette written notice of the increase not less than [**] days prior to the date upon which the increased Purchase Price is to become effective. [**] shall apply to orders for Aspect Products accepted by Aspect prior to or during such [**] day period which are to be delivered within [**] days of the date of such notice. -7- 8 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Notwithstanding anything to the contrary in this Section 7.2, [**] unless [**] reasonable efforts to [**] of the [**] which have [**] in [**] and, [**] reasonable efforts, was not [**] to [**]. 7.3 PURCHASE PRICE REDUCTIONS. Aspect may reduce the Purchase Price of any Aspect Product at any time. Such reduction shall be applicable to all Aspect Products shipped after the date of the reduction. [**] the [**] of the [**] for the [**] by [**] as provided in Section 7.2, Aspect shall reduce the Purchase Prices for all Aspect Products (excluding license fees and volume discounts) by not less than [**] per year. The first price reduction will be effective on the [**] anniversary of the introduction of the Marquette BIS/EEG Module, and the second price reduction shall be effective on the [**] anniversary of the introduction of the Marquette BIS/EEG Module. 7.4 [**]. In no case shall the [**] by any other Party that has [**] with Aspect [**] of this Agreement for [**] under [**] terms and conditions. 7.5 TAXES. All prices for Aspect Products are exclusive of all federal, state and local taxes, levies and assessments, and Marquette shall be responsible for the payment of all such taxes, levies and/or assessments imposed on Aspect Products purchased and/or licensed by Marquette hereunder, excluding taxes based on Aspect's net income from the transaction. Marquette shall be responsible for providing in a timely manner all documentation, in the nature of exemption certificates or otherwise, necessary to allow Aspect to refrain from collections, such as sales tax, which it would otherwise be obligated to make. 8. TERMS OF PAYMENT. 8.1 INVOICES. Marquette shall pay to Aspect the Purchase Price for all Aspect Products shipped hereunder within forty-five (45) days after the receipt of Aspect's invoice. Nothing herein shall affect Aspect's right to withhold shipment or otherwise exercise its rights under Section 23 (Termination) hereof in the event of Marquette's failure to make payment when due for Aspect Products delivered to Marquette. Marquette shall have the right to provide Aspect with a specific address to which Aspect will send invoices for Aspect Products purchased under this Agreement. 8.2 LATE PAYMENT CHARGE. Subject to applicable law, service and/or interest charges not exceeding the lesser of [**] per month or the highest amount permitted by law may, at the election of Aspect, be assessed on amounts past due more than [**] days (that is, more than [**] days after the payment due date as specified in Section 8.1). 9. SHIPMENT AND DELIVERY. 9.1 DELIVERY LOCATION. Each shipment must indicate the exact address of the recipient on the outside of the packaging as follows: -8- 9 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. [TBD] 9.2 DELIVERY TERMS. All shipments hereunder shall be FOB Aspect's Massachusetts point of origin (Incoterms 1990). All Aspect Products shall be deemed delivered and subject to Marquette's dominion and control only when placed in the possession of a carrier designated by Marquette, properly packed and ready for shipment to Marquette. Aspect shall cooperate with Marquette in the documentation and proof of loss claims promptly presented by Marquette to the appropriate carrier and/or insurer. 9.3 DELIVERY DATE AND DATE OF DISPATCH. The requested delivery date shall be specified on the Marquette Purchase Order provided that such delivery date must be at least [**] days after the date Aspect receives the Order; provided, however, that Aspect shall use its reasonable efforts to deliver the Order as early as reasonably possible (taking other customer demands on Aspect into account). Aspect shall utilize reasonable efforts to ensure that the order is delivered in accordance with Aspect's order acknowledgement and that the date of dispatch is ten (10) days prior to the delivery date. Late delivery penalties to Aspect will apply as specified in Section 6.6 of this Agreement. 10. ACCEPTANCE. Any Aspect Product shipped hereunder may be subjected to inspection and performance testing by Marquette, to confirm that it functions in accordance with Aspect's applicable product specifications in effect at the time of delivery of such Aspect Products to Marquette . Marquette shall provide written notice to Aspect of the rejection of any such Aspect Product within [**] days of the date of receipt of any Aspect Product. Aspect shall have [**] days from receipt of a notice from Marquette rejecting an Aspect Product either, at its option, to make any necessary repairs to the defective Aspect Product or to replace it. If Aspect replaces an Aspect Product, Marquette shall dispose of the replaced Aspect Product in accordance with Aspect's instructions and at Aspect's expense. Marquette's sole remedy for rejected Aspect Products shall be limited to prompt repair or replacement of such Aspect Products. 11. WARRANTY. 11.1 GENERAL. Aspect warrants solely to Marquette that Aspect Products (including Software) delivered hereunder shall perform substantially in accordance with the specifications in Exhibit B (Aspect's Standard Module Kit) or other applicable product specifications as published by Aspect in effect at the time of delivery of such Aspect Product (including Software), and shall be free from defects in materials and workmanship, when given normal, proper and intended usage, for twelve (12) months from the date of shipment of the Marquette BIS/EEG Module at Marquette's end customer site or eighteen (18) months from the date of shipment by Aspect to Marquette, whichever is less. Aspect agrees, during the applicable warranty period, to repair or replace (at Aspect's option) all defective Aspect Products within thirty (30) days after the date of return to Aspect and without cost (including shipping) to Marquette. In the event that Aspect is unable to repair or replace such defective Aspect Products -9- 10 within such thirty (30) day period, Aspect agrees to refund to Marquette the amounts paid to Aspect for such defective Aspect Products. This warranty shall not apply to expendable components and supply items, such as, but not limited to, cables, fuses and bulbs (or disposable items such as an Aspect BIS Sensor after the expiration date marked on the Sensor packaging); nor shall Aspect have any obligation under this Agreement to make repairs or replacements which are required by normal wear and tear, or which result, in whole or in part, from catastrophe, fault or negligence of Marquette, or anyone claiming through or on behalf of Marquette, or from improper or unauthorized use of Aspect Products, or use of Aspect Products in a manner for which they were not designed, or by causes external to Aspect Products such as, but not limited to, power or air conditioning failure. 11.2 WARRANTY PROCEDURES. Marquette shall notify Aspect of any Aspect Products which it believes to be defective during the applicable warranty period and which are covered by the warranties set forth in Section 11.1. At Aspect's option, such Aspect Products shall be returned by Marquette to Aspect's designated facility for examination and testing, or may be repaired on site by Aspect. Aspect shall either repair or replace, within thirty (30) days of receipt by Aspect, any such Aspect Product found to be so defective and promptly return such Aspect Products to Marquette. Transportation and insurance costs shall be borne by Aspect. Should Aspect's examination and testing not disclose any defect covered by the foregoing warranty, Aspect shall so advise Marquette and dispose of or return the Aspect Product in accordance with Marquette's instructions and at Marquette's sole expense, and Marquette shall reimburse Aspect for such transportation and insurance costs. 11.3 REPAIR WARRANTY. Aspect warrants its repair work and/or replacement parts for the duration of the original warranty period as set forth in Section 10(a) or at least six (6) months, whichever is longer. 11.4 DISCLAIMER OF WARRANTIES. THE PROVISIONS OF THE FOREGOING WARRANTIES ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL (INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 12. SERVICE AND SUPPORT. 12.1 SERVICE AND SUPPORT. Marquette shall be responsible for providing installation, customer training, service and support (including repair) to its end customers for the Aspect Products Marquette sells to such customers, and Marquette shall bear all related costs incurred for labor, parts, or travel to perform such service. 12.2 CENTRAL REPAIR SERVICE. For the term of this Agreement, Aspect agrees to provide central repair service (as opposed to field service) to Marquette for Aspect Products sold hereunder. -10- 11 12.3 SERVICE TRAINING. Aspect agrees to provide initial service training to a mutually agreed upon number of Marquette service representatives prior to the market release of the EEG/BIS module, as well as periodic (annually at a minimum) ongoing training for existing and new Marquette service personnel. 