<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 10, 2000
REGISTRATION NO. 333-________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CARDIAC SCIENCE, INC.
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
DELAWARE 3845 33-0465681
-------- ---- ----------
<S> <C> <C>
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
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16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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RAYMOND W. COHEN, PRESIDENT
CARDIAC SCIENCE, INC.
16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
-----------
(Name, Address Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
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Copies of all communications, including all communications sent to
the agent for service, should be sent to:
LEONARD J. BRESLOW, ESQ.
BRESLOW & WALKER, LLP
100 JERICHO QUADRANGLE, SUITE 230
JERICHO, NEW YORK 11753
TEL: (516) 822-6505
FAX: (516) 822-6544
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Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box X
---
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering ___________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box ___________
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<PAGE>
-----------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Class of Securities Amount Proposed Proposed Amount of
to be Registered to be Maximum Maximum Registration
Registered Offering Aggregate Fee
Price Per Offering
Security(2) Price
<S> <C> <C> <C> <C>
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Common Stock, par value $0.001 per share(1) 8,791,630 $4.69 $41,232,745 $10,886
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</TABLE>
(1) Represents shares of Common Stock, which may be sold by selling
stockholders. See "Selling Stockholders".
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended. Represents the average of the high and the low
prices of the Common Stock as quoted on the OTC Bulletin Board on
January 3, 2000.
Pursuant to Rule 416 of the Securities Act of 1933, this
registration statement also relates to such additional indeterminate number
of shares of Common Stock as may become issuable pursuant to the
anti-dilution provisions of the warrants held by certain of the selling
stockholders.
The registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to Section 8(a), may determine.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES, NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 10, 2000
CARDIAC SCIENCE, INC.
8,791,630 Shares
Common Stock
-----------
This prospectus relates to 8,791,630 shares of common stock of
Cardiac Science, Inc. which may be offered and sold, from time to time, by
the selling stockholders named in this prospectus. We will not receive any
proceeds from the sale of the shares by the selling stockholders.
Our common stock currently is quoted on the OTC Bulletin Board under
the symbol "DFIB." On December 31, 1999, the last reported sale price of our
common stock on the OTC Bulletin Board was $4.75 per share. We have applied
to have the common stock approved for quotation on the Nasdaq Small Cap
Market.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 TO READ ABOUT THE RISKS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OR THESE SECURITIES OR
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
We will bear all costs and expenses of the registration of the
shares under the Securities Act and certain state securities laws, other than
fees of counsel for the selling stockholders and any discounts or commissions
payable with respect to sales of the shares.
The date of this prospectus is January 10, 2000
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND
THE FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
We have developed proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD-TM-, to be incorporated into devices that
are attached prophylactically to patients determined to be at risk of sudden
cardiac arrest. RHYTHMx ECD enables these devices, such as external
defibrillator monitors and patient monitoring systems, to provide patients
suffering sudden cardiac arrest with potentially lifesaving defibrillation
therapy in as little as 10 seconds without human intervention. We intend to
license RHYTHMx ECD to third parties. We also have designed, are developing,
and intend to market non-invasive automatic external cardiac defibrillation
or "AECD-Registered Trademark-" devices that use RHYTHMx ECD as well as our
other proprietary technology. We believe our proprietary technology will help
to create a new standard of care by significantly increasing the rate at
which patients survive sudden cardiac arrests.
Our first device, the Powerheart, is the only non-invasive external
cardioverter defibrillator device that provides fully automatic detection and
treatment of ventricular tachyarrhythmias for in-hospital patients. In
December 1998, we entered into a five-year exclusive distribution and
licensing agreement with Medtronic Physio-Control, a subsidiary of Medtronic,
Inc. Medtronic Physio-Control will market the Powerheart in the U.S., Canada,
and selected European countries, and also has been licensed to integrate
RHYTHMx ECD into Medtronic's LIFEPAK-Registered Trademark- line of
in-hospital external defibrillators. We also have signed distribution
agreements covering 27 other international markets giving us representation
in 38 countries.
In addition to the Powerheart, we are developing two other products
based on our proprietary technology:
- a fully automatic defibrillator module that is designed to
be embedded and integrated into existing, third party
patient monitoring systems which typically are located in
most acute care areas within hospitals; and
- an automatic, portable, "public-access" external
defibrillator for use by early responders and non-medical
personnel.
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<PAGE>
Our strategy is to rapidly build a large installed base of products
using our proprietary technology through strategic alliances with established
industry leaders and by marketing through country-specific, independent
international distributors. We hope to generate revenue from licensing
RHYTHMx ECD, from selling devices that use our proprietary technology, and
from recurring sales of our single-use, disposable defibrillator pads. Both
the Powerheart and the automatic defibrillator module utilize these
disposable defibrillator pads which, for sanitary, safety, and performance
reasons, must be changed once every 24 hours. Our disposable defibrillator
pads feature our proprietary "smart chip" technology, designed to assure that
only our pads will be used with defibrillator and monitoring devices
utilizing our proprietary technology.
ABOUT US
We were incorporated in the State of Delaware in May 1991. Our
principal executive offices are located at 16931 Millikan Avenue, Irvine,
California 92606. Our phone number is 949-587-0357. Our website address is
cardiacscience.com. The information in our website is not a part of this
prospectus.
AECD, POWERHEART and MDF are our U.S. registered trademarks. AECD,
AECD ELECTRODES, and POWERHEART are our registered trademarks in Great
Britain, France, Japan, and China. Other service marks, trademarks, and trade
names referred to in this prospectus are the property of their respective
owners.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the selling stockholders .......... 8,791,630 shares
Common Stock outstanding prior to the offering ............ 12,031,252 shares
Common Stock outstanding after the offering ............... 12,031,252 shares
OTC Bulletin Board Symbol ................................. DFIB
</TABLE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully review and consider the risks discussed under "Risk Factors" as
well as the other information set forth in this prospectus before buying our
common stock.
3
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial information is derived from our
consolidated financial statements. You should read this summary financial
information in conjunction with "Management's Discussion and Analysis or Plan
of Operation" and the Consolidated Financial Statements and related notes.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
For the Year Ended December 31, September 30,
(Unaudited)
1994(1) 1995(1) 1996(1) 1997 1998 1999 1998
---------- ---------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses $ 454 $ 1,012 $ 827 $ 1,776 $ 3,722 $ 4,821 $ 2,493
---------- ---------- ---------- -------- -------- -------- --------
Loss from continuing (488) (940) (792) (1,781) (3,788) (4,829) (2,510)
operations
Extraordinary loss (245) --- --- --- --- --- ---
Loss from discontinued --- --- --- (44) (651) --- (88)
operations
---------- ---------- ---------- -------- -------- -------- --------
Net loss $ (733) $ (940) $ (792) $(1,825) $(4,439) $(4,829) $(2,598)
---------- ---------- ---------- -------- -------- -------- --------
---------- ---------- ---------- -------- -------- -------- --------
Basic and diluted (loss) per
share:
Continuing operations $ (0.28) $ (0.28) $ (0.23) $ (0.46) $ (0.69) $ (0.52) $((0.47)
Extraordinary loss (0.13)
Discontinued operations --- --- --- (0.01) (0.12) --- (0.02)
---------- ---------- ---------- -------- -------- -------- --------
Net loss per share $ (0.41) $ (0.28) $ (0.23) $ (0.47) $ (0.81) $ (0.52) $ (0.49)
---------- ---------- ---------- -------- -------- -------- --------
---------- ---------- ---------- -------- -------- -------- --------
Weighted average shares used in
Computing net loss per share 1,775 3,327 3,395 3,876 5,460 9,208 5,276
---------- ---------- ---------- -------- -------- -------- --------
---------- ---------- ---------- -------- -------- -------- --------
</TABLE>
(1) restated to give effect to a one-for-11.42857143 reverse stock split of
the issued and outstanding shares of the common stock effectuated in
September 1997.
