<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Under Section 13 or 15(d) of The Securities
Exchange Act of 1934
For the fiscal Year Ended December 31, 1997
[ ] Transition Report Under Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number 0-19567
CARDIAC SCIENCE, INC.
---------------------------
(Name of Small Business Issuer in its Charter)
DELAWARE 33-0465681
------------------------------------ -------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1176 MAIN STREET, SUITE C, IRVINE, CALIFORNIA 92614
---------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (714) 587-0357
--------------
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: COMMON STOCK,
$0.001 PAR VALUE
----------------
(Title of Class)
Check whether the registrant (1) has filed all reports required by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB: [X]
Revenues of the registrant for the year ended December 31, 1997 were
$1,213,071.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $7,659,119 as of March 10, 1998 based on the closing price of
the Common Stock on the OTC/Bulletin Board on March 10, 1998. Shares held by
each officer and director and by each person who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.
There were 4,974,560 shares of the registrant's Common Stock outstanding as of
March 10, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Issuer's Annual Meeting of Stockholders to be
held in 1998 are incorporated by reference to Parts III of this Form 10-KSB
Report.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
ITEM NUMBER AND CAPTION NUMBER
----------------------- ------
<S> <C>
PART I
Item 1. Description of Business 3
Item 2. Description of 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 Common Equity
and Related Stockholder Matters 14
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 7. Financial Statements 18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 31
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 32
Item 10. Executive Compensation 32
Item 11. Security Ownership of Certain Beneficial
Owners and Management 32
Item 12. Certain Relationships and Related Transactions 32
Item 13. Exhibits, List and Reports on Form 8-K 32
</TABLE>
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Cardiac Science Inc. ("Cardiac Science" or the "Company") is engaged in
the development of, and intends to manufacture and distribute, a line of
non-surgical, non-invasive automatic cardioverter defibrillator
("AECD-Registered Trademark-") devices (the "AECD Products") to treat persons
suffering from, or at high risk of, life threatening heart 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 Science also manufactures PC-based Holter
Electrocardiogram (ECG) systems and Ambulatory Holter recorders and
distributes these products (the "Holter Products") in the United States and
in over 40 countries through its subsidiary, Diagnostic Monitoring. Since its
incorporation in May 1991, and until its acquisition of Diagnostic Monitoring
in April 1997, the Company has devoted substantially all of its resources to
research and development activities, clinical testing and regulatory affairs.
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 AECD Products are designed to obviate the need for human
intervention. The AECD 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 three AECD devices under development by Cardiac Science. The
Company's initial product, the Powerheart-Registered Trademark-
defibrillator-monitor for in-hospital use, received 510(k) clearance from the
United States Food and Drug Administration (the "FDA") in October 1997 (See
"Governmental Regulations.") to allow it to begin marketing its
Powerheart-Registered Trademark-AECD in the United States. The Powerheart is
currently the only bedside defibrillator-monitor with FDA clearance to
provide fully automated detection and treatment of ventricular
tachyarrhythmias for in-hospital patients at risk of sudden cardiac arrest.
The Company has received approval from competent regulatory authorities,
including the FDA, to allow it to export its Powerheart-Registered Trademark-
defibrillator-monitor to certain international countries. (See "Marketing
and Sales - Current Status of Marketing and Sales.")
In September 1997, Cardiac Science began work to complete development
and begin production of the Powerheart commercial model. Upon completion of
the commercial model, of which there can be no assurance, the Company plans
to sell the Powerheart via a focused distribution strategy that will combine
a direct sales force and certain strategic partners in the United States and
distribution overseas through qualified international distributors.
The additional AECD Products under development include a light-weight,
ambulatory vest model which can be worn continuously by at-risk cardiac
patients and a fully automatic public access defibrillator which can be used
by first responders and other non-technical individuals outside of the
hospital environment.
Cardiac Science's primary objective is developing proprietary AECD
devices that successfully treat arrhythmias, obviate the need for human
intervention and increase the survival rates of cardiac arrest victims.
Cardiac Science believes its AECD 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. Cardiac Science has been issued
3
<PAGE>
one patent, has one additional patent under exclusive license and is in the
process of filing additional patents relating to its AECD technology.
While the acquisition of Diagnostic Monitoring provides Cardiac Science
with a revenue base from the sale of Holter Products, additional capital will
be needed to fulfill the Company's marketing, research and product
development goals. From May 20, 1991 (inception) through December 31, 1997,
the Company incurred losses of approximately $6.7 million. 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 to attaining profitable operations is
dependent upon 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.
The Company's offices are located at 1176 Main Street, Building "C",
Irvine, California 92614 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%-15%
decline in a patient's chance of survival with each passing minute.
Defibrillation delayed much longer than 10 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:
(graph follows)
4
<PAGE>
[GRAPH]
Persons who have survived heart attacks, or who 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.
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 into 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
skilled one) to administer the shock. The time interval from cardiac arrest
to the moment a shock is delivered could be several minutes.
Clinical studies have shown that the average survival rate of patients
who have had an in-hospital cardiac arrest is about 15 percent and has not
improved since the 1960s. The American Heart Association (AHA) has
acknowledged that it has under-emphasized the role of prompt defibrillation.
The AHA, as well as the world's major resuscitation councils, have determined
that rapid defibrillation is the single most important therapy for the
treatment of cardiac arrest. Studies have documented delays of more than 5
minutes between recognition of cardiac arrest and first defibrillation.
Immediate
5
<PAGE>
defibrillation means significantly increased survival rates, reduced damage
to heart and other vital organs, including the brain, which may lessen
debilitation and quicken recovery periods. Clinical studies have shown
survival rates of 90 percent when cardiac arrest patients are defibrillated
in less than one minute. For each minute that passes after cardiac arrest,
the likelihood of survival decreases approximately 10-15 percent accordingly;
early rhythm assessment and rapid defibrillation improve survival rates
significantly.
THE COMPANY'S PLANNED AECD-Registered Trademark- PRODUCTS
GENERAL
Cardiac Science's Automatic External Cardioverter Defibrillator (AECD)
devices are being designed 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.
The AECDs are designed to obviate the need for human intervention and
provide rapid defibrillation. The devices are non-invasive and do not
require surgery. The AECD is attached to the patient's chest via disposable
defibrillator pads. In accordance with patient specific parameters programmed
into the unit's microcomputer by the patient's physician, the AECDs
continuously monitors a patient's cardiac activity and detects
life-threatening abnormalities. Within seconds, and without human
interaction, the AECD transmits an electrical defibrillation shock to convert
the patient's heart to a normal rhythm.
The average response time for the company's AECD is less than 30 seconds
as compared to approximately 5 minutes or more for the current standard of
care. It is widely recognized that the most effective way to increase
survival from cardiac arrest is to reduce time to defibrillation. Because of
this attribute, Cardiac Science believes its AECD products are ideally suited
for patients who are at temporary risk (periods ranging from days to months)
of suffering cardiac arrest, including patients awaiting alternative cardiac
treatment.
MULTIPLE PRODUCTS FROM CORE TECHNOLOGY
There are three AECD devices under development by Cardiac Science. The
Company's initial product, the Powerheart-Registered Trademark-
defibrillator-monitor for in-hospital use, received 510(k) clearance from the
United States Food and Drug Administration on October 23, 1997 to allow it to
begin marketing its Powerheart AECD in the United States. The additional AECD
products under development include a lightweight, ambulatory vest model to be
worn continuously by at-risk cardiac patients and a fully automatic public
access defibrillator to be used by first responders and other non-technical
individuals outside of the hospital environment.
THE POWERHEART-Registered Trademark- AECD-Registered Trademark-
With Cardiac Science's Powerheart bedside model, detection of cardiac
arrest occurs within seconds without the need for observation by a nurse or
physician. When appropriate, 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. Currently, an in-hospital cardiac arrest requires the
life-threatening event to be detected and observed, for the defibrillator to
first be moved to the patient, connected and for the actual shock to be
delivered by highly trained hospital personnel.
The commercial version of the Powerheart is designed for wall mounting or
for use as a transport monitor. It can be transported by mobile "pole cart"
or gurney and can be carried by hand. Cardiac Science believes the Powerheart
offers significant advantages over defibrillators currently used in hospitals
today and id ideally suited for use in many areas of the hospital, including
Intensive Care Units ("ICUs"), Cardiac Care Units ("CCUs"), Step Down
(telemetry departments), Emergency Rooms ("ERs"), Chest Pain Centers, and
General Patient Wards.
POWERHEART DESIGN AND TECHNOLOGY
The Powerheart includes the following basic components:
* RHYTHM ANALYSIS SYSTEM - This system assesses the patient's
electrocardiogram ("ECG") signal to determine when therapy is
appropriate based upon parameters set by the patient's physician. ECG
signals are sensed by disposable defibrillator pads placed on the
patient's chest. This signal is amplified and filtered by an electrical
analog circuit, digitized, and then analyzed by the device's proprietary
software algorithms, which makes the determination of when and if
therapy
6
<PAGE>
(a defibrillation shock) is appropriate for the patient.
* DEFIBRILLATOR - The AECD system uses electrical circuitry that provides
an Association for the Advancement of Medical Instrumentation ("AAMI")
standard waveform for defibrillation. Such waveforms are used by a
majority of defibrillators on the market, and have the longest proven
record of success. The AECD can be programmed to transmit the low
amounts of electrical energy to the heart needed to terminate the
life-threatening arrhythmia. The AECD is designed to provide
progressively greater amounts of energy, if needed, to restore the
patient's heart to its 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.
* DEFIBRILLATION ELECTRODES - The AECD uses self-adhesive, disposable
defibrillation electrodes manufactured by a third party vendor to the
Company's specifications. Electrodes require daily replacement.
* DATA STORAGE - The device stores ECG data on a real-time basis in
digital form. In addition, a strip chart recorder automatically prints
real-time ECG and relevant parameter settings.
* USER INTERFACE - Operating modes and setting parameters for rhythm
analysis are programmed via the user interface. The bedside AECD has a
liquid crystal display that displays real-time patient ECG and device
settings.
* DATA RETRIEVAL SOFTWARE - This software is used to access the data
stored from 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 provides valuable post-facto analysis of
the patient's rhythm and device operation.
PUBLIC ACCESS / AED MODEL
Individuals experiencing cardiac arrest need immediate defibrillation
wherever the episode occurs. Short of having an AECD attached to them, the
best public alternative is to have one immediately available. This is the
concept behind the automated external defibrillator (AED) or public access
defibrillation (PAD). Since 1994, the American Heart Association has focused
on early defibrillation and has urged making PADs widely accessible. The
market for PADs 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. To summarize, the potential market for AEDs and PADs can be broken
into four segments:
* Vehicular segment - first responders - EMTs, fire trucks, police cars.
* Clinical segment - out patient clinics, doctors and dentists offices -
* Industrial segment - stadiums, commercial airlines, office buildings,
retirement homes, health clubs, golf courses
* Other markets - home, military, places the public gathers
Most of the development work already completed on the Powerheart bedside
model can be applied to the public access model. Cardiac Science 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. Cardiac
Science's version of this model will utilize its advance algorithms to allow
for fully automatic delivery of defibrillation therapy. Additional
engineering is required to develop prototype PAD devices suitable for
clinical testing.
AMBULATORY VEST MODEL
Only a small percentage of patients at risk of sudden cardiac arrest are
candidates for implantable devices, i.e., ICDs. Cardiac Science believes that
the vest worn ambulatory AECD will offer an efficacious, non-surgical and
cost effective alternative to ICDs for patients at temporary risk of sudden
cardiac arrest. The Company's vest worn ambulatory device may be utilized by
patients waiting for ICD implant surgery, patients undergoing titration
(adjustment) of arrhythmia medications, or patients unable to risk surgery.
This ambulatory model will be a lightweight vest worn continuously by
the patient, thereby permitting maximum movement during most normal
activities. Removal of the vest unit would be required during bathing and
certain other activities. Cardiac Science intends to develop the ambulatory
vest-worn unit, and has commenced the design and development of certain
sub-systems and components required for such products. Additional engineering
is required to develop prototype ambulatory vest-worn devices suitable for
clinical testing.
7
<PAGE>
POWERHEART-Registered Trademark- RESEARCH AND CLINICAL RESULTS
The main purpose of the clinical trials was to evaluate the efficacy and
safety of the Powerheart-Registered Trademark- defibrillator-monitor 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. Moreover, sensitivity indicates the device's ability to shock only
shockable rhythms. Data was 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-Registered Trademark- was 100%, and the
specificity was 99.4%. The average response time of the Powerheart-Registered
Trademark- was 20.9 seconds.
Research and development expenditures were $767,118 in 1997 and $422,360
in 1996.
On February 26, 1997, the Company submitted a 510(k) pre-market
notification to the FDA, pursuant to Section 510(k) of the Federal Food, Drug
and Cosmetic Act, for the Powerheart-Registered Trademark-
defibrillator-monitor for in-hospital use. 510(k) clearance was received from
the FDA in October 1997
Phase I - The Company's FDA approved AECD Powerheart-Registered
Trademark- defibrillator-monitor completed Phase I human clinical trials on
67 patients pursuant to an FDA approved Investigational Device Exemption.
During Phase I clinical trials, the Powerheart-Registered Trademark-
defibrillator-monitor was tested for performance of all automatic and
programming functions while attached to patients, except that the
cardioversion or defibrillation charge was not 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 an electrical charge to the patient or by
other means.
Phase II - 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 were
conducted 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
completed. During Phase II clinical trials, the device performed all
functions of Phase I and delivered the necessary electrical charge to
terminate both induced and spontaneous arrhythmias.
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-Registered Trademark-
defibrillator-monitor, will require active marketing, education and sales
efforts to bring market awareness to the product.
The Company believes that decisions to purchase the
Powerheart-Registered Trademark- 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 used in every U.S. hospital and in every hospital in
the world. Many hospitals have between 10 and 30, or more, of these devices.
The Company believes the Powerheart-Registered Trademark- bedside hospital
based AECD offers significant advantages over defibrillators currently in
used in hospitals. Studies clearly indicate the need for immediate and early
defibrillation. With the Company's Powerheart-Registered Trademark-
defibrillator-monitor, detection of cardiac arrest occurs within seconds
without the need for observation by a nurse or physician. Defibrillation
shock is automatically delivered in approximately 21 seconds without the need
for human intervention. Compared with the current standard of care which
takes minutes since it requires a cardiac arrest to be observed, the
defibrillator to first be moved to the patient, then connected and for the
actual shock to be delivered by highly trained hospital personnel. The
Company believes the Powerheart-Registered Trademark-defibrillator-monitor
(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
8
<PAGE>
general patient wards.