12.4 SERVICE PERIOD. For a period of seven (7) years following the last delivery to Marquette of the applicable Aspect Product ordered by Marquette hereunder, Aspect shall use its reasonable efforts to make available repair service (or at Aspect's sole discretion, exchange units for the Aspect Products) for purchase by Marquette and third party users of the Aspect products at Aspect's then-current prices for such repair services and exchange units. After expiry of this seven (7) year period, Aspect may, in its sole discretion, continue to supply repair services (and/or exchange units for the Aspect Products) subject to the mutual written agreement of the Parties. 12.5 SERVICE REPORTING. Aspect shall maintain a complete record of all repair activities performed on any Aspect products received for repair, and shall provide Marquette with a quarterly report on all service actions including failure and repair statistics at a sub-assembly level Service Reports for each product shall be sent electronically by email to a designated procurement and technical marketing engineer (Contact Persons shown in Exhibit D, Contact Persons / Addresses). Root cause analysis is to be performed and reported by Aspect to Marquette in case of abnormal failures, incidents and malfunctions. 13. QUALITY ASSURANCE. 13.1 CERTIFICATION STATUS. Both parties agree to maintain ISO900x, EN460x, European directive 93/42/EEC Annex II ("MDD AX-II") certification status and compliance with the U.S. Food and Drug Administration's ("FDA") Quality System Regulation ("QSR"), the European Medical Device Directive ("MDD"), and other appropriate regulations pertinent to the development, manufacturing and marketing of medical products similar to the Aspect Products. 13.2 ASPECT PRODUCT COMPLIANCE. All Aspect Products sold by Aspect under this Agreement shall fully comply with the above quality requirements and guidelines (MDD AX-II, FDA QSR, etc.) 13.3 QA AND REGULATORY AUDITS. Aspect shall permit Marquette's Quality Assurance department to conduct a reasonable audit of its facilities at a mutually agreed upon date after the date of this Agreement for the purpose of approving its status as an OEM supplier, and reasonable periodic audits thereafter for the purpose of confirming continuing compliance with applicable quality and regulatory requirements and guidelines. Such audits shall be scheduled with at least thirty (30) days advance notice during normal business hours and shall not take place more than once per calendar year. 14. REGULATORY MATTERS. -11- 12 14.1 ASPECT PRODUCTS. Aspect shall assume full regulatory responsibility for the Aspect Products, including obtaining and maintaining all applicable governmental authorizations and regulatory approvals required to distribute the Aspect BIS/EEG Module Kit. Both Parties shall work together to develop a regulatory plan which defines precisely what these regulatory and localization requirements are for all countries where the Marquette BIS/EEG Module is intended to be sold. In particular, Aspect shall be responsible for generating its own Device Master Record for the Aspect BIS/EEG Module Kit. It is understood that the Aspect BIS/EEG Module Kit shall be a component of the Marquette BIS/EEG Module. Marquette shall be responsible for obtaining and maintaining all applicable governmental authorizations and regulatory approvals required to distribute the combination of Aspect and Marquette products in the Marquette BIS/EEG Module as provided in Section 14.3. 14.2 MARQUETTE PATIENT MONITORS. Marquette shall assume full regulatory responsibility for the Marquette Patient Monitors, including obtaining and maintaining all applicable governmental authorizations and regulatory approvals required to distribute the Marquette Patient Monitors in all countries in the Territory. 14.3 MARQUETTE BIS/EEG MODULE. Marquette shall assume the regulatory responsibility for the combination of the Aspect and Marquette components in the Marquette BIS/EEG Module. Aspect shall fully support Marquette as required in the process of obtaining regulatory approvals by making available to Marquette any required information, data, certificates, or technical files in the requested formats. 14.4 INTERNATIONAL REGULATORY RESPONSIBILITIES. For bringing the Aspect Products into the market in countries affected by the European Medical Device Directive ("MDD"), Aspect is the legally responsible manufacturer under the MDD. The Aspect Products shall be marked accordingly. 14.5 PRODUCT COMPLAINTS AND INCIDENT REPORTING. Marquette and Aspect shall inform each other in writing immediately about any event that may require incident reporting in any country. Marquette and Aspect shall inform each other in writing within two (2) business days of a customer complaint regarding the Marquette BIS/EEG Module, the Aspect Products, or (within the Territory) Aspect BIS Sensors. Both parties will cooperate and use commercially reasonable efforts to resolve such customer complaints. Closure of any customer complaint relating to the Marquette BIS/EEG Module will occur when Marquette notifies Aspect that the problem is resolved. Closure of any customer complaint relating solely to Aspect Products or Aspect Sensors will occur when Aspect notifies Marquette that the problem is resolved. 14.6 RECALLS. In the event of any recall of an Aspect Product required by either a governmental agency, by Aspect, or by Marquette for safety or efficacy reasons which is the result of Aspect's failure to supply Aspect Products that (1) conform in all material respects to the applicable published specifications (including the -12- 13 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. specifications set forth in Exhibit B (Aspect's Standard Module Kit)) or (2) are free from defects in material and workmanship (when given normal, proper and intended usage), Aspect agrees to repair or replace at its own costs all Aspect Products subject to the recall and previously delivered to Marquette. Aspect also agrees to consult with Marquette to establish a reasonable process for managing the recall and Aspect shall be [**] (including, but not limited to [**] that are consistent with the recall process agreed to by the Parties. In the event that Aspect at its sole discretion requests a recall that is not required by a governmental agency for safety or efficacy reasons, Aspect shall be responsible for determining the scope of the recall, including the number of units, timeframe for the recall, and criteria for completion. Marquette agrees to maintain all necessary sales records to facilitate the recall. 14.7 DELEGATION. Marquette may at its sole discretion delegate some of the obligations under this Section 14 to its sub-distributors. 14.8 TRACEABILITY. For the purpose of facilitating product traceability, all Products purchased from Aspect by Marquette shall require identification of an internal order number and tracking code. 15. PRODUCT CHANGES; DISCONTINUED PRODUCTS; FUTURE PRODUCTS; CONTINUED SUPPLY. 15.1 PRODUCT CHANGES. Aspect shall have the right, at any time and from time to time, to make substitutions and modifications to Aspect Products, provided that such substitutions or modifications shall not materially affect form, fit, function, reliability, serviceability, performance, functional interchangeability or interface capability of Aspect Products. In the event that any proposed substitution or modification affects, in Aspect's reasonable judgment, the form, fit, function, reliability, serviceability, performance, functional interchangeability or interface capability of an Aspect Product, Aspect shall give Marquette written notice of such proposed substitution or modification at least [**] days prior to its taking effect and Marquette shall have the right, during such [**] day period and for [**] days thereafter, to order Aspect Products without such substitution or modification for delivery up to [**] days after such substitution or modification takes effect. Aspect shall provide the appropriate verification and validation information for evaluating the effect of the change on the Marquette BIS/EEG Module. 15.2 DISCONTINUED PRODUCTS. Aspect agrees to notify Marquette in writing not less than [**] in advance of the discontinuance of any Aspect Product. Marquette shall be able to place orders for at least [**] after receipt of the written notice in any case. In addition, Marquette shall be entitled to determine its lifetime-buy quantities and place a corresponding last purchase order. 15.3 FUTURE PRODUCTS. The Aspect Products are designed for use in measuring the effects of anesthetic and sedative agents on the brain during surgery. In the event that Aspect develops a product involving this or a different type of index, patient -13- 14 sensor, or application, Aspect and Marquette agree to discuss in good faith a new agreement for the purchase of such new product or products by Marquette. 16. OWNERSHIP AND PROTECTION OF RESULTS. 16.1 NO TRANSFER OF OWNERSHIP. It is expressly agreed that neither Aspect nor Marquette shall transfer to the other Party any patent rights, copyrights or other intellectual property of any kind that either Party owns as of the Effective Date of this Agreement. 