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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________________________ TO
_________________________
COMMISSION FILE NUMBER 0-19567
CARDIAC SCIENCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0465681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 HAMMOND DRIVE, SUITE 111, IRVINE, CALIFORNIA 92618
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (714) 587-0357
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant was $6,531,057, based on the average closing price as quoted on the
NASD Electronic Bulletin Board on March 11, 1997.
The number of shares of the Registrant's Common Stock outstanding as of March
24, 1997 was 37,471,177.
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TABLE OF CONTENTS
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Page
Item Number and Caption Number
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PART I
Item 1. Business........................................... 3
Item 2. Properties......................................... 13
Item 3. Legal Proceedings.................................. 13
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.................... 14
Item 6. Selected Financial Data............................ 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 16
Item 8. Financial Statements and Supplementary Data........ 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 18
PART III
Item 10. Directors and Executive Officers of the Registrant. 33
Item 11. Executive Compensation............................. 34
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................. 37
Item 13. Certain Relationships and Related Transactions..... 39
PART IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................ 41
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PART I
ITEM 1. BUSINESS
GENERAL
Cardiac Science, Inc. ("Cardiac Science" or the "Company") is a development
stage company engaged in the development of a line of non-surgical, non-invasive
automatic external cardioverter defibrillator ("AECD") devices (the "Products")
to treat persons suffering from, or at high risk of, life-threatening
arrhythmias (abnormal rhythms of the heart), such as ventricular tachycardia
(dangerously rapid heart rate) and ventricular fibrillation (quivering of the
heart), that lead to cardiac arrest.
Cardiac arrest is the single largest cause of death in the United States
and Europe. It is estimated to strike approximately 1.5 million Americans
yearly and more than double that worldwide, a third of whom die. The number of
persons at least temporarily at risk of life-threatening arrhythmias and cardiac
arrest includes hospitalized patients with symptoms that could indicate a heart
attack, heart attack survivors, those diagnosed with severe forms of heart
disease, persons suffering from congestive heart failure, heart transplant
patients, and patients whose surgery or treatment increases the risk of cardiac
arrest.
Current modalities for treating life-threatening arrhythmias include drug
therapies, automatic implantable cardioverter defibrillators ("ICDs"), which
require surgical procedures and are suited for patients with long-term risk of
arrhythmias, and existing external cardioverter defibrillators, which require
human intervention to analyze and interpret the patient's cardiac activity
and/or administer the shock.
The Company's Products are designed to obviate the need for human
intervention. The Products will continuously monitor a patient's cardiac
activity, detect abnormalities within seconds, and automatically, without human
interaction, via electrodes attached to the patient's chest, transmit electrical
shock (defibrillation) to convert the patient's heart to a normal rhythm.
There are four AECD devices under development by the Company: (i) the
Powerheart(R) bedside model for in-hospital use; (ii) a Powerheart(R) portable
model, which can be attached to an intravenous pole and transported within the
hospital; (iii) a light-weight, ambulatory vest model which can be worn
continuously by at-risk patients; and (iv) a public access defibrillator which
can be used by non-technical individuals outside of the hospital environment.
To date, the Powerheart has been tested, under an approved Investigational
Device Exemption ("IDE") granted by the United States Food and Drug
Administration (the "FDA"), on over 140 patients at a number of recognized
medical centers in the United States. It has accurately detected and evaluated
normal heart rhythm and ventricular tachyarrhythmias in these patients and has
responded by delivering defibrillation shocks in an average response time of 21
seconds with no observed adverse effects. On February 26, 1997 the Company
submitted a 510(k) pre-market notification to the FDA for the bedside model for
in-hospital use in the United States. There can be no assurance that a 510(k)
clearance will be allowed or that the Company will not be required to undertake
significantly more rigorous testing procedures, which could take years to
complete. (See "Governmental Regulations.") The Company has received approval
from competent regulatory authorities, including the FDA, to allow it to export
its Powerheart(R) bedside model to certain international countries. (See
"Marketing and Sales -Current Status of Marketing and Sales.")
The Company's primary objective is to pioneer the commercialization of AECD
devices to successfully treat arrhythmias and cardiac arrest. The Company
believes that the Products will be ideally suited for hospitalized and non-
hospitalized patients temporarily at risk (periods ranging from days to months)
of suffering cardiac arrest. Through its investment in clinical research, the
Company believes it has established competitive functional and technological
advantages in the development of AECD devices. The Company has been issued one
patent, and has one additional patent under exclusive license relating to its
AECD technology.
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Since its incorporation in May 1991, the Company has devoted substantially
all of its resources to research and development activities. From its
incorporation to December 31, 1996, the Company accumulated a deficit of
approximately $4.96 million. To date, the Company has not generated revenues.
The Company expects to incur additional losses at least until the Powerheart
AECD is in production.
The Company's offices are located at 8 Hammond Drive, Suite 111, Irvine,
California 92618 and the telephone number is (714) 587-0357.
CARDIAC ARREST, LIFE-THREATENING ARRHYTHMIAS AND THEIR TREATMENTS
Cardiac arrest is the loss of effective pumping action of the heart caused
by life-threatening arrhythmias. It results in the abrupt cessation of
circulation of blood to the vital organs and, without rapid resuscitation, leads
to death.
Arrhythmias are caused by disturbances in the electrical conduction
mechanism of the heart, and usually occur in persons suffering from various
forms of heart disease. The most common life-threatening arrhythmias are
ventricular tachycardia and ventricular fibrillation. Ventricular tachycardia,
in which electrical disturbances cause a dangerously fast heart rate, is often
the precursor to ventricular fibrillation, which is a rapid, chaotic contraction
of the heart that causes the heart to quiver. In ventricular fibrillation, the
electrical activity of the heart is completely disorganized and ineffectual,
producing no pulse or blood pressure. Ventricular fibrillation can be fatal
within minutes unless it is interrupted and a normal heart rhythm is quickly
restored.
The procedure for terminating life-threatening arrhythmias is known as
defibrillation. Defibrillation is achieved by the application of an electric
shock to the heart which synchronizes the heart's electrical activity and causes
the normal rhythm of the heart to be restored. Early defibrillation is the
single most important factor in reviving patients in cardiac arrest. In the
case of ventricular fibrillation, there is approximately a 10% decline in a
patient's chance of survival with each passing minute. Defibrillation delayed
much longer than 10 to 12 minutes yields a virtual zero probability of survival.
The following graph from the Textbook of Advanced Cardiac Life Support,
published by the American Heart Association in 1994, illustrates the percentage
resuscitation rate after administration of defibrillation within the first ten
minutes following the onset of ventricular fibrillation:
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Figure 1: RESUSCITATION SUCCESS VERSUS TIME
Persons who have survived heart attacks, have been diagnosed as having
certain forms of heart disease or who have undergone major heart surgery have
higher risks of suffering cardiac arrest. Physicians may attempt to treat such
persons with costly drug therapies to eliminate or control the occurrences of
arrhythmias. However, a substantial number of patients are resistant to such
drugs. Patients who respond to drug therapies, despite the reduced occurrence
of heart attacks, generally remain at relatively high risk of death from cardiac
arrest.
Implantable cardiovascular defibrillator ("ICD") devices, which are both
automatic and ambulatory, have been developed and are approved for sale by the
FDA for patients who have been diagnosed as high risk for cardiac arrest. An
ICD device is a complex electronic instrument, consisting of a heart monitor and
defibrillator module, which is implanted in the abdominal cavity or chest with
electrodes attached directly to the heart. When the monitor detects a dangerous
arrhythmia that satisfies the detection algorithm criteria designed into the
device, the defibrillator delivers an electrical charge through the heart that
provides nearly instantaneous reversion to normal heart rhythm. After battery
depletion, ICDs must be explanted and a new device implanted in the patient.
Non-surgical external defibrillators are widely used to treat patients in
cardiac arrest. One type of device is the manual defibrillator, for which a
highly-skilled human operator (i.e., a physician or paramedic) must analyze and
interpret the patient's electrocardiogram (ECG) data to determine if
defibrillation is required and, if necessary, manually administer an electrical
shock. Recently, more sophisticated external defibrillators have been developed
which perform the analysis of the patient's heart rhythm and, if it is
determined that the patient is in cardiac arrest, advise the operator to
administer the shock. The common denominator among these existing devices is
that they require the presence of a human operator (frequently a highly skilled
one) to administer the shock. The time interval from cardiac arrest to the
moment a shock is delivered could be several minutes. This reduces the chances
of a successful revival of the patient.
[CHART OF RESUSCITATION SUCCESS GOES HERE]
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TIME (MINUTES) RESUSCITATION SUCCESS
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2 Minutes 80% chance of survival
4 Minutes 60% chance of survival
6 Minutes 40% chance of survival
8 Minutes 18% chance of survival
10 Minutes 8% chance of survival
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THE COMPANY'S PLANNED PRODUCTS
General
The Company's Products are designed to obviate the need for any human
intervention. In accordance with patient specific parameters programmed into
the unit's microcomputer by the patient's physician, the Company's Products will
continuously monitor the patient's cardiac activity, provide early detection of
ventricular tachyarrhythmias, and automatically through electrodes attached to
the patient's chest, transmit electrical charges to the patient's heart to
terminate the arrhythmia. The devices will be non-invasive and will not require
surgery. Because of these attributes, the Company believes that, the AECD
products will be ideally suited for the many patients who are at temporary risk
(periods ranging from days to months) of suffering cardiac arrest, including
patients awaiting alternative cardiac treatment (e.g. ICD candidates during
their unprotected diagnostic period or during periods they are poor surgical
risks or surgery-reluctant) or at increased risk for a period of time (e.g.,
persons switching from one drug to another).
The Powerheart(R) Bedside AECD Models
To date, the Company's primary development focus has been on its
Powerheart(R) bedside model for in-hospital use. This model has been tested on
over 140 patients at a number of recognized medical centers in the United
States. It has accurately detected and evaluated normal heart rhythm and
ventricular tachyarrythmias in these patients and has responded by delivering
defibrillation shocks in an average response time of 21 seconds with no observed
adverse effect. On February 26, 1997, the Company submitted a 510(k) pre-market
notification to the FDA. There can be no assurance that a 510(k) clearance will
be allowed or that the Company will not be required to undertake significantly
more rigorous testing which could take years to complete. (See "Governmental
Regulations.")
The Company believes that most of the development work already completed on
the Powerheart(R) bedside model can be applied to the portable, ambulatory and
public access models. The portable models will be similar to the Powerheart(R)
bedside unit in the function and basic design and capable of either being
attached to an intravenous pole, gurney, or hand carried. The Company believes
that the Powerheart(R) bedside model, as well as the portable model, offers
significant advantages over defibrillators currently in use in hospitals today
and will be ideally suited for use in many areas of the hospital, including
Intensive Care Units ("ICUs"), Cardiac Care Unites ("CCUs"), Step Down
(telemetry departments), Emergency Rooms ("ERs"), and General patient wards.
The Public Access AECD Model
Individuals experiencing cardiac arrest need immediate defibrillation
wherever the episode occurs. Short of having an AECD attached to them, the best
alternative is to have one immediately available. This is the concept behind
public access defibrillation ("PAD"). Since 1994, the American Heart
Association ("AHA") has focused on early defibrillation and has urged making
PADs widely accessible. This Company believes that the market for PADs could be
significant and would include places where the public gathers, such as malls,
stadiums, airports, airplanes and office buildings. Also, every first response
vehicle (e.g., police cars; fire trucks) is a potential location for a PAD.
Several companies have positioned products for the PAD market. With the
possible exception of Heartstream, these companies have primarily targeted their
products toward medical practitioners and or trained operators. The Company has
developed a conceptual model for a PAD and believes its existing AECD technology
is well suited and can be utilized in a PAD product. Additional engineering
will be required to develop prototype PAD devices suitable for clinical testing.
The Ambulatory AECD Vest Model
The Company believes only a small portion of the patient universe are
candidates for implantable devices, i.e.; ICDs. The Company also believes that,
if successfully developed, the efficacy, non-surgical nature and cost
effectiveness of its ambulatory device will result in some patients who are at
longer term risk of cardiac arrest seeking this form of treatment rather than
the ICD. This ambulatory model will be a light-weight vest which can be worn
continuously by the
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patient, thereby permitting maximum movement during most normal activities.
Removal of the vest unit would be required during bathing and certain other
activities. The Company intends to develop the ambulatory vest-worn units over
the longer term, and has commenced the design and development of certain sub-
systems and components required for such products. Additional engineering will
be required to develop prototype ambulatory vest-worn devices suitable for
clinical testing.
Product Design and Technology. Each of the Products will include the
following basic components:
Rhythm Analysis System: This system assesses the patient's
electrocardiogram ("ECG") signal to determine when therapy is indicated based
upon parameters set by the patient's physician. The ECG signal is sensed by
electrodes placed on the patient's body. This signal is amplified and filtered
by an electrical analog circuit, digitized, and then analyzed by proprietary
software algorithms in the device's computer, which makes the determination of
when therapy (a defibrillation shock) is indicated for the patient.
Defibrillator: The AECD system uses electrical circuitry that provides
an AAMI standard waveform for defibrillation. Such waveforms are used by a
majority of defibrillators on the market, and have the longest proven track
record of success. A key part of the Company's program is the development of
AECD Products that will automatically transmit the lowest amount of electrical
energy to the heart needed to terminate the life-threatening arrhythmia. The
Products will be designed to provide progressively greater amounts of energy, if
needed, to return the patient's heart to it normal cardiac rhythm. The maximum
energy that can be delivered by the device is 360 joules, which is the maximum
limit recommended by the American Heart Association (AHA).
Defibrillation Electrodes: The AECD uses self-adhesive disposable
defibrillation electrodes manufactured by a third party vendor to the Company's
specifications. Electrodes require regular replacement.
User Interface: The electronic display and keys allow viewing the patient's
ECG waveform, setting the device's operating mode and setting parameters for
rhythm analysis.
Data Storage: The device stores real-time ECG and device status data on a
real-time basis in digital form on rugged removable media. In addition, a strip
chart recorder automatically prints real-time ECG and relevant device data
during significant detected events.
Data Retrieval Software: This software is used to access the data stored
on removable media by the AECD device. This software runs on a personal
computer. The data can be viewed on a monitor and printed on a standard high-
resolution printer. This valuable tool allows post-facto analysis of the
patient's rhythm and device operation.
RESEARCH AND CLINICAL RESULTS
The Company's prototype AECD Powerheart(R) bedside model has completed
Phase I human clinical trials on 67 patients pursuant to an FDA approved
Investigational Device Exemption. During Phase I clinical trials, the
Powerheart(R) bedside model was tested for performance of all automatic and
programming functions while attached to patients, except that the cardioversion
or defibrillation charge was not actually delivered to the patient by the
device. During this phase of testing, the arrhythmic episodes were induced by
the investigating physician in a controlled setting (usually an
electrophysiology lab) and the investigating physician terminated the arrhythmia
by manual delivery of the actual electrical charge to the patient or by other
means.
In June 1995, the FDA authorized the Company to commence Phase II clinical
trials and to enroll up to ten patients at one medical center, with the
requirement that data from the first five patients be provided to the FDA to
request expansion of the trials. In September 1995, data from the first six
patients were provided to the FDA. In October 1995, the FDA authorized the
Company to proceed with Phase II clinical trials at up to five centers and
enroll up to 235 patients. Phase II clinical trails currently are ongoing at
four nationally recognized medical centers: Arizona Heart Institute; University
of California, Irvine Medical Center; Montefiore Medical Center; and USC Medical
Center, with more than 140 patients
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completed. During Phase II clinical trials, the device performed all functions
of Phase I as well as delivered the necessary electrical charge to terminate
both induced and spontaneous arrhythmias.