The Powerheart-Registered Trademark- defibrillator-monitor targets a
substantially large hospital market of over 10,000 hospital locations around
the world. 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 functional disorders as the principal diagnosis. 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 STATUS OF AECD MARKETING AND SALES
On October 23, 1997, the Company received 510(k) clearance from the FDA
to market its Powerheart AECD defibrillator-monitor in the United States. In
September 1997, the Company began work to complete development and begin
production of the commercial version of the Powerheart. Upon completion of
the commercial version, for which there can be no assurance, the Company
plans to launch an aggressive sales effort. The Company plans to establish a
direct sales force in combination with a qualified strategic partner to
market the Powerheart-Registered Trademark- AECD in the United States.
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. The Company currently has no agreements with respect thereto
but has received interest from, and believes, but there can be no assurance,
it can establish strategic marketing and OEM partnerships with
well-established domestic and foreign patient monitoring manufacturers and
defibrillator manufacturers. Sales of AECD 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.
The Company intends generally to derive revenues from its proposed AECD
Products in various ways. The Company expects that the AECD 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 AECD Products, the
Company expects to receive revenues from sales of disposable defibrillator
electrodes, which must be used with the AECD Products in accordance with FDA
requirements.
THE COMPANY'S AMBULATORY ECG (HOLTER) PRODUCTS
On April 11, 1997, the Company acquired from Raymond Cohen, the
President and Chief Executive Officer of the Company, Innovative Physician
Services, Inc., d/b/a Diagnostic Monitoring ("DM"), a Nevada corporation.
DM, now a subsidiary of the Company, is engaged in the manufacturing, sales
and marketing of diagnostic cardiovascular and pulmonary medical devices.
DM's primary products are PC-based Ambulatory Holter ECG systems, Holter
recorders and related supplies and accessories (collectively, "Holter
Systems"). DM also markets Pulmonary Function Testing devices
("Spirometers") and PC-based Electrocardiographs. All of the products have
the necessary FDA 510(k) premarket approval.
Holter monitoring is a widely accepted and commonly used modality.
Holter Systems can be found in nearly every hospital in the world, and in
most cardiology practices in the United States. Holter Systems are utilized
to aid in the diagnosis and risk stratification of persons with known or
suspected cardiac arrhythmias, those diagnosed with various forms of heart
disease, patients with symptoms that could indicate a heart attack, and to
monitor and adjust medications of heart attack survivors and general cardiac
patients.
Holter Systems consist of a mix of proprietary and commercially
available hardware as well as proprietary software. These components
typically include Holter recorder(s), sophisticated ECG analysis software, an
interface circuit board, a tape transport or flash card reader device, an IBM
compatible PC, and a laser printer.
A Holter recorder is a small lightweight device that is worn by a
patient. It is attached with ECG electrodes and continuously monitors and
stores 24 hours of a patient's cardiac (ECG) activity. The ECG data is
stored on either a tape or flash card storage medium. At the end of the test
period the medium is removed from the recorder and inserted into an IBM
compatible computer that has been outfitted with Holter hardware and
software. The software analyzes and detects cardiac
9
<PAGE>
abnormalities, organizes the results by abnormal categories, and allows the
operator and physician to view, manipulate and edit the data in order to
produce a report of the findings.
With respect to the Company's Holter Products, the Company has
experienced individuals engaged in sales and marketing including marketing
support staff. Sales are made through qualified domestic and international
distributors, pursuant to strategic distribution agreements, and managed by
Diagnostic Monitoring employees on a country-by-country basis. Distribution
is currently in place with market coverage in over 40 countries worldwide. In
the United States, products are sold directly by Diagnostic Monitoring to
hospitals, physicians, and medical centers at prices that reflect market
conditions. Sales of Diagnostic Monitoring's Windows 95-Registered
Trademark- compatible Holter software and systems, Holter Recorder products,
and related Holter supplies represented 82% of the Company's total revenue.
Sales of PC-based Electrocardiographs accounted for 9.4% of revenues and
sales of Spirometers accounted for 4.6% of revenues. Export sales of
Diagnostic Monitoring's products to international countries represented 81%
of the Company's revenue, with the balance of sales coming from within the
United States.
MANUFACTURING
Presently, the Company maintains an FDA registered manufacturing
facility suitable for manufacturing its Holter Products in production
quantities. To date, the Company's AECD manufacturing activities have been
limited to the production of prototypes of its Powerheart-Registered
Trademark- defibrillator-monitor for use in its clinical trials. The Company
plans to manufacture its AECD Products via an established FDA-registered
contract manufacturer. The Company currently contemplates that the materials
to be used in manufacturing the AECD Products will consist primarily of
electronic, mechanical and electromechanical components that are generally
available from various vendors and suppliers. However, certain components
require customization for the Company by selected vendors and their
availability cannot be assured.
The majority of the components used in the Company's Holter Products,
other than the current version of software used in a Holter system, which is
purchased from a single source, may be purchased from any number of
suppliers. Although the Company has not experienced any material supply
disruptions or delays in its manufacturing operations to date, such
disruptions or delays may occur, which would have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company seeks to warehouse sufficient components to meet its monthly
production needs and to carry an inventory of finished goods adequate to meet
its present customers needs. Although to date the Company has not
experienced any significant delays in completing orders for its products,
there can be no assurance that such delays will not occur in the future. As
of December 31, 1997, the Company did not have any significant backlog in
orders for its products.
The FDA and foreign counterparts will conduct periodic inspections of
such facilities and manufacturing so as to ensure compliance with Quality
System and Good Manufacturing Practices and other regulations, such as those
promulgated by the International Standards Organization, and any concerns
raised by such inspections could result in regulatory action, delays, or
termination of production.
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 AECD
Product during the first 12 months immediately after a AECD 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 AECD
Products 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.
COMPETITION
To the Company's knowledge, the Powerheart-Registered Trademark- is
currently the only bedside defibrillator-monitor with 510(k) clearance to
provide fully automated detection and treatment of ventricular
tachyarrhythmias for in-hospital patients at risk of sudden cardiac arrest.
The Company's Powerheart-Registered Trademark- defibrillator-monitor may
compete with a variety of semi-automatic and manual defibrillators presently
in use which are developed by Physio-Control International Corporation,
Hewlett Packard Corporation and Zoll Medical, Inc., designed to deliver
therapy after being activated by a trained medical technician responding to a
cardiac emergency. The Compay may also compete with products from other
companies, such as Heartstream, Inc.,
10
<PAGE>
SurVivaLink, Inc., and Laerdal Corporation which may be used by first
responders and 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 AECD Products will not compete directly with
ICD devices. It is anticipated that the Company's AECD 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 AECD Products may be utilized by patients
waiting for ICD implant surgery or patients temporarily unable to risk such
surgery. In that connection, the proposed AECD Products may compete against
ICD devices presently marketed by a number of firms, including Medtronics,
Inc., Pacesetter Systems, Inc., Guidant Inc., Intermedics, Inc., and
Teletronics Pacing Systems, Inc.
The Company's Holter Products compete directly with companies such as
Marquette Medical Systems, Del Mar Avionics, Oxford Medical, Space Labs
Medical, Zymed and others.
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
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.
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 AECD 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 AECD 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
ELECTRODES" 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
11
<PAGE>
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 AECD
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 AECD 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 to the FDA for an Investigational Device Exemption ("IDE"), upon
which the FDA 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 October 23, 1997 the Company received 510(k) clearance from the FDA
to market its Powerheart-Registered Trademark- AECD in the United States.
The Company's AECD products will 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 AECD Products
or their labeling may require additional FDA testing, review and approval.
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.
EMPLOYEES
The Company currently has 15 employees including two in production of
the Company's Holter Products, five in Research and Development, four in
Sales and Marketing and four in the General and Administrative department
which includes Raymond W. Cohen, President and CEO and Brett L. Scott, Chief
Financial Officer and Secretary. The Company is actively recruiting and,
subject to requisite capital, intends to hire additional personnel to satisfy
its research and development and regulatory staffing requirements.
FORWARD LOOKING STATEMENTS
This Form 10-KSB contains forward-looking statements within the meaning
of the Securities Act of 1933, as amended, and the Securities Act of 1934, as
amended, which involve risks and uncertainties, including, but not limited
to, economic, competitive, governmental and technological factors affecting
the Company's operations, markets, products, services and prices, and other
factors. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result of factors described
herein.
12
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company currently leases approximately 5,400 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 $5,600.
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 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, 1997
First Quarter $ 2.63 $ 1.26
Second Quarter 3.31 1.49
Third Quarter 2.75 1.14
Fourth Quarter 3.88 1.25
Year Ended December 31, 1996
First Quarter $ 8.21 $ 4.29
Second Quarter 5.71 4.29
Third Quarter 5.00 2.14
Fourth Quarter 2.85 1.43
</TABLE>
The above prices have been adjusted to give retroactive effect to a reverse
stock split on September 8, 1997, see Note 5 of the consolidated financial
statements, for all periods presented.
HOLDERS
As of March 10, 1998, there were approximately 800 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements of the Company and notes thereto set forth
elsewhere herein.
The Company is engaged in the development of non-invasive automatic
defibrillator devices for the treatment of arrhythmias that lead to cardiac
arrest. The Company commenced operations in May 1991. Until its acquisition of
Diagnostic Monitoring in April 1997, its operations have consisted primarily of
research and development activities and clinical FDA testing.
Cardiac Science's Automatic External Cardioverter Defibrillator
(AECD-Registered Trademark-) devices are designed 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. The AECD products will continuously monitor a patient's cardiac
activity, detect abnormalities within seconds, and automatically, without
human interaction, via disposable defibrillator pads attached to the
patient's chest, transmit electrical shock (defibrillation) to convert the
patient's heart to a normal rhythm. Reducing time to defibrillation is widely
recognized as the most effective way to increase survival from cardiac arrest.
There are three AECD devices under development by the Company. The
Company's initial product, the Powerheart-Registered Trademark-
defibrillator-monitor for in-hospital use, received 510(k) clearance from the
United States Food and Drug Administration in October 1997 to allow it to
begin marketing its Powerheart AECD in the United States. The additional AECD
products under development include a light-weight, ambulatory vest model
which can be worn continuously by at-risk cardiac patients and a fully
automatic public access defibrillator which can be used by first responders
and other non-technical individuals outside of the hospital environment.
The Company's primary objective is to pioneer the commercialization
of AECD devices that obviate the need for human intervention to successfully
treat arrhythmias that lead to cardiac arrest. The Company believes the AECD
Products are 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.
In September 1997 the Company began work to complete development and
begin production of the Powerheart-Registered Trademark- commercial model.
Upon completion of the commercial model, of which there can be no assurance,
the Company plans to sell the Powerheart-Registered Trademark- through a
strategic U.S. distribution partner and overseas through existing its
existing network of international distributors.
Diagnostic Monitoring develops, manufactures and distributes
cardiac devices and supplies, primarily PC-based Ambulatory ECG ("Holter")
systems and Holter recorders, on a worldwide basis. Sales are made through
qualified domestic and international distributors, pursuant to strategic
distribution agreements, and managed by Diagnostic Monitoring employees on a
country-by-country basis. Distribution is currently in place with market
coverage in over 40 countries worldwide. In the United States, products are
sold directly by Diagnostic Monitoring to hospitals, physicians, and medical
centers at prices that reflect market conditions. Diagnostic Monitoring's
products are primarily made in the United States. Certain products and
components are subcontracted and manufactured to Diagnostic Monitoring's
specifications.
15
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
For the year ended December 31, 1997, the Company had revenues of
$1,213,071 and a net loss of $1,824,598, compared to no revenues and a net
loss of $791,945 for the year ended December 31, 1996.
Revenues generated for the year ending December 31, 1997 are
attributable to the sale of Holter products. Gross profit on sales for the
year ending December 31, 1997 was $459,378 or 38% of revenues. Sales of
Diagnostic Monitoring's Windows 95-Registered Trademark- compatible Holter
software and systems, Holter Recorder products, and related Holter supplies
represented 82% of the Company's total revenue. Sales of PC-based
Electrocardiographs accounted for 9.4% of revenues and sales of Spirometers
accounted for 4.6% of revenues. Export sales of Diagnostic Monitoring's
products to international countries represented 81% of the Company's revenue,
with the balance of sales coming from within the United States.
Expenses for research and development increased to $767,118 for the
year ended December 31, 1997 compared to $422,360 for the year ended
December 31, 1996. The increase was due to expenses incurred in the
commercialization efforts for the Company's Powerheart-Registered
Trademark-product.
Selling expenses increased to $458,603 for the year ended December 31,
1997, compared to no selling expenses incurred in 1996. The increase was a
result of selling expenses incurred to support the sale of the Company's
Holter products and pre-marketing expenses for the Powerheart.
General and administrative expenses increased to $1,052,408 for the year
ended December 31, 1997, compared to $404,480 for the year ended December 31,
1996. The increase was a result of expenditures incurred to support both the
Holter Product line (acquired in 1997) and infrastructure necessary to
commercialize the Powerheart and begin initial preparations for market
release. Expenses, which increased in 1997 as compared to 1996, included
amortization of intangible assets, personnel costs and related fringes,
insurance premiums for both product liability and directors and officers
insurance, and professional fees.
Interest expense increased to $10,133 for the year ended December 31,
1997 as compared to $ 2,300 for the year ended December 31, 1996. The
increase was associated with the debt incurred as a result of the acquisition
of Diagnostic Monitoring.
Interest income decreased to $5,886 for the year ended December 31, 1997
as compared to $38,183 for the year ended December 31, 1996, due to declining
cash balances (see "Liquidity And Capital Resources").
The increased loss for the year ended December 31, 1997 as compared to
the year ended December 31, 1996 is primarily attributable to increased
operating costs offset by an increase in gross margins from the sale of
Holter products.
INCOME TAXES
The Company has approximately $6,430,000 of federal net operating
loss carryforwards and $2,700,000 of California net operating loss
carryforwards at December 31, 1997 which will begin to expire in 2006
and 2000; respectively. The Company had deferred tax assets of
$2,724,824 at December 31, 1997. The Company has established a
valuation allowance to fully offset its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents and
working capital deficit of $561,351 and $(363), respectively. From
inception, the Company's sources of funding for operations were derived
from equity placements aggregating approximately $7,500,000. The Company
has incurred losses of approximately $6,800,000 since inception and
expects to incur substantial additional operating losses as a result of
expenditures related to the marketing and sales support functions,
research and product development activities and the completion and
initiation of clinical trials for current and future products. The
timing and amounts of these expenditures will depend upon many factors,
some of which are beyond the Company's control, such as the results of
clinical trials, the requirements for and time required to obtain
approval of 510(k) applications or other regulatory approvals, the
progress of the Company's research and development programs, and market
acceptance of the Company's products.