16.2 MODELS, PATTERNS, DIES, ETC. Aspect shall retain the title to and possession of any models, patterns, dies, molds, jigs, fixtures, and other tools made for or obtained in connection with this Agreement and related to the Aspect Products, even if made for, obtained by or paid for by Marquette. 16.3 DEVELOPMENTS. If there are developments (including patentable inventions) conceived, created or reduced to practice under this Agreement then the rights to such developments shall be retained (a) by Aspect if conceived, created and reduced to practice solely by Aspect, or (b) by Marquette, if solely conceived, created and reduced to practice by Marquette, or (c) jointly by Marquette and Aspect (without any duty to account to the other) if jointly developed by Marquette and Aspect, provided that: (i) Marquette shall assign to Aspect all rights to any developments conceived, created or reduced to practice by Marquette solely relating to the Aspect BIS/EEG Module Kit; and (ii) Aspect shall assign to Marquette all rights to any development solely relating to the Marquette Patient Monitor. 17. DOCUMENTATION AND TRAINING. Aspect agrees to provide Marquette with such product literature, operations and maintenance manuals, and other information and training (including training to avoid possible misrepresentation of Aspect's Bispectral Index) as is mutually agreed, to enable Marquette to properly sell and maintain Aspect Products, provided that in no event shall the source code or source listings of Aspect Software be required to be disclosed or provided by Aspect to Marquette [**]. Aspect agrees to give Marquette the rights to use or reproduce its user documentation for incorporation into Marquette documentation excluding source code or source listings as previously mentioned. Such documentation should be provided in an electronic format. Aspect shall be given the opportunity to review and approve Marquette documentation that incorporates Aspect documentation prior to publication. The training Aspect is required to provide Marquette under this Section 17 shall begin at least three (3) months prior to introduction of the Marquette BIS/EEG Module and shall be defined as part of the Project's marketing plan. -14- 15 18. CONFIDENTIALITY. No confidential information disclosed by either Party to the other in connection with this Agreement shall be disclosed to any person or entity other than the recipient Party's employees and contractors directly involved with the recipient Party's use of such information who are bound by written agreement to protect the confidentiality of such information, and such information shall otherwise be protected by the recipient Party from disclosure to others with the same degree of care accorded to its own confidential information of like importance. In addition, each Party and its representatives shall use the confidential information only for the purposes specified under this Agreement and such information shall not be used for any other purpose without the prior written consent of the disclosing Party. To be subject to this provision, information must be delivered in writing and designated as proprietary or confidential, or if initially delivered orally, must be identified at the time of disclosure, and confirmed in writing as confidential within ten (10) days after such oral disclosure. Information shall not be subject to this provision if it is or becomes a matter of public knowledge without the fault of the recipient Party, if it was a matter of written record in the recipient Party's files prior to disclosure to it by the other Party, if it was or is received by the recipient Party from a third person under circumstances permitting its unrestricted disclosure by the recipient Party, or if it was independently developed by the recipient Party without reference to the confidential information. Upon termination of this Agreement, each Party shall promptly destroy all confidential information of the other Party in the possession or control of such Party and all copies thereof, provided that each Party may retain one copy thereof for archival purposes. The obligations under this Section 18 shall continue for both parties for a period of five (5) years after delivery by Aspect to Marquette of the last Aspect Product under this Agreement, provided, however that any [**] pursuant to [**] shall be maintained in confidence in perpetuity. Marquette is entitled to transmit confidential information of Aspect to Marquette subsidiaries and affiliated companies. In such, case these subsidiaries and affiliated companies may only use such information to the same extent as Marquette is entitled to use such information under this Agreement. Marquette shall be responsible if any of these subsidiaries and affiliated companies fail to comply with the confidentiality provisions of this Agreement. -15- 16 19. WARRANTIES AND INDEMNITIES. 19.1 WARRANTIES BY ASPECT. (a) Aspect represents and warrants that it either has all rights, title and interest in, or valid licenses to, the Aspect Products and any related intellectual property rights thereto. Aspect represents and warrants that it has not granted in the Territory any exclusive licenses or exclusive sublicenses in the Aspect Products that would prevent it from granting Marquette the licenses set forth in Section 4.3 (Aspect Software License). Aspect also represents and warrants that it has the right and authority to engage in the joint development of the Marquette BIS/EEG module as contemplated hereunder and that to its knowledge such activity will not infringe upon or misappropriate any third party's intellectual property rights. (b) Aspect warrants that it will deliver all Aspect Products free from the rightful claims of any third party for infringement of any Patents, Trademarks or Copyrights or misappropriation of Trade Secrets. Aspect also warrants that as of the date of this Agreement, Aspect has received no notice of a claim of infringement or misappropriation from any third party regarding Aspect Products. Marquette's exclusive remedy with respect to breach of any warranty provided in this Section 19.1 shall be that Aspect will defend at its own expense, and will pay the costs and damages (including attorneys fees, other professional fees and other costs of litigation or settlement) made in settlement or awarded as a result of, any action brought against Marquette or any of Marquette's customers based on an allegation of such infringement or misappropriation with respect to any Aspect Product, provided that the Indemnification Procedures set forth in Section 19.3 are followed. If an injunction is obtained against Marquette's or its customers' use of an Aspect Product by reason of an infringement or misappropriation described above, or if in Aspect's opinion an Aspect Product or any part thereof is likely to become the subject of a claim of such infringement or misappropriation, Aspect will, at its option and its own expense procure the right for Marquette and its customers to continue using such Aspect Product, or replace or modify such Aspect Product or any part thereof so that it becomes non-infringing. If neither of the foregoing options are reasonably available to Aspect, Aspect shall have the right to discontinue supplying such Aspect Products to Marquette. Aspect shall not have any obligation to Marquette or its customers under any provision of this Section if the infringement or misappropriation claim is based upon the modification of any Aspect Product not made by Aspect, the use of Aspect Products in combination with any program or equipment, or any part thereof, not furnished or recommended in writing by Aspect, or the use of such Aspect Products in a manner or environment, or for any purpose, for which Aspect did not design or license them. -16- 17 (c) In the event that any claim is brought against Marquette as a result of personal injuries and/or property damages resulting from that portion of the Marquette BIS/EEG Module developed and manufactured by Aspect, and provided further that such claims do not arise as a result of the misuse of the Aspect Products, or the use of the Aspect Products in an application for which it was not designed by Aspect, where such claim would not have occurred but for such misuse or use, Aspect agrees that it shall indemnify and hold Marquette and its directors, officers, employees, representatives and agents harmless from and against any damages, liabilities, costs and expenses (including attorneys' and other professional fees and other costs of litigation) arising out of such claim, provided that the procedures set forth in Section 19.3 are followed. 