The main purpose of the clinical trials is to evaluate the efficacy
(sensitivity) and safety (specificity) of the Powerheart(R) bedside model in
treating arrhythmias according to its device specifications. Sensitivity is the
measure of most importance for this device since it quantifies how many true
shockable episodes were correctly identified and responded to by the device. It
indicates the devices ability to shock only shockable rhythms, and is therefore
indicative of its safety. Data were collected from a total of 141 patients from
4 clinical centers in these trials during the period from May 1993 to October
1996. These patients collectively experienced 93 shockable events, the
sensitivity of the Powerheart was 100%, and the specificity was 99.4%. The
average response time of the Powerheart was 20.9 seconds.
The Company believes that, based upon its patient testing to date in Phase
I and Phase II clinical trials, it will ultimately satisfy the FDA requirements.
On February 26, 1997, the Company submitted a 510(k) pre-market notification
("510(k) Notification") to the FDA, pursuant to Section 510(k) of the Federal
Food, Drug and Cosmetic Act, for the Powerheart(R) bedside model for in-hospital
use. On March 27, 1997, the FDA sent a letter to the Company stating that the
FDA had received the 510(k) Notification and would notify the Company when the
processing thereof has been completed or if any additional information is
required. However, there is no assurance that the FDA will approve the device
on a timely basis or at all, or, if approved, that FDA clearance will be
maintained. (See "Governmental Regulations.")
MARKETING AND SALES
Market Overview
The Company believes that the key to adoption of its line of AECD devices
will be market awareness of, and exposure to, the devices, as well as clinical
experience with the AECD. The Company believes that the commercial success of
its initial product, the Powerheart(R) bedside model, will require active
marketing, education and sales efforts to bring market awareness to the product.
The Company believes that decisions to purchase the Powerheart(R) AECD will
generally be made by cardiologists, cardiovascular surgeons, (including those
specializing in electrophysiology and arrhythmia control), internists, nursing
staffs, administrators and other hospital personnel involved in product
procurement and cost benefit analysis.
Defibrillators are in use in every hospital in the U.S. and the world, and
many hospitals have between ten and thirty, or more, of these devices in use
today. The Company believes that the Powerheart(R) bedside hospital based AECD
(as well as the portable model) offers significant advantages over the
defibrillators currently in use in hospitals today. Studies clearly indicate
the need for immediate and early defibrillation. With the Company's
Powerheart(R) bedside model, detection of cardiac arrest occurs within seconds
without the need for observation by a nurse or physician; and a defibrillation
shock is automatically delivered in approximately 21 seconds (without the need
for human intervention), as compared with the current standard of care which
takes minutes since it requires a cardiac arrest to be detected, observed and
for the defibrillator to first be moved to the patient, connected and for the
actual shock to be delivered by highly trained hospital personnel. Based on
these attributes and distinct benefits, the Company believes that the
Powerheart(R) bedside model, (as well as the portable model) will be ideally
suited for use in many areas of the hospital including ICUs, CCUs, Step Down,
ERs, and General patient wards.
The Powerheart(R) bedside model targets a substantially large hospital
market of over 100,000 ICU/CCU beds (with many thousands more in ER and General
patient wards) in well over 5,000 hospital locations in the U.S. alone. The
world market inclusive of Europe, Asia, Latin America and the Middle East is
substantially larger. Over 1.5 million admissions to intensive care units in
the United States alone are for suspected heart attack patients. The number of
persons at least temporarily at risk of life-threatening arrhythmias and cardiac
arrest includes hospitalized patients with symptoms that could indicate a heart
attack, heart attack survivors, those diagnosed with severe forms of heart
disease, persons suffering from congestive heart failure, heart transplant
patients, and patients whose surgery or treatment increases the risk of cardiac
arrest.
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Patients spend nearly 1.0 million days annually in U.S. hospitals with
ventricular fibrillation, ventricular tachycardia or cardiac arrest as the
primary diagnosis. Another 1.4 million days were spent with unspecified cardiac
arrhythmia, premature beats, conduction disease, such as sick sinus syndrome and
junctional disorders as the principle diagnosis and another 900,000 with atrial
arrhythmias.
The Automatic External Defibrillator (AED) market is estimated at over $500
million with an average unit sale price of between $5,000 and $7,500. The PAD
market is estimated to reach $150 million by the year 2000.
Current status of Marketing and Sales
At present, the Company does not have the government clearances necessary
to commence its United States marketing activities. However, the Company does
have personnel experienced in marketing and ultimately plans to launch an
aggressive sales effort.
Prior to receiving FDA approval, the Company intends to market its
Products in foreign countries where FDA type approval is not required. However,
no foreign sales of the Company's Products can occur unless and until the
Company obtains appropriate approval (including a "No Objection Letter") from
the foreign country as well as FDA export authorization (including FDA
determination that export is not contrary to the public health and safety). The
Company has received approval to import from the competent authorities of, and
the FDA has authorized the Company to export its Powerheart(R) bedside device
to, Italy, Spain, Sweden, Switzerland, and Hong Kong. The Company intends to
begin exporting to those countries upon completion of its engineering
manufacturing phase and upon completion of finished goods production of the
Powerheart(R) bedside device. While similar authorization to import into other
countries has been requested from competent authorities in the respective
countries, there is no assurance that the host country or the FDA will approve
such requests. Sales of Products in foreign countries are expected to be made
through qualified foreign distributors, pursuant to strategic distribution
agreements, and managed by Company employees on a country-by-country basis.
There is no assurance that the Company will be able to effectuate such
agreements or, even if it does so, that such agreements will be profitable or
successful, or that the Company can establish a viable foreign market for its
Products.
Should the Company be successful in securing FDA approval, for which there
can be no assurance, the Company plans to establish a direct field sales force
to cover those highly concentrated regions of population and medical centers
where large patient populations are likely to exist. In some regions, the
Company plans to engage distributors and independent sales representative that
specialize in hospital cardiology markets. Although there is no assurance that
the Company will succeed in its efforts, it also plans to seek strategic
marketing alliances with manufacturers who might consider embedding the
Company's proprietary AECD technology inside their devices, and companies that
serve specialized markets such as home health care. The Company currently has
no agreements with respect thereto nor is it engaged in discussions relating to
such alliances.
The Company intends generally to derive revenues from its proposed Products
in various ways. The Company expects that the Products will be sold to
distributors, and leased, rented, or sold to hospitals and medical centers, at
prices reflecting market conditions. In addition to these revenues from
equipment sales, rentals or leases of the Products, the Company expects to
receive revenues from sales of disposable defibrillator electrodes which must be
used with the Products in accordance with FDA requirements.
MANUFACTURING
Presently, the Company does not have a manufacturing facility suitable for
manufacturing the Products in production quantities; and its manufacturing
activities have been limited to the production of prototypes of its
Powerheart(R) bedside model for use in its clinical trials. To manufacture its
Products, the Company will need assembly and testing facilities of the type
generally used in light electronic and electromechanical assembly and testing of
medical products. The cost of establishing and monitoring the necessary
manufacturing facilities may be substantial, and it is possible the Company may
encounter difficulties in such areas as quality control and assurance, and
shortages of qualified personnel. The FDA and
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foreign counterparts will conduct periodic inspections of such facilities and
manufacturing so as to ensure compliance with Good Manufacturing Practice (GMP)
and other regulations, such as those promulgated by the International Standard
Organization, and any concerns raised by such inspections could result in
regulatory action, delays, or termination of production. As an alternative to
establishing its own manufacturing facility, the Company may pursue a strategic
alliance with a GMP approved contract manufacturer. However, there can be no
assurance that the Company will be able to establish such an alliance, or, if
able to establish such an alliance, that it will be on terms favorable to the
Company.
The Company currently contemplates that the materials to be used in
manufacturing the Products will consist primarily of electronic, mechanical and
electromechanical components that are generally available from various vendors
and suppliers. However, certain components will require customization for the
Company by selected vendors and their availability cannot be assured.
WARRANTY POLICY
While its warranty policy may be subject to periodic change, the Company
currently intends to provide a full parts and labor warranty for each Product
during the first 12 months immediately after a Product's sale. After the
warranty period expires, the Company currently intends to require the customer
to pay for any parts and labor required to repair the Product and the Company
currently intends to offer customers maintenance agreements. In the event of
any Product's malfunction, the Company, because of the life-saving nature of the
Product, currently intends to make available the temporary use of another unit
to the end user for the time the unit is under repair. Product repairs are
expected to be made at the Company's manufacturing facility and at specified
repair facilities in foreign countries. The Products will be configured so as
to permit or require certain components or accessories to be replaced from time
to time.
COMPETITION
The Company does not believe there are any products currently being
marketed that are functionally equivalent to the AECD Products. The Company's
Powerheart(R) bedside model may compete with a variety of existing, less
sophisticated, manual defibrillators that are presently in widespread use. In
addition, the Powerheart(R) bedside model may compete against currently marketed
manual defibrillators developed by Physio-Control International Corporation,
Hewlett Packard Corporation and Zoll Medical, Inc., which are designed to
automatically deliver therapy after being activated by a trained medical
technician responding to a cardiac emergency, or products from other companies,
such as Heartstream, Inc., SurVivaLink, Inc., and Laerdal Corporation, which may
be used by lay persons. All of the foregoing products, unlike the Company's
Products, require human intervention.
The Company understands that another company, Lifecor, Inc., has developed
or is developing a wearable automatic external defibrillator, which may compete
with the company's proposed ambulatory AECD Product.
The Company believes its Products will not, to a significant extent,
compete directly with ICD devices. It is anticipated that the Company's
Products will generally be utilized by patients seeking protection from cardiac
arrest for periods ranging from days to months, while the ICD devices will be
utilized by patients requiring protection for lengthy or indefinite durations.
It is anticipated that most long-term, high-risk patients will choose ICD
devices over the Company's vest-worn AECD devices, when and if developed, to
avoid having to regularly replace electrodes and to eliminate the need to
constantly wear a vest or to be at risk when the vest is removed (such as when
bathing). The Company's Products may be utilized by patients waiting for ICD
implant surgery or patients temporarily unable to risk such surgery. In that
connection, the proposed Products may compete against ICD devices presently
marketed by a number of firms, including Medtronics, Inc., Pacesetter Systems,
Inc., Guident Inc., Intermedics, Inc., and Teletronics Pacing Systems, Inc.
Many of the Company's competitors are well established in the medical
device field and have much greater financial, research, manufacturing and
marketing resources than the Company. There is no assurance that such companies
or other competitors will not develop invasive or non-invasive products capable
of delivering the same or greater therapeutic benefits as, but with greater
safety and/or cost effectiveness than, the Products of the Company. Further,
there is no assurance that future forms of technology or therapies for treating
cardiac arrest will not render the Products obsolete or uneconomical.
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PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
While the Company believes that patent and trademark protection is
valuable to the Company as a barrier to market entry by others, the Company also
believes that its trade secrets, proprietary technology, early market entry and
its ability to develop a market for its Products may be equally important.
However, there is no assurance that the Company's technology will not be copied
or duplicated by competitors.
On December 12, 1995, the U.S. Patent and Trademark Office issued to the
Company Patent No. 5,474,574 titled "Automatic External Cardioverter
Defibrillator". The inventors have assigned right to the patent on a royalty-
free basis. However, no assurances can be given that this patent will be upheld
if challenged, or that this patent will provide an effective barrier to entry by
other entities.
In December 1993, the Company obtained an exclusive license under United
States Patent No. 4,576,170, issued on March 18, 1986 and titled "Heart Monitor
and Defibrillator Device," to make, have made, use and sell products covered by
the patent. The Company believes that this patent relates to one or more of the
Company's proposed Products. The Company is required to pay royalties, including
minimum annual royalties ($0 for the first year, $10,000 for the second year and
$20,000 per year thereafter until expiration of the Patent), based upon sales of
Products covered by the patent. No assurance can be given that this patent
would be upheld if challenged, or that this patent will provide an effective
barrier to entry by other entities.
The United States Patent and Trademark Office has granted the Company a
registration of the "AECD", "POWERHEART" and "MDF" marks. The Company has filed
a trademark application with the United States Patent and Trademark Office for
the "AECD ELECTRODES" mark. Additionally, Great Britain, France, Japan and
China have granted the Company registration of the "AECD", "AECD ELECTRODE(s)"
and "POWERHEART" marks; applications are pending in certain other foreign
countries for the registration of these marks. There can be no assurance that
any other trademarks will be granted to the Company, or that any of the
Company's trademarks would be sustained in court if interfered with or
challenged.
In 1992, the Company was assigned all of the rights, titles and interests
to any and all trade secret rights and technology concerning the manufacture of
defibrillator devices for the treatment of ventricular tachyarrhythmias such as
ventricular tachycardia, ventricular fibrillation and similar heart diseases,
held by Medstone International, Inc., a principal stockholder of the Company,
but excluding any such rights and technology to the extent they have been used
in the past or are presently being used in the manufacture of Medstone's
lithotripsy products, which are used for the non invasive disintegration of
kidney stones in human patients.
Other patents in the field of the Company's technology are known to exist.
Although the Company does not believe that licenses are necessary under the
other patents of which the Company is aware, no assurances can be given that the
Company's technology will not be challenged as infringing upon the other
patents. Also, no assurances can be given that the Company's technology will
not be challenged as infringing upon other patents or proprietary rights of
others in the United States or worldwide of which the Company is not aware.
GOVERNMENTAL REGULATIONS
Clinical testing, manufacturing, packaging, labeling, promotion, marketing,
distribution, registration, listing, notification, recordkeeping, reporting,
clearance and approval of medical devices such as the Products in the United
States are generally subject to regulation by the FDA. Medical devices intended
for human use are classified into three categories, subject to varying degrees
of regulatory control. Class III devices, which the Company believes will
include the Products, are subject to the most stringent controls.
Class III devices, in general, may be commercially marketed only after the
grant of a Premarket Approval ("PMA"). The PMA process generally takes several
years and substantial financial resources to accomplish. It requires submission
11
<PAGE>
to the FDA for an Investigational Device Exemption ("IDE"), upon which the FA
may permit limited and supervised human clinical evaluation of the product under
controlled conditions. Extensive reporting, monitoring and follow-ups of
patient treatments are required and the FDA has the authority to review labeling
and other information distributed regarding investigational products. The
filing of a PMA application entails an initial review by the FDA before
accepting the application for filing. If accepted for filing, the filing
application must then undergo extensive review by the FDA, and possibly by an
FDA panel which would make its recommendation to the FDA to approve or not to
approve the PMA application.
Some Class III devices may be marketed based upon the submission of a
510(k) Notification to the FDA where the FDA does not require a PMA and the
device is "substantially equivalent" to a similar product which was commercially
marketed in the United States prior to May 28, 1976. Unless questioned by the
FDA such "substantially equivalent" devices may be marketed 90 days after the
submission of the 510(k) Notification.
On February 26, 1997, the Company submitted a 510(k) Notification with the
FDA for its bedside unit for in-hospital use. On March 27, 1997, the FDA sent a
letter to the Company stating that the FDA had received the 510(k) Notification
and that it would notify the Company when the processing thereof has been
completed or if any additional information is required. In the event the
Company is unable to obtain 510(k) clearance for its bedside unit for in-
hospital use, it will have to follow the more costly and time consuming route of
a PMA. In such event there is no assurance that the Company will maintain
compliance with all of the FDA's requirements, and any concerns raised by the
FDA could result in regulatory action or delays in the investigation and
approval process or problems post-approval.
If Products are approved, they will continually be subject to FDA review
of labeling, advertising and promotional materials, as well as recordkeeping and
reporting requirements. Failure to comply with any of the FDA's requirements,
or the discovery of a problem with any of the Products, could result in FDA
regulatory or enforcement action. Further, any changes to the Products or their
labeling may require additional FDA testing, review and approval.
When and if the Company establishes a facility to manufacture its Products,
the FDA also will have the authority to conduct detailed inspections of such
manufacturing facility to determine whether or not in its manufacture of medical
devices the Company is following "Good Manufacturing Practices." After approval
for a Product is granted by the FDA, the Company will also be required to file
an establishment registration and device listing with the FDA, and to obtain a
license to manufacture medical devices from the California Department of Health
Services and will be subject to periodic inspections and other regulation by
that agency.