SELECTED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30, 1999
(Unaudited)
1994 1995 1996 1997 1998 Actual Pro Forma(1)
------ ------ ---- ------ ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $1,950 $1,178 $413 $ 561 $1,248 $4,818 $8,491
Working capital (deficit) 1,767 969 241 (.3) (550) 4,619 7,280
Total assets 2,005 1,230 453 1,784 1,556 6,335 8,997
Long term debt, net of 102 102 --- --- 16 110 110
current portion
Total stockholders' equity 1,712 909 269 697 (288) 4,949 7,610
(deficit)
</TABLE>
(1) on a pro forma basis to give effect to the sale of 786,520 shares of
common stock and issuance of 257,500 shares of common stock for common
stock subscribed at September 30, 1999.
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<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK.
YOU SHOULD CAREFULLY REVIEW AND CONSIDER THE RISKS AND UNCERTAINTIES
DESCRIBED BELOW AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS
BEFORE INVESTING IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY
OCCUR, OUR BUSINESS, FINANCIAL CONDITION, OR OPERATING RESULTS COULD BE
MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON
STOCK COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES, WE EXPECT TO
INCUR LOSSES IN THE FUTURE, AND OUR AUDITORS HAVE EXPRESSED DOUBT AS TO OUR
ABILITY TO CONTINUE AS A GOING CONCERN.
We were formed in 1991 and have been engaged primarily in
organizational activities, research and development, pre-clinical testing,
human clinical trials, and capital raising activities. In February 1994, we
substantially curtailed our operations due to lack of funds. In May 1994, we
temporarily ceased all activities except those related to obtaining
financing. We resumed operations upon the completion of a private placement
financing in September 1994.
We incurred net losses of approximately $4,829,000 for the nine
months ended September 30, 1999, $4,438,700 for the year ended December 31,
1998, and $1,824,600 for the year ended December 31, 1997. As of September
30, 1999, we had an accumulated deficit of $16,047,279, which has since
increased. Except for sales by our former wholly owned subsidiary, Diagnostic
Monitoring, we have not generated any operating revenues to date. The
development and commercialization of our products will require substantial
expenditures for research and development, regulatory clearances, and the
establishment of manufacturing, marketing, and sales capabilities. As a
result, we anticipate that we will continue to incur losses for the
foreseeable future.
We received a report on our consolidated financial statemens from
our independent accountants, PricewaterhouseCoopers LLP, for the year ended
December 31, 1998, that includes an explanatory paragraph expressing
substantial doubt as to our ability to continue as a going concern without,
among other things, obtaining additional financing adequate to support our
research and development activities, or achieving a level of revenues
adequate to support our cost structure.
OUR BUSINESS IS SUBJECT TO FACTORS OUTSIDE OUR CONTROL
Our business may be affected by a variety of factors, many of which
are outside our control. Factors that may affect our business include:
- the success of our product development efforts;
- the success of our marketing campaign;
- competition;
- our ability to attract qualified personnel;
5
<PAGE>
- the amount and timing of operating costs and capital
expenditures necessary to establish our business,
operations, and infrastructure;
- governmental regulation; and
- general economic conditions as well as economic conditions
specific to the medical industry.
OUR PRODUCTS, SOME OF WHICH ARE STILL UNDER DEVELOPMENT, MAY NOT BE READILY
ACCEPTED BY THE MARKET
Although defibrillation techniques are well known within the medical
community worldwide and are considered to be accepted and effective medical
therapy, we can not assure you that the market will recognize the benefits or
the potential applications of our products. Even if we are able to
successfully demonstrate to physicians and potential customers the benefits,
safety, efficacy, and cost-effectiveness of our products, we cannot assure
you that there will be sufficient market acceptance and demand of our
products to allow us to operate profitably.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited manufacturing experience, and no experience in
manufacturing products in the volumes that will be necessary for us to
achieve significant commercial sales. In September 1998, we entered into a
development and manufacturing agreement with Zevex International, Inc., a
contract medical device manufacturer. To date, Zevex's manufacturing
activities for us have been limited to the production of prototype models of
the Powerheart for use in clinical trials. Although Zevex is an established
contract manufacturer, we cannot assure you that Zevex will be able to
provide reliable, high-volume manufacturing at commercially reasonable costs.
Zevex may encounter difficulties in establishing its production capabilities,
including problems involving quality control and assurance, and shortages of
qualified personnel. In addition, Zevex's manufacturing facilities will be
subject to applicable FDA regulations, international quality standards, and
other regulatory requirements. Failure by Zevex or us to maintain our
respective facilities in accordance with FDA regulations, international
quality standards, or other regulatory requirements may result in delays or
termination of production, which could have a material adverse effect on our
business, financial condition, and results of operations.
6
<PAGE>
WE MUST MAINTAIN AND ESTABLISH STRATEGIC ALLIANCES AND OTHER THIRD PARTY
RELATIONSHIPS TO IMPLEMENT OUR BUSINESS STRATEGY
Our strategy for manufacturing, marketing, and distributing our
products is dependent upon forming strategic alliances and relationships with
joint venture partners, contract manufacturers, or other third parties, and
upon the subsequent success of these parties in performing their
responsibilities. We cannot assure you that our existing arrangements or
those, which we may establish in the future will be successful. There would
be a material adverse effect on us if
- any of our existing arrangements are cancelled or are
unsuccessful, and we are unable to secure new alliances in
their place; or
- we are unable to secure additional strategic alliances.
WE MUST COMPLY WITH GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
We are subject to significant regulations by authorities in the
United States and foreign jurisdictions regarding the clearance of our
products and the subsequent manufacture, marketing, and distribution of our
products once approved. The design, efficacy, and safety of our products are
subject to extensive and rigorous testing before receiving marketing
clearance from the FDA. The FDA also regulates the registration, listing,
labeling, manufacturing, packaging, marketing, promotion, distribution,
record keeping and reporting for medical devices. The process of obtaining
FDA clearances is lengthy and expensive, and we cannot assure you that we
will be able to obtain the necessary clearances for marketing our products on
a timely basis, if at all. Failure to receive or delays in receipt of
regulatory clearances would limit our ability to commercialize our products,
which would have a material adverse effect on our business, financial
condition, and results of operations. Even if such clearances are granted by
the FDA, our products will be subject to continual review. Later discovery of
previously undetected problems or failure to comply with regulatory standards
may result in restriction of the product's labeling, a costly and
time-consuming product recall, withdrawal of clearance, or other regulatory
or enforcement action. Moreover, future governmental statutes, regulations,
or policies, or changes in existing statutes, regulations, or policies, may
have an adverse effect on the development, production, or distribution of our
products.
Any regulatory clearance, if granted, may include significant
limitations on the uses for which our products may be marketed. FDA
enforcement policy strictly prohibits the marketing of cleared medical
devices for unapproved uses. In addition, the manufacturing processes used to
produce our products will be required to comply with the Good Manufacturing
Practices or "GMP" regulations of the FDA. These regulations cover design,
testing, production, control, documentation, and other requirements.
Enforcement of GMP regulations has increased significantly in the last
several years, and the FDA has publicly stated that compliance will be more
strictly scrutinized. Our facilities and manufacturing processes and those of
certain of our third party contract manufacturers and suppliers will be
subject to periodic inspection by the FDA and other agencies. Failure to
comply with applicable regulatory requirements could result in, among other
things,
7
<PAGE>
- warning letters,
- fines,
- injunctions,
- civil penalties,
- recalls or seizures of products,
- total or partial suspension of production,
- refusal of the government to grant pre-market clearance or
pre-market approval for devices,
- withdrawal of clearances, and
- criminal prosecution.