19.2 WARRANTIES BY MARQUETTE. (a) Marquette represents and warrants that it either has all rights, title and interest in, or valid license to, the Marquette Patient Monitor and any related intellectual property rights thereto. Marquette also represents and warrants that it has the right and authority to engage in the development of the Marquette BIS/EEG Module as contemplated hereunder and that to its knowledge such activity will not infringe upon or misappropriate any third party's intellectual property rights or violate the terms of any agreement Marquette has entered into with a third party. (b) Marquette warrants that as of the date of this Agreement, Marquette has received no notice of a claim of infringement or misappropriation from any third party regarding the Marquette Patient Monitor or any other Marquette-supplied component of the Marquette BIS/EEG Module. Aspect's exclusive remedy with respect to breach of any warranty provided in this Section 19.2 shall be that Marquette will defend at its own expense, and will pay the costs and damages (including attorneys fees, other professional fees and other costs of litigation or settlement) made in settlement or awarded as a result of, any action brought against Aspect or any of Aspect's customers based on an allegation of such infringement or misappropriation with respect to any Marquette Patient Monitor or any other Marquette-supplied component of the Marquette BIS/EEG Module, provided that the Indemnification Procedures set forth in Section 19.3 are followed. If an injunction is obtained against Aspect's or its customers' use of a Marquette Patient Monitor or any other Marquette-supplied component of the Marquette BIS/EEG Module by reason of an infringement or misappropriation described above, or if in Marquette's opinion a Marquette Patient Monitor or any other Marquette-supplied component of the Marquette BIS/EEG Module or any part thereof is likely to become the subject of a claim of such infringement or misappropriation, Marquette will, at its option and its own expense procure the right for Aspect and its customers to continue using such Marquette Patient Monitor or any other Marquette-supplied component of the Marquette -17- 18 BIS/EEG Module, or replace or modify such Marquette Patient Monitor or any other Marquette-supplied component of the Marquette BIS/EEG Module or any part thereof so that it becomes non-infringing. Marquette shall not have any obligation to Aspect or its customers under any provision of this Section 19.2 if the infringement or misappropriation claim is based upon the use of Marquette Patient Monitors or any other Marquette-supplied component of the Marquette BIS/EEG Modules in combination with any program or equipment, or any part thereof, not furnished or recommended in writing by Marquette, or the use of such Marquette Patient Monitors or any other Marquette-supplied component of the Marquette BIS/EEG Modules in a manner or environment, or for any purpose, for which Marquette did not design or license them. (c) In the event that any claim is brought against Aspect as a result of personal injuries and/or property damages resulting from the Marquette BIS/EEG Module, and provided further that such claims do not arise as a result of the defective design or operation of that portion of the Marquette BIS/EEG Module developed or manufactured by Aspect, Marquette agrees that it shall indemnify and hold Aspect and its directors, officers, employees, representatives and agents harmless from and against any damages, liabilities, costs and expenses (including attorneys' and other professional fees and other costs of litigation) arising out of such claim, provided that the procedures set forth in Section 19.3 are followed. 19.3 INDEMNIFICATION PROCEDURES. (a) In the event that any person intends to claim indemnification pursuant to this Agreement, (an "Indemnitee"), it shall promptly notify the indemnifying Party (the "Indemnitor") in writing of such alleged liability, provided that the failure to promptly notify the Indemnitor shall not relieve the Indemnitor of any obligation under this Agreement except to the extent such failure to provide prompt notice adversely impairs the Indemnitor's ability to defend against the claim, suit or proceeding. (b) The Indemnitor shall have the sole right to control the defense and settlement thereof, provided, that (i) the Indemnitor may not consent to imposition of any obligation or restriction on the Indemnitee in any settlement unless mutually agreed among Aspect and Marquette (ii) Indemnitor shall keep Indemnitee fully informed and permit the Indemnitee to participate (at Indemnitee's expense) as the Indemnitee may reasonably request and (iii) Indemnitee may, without affecting its right to indemnity hereunder, defend and settle any such claim, suit or proceeding if Indemnitor declines to defend against such claim, suit or proceeding or Files for Bankruptcy. The Indemnitee shall cooperate with the Indemnitor and its legal representatives in the investigation of any action, claim or liability covered by this Agreement. -18- 19 (c) The Indemnitee shall not, except at its own cost, voluntarily make any payment or incur any expense with respect to any claim or suit without the prior written consent of Indemnitor, which Indemnitor shall not be required to give, provided that the Indemnitee may, without affecting its right to indemnity hereunder, defend and settle any such claim, suit or proceeding if the Indemnitor declines to take responsibility or Files for Bankruptcy. 20. TRADEMARKS. 20.1 TRADEMARKS. (a) OWNERSHIP. Marquette acknowledges and agrees that Aspect is the sole and exclusive owner of all right, title and interest in, or has valid licenses to the trademarks (the "Aspect Trademarks") identified on Exhibit E (Aspect Trademarks). Aspect acknowledges and agrees that Marquette is the sole and exclusive owner of all right, title and interest in and to the trademarks (the "Marquette Trademarks") identified on Exhibit F (Marquette Trademarks). Each Party recognizes the value of the other Party's Trademarks and the good will associated with the other Party's Trademarks. Marquette agrees that its use of the Aspect Trademarks and any good will arising therefrom shall inure to the benefit of Aspect. Aspect agrees that its use of the Marquette Trademarks and any good will arising therefrom shall inure to the benefit of Marquette. Nothing contained herein shall create, nor shall be construed as an assignment of, any right, title or interest in or to the Aspect Trademarks to Marquette, or the Marquette Trademarks to Aspect, other than the grant of the licenses in Section 20.1 (c) below; it being acknowledged and agreed that all other right, title and interest in and to the Aspect Trademarks is expressly reserved by Aspect and its licensors, and all other right, title and interest in and to the Marquette Trademarks is expressly reserved by Marquette. Each Party shall keep the other Party's Trademarks free from all liens, mortgages or other encumbrances. Each Party agrees that it shall not attack or otherwise challenge the title, validity or any other rights of the other Party in or to its Trademarks. (b) NOTICE. All Marquette BIS/EEG Modules that use the Aspect Trademarks shall be accompanied, where reasonable and appropriate, by a proprietary notice consisting of the following elements: (i) The statement "[insert trademark(s)] is a trademark(s) of [or licensed to] Aspect Medical Systems, Inc." (ii) Marquette shall include the "(TM)" or "(R)" symbol, as instructed by Aspect, after the first prominent use of the Aspect Trademark in the Marquette Patient Monitor and related materials. Marquette shall have a period of sixty (60) days in which to begin to use the -19- 20 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. "(R)" symbol in replacement of the "(TM)" symbol upon receiving instructions to do so by Aspect for all new stock of such materials. Marquette may continue to deliver stocked literature before the change becomes effective. Marquette shall reproduce copyright and trademark notices of Aspect on the "splash screen" or in the same location where Marquette reproduces its own copyright and trademark notices . (c) LICENSE. Each Party hereby grants to the other a nonexclusive, worldwide, royalty-free license (without the right to sublicense) to use the other Party's Trademarks to designate and promote Aspect Products in conjunction with Marquette BIS/EEG Modules. Neither Party shall have any other right to use, display or utilize the other Party's Trademarks for any other purpose or in any other manner. (d) QUALITY STANDARDS. (i) INSPECTION. Upon reasonable notice and request, each Party will furnish to the other samples of its applicable advertising and promotional materials as necessary to allow the requesting Party to monitor compliance with this Agreement. (ii) COMPLIANCE. Aspect acknowledges the high standards of quality and excellence established by Marquette with respect to products bearing Marquette's trademarks. Marquette acknowledges the high standards of quality and excellence established by Aspect with respect to products bearing the Aspect Trademarks. Each Party agrees that Marquette BIS/EEG Modules with which both parties' Trademarks are used shall be of such quality so as to maintain such high standards and to reflect well upon both Parties. Each Party agrees to adhere to its own or the following quality standards (whichever may be more rigorous) for use of the other Party's Trademarks in connection with the Marquette BIS/EEG Module: - In order to ensure that the Marquette BIS/EEG Module distributed under both parties' Trademarks complies with the consistent quality standards of each Party, all Marquette BIS/EEG Modules distributed by or for Marquette which bear an Aspect Trademark shall conform to