Any financial interests in the Company held by investigators could also be
subject to future regulation. Congress recently enacted legislation providing
that the Department of Health and Human Services promulgate regulations defining
the circumstances that constitute financial interest in a project that may
create a bias for certain results. Such rules may require disclosure of, limit
or prohibit equity ownership by, individuals conducting research for the
Company.
Foreign sales of the Products will be subject to foreign governmental
regulation and restrictions which vary from country to country. Until a 510(k)
approval or a PMA is issued by the FDA, the export of medical devices to foreign
countries must be preceded by FDA approval of export applications. In certain
countries, specific governmental approvals for sales of the Products will be
required which may be costly and time consuming to obtain or may not be
available. The Company has received approval to import from the competent
authorities, and the FDA has authorized the Company to export its Powerheart(R)
bedside device to, Italy, Spain, Sweden, Switzerland and Hong Kong. The Company
is not currently exporting any of its Products. While similar authorization to
import into other countries has been requested from competent authorities in the
respective countries, there is no assurance that the host country or the FDA
will approve such requests.
EMPLOYEES
The Company currently has six employees, including Raymond W. Cohen,
President and Chief Executive Officer, a Director of Software Engineering, two
clinical scientists, one technician and one administrative assistant. The
Company is actively recruiting and intends to hire additional personnel to
satisfy its research and development, marketing, production, regulatory and
administrative staffing requirements.
12
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases approximately 3,400 square feet in Irvine,
California, which is comprised of the Company's executive offices, engineering
facility, and software and hardware laboratories. The monthly rental for these
properties is approximately $2,500. Until February 1994, the Company occupied
space, on a month-to-month basis, within the facilities of Medstone at 9975
Toledo, Irvine, California, for which the Company was charged rent based upon
allocable square footage usage. The monthly rental for those facilities was
$1,408.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
There is no established public trading market for the Company's Common
Stock. Since June 1992, the Common Stock has been quoted sporadically on the
NASD Electronic Bulletin Board under the symbol "DFIB". These quotes are
reported in the interdealer "pink sheets," which reflect inter-dealer prices
without retail mark-up, mark-down or commission, are not necessarily
representative of actual transactions or of the value of the Company's
securities, and may not be based upon any recognized technique of valuation in
the investment banking community.
The quoted range of high and low bid prices for the Common Stock are as
follows:
<TABLE>
<CAPTION>
PRICE RANGE
------------------
PERIOD HIGH LOW
- ------ ------ ---------
<S> <C> <C>
Year Ended December 31, 1996
First Quarter $23/32 $ 3/8
Second Quarter 1/2 3/8
Third Quarter 14/32 3/16
Fourth Quarter 1/4 1/8
Year Ended December 31, 1995
First Quarter $23/64 $15/64
Second Quarter 7/16 15/64
Third Quarter 31/64 15/64
Fourth Quarter 21/32 19/64
</TABLE>
HOLDERS
As of March 24, 1997, there were approximately 867 holders of record of
Common Stock.
DIVIDENDS
The Company has never paid any cash dividends on its Common Stock. The
Company presently intends to retain earnings, if any, to finance its operations
and therefore does not anticipate paying any cash dividends in the foreseeable
future. The payment of any dividends will depend upon, among other things, the
Company's earnings, assets and general financial condition.
14
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
PERIOD FROM
MAY 20, 1991
YEAR ENDED (INCEPTION) TO
----------------------------------------------------------------------- DEC. 31,
1996 1995 1994 1993 1992 1996
------------ ------------ ------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development............. $ 422,360 $ 533,967 $ 112,690 $ 576,987 $ 258,207 $ 1,990,365
General and administrative........... 404,480 485,847 341,275 810,688 471,699 2,663,783
Interest expense..................... 2,300 2,040 45,911 93,076 43,188 194,814
Interest income...................... (38,183) (83,698) (11,479) (11,275) --- (144,635)
----------- ----------- ----------- ----------- ---------- -----------
Total costs and expenses.............. 790,957 938,156 488,397 1,469,476 773,094 4,704,327
Provision for income taxes............ 988 2,340 --- 1,600 800 5,728
----------- ----------- ----------- ----------- ---------- -----------
Loss before extraordinary expense..... (791,945) (940,496) (488,397) (1,471,076) (773,894) (4,710,055)
Extraordinary expense from
extinguishment of debt............... --- --- 245,000 --- --- 245,000
----------- ----------- ----------- ----------- ---------- -----------
Net loss.............................. $ (791,945) $ (940,496) $ (733,397) $(1,471,076) $ (773,894) $(4,955,055)
=========== =========== =========== =========== ========== ===========
Net loss per share:
Loss before extraordinary expense.... $(.02) $(.03) $ (.03) $(.15) $(.11)
Extraordinary expense................ --- --- (.01) --- ---
----------- ----------- ----------- ---------- -----------
Net loss per share................... $(.02) $(.03) $ (.04) $(.15) $(.11)
=========== =========== =========== ========== ===========
Number of shares used in the
computation of net loss per share:... 33,805,344 38,019,011 20,281,895 10,036,561 7,069,690
=========== =========== =========== =========== ==========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Working capital (deficit)............. $ 240,533 $ 969,346 $ 1,766,725 $ (333,356) $ 695,192
Total assets.......................... 452,863 1,230,515 2,005,634 42,631 873,452
Long-term debt (to related parties)... --- 102,000 102,000 755,371 755,371
Stockholders' equity (deficiency)..... 269,192 908,835 1,712,005 (1,054,482) (48,354)
</TABLE>
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the financial
statements of the Company and notes thereto set forth elsewhere herein.
The Company is a development stage company which is primarily engaged in
the development of non-invasive automatic defibrillator devices to treat persons
suffering from, or at high risk of, life threatening arrhythmias. The Company
commenced operations in May 1991. Its operations to date have consisted
primarily of organizational activities, research and development, clinical
testing, and financing related activities. The Company has not generated any
revenues to date. At present, the Company does not have the Products, financing
or government approvals necessary to commence marketing activities.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
For the year ended December 31, 1996, the Company had no operating revenues
and a net loss of $791,945, compared to no operating revenues and a loss of
$940,496 for the year ended December 31, 1995. The decreased loss reflects the
Company's reduction of product development expenses while awaiting clinical
trial results to determine where additional efforts should be devoted.
Expenses for research and development decreased to $422,360 for the year
ended December 31, 1996 compared to $533,967 for the year ended December 31,
1995 and due to the lower headcount and corresponding lower payroll and related
expenses due to fewer clinical trials.
General and administrative expenses decreased to $404,480 for the year
ended December 31, 1996, compared to $485,847 for the year ended December 31,
1995, due to a decrease in the use of management consultants in the current
period. This was partially offset by an increase in liability insurance expense
for product clinical trial coverage for a full year.
Interest expense remained relatively level at $ 2,300 for the year ended
December 31, 1996, compared to $2,040 for the year ended December 31, 1995, as
the Company paid a bridge loan commitment fee that was not fulfilled in 1996.
Interest income decreased to $38,183 for the year ended December 31, 1996,
compared to $83,698 for the year ended December 31, 1995, due to a declining
cash balance as the Company continues to operate using the funds generated in
the 1994 Private Placement described in "Liquidity And Capital Resources."
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
For the year ended December 31, 1995, the Company had no operating revenues
and a loss of $940,496 compared to no operating revenue and a net loss before
extraordinary expenses of $488,397 for the year ended December 31, 1994. The
increase for the 1995 period reflects increased expenditures for product
development, Phase II human clinical trials, and administrative support as
compared to 1994, a portion of which year the Company's operations were
suspended.
Expenses for research and development increased to $533,967 for the year
ended December 31, 1995, compared to $112,690 for the year ended December 31,
1994, due to the costs associated with Phase II clinical trials, additional
personnel hired to continue product development and the associated costs of
product clinical devices, compared to the curtailed operations during 1994.
16
<PAGE>
General and administrative expenses were $485,847 for the year ended
December 31, 1995, compared to $341,275 for the year ended December 31, 1994.
The increase in 1995 is due to costs associated with resumption of
administrative operations compared to 1994's curtailed operations.
Interest expense decreased to $2,040 for the year ended December 31, 1995,
compared to $45,911 for the year ended December 31, 1994, due to the lower
level of borrowing in the current period and a negotiated suspension of interest
costs on the remaining debt.
Interest income increased to $83,698 for the year ended December 31, 1995,
from $11,479 for the prior year period, due to the higher investable average
cash balance resulting from the financing concluded in September 1994.
Extraordinary expenses from the extinguishment of debt decreased to $0 in
the year ended December 31, 1995, from $245,000 in 1994, as a result of Medstone
subscribing for 1,800,000 shares in 1994 and the Company agreeing to issue a
warrant to Medstone to purchase 1,000,000 shares of Common Stock at $.001 in
satisfaction of all outstanding unsecured liabilities owing to Medstone. See
"Liquidity and Capital Resources."
- --------------------------------
INCOME TAXES
The Company has approximately $4,594,000 of federal net operating loss
carryforwards and $1,936,000 of California net operating loss carryforwards at
December 31, 1996 which will begin to expire in 2006 and 1997; respectively. The
Company had deferred tax assets of $1,800,000 and $1,500,000 at December 31,
1996 and 1995, respectively. The Company has established a valuation allowance
to fully offset its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash and cash equivalents and working
capital of $413,311 and $240,533, respectively, as compared to cash and cash
equivalents and working capital of $1,177,806 and $969,346 at December 31, 1995,
respectively.
The Company received cash contributions of $11,000 upon its initial share
issuances to its founding shareholders in May 1991. During the period June 1991
through December 31, 1993, the Company received loans in the aggregate principal
amounts of $510,000 and $250,000 from Medstone International, Inc. ("Medstone")
and Technology Funding, Inc. ("Technology Funding"), (principal shareholders of
the Company), respectively. These loans were evidenced by promissory notes,
(the "Medstone Note" and the "Technology Funding Note"), which accrued interest
at a rate of 8% per annum, payable quarterly, and which were secured by all of
the Company's assets and were scheduled to mature on the earlier of April 1,
1995 or the closing of an initial public offering of the Company's Common Stock
pursuant to an effective registration statement under the Securities Act of
1933. In connection with such borrowings, the Company issued to Medstone
warrants to purchase 3,400,000 shares of Common Stock, (the "Medstone Warrants")
for an aggregate exercise price of $510,000, and to Technology Funding warrants
to purchase 1,666,667 shares of Common Stock (the "Technology Funding Warrants")
for an aggregate exercise price of $250,000.
In January 1993, in conjunction with a private placement, the Company
issued 3,000,000 shares, and warrants to purchase 3,000,000 shares, for an
aggregate net proceeds of approximately $965,000. The proceeds from the private
placement funded the Company's operations through October 1993. As of December
31, 1996, a total of 862,500 warrants issued in the private placement had been
exercised for gross proceeds of $345,000.
In February 1994, the Company substantially curtailed operations due to
lack of funds, and, in May 1994, unable to locate an immediate source for a
working capital infusion, the Company temporarily ceased all activities except
in connection with obtaining financing.
In September 1994, the Company completed a private placement (the "Private
Placement"), issuing 20,000,000 shares of Common Stock at $.15 per share for
gross proceeds of $3,000,000. Net proceeds were approximately $2,205,000, after
payment of commissions and expenses to A.R. Baron & Co., Inc., who acted as
placement agent, and legal and other
17
<PAGE>
expenses related to the Private Placement. Shortly thereafter, the Company
leased new premises, rehired certain of its employees and resumed its research
and development activities.
In connection with the Private Placement and concurrently with the closing
thereof, (i) Medstone exercised the Medstone Warrants to the extent of 2,720,000
shares, (ii) the Company utilized the proceeds therefrom ($408,000) to pay an
equivalent portion of the $510,000 Medstone Note, (iii) the due date for the
remaining principal balance on the Medstone Note ($102,000) was extended to
April 1, 1996, (iv) Medstone retained its current lien on the assets of the
Company until the balance of the Medstone Note is paid, (v) the expiration date
for the remaining Medstone Warrants to purchase 680,000 shares of Common Stock
was changed to June 30, 1996, and (vi) all outstanding unsecured obligations
owing by the Company to Medstone (approximately $175,000) were satisfied by
Medstone subscribing for 1,800,000 shares of Common Stock and the Company
agreeing to issue a ten year warrant to purchase 1,000,000 shares of Common
Stock at $.001 per share. In April 1995, per an oral agreement between the
Company and Medstone, interest expense on the note was suspended due to prior
consideration paid during the renegotiation of the unsecured debt in 1994. The
2,720,000 shares underlying the warrants and the 1,800,000 shares for debt
forgiveness were not issued in 1994 in accordance with an agreement between the
Company and Medstone, but as of January 22, 1996 all shares have been issued. In
addition, concurrently with the closing of the Private Placement, (i) Technology
Funding exercised all of the 1,666,667 Technology Funding Warrants and (ii) the
Company utilized the proceeds therefrom ($250,000) to pay the $250,000
Technology Funding Note. The shares underlying the warrants will not be issued
until the Company completes its proposed recapitalization. Consequently, the
amounts relating to these shares are shown as Common Stock subscribed.
Also in connection with the Private Placement, the Company entered into
agreements with each of Breslow & Walker, counsel of the Company, Howard Cooper,
Chairman, and Fran Daniels, a financial consultant, to forego receipt of
outstanding payables aggregating $126,000 which were due on March 19, 1996. The
Company has negotiated extensions on these terms for Breslow & Walker and Fran
Daniels to extend the due date until a successful closure of funding of the
Company, and has paid all amounts due to Howard Cooper.
In April 1996, Medstone exercised warrants to purchase 680,000 shares of
the Company's Common Stock. The proceeds therefrom ($115,402) were used to pay
down the remaining loan balance left outstanding from the 1994 Private Placement
and accrued interest. Upon payoff of the loan, Medstone released all liens
against the Company's assets.
The Company anticipates that its current cash balance, will be sufficient
to meet the Company's cash requirements for at least the next 6 months. In this
connection, the Company currently intends to seek to complete a private offering
of its securities. However, there can be no assurance that such an offering can
be consummated or that the Company will be able to obtain alternative financing.
In the event the Company is unable to obtain any such financing, the Company
will be unable to complete the development of its Products or to continue as a
going concern.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14. "Exhibits, Financial Statement Schedules, and Reports
on Form 8-K".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Science, Inc.
We have audited the accompanying balance sheets of Cardiac Science, Inc., (a
development stage company) as of December 31, 1996 and 1995, and the related
statements of operations, stockholders' equity (deficiency), and cash flows for
the years ended December 31, 1996, 1995, and 1994 and the period May 20, 1991
(inception) to December 31, 1996. 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 Cardiac Science, Inc. (a
development stage company) at December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years ended December 31, 1996, 1995, and
1994 and the period from May 20, 1991 (inception) to December 31, 1996, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Cardiac
Science, Inc. will continue as a going concern. As discussed in Note 2, the
Company is in the development stage and realization of the Company's assets is
dependent upon future events, the outcome of which is indeterminable.
Additionally, successful completion of the Company's development program and its
transition, ultimately, to attaining profitable operations is dependent upon
obtaining additional financing adequate to fulfill its research and development
activities, and achieving a level of revenues adequate to support the Company's
cost structure. Accordingly, these conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of
liabilities that may result from the possible inability of Cardiac Science, Inc.
to continue as a going concern.
Ernst & Young LLP
Orange County, California
April 14, 1997
19
<PAGE>
CARDIAC SCIENCE, INC.