To market our products in certain foreign jurisdictions, we (or our
distributors and agents) must obtain required regulatory clearances and
approvals and otherwise comply with extensive regulations regarding safety
and quality. Compliance with these regulations and the time required for
regulatory reviews vary from country to country. We cannot assure you that we
will obtain regulatory clearances and approvals in foreign countries, and we
may be required to incur significant costs in applying for, obtaining, or
maintaining foreign regulatory clearances and approvals.
We have not received FDA clearance to market the commercial version of the
Powerheart in the United States.
We received 510(k) clearance from the FDA for the clinical version of the
Powerheart. In October 1999, we filed an application with the FDA seeking
clearance to market the commercial version of the Powerheart. We cannot
assure you that our recently filed application will be approved in the near
future or at all. We cannot market the Powerheart in the United States until
the application is approved. If our application is not approved, it would
have a material adverse affect on our business.
WE FACE INTENSE COMPETITION
The domestic and international markets for external defibrillators
are highly competitive. Our products will compete with a variety of existing
external defibrillators that are presently in widespread use, including
devices which are designed to automatically perform the diagnosis of the
patient but with which therapy is manually initiated by a trained medical
technician. The external defibrillation market is dominated by
- Medtronic Physio-Control, a wholly-owned subsidiary of
Medtronic, Inc.;
- Hewlett Packard Corporation and its subsidiary,
HeartStream, Inc.; and
- Zoll Medical, Inc.
8
<PAGE>
Other competitors in this market segment include Marquette
Electronics, Inc., SurVivaLink Corporation, and Laerdal Corporation. Many of
the manufacturers of competing external devices
- are well established in the medical device field,
- have substantially greater experience than us in research
and development, obtaining regulatory clearances,
manufacturing, and sales and marketing, and
- have significantly greater financial, research,
manufacturing, and marketing resources than us.
Other companies can develop invasive or non-invasive products
capable of delivering comparable or greater therapeutic benefits than our
products or which offer greater safety or cost effectiveness than our
products. Furthermore, future technologies or therapies developed by others
may render our products obsolete or uneconomical, and we may not be
successful in marketing our products against such competitors.
IF WE SELL OUR PRODUCTS INTERNATIONALLY, WE WILL BE EXPOSED TO NUMEROUS RISK
ASSOCIATES WITH INTERNATIONAL OPERATIONS.
We intend to market our products in international markets.
International operations entail various risks, including
- political instability;
- economic instability and recessions;
- exposure to currency fluctuations;
- difficulties of administering foreign operations generally;
- reduced protection for intellectual property rights;
- potentially adverse tax consequences; and
- obligations to comply with a wide variety of foreign laws
and other regulatory requirements.
WE HAVE LIMITED MARKETING AND SALES CAPABILITIES
We have limited sales and marketing resources. Although our
executive management team has extensive marketing and sales experience in the
cardiology field, we cannot assure you that our marketing and sales efforts
will be successful. We intend to market our products in the United States and
certain foreign countries via a strategic distribution alliance with
Medtronic Physio-Control, Inc. We intend to market our products in other
foreign countries through a network of international distributors, of which
24 distributors have already entered into exclusive, country-specific
agreements. We cannot assure you that we will be able to consummate
additional strategic distribution partnerships with other companies for our
products, or that distributors will devote adequate time or resources to
selling our products.
9
<PAGE>
OUR BUSINESS IS DEPENDENT UPON OUR EXECUTIVE OFFICERS, AND OUR ABILITY TO
ATTRACT AND RETAIN OTHER KEY PERSONNEL
Our success is dependent in large part on the continued employment
and performance of our President and Chief Executive Officer, Raymond W.
Cohen, as well as other key management and operating personnel. The loss of
any of these persons could have a material adverse effect on the business. We
do not have key person life insurance on any of our employees.
Our future success also will depend upon our ability to retain
existing key personnel, and hire and retain additional qualified technical,
engineering, scientific, managerial, marketing, and sales personnel. The
failure to recruit such personnel, the loss of such existing personnel, or
failure to otherwise obtain such expertise would have a material adverse
effect on our business and financial condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS
The testing, manufacturing, marketing and sale of medical devices
subjects us to the risk of liability claims or product recalls. For example,
it is possible that our products will fail to deliver an energy charge when
needed by the patient, or that they will deliver an energy charge when it is
not needed. As a result, we may be subject to liability claims or product
recalls for products to be distributed in the future or products that have
already been distributed. Although we maintain product liability insurance in
the countries in which we intend to conduct business, we cannot assure you
that such coverage is adequate or will continue to be available at affordable
rates. Product liability insurance is expensive and may not be available in
the future on acceptable terms, if at all. A successful product liability
claim could inhibit or prevent commercialization of our products, impose a
significant financial burden on us, or both, and could have a material
adverse effect on our business and financial condition.
OUR TECHNOLOGY MAY BECOME OBSOLETE
The medical equipment and health care industries are characterized
by extensive research and rapid technological change. The development by
others of new or improved products, processes, or technologies may make our
products obsolete or less competitive. Accordingly, we plan to devote
continued resources, to the extent available, to further develop and enhance
our existing products and to develop new products. We cannot assure you that
these efforts will be successful.
WE DEPEND ON PATENTS AND PROPRIETARY RIGHTS
Our success will depend, in part, on our ability to obtain and
maintain patent rights to preserve our trade secrets and to operate without
infringing on the proprietary rights of third parties. The validity and
breadth of claims covered in medical technology patents involve complex legal
and factual questions and therefore may be highly uncertain. We cannot assure
you that
- any additional patents will be issued to us,
- the scope of any existing or future patents will exclude
competitors or provide us with competitive advantages,
10
<PAGE>
- any of our patents will be held valid and enforceable if
challenged, or
- others will not claim rights in or ownership to the patents
and other proprietary rights held by us.
Furthermore, others may have developed or could develop similar products or
patent rights, may duplicate our products, or design around our current or
future patents. In addition, others may hold or receive patents, which
contain claims having a scope that covers products developed by us. We also
rely upon trade secrets to protect our proprietary technology. Others may
independently develop or otherwise acquire substantially equivalent know-how,
or gain access to and disclose our proprietary technology. We cannot assure
you that we can ultimately protect meaningful rights to our proprietary
technology.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS
There has been substantial litigation regarding patent and other
intellectual property rights in the medical device industry. Such litigation,
if it occurs, could result in substantial expense to us and diversion of our
efforts, but may be necessary to
- enforce our patents,
- protect our trade secrets and know-how,
- defend us against claimed infringement of the rights of
others, or
- determine the enforceability, scope, and validity of the
proprietary rights of others.
An adverse determination in any such litigation could subject us to
significant liability to third parties or require us to seek licenses from
third parties. Although patent and intellectual property disputes in the
medical device industry have often been settled through licensing or similar
arrangements, costs associated with such arrangements may be substantial and
could include ongoing royalties. Moreover, we cannot assure you that
necessary licenses would be available to us on satisfactory terms, if at all.
If such licenses cannot be obtained on acceptable terms, we could be
prevented from marketing our products. Accordingly, an adverse determination
in such litigation could have a material adverse effect on our business and
financial condition.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board with relatively
limited trading activity to date. Although we have applied to have the common
stock approved for quotation on the Nasdaq Small Cap Market; we cannot assure
you that the application will be approved. Moreover, we cannot assure you
that an active trading market will develop for our common stock, or that if
one develops, it will be sustained.