those commercially reasonable standards which Aspect provides to Marquette in writing. Marquette shall cause each major new release of such Marquette BIS/EEG Modules to comply with such standards or remove the Aspect Trademark(s) from any such new release, which does not comply with such standards. Marquette shall have a period of [**] in which to bring newly manufactured Marquette -20- 21 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. BIS/EEG Modules into compliance with any commercially reasonable standard provided to it in writing by Aspect following the date of receipt of such standard. - Each Party acknowledges that if Marquette BIS/EEG Modules bearing both Parties' Trademarks fail to satisfy the quality standards set forth above, the substantial good will which each Party has built and now possess in its own products and Trademarks shall be impaired. (e) PROTECTION AND INFRINGEMENT. Each Party agrees to cooperate with and assist the other Party in obtaining, maintaining, protecting, enforcing and defending the other Party's proprietary rights in and to its Trademarks. In the event that either Party learns of any infringement, threatened infringement or passing-off of the other Party's Trademarks, or that any third party claims or alleges that the other Party's Trademarks infringe the rights of the third party or are otherwise liable to cause deception or confusion to the public, the Party obtaining such information shall notify the other Party giving the particulars thereof, and if such claims or allegations relate to this Agreement, the Marquette BIS/EEG Module, the Aspect BIS/EEG Kit or Aspect Products sold hereunder, shall provide necessary information and assistance reasonably requested by such other Party in the event that such other Party decides that proceedings should be commenced. (f) TERMINATION. In addition to the termination rights set forth in Section 23 hereof, in the event that either Party is in material breach of any provision of this Section 20, the non-breaching Party may, upon [**] days written notice, terminate the license granted in Section 20.1 (c) if the breaching Party does not cure such breach or default within such [**] day period. In addition to the provisions of Section 23 hereof, upon termination of the license granted in Section 20.1 (c), or upon termination of this Agreement, for whatever cause: (i) each Party shall immediately cease and desist from any further use of the other Party's Trademarks and any trademarks confusingly similar thereto, either directly or indirectly; (ii) All rights in the Aspect Trademarks granted to Marquette hereunder shall immediately revert to Aspect, and all rights in the Marquette Trademarks granted to Aspect hereunder shall immediately revert to Marquette; (iii) In the event that this Agreement is terminated for any reason other than a material breach or material default by Marquette, Marquette shall thereafter to dispose of all of the unsold Marquette Patient Monitors bearing the Trademarks and advertising and promotional -21- 22 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. materials relating thereto which had been completed by it prior to such termination, provided such Marquette Patient Monitors and materials were in the process of manufacture before such termination. (g) PROMOTIONAL CLAIMS. The general form of any promotional claims by Marquette regarding Aspect's Bispectral Index technology and/or the integration of Aspect's Bispectral Index technology in Marquette Patient Monitors, and the specific form of the use of Aspect's trade names and trademarks, and of intended use claims regarding Aspect's Bispectral Index technology, in promotional material, advertisement, and/or in written technical literature shall be subject to review and approval by Aspect prior to its publication or display. The general form of any promotional claims by Aspect regarding Marquette's Patient Monitors or the integration of Aspect's Bispectral Index technology in Marquette Patient Modules, and the specific form of the use of Marquette's trade names and Trademarks, and of intended use claims regarding the Marquette BIS/EEG Modules, in promotional material, advertisement, and/or in written technical literature shall be subject to review and approval by Marquette prior to its publication or display. 21. EXPORT. Marquette shall not export, directly or indirectly, Aspect Products (including when integrated into a Marquette Patient Monitor) or other products, information or materials provided by Aspect hereunder, to any country for which the United States requires any export license or other governmental approval at the time of export without first obtaining such license or approval. It shall be Marquette's responsibility to comply with the latest United States export regulations, and Marquette shall defend and indemnify Aspect from and against any damages, fines, penalties, assessments, liabilities, costs and expenses (including reasonable attorneys' fees and court costs) arising out of any claim that Marquette Patient Monitors or other products, information or materials provided by Aspect hereunder were exported or otherwise shipped or transported in violation of applicable laws and regulations. 22. CO-MARKETING PROGRAM. Marquette and Aspect will undertake co-marketing programs in the future in certain geographies, including North America, consistent with the goals and principles outlined in Exhibit F to this Agreement. The Parties further agree to utilize their best efforts to finalize a definitive co-marketing agreement to implement the goals outlined in Exhibit F within [**] days following the date on which this OEM Development and Purchase Agreement is signed by both Parties. -22- 23 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 23. TERM; DEFAULT AND TERMINATION. 23.1 TERM AND RENEWAL. The initial term of this Agreement shall commence on the Effective Date and shall continue for a period of three (3) years following introduction of the Marquette BIS/EEG Module. The term of this Agreement shall be renewed automatically for successive twelve (12) month periods, unless either Party provides written notice of termination to the other Party at least sixty (60) days prior to expiration of the Agreement. 23.2 TERMINATION FOR GOOD CAUSE. (a) TERMINATION BY ASPECT. The Agreement may be terminated by Aspect giving [**] prior written notice to Marquette in the event Marquette has not commercially introduced a Marquette BIS/EEG Module by October 31, 2001. (b) TERMINATION BY MARQUETTE. The Agreement may be terminated by Marquette giving [**] written notice to Aspect if Aspect has failed to provide a Aspect BIS/EEG Module Kit consistent with the specifications outlined in Exhibit C to Marquette by December 31, 2000. Furthermore, Marquette will require prototype Aspect BIS/EEG Module Kits in advance of the December 31, 2000 date, as follows in order to make the date specified in Section 23.2(a): [**] then current Aspect BIS/EEG Module Kit approximately 10-12 weeks after the project commences; [**] then current Aspect BIS/EEG Module Kits approximately five (5) months thereafter; and approximately [**] then current Aspect BIS/EEG Module Kits two (2) months thereafter. Specific schedules and volumes for prototype Aspect BIS/EEG Module Kits will be mutually agreed upon by both Parties to meet the mutual timelines. (c) MATERIAL COMPETITIVE FEATURES. Either Party may terminate this Agreement if the other Party's [**] do not [**] for [**] the [**] of [**] and [**] on the [**] . In order to exercise its rights under this Section 23.2(c), a Party must provide [**] prior written notice to the other Party, specifying in reasonable detail the [**] or [**] that are [**]. Following receipt of such notification, the notified Party shall have [**] to [**] in [**]. If at the end of such [**] period, the notified Party is unable to do so, the notifying Party may terminate the Agreement; provided, that no such notification shall be effective prior to [**]. -23- 24 23.3 EVENTS OF DEFAULT. The following shall constitute events of default under this Agreement: (i) if either Party assigns this Agreement or any of its rights or obligations hereunder without the prior written consent of the respective other Party, except: (a) as specifically permitted under this Agreement; or (b) in connection with the sale or other transfer of such Party's business to which this Agreement relates (the word "assign" to include, without limiting the generality thereof, a transfer of a majority interest in the Party) or (ii) if either Party shall neglect or fail to perform or observe any of its obligations to the other Party hereunder, including, without limiting the generality thereof, the timely payment of any sums due, and such failure is not cured within thirty (30) days (ten (10) days in the event of a default in the payment of amounts owed the other Party) after written notice thereof from the other Party; or (iii) if there is (w) a dissolution, termination of existence, liquidation, insolvency or business failure of either Party, or the appointment of a custodian or receiver of any part of either Party's property, if such appointment is not terminated or dismissed within thirty (30) days; (x) a composition or an assignment or trust mortgage for the benefit of creditors by either Party; (y) the commencement by either Party of any bankruptcy proceeding under the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally; or (z) the commencement against either Party of any proceeding under the United States Bankruptcy Code or any other federal or state bankruptcy, reorganization, receivership, insolvency or other similar law affecting the rights of creditors generally, which proceeding is not dismissed within thirty (30) days ("File for Bankruptcy"). 