---------------------
(A development stage company)
BALANCE SHEETS
--------------
ASSETS
------
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $413,311 $1,177,806
Prepaid expenses................ 10,893 11,220
-------- ----------
Total current assets.............. 424,204 1,189,026
Equipment, at cost................... 70,286 70,286
Less accumulated depreciation... (45,639) (32,809)
-------- ----------
Equipment, net...................... 24,647 37,477
Other assets......................... 4,012 4,012
-------- ----------
$452,863 $1,230,515
======== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable.................................................. $ 129,186 $ 164,447
Accrued interest.................................................. --- 13,402
Accrued expenses.................................................. 4,216 4,216
Accrued payroll................................................... 50,269 37,615
----------- -----------
Total current liabilities........................................ 183,671 219,680
Note payable to related party......................................... --- 102,000
Stockholders' equity:
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued or outstanding at December 31, 1996 or 1995
Common stock - $.001 par value:
Authorized shares - 40,000,000
Issued and outstanding shares - 37,321,177
in 1996 and 31,953,677 in 1995..................................... 37,273 31,905
Common stock subscribed - 1,816,667 in 1996 and
6,186,667 in 1995.................................................. 268,000 924,134
Additional paid-in capital.......................................... 4,918,974 4,115,906
Deficit accumulated during the development stage.................... (4,955,055) (4,163,110)
----------- -----------
Total stockholders' equity........................................ 269,192 908,835
----------- -----------
$ 452,863 $ 1,230,515
=========== ===========
</TABLE>
See accompanying notes.
20
<PAGE>
CARDIAC SCIENCE, INC.
(A development stage company)
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 20, 1991
(INCEPTION) TO
FOR THE YEAR ENDED DECEMBER 31, DECEMBER 31,
1996 1995 1994 1996
- ---------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Costs and expenses:
Research and development..................... $ 422,360 $ 533,967 $ 112,690 $ 1,990,365
General and administrative................... 404,480 485,847 341,275 2,663,783
Interest expense............................. 2,300 2,040 45,911 194,814
Interest income.............................. (38,183) (83,698) (11,479) (144,635)
----------- ----------- ----------- -----------
Total costs and expenses..................... 790,957 938,156 488,397 4,704,327
Provision for income taxes.................... 988 2,340 --- 5,728
----------- ----------- ----------- -----------
Loss before extraordinary expense............. (791,945) (940,496) (488,397) (4,710,055)
Extraordinary expense from
extinguishment of debt....................... --- --- 245,000 245,000
----------- ----------- ----------- -----------
Net loss...................................... $ (791,945) $ (940,496) $ (733,397) $(4,955,055)
=========== =========== =========== ===========
Net loss per share:
Loss before extraordinary expense............ $ (.02) $ (.03) $ (.03)
Extraordinary expense........................ --- --- (.01)
----------- ----------- -----------
Net loss per share........................... $ (.02) $ (.03) $ (.04)
=========== =========== ===========
Number of shares used in the computation of
net loss per share........................... 38,805,344 38,019,011 20,281,895
=========== =========== ===========
</TABLE>
See accompanying notes.
21
<PAGE>
CARDIAC SCIENCE, INC.
(A development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
MAY 20, 1991 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK SUBSCRIBED ADDI-
--------------------- ----------------------- TIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
----------- ------- --------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
cash on May 20, 1991....... 6,927,448 $ 6,927 --- $ --- $ 4,073 $ --- $ --- $ 11,000
Net loss..................... --- --- --- --- --- (244,247) --- (244,247)
---------- ------- --------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 1991. 6,927,448 6,927 --- --- 4,073 (244,247) --- (233,247)
Cancellation of common stock
at $.0016 per share......... (29,761) (30) --- --- (17) --- --- (47)
Issuance of common stock for
cash at $.03 per share...... 70,000 70 --- --- 2,030 --- --- 2,100
Issuance of common stock
in lieu of payment of
interest payable at $.15 per
share....................... 144,493 145 --- --- 21,529 --- --- 21,674
Issuance of common stock for
services at $.38 per share.. 60,000 60 --- --- 22,740 --- --- 22,800
Issuance of common stock for
services at $.4375 per share 50,479 50 --- --- 22,033 --- --- 22,083
Issuance of common stock for
services at $.898 per share. 50,000 50 --- --- 44,872 --- --- 44,922
Issuance of common stock for
services at $2.156 per share. 6,611 7 --- --- 14,248 --- --- 14,255
Common stock issuable........ --- --- --- --- 831,000 --- --- 831,000
Net loss..................... --- --- --- --- --- (773,894) --- (773,894)
---------- ------- --------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 1992. 7,279,270 7,279 --- --- 962,508 (1,018,141) --- (48,354)
Issuance of common stock in
lieu of payment of interest
payable at $.40 per share... 129,473 129 --- --- 51,660 --- --- 51,789
Issuance of common stock for
cash at $.40 per share...... 3,000,000 3,000 --- --- 130,889 --- --- 133,889
Issuance of common stock for
services at $.40 per share.. 72,699 73 --- --- 29,007 --- --- 29,080
Common stock warrants
exercised at $.40 per share. 625,000 625 --- --- 249,375 --- --- 250,000
Common stock options
exercised at $.03 per share. 6,667 7 --- --- 193 --- --- 200
Cancellation of common stock
at $.0016 per share......... (6,298) (6) --- --- (4) --- --- (10)
Net loss..................... --- --- --- --- --- (1,471,076) --- (1,471,076)
---------- ------- --------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 1993. 11,106,811 11,107 --- --- 1,423,628 (2,489,217) --- (1,054,482)
Common stock warrants
exercised at $.15 per share,
net......................... --- --- 4,386,667 654,134 --- --- --- 654,134
Common stock subscribed
for debt forgiveness
at $.15 per share........... --- --- 1,800,000 270,000 --- --- --- 270,000
Issuance of common stock
for cash at $.15 per
share, net.................. 20,000,000 20,000 --- --- 2,185,000 --- --- 2,205,000
Issuance of common stock in
lieu of payment of interest
payable at $.15 per share... 370,866 370 --- --- 55,226 --- --- 55,596
Issuance of common stock for
services at $.40 per share.. 100,000 100 --- --- 39,900 --- --- 40,000
Common stock warrants
exercised at $.40 per
share....................... 200,000 200 --- --- 79,800 --- --- 80,000
Warrants issued at $.001 per
share for future services... --- --- --- --- 149,000 --- (149,000) ---
Warrants issued at $.001 per
share for debt
extinguishment.............. --- --- --- --- 150,000 --- --- 150,000
Amortization of unearned
compensation................ --- --- --- --- --- --- 45,154 45,154
Net loss..................... --- --- --- --- --- (733,397) --- (733,397)
---------- ------- --------- -------- ---------- ----------- ----------- ----------
Balance at December 31, 1994. 31,777,677 31,777 6,186,667 924,134 4,082,554 (3,222,614) (103,846) 1,712,005
</TABLE>
22
<PAGE>
CARDIAC SCIENCE, INC.
(A development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
MAY 20, 1991 (INCEPTION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK SUBSCRIBED ADDI-
--------------------- ----------------------- TIONAL
NUMBER OF NUMBER OF PAID-IN ACCUMULATED UNEARNED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMPENSATION TOTAL
----------- ------- --------- -------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock in
lieu of payment of royalties
at $.50 per share........ 60,000 $ 60 --- $ --- $ 29,940 $ --- $ --- $ 30,000
Common stock options
exercised................... 116,000 68 --- --- 3,412 --- --- 3,480
Amortization of unearned
compensation................ --- --- --- --- --- --- 103,846 103,846
Net loss..................... --- --- --- --- --- (940,496) --- (940,496)
---------- ------- ---------- --------- ---------- ----------- ---------- ---------
Balance at December 31, 1995. 31,953,677 31,905 6,186,667 924,134 4,115,906 (4,163,110) --- 908,835
Issuance of common stock for
subscribed stock........... 4,520,000 4,520 (4,520,000) (674,134) 669,614 --- --- ---
Common stock subscribed for
license fees at $.12 per
share..................... --- --- 150,000 18,000 --- --- --- 18,000
Common stock options
exercised at $.03 per share. 130,000 130 --- --- 3,770 --- --- 3,900
Common stock warrants
exercised at $.15 per share. 680,000 680 --- --- 114,722 --- --- 115,402
Common stock warrants
exercised at $.40 per share. 37,500 38 --- --- 14,962 --- --- 15,000
Net loss..................... --- --- --- --- --- (791,945) --- (791,945)
---------- ------- ---------- --------- ---------- ----------- ---------- ---------
Balance at December 31, 1996. 37,321,177 $37,273 1,816,667 $ 268,000 $4,918,974 $(4,955,055) $ --- $ 269,192
========== ======= ========== ========= ========== =========== ========== =========
</TABLE>
See accompanying notes.
23
<PAGE>
CARDIAC SCIENCE, INC.
(A development stage company)
STATEMENTS OF CASH FLOWS
-----------------------------
<TABLE>
<CAPTION>
PERIOD FROM
MAY 20, 1991
YEAR ENDED DECEMBER 31, (INCEPTION) TO
-------------------------------------------- DECEMBER 31,
1996 1995 1994 1996
--------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $(791,945) $ (940,496) $ (733,397) $(4,955,055)
Adjustments to reconcile
net loss to net cash used in
operating activities:
Depreciation................ 12,830 13,412 9,315 45,639
Expenses paid by common
stock...................... 18,000 --- --- 18,000
Accounts payable converted
to notes payable to related
parties.................... --- --- --- 305,371
Amortization of unearned
compensation from issuance
of warrants................ --- 103,846 45,154 149,000
Non-cash extraordinary
charge..................... --- --- 245,000 245,000
Changes in operating
assets and liabilities:
Prepaid expenses and other
current assets............ 327 (3,507) (2,366) (10,893)
Accounts payable (35,261) 25,932 (101,687) 304,718
Accrued payroll........... 12,654 34,524 (16,203) 50,269
Accrued expenses........... (13,402) (2,405) 45,911 129,059
Accrued interest........... -- -- (146) 4,216
Other, net................. --- 2,317 (5,040) (4,012)
--------- ---------- ---------- -----------
Net cash used in operating
activities................. (796,797) (766,377) (513,459) (3,718,688)
--------- ---------- ---------- -----------
Cash flows from investing
activities - purchase
of equipment................. --- (9,938) (17,310) (70,286)
--------- ---------- ---------- -----------
Cash flows from financing
activities:
Proceeds from notes payable
to related parties......... --- --- --- 450,000
Payments of notes payable to
related party.............. (102,000) --- (450,000) (552,000)
Proceeds of advance from
related party.............. --- --- 600 10,600
Payments of advance from
related party.............. --- --- (10,600) (10,600)
Proceeds from issuance of
and subscription for common
stock...................... 134,302 3,480 2,938,371 4,304,285
--------- ---------- ---------- -----------
Net cash provided by
financing activities....... 32,302 3,480 2,478,371 4,202,285
---------- ---------- ----------- -------------
Net increase (decrease) in
cash and cash equivalents.. (764,495) (772,835) 1,947,602 413,311
Cash and cash equivalents at
beginning of period......... 1,177,806 1,950,641 3,039 0
---------- ---------- ----------- -------------
Cash and cash equivalents at
end of period............... $ 413,311 $1,177,806 $ 1,950,641 $ 413,311
========== ========== =========== =============
Supplemental cash flow
disclosures:
Cash paid during the period
for:
Income taxes............... $ 988 $ 2,340 $ --- $ 5,728
Interest................... $ --- $ 4,444 $ --- $ 44,851
Supplemental schedule of
noncash investing and
financing activities:
Accounts payable, note
payable and accrued
interest paid by issuance
of or subscription for
common stock............... $ --- $ 30,000 $ 271,359 $ 506,162
</TABLE>
See accompanying notes.
24
<PAGE>
CARDIAC SCIENCE, INC.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
DECEMBER 31, 1996
-----------------
1. ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Cardiac Science, Inc. (the "Company") was incorporated on May 20, 1991 to
develop, manufacture and market a family of non-invasive (non-surgical)
Automatic External Cardioverter Defibrillator ("AECD") devices (the "Products")
---- --------
to treat persons suffering from or at high risk of life-threatening arrhythmias.
The Company's Products will be designed to continuously monitor, quickly detect
and then automatically, through transmission of electrical energy charges to the
patient's heart, terminate the ventricular tachyarrhythmia (dangerously fast
heart rate) and/or ventricular fibrillation (quivering of the heart following
tachyarrhythmia which usually results in death). Among the
cardioverter/defibrillator devices under development by the Company will be
ambulatory (mobile) AECD devices similar in function to the Implantable
Cardioverter Defibrillator ("ICD") devices that are either currently approved
---
for sale by the U.S. Food and Drug Administration (the "FDA") or are undergoing
---
clinical trials. However, the Company's planned AECD Products will not require
surgery to implant the devices. Moreover, the Company's Products will not
require the presence of a human operator to activate the device and deliver the
defibrillator charge, as is the case with some existing devices.
2. BASIS OF PRESENTATION AND CONTINUED EXISTENCE
The Company is in the development stage. From May 20, 1991 (inception)
through December 31, 1996, the Company has not generated any operating revenues
and has incurred losses of $4,955,055. Recovery of the Company's assets is
dependent upon future events, the outcome of which is indeterminable.
Additionally, successful completion of the Company's development program and its
transition, ultimately, to attaining profitable operations is dependent upon
obtaining additional financing adequate to fulfill its research and development
activities, and achieving a level of revenues adequate to support the Company's
cost structure. The Company is currently attempting to identify other sources
of financing. There can be no assurance that the Company will be successful in
these areas.
In February 1994, the Company substantially curtailed its operations due to
lack of operating capital. Concurrently, Medstone International, Inc.
("Medstone"), a principal stockholder of the Company from whom the Company
borrowed space, was in the process of moving its facility and the Company was
not given the option of occupancy in the relocated facility. The employees,
whose time the Company purchased on a pro-rata basis, resumed full-time efforts
for Medstone.
In May 1994, the Company halted all operations due to lack of funding and
the lack of an immediate source for a working capital infusion. Efforts to
obtain additional financing were conducted by consultants and advisors of the
Company on a contingency basis.
In September 1994, the Company completed a private placement offering (the
"Private Placement") of 20,000,000 shares of Common Stock at $.15 per share for
gross proceeds of
25
<PAGE>
$3,000,000. Proceeds of $2,205,000, net of issuance costs of $795,000, were used
to reduce trade payables and to provide working capital to resume operations.
In connection with the Private Placement, Medstone exercised warrants to
purchase 2,720,000 shares of the Company's Common Stock. The proceeds of
$408,000 were used to repay a portion of the notes payable to Medstone. The due
date for the remaining principal balance of $102,000 was extended to April 1,
1996. The expiration date for the remaining warrants were changed to June 30,
1996. In addition, Medstone subscribed for 1,800,000 shares of the Company's
Common Stock and the Company issued a ten year warrant to purchase 1,000,000
shares at $.001 per share in exchange for unsecured obligations of approximately
$175,000. The difference between the value of the stock and warrant issued,
$270,000 and $150,000, respectively, and the extinguished debt of $175,000 or
$245,000 was treated as an extraordinary expense. The 2,720,000 shares
underlying the warrants and the 1,800,000 shares for debt forgiveness were not
issued at the time of the Private Placement in accordance with an agreement
between the Company and Medstone. Consequently the amounts relating to these
shares were shown as common stock subscribed. As of January 22, 1996 all shares
have been issued.
In connection with the Private Placement, Technology Funding, Inc.
("Technology Funding"), a principal stockholder of the Company exercised
warrants to purchase 1,666,667 shares of the Company's Common Stock. The
proceeds were used by the Company to repay the note payable to Technology
Funding of $250,000. The shares underlying the warrants will not be issued
until the Company completes its proposed recapitalization. Consequently, the
amounts relating to these shares are shown as Common Stock subscribed.
In connection with the Private Placement, ten year warrants to purchase
11,000,000 shares of the Common Stock at $.001 per share were issued to the
following: 6,000,000 shares to the placement agent, 3,000,000 shares to legal
counsel of the Company, 1,000,000 shares to a financial advisor to the Company,
and 1,000,000 shares to directors of the Company.
Also in connection with the Private Placement, ten year stock options to
purchase 1,250,000 shares at $.15 per share were granted to an officer of the
Company.