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<PAGE>
OUR STOCK PRICE MAY BE VOLATILE
The market prices of many publicly traded companies, including
emerging companies in the health care industry, have been and can be expected
to be highly volatile. The future market price of our common stock could be
significantly impacted by
- future sales of our common stock.
- announcements of technological innovations for new
commercial products by our present or potential competitors,
developments concerning proprietary rights,
- adverse results in our field or with clinical tests,
- adverse litigation,
- unfavorable legislation or regulatory decisions,
- public concerns regarding our products,
- variations in quarterly operating results,
- general trends in the health care industry, and
- factors outside of our control.
WE DO NOT ANTICIPATE PAYING DIVIDENDS
To date, we have not declared or paid dividends on our common stock.
We presently intend to retain earnings, if any, to finance our operations and
do not expect to pay cash dividends on our common stock in the foreseeable
future. The payment of dividends will depend, among other things, upon our
earnings, assets, general financial condition, and upon other relevant
factors.
OUR RIGHT TO ISSUE PREFERRED STOCK COULD ADVERSELY AFFECT COMMON STOCKHOLDERS
Our certificate of incorporation authorizes the issuance of
preferred stock with such designations, rights, and preferences as may be
determined from time to time by our Board of Directors, without any further
vote or action by our stockholders. Therefore, our Board of Directors is
empowered, without stockholder approval, to issue a class of stock with
dividend, liquidation, conversion, voting, or other rights, which could
adversely affect the voting power or, other rights of the holders of our
common stock.
ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions of the Delaware General Corporation Law and our charter
may discourage potential acquisition proposals or delay or prevent a change
of control. See "Description of Capital Stock."
12
<PAGE>
OUR COMMON STOCK IS A "PENNY STOCK"
The Securities and Exchange Commission has adopted regulations which
define a "penny stock" to be any equity security that has a market price of
less than $5.00 per share, subject to certain exceptions, including an
exception for securities authorized for quotation on certain stock exchanges
and on the Nasdaq Small Cap Market. For any transaction involving a penny
stock, the rules require the delivery, prior to the transaction, of a
disclosure schedule prepared by the SEC relating to the penny stock market.
Disclosure also must be made about commissions payable to both the
broker-dealer and the registered representative, and about current quotations
for the security. Finally, monthly statements must be sent disclosing recent
price information for the penny stock held in the account and information on
the limited market in pennystocks. Our common stock currently falls within
the definition of a "penny stock." If our common stock were to continue to
trade below $5.00 per share, the trading market for our common stock would be
materially adversely affected unless an exemption from the penny-stock rules
is available.
FUTURE ISSUANCES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
We have reserved a total of 1,305,000 shares of our common stock for
issuance upon the exercise of options that may be granted under our Amended
1997 Stock Option/Stock Issuance Plan, and a total of 1,742,466 shares of our
common stock for issuance upon the exercise of outstanding warrants to
purchase common stock. The holders of these options or warrants may exercise
them at a time when we would otherwise be able to obtain additional equity
capital on terms more favorable to us. The exercise of these options or
warrants and the sale of the common stock obtained upon exercise would have a
dilutive effect on our stockholders, and may have a material adverse effect
on the market price of our common stock. In addition, the issuance of options
pursuant to our Stock Option Plan may adversely affect our ability to
consummate future equity financings.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT OUR STOCK PRICE
A substantial number of our shares are available for future sale. If
these shares are sold in the public market, it may adversely affect
prevailing market prices for our common stock and could impair our ability to
raise capital through future sales of equity securities. See "Shares Eligible
for Future Sale."
13
<PAGE>
WARNING REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements,
including statements regarding:
- products under development;
- technological and competitive advantages;
- timetable for commercial introduction of our products;
- our ability to improve patient care, increase survival
rates, decrease recovery time, lessen patient debilitation,
and reduce patient care costs;
- markets, demand for our services, purchase orders and
commitments;
- strategic alliances; and
- the competitive and regulatory environment.
These forward-looking statements are based on current expectations
that involve numerous risks and uncertainties. Assumptions relating to the
foregoing involve judgments with respect to, among other things, future
economic, competitive, and market conditions and future business decisions,
all of which are difficult or impossible to predict accurately and many of
which are beyond our control. Although we believe that our assumptions
underlying the forward-looking statements are reasonable, any of the
assumptions could prove inaccurate and, therefore, we cannot assure you that
the results discussed or implied in such forward-looking statements will
prove to be accurate. In light of the significant uncertainties inherent in
such forward-looking statements, the inclusion of such statements should not
be regarded as a representation by us or any other person that our objectives
and plans will be achieved. Words such as "believes," "anticipates,"
"expects," "intends," "may," and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying
such statements. We undertake no obligation to revise any of these
forward-looking statements.
DIVIDEND POLICY
We have never declared or paid dividends, and do not intend to pay
any dividends in the foreseeable future on shares of our common stock. Our
earnings, if any, are expected to be retained for use in expanding our
business. The payment of dividends is within the discretion of our Board of
Directors and will depend upon our earnings, if any, capital requirements,
financial condition, and such other factors as are considered to be relevant
by our Board of Directors from time to time.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September
30, 1999:
- on an actual basis, and
- on a pro forma basis to give effect to the sale (subsequent
to September 30, 1999 and through December 10, 1999 of
786,520 shares of common stock and issuance of 257,500
shares of common stock for common stock subscribed at
September 30, 1999.
<TABLE>
<CAPTION>
September 30, 1999
Actual (1) Pro Forma(1)
----------- ------------
(in thousands)
<S> <C> <C>
Long-term Debt $ 110 $ 110
----------- ------------
Stockholders' equity
Series A preferred stock, $0.01 par value per
share: 1,000,000 shares authorized; none issued
or outstanding, actual; none issued and
outstanding, as adjusted --- ---
Common stock, $0.001 par value per share:
20,000,000 shares authorized; 10,987,232 shares
issued and outstanding, actual; 12,031,252 shares
issued and outstanding, pro forma 11 12
Common stock subscribed 1,011 ---
Additional paid-in capital 19,975 23,645
Accumulated deficit (16,047) (16,047)
----------- ------------
Total stockholders' equity 4,949 7,610
----------- ------------
Total capitalization $ 5,059 $ 7,720
----------- ------------
----------- ------------
</TABLE>
(1) Excludes: (a) an aggregate of 1,742,466 shares purchasable pursuant to
warrants to purchase common stock outstanding as of September 30, 1999;
(b) an aggregate of 1,305,000 shares purchasable pursuant to options
under the Amended 1997 Stock Option/Issuance Plan.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the
symbol "DFIB". The following table sets forth for the periods indicated the
high and low bid quotations for our common stock as reported on the OTC
Bulletin Board. These quotations reflect inter-dealer prices, without retail
mark-up, markdown or commission, and may not necessarily represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
4th Quarter 1999, ended 12/31/99 $5.13 $3.81
3rd Quarter 1999, ended 9/30/99 $5.31 $3.81
2nd Quarter 1999, ended 6/30/99 $4.00 $2.13
1st Quarter 1999, ended 3/31/99 $2.50 $1.63
4th Quarter 1998, ended 12/31/98 $2.50 $1.63
3rd Quarter 1998, ended 9/30/98 $2.38 $1.63
2nd Quarter 1998, ended 6/30/98 $2.38 $1.75
1st Quarter 1998, ended 3/31/98 $2.34 $1.19
4th Quarter 1997, ended 12/31/97 $3.34 $1.25
3rd Quarter 1997, ended 9/30/97 $2.63 $1.26
2nd Quarter 1997, ended 6/30/97 $2.63 $1.49
1st Quarter 1997, ended 3/31/97 $2.63 $1.26
</TABLE>
As of December 31, 1999, there were approximately 688 holders of
record of the our common stock. On December 31, 1999, the last sale price
reported on the OTC Bulletin Board for our common stock was $4.75 per share.