16
<PAGE>
While the acquisition of Diagnostic Monitoring provides the Company
with a revenue base, additional capital will be needed to fulfill the
Company's marketing, research and product development goals. Additionally,
successful completion of the Company's development program for its AECD
products and its transition to attain profitable operations is dependent upon
achieving a level of revenues adequate to support the Company's cost structure
In January 1997, the Company entered into an advisory and consulting
agreement (the "Sorbus Agreement") with Sorbus Asset Strategies, S.A., a
Swiss company ("Sorbus"). Sorbus agreed, among other things, to locate, on a
best efforts basis, potential investors to purchase shares of common stock,
(the "Financing"). As a condition precedent to the Financing, the Sorbus
Agreement provided, among other things, that the Company obtain the approval
of its Board of Directors and stockholders to amend the Company's Certificate
of Incorporation (i) to effectuate a one-for-11.42857143 reverse stock split
of the issued and outstanding shares of the common stock, (the "Reverse
Split") and (ii) to reduce the number of authorized shares of common stock
from 40,000,000 to 20,000,000 shares, (the "Stock Reduction"). On April 9,
1997, the Board of Directors of the Company unanimously approved the Reverse
Split and the Stock Reduction. Stockholders holding a majority of the issued
and outstanding common stock and all of the Preferred Stock approved the
Reverse Split and the Stock Reduction on May 15, 1997. The Financing was
completed in 1997 when the Company sold 1,000,000 shares of common stock for
$2,000,000 in gross proceeds. The Company's cash resources are minimal and
subsequent to December 31, 1997 the Company has borrowed $200,000 from a bank
on a revolving line of credit.
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. Given the current sales volume and applications of cash, the Company
expects that further capital additions will be necessary to sustain growth
until the Company becomes cash positive. In this respect, the Company is
considering a number of alternatives, including additional equity financings
and corporate partnerships. There can be no assurance that any such
transactions will be available at terms acceptable to the Company or that any
financing transaction will not be dilutive to current stockholders or that
the Company will have sufficient working capital to fund future operations.
17
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cardiac Science, Inc.
Irvine, California
We have audited the consolidated balance sheet of Cardiac Science, Inc., as
of December 31, 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended. 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 audit.
We conducted our audit 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 audit 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. as of
December 31, 1997, and the results of its operations and its cash flows for
the year then ended, 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 has suffered recurring losses from operations which raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regards to this matter are also described in Note 2.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Coopers & Lybrand L.L.P.
Newport Beach, California
March 11, 1998
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Science, Inc.
We have audited the statements of operations, stockholders' equity and cash
flows of Cardiac Science, Inc., (a development stage company), for the year
ended 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 audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the results of operations, stockholders' equity and
cash flows of Cardiac Science, Inc. for the year ended 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.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
ASSETS
------
<S> <C>
Current assets:
Cash and cash equivalents $ 561,351
Trade accounts receivable, net of allowances of $16,028 216,162
Inventory 209,413
Prepaid expenses 99,267
------------------
Total current assets 1,086,193
Equipment, net 85,927
Intangible assets, net of amortization of $49,285 607,853
Other assets 4,012
------------------
$ 1,783,985
------------------
------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued expenses $ 1,016,323
Note payable to stockholder 70,233
------------------
Total current liabilities 1,086,556
------------------
------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued or outstanding
Common stock - $.001 par value; 20,000,000 shares authorized,
4,974,560 issued and outstanding 4,975
Additional paid-in capital 7,472,107
Accumulated deficit (6,779,653)
------------------
Total stockholders' equity 697,429
------------------
$ 1,783,985
------------------
------------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
20
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1997 1996
--------------- -----------
<S> <C> <C>
Sales $ 1,213,071
Cost of sales 753,693
---------------
Gross profit 459,378
Operating expenses:
Research and development 767,118 $ 422,360
Selling 458,603 ---
General and administrative 1,052,408 404,480
--------------- -----------
Loss from operations (1,818,751) (826,840)
Interest income (expense), net (4,247) 35,883
--------------- -----------
Loss before provision for income taxes (1,822,998) (790,957)
Provision for income taxes 1,600 988
--------------- -----------
Net loss $ (1,824,598) $ (791,945)
--------------- -----------
--------------- -----------
Basic and diluted loss per share (Note 5) $ (0.47) $ (0.23)
--------------- -----------
--------------- -----------
Number of shares used in the computation of
loss per share (Note 5) 3,875,656 3,395,466
--------------- -----------
--------------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
21
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
Common Stock Preferred Stock Subscribed
------------------- ----------------- ------------------
Number of Amount Number of Amount Number of Amount Additional Accumulated
Shares Shares Shares Paid-In Deficit Total
Capital
--------- -------- --------- ------ --------- -------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(restated-see Note 5) 2,795,947 $2,796 --- $ --- 541,333 $924,134 $4,145,015 $(4,163,110) $908,835
Issuance of common stock for
subscribed amount 395,500 396 (395,500) (674,134) 673,738 ---
Common stock subscribed for
license fees at $1.37
per share 13,125 18,000 18,000
Common stock options
exercised at $0.34 per share 11,375 11 3,889 3,900
Common stock warrants
exercised at $1.71 per share 59,500 60 115,342 115,402
Common stock warrants
exercised at $4.57 per share 3,280 3 14,997 15,000
Net loss (791,945) (791,945)
--------- -------- --------- ------ --------- -------- ----------- ------------ ----------
Balance at December 31, 1996
(restated-see Note 5) 3,265,602 3,266 --- --- 158,958 268,000 4,952,981 (4,955,055) 269,192
Issuance of preferred stock
for the acquisition of
Diagnostic Monitoring 500 600,000 600,000
Issuance of common stock for
subscribed amount 158,958 159 (158,958) (268,000) 267,841 ---
Conversion of preferred
stock into common stock 500,000 500 (500) (600,000) 599,500 ---
Issuance of common stock
for cash at $2.00 per share 1,000,000 1,000 1,999,000 2,000,000
Issuance costs (including
50,000 shares of common
stock at $2.00 per share) 50,000 50 (347,215) (347,215)
Net loss (1,824,598) (1,824,598)
--------- -------- --------- ------ --------- -------- ----------- ------------ -----------
Balance at December 31, 1997 4,974,560 $ 4,975 --- $ --- --- $ --- $7,472,107 $(6,779,653) $ 697,429
--------- -------- --------- ------ --------- -------- ----------- ------------ ----------
--------- -------- --------- ------ --------- -------- ----------- ------------ ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
22
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,824,598) $ (791,945)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 70,047 12,830
Expenses paid with common stock 18,000
Changes in operating assets and liabilities,exclusive of
Diagnostic Monitoring acquisition:
Trade receivables (86,587) ---
Inventory (87,407) ---
Prepaid expenses (75,142) 327
Accounts payable and accrued expenses 452,015 (36,009)
-------------- -------------
Net cash used in operating activities (1,551,672) (796,797)
-------------- -------------
Cash flows from investing activities:
Purchase of equipment (64,700) ---
Cash acquired in Diagnostic Monitoring acquisition 43,223 ---
-------------- -------------
Net cash used by investing activities (21,477) ---
-------------- -------------
Cash flows from financing activities:
Payment on bank line of credit (18,903) ---
Payments of notes payable to stockholder (12,743) (102,000)
Proceeds from sale of common stock 2,000,000 ---
Proceeds from exercise of common stock options --- 3,900
Proceeds from exercise of common stock warrants --- 130,402
Costs of equity issuances (247,165) ---
-------------- -------------
Net cash provided by financing activities 1,721,189 32,302
-------------- -------------
Net increase (decrease) in cash and cash equivalents 148,040 (764,495)
Cash and cash equivalents at beginning of year 413,311 1,177,806
-------------- -------------
Cash and cash equivalents at end of year $ 561,351 $ 413,311
-------------- -------------
-------------- -------------
Supplemental cash flow disclosures:
Cash paid during the year for:
Income taxes $ 1,600 $ 988
Interest $ 10,133 $ 2,300
Supplemental schedule of noncash investing
and financing activities:
Conversion of preferred stock into common stock $ 600,000
Exchange of common stock subscribed for
common stock $ 268,000
Common stock issued in payment of fees $ 18,000
Acquisition of Diagnostic Monitoring:
Fair value of noncash assets acquired $ 282,154
Liabilities assumed and incurred (382,515)
Intangible assets 657,138
Preferred stock issued (600,000)
--------------
Cash acquired $ (43,223)
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
23
<PAGE>
.
CARDIAC SCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Cardiac Science, Inc. (the "Company") was incorporated on May 20, 1991
to develop, manufacture and market a line 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 are 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 are 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 existing devices.
2. BASIS OF PRESENTATION AND CONTINUED EXISTENCE
Until the acquisition of Innovative Physician Services, Inc. d/b/a
Diagnostic Monitoring ("Diagnostic Monitoring") on April 11, 1997 (see Note
4), the Company was a development stage company engaged in the development of
the Products for the treatment of arrhythmias that lead to cardiac arrest.
Diagnostic Monitoring develops, manufactures and distributes cardiac devices
and supplies, primarily PC-based Ambulatory ECG ("Holter") systems and Holter
recorders on a worldwide basis.
While the acquisition of Diagnostic Monitoring provides the Company with
a revenue base, additional capital is needed to fulfill the Company's
marketing, research and product development goals. From May 20, 1991
(inception) through December 31, 1997, the Company incurred losses of
approximately $6.8 million. 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
to attain profitable operations is dependent upon 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and of its wholly owned subsidiary, Diagnostic Monitoring. All
inter-company accounts and transactions have been eliminated in consolidation.
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.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
December 31, 1997 presentation.
CASH AND CASH EQUIVALENTS
24
<PAGE>
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The Company
maintained approximately $490,000 of its cash in a money market fund with one
major financial institution at December 31, 1997.
INVENTORY
Inventory, which consists of finished products and subassemblies, is
stated at the lower of cost (first-in, first-out) or market value.
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. Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of equipment, the
accounts are relieved of the cost and related accumulated depreciation and
any resulting gain or loss is included in operations.
LONG-LIVED ASSETS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
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
The Company has adopted FASB No. 128, EARNINGS PER SHARE. This
statement requires the presentation of basic and diluted earnings per share,
as defined, on the statement of operations for companies whose capital
structure includes convertible securities and options.
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.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
REVENUE RECOGNITION
Sales and related costs of goods sold are recognized when goods are
shipped to customers. The majority of the Company's customers are
distributors who sell goods to third party end users. The Company is not
contractually obligated to repurchase any inventory from distributors.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 defines a fair value
based method of accounting for an employee stock option. Fair value of the
stock option is determined considering factors such as the exercise price,
the expected life of the option, the current price of the underlying stock,
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option. Under the fair value based method, compensation
cost is measured at the grant date based on the fair value of the award and
is recognized over the service period. Pro forma disclosures for entities
that elect to continue to measure compensation cost under the intrinsic
method provided by Accounting Principles Board Opinion No. 25 must include
the effects of all awards granted in fiscal years that begin after March 15,
1994.
INCOME TAXES
The Company follows SFAS No. 109, ACCOUNTING FOR INCOME TAXES,
which requires the recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax
25
<PAGE>
consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end based
on enacted tax laws and statutory rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
4. ACQUISITION OF DIAGNOSTIC MONITORING
On April 11, 1997, the Company acquired Diagnostic Monitoring for 500
shares (5,714.285 pre-split) 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 Preferred Stock was
entitled to 1,000 votes per share; was convertible into 1,000 shares of the
Company's common stock, at any time, and from time to time, at the holder's
option, without the payment of any additional consideration, and was
automatically convertible 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. There were no dividend rights on the Preferred Stock. On
September 8, 1997, the Company effectuated a one-for-11.42857413 reverse
stock split and the shares of Preferred Stock automatically converted into
500,000 shares of common stock.
The total purchase price was $682,975, the fair market value of the
Preferred Stock issued and the Note. The fair market value of the Preferred
Stock issued was estimated based on the trading value of the common stock
less a 30% discount to take into consideration the lack of the ability to
trade and other features of the Preferred Stock. The fair market value of
the Note represents the discounted value (at 11.25%) of the Note over 20
months.
The transaction was accounted for under the purchase method of
accounting and the purchase price was allocated to the fair market value of
the assets acquired and liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 43,223
Accounts receivable 129,575
Inventory 122,006
Other assets 13,232
Property and equipment 17,341
Intangible assets 657,138
Bank line of credit (18,903)
Accounts payable and accrued expenses (280,637)
Note payable to stockholder (82,975)
-------------
Preferred stock issued $ 600,000
-------------
-------------
</TABLE>
The intangible assets resulting from the purchase price allocation is being
amortized over 10 years using the straight-line method.
5. RECAPITALIZATION AND REVERSE SPLIT
In January 1997, the Company entered into an advisory and consulting
agreement (the "Sorbus Agreement") with Sorbus Asset Strategies, S.A., a
Swiss company ("Sorbus"). Sorbus agreed, among other things, to locate, on a
best efforts basis, potential investors to purchase shares of common stock,
(the "Financing"). As a condition precedent to the Financing, the Sorbus
Agreement provided, among other things, that the Company obtain the approval
of its Board of Directors and stockholders to amend the Company's Certificate
of Incorporation (i) to effectuate a one-for-11.42857143 reverse stock split
of the issued and outstanding shares of the common stock (the "Reverse
Split") and (ii) to reduce the number of authorized shares of common stock
from 40,000,000 to 20,000,000 shares (the "Stock Reduction"). On April 9,
1997, the Board of Directors of the Company unanimously approved the Reverse
Split and the Stock Reduction. Stockholders holding a majority of the
issued and outstanding common stock and all of the Preferred Stock approved
the Reverse Split and the Stock Reduction on May 15, 1997. The Financing was
completed in 1997 when the Company sold 1,000,000 shares of common stock for
$2,000,000 in gross proceeds.
On September 8, 1997, the Company effectuated the Reverse Split and the
Stock Reduction. All share and per share amounts have been adjusted to give
retroactive effect to the Reverse Split for all periods presented.
26
<PAGE>
6. COMMITMENTS AND CONTINGENCIES
REVOLVING LINE OF CREDIT
The Company entered into a Loan and Security Agreement with a Bank dated
November 14, 1997. The agreement provides for a revolving line of credit up to
$200,000 collateralized by substantially all assets of the Company and includes
certain covenants. The term of the agreement is for twelve months. The balance
outstanding at December 31, 1997 was $0. In January 1998, the Company had
borrowings of $200,000.