23.4 REMEDIES. Upon any event of default, and in addition to any other remedies either Party may have at law or in equity, the non-defaulting Party may terminate the Agreement, cancel any outstanding Order, refuse to make or take further Orders or deliveries, cancel any discount given, and declare all obligations immediately due and payable. Any such termination or other action taken by the non-defaulting Party pursuant to this Section 23.4 shall not relieve the defaulting Party of its obligations hereunder and the non-defaulting Party shall retain all legal and equitable remedies after such termination. -24- 25 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 24. INSURANCE. Upon request, Aspect shall provide evidence of product liability, general liability and property damage insurance against an insurable claim or claims which might or could arise regarding Aspect products purchased from Aspect. Such insurance shall contain a minimum limit of liability for bodily injury and property damage of not less than 2,000,000 (two million) US$. 25. ** 25.1 [**]. Aspect warrants that the [**], together with all [**], as now exists or hereafter becomes available including but not limited to, the then [**] of [**] for the [**] will have been [**] at Marquette's expense [**] pursuant to an agreement between [**] is reasonably satisfactory to Marquette, and Aspect [**]. Such [**] shall be [**] to Marquette within thirty (30) days from the execution date hereof that [**] have been [**]. [**] by Aspect upon execution hereof to [**] upon written notice thereof by Marquette promptly after any of the following occurrences: (a) Aspect fails to [**] as it is required to do under Sections [**] and [**] of this Agreement; (b) Aspect suspends or discontinues business or indicates its intention to suspend or discontinue business. 25.2 MARQUETTE'S RIGHT TO [**]. Upon the occurrence of any of the above, Marquette shall have the right to [**]. 25.3 [**]. Marquette shall have the right to [**] at any time, at its own cost, [**]; and the right to [**] Marquette that it is the [**]. 25.4 DISPUTES. Should there be any dispute as to whether Marquette shall be entitled to [**], then such dispute shall be resolved in accordance with the terms and conditions set forth in Section 26 (Dispute Resolution) of this Agreement. -25- 26 26. DISPUTE RESOLUTION 26.1 GENERAL. Any dispute, controversy or claim arising out of or relating to this Agreement or any related agreement or the validity, interpretation, breach or termination thereof (a "Dispute"), including claims seeking redress or asserting rights under applicable law, shall be resolved in accordance with the procedures set forth herein. Until completion of such procedures, no Party may take any action not contemplated herein to force a resolution of the Dispute by any judicial or similar process, except to the limited extent necessary to; (i) avoid expiration of a claim that might eventually be permitted hereby; or (ii) obtain interim relief, including injunctive relief, to preserve the status quo or prevent irreparable harm. 26.2 WAIVER. In connection with any Dispute, the parties expressly waive and forego any right to (i) punitive, exemplary, statutorily, enhanced or similar damages in excess of compensatory damages and (ii) trial by jury. 26.3 GOOD FAITH NEGOTIATIONS. Any Dispute relating to this Agreement (a "Dispute") will be resolved first through good faith negotiations between appropriate management-level representatives of each Party having responsibility for the sale or use of products involved. 26.4 MEDIATION. If within sixty (60) day the parties are unable to resolve the dispute through good faith negotiation, either Party may submit a Dispute for resolution by mediation pursuant to the Center for Public Resources Model Procedure for Mediation of Business Disputes as then in effect. The mediation shall be conducted in New York City. Mediation will continue for at least thirty (30) days unless the mediator chooses to withdraw sooner. At the request of either Party, the mediator will be asked to provide an evaluation of the Dispute and the parties' relative positions. Each Party shall bear its own costs of mediation effort. 26.5 ARBITRATION. After completion of any mediation effort, a Party may submit the Dispute for resolution by arbitration pursuant to the Non-Administered Arbitration Rules of the Center for Public Resources as in effect on the date hereof, unless the parties agree to adopt such rules as in effect at the time of the arbitration. The arbitral tribunal shall be composed of one arbitrator; and the arbitration shall be conducted in New York. If the resolution of the Dispute is not found within the terms of this Agreement, the arbitrator shall determine the Dispute in accordance with the governing law of the Agreement, without giving effect to any conflict of law rules or other rules that might render such law inapplicable or unavailable. The prevailing Party in any arbitration conducted under this Section shall be entitled to recover from the other Party (as part of the arbitral award or order) its reasonable attorneys' fees and other costs of arbitration. 26.6 APPLICABLE LAW. The law applicable to the validity of this arbitration provision, the conduct of the arbitration, the challenge to or enforcement of any arbitral award or order or any other question of arbitration law or procedure shall be -26- 27 governed exclusively by the Federal Arbitration Act, 9 U.S.C. sections 1-16; however, the award can be modified or vacated on grounds cited in the Federal Arbitration Act or, if the arbitrator's findings of facts are not supported by substantial evidence or the conclusions of law are erroneous, under the laws of the State of New York. The place of arbitration shall be in New York City. The parties agree that the federal and state courts located in the State of New York shall have exclusive jurisdiction over any action brought to enforce this arbitration provision, and each Party irrevocably submits to the jurisdiction of said courts. Notwithstanding the foregoing sentence, either Party may apply to any court of competent jurisdiction, wherever situated, for enforcement of any judgment on an arbitral award. 26.7 TIME LIMIT. Except as time barred under any applicable statute of limitation of lesser duration, any claim by either Party shall be time-barred unless the asserting Party commences an arbitration proceeding with respect to such claim within two years after the cause of action has accrued. 26.8 PROVISIONAL OR INTERIM JUDICIAL MEASURES. Notwithstanding any other provision of this Agreement, the parties expressly agree that prior to the first meeting of the arbitrator either shall have the right to apply to any state or federal court in the State of New York or any other court that would otherwise have jurisdiction, for provisional or interim measures. 26.9 CONSOLIDATED PROCEEDINGS. Each Party hereby consents to a single, consolidated arbitration proceeding of multiple claims, or claims involving more than two parties. The prevailing Party or parties in any arbitration conducted under this paragraph shall be entitled to recover from the other Party or parties (as part of the arbitral award or order) its or their reasonable attorneys' fees and other reasonable costs of arbitration. 27. GENERAL PROVISIONS. 27.1 FORCE MAJEURE. In the event that either Party is prevented from performing, or is unable to perform, any of its obligations under this Agreement due to any act of God, fire, casualty, flood, war, strike, lock out, failure of public utilities, injunction or any act, exercise, assertion or requirement of governmental authority, epidemic, destruction of production facilities, insurrection, inability to procure materials, labor, equipment, transportation or energy sufficient to meet manufacturing needs, or any other cause beyond the reasonable control of the Party invoking this provision, and if such Party shall have used its best efforts to avoid such occurrence and minimize its duration and has given prompt written notice to the other Party, then the affected Party's performance shall be excused and the time for performance shall be extended for the period of delay or inability to perform due to such occurrence. -27- 28 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. 27.2 PUBLICITY. Neither Party shall originate any publicity, news release or other public announcement relating to this Agreement or the existence of an arrangement between the Parties without the prior written approval of the other Party, except as otherwise required by law. 27.3 WAIVER. The waiver by either Party of a breach or a default of any provision of this Agreement by the other Party shall not be construed as a waiver of any succeeding breach of the same or any other provision, nor shall any delay or omission on the part of either Party to exercise or avail itself of any right, power or privilege that it has, or may have hereunder, operate as a waiver of any right, power or privilege by such Party. 