16
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial information is derived from our
consolidated financial statements. You should read this summary financial
information in conjunction with "Management's Discussion and Analysis or Plan
of Operation" and the Consolidated Financial Statements and related notes.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
For the Year Ended December 31, September 30,
(Unaudited)
1994(1) 1995(1) 1996(1) 1997 1998 1999 1998
-------- ---------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses $ 454 $ 1,012 $ 827 $ 1,776 $ 3,722 $ 4,821 $ 2,493
-------- ---------- --------- -------- -------- -------- --------
Loss from continuing
operations (488) (940) (792) (1,781) (3,788) (4,829) (2,510)
Extraordinary loss (245) --- --- --- --- --- ---
Loss from discontinued
operations --- --- --- (44) (651) --- (88)
-------- ---------- --------- -------- -------- -------- --------
Net loss $ (733) $ (940) $ (792) $(1,825) $(4,439) $(4,829) $(2,598)
-------- ---------- --------- -------- -------- -------- --------
-------- ---------- --------- -------- -------- -------- --------
Basic and diluted (loss) per share:
Continuing operations $ (0.28) $ (0.28) $ (0.23) $ (0.46) $ (0.69) $ (0.52) $((0.47)
Extraordinary loss (0.13)
Discontinued operations --- --- --- (0.01) (0.12) --- (0.02)
-------- ---------- --------- -------- -------- -------- --------
Net loss per share $ (0.41) $ (0.28) $ (0.23) $ (0.47) $ (0.81) $ (0.52) $ (0.49)
-------- ---------- --------- -------- -------- -------- --------
-------- ---------- --------- -------- -------- -------- --------
Weighted average shares used in
Computing net loss per share 1,775 3,327 3,395 3,876 5,460 9,208 5,276
-------- ---------- --------- -------- -------- -------- --------
-------- ---------- --------- -------- -------- -------- --------
</TABLE>
(1) restated to give effect to a one-for-11.42857143 reverse stock split of
the issued and outstanding shares of the common stock effectuated in
September 1997.
SELECTED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30, 1999
(Unaudited)
1994 1995 1996 1997 1998 Actual Pro Forma(1)
------- ------- ------- ------- ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,950 $ 1,178 $ 413 $ 561 $ 1,248 $ 4,818 $ 8,491
Working capital (deficit) 1,767 969 241 (.3) (550) 4,619 7,280
Total assets 2,005 1,230 453 1,784 1,556 6,335 8,997
Long term debt, net of 102 102 --- --- 16 110 110
current portion
Total stockholders' equity 1,712 909 269 697 (288) 4,949 7,610
(deficit)
</TABLE>
(1) on a pro forma basis to give effect to the sale of 786,520 shares of
common stock and issuance of 257,500 shares of common stock for common
stock subscribed at September 30, 1999.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
You should read the following discussion and analysis in conjunction
with the financial statements and notes thereto contained elsewhere in this
prospectus. The following information contains forward-looking statements,
which are subject to risks and uncertainties. If one or more of these risks
and uncertainties materialize, actual results may differ from those expressed
or implied by the forward-looking statements.
GENERAL
We have developed proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that
are attached prophylactically to patients determined to be at risk of sudden
cardiac arrest. We commenced operations in May 1991. Until our acquisition of
Diagnostic Monitoring in April 1997, our operations consisted primarily of
research and development activities and clinical FDA testing. Diagnostic
Monitoring manufactured PC-based Holter Electrocardiogram systems and
Ambulatory Holter recorders and distributed these products in over 40
countries. We sold substantially all of the assets of Diagnostic Monitoring
on December 31, 1998 (see note 5 of the consolidated financial statements).
Cardiac arrest is the single largest cause of death in the United
States and Europe. Our mission is to increase the survival rate of cardiac
arrest victims and create a new standard of care through the development and
commercialization of our proprietary technology.
We have three products, two of which are still under development,
that utilize our proprietary technology. Our initial product, the Powerheart,
is a bedside defibrillator-monitor designed for in-hospital use. The
Powerheart attaches prophylactically to at risk cardiac patients for the
purpose of providing fully automatic detection and treatment of
life-threatening tachyarrhythmias that lead to cardiac arrest. The second
product, currently under development, is a fully automatic defibrillator
module that is designed for integration into bedside patient monitoring
systems. Functionally, this module is designed to extend patient monitoring
systems beyond diagnostics to provide patients who suffer life-threatening
tachyarrhythmias with the added protection of automatic therapy delivery
without human intervention. We believe the Powerheart and the automatic
defibrillator module will be ideally suited for hospitalized patients
temporarily at risk of suffering cardiac arrest. The third product, also
currently under development, is a fully-automatic public access defibrillator
that can be used by first responders and other non-technical individuals
outside of the hospital environment.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with the world leader in external defibrillation,
Medtronic Physio-Control, a subsidiary of Medtronic, Inc. Medtronic
Physio-Control will market the Powerheart in the U.S., Canada and selected
European countries, and also has been licensed to integrate RHYTHMx ECD into
Medtronic's LIFEPAK-Registered Trademark- line of in-hospital external
defibrillators. We have signed distribution agreements to date covering 27
other international markets giving us representation in 39 countries.
18
<PAGE>
We have received 510(k) clearance from the U.S. Food and Drug
Administration for the clinical version of the Powerheart and also have
received FDA 510(k) clearance for RHYTHMx ECD, which we plan to integrate
into third-party manufactured bedside monitoring and defibrillator systems.
In October1999, we filed an application with the FDA to market the commercial
version of the Powerheart in the United States.
We have been issued one patent, and have one additional patent under
exclusive license. We are in the process of filing additional patents
relating to our proprietary technology.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Expenses for research and development increased to $2,209,524 for
the year ended December 31, 1998 compared to $756,936 for the year ended
December 31, 1997. This increase was due to engineering and pre-production
costs associated with the commercialization of the Powerheart. Included in
these costs were increases in personnel costs and related fringes, and
payments to independent engineering contractors and Zevex, Inc., our contract
manufacturer.
Marketing expenses increased to $341,476 for the year ended December
31, 1998, compared to $251,777 for the year ended December 31, 1997. The
increase was a result of pre-marketing expenses related to the Powerheart and
the addition of personnel and related fringes.
General and administrative expenses increased to $1,170,551 for the
year ended December 31, 1998, compared to $766,991 for the year ended
December 31, 1997. The increase was a result of expenditures incurred to
support the infrastructure necessary to commercialize the Powerheart and to
begin initial preparations for market release. Expenses, which increased in
1998 as compared to 1997, included personnel costs and related fringes,
insurance premiums for both product liability and directors and officers
insurance, and professional fees.
Net interest expense increased to $65,353 for the year ended
December 31, 1998 as compared to $10,133 for the year ended December 31,
1997. The increase was associated with the debt incurred as a result of the
acquisition of Diagnostic Monitoring, borrowings on the bank line of credit
in 1998 and the debt discount in connection with the issuance of warrants
(see note 10 to the consolidated financial statements).
Interest income was approximately the same at $6,470 for the year
ended December 31, 1998 as compared to $5,886 for the year ended December 31,
1997.
For the year ended December 31, 1998, we incurred a net loss from
continuing operations of $3,787,704, as compared to $1,780,751 for the year
ended December 31, 1997. The increased loss for the year ended December 31,
1998 was primarily attributable to the increases in operating expenses, which
included expenses incurred in commercializing the Powerheart.