OPERATING LEASE
The Company leases office space and equipment under the terms of
operating lease agreements.
Total rent expense for the years ended December 31, 1997 and 1996 was
$55,664 and $40,800, respectively. The minimum lease payments under the
terms of these lease agreements are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
-------------
<S> <C>
1998 $ 64,776
1999 67,368
2000 22,748
-----------
$ 154,892
-----------
-----------
</TABLE>
7. INCOME TAXES
The Company's provision for income tax represents the current state minimum
taxes. There is no deferred income tax provision.
The temporary differences which give rise to the deferred tax provision
(benefit) consists of the following for the year ended December 31, 1997:
<TABLE>
<S> <C>
Property and equipment $ (951)
Capitalized costs (67,814)
Accrued liabilities 3,937
Allowance for doubtful accounts (6,866)
Inventory reserve (4,284)
State income taxes 272
Tax credit carryforwards (68,089)
Net operating loss carryforwards (639,508)
----------
(783,303)
Valuation allowance 783,303
----------
$ 0
----------
----------
</TABLE>
The temporary differences which give rise to deferred income tax assets
and liabilities at December 31, 1997 are as follows:
<TABLE>
<S> <C>
Property and equipment $ 1,707
Capitalized costs 98,402
Accrued liabilities 1,018
Allowance for doubtful accounts 6,866
Inventory reserve 4,284
State income taxes 544
Tax credit carryforwards 198,614
Net operating loss carryforwards 2,413,389
-----------
2,724,824
Valuation allowance (2,724,824)
-----------
</TABLE>
27
<PAGE>
<TABLE>
<S> <C>
$ 0
-----------
-----------
</TABLE>
The provision for income taxes differs from the amount that would result
from applying the federal statutory rate for the year ended December 31, 1997 as
follows:
<TABLE>
<S> <C>
Statutory regular federal income tax rate (34.0%)
Nondeductible expenses 0.2
State income taxes 0.1
Tax credits (1.0)
Change in valuation allowance 34.8
-----------
0.1%
-----------
-----------
</TABLE>
As of December 31, 1997, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $97,000
and $102,000, respectively. These credits begin to expire in 2010 for
federal and state purposes. The Company also has approximately $6,430,000
and $2,700,000 of federal and state net operating loss carryforwards which
will begin to expire in 2006 and 2000, respectively.
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
has issued 1,750,000 shares of common Stock which has 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 would create additional ownership changes and
may further limit the Company's ability to utilize its net operating loss
carryforwards in future periods.
8. 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 61,250 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 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 stockholders' meeting, to members of the Board of Directors of the
Company of non-statutory stock options to purchase 2,188 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 70,000 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.
The 1991 Plan and the 1993 Plan (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 power of all classes of stock of the
28
<PAGE>
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 transferable 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.
Stock option activity under the Plans are summarized as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
------------- -----------
<S> <C> <C>
Outstanding, beginning of year 148,315 213,500
Granted --- ---
Exercised --- (11,375)
Canceled (114,627) (53,810)
------------- -----------
Outstanding, end of year 33,688 148,315
------------- -----------
------------- -----------
Exercisable, end of year 24,588 66,266
------------- -----------
------------- -----------
As of the end of the year:
Option Price per share $2.97 - $ 21.43 $1.71-$21.43
Weighted average option price
per share $4.17 $2.59
</TABLE>
At December 31, 1997 the number of shares reserved and available for
issuance under the plans was 97,562. The weighted average remaining
contractual life as of December 31, 1997 is approximately 25 months.
The Board of Directors approved a 1997 Stock Option/Stock Issuance Plan
on December 8, 1997. This plan is subject to shareholder approval at the
1997 Annual Meeting of Stockholders to be held May 12, 1998. No options have
been granted under this plan through December 31, 1997.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
In calculating pro forma information as required by SFAS No. 123, 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 year ended December 31, 1995: risk free
interest rate of 6.5%; dividend yield of 0%; volatility of the expected
market prices of the Company's common stock of 85.1%; and expected life of
the options of 5.5 years. There have been no option grants in fiscal years
ended December 31, 1996 or 1997.
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 follows (in thousands, except per share
information):
<TABLE>
Year Ended December 31,
1997 1996
------------ -----------
<S> <C> <C>
Pro forma net loss $ (1,837) $ (805)
Pro forma net loss per share $ (.47) $ (.23)
</TABLE>
9. WARRANTS
During 1992, the Company granted warrants to Medstone and Technology
Funding to purchase 297,500 and 145,833 shares of the Company's common stock,
respectively, at $1.71 per share in conjunction with their loans to the
Company for $510,000 and $250,000, respectively. Concurrent with the
September, 1994 closing
29
<PAGE>
of the private placement (i) Medstone exercised its warrants to the extent of
238,000 shares, (ii) the Company utilized the proceeds therefrom ($408,000)
to pay an equivalent portion of the $510,000 Medstone Note, (iii) the
expiration date for the remaining Medstone Warrants to purchase 59,500 shares
of common stock was changed to June 30, 1996, (iv) Technology Funding
exercised all of the 145,833 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 were issued. The shares underlying the warrants exercised
by Technology Funding were not to be issued until the Company completed its
recapitalization in 1997. Consequently, the amounts relating to these shares
are shown as common stock subscribed at December 31, 1996. In April 1996,
Medstone exercised the remaining warrants to purchase 59,500 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 (i.e. the Medstone
Note). In December 1992, the Company granted warrants to two of its
executive officers and directors to purchase an aggregate of 94,886 shares of
the common stock at $4.57 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 262,500 shares of its
common stock at $4.57 per share, of which through December 31, 1995 a total
of 72,187 shares had been purchased, and to the Company's placement agent
warrants to purchase 65,625 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, 3,280 shares were exercised for net proceeds to
the Company of $15,000 and the remaining warrants expired unexercised. In
June 1993 warrants to purchase 131 shares of the common stock at $11.43 per
share were issued to a supplier in consideration of services. These warrants
are exercisable and expire in June 1998.
In connection with a private placement of common stock in 1994, ten year
warrants to purchase 962,500 shares of common stock at $.01 per share were
issued as follows: 525,000 shares to the placement agent for the offering,
262,500 shares to legal counsel of the Company, 87,500 shares to a financial
advisor to the Company, and 87,500 shares to two directors/consultants of the
Company. These warrants become exercisable beginning in August 1998. In
January 1996, warrants to purchase 17,500 shares of the common stock at $4.57
per share were issued to a director of the Company for past services. In
connection with a private placement of common stock in 1997 (Note 5),
warrants to purchase 100,000 shares of the common stock at $2.25 per share
were issued to the placement agent.
At December 31, 1997, a total of 1,141,347 warrants were outstanding
of which 178,847 were exercisable.
9. STATEMENT OF FINANCIAL STANDARDS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 is effective for fiscal years beginning after December
15, 1997 and requires restatement of earlier periods presented. It
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
Comprehensive income is defined as the change in equity of a business
enterprise during a period from transactions and other events and
circumstances from nonowner sources. The implementation of SFAS No. 130 is
not expected to have a material effect on the Company's financial statement
presentation.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 and requires restatement of
earlier periods presented, establishes standards for the way that a public
enterprise reports information about key revenue-producing segments in the
annual financial statements and selected information in interim financial
reports. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. The Company
intends to implement SFAS 131 in 1998 and is currently reviewing the
provisions of and its impact on the Company's financial presentation.
10. CONCENTRATIONS OF RISK
Approximately 81% of the Company's revenues for the year ended December
31, 1997 are export sales to international countries.
30
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(i) Coopers & Lybrand L.L.P., ("Coopers") has been appointed as
the Registrant's certified public accountants replacing Ernst &
Young L.L.P., ("Ernst") who has been dismissed, effective November 13,
1997.
(ii) The Ernst reports on the financial statements of the
Company for the years ended December 31, 1996 and 1995 do not contain
an adverse opinion or a disclaimer of opinion, nor was either report
qualified or modified as to uncertainty, audit scope, or accounting
principles except that the report contained a going concern
qualification.
(iii) The Company's decision to change its accountants was
approved by its Board of Directors on November 13, 1997.
(iv) During the period covered by the financial statements
through November 13, 1997, there were no disagreements with the
former accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure.
31
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,PROMOTERS AND CONTROL PERSONS; IN
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item concerning the Company's directors
and executive officers is incorporated by reference from the information to be
provided under the caption "Election of Directors" in the Company's Proxy
Statement for it Annual Meeting of Stockholders to be held in 1998 (the "Proxy
Statement").
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information to be under the caption "Compensation of Executive Officers" in the
Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information to be under the caption "Common stock Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information to be under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement.
ITEM 13 EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS
1. Financial Statements Page
Report of Independent Accountants 18
Report of Independent Auditors 19
Consolidated Balance Sheet at December 31, 1997 20
Consolidated Statements of Operations for the 21
years ended December 31, 1997 and 1996
Consolidated Statement of Stockholders' Equity 22
for the years ended December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the 23
years ended December 31, 1997 and 1996
Notes to Consolidated Financial Statements 24
(b) REPORTS ON FORM 8-K
The Company filed two reports on Form 8-K with the Commission during
the quarter ended December 31, 1997. The first Form 8-K dated
November 13, 1997 related to the Changes in the Registrant's
Certifying Accountant. The second Form 8-K dated December 4, 1997
related to the sale of equity securities.
32
<PAGE>
(c) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Warrant Certificates of A.R. Baron, Breslow & Walker, Howard K. Cooper, J. Donald
Hill, Fran Daniels and Medstone, Inc. (2)
10.1 1991 Stock Option Plan, as amended (3)
10.2 Agreement, dated August 20, 1997, between Financial Sciences of America and the
Company
10.3 Agreement, dated August 20, 1997, between Breslow & Walker L.L.P. and the Company
10.4 Facility Lease dated May 1, 1997 for 1176 Main St, Bldg C, Irvine, CA
10.6 Employment Agreement, dated January 1997 between the Company and Raymond Cohen(5)
10.7 1993 Stock Option Plan(5)
10.8 Agreement and Plan of Merger, dated April 9, 1997, by and among the Company,
Raymond W. Cohen, Innovative Physicians Service, Inc. d/b/a Diagnostic
Monitoring and CSI Merging Corporation(4)
10.9 Promissory Note, dated April 9, 1997 in principal amount of $100,000
payable to Raymond W. Cohen.(4)
23 Consent of Auditor
</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, 1993.
(3) Previously filed under Amendment No. 1, dated April 18, 1992, to
Application For Registration on Form 10.
(4) Previously filed with Form 10-K for the year ended December 31, 1996.
33
<PAGE>
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT , THE REGISTRANT
CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED.
CARDIAC SCIENCE, INC.
By: RAYMOND W. COHEN
------------------------------
Raymond W. Cohen
President & Chief Executive Officer
By: BRETT L. SCOTT
---------------------------------
Brett L. Scott
Chief Financial Officer &
Secretary (Principal
Financial and Accounting Officer)
Date: March 25, 1998
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW BY
THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON
THE DATES INDICATED.
Signature Title Date
- --------- ----- ----
RAYMOND W. COHEN Director March__, 1998
- -----------------------
Raymond W. Cohen
PAUL QUADROS Director March__, 1998
- -----------------------
Paul Quadros
PETER CROSBY Director March__, 1998
- -----------------------
Peter Crosby
34
<PAGE>
August 20, 1997
Cardiac Science, Inc.
1176 Main Street
Suite C
Irvine, CA 92614
Gentlemen:
Cardiac Science, Inc. ("CSI") has advised the undersigned that (a) it
has retained Sorbus Asset Strategies, S.A., a Swiss corporation ("Sorbus"),
to assist CSI in finding qualified investors to purchase shares of Common
Stock (the "Financing"), and (b) as a condition precedent to the consummation
of the Financing, Sorbus requires the agreement on the part of the undersigned
to defer collection of (i) $10,000 of fees currently due and owing to the
undersigned, which fees were previously deferred in connection with a prior
offering of securities by CSI, and (ii) $100,000 of fees which would otherwise
be payable to the undersigned upon consummation of the Financing in accordance
with the terms of an Agreement, dated the 1st day of October 1994 (the
"Agreement") between CSI and the undersigned for the performance of investor
relations services (collectively, the "Deferred Fees"), until the earlier of
12 months from the consummation of the Financing or the completion of the
next financing for CSI; provided that CSI agrees to pay the Deferred Fees to
the undersigned immediately upon CSI failing to honor the Agreement (except
to the extent that the failure to honor the Agreement is based upon the
agreement herein to defer the payment referred to in (b) (ii) of this
paragraph).
To induce Sorbus to cause the Financing to be consummated, and as
consideration therefor, the undersigned covenants and agrees to defer
collection of the Deferred Fees until the earlier of 12 months from the
consummation of the Financing or the completion of the next financing for
CSI; provided that (a) the Financing is for a minimum of $1,500,000 of gross
proceeds and is consummated on or before August 31, 1997, and (b) CSI agrees
to pay the Deferred Fees to the undersigned immediately upon CSI failing to
honor the Agreement (except to the extent that the failure to honor the
Agreement is based upon the agreement herein to defer the payment referred to
in (b) (ii) of the first paragraph hereof).
Very truly yours,
FINANCIAL SCIENCES OF AMERICA, INC.
By: /s/ Francesca Daniels, Pres.
---------------------------------
AGREED TO AND ACCEPTED: Francesca Daniels, President
CARDIAC SCIENCE, INC.
By: /s/ Raymond Cohen
-----------------------------
Raymond Cohen, President
<PAGE>
August 20, 1997
Cardiac Science, Inc.
1176 Main Street
Suite C
Irvine, CA 92614
Gentlemen:
Cardiac Science, Inc. ("CSI") has advised the undersigned that (a) it
has retained Sorbus Asset Strategies, S.A., a Swiss corporation ("Sorbus"),
to assist CSI in finding qualified investors to purchase shares of Common
Stock (the "Financing"), and (b) as a condition precedent to the
consummation of the Financing, Sorbus requires the agreement on the part of
the undersigned to defer collection of $128,692.50 in fees due and owing to
the undersigned ($86,000 previously deferred in connection with a prior
offering of securities by CSI and $42,692.50 owed in connection with an
aborted bridge financing) (the "Deferred Fees"), until the earlier of 12
months from the consummation of the Financing or the completion of the next
financing for CSI; provided that CSI agrees to pay the Deferred Fees to the
undersigned immediately upon the undersigned ceasing to act as general
counsel to CSI (other than on account of the undersigned's voluntary
resignation as such counsel).