27.4 NO AGENCY. Nothing contained in this Agreement shall be deemed to constitute either Party as the agent or representative of the other Party, or both Parties as joint venturers or partners for any purpose. Neither Party shall be responsible for the acts or omissions of the other Party, and neither Party shall have authority to speak for, represent or obligate the other Party in any way without prior written authority from the other Party. 27.5 SURVIVAL OF OBLIGATIONS. All obligations of either Party under Sections 4.3 (but only insofar as it relates to the rights of Marquette customers to continue using Marquette BIS/EEG Modules), 5 (Royalties), 11 (Warranty), 12 (Service and Support), 14 (Regulatory Matters), 16 (Ownership and Protection of Results), 18 (Confidentiality), 19 (Indemnities), 20 (Trademarks), [**], 26 (Dispute Resolution), and 27.6 (Limitation on Liability) shall survive the expiration or termination of this Agreement and continue to be enforceable. 27.6 LIMITATION ON LIABILITY. EXCEPT AS PROVIDED IN SECTION 19, EACH PARTY'S LIABILITY ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF ASPECT PRODUCTS OR THEIR USE OR DISPOSITION, WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED THE SUM OF (i) THE TOTAL ACTUAL PURCHASE PRICE PAID BY MARQUETTE FOR ALL ASPECT PRODUCTS PURCHASED HEREUNDER; (ii) ALL AMOUNTS PAID BY MARQUETTE TO ASPECT FOR PROJECT DEVELOPMENT COSTS PURSUANT TO SECTION 3.4 OF THIS AGREEMENT; AND (iii) ALL AMOUNTS PAID BY MARQUETTE TO ASPECT FOR SERVICE AND SUPPORT PURSUANT TO SECTION 12 OF THIS AGREEMENT. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR OTHER INDIRECT DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOSS OF PROFITS, LOSS OF DATA OR LOSS OF USE DAMAGES) ARISING OUT OF THE MANUFACTURE, SALE OR SUPPLYING OF ASPECT PRODUCTS. -28- 29 27.7 SEVERABILITY. In the event that any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable because it is invalid or in conflict with any law of any relevant jurisdiction, the validity of the remaining provisions shall not be affected and the rights and obligations of the Parties shall be construed and enforced as if the Agreement did not contain the particular provisions held to be unenforceable. 27.8 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts, without reference to conflict of laws principles, and shall not be governed by the U.N. Convention on Contracts for the International Sale of Goods. 27.9 NOTICES. Any notice or communication with regard to the termination of or changes to this Agreement from one Party to the other shall be in writing and either personally delivered or sent via certified mail, postage prepaid and return receipt requested addressed, to such other Party at the address of such Party specified in this Agreement or such other address as either Party may from time to time designate by notice hereunder. 27.10 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties. No waiver, consent, modification or change of terms of this Agreement shall bind either Party unless in writing signed by both Parties, and then such waiver, consent, modification or change shall be effective only in the specific instance and for the specific purpose given. There are no understandings, agreements, representations or warranties, expressed or implied, not specified herein regarding this Agreement or the Aspect Products purchased and/or licensed hereunder. Only the terms and conditions contained in this Agreement shall govern the transactions contemplated hereunder, notwithstanding any additional, different or conflicting terms which may be contained in any Order or other document provided by one Party to the other. Failure of Aspect to object to provisions contained in any Order or other document provided by Marquette shall not be construed as a waiver of the terms and conditions of this Agreement nor an acceptance of any such provision. 27.11 HEADINGS. Captions and headings contained in this Agreement have been included for ease of reference and convenience and shall not be considered in interpreting or construing this Agreement. -29- 30 27.12 EXHIBITS: The following Exhibits shall be part of this Agreement: EXHIBIT A: Aspect Products and Purchase Prices EXHIBIT B: Aspect's Standard BIS Module Kit EXHIBIT C: Development Project EXHIBIT D: Contact Persons/Addresses Prices EXHIBIT E: Aspect and Marquette Trademarks 27.13 BENEFICIARIES. Except for the provisions of Section 19 hereof, which are also for the benefit of the other Persons indemnified, this Agreement is solely for the benefit of the parties hereto and their respective affiliates, successors in interest and permitted assigns and shall not confer upon any other person any remedy, claim, liability, reimbursement or other right in excess of those existing without reference to this Agreement. 27.14 ASSIGNMENT. Neither Party may assign or delegate this Agreement or any rights or obligations under this Agreement without the prior written consent of the other, which shall not be unreasonably withheld; provided, however, that Marquette may, without the prior written consent of Aspect, assign and delegate this Agreement and any or all of its rights and obligations hereunder to any of its affiliates within the GE Medical Systems division of General Electric Company, and provided that either party shall have the right to assign this Agreement in connection with a sale of the business of such party to which this Agreement relates. IN WITNESS WHEREOF, this Agreement has been duly executed as a sealed instrument as of the date specified above. Aspect Medical Systems, Inc. GE Marquette Medical Systems, Inc. By: /s/ J. Breckenridge Engle By: /s/ Kevin King ------------------------------ ------------------------------ J. Breckenridge Engle Kevin King Title: Chairman Title: Vice President and --------------------------- General Manager of Global Marketing --------------------------- -30- 31 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT A ASPECT PRODUCTS AND PURCHASE PRICES A) ASPECT BIS/EEG MODULE KIT: Within thirty (30) days of the date of this Agreement, Marquette shall [**] of the following [**] by giving Aspect written notice [**]. [**]: List price for Aspect BIS/EEG Module Kit: [**] (includes [**] for components and [**] for BIS license) Volume discounts:
- -------------------------------------------------------------------------------- QUANTITY PER YEAR PRICE (COMPONENTS + LICENSE DISCOUNT -------- --------------------------- -------- [**] [**] [**] [**] [**] [**] [**] [**] [**]
- -------------------------------------------------------------------------------- Exceptions to [**]. [**]: Assumes [**] of [**] and [**]: [**] (based on installed base of approximately [**] GE Marquette OR monitors at [**] /unit) [**] volume discounts according to the following schedule:
- -------------------------------------------------------------------------------- QUANTITY PER YEAR PRICE (COMPONENTS ONLY) DISCOUNT -------- ----------------------- -------- [**] [**] [**] [**] [**] [**] [**] [**] [**]
- -------------------------------------------------------------------------------- -31- 32 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. Composite volume discount schedule [**] - for illustration purposes only:
- -------------------------------------------------------------------------------- PRICE DISCOUNT (COMPONENTS (COMPONENTS QUANTITY AND LICENSE AND LICENSE) PER YEAR NOTE A NOTE A -------- ----------- ------------ [**] [**] [**] [**] [**] [**] [**] [**] [**]
- -------------------------------------------------------------------------------- Note A: assumes imputed BIS license fee of [**] per unit B) ASPECT BIS SENSOR: Transfer price to Marquette for distribution solely to Marquette customers outside North America and solely for use with Marquette BIS/EEG Modules: [**] of Aspect's list price in the U.S. C) ASPECT SPARE PARTS/ACCESSORY PRICES
- -------------------------------------------------------------------------------- Aspect Marquette Orderable List Price Price Parts/Products (US$) (US$) - Note A -------------- ---------- -------------- DSC-2 [**] [**] (replacement BIC Engine PCB [**] [**] (replacement) Sensor Cable [**] [**] (replacement) DSC-4 [**] [**] (replacement) User Manual [**] [**]