19
<PAGE>
On December 31, 1998 we sold substantially all of the assets of
Diagnostic Monitoring. We have restated our prior financial statements to
present the operating results of Diagnostic Monitoring as a discontinued
operation (see note 5 of the consolidated financial statements). For the year
ended December 31, 1998, we incurred a net loss from discontinued operations
of $101,412 as compared to $43,847 for the year ended December 31, 1997. We
also recognized a loss on the sale of Diagnostic Monitoring's assets of
$549,618. This non-cash loss primarily was attributable to the write off of
goodwill associated with the original purchase of Diagnostic Monitoring.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998
Research and development expenses increased to $1,126,098 and
$2,795,408, respectively, for the three and nine months ended September 30,
1999, from $436,430 and $1,416,229, respectively, for the three and nine
months ended September 30, 1998. These increases were due to engineering and
pre-production costs associated with the commercialization of the Powerheart.
Included in these costs were increases in personnel costs and related
fringes, and costs associated with independent engineering contractors.
Marketing expenses increased to $252,871 and $932,792, respectively,
for the three and nine months ended September 30, 1999, from $82,460 and
$204,454, respectively, for the three and nine months ended September 30,
1998. The increases were a result of pre-marketing expenses related to the
Powerheart including costs associated with the development of marketing
literature and the addition of personnel and related fringes.
General and administrative expenses increased to $342,917 and
$1,092,542, respectively, for the three and nine months ended September 30,
1999, from $264,083 and $872,483 for the three and nine months ended
September 30, 1998. The increases in expenses for the quarter and nine months
ended September 30, 1999 as compared to the same periods in 1998 included
personnel costs and related fringes, consulting and professional fees.
Interest expense, net, decreased to $2,918 and $6,550 for the three
month and year to date period ended September 30, 1999 as compared to $5,645
and $14,771, respectively, for the same periods in the prior year due to the
reduction of the bank line of credit and investment of the proceeds from
private placements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had cash and cash equivalents of
$4,818,475 and working capital of $4,618,996 as compared to cash and cash
equivalents of $1,247,602 and negative working capital of $549,898 at
December 31, 1998. From inception, our sources of funding for operations were
derived from equity placements aggregating approximately $21 million. We have
incurred losses of $16,047,279 since inception, and we expect to incur
substantial additional operating losses as a result of expenditures related
to marketing and sales efforts, research and product development activities,
and costs associated with the commercialization and product rollout of the
Powerheart. The timing and amounts of these expenditures will depend upon
many factors, some of which are beyond our control.
20
<PAGE>
We have raised approximately $10.3 million in a series of private
equity placements for the nine-month period ending September 30, 1999. In
connection with these private placements we paid certain fees and expenses.
Additional capital will be needed to fulfill our marketing, research and
product development goals. Successful completion of our development program
for our products and transition to attain profitable operations is dependent
upon achieving a level of revenues adequate to support the required cost
structure.
We anticipate that the current cash balance and the anticipated
collection of subscriptions receivable will be sufficient to meet our cash
requirements into April 2000. Additional capital will be necessary to ensure
our viability. In this respect, we are considering a number of alternatives,
including additional equity financings and corporate partnerships. We cannot
assure you that any such transactions will be available on terms acceptable
to us, if at all, or that any financing transaction will not be dilutive to
current stockholders. We also cannot assure you that we will have sufficient
working capital to fund future operations. If we are not able to raise
additional funds, we may be required to significantly curtail or cease our
operating activities. The accompanying financial statements have been
prepared assuming that we will continue as a going concern.
NET OPERATING LOSS CARRYFORWARDS
We had approximately $10,110,000 of federal net operating loss
carryforwards and $2,875,000 of California net operating loss carryforwards
at December 31, 1998 which will begin to expire in 2007 and 1999,
respectively. We had deferred tax assets of $4,181,335 at December 31, 1998.
We have established a valuation allowance to fully offset the deferred tax
assets.
YEAR 2000 ISSUE
Many companies will face potentially serious information systems
(computer) problems because many software applications and operational
programs written in the past may not properly recognize calendar dates
beginning in the Year 2000. This problem could force computers to either shut
down or provide incorrect information and could result in an inability to
process transactions or engage in normal business activities. Based on a
recent assessment, we believe that the software we use will not be impacted
by the Year 2000 issue. We believe that our existing information systems
equipment, primarily composed of personal computers, are Year 2000 compliant.
In addition, we believe the Powerheart and RHYTHMx ECD are Year 2000
compliant. We have received confirmation from our major vendors that they are
Year 2000 compliant. Costs spent to date on the Year 2000 issue are minimal
and we do not expect to incur additional costs which would be considered
material. If we determine that a particular vendor will be impacted by this
problem, we may attempt to identify additional or replacement vendors, which
could delay accessibility of the products or services provided by such
vendors. A delay or failure to identify an additional or replacement vendor
could have a material adverse effect on our business, operating results and
financial condition.
21
<PAGE>
BUSINESS
We have developed proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that
are attached prophylactically to patients determined to be at risk of sudden
cardiac arrest. RHYTHMx ECD enables these devices to provide patients
suffering sudden cardiac arrest with potentially lifesaving defibrillation
therapy in as little as 10 seconds without human intervention. We intend to
license RHYTHMx ECD to third parties. We also have designed, are developing,
and intend to market non-invasive automatic external cardiac defibrillation,
or "AECD," devices that use RHYTHMx ECD as well as our other proprietary
technology.
Our first device, the Powerheart, is the only non-invasive external
cardioverter defibrillator device that provides fully automatic detection and
treatment of ventricular tachyarrhythmias for in-hospital patients. In
addition to the Powerheart, we are developing two other products based on our
proprietary technology:
- a fully automatic defibrillator module which is designed to
be embedded and integrated into existing, third party
patient monitoring systems which typically are located in
most acute care areas within hospitals; and
- an automatic, portable, "public-access" external
defibrillator for use by early responders and non-medical
personnel.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with Medtronic Physio-Control, a subsidiary of
Medtronic, Inc. Medtronic Physio-Control will market the Powerheart in the
U.S., Canada, and selected European countries, and also has been licensed to
integrate RHYTHMx ECD into Medtronic's LIFEPAK-Registered Trademark- line of
in-hospital external defibrillators. We also have signed distribution
agreements covering 27 other international markets giving us representation
in 38 countries.
BACKGROUND
The American Heart Association ("AHA") and numerous clinical
researchers have established that a patient's chance of survival decreases by
approximately 10% or more each minute after the onset of cardiac arrest.
Early defibrillation is the most critical factor in patient survival.
Clinical studies have shown that the average survival rate of
patients who have had an in-hospital cardiac arrest is about 15% -- a rate,
which has not improved since the 1960's. The AHA has acknowledged that it has
under-emphasized the role of prompt defibrillation. The AHA and some of the
world's major resuscitation councils have determined that prompt
defibrillation is the single most important therapy for the treatment of
cardiac arrest. Studies have documented in-hospital delays of more than five
minutes between recognition of cardiac arrest and first defibrillation.
Immediate defibrillation means a significantly greater chance of survival and
reduced damage to the heart and other vital organs (including the brain),
which may result in less debilitation and more rapid recovery. Clinical
studies where defibrillation was administered in under one minute have shown
survival rates in excess of 90%.
22
<PAGE>
ELECTROCARDIOGRAM BASICS
The heart is divided into four chambers. The two upper chambers that
take blood in from the body are called the left and right atria. The two
lower chambers that pump blood out are known as the left and right
ventricles. For the heart to operate properly, different parts of the heart
must contract in the proper sequence and certain parts, such as the
ventricles, must contract simultaneously. The pumping action of the heart is
managed by conductive fibers that "wire" the heart electrically. A normally
beating heart produces a series of regular electrical events.