In April 1996, Medstone exercised warrants to purchase 680,000 shares of
the Company's Common Stock. The proceeds therefrom of $115,402 were used to pay
down the remaining loan balance left outstanding from the 1994 Private Placement
and accrued interest. Upon payoff of the loan, Medstone released all liens
against the Company's assets.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of 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.
26
<PAGE>
Reclassifications
-----------------
Certain prior period balances have been reclassified to conform with the
December 31, 1996 presentation.
Cash and cash equivalents
-------------------------
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The Company
maintained $386,000 of its cash in a money market fund with one major financial
institution at December 31, 1996.
Equipment
---------
Property and equipment is carried at cost. Depreciation of equipment is
provided on the straight-line method over estimated useful lives of five years.
Long-Lived Assets
-----------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of (SFAS 121), in March 1995. SFAS No.
121 requires long-lived assets and certain intangibles held and used by the
Company to be reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. The recoverability
test is to be performed at the lowest level at which undiscounted net cash flow
can be directly attributable to long-lived assets. The Company adopted SFAS No.
121 on January 1, 1996 with no material effect on the Company's financial
statements.
Per share information
---------------------
Net loss per share as presented in the accompanying statements of
operations is computed based on the weighted average number of common shares
outstanding and subscribed. Shares issuable upon exercise of outstanding stock
options and warrants are not included since the effects would be anti-dilutive.
Stock Compensation
------------------
The Company has elected to follow Account Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
Accounting for Stock-Based Compensation, requires the use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
To calculate the pro forma information required by Statement 123, the
Company uses the Black-Scholes option pricing model. The Black-Scholes 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
valuation models require the input of highly subjective assumptions including
the expected stock price volatility. Because the Company's employee stock
options have characteristics
27
<PAGE>
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.
4. INCOME TAXES
The Company provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between financial statements and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future based on enacted
tax laws and rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to amounts which are more likely than
not to be realized.
The Company has approximately $4,594,000 of federal net operating loss
carryforwards and $1,936,000 of California net operating loss carryforwards at
December 31, 1996 which will begin to expire in 2006 and 1997, respectively.
The Company had deferred tax assets of $1,800,000 and $1,500,000 at December 31,
1996 and 1995, respectively. The Company has established a valuation allowance
to fully offset its deferred tax assets.
The Tax Reform Act of 1986 contains provisions which could substantially
limit the availability of the net operating loss carryforwards if there is a
greater than 50% change in ownership during a three year period. The Company
issued an additional 20,000,000 shares of Common Stock in September 1994 which
resulted in a greater than 50% change in ownership. This ownership change has
substantially limited the Company's ability to utilize its net operating loss
carryforwards in future periods. In addition, the Company also has outstanding
warrants and options which if exercised during the three year period would
create additional ownership changes and may further limit the Company's ability
to utilize its net operating loss carryforwards in future periods.
5. STOCK OPTIONS
1991 Stock Option Plan
----------------------
The Company's 1991 Stock Option Plan (the "1991 Plan") provides for the
---------
granting of stock options intended to qualify as incentive stock options and
stock options not intended to qualify as incentive stock options ("non-statutory
-------------
options"). The 1991 Plan is administered by a committee of two or more persons
- -------
appointed by the Company's Board of Directors (the "Committee"), or by the Board
---------
itself carrying out the Committee's functions. The Committee may grant options
to any officers, directors or key employees of the Company or its subsidiaries
and to any other individuals whose participation in the 1991 Plan the Committee
determines is in the Company's best interest. Up to 700,000 shares of Common
Stock are authorized to be issued under the 1991 Plan. Such number of shares,
as well as the number of shares issuable upon an option's exercise and the
exercise price, are subject to adjustments as set forth in the 1991 Plan.
1993 Stock Option Plan
----------------------
The 1993 Stock Option Plan (the "1993 Plan") authorizes the granting of
---------
incentive stock options to employees of the Company, including officers, and
non-statutory stock options to
28
<PAGE>
employees, including officers and directors of the Company, as well as to
certain consultants and advisors.
The 1993 Plan also authorizes the yearly grant, upon the date of the annual
shareholders meeting, to members of the Board of Directors of the Company of
non-statutory stock options to purchase 25,000 shares of the Company's Common
Stock at an exercise price equal to the fair market value thereof on the date of
grant ("Directors' Options"). Up to 800,000 shares of Common Stock may be issued
------------------
under the 1993 Plan, subject to adjustment upon the occurrence of certain
events, including, but not limited to, stock dividends, stock splits,
combinations, mergers, consolidations, reorganizations, reclassifications,
exchanges, or other capital adjustments. The option price for the Common Stock
underlying options granted pursuant to the 1993 Plan (other than Directors'
Options) is determined by the Board of Directors or a committee designated by
the Board of Directors and consisting of two or more members. The 1993 Plan
limits to $100,000 the fair market value (determined at the time the option is
granted) of the Common Stock with respect to which incentive stock options are
first exercisable by any individual employee during any calendar year.
29
<PAGE>
Stock option activity under the Company's plans are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
--------------- ------------- -------------
<S> <C> <C> <C>
Outstanding, beginning of year 2,440,000 1,920,417 684,444
Granted --- 755,000 1,250,000
Exercised (130,000) (116,000) 0
Canceled (615,000) (119,417) (14,027)
-------------- ------------ ------------
Outstanding, end of year 1,695,000 2,440,000 1,920,417
============== ============ ============
Option price per share
----------------------
Outstanding, end of year $.15 - $ 1.875 $.03 - $2.05 $.03 - $2.05
</TABLE>
At December 31, 1996 the number of shares reserved and available for
issuance under the plans was 355,000. Outstanding options for 757,333 shares
were exercisable at December 31, 1996.
In calculating pro forma information regarding net income and net income
per share, as required by Financial Accounting Standards Board Statement No.
123, Accounting for Stock-Based Compensation, the fair value was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for the options on the Company's common stock for
the years ended December 31, 1996 and 1995, respectively: risk free interest
rates of 6.5% and 6.5%; dividend yields of 0% and 0%; volatility of the expected
market prices of the Company's common stock of .851 for both periods; and
expected life of the options of 5.5 years for both periods.
For Purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
proforma information for the years ended December 31, 1996 and 1995 follows (in
thousands, except per share information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Pro forma net income (loss)............. $ (805) $ (951)
Pro forma net income (loss) per share... $( .02) $( .03)
</TABLE>
These pro forma amounts reflect only the cumulative effect of the expense
of options granted during the years ended December 31, 1996 and 1995, and does
not give effect to options granted prior to January 1, 1995.
The Plans incorporate the federal tax law requirements for incentive stock
options. Among other such requirements, the per share exercise price of an
incentive stock option granted under the Plans must not be less than 100% of the
fair market value of a share of the Common Stock on the date of grant and the
option may not be exercised more than 10 years after its grant date. If an
incentive stock option is granted to an employee owning more than 10 % of the
total combined voting
30
<PAGE>
power of all classes of stock of the Company, the exercise price may not be less
than 110% of such fair market value and the option may not be exercised more
than five years after its grant date.
Outstanding options may be terminated or accelerated in the event of
certain corporate acquisitions or other change of control events. An option
granted under the Plans will not be assignable or transferable by the grantee
other than by will or the laws of inheritance, except that a non-statutory
option will be transferrable by the grantee pursuant to a qualified domestic
relations order as defined in the Code, Title I of the Employee Retirement
Income Security Act or the rules thereunder. Other vesting, termination and
payment provisions for incentive and non-statutory options may be determined by
the Committee.
6. WARRANTS
During 1992, the Company granted warrants to Medstone and Technology
Funding to purchase 3,400,000 and 1,666,667 shares of the Company's Common
Stock, respectively, at $.15 per share in conjunction with their loans to the
Company for $510,000 and $250,000, respectively. Concurrent with the September,
1994 closing of the Private Placement (i) Medstone exercised the Medstone
Warrants to the extent of 2,720,000 shares, (ii) the Company utilized the
proceeds therefrom ($408,000) to pay an equivalent portion of the $10,000
Medstone Note, (iii) the expiration date for the remaining Medstone Warrants to
purchase 680,000 shares of Common Stock was changed to June 30, 1996, (iv)
Technology Funding exercised all of the 1,666,667 Technology Funding Warrants
and, (v) the Company utilized the proceeds therefrom ($250,000) to pay the
$250,000 Technology Funding Note. The shares underlying the Medstone Warrants
were not issued at the time of the Private Placement due to an agreement between
the Company and Medstone and were classified as common stock subscribed, but as
of January 22, 1996 the shares have been issued. The shares underlying the
warrants exercised by Technology Funding will not be issued until the Company
completes its proposed recapitalization. Consequently, the amounts relating to
these shares are shown as Common Stock subscribed. In April 1996, Medstone
exercised the remaining warrants to purchase 680,000 of the Company's Common
Stock and the Company utilized the proceeds therefrom ($102,000) to pay off the
remainder of the Note Payable to Related Party. In June 1992, the Company
granted warrants to an individual to purchase 150,000 shares of the Common Stock
at $.25 per share in consideration of financial consulting services to be
performed for the Company. The warrants granted to this individual vest over a
three year period and expire in 1997. In December 1992, the Company granted
warrants to two of its executive officers and directors to purchase 1,084,408
shares of the Common Stock at $.40 per share in consideration of services. The
warrants granted to the executive officers and directors are immediately
exercisable and expire in 2002. In connection with a private offering completed
in January 1993, the Company issued to the purchasers of shares of its Common
Stock warrants to purchase an additional 3,000,000 shares of its Common Stock at
$.40 per share, of which through December 31, 1995 a total of 825,000 shares had
been purchased with the warrants issued, and to the Company's placement agent
warrants to purchase 750,000 shares of the Common Stock under the same terms and
conditions as those warrants granted to purchasers of the shares in the private
offering, none of which were exercised. The warrants issued in connection with
the private offering were immediately exercisable and were scheduled to expire
on December 31, 1995; however, the Board of Directors extended the expiration
date on warrants from the private offering to January 31, 1996. In January 1996,
37,500 shares were exercised for net proceeds to the Company of $15,000 and the
remaining 2,887,500 expired unexercised. In June 1993 warrants to purchase 1,500
shares of the Common Stock at $1.00 per share were issued to a supplier in
consideration of services. These warrants were immediately exercisable and
expire in June 1998. In connection with the Private Placement, ten year warrants
to purchase 11,000,000 shares of Common Stock at $.001 per share were issued as
follows: 6,000,000 shares to the placement agent for the offering, 3,000,000
shares to legal counsel of the Company, 1,000,000 shares to a financial advisor
to the Company, and
31
<PAGE>
1,000,000 shares to two directors/consultants of the Company. In January 1996,
warrants to purchase 200,000 shares of the Common Stock at $.40 per share were
issued to a director of the Company for past services. At December 31, 1996,
warrants to purchase 13,435,908 shares of Common Stock were exercisable.
7. RELATED PARTIES
The Company currently receives accounting services from Medstone for a fee
that, in view of management, is consistent with the fees charged by independent
third party. The Company also uses the same group health insurance policy as
Medstone to take advantage of favorable rates for larger groups. The policy is
billed to Medstone, and then Medstone bills the Company for the portion relating
to the Company's employees. At December 31, 1996 the unpaid portion of the
health insurance was $2,895. Certain stockholders of the Company are also
officers and directors of Medstone. The Company issued 370,866 shares of Common
Stock in 1994 in lieu of cash payment of interest owed on the notes payable to
Medstone and Technology Funding.
8. SUBSEQUENT EVENT
On April 11, 1997, the Company acquired from Raymond Cohen, the President
and Chief Executive Officer of the Company ("Cohen"), Innovative Physicians
Services, Inc. d/b/a Diagnostic Monitoring ("IPS"), a Nevada corporation engaged
in the sale of medical diagnostic equipment, particularly Holter technology,
through a network of domestic and international distributors, for 5,714.285
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock") plus a non-interest bearing promissory note (the "Note") in the
principal amount of $100,000, payable in eighteen (18) equal consecutive monthly
installments commencing upon the earlier of April 9, 1999 or the completion of
an equity financing by the Company of not less than $2,000,000 of gross
proceeds. Each share of Series A Preferred Stock (i) is entitled to 1,000 votes
per share;(ii) is convertible into 1,000 shares of the Company's common stock,
par value $0.001 per share (the "Common Stock"), at any time, and from time to
time, at the holder's option, without the payment of any additional
consideration, and (iii) automatically shall convert into 1,000 shares of Common
Stock (subject to adjustment for any reverse stock split, etc.) upon there being
a sufficient number of authorized but unissued shares of Common Stock to allow
such conversion.
32
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES WITH THE COMPANY
- ---- --- -------------------------------------
<S> <C> <C>
Raymond W. Cohen 38 President and Chief Executive Officer
J. Donald Hill 62 Director
Paul D. Quadros 50 Director
Roderick de Greef 36 Director
</TABLE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by them.
RAYMOND W. COHEN was named President and Chief Executive Officer on
February 24, 1997. He became a director of the Company on April 9, 1997. Since
1993, Mr. Cohen was President of Diagnostic Monitoring, a diagnostic medical
device company distributing cardiovascular products worldwide. From 1990 to
1993, he was Vice President, Sales and Marketing of Diagnostic Monitoring. From
1988 to 1990 Mr. Cohen was President of BioAnalogics, Inc., a development stage
medical device manufacturer. During his tenure at Brentwood Instruments, Inc.,
a distributor of cardiopulmonary devices from 1981 to 1988, Mr. Cohen held
various sales and marketing position, including Vice President of Sales and
Marketing from 1985 to 1988. Mr. Cohen holds a B.S. in Business Management from
the State University of New York at Binghamton.
J. DONALD HILL has been serving as a director of the Company since
September 19, 1994. Since January 1996, Mr. Hill has been Chief Executive
Officer and Chairman of the Board of Excel Technology, Inc., a publicly traded
company engaged primarily in the manufacture of laser products and systems. He
has served as President of Excel Technology since 1994. Mr. Hill has also
served as President of Excel/Quantronix, Inc., a wholly-owned subsidiary of
Excel Technology, since November 1992 and was a business consultant to
Excel/Quantronix from February 1992 to November 1992. From January 1992 to
October 1991, Mr. Hill was Chief Executive Officer of Medstone International,
Inc. From 1988 to 1990 he was Director of Corporate Finance at Weeden & Co., an
investment firm and member of the New York Stock Exchange. Mr. Hill served as
Vice Chairman of First Affiliated Securities, Inc. from 1978 to 1988, and from
1966 to 1977 was a General Partner of Loeb, Rhoades & Company. Since November
1995, Mr. Hill has served as a director of Cryomedical Sciences, Inc., a
publicly traded company engaged primarily in the development and manufacture of
products for use in the field of low-temperature medicine.
PAUL D. QUADROS has been a director of the Company since its formation in
May 1991. He is the Chairman of the Board of UroGen Corp., a developer of
pharmaceuticals to treat prostate cancer. Prior to joining UroGen in June 1995,
Mr. Quadros served as Senior Vice President and Chief Financial Officer of
Thermatrix, Inc., a manufacturer of pollution control equipment. Prior to
joining Thermatrix in June 1994, Mr. Quadros was a General Partner of Technology
Funding, a venture capital management organization. During his tenure at
Technology Funding he was a member of the Commitments Committee from 1986 -
1994, serving as its Chairman from 1987-1990. From 1991-1994 he was Chairman of
Technology Funding's Medical Investment Committee and was
33
<PAGE>
actively involved in managing Technology Funding's health care portfolio. Mr.
Quadros served on the board of directors of Medstone International, Inc. from
1988-1995. Mr. Quadros has a B.A. in Finance from California State University at
Fullerton and an M.B.A. from the UCLA Graduate School of Management. He
currently serves on the board of directors at NeoVision Corporation and
Phenotypics Corporation.