To induce Sorbus to cause the Financing to be consummated, and as a
consideration therefor, the undersigned covenants and agrees to defer
collection of the Deferred Fees until the earlier of 12 months from the
consummation of the Financing or the completion of the next financing for
CSI; provided that (a) the Financing is for a minimum of $1,500,000 of gross
proceeds and is consummated on or before August 31, 1997, and (b) CSI agrees
to pay the Deferred Fees to the undersigned immediately upon the
undersigned's ceasing to act as general counsel to CSI (other than on account
of the undersigned's voluntary resignation as such counsel).
Very truly yours,
BRESLOW & WALKER, LLP
By: /s/ Howard S. Breslow, Partner
-------------------------------
Howard S. Breslow, Partner
AGREED TO AND ACCEPTED:
CARDIAC SCIENCE, INC.
By: /s/ Raymond W. Cohen
--------------------------
Raymond Cohen, President
<PAGE>
STANDARD BUSINESS PARK LEASE
THIS LEASE (hereinafter called the "Lease"), executed in duplicate, is
entered into this 3rd day of April 1997, by and between CONNECTICUT GENERAL
LIFE INSURANCE COMPANY entering into this agreement on behalf of its Separate
Account R. Separate Account R is a separate account as defined in Sec. 3(17)
of the Employee Retirement Income Security Act of 1974. Only the assets of
such fund shall be bound for obligations of Separate Account R and no report
shall be had to any other assets of Connecticut General Life Insurance
Company, hereinafter called "Lessor", and CARDIAC SCIENCE, INC., a Delaware
Corporation hereinafter called "Lessee". Lessor and Lessee hereby agree as
follows:
1. LEASED PREMISES. Lessor hereby lets and demises to Lessee, and Lessee
hereby hires from Lessor, on the terms, covenants, and conditions set forth
herein, those premises designated in Exhibit "A" attached hereto and
incorporated herein, hereinafter called the "Leased Premises", know as and
located at: 1176 Main Street, Suites B/C, Irvine, California 92614 (5,365
square feet), being a portion of a building, hereinafter called the
"Building", located individually or as a group of contiguous buildings
including the land and all improvements thereon, hereinafter called the
"Business Park", other portions of which building and which business park
shall from time to time be leased by Lessor to other Lessees.
2. TERM. The term of this Lease (the "Lease Term") shall be for thirty-six
(36) months commencing on May 1, 1997 and ending April 30, 2000.
3. LATE OR EARLY DELIVERY OF POSSESSION. In the event that Lessor is unable
to deliver possession of the Leased Premises to Lessee on the above stated
commencement date for any reason whatsoever, Lessor shall not be subject to
any liability for loss or damages resulting therefrom, nor shall the validity
of this Lease be affected nor the term thereof extended, but under such
circumstances there shall be a proportionate reduction in rent to cover the
period of time from the above stated commencement date to the date that
possession of the Leased Premises is tendered to Lessee: provided, however,
that if possession of the Leased Premises is not tendered by Lessor to Lessee
within ninety (90) days following the above stated commencement date, then at
any time after the ninety (90) day period and prior to tender by Lessor of
possession. Lessee may terminate this Lease by delivery of written notice of
such termination to Lessor, and thereupon all rights and obligations
hereunder of both parties shall cease. If Lessor is able to deliver
possession of the Leased Premises to Lessee prior to the above stated
commencement date and Lessee accepts such early possession, the ending date
of the Lease Term shall not be affected but the Lease Term shall be extended
so as to advance the commencement date to the date of early acceptance of
possession, and Lessee shall pay Lessor, at the time Lessee takes possession,
a proportionate increase in rent to cover such additional period of time. The
Leased Premises shall be deemed to have been delivered to Lessee upon
Lessor's tender of the Leased Premises in a substantially complete condition,
subject to minor punch list items.
4. RENT.
(a) Lessee agrees to pay to Lessor, at such place as Lessor may
designate, without deduction, offset, prior notice or demand, the minimum
rent for the Leased Premises during the Lease Term of one hundred ninety-six
thousand nine hundred fifty-six dollars and no/100 DOLLARS ($196,956) in
lawful money of the United States, payable in monthly installments of five
thousand two hundred fifty-eight dollars and no/100 DOLLARS ($5,258.00). All
payments of rent shall be due and payable in advance on the first day of each
calendar month during the Lease Term. Lessee acknowledges and agrees that
Lessor will not be required to send monthly statements or invoices as a
condition of Lessee's obligation of timely payment of rent under this Lease,
and that Lessee shall not have any right of offset against any rent coming
due under this Lease. Rent payments are to be made by check payable to MAIN &
REDHILL BUSINESS CENTER MANAGEMENT ACCOUNT and mailed care of Davis
Developments, 1420 Bristol Street North, Suite 100, Newport Beach, CA 92660
to reach that office by the first of each month. Base Rent Schedule Section 46
(b) Lessee acknowledges that late payment by Lessee to Lessor of rent or
other sums due hereunder will cause Lessor to incur costs in excess of those
contemplated by this Lease, the exact amount of which would be extremely
difficult and impractical to ascertain. Such costs include, but are not
limited to, processing and accounting charges, and late charges which may be
imposed on Lessor by the terms of any mortgage or deed of trust covering the
Leased Premises. Therefore, in the event that Lessee should fail to pay any
installment of rent or any other sum due under this lease after such amount
is due, Lessee shall pay to Lessor as additional rent a late charge equal to
six percent (6%) of each such installment or other sum.
(c) Should any payment be made by a check, and following its deposit by
Lessor such check is returned for any reason, Lessee hereby agrees to pay to
Lessor, as additional rent, a service charge of FIFTEEN DOLLARS ($15.00).
(d) The Leased Premises described in paragraph 1 above includes the
construction by Lessor of the tenant improvements set forth in the Tenant
Improvement Schedule attached hereto as EXHIBIT "B", and incorporated herein
in the event that Lessee requests Lessor to construct or to permit the
construction of additional tenant improvements and Lessor agrees to permit
such additional tenant improvements, all as provided by paragraph 8 below.
Lessee agrees that the rent shall be increased by a sum to be determined by
the parties prior to construction of the additional tenant improvements.
Form #1278 Initials: RWC
--------
--------
<PAGE>
6. DEPOSITS. Lessee has deposited with Lessor a security deposit in the sum
of five thousand two hundred fifty-eight dollars and no/100 DOLLARS
($5,258.00) receipt of which is hereby acknowledged, as security for the
full performance by Lessee of all of the provisions of this Lease. Should
Lessee comply with all of the terms, covenants, and conditions of this Lease
by said Lessee to be performed, and promptly pay all rent provided for herein
and all other sums payable by Lessee to Lessor hereunder, then the said
security deposit shall be returned in full to Lessee upon expiration of this
Lease, after surrender to Lessor of the Lease Premises and after prompt
inspection by Lessor whereby Lessor has determined that the Leased Premises
are in as good condition as on the date of the commencement of the Lease Term
set forth above, excepting only ordinary wear and tear. Lessee's interest in
said security deposit is not assignable by Lessee. Lessor may at its option
apply said security deposit, or so much thereof as may reasonably be
necessary, to remedy defaults by Lessee in payment of rent, to repair damages
to the Leased Premises or the Building caused by Lessee, to claim the Leased
Premises upon termination of the Lease, or to compensate Lessor for any loss
or damage sustained or suffered by Lessor due to any breach of this Lease by
Lessee. In the event that said sum or any portion thereof is so applied by
Lessor, Lessee shall, upon written demand of Lessor, immediately remit to
Lessor an amount sufficient to restore said deposit to the original sum. The
exercise of the options given Lessor under this section shall in no way
affect any other remedy available to Lessor. Following the termination of
this Lease, any remaining portion of said security deposit shall be returned
to Lessee. Lessor shall not be required to keep this security deposit
separate from its general funds. Lessor's obligation with respect to the
security deposit is that of a debtor, not a trustee, and the security deposit
may be commingled or dissipated or both, and in any event no interest shall
accrue thereon. Should the interest of Lessor in the Leased Premises be sold,
Lessor may deliver funds deposited by Lessee to the purchaser of such
interest, and thereupon Lessor shall be discharged from any further liability
concerning such deposits.
7. ENVIRONMENTAL FACTOR ADJUSTMENT. In the event that any tax, assessment,
levy, or surcharge is made upon Lessor or the Building or the grounds of
which the Leased Premises are a part, which is based upon the National
Environmental Policy Act, the California Environmental Quality Act, or any
other legislation or rule, regulation, or ordinance relating to environmental
quality or energy conservation, and which charge is measured by any physical
element, configuration, status, or use of such Building or grounds, or energy
use therein or thereon, Lessee shall pay to Lessor upon demand, as additional
rent, Lessee's percentage portion (as numerically set forth in paragraph 4(f)
above) of all such charges.
8. UTILITIES. Lessee to pay prorata share of electric and gas bills commonly
shared within the building. Tenant's percent currently 69.19%. This percent
is subject to change with building occupancy. (Lessee will have their own
electric meter and one in common). Lessee shall pay for all water, gas, heat,
light, electricity, telephone service, and all other service metered or
chargeable to the Leased Premises, and furnish such deposits as each public
utility providing any such service may require. Lessor reserves the right to
install meters for any public utility servicing the Leased Premises for which
a meter is not presently installed, in which event Lessee shall make payments
when due directly to the appropriate public utility. As additional rent,
Lessee shall pay to Lessor the sum of $25.00 per month for trash removal, and
when water service is not separately metered Lessee shall pay to Lessor for
restroom water service the sum of $25 per month payable monthly, in advance,
concurrently with the payment of rent as specified in paragraph 4 above.
Lessee agrees not to over-burden the trash facilities. Lessee shall not
overload any of the mechanical, electric, plumbing, sewer, or other utility
equipment. If there is an increase in Lessee's use of trash removal service
or facilities over the normal needs initially anticipated by Lessor, or if
Lessee uses the water service for other than normal restroom purposes. Lessee
agrees to pay such additional monthly charges as may reasonably be determined
by Lessor.
9. USE OF PREMISES. The Leased Premises shall be used and occupied by Lessee
only for general office for a medical products manufacturer company as zoned
by the City of Irvine and for no other purpose without the express, prior,
written consent of Lessor. In particular, Lessee shall comply with all
limitations on the use of the Leased Premises and the Business Park contained
in: (a) all laws, ordinances, rules, orders and regulations of any
governmental body that
Form #1278 Initials: RWC
--------
--------
2
<PAGE>
affect the Leased Premises or the cleanliness, safety, occupation or use
thereof, including without limitation the City of Irvine Planned Community
District Regulations, Irvine Industrial Complex-West Amendment No. 14,
effective July, 1977, and any other zoning ordinance of the City of Irvine or
any other governmental agency having jurisdiction over the Business Park: (b)
the Declaration of Restrictions executed by Irvine Industrial Complex, a
California corporation, dated May 20, 1965, recorded May 21, 1965 in Book
7529, Page 600, as Instrument No. 16662 in the Official Records of Orange
County, California; (c) the Amended and Restated Ground Lease as to Parcel 8
between the Irvine Company, a Michigan corporation, and Shaw and Talbot and
Koll, Ltd., a California limited partnership, dated as of October 12, 1981, a
memorandum of which was recorded October 14, 1981 in Book 14256, Page 837, as
Instrument No. 18797 in the Official Records of Orange County, California;
and (d) the Declaration of Covenants, Conditions, and Restrictions for
Main-Redhill Property Owners Association, executed by Shaw and Talbot and
Koll, Ltd., a California limited partnership, dated October 13, 1981,
recorded October 14, 1981 in Book 14256, Page 840, as Instrument No. 18798 in
the Official Records of Orange County, California. In addition to the
restrictions contained in the instruments referred to above, Lessee agrees to
abide by the following restrictions (which restrictions may or may not be
contained in the instruments referred to above):
(a) Lessee shall not use the Leased Premises for any of the following
operations or uses:
(I) Residential;
(II) Trailer courts, mobile home parks or recreational vehicle
campgrounds;
(III) Labor camps, migrant worker camps, or jail or honor farms;
(IV) Junk yards;
(V) Drilling for and/or the removal of oil, gas or other
hydrocarbon substances;
(VI) Commercial excavation of building or construction materials;
(VII) Distillation of bones;
(VIII) Stockyard, slaughter or animals, or fat rendering;
(IX) Keeping or storing any animal and/or pet;
(X) Refining of petroleum or any of its products;
(XI) Smelting of iron, tin, zinc or any other ore; or
(XII) Dumping, disposal, incineration or reduction of garbage,
sewage, offal, dead animals or refuses.
(b) Lessee shall not use more than 100% of the floor area of the Leased
Premises for office purposes without the express, prior, written
consent of Lessor.
(c) Lessee shall not produce a nuisance to other portions of the
Business Park, including without limitation the production of
vibration, sound electro-magnetic disturbance, radiation, air or
water pollution or dust, the emission of odors or toxic or non-toxic
matter, or the production of, or the permitting the use of, any loud
noise, music, or loud-speaker system.
(d) Lessee shall not change nor attempt to change the zoning
classification of the Business Park nor obtain or apply to obtain a
conditional use permit, zoning variance, exception, or other
similar governmental approval with respect to the use or development
of the Leased Premises not expressly allowed under such existing
zoning regulations, without the express, prior, written consent of
Lessor.
(e) Lessee shall not perform or permit any act or carry on any practice
which may injure or impair the Building or any portion of the
Business Park, or be a menace or nuisance of any kind, or materially
or unreasonably interfere with the permitted activities of other
lessees within the Business Park.
(f) Lessee shall not maintain nor permit any outside storage on or
about the Leased Premises and all operations of Lessee shall be
performed and carried out entirely within the Building.
(g) Lessee shall not conduct or permit to be conducted any sale by
auction upon the Leased Premises.
10. ALTERATIONS; TRADE FIXTURES. Lessee agrees not to make or permit or
suffer to be made any alterations, improvements, or additions to the Leased
Premises or any part thereof without the prior written consent of Lessor,
except such repairs as Lessee is required to make by the provisions of this
Lease. Should Lessee desire to alter the Leased Premises and should Lessor
give written consent to such alterations, Lessee shall, at Lessor's option
contract with a contractor approved by Lessor for the construction of such
alterations. All such work, regardless of by whom performed, shall be done at
such times and in such manner as Lessor may from time to time designate. Any
alterations of or additions to the Leased Premises, excepting movable
furniture and trade fixtures, shall, at Lessor's option, become part of the
realty and belong to Lessor; however, Lessee may, upon written consent of
Lessor, install trade fixtures (exclusive of trade fixtures or other trade
equipment which would effectively convert warehouse area to additional office
area), machinery or other trade equipment in conformance with the ordinances
of the applicable city and county, any covenants, conditions or restrictions
of record, and such rules as Lessor shall from time to time establish, and
the same may be removed upon the termination of this Lease provided that
Lessee is not then in default under any of the terms or conditions of this
Lease and further provided that the Leased Premises would not be damaged by
such removal.