Unfortunately, the heart does not always function in an organized
manner. Due to disease or other unknown causes, the wiring of the heart can
lose control of the ventricular contractions. When this occurs, the signal to
contract is processed unevenly through the heart muscle rather than through
the normal conduction path, resulting in an unstable cardiac rhythm. This
generates abnormal contractions of the heart known as "arrhythmias." While
not all arrhythmias are life threatening, the most common life-threatening
arrhythmias are ventricular tachycardia and ventricular fibrillation.
- VENTRICULAR TACHYCARDIA. This occurs when electrical
disturbances cause a dangerously fast heart rate. The
increased heart rate and the uneven nature of the
contractions reduce the delivery of blood and oxygen to the
brain and body. This can result in unconsciousness, and may
lead to ventricular fibrillation (described below) and
subsequent death if left untreated. Ventricular tachycardia
may be treated with drugs, by a procedure called pacing, or
by electrical shock called "cardioversion." Cardioversion
depolarizes the entire heart causing the heart to "reset."
It is appropriate when the ventricular tachycardia rate is
very fast. Termination of the abnormal contractions returns
the cardiac rhythm back to normal.
- VENTRICULAR FIBRILLATION. This is a condition in which many
different locations of the heart contract at an extremely
disorganized and rapid rate of 150 to 500 beats per minute.
These different, rapid impulses cause an irregular and
chaotic cardiac rhythm with little or no delivery of blood
and oxygen to the brain and body. In this condition, a
patient will quickly lose consciousness and die within
minutes unless the rhythm is terminated by an electrical
shock. This shock is called defibrillation.
23
<PAGE>
IMPORTANCE OF EARLY DEFIBRILLATION
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% (or higher) decline in a patient's chance of survival
with each passing minute. If defibrillation is delayed longer than 10 to 12
minutes, there is little probability of survival. The following graph from
the Textbook of Advanced Cardiac Life Support, published by the AHA in 1994,
illustrates resuscitation rates after defibrillation within the first ten
minutes following the onset of ventricular fibrillation.
[GRAPH]
CURRENT MODES OF TREATMENT
- IMPLANTABLE CARDIOVERTER DEFIBRILLATOR OR "ICD" DEVICES.
These devices, which are both automatic and ambulatory, are
implanted into patients at chronic risk for cardiac arrest.
An ICD device is a complex electronic instrument, consisting
of a heart monitor and defibrillator module, 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,
the defibrillator delivers an electrical charge through the
heart that provides nearly instantaneous reversion to normal
heart rhythm. ICD devices are invasive and the procedure
costs well over $40,000.
- EXTERNAL DEFIBRILLATORS. These are widely used to treat
patients in cardiac arrest. One type of device is the
manual defibrillator, which requires highly skilled medical
personnel (e.g., a physician or paramedic) to analyze and
interpret the patient's electrocardiogram to determine if
defibrillation is required and, if it is, to manually
administer the electrical shock. Recently, more sophisticated
semi-automatic 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 medical staff to administer the shock. The common
denominator among these existing devices is that they require
the intervention of a trained medical technician to
administer the shock.
24
<PAGE>
OUR PROPRIETARY SOFTWARE
We have developed a proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that
are attached prophylactically to patients determined to be at risk of sudden
cardiac arrest. RHYTHMx ECD enables these devices, such as external
defibrillator-monitors and patient monitoring systems, to deliver potentially
life saving defibrillation therapy, in as little as 10 seconds, without the
need for human intervention. It allows patient specific parameters to be
programmed into the device's microcomputer in accordance with the physician's
instructions. We received FDA clearance for RHYTHMx ECD in August 1998.
To analyze a patient's heart rhythm, RHYTHMx ECD detects and
captures the electrical signal produced by the heart's activity. The incoming
signal is sampled every two milliseconds-- i.e., 2/1000th of a second. This
signal is filtered, manipulated, and processed mathematically to produce
meaningful and reliable data for analysis. The primary parameter in
determining if a rhythm is shockable or not is the rate at which electrical
events occur. This rate is called the Shockable Tachyarrhythmia Detection
rate or simply the "detection rate." Analysis of the detection rate occurs on
a continuous basis.
RHYTHMx ECD is capable of distinguishing between unusually fast
"normal" rhythms and abnormal rhythms (e.g., ventricular tachyarrhythmias),
the latter of which requires electrical shock. This feature is called
Modulation Domain Function or "MDF-Registered Trademark-." MDF uses
sophisticated morphology differentiation techniques designed to reduce the
probability of mistakenly delivering defibrillation therapy for rapid, albeit
normal, heart rhythms.
When a device utilizing RHYTHMx ECD is ready to deliver a shock, it
first verifies that the defibrillation pads are properly attached to the
patient, that it can safely deliver the shock, and that the rhythm is still
shockable. If the life-threatening rhythm has changed on its own and no
longer requires a shock, the device safely disposes of the charge within the
device itself. After the shock is delivered, the device quickly re-acquires
the electrocardiogram signal and resumes analysis of the resulting rhythm. If
the life-threatening rhythm continues, the devise recharges and causes
another shock to be delivered, if so programmed. If the shock restores a
normal rhythm, the device waits for one minute, then resets to the beginning
of its therapy sequence. Should the abnormal rhythm recur during this one
minute interval, the device continues therapy by delivering the next
programmed shock.
RESEARCH AND CLINICAL RESULTS
To validate the safety and efficacy of our technology, a
multi-center clinical trial using the Powerheart was conducted between
February 1993 and May 1997. The trial was divided into two phases. Phase I
tested the tachyarrhythmia detection and discrimination algorithm. Phase II
tested the entire system including both the arrhythmia analysis algorithm and
the prototype Powerheart shock delivery system in which RHYTHMx ECD had been
embedded. In the Phase II trial, patients attached to the Powerheart were
studied in either the electrophysiology lab or in the critical care unit. A
total of 155 patients were enrolled.
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<PAGE>
Phase II data was collected from a total of 104 patients at the
following medical centers: Arizona Heart Institute, University of
California-Irvine Medical Center and the University of Southern California
Medical Center. The Powerheart was utilized for 1,216 hours during this study.
Overall results from both phases of the clinical trial found that:
- Powerheart had
* a SENSITIVITY of 100% -- i.e., it correctly
identified shockable episodes, and
* a SPECIFICITY of 99.5% -- i.e., it did not allow a
non-shockable rhythm to be shocked in 99.5% of the
episodes:
- the average time to first shock using Powerheart was
approximately 21 seconds, and
- normal rhythm was restored by the first shock with the
Powerheart in 96.2% of the cases.
The table below presents performance data for the Powerheart in
relation to AHA-recommended goals. As illustrated, the Powerheart exceeded
both stipulated AHA performance goals.
<TABLE>
<CAPTION>
-------------------------------------------------------------
AHA'S HIGHEST GOALS POWERHEART PERFORMANCE
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Shockable Sensitivity > 90.0% 100.0%
- -----------------------------------------------------------------------------------------------------------
Nonshockable Specificity > 99.0% 99.5%
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Source: Cardiac Science 510(k) submission
PRODUCTS
We have designed three products that use our proprietary software.
Our initial product, the Powerheart, is a defibrillator-monitor designed for
in-hospital use. We received 510(k) clearance for the clinical version of the
Powerheart in late 1997 and began shipping the product in the fourth quarter
of 1999 to Medtronic Physio-Control at their European headquarters located in
the United Kingdom. We plan to continue shipments of the Powerheart to our
European distributors and will begin shipments to Medtronic Physio-Control in
the United States when we receive FDA clearance for the commercial version of
the Powerheart. The second product, currently under development, is on
automatic defibrillator module designed for integration into existing third
party patient monitoring systems. The third product, also under development,
is a fully automatic public access defibrillator for use by first responders
and non-technical personnel outside the hospital environment.