- -------------------------------------------------------------------------------- -32- 33 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT B: SPECIFICATIONS ASPECT'S STANDARD BIS MODULE KIT Aspect's BIS Module Kit is designed specifically for OEM applications and allows the integration of Aspect's BIS monitoring technology into OEM equipment. The BIS Engine will interface to the patient via the Aspect BIS sensor and to the OEM equipment utilizing a serial (RS-232) 3-wire interface and the necessary power connections. The BIS Module Kit consists of a Digital Signal Converter (DSC-2) that is placed in proximity to the patient and a small circuit board that resides in the OEM equipment. The DSC-2 is a small (palm sized) front-end to the BIS Engine circuit board that provides the patient interface and performs the high performance analog to digital conversion of the EEG signals. The EEG signals are transmitted in digital format from the DSC-2 to the BIS engine circuit board via a 12 foot cable that is hard wired at the DSC-2. The small BIS Engine circuit board performs digital signal processing on the digitized EEG signal and outputs the Bispectral Index to the OEM system via the RS-232 serial connection. The board is constructed using double-sided surface mount techniques. The connections to the BIS Engine circuit board are a serial interface (RS-232), power, and DSC connections. DETAILED TECHNICAL SPECIFICATIONS: Digital Output: [**] Main Parameters: [**] Electrical Safety: [**] Power: [**] Artifact Rejection: [**] Bispectral Index: [**] DIGITAL SIGNAL CONVERTER (DSC-2) Description: [**] Weight: [**] Dimensions: [**] [**] Cable Length: [**] -33- 34 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. (a) BIS Engine PCB Physical: [**] Processing Power: [**] (b) Software Upgrades The BIS engine software is stored in reprogrammable FLASH memory. Software upgrades can be accomplished on-site or remotely via the serial interface. (c) Serial Identifier Each BIS engine is given a unique serial identifier. This allows for electronic identification/tracking of every BIS Engine. -34- 35 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT C: DEVELOPMENT PROJECT - PRELIMINARY OUTLINE 1. SCOPE This preliminary outline describes a development project that Aspect would perform for GE Marquette. This outline is based on notes from a meeting held at Aspect on August 18, 1999. A more detailed project description needs to be completed before the timetable and costs can be finalized. 2. DEVELOPMENT TIMETABLE A detailed project schedule needs to be developed. It is planned that the total elapsed time of the project will be approximately [**]. 3. SOFTWARE PROJECT - [**] Expanded BIS Engine Software Functionality: Aspect will [**] so that, in addition to all of the functionality of the standard BIS Module Kit (described in Attachment A), the system will [**] when a [**] is connected to the BIS Engine circuit board. Upon connection of the [**], the BIS software will automatically [**] processing. The BIS engine will then [**] including [**]. The BIS engine will then transmit these [**] to the host system via the [**]. 4. TASKS Determine and Specify: System Specifications (Aspect/GE Marquette) including hazard analysis Software Specifications (Aspect) Develop/Implement (Aspect) Verification & Validation (Aspect) After Aspect has validated the BIS/EEG module kit, GE Marquette will have the responsibility to validate, with Aspect's assistance, the BIS/EEG module in the GE Marquette system. The approximate cost to complete this software project is [**]. DSC-4 Hardware Development Project Conceptually, Aspect will [**] the [**] that is [**] . However, this [**]. A preliminary review indicates that [**]. Additionally, there may be [**]. Therefore a small development budget needs to be established in order to bring this product back on-line. An estimate of the project cost including engineering and tooling is roughly [**]. A full review of the manufacturability of the DSC-4 needs to be completed before Aspect can commit to the actual development expense and the transfer price of the DSC-4. -35- 36 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT D: CONTACT PERSONS/ADDRESSES CONTACT PERSONS AND RESPONSIBILITIES AT ASPECT:
- -------------------------------------------------------------------------------------------------- EMAIL PHONE NUMBER/ PERSON TITLE RESPONSIBILITY FAX NUMBER - -------------------------------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] - -------------------------------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] - -------------------------------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] - -------------------------------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] - -------------------------------------------------------------------------------------------------- [**] [**] [**] [**] [**] [**] - --------------------------------------------------------------------------------------------------
MAILING ADDRESS: Aspect Medical Systems, Inc. 2 Vision Drive Natick, MA 01760-2059 USA CONTACT PERSONS AND RESPONSIBILITIES AT GE MARQUETTE:
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MAILING ADDRESS: GE Marquette Medical Systems, Inc. -36- 37 EXHIBIT E: ASPECT TRADEMARKS TRADEMARK REFERENCE - --------- --------- Aspect(R) None* A-2000(TM) A-2000 is a trademark of Aspect Medical Systems, Inc. Bispectral Index(R) Bispectral is a registered trademark of Aspect Medical Systems, Inc. BIS logo is a registered trademark of Aspect Medical Systems, Inc. * This trademark is registered as a trademark to another company, and is used under license by Aspect Medical Systems. -37- 38 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXHIBIT F: CO-MARKETING PROGRAM a) Goals: - to provide GE Marquette customers with access to BIS, and a seamless transition from Aspect's A-2000 BIS monitor to GE Marquette's BIS Module, during the period in which the BIS module is under development by GE Marquette - to ensure that the field organizations of both Aspect and GE Marquette are properly incented to assist one another, and to work in collaboration, to promote the BIS technology, irrespective of the platform on which it is available. - to minimize the likelihood that GE Marquette customers will be disposed to delay purchasing BIS until GE Marquette completes the development of a BIS module. - to minimize the incremental costs to customers of exchanging one BIS platform for another when the module becomes available; and - to encourage existing GE Marquette customers to remain loyal to GE Marquette, and to stimulate monitoring system sales to new customers, by offering a BIS solution that address current and future needs at a very attractive price. b) Term: beginning immediately following an announcement by GE Marquette and Aspect that GE Marquette intends to develop a BIS module until the module is launched. It is understood that the module will be launched approximately 2-3 months prior to becoming commercially available. c) Proposed Pricing: Aspect list price [**] per monitor. Aspect's current list prices vary from [**] per monitor depending on the number of monitors purchased. In addition to outright sales, the parties will also make available a fee-for-use program using equivalent terms. (Aspect would need to do the fee-for-use program - Marquette would just submit the referral to Aspect and Marquette would still exchange for the module at no module charge.) In exchange, customers will receive A-2000 monitors initially; as soon as the BIS module is available, the module will be exchanged for the monitor. d) Mechanics: following each sale under this program, Aspect will assume responsibility for installation, in-service, and clinical support for the A-2000. Following release of the BIS Module, Marquette will assume responsibility for installation and in-service of the module, at which time the used A-2000 will be returned to Aspect. e) [**]: proceeds from sale of the BIS platform (i.e. the A-2000 followed by the BIS Module) will be [**]. In the event GE Marquette fails to deliver a BIS module within a suitable period of time as specified in the Agreement. -38- 39 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. f) Sales rep compensation: it is understood that a compensation program for both field organizations will be established that appropriately ties rep compensation to success of the program. g) Elements of co-marketing program: customer lists to be shared, high priority accounts to be jointly identified and developed, co-promotional activities to be coordinated (e.g. trade shows, joint seminars and customer presentations, etc.); reimbursements to Marquette due quarterly with customer lists, selling price, number of sensors purchased by customer. h) Territory: U.S. and other countries to be discussed. i) Possible role of MVP: in the event MVP acts as a distributor for Aspect, the terms of their participation in the co-marketing program to be negotiated. j) Demonstration Equipment: for promotional purposes only (not to be sold to any end-user), Marquette will require five (5) demonstration Aspect A-2000 Monitors. Terms of the transfer price for these demonstration units will be negotiated. k) BIS Sensor [**]: Marquette [**] BIS Sensors [**] as a result of the [**] to a [**]. -39- EX-23.2 11 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report and to all references to our Firm included in or made a part of this registration statement. /s/ Arthur Andersen LLP Boston, Massachusetts January 20, 2000 EX-27.2 12 FINANICAL DATA SCHEDULE
5 1 US DOLLARS YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 13,535,364 1,000,000 4,707,235 407,000 1,514,702 23,045,909 5,783,716 2,334,464 29,401,608 10,767,398 3,872,484 0 67,560,365 18,158 (54,499,306) 29,401,608 27,187,650 27,187,650 9,324,111 35,543,726 0 212,100 (1,316,771) (7,039,305) 0 (7,039,305) 0 0 0 (7,039,305) (4.57) (4.57)
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