RODERICK DE GREEF became director of the Company on April 9, 1997. Mr. de
Greef has been a principal in Sorbus Asset Strategies, S.A., a Swiss based
merchant bank and financial consulting firm, and its predecessor organization,
since January 1996. Mr. de Greef has worked closely with a number of development
stage companies in senior financial management positions, and has been involved
with the financing of public companies, including mergers and acquisitions,
public offerings and strategic financial management. Mr. de Greef presently is a
member of the Board of Directors of six development stage companies. From
October 1990 to December 1996, Mr. de Greef was Vice President, Chief Financial
Officer, and a Director of International BioAnalogics Systems, Inc., a
development stage medical device manufacturer and distributor. Mr. de Greef
received a BA degree in Economics in International Relations from San Francisco
State University in 1983 and a Masters degree in business administration from
the University of Oregon in 1993.
All directors of the Company hold office until the next annual meeting of
stockholders of the Company or until their successors are elected and qualified.
No family relationship exists between any director or executive officer and
any other director or executive officer of the Company.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid by
the Company during each of the Company's last three fiscal years to the
Company's Chief Executive Officer. No other executive officer of the Company
received salary and bonus payments in excess of $100,000 during the year ended
December 31, 1996.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------- -------------------------- -------
NAME OTHER RESTRICTED
AND ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION AWARDS(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- ------------ ------- ------ ------ ------------ ----------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prabodh Mathur (1) 1996 80,000 30,000 --- --- --- --- ---
Acting President 1995 80,000 40,000 --- --- --- --- ---
1994 18,205 --- --- --- 1,250,000(2) --- ---
</TABLE>
- ----------------
(1) The Company hired Mr. Mathur as a full-time employee concurrent with the
consummation of the Private Placement in September 1994. Mr. Mathur
resigned from the Company effective January 6, 1997.
(2) Represents options to purchase 1,250,000 shares of Common Stock at $.15 per
share. The options terminated on April 6, 1997.
34
<PAGE>
EMPLOYMENT AND CONSULTING AGREEMENTS
In February 1997, the Company entered into an employment agreement with
Raymond Cohen pursuant to which he was named President & Chief Executive
Officer. Mr. Cohen's base salary will be $120,000 per annum, plus such bonuses
and stock options which he may be eligible to receive based on incentive plans
approved by the Board of Directors. In addition, Mr. Cohen will receive a car
allowance of $6,000 per annum.
1991 STOCK OPTION PLAN
The Company's 1991 Stock Option Plan (the "1991 Plan") provides for the
granting of stock options intended to qualify as incentive stock options and
stock options not intended to qualify as incentive stock options ("non-statutory
options"). The 1991 Plan may be administered by a committee of two or more
persons appointed by the Company's Board of Directors (the "Committee") or by
the Board of Directors itself carrying out the Committee's functions. Options
may be granted to any officers, directors or key employees of the Company or its
subsidiaries and to any other individuals whose participation in the 1991 Plan
the Board of Directors (or Committee) determines is in the Company's best
interests ("Eligible Grantees"). Up to 700,000 shares of Common Stock may be
issued under the 1991 Plan. Such number of shares, as well as the number of
shares issuable upon an option's exercise and the exercise price, are subject to
adjustments set forth in the 1991 Plan in certain events.
The per share exercise price of an incentive stock option granted under
the 1991 Plan must not be less than 100% of the fair market value of a share of
the Common Stock on the date of grant and the option may not be exercised more
than 10 years after its grant date. If an incentive stock option is granted to
an employee owning more than 10% of the total combined voting power of all
classes of stock of the Company or of its parent or subsidiary corporation, the
exercise price may not be less than 110% of such fair market value and the
option may not be exercised more than five years after its grant date.
Outstanding options may be terminated or accelerated in the event of
certain corporate acquisitions or change of control events. An option granted
under the 1991 Plan is generally not assignable or transferable by the grantee
other than by will or the laws of inheritance. Other vesting, termination and
payment provisions for incentive and non-statutory options may be determined by
the Board of Directors (or Committee).
As of December 31, 1996, the Company has issued under the 1991 Plan
options to purchase an aggregate of 2,015,000 shares of Common Stock, of which,
252,667 were exercised. 512,333 were canceled, and 1,250,000 were outstanding.
As of December 31, 1996; there were no options available to be granted under the
1991 Stock Option Plan.
35
<PAGE>
1993 STOCK OPTION PLAN
The 1993 Stock Option Plan (the "1993 Plan") authorizes the granting of
incentive stock options to employees of the Company, including officers, and
non-statutory stock options to employees, including officers, and directors of
the Company, as well as to certain consultants and advisors.
The 1993 Plan also authorizes the yearly grant to members of the Board of
Directors of the Company of non-statutory stock options to purchase 25,000
shares of Common Stock at an exercise price equal to the fair market value
thereof on the date of grant ("Directors' Options").
Up to 800,000 shares of Common Stock may be issued under the 1993 Plan,
subject to adjustment upon the occurrence of certain events, including, but not
limited to, stock dividends, stock splits, combinations, mergers,
consolidations, reorganizations, reclassifications, exchanges or other capital
adjustments.
The option price for the Common Stock underlying options granted pursuant
to the 1993 Plan (other than Directors' Options) is determined by the Board of
Directors or a committee designated by the Board of Directors and consisting of
two or more members, but in no event shall it be, with respect to incentive
stock options, less than 100% of the fair market value of the Common Stock on
the date it is granted (110% in the case of optionees who own more than 10% of
the voting power of all classes of stock of the Company). The exercise price
for non-statutory options (other than Directors' Options) may be less than 100%
of the fair market value of the Common Stock on the date the Option is granted.
The 1993 Plan limits to $100,000 the fair market value (determined at the time
the option is granted) of the Common Stock with respect to which incentive stock
options are first exercisable by any individual employee during any calendar
year.
No option granted under the 1993 Plan may be exercised after the
expiration of the option, which may not, in any case, exceed 10 years from the
date of grant (five years in the case of optionees who own more than 10% of the
voting power of all classes of the stock of the Company).
As of December 31, 1996, the Company has issued under the 1993 Plan
options to purchase an aggregate of 830,000 shares, none of which have been
exercised, 385,000 of which have been canceled due to terminations, and 445,000
of which were outstanding. There are 355,000 shares available to be granted
under the 1993 Stock Option Plan.
36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of April 14, 1997, certain information
regarding the beneficial ownership of Common Stock and Preferred Stock by (i)
each stockholder known to the Company to be the beneficial owner of more than 5%
of the outstanding shares thereof; (ii) each director of the Company; (iii) each
executive officer of the Company; and (iv) all officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF
TITLE OF CLASS OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS (1)
- ----------------- ------------------------------------- -------------------- --------------------
<S> <C> <C> <C>
Common Medstone, Inc. 7,248,822(2) 18.8%
100 Columbia
Suite 100
Aliso Viejo, CA 92656
Common Parsons & Whittemore Ltd. 6,263,333 16.7%
20/26 Wellesley Road
Surrey, England
Common Suan Investments, Inc. 2,000,000(3) 5.1%
911 Stevens Road
Hillside, NJ 07025
Common L Rolls Ltd. 3,321,333 8.9%
45 River Court
London, England
Common Breslow & Walker, LLP 3,035,000(4) 7.5%
767 Third Avenue
New York, New York 10017
Common Technology Funding, Inc. 2,315,147(5) 5.9%
200 Alameda de las Pulgas
San Mateo, CA 94402
Common Howard K. Cooper (10) 1,899,373(6) 4.9%
5940 Fairhaven Avenue
Woodland Hills, CA 91367
Common Prabodh Mathur (11) 754,687(7) 2.0%
100 Columbia, Suite 100
Aliso Viejo, CA 92656
Common J. Donald Hill 767,977(7) 2.0%
8 Hammond Drive, Suite 111
Irvine, CA 92618
Common Paul D. Quadros 307,000(9) *
1400 Fashion Island Blvd., Suite 80
San Mateo, CA 94404
Common Raymond W. Cohen (12) - -
8 Hammond Drive, Suite 111
Irvine, CA 92618
Common Roderick de Greef (12) - -
8 Hammond Drive, Suite 111
Irvine, CA 92618
Series A Raymond W. Cohen 5,714.285 100%
Covertible 8 Hammond Drive, Suite 111
Preferred Stock Irvine, CA 92618
Common Stock All officers and directors as a group 1,829,664 4.7%
(five persons)(7)(8)(9)(12)(13)
Preferred Stock 5,714,.285 100%
- ----------------
</TABLE>
(1) Shares of Common Stock subject to options and warrants currently
exercisable or exercisable within 60 days are deemed outstanding for
computing the number of shares and the percentage of the outstanding
shares held by a person holding such options or warrants but are not
deemed outstanding for computing the percentage of any other person.
Except as indicated by footnote, and subject to community property laws
where applicable, the persons named in the table have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
37
<PAGE>
(2) Includes 1,000,000 shares issuable upon exercise of outstanding
warrants.
(3) Consists of 2,000,000 shares issuable upon exercise of outstanding
warrants.
(4) Includes 3,000,000 shares issuable upon exercise of warrants.
(5) Includes (i) 437,130 shares held and 1,666,667 shares subscribed by
Technology Funding Partners and (ii) 211,350 shares held by Technology
Funding Partners II. Technology Funding, Inc. is the managing general
partner of Technology Funding Partners I and Technology Funding Partners
II. Technology Funding, Inc. is entitled to exercise voting and investment
power with respect to all shares owned by Technology Funding Partners I
and Technology Funding Partners II and therefore may be deemed to be the
beneficial owner of such shares.
(6) Includes 1,199,605 shares issuable upon exercise of outstanding
warrants.
(7) Includes 384,803 shares issuable upon exercise of outstanding warrants.
(8) Includes 650,000 shares issuable upon exercise of outstanding warrants.
(9) Includes (i) 200,000 shares issuable upon exercise of outstanding warrants
and (ii) 25,000 shares issuable upon exercise of presently outstanding
stock options.
(10) Resigned from the Company effective April 12, 1996.
(11) Resigned from the Company effective January 6, 1997.
(12) Elected as a director on April 9, 1997.
(13) Does not include Mr. Cooper due to his resignation from the Company
effective April 12, 1996.
* Less than 1%
38
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the period June 1991 through December 31, 1993, the Company
received loans in the aggregate principal amount of $510,000 from Medstone
International, Inc. ("Medstone"). The loans were evidenced by the promissory
note ("the Medstone Note") bearing interest at a rate of 8% per annum, payable
quarterly, were secured by the Company's assets and were scheduled to mature on
April 1, 1995. In connection with such loans, the Company issued to Medstone the
Medstone Warrants to purchase 3,400,000 shares of Common Stock ("Medstone
Warrants") for an aggregate exercise price of $510,000. In July 1994, the
Company entered into an agreement with Medstone pursuant to which, (i) Medstone
exercised the Medstone Warrants to the extent of 2,720,000 shares, (ii) the
Company utilized the proceeds therefrom ($408,000) to pay an equivalent portion
of the Medstone Note, (iii) the due date for the remaining principal balance on
the Medstone Note ($102,000) was extended to April 1, 1996, (iv) Medstone
maintained its current lien on the assets of the Company until the balance of
the Medstone Note is paid, (v) the expiration date for the remaining Medstone
Warrants to purchase 680,000 shares of Common Stock was changed to March 31,
1996, and (vi) all outstanding unsecured obligations owing by the Company to
Medstone (approximately $175,000) were satisfied by subscription of 1,800,000
shares of Common Stock and issuance of a ten year warrant to purchase 1,000,000
shares of Common Stock at $.001 per share. In April 1996, Medstone exercised its
680,000 warrants for gross proceeds of $102,000, the Company used these proceeds
to repay the principal of the note in the amount of $102,000, and Medstone
released its lien on the Company's assets. The Company also issued a total of
419,054 shares of Common Stock to Medstone in lieu of cash payments of interest
owed on the Medstone Note from the period April 1, 1992 to December 31, 1995.
39
<PAGE>
In July 1994, the Company entered into an agreement with Breslow & Walker,
counsel to the Company, and Howard K. Cooper, former Chairman, to defer
collection of payables of $86,000, and $30,000, respectively, until the earlier
of March 19, 1996 or completion of the next public offering of securities of the
Company. The Company had negotiated extensions on these terms for Breslow and
Walker to extend the due date until a successful closure of funding of the
Company, and has paid all amounts due to Mr. Cooper.
On April 11, 1997, the Company acquired from Raymond Cohen, the President
and Chief Executive Officer of the Company ("Cohen"), Innovative Physicians
Services, Inc. d/b/a Diagnostic Monitoring ("IPS"), a Nevada corporation engaged
in the sale of medical diagnostic equipment, particularly Holter technology,
through a network of domestic and international distributors, for 5,714.285
shares of the Company's Series A Convertible Preferred Stock (the "Preferred
Stock") plus a non-interest bearing promissory note (the "Note") in the
principal amount of $100,000, payable in eighteen (18) equal consecutive monthly
installments commencing upon the earlier of April 9, 1999 or the completion of
an equity financing by the Company of not less than $2,000,000 of gross
proceeds. Each share of Series A Preferred Stock (i) is entitled to 1,000 votes
per share; (ii) is convertible into 1,000 shares of the Company's common stock,
par value $0.001 per share (the "Common Stock"), at any time, and from time to
time, at the holder's option, without the payment of any additional
consideration, and (iii) automatically shall convert into 1,000 shares of Common
Stock (subject to adjustment for any reverse stock split, etc.) upon there being
a sufficient number of authorized but unissued shares of Common Stock to allow
such conversion. A more complete description of the transaction has been filed
on a Form 8-K.
40
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) INDEX TO FINANCIAL STATEMENTS Page
------
<S> <C> <C>
1. Financial Statements
Report of Independent Auditors 19
Balance Sheets at December 31, 1996 and 1995........... 20
Statements of Operations for the years ended
December 31, 1996, 1995 and 1994, and
the period from May 20, 1991 (inception) to
December 31, 1996.................................... 21
Statement of Stockholders' Equity (Deficiency)
for the period from May 20, 1991 (inception) to
December 31, 1996.................................... 22-23
Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994, and the
period from May 20, 1991 (inception) to
December 31, 1996.................................... 24
Notes to Financial Statements.......................... 25
</TABLE>
2. Schedules to Financial Statements
All schedules are omitted because they are not applicable or
the required information is included in the financial
statements or notes thereto.
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed with the Commission during the
quarter ended December 31, 1996.
41
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
3.1 Certificate of Incorporation/ (1)/
3.2 Bylaws /(1)/
3.3 Certificate of Designation for Series A Convertible
Preferred Stock /(7)/
4.1 Warrant Certificates of Howard K. Cooper and Prabodh Mathur
/(2)/
4.2 Warrant Certificates of A.R. Baron, Breslow & Walker, Howard
K. Cooper, J. Donald Hill, Fran Daniels and Medstone, Inc./
(3)/
4.3 Amended Warrant Certificate of Medstone, Inc./(3)/
10.1 1991 Stock Option Plan, as amended /(4)/
10.2 Agreement, dated July 20, 1994 between Fran Daniels
and the Company /(3)/
10.3 Agreement, dated July 20, 1994, between Breslow &
Walker and the Company /(3)/
10.4 Facility Lease dated September 30, 1994 for 8 Hammond Drive,
Irvine, CA. /(5)/
10.5 Agreement dated October 1, 1994 between Financial Sciences
of America and the Computer/(5)/.
10.6 Employment Agreement, dated January 1997 between the Company
and Raymond Cohen
10.7 1993 Stock Option Plan
10.8 Agreement and Plan - (Merger, dated April 9, 1997, by and
______ the Company, Raymond W. Cohen, Innovative Physicians
Service, Inc. d/b/a Diagnostic Monitoring and CS1 Merging
corporations /(7)/
10.9 Promissory Note, dated April 9, 1997 in principal amount of
$100,000 payable to Raymond W. Cohen /(6)/
27 Financial Data Schedule /(7)/
</TABLE>
_________________________
(1) Previously filed with the Company's Application for Registration on Form 10
dated October 2, 1991.