Upon the termination of this Lease, Lessee shall return the Leased Premises
in the same condition as when rented to Lessee, reasonable wear and tear
excepted. Throughout the term hereof, Lessee shall take good care of the
Leased Premises, its appurtenances, fixtures, and equipment, and shall not
drill into, disfigure, or deface any part of the Building, or the buildings,
grounds, or any part or portion of the Business Park, or suffer the same to
be done. Lessee shall immediately notify Lessor and repair the Leased
Premises, its appurtenances, fixtures, and equipment, whenever needed as a
result of the misuse or neglect of Lessee. In lieu of such repairs by Lessee,
Lessor may, at its option, perform such repairs for Lessee and in that event
the cost thereof shall be determined on statements rendered by Lessor to
Lessee and the sum so determined shall by payable to Lessor upon delivery of
such statement.
11. MECHANICS' AND OTHER LIENS. Lessee shall neither permit nor suffer any
mechanics' lien or other lien to be filed against the Leased Premises or the
Building or any other part of the Business Park, by reason of any work or
labor performed for, materials supplied to, or obligations incurred by,
Lessee or at Lessee's request or consent, or at the request or consent of any
of Lessee's agents, employees, sublessees, or invitees.
Should any such lien be filed, Lessee shall cause it to be removed forthwith.
Should Lessee fail to discharge any such lien or fail to furnish an insurance
bond in twice the amount of such lien against the foreclosure thereof, Lessor
may, but shall not be obligated to, discharge the same or take such other
action as Lessor deems necessary to prevent a judgment or foreclosure on said
lien from being executed against any portion of the Business Park, and all
costs and expenses thereof, including reasonable attorney's fees incurred by
Lessor, shall be repaid by Lessee to Lessor on written demand therefor.
Form #1278 Initials: RWC
--------
--------
3
<PAGE>
Nothing in this Lease shall be construed as in any way constituting a consent
or request by Lessor, expressed or implied, by inference or otherwise, to any
contractor, subcontractor, laborer, or materialman for the performance of any
labor or the furnishing of any materials for any specific or general
improvement, alteration, or repair of or to the Leased Premises or any
portion of the Business Park. Lessor shall have the right in the event of any
construction, alteration, repair, or work in, on, or to the Leased Premises
or to any part thereof, to post and file such notices of nonresponsibility as
are now or shall hereafter be provided by law, and Lessee shall give Lessor
written notice five (5) days prior to employing any laborer or contractor to
perform any such service.
12 ACCEPTANCE OF PREMISES. Lessee acknowledges that Lessee has thoroughly
examined the Leased Premises and that no statement or representation not
herein expressed as to the past, present or future condition or repair
thereof, or of the Building or the Business Park, has been made by or on
behalf of Lessor. By taking possession hereunder, Lessee acknowledges that
the Leased Premises are in good and sanitary order, condition and repair and
Lessee hereby waives any claim or right on account of the condition thereof.
13 SURRENDER OF THE LEASED PREMISES. At the expiration of the tenancy hereby
created, Lessee shall surrender the Leased Premises in the same condition as
the Leased Premises were in upon delivery of possession thereto under this
Lease, reasonable wear and tear excepted, and damage by unavoidable casualty
excepted to the extent that the same is covered by Lessor's fire insurance
policy, and Lessee shall surrender all keys for the Leased Premises to Lessor
at the place then fixed for the payment of rent and shall inform Lessor of
all combinations on locks, safes and vaults, if any, in the Leased Premises.
Lessee shall, at the option of Lessor, remove all of Lessee's trade fixtures
before surrendering the Leased Premises and repair any damage to the Leased
Premises caused thereby. If the Leased Premises are not surrendered
immediately upon termination of this Lease, Lessee shall be responsible to
Lessor for all damages which Lessor may suffer by reason thereof, and Lessee
shall indemnify Lessor against, and hold Lessor harmless from, any and all
claims made by any succeeding lessees against Lessor, resulting from delay in
delivering possession of the Leased Premises to such succeeding lessee, so
far as such delay is occasioned by the failure of Lessee to so surrender the
Leased Premises. Lessee's obligation to observe and perform this covenant
shall survive the expiration or other termination of the term of this Lease.
14 WASTE. Lessee shall not commit or suffer any waste upon the Leased
Premises or any portion of the Business Park.
15 INSURANCE. No use shall be made or permitted to be made of the Leased
Premises, nor acts done, which will increase the premiums for, or the
existing rate of insurance on, the Building or the Business Park, or cause
the cancellation of any insurance policy covering the Building or the
Business Park, nor shall Lessee sell, or permit to be kept, used or sold, in
or about the Leased Premises, any article which may be prohibited by standard
form fire insurance policies. Lessee shall, at its sole cost and expense,
comply with any and all requirements pertaining to the Leased Premises
established by any insurance organization or company, which requirements are
necessary for the maintenance of reasonable fire and public liability
insurance covering the Leased Premises, the Building, or the Business Park.
Lessee shall maintain in full force and effect on all of its fixtures and
equipment in the Leased Premises a policy or policies of fire and extended
coverage insurance with standard coverage endorsement to the extent of at
least eighty percent (80%) of their insurable value. During the Lease Term
the proceeds from any such policy or policies of insurance shall be used for
the repair or replacement of the fixtures and equipment so insured. Lessor
shall have no other interest in Lessee's insurance upon Lessee's equipment
and fixtures. Lessee shall furnish Lessor with a certificate of such policy
within thirty (30) days of the commencement of the Lease Term, and whenever
requested by Lessor, Lessee shall satisfy Lessor that such policy is in full
force and effect. Lessor shall not be required to carry any insurance on
Lessee's possessions.
During the entire Lease Term, Lessee shall, at Lessee's sole cost and
expense, provide and keep in force, policies of insurance written by
companies acceptable to Lessor, insuring Lessor and Lessee jointly against
liability for bodily injury with limits of not less than FIVE HUNDRED
THOUSAND DOLLARS ($500,000) for injuries to or death of one person and ONE
MILLION DOLLARS ($1,000,000) for injuries to or death of more than one
person in any one occurrence, and with limits of not less than FIVE HUNDRED
THOUSAND DOLLARS ($500,000) per occurrence for damage to property, such
limits to be for any greater amounts as may be reasonably indicated by
circumstances from time to time existing. Lessee shall furnish Lessor with a
certificate of such policy and whenever requested shall satisfy Lessor that
such policy is in full force and effect. Such policy shall name Lessor as an
additional insured and shall be primary and noncontributing with any
insurance carried by Lessor. The policy shall further provide that it shall
not be cancelled or altered without twenty (20) days' prior written notice to
Lessor.
16 MUTUAL WAIVER OF SUBROGATION. Lessor and Lessee each hereby waive any and
all rights of recovery, causes of action, claims and demands against the
other, or against the officers, employees, agents, or representatives of the
other, that may hereafter exist, by reason of the loss, destruction or damage
occasioned to such waiving party of its property or the property of others
under its control, caused by any peril included within the classification of
fire and extended coverage insurance, to the extent that such loss or damage
is insured against under any insurance policy of the waiving party in force
at the time of such loss or damage.
17 INDEMNIFICATION BY LESSEE. This Lease is made on the express condition
that Lessor shall not be liable, or suffer loss by reason of injury to person
or property, from whatever cause, all or in any way connected with the
condition or use of the Leased Premises or the improvements or personal
property therein or thereon, including without limitation any liability for
injury to the person or property of Lessee, its agents, officers, employees
or invitees. Except as provided in paragraph 14 hereof with respect to waiver
of subrogation, Lessee agrees to indemnify Lessor and Lessor's agents, and
hold Lessor and Lessor's agents harmless from any and all liability, loss,
cost, claim, or obligation on account of, or arising out of, any such injury
or loss however occurring, including without limitation Lessee's use of the
Leased Premises, the Building, or the Business Park, or form the conduct of
Lessee's business, or from any activity, work, or thing done, permitted or
suffered by Lessee in or about the Leased Premises, the Building, the
Business Park, or elsewhere. Lessee shall further indemnify and hold Lessor
and Lessor's agents harmless from and against any and all claims arising from
any breach or default in the performance of any obligation on Lessee's part
to be performed under this Lease, or arising from any negligence of Lessee or
Lessee's agents, contractors, or employees, and from and against all costs,
attorneys' fees, expenses, and liabilities incurred in the defense of any
such claim or any action or proceeding brought thereon.
In the event that any action, suit, or proceeding is brought against Lessor,
or any of Lessor's agents by reason of any such occurrence, then upon
Lessor's request, Lessee shall, at Lessee's expense, resist and defend such
action, suit or proceeding, or cause the same to be resisted and defended by
counsel designated by the insurer whose policy covers the occurrence or by
counsel designated by Lessee and approved by Lessor. The obligations of
Lessee under this section arising by reason of any occurrence taking place
during the Lease Term or any other time of possession or use of the Leased
Premises by Lessee, shall survive any termination of this Lease.
Form #1278 Initials: RWC
--------
--------
4
<PAGE>
18. WAIVER OF CLAIMS. Lessee hereby waives all claims against Lessor for
damages to goods, wares and merchandise in, upon or about the Leased Premises
for injury to Lessee, its agents, employees, invitees, or third persons in or
about the Leased Premises from any cause arising at any time.
Lessor shall not be liable for injury to Lessee's business or loss of income
therefrom or for damage which may be sustained by the person, goods, wares,
merchandise, or property of Lessee, its employees, invitees, customers,
agents, or contractors, or any other person in or about the Leased Premises,
the Building, or the Business Park caused by or resulting from fire, steam,
electricity, gas, water, or rain, which may leak or flow from or into any
part of the Leased Premises, or from the breakage, leakage, obstruction, or
other defects of pipes, sprinklers, wires, appliances, plumbing, heating, air
conditioning, or lighting, or fixtures of the same, whether such damage or
injury results from conditions arising upon the Leased Premises, the
Building, or the Business Park, or from other sources or places, and
regardless of whether the cause of such damage or injury or the means of
repairing the same is inaccessible to Lessee, Lessor shall not be liable for
any damages arising from any act or neglect of any other lessees of the
Business Park.
19. MAINTENANCE AND REPAIRS. Lessee shall, at all times and at its sole cost
and expense, keep and maintain the Leased Premises and appurtenances and
every part thereof (excepting heating and air conditioning equipment,
exterior walls, and roofs which shall be maintained by Lessor), including
plumbing, windows and skylights, any store front, glass, carpet, levelors,
and the interior of the Leased Premises, in good and sanitary order,
condition and repair. Lessee shall, at its sole cost and expense, keep and
maintain all utilities, fixtures and mechanical equipment used by Lessee in
good order, condition, and repair. In the case of equipment installed by
Lessor for Lessee where Lessee is responsible for maintenance of the
equipment, such maintenance will be provided by a reputable maintenance
service company acceptable to Lessor at Lessee's expense. Evidence of such a
service contract shall be provided to Lessor by Lessee upon Lessor's request.
If Lessee refuses or neglects to undertake and properly complete, to the
reasonable satisfaction of Lessor, any matter of repair required of Lessee
hereunder, then Lessor may make such repairs and Lessor shall not have any
liability to Lessee for any loss or damage that may accrue to Lessee's
merchandise, fixtures, or other property or to Lessee's business by reason
thereof, and upon completion thereof, Lessee shall pay all of Lessor's costs
for making such repairs plus an additional twenty percent (20%) of such costs
for overhead and supervision, upon presentation of a statement therefor, as
additional rent. Said statement may include interest at the rate of ten
percent (10%) per annum on said total cost from the date of substantial
completion of repairs by Lessor.
20. SIGNS, LANDSCAPING. Lessee shall not place, or permit to be placed or
maintained, on any exterior door, wall or window of the Leased Premises any
sign, awning or canopy, or advertising matter or other thing of any kind, and
will not place or permit to be placed or maintained, any decoration, sign,
lettering or advertising matter on the glass of any window or door, or other
place that can be seen through the glass of the Leased Premises without first
obtaining Lessor's written approval and consent. Lessee further agrees to
maintain such sign, awning, canopy, decoration, lettering, advertising
matter, or thing as may be approved be Lessor, in good condition and repair
at all times. Lessee shall not place any sign on a vehicle in the parking
areas.
Lessee agrees to pay for the cost and installation of a sign identifying
Lessee's business, which sign shall be in strict conformance with Lessor's
sign criteria as set forth in EXHIBIT "C" attached hereto and incorporated
herein, as to design, material, color, location, size, letter style, method
of installation, and rules concerning lighting. Any signs not in conformity
with this Lease may be immediately removed and destroyed by Lessor without
notice. Lessee agrees to pay for the cost of maintaining such sign.
Notwithstanding the foregoing, Lessor reserves the right, at any time and
from time to time, to waive or otherwise grant exceptions from such sign
criteria for any other lessee, without in any way waiving or granting an
exception to Lessee's obligation to conform strictly with the designated sign
criteria, and Lessee hereby consents to Lessor's allowing non-conforming
signs of other lessees.
Lessor shall have the right to control all landscaping and Lessee shall not
in any way damage or alter the landscaping.
21. ENTRY BY LESSOR. Lessee shall permit Lessor and Lessor's agents to enter
the Leased Premises at all reasonable times for the purpose of inspecting the
same or for the purpose of maintaining the Building, or for the purpose of
making repairs, alterations, or additions to any portion of the Building,
including the erection and maintenance of such scaffolding, canopies, fences
and props as may be required, or for the purpose of posting notices of
non-responsibility for alterations, additions, or repairs, or for the purpose
of placing upon the Building any usual or ordinary "for sale" signs, without
any rebate of rent and without any liability to Lessee for any loss of
occupancy or quiet enjoyment of the Leased Premises thereby occasioned; and
Lessee shall permit Lessor, at any time within sixty (60) days prior to the
expiration of this Lease, to place upon the Leased Premises any usual or
ordinary "to let", "for lease", "available", or comparable signs.