(2) Previously filed with the Company's Form 10-K for the year ended December
31, 1992.
(3) Previously filed with the Company's Form 10-K for the year ended December
31, 1993.
(4) Previously filed under Amendment No. 1, dated April 18, 1992, to
Application For Registration on Form 10.
(5) Previously filed with the Company Form 10-K for the year ended December 31,
1994.
(6) Previously filed with Form 8-K on April 14, 1997.
(7) To be filed by Amendment.
(8) Previously filed with Form S-8 June 8, 1993.
42
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
CARDIAC SCIENCE, INC.
By: /s/ RAYMOND W. COHEN
---------------------------------
Raymond W. Cohen
President &
Chief Executive Officer
By: /s/ RAYMOND W. COHEN
---------------------------------
Raymond W. Cohen
(Principal Financial Officer)
Date: March 30, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ J. DONALD HILL Director March __, 1997
- -------------------------------------------
J. Donald Hill
/s/ PAUL QUADROS Director March __, 1997
- -------------------------------------------
Paul Quadros
</TABLE>
43
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of
January __, 1997, by and between Cardiac Science, Inc., a Delaware corporation
(the "Company"), and Raymond Cohen, an individual resident of the State of
California ("Employee").
W I T N E S S E T H:
WHEREAS, the Company is a development stage company formed to develop,
manufacture and market a family of non-invasive Automatic External Cardioverter
Defibrillator devices to treat persons suffering from or at high risk of life
threatening arrhythmias; and
WHEREAS, Employee is the sole stockholder and Chief Executive Officer of
Innovative Physicians Services, Inc. d/b/a Diagnostic Monitoring ("DM"), a
Nevada corporation engaged in the sale of medical diagnostic equipment,
particularly Holter technology, through a network of domestic and international
distributors; and
WHEREAS, the Company has entered into an Agreement with Sorbus Asset
Strategies, S.A. ("SAS"), pursuant to which SAS will use its "best efforts" to
find investors who may invest up to a maximum of $2,000,000 in the Company
through the purchase of shares of the Company's common stock on the condition,
among others, that the Company employ Employee as its President and Chief
Executive Officer ("CEO") upon mutually acceptable terms (the "Financing
Transaction"); and
WHEREAS, the Company has entered into a letter of intent with DM and
Employee, pursuant to which the parties have agreed to use their best efforts to
negotiate and finalize a transaction whereby the Company would acquire DM (the
"Acquisition Transaction") simultaneously with the completion of the Financing
Transaction and Employee would become the President and CEO of the Company; and
WHEREAS, the parties wish to (a) provide for the employment of Employee as
the President and CEO of the Company, pending completion of the Acquisition
Transaction and the Financing Transaction, and (b) set forth the terms under
which Employee shall continue as the President and CEO of the Company upon
completion of the Acquisition Transaction and Financing Transaction;
NOW, THEREFORE, in consideration of the premises, the mutual promises
hereinafter set forth, and other good and valuable consideration had and
received, the parties hereby agree as follows:
1. Employment; Term of Employment. Upon and subject to the terms,
conditions and other provisions of this Agreement, the Company hereby employs
Employee, and Employee hereby agrees to serve, as President and CEO of the
Company, for the period commencing on the date hereof (the "Effective Date") and
ending upon the earlier of (a) the completion of the Financing Transaction, (b)
the termination of the Financing Transaction without the completion thereof, or
(c) six months after the Effective Date (the "Initial Employment Period");
provided, however, if the Initial Employment Period ends as a result of the
completion of the Financing Transaction, the term of this Agreement
1
<PAGE>
shall automatically be extended for a period which ends 18 months from the
Effective Date, unless extended by mutual agreement of the parties hereto (the
"Subsequent Employment Period"). The Initial Employment Period and the
Subsequent Employment Period are hereinafter referred to as the Employment Term.
2. Employee's Services and Duties. During the Employment Term, Employee
shall:
(a) Perform the services of a President and CEO as may be set forth in
the Bylaws of Company and as are customarily required by such position;
(b) Observe and conform to the policies and directions promulgated
from time to time by Company's Board of Directors; and
(c) Serve the Company faithfully, diligently and competently and to
the best of his ability.
3. Time to be Devoted to Employment.
3.1 During the Initial Employment Period, Employee shall devote not
less than two days per week to the business of the Company.
3.2 During the Subsequent Employment Period, Employee shall devote
his full business time, attention and energies to his duties and
responsibilities hereunder.
4. Compensation and Other Benefits. As compensation in full for the
services to be rendered by Employee hereunder during the Employment Term,
Employee shall receive the following compensation, which compensation shall be
subject to all appropriate federal, state and local withholding taxes:
(a) During the Initial Employment Period a salary in the amount of
$5,000 per month.
(b) During the Subsequent Employment Period:
(i) A salary in the amount of $10,000 per month ("Base Salary");
(ii) An automobile allowance in the amount of $500 per month;
(iii) An incentive plan mutually agreed to by the Company and
Employee and tied to Employee's performance;
(iv) Such health insurance and other benefits as Company
customarily provides to its employees;
(v) Stock options as may be granted from time to time by the
Board of Directors of the Company; and
2
<PAGE>
(vi) Four weeks paid vacation each year during the Employment
Term, which vacation shall be taken at such times as are
consistent with the needs of the Company and the convenience
of Employee.
5. Certain Business Expenses. The Company shall reimburse Employee for
business expenses (a) which are reasonable and necessary for Employee to
perform, and were incurred by Employee in the course of the performance of, his
duties pursuant to this Agreement, and (b) for which Employee has submitted
vouchers and completed an expense report in the form required by the Company.
6. Confidential Information.
6.1 Employee acknowledges that, because of his employment hereunder,
he will be in a confidential relationship with the Company and will have access
to confidential information and trade secrets of the Company. Employee
acknowledges and agrees that the following constitutes confidential and/or trade
secret information belonging exclusively to Company (collectively "Confidential
Information"):
(a) all information related to customers including, without
limitation, customer lists, the identities of existing, past or prospective
customers, prices charged or proposed to be charged to customers, customer
contacts, special customer requirements and all related information;
(b) marketing plans, materials and techniques; and
(c) all know-how, devices, compilations of information, copyrightable
material and technology and technical information, relating to the business of
the Company.
6.2 Employee agrees that except in the limited performance of his
duties under this Agreement, Employee shall not use for his own benefit or
disclose to any third-party Confidential Information acquired by reason of his
employment under this Agreement or his former status as officer of the Company.
6.3 This Section 6 shall survive termination of this Agreement.
7. Company Property.
7.1 Any patents, inventions, discoveries, applications or processes,
software and computer programs devised, planned, applied, created, discovered or
invented by Employee in the course of his employment under this Agreement and
which pertain to any aspect of the business of the Company, or its subsidiaries,
affiliates or customers, shall be the sole and absolute property of the Company,
and Employee shall make prompt report thereof to the Company and promptly
execute any and all documents reasonably requested to assure the Company the
full and complete ownership thereof.
7.2 All records, files, lists, drawings, documents, equipment and
similar items relating to the Company's business which Employee shall prepare or
receive from the Company shall remain the
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Company's sole and exclusive property. Upon termination of this Agreement,
Employee shall return promptly to the Company all property of the Company in his
possession and Employee represents that he will not copy, or cause to be copied,
printed, summarized or compiled, any software, documents or other materials
originating with and/or belonging to the Company. Employee further represents
that he will not retain in his possession any such software, documents or other
materials in machine or human readable forms.
7.3 This Section 7 shall survive termination of this Agreement.
8. Non-Competition; Non-Solicitation.
8.1 In view of the unique and valuable services it is expected
Employee will render to the Company, Employee's knowledge of the business of the
Company and proprietary information relating to the business of the Company and
similar knowledge regarding the Company it is expected Employee will obtain
during the course of his employment with the Company, and in consideration of
this Agreement and the compensation to be received by Employee hereunder,
Employee agrees that for as long as he is employed by the Company and for a
period of one year thereafter (the "Covenant Period"), he will not compete with
the Company (or any of its subsidiaries now owned or hereafter acquired) or,
directly or indirectly, own, manage, operate, control, loan money to, or
participate in the ownership, management, operation or control of, or be
connected with as a director, officer, employee, partner, consultant, agent,
independent contractor or otherwise, or acquiesce in the use of his name, in any
other business or organization which competes with the Company (or any of its
subsidiaries now owned or hereinafter acquired), in any geographical area in
which the Company is then conducting business or in which, to the knowledge of
Employee, the Company plans to conduct business within a twelve month period of
time; provided, however, that Employee shall be permitted to own less than a 5%
interest as a shareholder in any company which is listed on any national
securities exchange even though it may be in competition with the Company.
8.2 Employee will not, during the Covenant Period, directly or
indirectly, or on behalf of any other person or entity, solicit or interfere
with, or endeavor to entice away any employees (full-time or part-time) or
customers of the Company (or any of its subsidiaries now owned or hereafter
acquired).
9. Injunctive Relief.
9.1 Since a breach of the provisions of Sections 6, 7, or 8 could not
adequately be compensated by money damages and will cause irreparable injury to
the Company, the Company shall be entitled, in addition to any other right or
remedy available to it, to an injunction or restraining order enjoining such
breach or a threatened breach, and no bond or other security shall be required
in connection therewith, and Employee hereby consents to the issuance of any
such injunction or restraining order.
9.2 Employee agrees that the provisions of Section 8 are reasonable
and necessary to protect the Company and its business. It is the desire and
intent of the parties that the provisions of Section 8 shall be enforced to the
fullest extent permitted under the public policies and laws applied
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in each jurisdiction in which enforcement is sought. If any restriction
contained in Section 8 shall be deemed to be invalid, illegal or unenforceable
by reason of the extent, duration or geographical scope thereof, or otherwise,
then the court making such determination shall have the right to reduce such
extent, duration, geographical scope or other provision hereof and in its
reduced form such restriction shall then be enforceable in the manner
contemplated hereby.
9.3 This Section 9 shall survive the termination of this Agreement.
10. Termination Prior to Expiration of Employment Term.
10.1 The Company in its sole discretion may terminate Employee's
employment with or without cause, at any time. In the event Employee is
terminated with cause, or without cause during the Initial Employment Period,
Employee shall have no right to receive compensation or other benefits for any
period commencing after the date of such termination. In the event Employee is
terminated without cause during the Subsequent Employment Period, Employee shall
be entitled to receive the Base Salary for the balance of the Subsequent
Employment Period, but shall not be entitled to receive any benefits or other
compensation for any period commencing after the date of such termination. Cause
for termination of employment shall include: (a) dishonesty by Employee
detrimental to the best interests of the Company or any of its affiliates; (b)
continuing inattention to or neglect of the duties to be performed by Employee
hereunder, which inattention is not the result of illness or accident; (C)
willful disloyalty to the Company; (d) participation in any fraud by Employee;
(e) disclosure by Employee of any Confidential Information, as that term is
defined in Section 6, in breach of this Agreement; or (f) any other material
breach of this Agreement unless remedied by Employee within fifteen (15) days of
the occurrence of the breach.
10.2 In the event the Employee's employment is terminated by reason
of his voluntary resignation or death during the Employment Term, the Employee
shall have no right to receive compensation or other benefits for any period
commencing after the date of such termination. The Employee will be obligated to
give Company ninety (90) days' written advance notice of his intent to resign so
that Company will have an opportunity to seek a replacement for the Employee.
10.3 The Company in its sole discretion may terminate the Employee's
employment if the Employee shall become physically or mentally disabled
("Disability") during the Employment Term such that, (a) in the Board of
Directors' good faith judgment, Employee is permanently incapable of properly
performing each of the duties customarily performed by him hereunder, or (b)
such Disability lasts for a period of 45 consecutive days or for 75 days in any
six-month period and the Company elects to treat such Disability as being
permanent in nature. In the event the Employee's employment is terminated on
account of a Disability, the Employee shall have the right to receive Disability
payments equal to 60% of the Base Salary for a period of six months after his
employment is terminated on account of the Disability, but shall not be entitled
to receive any benefits or other compensation for any period commencing after
the date of such termination. The Company shall be entitled to procure a
disability policy for the benefit of Employee to cover such payments.
11. Notices. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed to have been delivered
three business days after having been
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mailed in a general or branch post office and enclosed in a registered or
certified post-paid envelope; one business day after having been sent by
overnight courier; when delivered to a telegraph company or when telecopied or
scanned graphically or otherwise by communications equipment of the sending
party on a business day, or otherwise, on the next succeeding business day
thereafter; and, in each case, addressed to the respective parties at the
addresses on record with Company or to such other changed addresses that the
parties may have fixed by notice as provided herein.
12. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
13. Headings. The headings herein are for convenience only, do not
constitute a part of this Agreement, and shall not be deemed to limit or affect
any of the provisions hereof.
14. Entire Understanding. This Agreement constitutes the entire agreement
and understanding between the parties with respect to the employment of Employee
by Company, and supersedes all prior agreements, representations and
understandings, both written and oral, between the parties hereto with respect
to the subject matter hereof.
15. Amendments. This Agreement may not be modified or changed except by
written instrument signed by all of the parties hereto.
16. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California.
17. Construction. Whenever in this Agreement the context so requires,
references to the masculine shall be deemed to include feminine and the neuter,
references to the neuter shall be deemed to include the masculine and feminine,
references to the plural shall be deemed to include the singular and references
to the singular shall be deemed to include the plural.
18. Cooperation. Each party hereto shall cooperate with the other party
and shall take such further action and shall execute and deliver such further
documents as may be necessary or desirable in order to carry out the provisions
and purposes of this Agreement.
19. Waiver. No amendment or waiver of any provision of this Agreement
shall in any event be effective, unless the same shall be in writing and signed
by the parties hereto, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose for which given. The
failure of any party to insist, in any one or more instances, upon performance
of any of the terms, covenants or conditions of this Agreement shall not be
construed as a waiver or relinquishment of any rights granted hereunder or any
such term, covenant or condition.
20. Parties in Interest; Assignment. This Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective permitted
successors, assigns, heirs and/or personal representatives. Except as
specifically provided herein, neither this Agreement nor any interest herein,
shall be assigned or assignable by operation of law or otherwise, by any party
without the
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prior written consent of the other party, except that, without such consent,
Company may assign this Agreement or any interest therein, by operation of law
or otherwise, to (a) any successor to all or substantially all of its stock,
assets or business by dissolution, merger, consolidation, transfer of assets, or
otherwise, or (b) any direct or indirect subsidiary of Company or of any such
successor referred in (a) hereof. Nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties and their
respective successors and permitted assigns any rights or remedies under or by
reason of this Agreement.
21. Severability. If any provision of this Agreement shall be deemed
invalid, unenforceable or illegal, then notwithstanding such invalidity,
unenforceability or illegality, the remainder of this Agreement shall continue
in full force and effect.
22. Full Understanding. Employee represents that he has carefully read and
fully understands all of the provisions of this Agreement, that he is competent
to execute this Agreement, that his agreement to execute this Agreement has not
been obtained by any duress and that he freely and voluntarily enters into it,
and that he has read this document in its entirety and fully understands the
meaning, intent and consequences of this document.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
RAYMOND COHEN
CARDIAC SCIENCE, INC.
By:
Authorized Signatory
<PAGE>
EXHIBIT 10.7
CARDIAC SCIENCE, INC.
1993 STOCK OPTION PLAN
1. PURPOSE OF PLAN
The purpose of this 1993 Stock Option Plan (the "Plan") is to further the growth
and development of Cardiac Science, Inc. (the "Company") by encouraging and
enabling employees, including officer, and directors of, and consultants and
advisors to, the Company to obtain a proprietary interest in the Company through
the ownership of stock, thereby providing such persons with an added incentive
to continue in the employ or service of the Company and to stimulate their
efforts in promoting the growth, efficiency and profitability of the Company,
and affording the Company a means of attracting to its service persons of
outstanding quality.