22. DESTRUCTION. In the event that the Leased Premises or the Building are
damaged by fire or other perils covered by Lessor's extended coverage
insurance, or in the event that the Leased Premises or the Building are
declared unsafe or unfit for occupancy by any authorized public authority for
any reason (other than Lessee's act, neglect, use or occupation) which
declaration requires repairs to either the Leased Premises or the Building,
Lessor shall promptly make such repairs, provided such repairs can reasonably
be undertaken and completed within sixty (60) days under the laws and
regulations of authorized public authorities, and this Lease shall remain in
full force and effect, except that Lessee shall be entitled to a
proportionate reduction of the rent while such repairs are being made, such
proportionate reduction to be based upon the extent to which the making of
such repairs shall materially interfere with the business carried on by the
Lessee in the Leased Premises. If the damage or declaration is due to the
fault or neglect of Lessee or its agents or employees, there shall be no
abatement of rent. If repairs cannot reasonably be undertaken and completed
within sixty (60) days, or repairs cannot be made under the then current laws
and regulations, this Lease may be terminated at the option of either party,
by notice to the other party within sixty (60) days of the damage or
declaration, as of the date specified in such notice, which date shall be no
less than thirty (30) and no more than sixty (60) days after the giving of
such notice. As to any partial destruction (including any destruction
necessary in order to make repairs required by any declaration) for which
Lessor is obligated to repair or may elect to repair under the terms of this
paragraph, the provisions of Section 1932, Subdivision (2), and Section 1933,
Subdivision (4), of the Civil Code of the State of California are waived by
Lessee. In the event that the Leased Premises or the Building of which the
Leased Premises are a part are damaged as a result of any cause other than
the perils covered by Lessor's fire and extended coverage insurance, then
Lessor shall have the option: (1) to repair such damage, this Lease
continuing in full force and effect, in which case the rent shall be
proportionately reduced as hereinabove in this paragraph provided, or (2)
give notice to Lessee at any time within sixty (60) days after such damage
terminating this Lease as of the date specified in such notice, which date
shall be no less than thirty (30) and no more than sixty (60) days after the
giving of such notice. In the event of giving notice of termination of this
Lease as provided in this paragraph 22, this Lease shall expire and all
interest of Lessee in the Leased Premises shall terminate on the date so
specified in such notice and the rent, reduced by a proportionate amount,
based upon the extent, if any, to which such damage materially interfered
with the business carried on by Lessee in the Leased Premises, shall be paid
up to the date of such termination.
Form #1278 Initials: RWC
--------
--------
5
<PAGE>
Notwithstanding anything to the contrary contained in this paragraph 22,
Lessor shall not have any obligation whatsoever to repair, reconstruct, or
restore the Leased Premises when the damage resulting from any casualty
covered under this paragraph 22 occurs during the last twelve (12) months of
the term of this Lease or any extension thereof.
In no event shall Lessor be required to repair any injury or damage from
fire or other cause, or to make any repairs or replacements of any panels,
decoration, office fixtures, railings, floor covering, partitions, fixtures
or any other property installed in the Leased Premises by Lessee.
Lessee shall not be entitled to any compensation or damages from Lessor
for loss of the use of the whole or any part of the Leased Premises, or
Lessee's personal property, or any inconvenience or annoyance occasioned by
such damage, repair, reconstruction or restoration.
23. ASSIGNMENT AND SUBLEASING. Lessee shall not sublease the Leased
Premises nor any portion thereof, nor shall Lessee assign any interest under
this Lease or permit the use of the Leased Premises by any person or persons
other than Lessee, whether voluntarily or involuntarily, without the express,
prior, written consent of Lessor. Lessor shall not unreasonably withhold its
consent to any assignment of this Lease by Lessee. It is understood that
Lessor is subject to the Employee Retirement Income Security Act ("ERISA")
and may refuse consent solely on the basis that the proposed assignment or
subletting may result in a prohibited transaction under ERISA or would
otherwise cause a breach of any ERISA-related requirement. Any attempted
assignment or subletting without Lessor's express, prior, written consent
shall be void and shall, at the option of Lessor, terminate this Lease.
Consent by Lessor to any assignment or subletting shall not release Lessee
from its primary liability under this Lease, and Lessor's consent to one
assignment, subletting or occupation or use by a party other than Lessee
shall not be deemed a consent to any other assignment, subletting or
occupation or use by any other party, nor a waiver of Lessor's right to
approve or disapprove thereof. A transfer of ten percent (10%) or more of any
interest in Lessee (whether by stock, partnership interest or otherwise) will
be deemed an assignment of this Lease.
24. INSOLVENCY. If Lessee or any guarantor of this Lease shall become
bankrupt or insolvent, or unable to pay its debts as such become due, or file
any debtor proceedings, or take or have taken against Lessee or any guarantor
in any court pursuant to any statute either of the United States or of any
State a petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of Lessee's or any
such guarantor's property, or if Lessee or any such guarantor makes an
assignment for the benefit of creditors, or petitions for or enters into such
arrangement, and any such condition, proceedings, petition, appointment,
assignment or action continues unremoved for a period of thirty (30) days,
then Lessee shall, for purposes of this Lease, be deemed to be insolvent and
in default under this Lease, and this Lease shall thereupon terminate, and
Lessor, in addition to any other rights or remedies it may have, shall have
the immediate right of reentry and may remove all persons and property from
the Leased Premises and such property may be removed and stored in a public
warehouse or elsewhere at the cost of, and for the account of Lessee, all
without service of notice or resort to legal process and without being deemed
guilty of trespass, or becoming liable for any loss or damage which may be
occasioned thereby.
25. ABANDONMENT. Lessee shall not vacate nor abandon the Leased Premises at
any time during the Lease Term, nor permit the Leased Premises to remain
unoccupied for a period longer than five (5) consecutive days during the
Lease Term; and if Lessee shall so abandon, or vacate or surrender the Leased
Premises, or suffer this Lease or the Leased Premises to be taken under any
writ of execution or in any other way be dispossessed by process of law, or
otherwise, any of which shall, for purposes of this Lease, be deemed an
abandonment, then Lessee shall be in default under this Lease and any
personal property belonging to Lessee and left on the Leased Premises shall,
at the option of the Lessor, be deemed abandoned.
26. DEFAULT AND RIGHT TO RE-ENTER. In the event that Lessee: (a) fails to
make any payment of rent or any other payment required to be made by Lessee
hereunder within ten (10) days after the same shall be due, or within three
(3) days after written notice and demand, or (b) fails to perform any other
of the terms, conditions or covenants of this Lease to be observed or
performed by Lessee and such failure continues for more than fourteen (14)
days after written notice of such default, or (c) becomes insolvent as
described in paragraph 24 hereof, or (d) abandons the Leased Premises as
described in paragraph 25 hereof, or (e) assigns or sublets all or any
portion of the Leased Premises or the Leased Premises are occupied or used by
any other party without first obtaining Lessor's written consent; then Lessee
shall be in default under this Lease, and Lessor shall have, in addition to
any other rights or remedies which Lessor may have, the immediate right of
re-entry and Lessor may remove all persons and property from the Leased
Premises and such property may be removed and stored in a public warehouse or
elsewhere at the cost of, and for the account of Lessee, all without service
of notice or resort to legal process and without Lessor's or Lessor's agent's
being deemed guilty of trespass or becoming liable for any loss or damage
which may be occasioned thereby.
Should Lessor elect to re-enter, as herein provided, or should Lessor take
possession pursuant to legal proceedings or pursuant to any notice provided
for by law, Lessor may either terminate this Lease or Lessor may from time to
time without terminating this Lease, make such alterations and repairs as may
be necessary in order to relet the Leased Premises, and relet said premises
or any part thereof for such term or terms and upon such conditions as Lessor
in its sole discretion may deem advisable; and upon each such reletting all
rentals received by Lessor from such reletting shall be applied, first, to
the payment of any indebtedness other than rent due hereunder from Lessee to
Lessor; second, to the payment of any costs and expenses of such reletting,
including brokerage fees and attorney's fees and all costs of such
alterations and repairs; third, to the payment of rent due and unpaid
hereunder, and the residue, if any, shall be held by Lessor and applied in
payment of future rent as the same may become due and payable hereunder. If
such rentals received by Lessor from such reletting during any month are less
than the amount to be paid during that month by Lessee hereunder, Lessee
shall pay any such deficiency to Lessor. Such deficiency shall be calculated
and paid monthly.
No such re-entry or taking possession of the Leased Premises by Lessor shall
be construed as an election by Lessor to terminate this Lease unless a
notice of such intention is sent to Lessee or unless the termination of this
Lease is decreed by a court of competent jurisdiction. Notwithstanding any
such reletting without termination, Lessor may at any time thereafter elect
to terminate this Lease for such previous breach provided such breach has not
been cured. Should Lessor at any time terminate this Lease for any breach, in
addition to any other remedy Lessor may have, Lessor may recover from Lessee
all damages which Lessor may incur by reason of such breach, including the
cost of recovering the Leased Premises, and including (1) all amounts that
would have fallen due as rent between the time of termination of this Lease
and the time of the claim, judgment, or other award, less the avails of all
relettings and attornments, plus interest on the balance at the rate of ten
percent (10%) per year; and (2) the worth at the time of the claim, judgment
or other award, of the amount by which the unpaid rent for the balance of the
Lease Term exceeds the amount of such rental loss that Lessee proves could be
reasonably avoided. "Worth", as used in this provision, is computed by
discounting the total at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the claim, judgment, or award, plus one percent
(1%).
Form #1278 Initials: RWC
--------
--------
6
<PAGE>
upon any default or abandonment by Lessee. Lessee's obligation to pay rental
and other payments under this Lease shall continue and this Lease shall
continue in full force and effect, until this Lease is terminated as herein
provided, and Lessor shall be entitled to recover, in addition to any other
sums due under this Lease, any rental or other payments as they become due for
the period after such default or abandonment. In addition to and without
limiting any of the foregoing, Lessor shall have the remedy described in
California Civil Code Section 1951.4.
27. SURRENDER OF LEASE NOT MERGER. The voluntary or other surrender of this
Lease by Lessee, or a mutual cancellation thereof, shall not work a merger,
and shall, at the option of Lessor, terminate all or any existing subleases and
subtenancies, or may, at the option of Lessor, operate as an assignment to
Lessor of any or all of such subleases or subtenancies.
28. ATTORNEYS' FEES AND COLLECTION CHARGES. In the event of any legal action
or proceeding between the parties hereto, reasonable attorneys' fees and
expenses of the prevailing party in any such action or proceeding may be added
to the judgment therein. Should Lessor be named as a defendant in any suit
brought against Lessee in connection with or arising out of Lessee's occupancy
hereunder, Lessee shall pay to Lessor all costs and expenses incurred by Lessor
in such suit, including reasonable attorneys' fees. In addition to the charges
provided for in paragraph 4(b) hereof in the event of a late payment by Lessee
to Lessor of rent or other sums due hereunder, Lessee shall pay a charge of
$75.00 to Lessor for preparation of a demand for delinquent rent.
29. CONDEMNATION. If any part of the Leased Premises or the Building shall be
taken or condemned for a public or quasi-public use, and a part thereof remains
which is susceptible of occupation hereunder, this Lease shall, as to the part
so taken, terminate as of the date title shall vest in the condemnor, and the
rent payable hereunder shall be adjusted so that the Lessee shall be required
to pay, during the remainder of the Lease Term, only such portion of such rent
as the number of square feet in the part remaining after the condemnation bears
to the number of square feet in the entire Leased Premises at the date of
condemnation; but in such event Lessor shall have the option to terminate this
Lease as of the date when title to the part so condemned vests in the
condemnor. If all of the Leased Premises be taken or condemned, or such part
thereof so that there does not remain a portion susceptible for use and
occupancy hereunder, this Lease shall thereupon terminate. If a part or all of
the Leased Premises be taken or condemned, all compensation awarded upon such
condemnation or taking shall go the the Lessor, and Lessee hereby irrevocably
assigns and transfers to Lessor any right to compensation or damages to which
the Lessee may be entitled during the term hereof by reason of the condemnation
of all or a part of the Leased Premises.
30. NOTICES. All notices, statements, demands, request, consents, approvals,
authorizations, offers, agreements, appointments and designations under this
Lease by either party to the other shall be in writing and shall be
sufficiently given and served upon the other party when served personally, or
forty-eight (48) hours after being deposited in the United States Mail, sent by
registered or certified mail, return receipt requested, postage prepaid, and
addressed to Lessor or Lessee respectively at the address set forth after their
signatures at the end of this Lease, or to such other address as either of the
respective parties may designate in such a notice.
31. WAIVER. The waiver by Lessor of any breach of any term, covenant, or
condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition of any subsequent breach of the same or any other term,
covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Lessor shall not be deemed to be a waiver of any preceding breach
by Lessee of any term, covenant, or condition of this Lease, other than the
failure of Lessee to pay the particular rent so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
32. EFFECT OF HOLDING OVER. If Lessee should remain in possession of the
Leased Premises after the expiration of the Lease Term and without executing a
new lease, then such holding over shall be construed as a tenancy from month to
month, subject to all the conditions, provisions, and obligations of this Lease
insofar as the same are applicable to a month-to-month tenancy, except that the
monthly rent shall be one and one-half (1-1/2) times the monthly amount of the
minimum annual rent for the last month of the Lease Term.
33. PARKING. Lessee shall be entitled to park in common with other lessees of
Lessor. Lessee agrees not to overburden the parking facilities and agrees
to cooperate with Lessor and other lessees in the use of parking facilities.
Lessor reserves the right in its absolute discretion to determine whether
parking facilities are becoming crowded and, in such event, to allocate parking
spaces among Lessee and other lessees, and, at Lessor's election, to locate and
from time to time to relocate such spaces.
34. WAIVER OF TRIAL BY JURY, COUNTERCLAIMS, AND RIGHTS OF REDEMPTION. The
parties hereto shall and they hereby do waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other on any matters whatsoever arising out of or in any way connected with
this Lease, the relationship of Lessor and Lessee, Lessee's use or occupancy of
the Leased Premises, or any claim of injury or damage. In the event Lessor
commences any proceedings for nonpayment of rent, minimum rent, or additional
rent, Lessee will not interpose any counterclaim of whatever nature or
description in any such proceedings. This shall not, however, be construed as
a waiver of Lessee's right to assert such claims in any separate action or
actions brought by the Lessee.
Lessee hereby expressly waives any and all rights of redemption granted by or
under any present or future laws in the event of Lessee's being evicted or
dispossessed for any cause, or in the event of Lessor's obtaining possession of
the Leased Premises, by reason of the violation by Lessee of any of the terms,
covenants, or conditions of this Lease, or otherwise.
35. SUBORDINATION. Lessor hereby reserves the right to place liens on,
encumber, mortgage, convey by deed of trust, or hypothecate for security the
Leased Premises, the Building, the Business Park, or any part thereof, and in
such event this Lease and the leasehold interest hereby created shall, at
Lessor's option, be subject and subordinate thereto, and to all advances made
on the security thereof and to all renewals, extensions, or replacements
thereof. Lessee agrees to and shall, within ten (10) days following the
written request of Lessor to do so, execute, acknowledge, and deliver to Lessor
or to the recipient designated by Lessor, any and all documents required or
reasonably requested to subordinate Lessee's rights under and interest in this
Lease to any such lien, encumbrance, mortgage, deed of trust, or hypothecation.