2. SHARES OF STOCK SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 12 hereof, an aggregate of 800,000
shares of common stock, par value $.001 per share, of the Company ("Common
Stock") shall be reserved for issuance upon the exercise of options which may be
granted from time to time in accordance with the Plan. Such shares may be, in
whole or in part, as the Board of Directors of the Company (the "Board of
Directors") shall from time to time determine, authorized but unissued shares of
issued shares which have been reacquired by the Company. If, for any reason, an
option shall lapse, expire or terminate without having been exercised in full,
these options shall (unless the Plan shall have been terminated) again be
available for the purpose of the Plan.
3. ADMINISTRATION
(a) The Board of Directors shall administer the Plan and, subject to Sections
3(c) and 3(d) hereof, and subject to the other express provisions of the Plan,
shall have authority in its discretion to determine and designate from time to
time, those persons eligible for a grant of options under the Plan, those
persons to whom options are to be granted, the purchase price of the shares
covered by each option, the time or times at which options shall be granted, and
the manner in which said options are exercisable. In making such determination,
the Board of Directors may take in to account the nature of the services
rendered by the respective persons, their present and potential contributions to
the Company's success and such other factors as the Board of Directors in its
sole discretion shall deem relevant. Subject to the express provision of the
Plan, the Board of Directors shall also have authority to interpret the Plan, to
prescribe, amend and rescind rules and regulations relating to it, to determine
the terms and provisions of the instruments by which options shall be evidenced,
which shall not be inconsistent with the terms of the Plan, and to make all
other determinations necessary or advisable for the administration of the Plan,
all of which determinations shall be final, binding and conclusive.
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(b) The Board of Directors may, at its discretion, in accordance with the
provisions of the Company's By-Laws, by resolution adopted by the affirmative
vote of a majority of the entire Board of Directors, appoint from among its
members a Stock Option Plan Committee (the "Committee"). Such Committee shall be
composed of two or more directors and shall have and may exercise any and all of
the powers relating to the administration of the Plan and the grant of options
hereunder as are set forth above in Section 3(a), as the Board of Directors
shall confer and delegate. The Board of Directors shall have the power at any
time to fill vacancies in, to change the membership of, or to discharge, such
Committee. The Committee shall select one of its members as its members as its
Chairman and shall hold its meetings at such time and at such places as it shall
deem advisable. A majority of such Committee shall constitute a quorum and such
majority shall determine its action. The Committee shall keep minutes of its
proceedings and shall report the same to the Board of Directors at the meeting
next succeeding.
(c) Any provision of the Plan to the contrary notwithstanding, options granted
to eligible members of the Board o Directors pursuant to Section 3(d) hereof
shall be automatic, without any discretion on the part of he Board of Directors
or the Committee, as the case may be, with respect to the grantee, the number of
shares of Common Stock subject to such options, the term of the options or the
exercise price of the options.
(d) Throughout the term of the Plan, on the date of each Annual Meeting of the
Shareholders of the Company (the "Annual Meeting Date"), each member of the
Board of Directors shall be granted a Non-Incentive Stock Option to purchase
25,000 shares of Common Stock at an exercise price equal to the fair market
value of Common Stock on the date of grant. For purposes of this Section 3, fair
market value shall mean the closing bid price per share of the Company's Common
Stock as quoted on the NASD Electronic Bulletin Board or NASDAQ on the trading
day immediately preceding the date of grant, or, in the event that the Company's
Common Stock is traded on an exchange, the closing price per share of the
Company's Common Stock on such exchange on the trading day immediately preceding
the date of grant. Such options shall be immediately exercisable and expire five
(5) years after the date of grant.
(e) No director or member of the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any option granted
thereunder.
4. PERSONS TO WHOM SHARES MAY BE GRANTED
Subject to Section 3(d) hereof, options may be granted to persons who are, at
the time of the grant, employees, including officers, or directors of, or
consultants or advisors to, the Company or any subsidiary corporation (as
defined in Section 425 of the Internal Revenue Code of 1986, as amended (the
"Code"), and herein referred to as "Subsidiary"), including part-time employees,
as the Board of Directors (or Committee) shall select from time to time from
among those nominated by the Board of Directors (or Committee). In addition,
for purposes of this Plan, options may only be granted to those consultants and
advisors who shall render bona fide services
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to the Company and such services must not be in connection with the offer or
sale of securities in a capital-raising transaction. Subject to the provisions
hereinafter set forth, options granted under the Plan shall be designated either
(i) "Incentive Stock Options" (which term, as used herein, shall mean options
intended to be "incentive stock options" within the meaning of Section 422 of
the Code) or (ii) "Non-Incentive Stock Option" (which term as used herein, shall
mean options not intended to be "incentive stock options" within the meaning of
Section 422 of the Code). Each option granted to a person who is not an
"employee" (within the meaning of Section 422 of the Code) of the Company or a
Subsidiary on the date of the grant shall be designated a Non-Incentive Stock
Option. Subject to Section 3(c) hereof, the Board of Directors (or Committee)
may grant, at any time, new options to a person who has previously received
options whether such prior options are still outstanding, have previously been
exercised in whole or in part, have expired, or are canceled in connection with
the issuance of new options. The purchase price of the new options may be
established by the Board of Directors (or Committee) without regard to the
existing option price.
5. OPTION PRICE
(a) Subject to Section 3(c) hereof, the purchase price of the Common Stock
underlying each option shall be determined by the Board of Directors (or
Committee), which determination shall be final, binding and conclusive;
provided, however, that in no event shall the purchase price for Incentive Stock
Options be less than 100% (110% in the case of optionee who own more that 10% of
the voting power of all classes of stock of the Company) of the fair market
value of the Common Stock on the date the option is granted. The purchase price
for Non-Incentive Stock Options may be less than 100% of the fair market value
of the Common Stock on the date the option is granted. In determining such fair
market value, the Board of Directors (or Committee) shall consider (i) the
average between the highest and lowest selling prices of the Common Stock on the
date on which the option is granted (if such Common Stock is listed on a
national securities exchange); (ii) the closing bid prices as quoted by the
National Quotation Bureau or a recognized dealer in the Common Stock on the date
of grant (if such Common Stock is not listed on such an exchange); and (iii)
such other factors as the Board of Directors (or Committee) shall deem
appropriate or which may be relevant under applicable federal tax laws and
Internal Revenue rules and regulations. For purposes of the Plan, the date of
grant of any option shall be the date on which the Board of Directors (or
Committee) shall be resolution duly authorize such option.
(b) Nothwithstanding any other provisions herein contained, the aggregate fair
market value (as defined above), determined at the time the Incentive Stock
Options are granted, of the Common Stock with respect to which such Incentive
Stock Options are exercisable for the first time by an employee during any
calendar year shall not exceed $100,000. Non-Incentive Stock Options shall not
be subject to the limitations of this paragraph 5(b).
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6. EXERCISE OF OPTIONS
(a) Subject to the provisions set forth in Sections 9, 10, and 11 hereof, no
option shall be exercisable unless the holder thereof shall have been an
employee, including officer, or director of the Company and/or a Subsidiary from
the date of the granting of the option until the date of exercise. This
provision shall not be applicable to Non-Incentive Options granted to
consultants or advisors of the Company.
(b) The number of shares which are issued pursuant to the exercise of an option
shall be charged against the maximum limitations on shares set forth in Section
2 hereof.
(c) The exercise of an option shall be made contingent upon receipt by the
Company from the holder thereof of (i) a written representation and
acknowledgment that at the time of such exercise it is his then present
intention to acquire the option shares for investment and not with a view to
distribution or resale thereof, that he knows that the Company is not obligated
to register the shares and that the shares may be to be held indefinitely unless
an exemption from the registration requirements of the Securities Act of 1933,
as amended, is available or the Company has registered the shares underlying the
options, that the Company may place a legend on the certificate(s) evidencing
the shares reflecting the fact that they were acquired for investment and cannot
be sold or transferred unless registered under the Securities Act of 1933, as
amended, or unless counsel for the Company is satisfied that the circumstances
of the proposed transfer do not require such registration and (ii) cash, or a
check to its order, for the purchase price of such shares.
(d) The holder of an option shall have none of the rights of a stockholder with
respect to shares subject to the option until a certificate for such shares has
been issued to him upon the due exercise of the option.
(e) Neither the Plan, nor the granting of an option, nor any other action taken
pursuant to the Plan shall constitute or be evidence of any agreement or
understanding, express or implied, that an employee, officer, director,
consultant or advisor, as the case may be, has a right to continue in such
position for any period of time or at any particular rate of compensation.
7. TERM OF OPTIONS
Subject to Section 3(c) hereof, the period during which each option granted
hereunder shall be exercisable shall be determined by the Board of Directors (or
Committee); provided, however, that no option shall be exercisable for a period
exceeding ten (10) years (five (5) years in the case of optionee who own more
than 10% of the voting power of all classes of the stock of the Company) from
the date the options are granted.
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8. NON-TRANSFERABILITY OF OPTIONS
No option granted pursuant to this Plan shall be subject to anticipation, sale,
assignment, pledge, encumbrance, or charge or otherwise transferable except by
will or the laws of descent and distribution, or pursuant to a qualified
domestic relations order as defined by the Code ("QDRO"), or Title I of the
Employee Retirement Income Security Act, or the rules thereunder ("ERISA"), and
an option shall be exercisable during the lifetime of the holder thereof only by
such holder or pursuant to a QDRO or ERISA.
9. TERMINATION OF SERVICES
In the event that an employee or any other person to whom an option has been
granted under the Plan shall cease to be an employee, officer or director of the
Company or a Subsidiary, by reason of a termination of such relationship other
than by reason of death, disability or retirement at age 65, the option granted
to such employee or other person shall terminate, lapse and expire 90 days from
the date of such termination. So long as the holder of an option shall continue
to be in the employ, or continue to be a director, of the Company or one or more
of its Subsidiaries, such holder's option shall not be affected by any change of
duties or position. Absence on leave approved by the employing corporation
shall not be considered an interruption of employment for any purpose under the
Plan. The granting of an option in any year shall not give the holder of the
option any rights to similar grants in future years or any right to be retained
in the employ or service of the Company or any of its Subsidiaries or interfere
in any way with the right of the Company or any such Subsidiary to terminate
such holder's employment or services at any time.
10. RETIREMENT OR DISABILITY OF HOLDER OF OPTION
If any employee, officer or director to whom an option has been granted under
the Plan shall cease to be an employee, officer or director of the Company or a
Subsidiary, by reason of disability or retirement at age 65, such holder may
exercise such option at any time prior to the expiration date of the option or
within three months (one year in the case of termination by reason of
disability) after the date of termination for such cause, whichever is earlier,
but only to the extent the holder had the right to exercise such option on the
date of termination.
11. DEATH OF HOLDER OF OPTION
If any employee, officer or director to whom an option has been granted under
the Plan shall cease to be ban employee, officer or director of the Company or a
Subsidiary, by reason of death, or such holder of an option shall die within
three months after termination by reason of retirement at age 65, the option may
be exercised by the person or persons to whom the optionee's rights under the
option are transferred by will or by laws of descent and distribution at any
time prior to the expiration date of the option or within three months from the
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date of death, whichever is earlier, but only to the extent the holder of the
option had the right to exercise such option on the date of such termination.
Notwithstanding the foregoing, no option may be exercised after ten years from
the date of its grant.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION
If the shares of Common Stock outstanding are changed in number, kind or class
by reason of a stock split, combination, merger, consolidation, reorganization,
reclassification, exchange or any capital adjustment, including a stock
dividend, or if any distribution is made to shareholders other than a cash
dividend, then (i) the aggregate number and class of shares that may be issued
or transferred pursuant to Section 2, (ii) the number and class of shares which
are issuable under outstanding options, and (iii) the purchase price to be paid
per share under outstanding options, shall be adjusted as hereinafter provided.
In the event of a liquidation of the Company, or a merger, reorganization, or
consolidation of the Company with any other corporation in which the Company is
not the surviving corporation or the Company becomes a wholly owned subsidiary
of another corporation, any unexercised options theretofore granted under the
Plan shall be deemed canceled unless the surviving corporation in any such
merger, reorganization or consolidation elected to assume the options under the
Plan or to issue substitute options in place thereof; provided, however, that,
notwithstanding the foregoing, if such options would otherwise be canceled in
accordance with the foregoing, the optionee shall have the right, exercisable
during a ten-day period ending on the fifth day prior to such liquidation,
merger or consolidation, to exercise the option in whole or in part.
Adjustments under this Section 12 shall be made in a proportionate and equitable
manner by the Board of Directors (or Committee), whose determination as to what
adjustments shall be made, and the extent thereof, shall be final, binding and
conclusive. In the event that a fraction of a shares results from the foregoing
adjustment, said fraction shall be eliminated and the price per share of the
remaining shares subject to the option adjusted accordingly. The granting of an
option pursuant to this Plan shall not affect in any way the right or power of
the Company to make adjustments, reorganizations, reclassifications, or changes
of its capital or business structure or to merge, consolidate, dissolve,
liquidate, or sell or transfer all or any part of its business or assets.
13. VESTING OF RIGHTS UNDER OPTIONS
Nothing contained in this plan or in any resolution adopted or to be adopted by
the Board of Directors (or Committee) or the shareholders of the Company shall
constitute the vesting of any rights under any option. The vesting of such
rights shall take place only when a written agreement shall be duly executed and
delivered by and on behalf of the Company to the person to whom the option shall
be granted.
14. RIGHTS AS A SHAREHOLDER
A holder of an option shall have no rights of a shareholder with respect to any
shares covered by his option until the date of issuance of a stock certificate
to him for such shares.
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15. TERMINATION AND AMENDMENT
The Board of Directors may, at any time, terminate or suspend this plan or make
such modifications or amendments thereto as it shall deem advisable; provided,
however, that no termination, modification or amendment shall adversely affect
the rights of a holder of an option previously granted under the Plan; and,
provided further, however, that if required to qualify the Plan under Rule 16b-3
promulgated under Section 16 of the Securities Exchange Act of 1934, as amended,
in no event shall the provisions of the Plan be amended more than once every six
(6) months other than to comport with changes in the Code, ERISA or rules
promulgated by the Securities and Exchange Commission; and provided further,
that if required to qualify the Plan under Rule 16b-3, no amendment that would
(a) materially increase the number of shares that may be issued under the Plan,
(b) materially modify the requirements of eligibility for participation in the
Plan, or (c) otherwise materially increase the benefits necessary to
participants under the Plan, shall be made without the approval of the
shareholders of the Company.
16. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS
Subject to the terms and conditions and within the limitations of the Plan, the
Board of Directors may modify, extend or renew outstanding options granted under
the Plan, or accept the surrender of outstanding options (to the extent not
theretofore exercised) and authorize the granting of new options in substitution
therefor. Notwithstanding the foregoing, no modification of an option shall,
without the consent of the holder thereof, alter or impair any rights or
obligations under any option theretofore granted under the Plan.
17. INDEMNIFICATION
In addition to such other rights of indemnification as they may have as member
of the Board of Directors (or Committee) the members of the Board of Directors
(or Committee) administering the Plan shall be indemnified by the Company
against reasonable expenses, including attorneys' fees, actually and necessarily
incurred in connection with the defense of any action, suit, or proceeding, or
in connection with any appeal therein, to which they or any of them may be a
party by reason of any action taken or failure to act under or in connection
with the Plan or any Option granted thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any action, suit or proceeding that such member
is liable for negligence or misconduct in the performance of his duties,
provided that within 60 days after institution of any such action, suit, or
proceeding, the member shall in writing offer the Company the opportunity, at
its own expense, to handle and defend the same.
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18. EFFECTIVE DATE
The Plan shall become effective on May 20, 1993, upon its approval by the
holders of all outstanding shares of Common Stock of the Company entitled to
vote thereon and shall terminate on May 30, 2003, and no option may be granted
under the Plan thereafter, but such termination shall not effect any option
theretofore granted.
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