Should Lessee fail or refuse to so execute, acknowledge, and deliver such
documents, Lessee's interest in this Lease nevertheless shall be, at the option
of Lessor, subordinate to any such lien. Lessee also hereby agrees to deliver
to any lender designated by Lessor, within ten (10) days following the written
request of Lessor, such financial statements of Lessee as may be reasonably
required by such lender. Such statements shall include the past three years'
financial statements of Lessee. All such financial statements shall be
received in confidence.
Form #1278 Initials: RWC
--------
--------
7
<PAGE>
36. ESTOPPEL CERTIFICATE. Lessee shall, within not more than ten (10) days
after written notice from Lessor, execute, acknowledge and deliver to Lessor
a statement in writing (1) certifying that this Lease is unmodified and in
full force and effect (or, if modified, stating the nature of such
modification and certifying that this Lease, as so modified, is in full force
and effect), and stating the date to which the rent and other charges are
paid in advance, if any, and stating the amount and nature of any and all
sums deposited with Lessor, if any, and (2) acknowledging that there are not,
to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder,
or specifying such defaults if any are claimed. Any such statement may be
conclusively relied upon by any prospective purchaser or encumbrancer of any
property of which the Leased Premises are a part. Lessee's failure to deliver
such statement within such time shall be conclusive upon Lessee (1) that this
Lease is in full force and effect, without modification except as may be
represented by Lessor, (2) that there are no uncured defaults in Lessor's
performance, and (3) that not more than one month's rent has been paid in
advance. Lessee understands that Lessor is subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), so that transactions with
some individuals or entities may result in a breach of an ERISA-related
requirement. Neither Lessee, nor any individual or entity affiliated with
Lessee, is a "Party in Interest" within the meaning of Section 3(14) of ERISA
(a copy of which is attached hereto as Exhibit D) with respect to any person
or entity shown on the list attached hereto as Schedule 1. Lessee agrees to
furnish to Lessor, within fifteen (15) days after Lessor's request, but no
more frequently that quarterly, a written representation and warranty that
Lessee, or any person or entity affiliated with Lessee is not a "Party in
Interest" within the meaning of Section 3(14) of ERISA (a copy of which is to
be attached to the representation and warranty) with respect to any person or
entity on an updated Schedule 1 (which shall be attached to the
representation and warranty) provided to Lessee in accordance with the notice
provisions of Paragraph 30 of this Lease. Lessee agrees to indemnify and hold
Lessor harmless from any costs, expense or damage (including reasonable
attorneys' fees) which may result from a breach of such representation and
warranty.
37. LIABILITY OF LESSOR. Lessor purchased and holds title to the Leased
Premises with assets of and for the account of Separate Account R, which is a
separate account, as defined in Section 3(17) of ERISA, shown on the books
and records of Lessor. Only the assets of Separate Account R shall be bound
for obligations of Lessor hereunder and no resort shall be had to any other
assets of Lessor.
38. CONDITION TO LEASE. In the event that the combined period of the Lease
Term, together with all options granted herein, if any, exceed five (5)
years, then as a condition subsequent to the obligation of the parties
hereunder, the holder of the first mortgage or first deed of trust secured by
the real property of which the Leased Premises are a part, may reject and
terminate this Lease provided that written notice thereof shall be given to
Lessee within thirty (30) days of the date hereof. In the event of such
rejection or termination, Lessee shall immediately vacate and surrender the
Leased Premises as provided in this Lease, and Lessor shall have no liability
to Lessee as a result of such rejection or termination.
39. RULES AND REGULATIONS. Lessee hereby agrees to the following:
(a) All garbage and refuse shall be placed by Lessee in the containers at
the location prepared by Lessor for refuse collection, in the manner and at
the times and places specified by Lessor.
(b) No aerial or antenna shall be erected on the roof or exterior walls of
the Leased Premises, or on the grounds, without in each instance, the written
consent of Lessor first being obtained. Any aerial or antenna so installed
without such written consent shall be subject to removal by Lessor at any
time without notice.
(c) The plumbing facilities shall not be used for any purposes other than
that for which they are constructed, and no foreign substance of any kind
shall be thrown therein, and the expense of any breakage, stoppage, or damage
resulting from a violation of these provisions shall be borne by Lessee.
(d) Lessee shall use at Lessee's cost such pest extermination contractor as
Lessor may direct and at such intervals as Lessor may require. Lessor
reserves the right from time to time to amend or supplement the foregoing
rules and regulations, and to adopt and promulgate additional rules and
regulations applicable to the Leased Premises. Notice of such rules and
regulations and amendments and supplements thereto, if any, shall be given to
the Lessee.
Lessee agrees to comply with all such rules and regulations upon notice from
Lessor, provided that such rules and regulations shall apply to a majority of
all lessees of the Building of which the Leased Premises are a part.
40. LEVELORS. Lessor shall select a standard Levelor Blind and color for use
throughout the Building and Lessee shall use such standard levelor blind for
all windows to be covered by Lessee. Lessee shall be required to provide, at
Lessee's expense, prescribed levelor blind in front of windows in which the
space is utilized for other than office use, such as storage and
manufacturing.
41. MISCELLANEOUS PROVISIONS.
(a) Whenever the singular number is used in this Lease and when required
by the context, the same shall include the plural, and the masculine,
feminine, and neuter genders shall each include either of the others as may be
appropriate, and the word "person" shall include corporation, firm, or
association. If there be more than one Lessee, the obligations imposed under
this Lease upon Lessee shall be joint and several.
(b) The headings or titles to the paragraphs of this Lease are not a part
of this Lease and shall have no effect upon the construction or interpretation
of any part of this Lease.
(c) This instrument contains all of the agreements and conditions made
between the parties to this Lease and may not be modified orally or in any
manner other than by an agreement in writing signed by all of the parties to
this Lease. No oral or written statement by any party or by the agent of any
party, made or delivered prior to or concurrently with the execution of this
Lease, and which is not a part of this written Lease, shall be binding upon
any party to this Lease.
(d) Time is of the essence of each term and provision of this Lease.
(e) Except as otherwise expressly stated, each payment required to be
made by Lessee shall be in addition to and not in substitution for other
payments to be made by Lessee.
(f) Except as expressly provided for herein, the terms and provisions of
this Lease shall be binding upon and inure to the benefit of the heirs,
executors, administrators, successors, and assigns of Lessor and Lessee.
(g) If any of the terms, conditions, or provisions of this Lease should
be held invalid or in violation of law, this Lease and all other terms,
conditions, and provisions thereof shall nevertheless remain in full force
and effect.
42. COVENANTS, CONDITIONS, AND RESTRICTIONS. Lessee acknowledges that as of
the date of this Lease, the Leased Premises are encumbered by certain
covenants, conditions, and restrictions and grants of easement of record, and
Lessee agrees to be bound by all of the terms, conditions, and provisions
thereof.
Form #1278 Initials: RWC
--------
--------
8
<PAGE>
43 MORTGAGEE PROTECTION. In the event of any default of the part of Lessor,
Lessee will give notice by registered or certified mail to any beneficiary of
a deed of trust or mortgagee of a mortgage covering the Leased Premises whose
address shall have been furnished to Lessee, and shall offer such beneficiary
or mortgagee a reasonable opportunity to cure the default, including time to
obtain possession of the Leased Premises by power of sale or by a judicial
foreclosure, if such should prove necessary to effect a cure.
In the event of a judicial foreclosure or trustee's sale pursuant to a
mortgage or deed of trust covering the Leased Premises, the purchaser may
elect not to terminate this Lease, in which event Lessee shall attorn to such
new purchaser and, if requested, Lessee shall execute a new lease on the same
terms as this Lease for the balance of the Lease Term.
44 DEPOSIT AGREEMENT. Lessee hereby agrees that Lessor shall be entitled to
immediately endorse and cash Lessee's good faith rent and security deposit
check(s) accompanying this Lease. It is further agreed and understood that
such action shall not guarantee acceptance of this Lease by Lessor but in the
event Lessor does not accept this Lease the deposit shall be refunded in full
to Lessee. This Lease shall be effective only after Lessee has received a
copy fully executed by Lessor.
45 SPECIAL PROVISIONS. Special provisions of this Lease numbered 46 through
47 are attached hereto and are made a part hereof. If none, so state in the
following space ___________________________.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the day
and year first above written.
"LESSOR" "LESSEE"
CARDIAC SCIENCE, INC.,
Connecticut General Life Insurance Company ----------------------------------
is entering into this agreement on behalf a Delaware Corporation
of its Separate Account R. Separate
Account R is a separate account as defined
in Sec. 3(17) of the Employee Retirement By /s/ Raymond W. Cohen
Income Security Act of 1974. Only the --------------------------------
assets of such fund shall be bound for Raymond W. Cohen, President
obligations of Separate Account R and
no resort shall be had to any other assets
of Connecticut General Life Insurance Title President
Company. ----------------------------
Connecticut General Life Insurance Company By
on behalf of its Separate Account R. -------------------------------
By CIGNA INVESTMENT ADVISORY COMPANY, INC. Title
--------------------------------------- ----------------------------
By: CIGNA Investments, Inc.
By /s/ Stephen J. Olstein Mailing Address
------------------------------------- ------------------
STEPHEN J. OLSTEIN
MANAGING DIRECTOR
------------------------------------- ----------------------------------
Phone
------------------------------------- ----------------------------
46 Base Rent Schedule is as follows:
May 1, 1997 through April 30, 1998 $5,258.00 per month
May 1, 1998 through April 30, 1999 $5,458.00 per month
May 1, 1999 through April 30, 2000 $5,687.00 per month
47 Tenant Improvements as follows:
Refer to Exhibit "B" & Exhibit "B-1".
<PAGE>
[BUSINESS CENTER MAP]
MAIN & REDHILL BUSINESS CENTER
IRVINE INDUSTRIAL COMPLEX
IRVINE, CALIFORNIA 92714
EXHIBIT "A"
Initials: RWC
--------
--------
<PAGE>
DATE: April 3, 1997
PROJECT: Main & Redhill Business Center
LESSEE: CARDIAC SCIENCE, INC.
UNIT ADDRESS: 1176 B/C Main Street
ITEM:
EXISTING IMPROVEMENTS ONLY
- ----
xxx EXISTING IMPROVEMENTS PLUS THOSE SHOWN BELOW:
- ----
WALLS: as-is
CEILINGS: as-is
DOORS: see Exhibit "B-1"
FLOORCOVERINGS: New carpet & VCT throughout - spec standard
PLUMBING: as-is
LIGHTS: see Exhibit "B-1"
LIGHT SWITCHES: as-is
WALL ELECTRICAL OUTLETS: as-is
CONDUIT FOR TELEPHONE JACKS: Tenant responsible for phone jacks & lines
HVAC/FAN: as-is
WATER HEATER: as-is
PAINTING: New paint throughout suite - spec standard
OTHER: none
UNLESS OTHERWISE STATED, THE IMPROVEMENTS LISTED ABOVE WILL BE FINAL. ANY
ADDITIONS OR CHANGES WILL BE PAID FOR BY LESSEE.
EXHIBIT "B"
INITIAL
/s/ RWC
-------
-------
-------
<PAGE>
Exhibit "B-1"
[Floor Plan]
CONSTRUCTION NOTES:
1.) New carpet & VCT where indicated (carpet = c). Tenant to select color
spec-standard.
2.) New paint throughout entire office. Tenant to select color spec-standard.
3.) Electrical work: Landlord will agree to relocated 5 existing light
fixtures from VCT area of bull pen to the carpet area of bull pen.
Landlord will also agree to provide 15 standard light fixtures in VCT
area.
4.) Closet Doors: 1. Landlord will agree to add standard door & repair hole
in storage area.
2. Landlord will agree to relocate closet door to be as
flush as possible with current back wall.
5.) Mini Blinds: Landlord will agree to provide mini blinds throughout
suite. Spec standard.
INITIAL
/s/ RWC
-------
-------
-------
<PAGE>
In particular, Tenant, at its sole cost, shall comply with all laws relating
to the storage, use and disposal of hazardous, toxic or radioactive matter,
including those materials identified in Sections 66680 through 66685 of Title
22 of the California Administrative Code, Division (collectively, "Toxic
Materials"). If Tenant does store, use or dispose of any Toxic Materials,
Tenant shall notify Landlord in writing at least ten (10) days prior to their
first appearance on the Premises and Tenant's failure to do so shall
constitute a default under the lease. Tenant shall be solely responsible for
and shall defend, indemnify and hold Landlord and Landlord's agents harmless
from and against all claims, costs and liabilities, including attorney's fees
and costs, arising out of or in connection with the removal, clean-up and
restoration work and materials necessary to return the Premises and any other
property of whatever nature to their condition existing prior to the
appearance of the Toxic Materials on the Premises. Tenant's obligations
hereunder shall survive the termination of this Lease.
LANDLORD TENANT
INITIAL
/s/ RWC
- ---------- ----------- -------
Initial Initial
-------
Exhibit E -------
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Cardiac Science, Inc. on Form S-8 (File No. 33-63986) of our report dated
March 11, 1998, which contains a paragraph regarding the Company's ability to
continue as a going concern, on our audit of the consolidated financial
statements of Cardiac Science, Inc. as of December 31, 1997 and for the year
ended December 31, 1997 which report is included in this Annual Report on
Form 10-KSB.
Coopers & Lybrand L.L.P.
Newport Beach, CA
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 561,351
<SECURITIES> 0
<RECEIVABLES> 216,162
<ALLOWANCES> 0
<INVENTORY> 209,413
<CURRENT-ASSETS> 1,086,193
<PP&E> 85,927
<DEPRECIATION> 94,557
<TOTAL-ASSETS> 1,783,985
<CURRENT-LIABILITIES> 1,086,556
<BONDS> 0
0
0
<COMMON> 4,975
<OTHER-SE> 692,454
<TOTAL-LIABILITY-AND-EQUITY> 1,783,985
<SALES> 1,213,071
<TOTAL-REVENUES> 1,213,071
<CGS> 753,693
<TOTAL-COSTS> 3,031,822
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,247
<INCOME-PRETAX> (1,822,998)
<INCOME-TAX> 1,600
<INCOME-CONTINUING> (1,824,598)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,824,598)
<EPS-PRIMARY> (.47)
<EPS-DILUTED> (.47)
</TABLE>