POWERHEART (HOSPITAL BEDSIDE DEFIBRILLATOR-MONITOR)
The Powerheart utilizes RHYTHMx ECD to monitor in-hospital patients
at high risk of
26
<PAGE>
cardiac arrest and to immediately treat life-threatening arrhythmias when
they occur. Use of the Powerheart obviates the need for human intervention
and provides defibrillation in as little as 10 seconds.
The Powerheart is a non-invasive device attached externally to the
patient's chest via disposable electrodes and disposable defibrillator pads.
Patient-specific parameters are programmed into its microcomputer in
accordance with the physician's instructions. The Powerheart then
continuously monitors the patient's cardiac activity and, if it detects a
life-threatening abnormality, transmits a defibrillation shock within
seconds, without human interaction, to convert the patient's heart rhythm
back to normal.
In clinical trials, the average response time for the Powerheart to
deliver a defibrillation shock was 21 seconds as compared to approximately
five to seven minutes with the current standard of care. It is widely
recognized that the most effective way to increase survival from sudden
cardiac arrest is to reduce time to defibrillation.
We believe that implementation of the Powerheart in a hospital
environment will result in an increase in the quality of care with a
simultaneous reduction in patient care costs. Many patients suspected to be
at risk of cardiac problems are admitted to a cardiac care unit for no reason
other than the ability to receive prompt defibrillation therapy in the event
of cardiac arrest. For these patients, the Powerheart provides yet another
advantage. These patients may be attached to a Powerheart and then moved down
to a less expensive monitoring unit or even a standard hospital bed. This
would allow for more cost-effective use of cardiac care beds, and would
provide appropriate care when the critical care unit becomes overcrowded.
The Powerheart can be wall mounted or attached to a mobile "pole
cart." Moreover, it can be used when patients are being transported within
the hospital. In addition to the RHYTHMx ECD, the device includes the
following components:
- RHYTHM ANALYSIS SYSTEM - This system assesses the patient's
electrocardiogram to determine when therapy is appropriate
based upon parameters set by the patient's physician. ECG
signals are sensed by ECG electrodes placed on the
patient's chest. The signal is amplified and filtered by an
electrical analog circuit, digitized, and then analyzed by
RHYTHMx ECD to determine when defibrillation therapy is
appropriate.
- DEFIBRILLATOR - The Powerheart uses electrical circuitry
that provides an AAMI (Association for the Advancement of
Medical Instrumentation) standard waveform for
defibrillation. These waveforms are used by a majority of
defibrillators on the market and have the longest proven
performance record.
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<PAGE>
The Powerheart can be programmed to initially deliver a low
amount of electrical energy and then provide progressively
greater amounts of energy, if needed, to restore the
patient's heart to its normal rhythm. The maximum energy
that can be delivered by the Powerheart is 360 joules, the
limit recommended by the AHA.
- DEFIBRILLATION PADS - The Powerheart uses our proprietary,
self-adhesive, single use, disposable defibrillation pads.
These proprietary pads are manufactured by a third party to
our specifications. They must be replaced on a daily basis
for sanitary, safety, and performance reasons.
- DATA STORAGE - The device stores real-time ECG data on a
real-time basis in digital form. In addition, a strip chart
recorder automatically prints real-time ECG and relevant
device data during significant detected events.
- USER INTERFACE - Operating modes and patient-specific
parameters for rhythm analysis are programmed via the user
interface. The Powerheart has a liquid crystal display that
indicates real-time patient ECG data as well as device
settings.
- DATA RETRIEVAL SOFTWARE - This software, which runs on a
personal computer, is used to access data stored by the
Powerheart. The data can be viewed on a monitor and printed
on a standard high-resolution printer. These capabilities
enable valuable post-facto analysis of the patient's rhythm
and the device's operations.
The Powerheart is capable of providing as many as nine
defibrillation shocks of up to 360 joules for each life-threatening
ventricular tachyarrhythmia event. The Powerheart's unique protection is
available to the patient throughout the period of high risk, whether the
duration is hours, days, or weeks.
The Powerheart runs on standard AC power, but also has a backup
battery that provides up to one hour of freestanding use. This battery is
recharged automatically whenever the Powerheart is plugged in so that it is
always ready for use. The battery provides reliable backup in case of a power
outage and allows the Powerheart to go with the patient should the patient
need to be moved.
Besides the disposable defibrillation pads attached to the patient,
four additional monitoring electrodes also are attached which provide up to
three separate ECG signals (channels) for analysis. These additional channels
provide the physician with the ability to select and change the channel of
ECG to be analyzed. Once the electrodes are attached, the operator can
program the Powerheart according to the physician's specification. The
Powerheart automatically verifies hook-up quality. Assuming the patient is in
a normal rhythm, the operator can proceed to program the device and commence
automatic analysis.
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<PAGE>
During the monitoring period, the Powerheart can communicate with
the medical staff in a variety of ways. The ECG is always available for
review on the Powerheart's liquid crystal display. This display provides
important patient ECG information regarding heart rate and rhythm. The
printer will provide hard copy documentation in standard ECG "strip chart"
format. These strips are printed automatically during a cardiac event. They
also may be printed whenever the operator desires. The Powerheart also stores
patient data and events in its non-volatile flash memory. This data can be
output to a personal computer for detailed review and/or printing. In the
case of a cardiac event or any situation requiring operator attention, the
Powerheart can alert the operator through an appropriate combination of
visual alarms, audible alarms, and voice prompts.
The Powerheart can be programmed to operate in three different
modes: manual, advisory, and fully automatic.
- MANUAL MODE. In this mode, the Powerheart functions as a
standard manual defibrillator. The operator selects the
shock energy, charges the device, and manually delivers the
shock.
- ADVISORY MODE. In this mode, the Powerheart provides the
automatic analysis and will automatically prepare to shock
a shockable rhythm. However, the operator must interact
with the device before a defibrillation shock will be
delivered to the patient, and
- FULLY AUTOMATIC MODE. This is the primary intended mode of
operation for the Powerheart. The automatic mode of the
Powerheart delivers optimal benefits to the patient and
healthcare provider in terms of its instant analysis and
rapid response features.
The table below compares the Powerheart to existing semi-automatic
external defibrillators used in most hospitals.
<TABLE>
<CAPTION>
CAPABILITY POWERHEART STANDARD HOSPITAL DEFIBRILLATOR
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Indication for use Patients at risk for cardiac arrest Patient is unconscious, has no pulse
and is not breathing
Conditions for attachment Normal rhythm Patient assumed to be in ventricular
tachycardia or Ventricular fibrillation
Time to first defibrillation 21 seconds (average) 5 - 7 minutes
Unattended use Yes No
Automatic shock Yes No
Prophylactic Monitoring Yes No
Signal interference Designed to reject signal interference Not suitable for patients that are
and allow patient motion moving or being moved
Length of use Long-term For emergencies only
Accuracy-- Specificity: >99.0% >99.0%
Sensitivity: >99.0% 75.0%-95.0%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
AUTOMATIC DEFIBRILLATOR MODULE (PATIENT MONITORING MODULE)
The Automatic Defibrillator Module currently under development is
being designed for integration into patient monitoring systems. Our
conceptual model of the Automatic Defibrillator Module includes RHYTHMx ECD
embedded in a high voltage defibrillator module. Functionally, the Automatic
Defibrillator Module extends the capabilities of patient monitoring systems
beyond diagnostics to delivering therapy automatically and without human
intervention. We believe the Automatic Defibrillator Module will enable a
patient monitoring system to accurately and instantly detect the onset of
ventricular tachyarrhythmias, discriminate between a shockable and
non-shockable rhythm, and direct the high voltage defibrillator module to
automatically deliver a therapeutic shock without the need for human
intervention. This therapeutic shock is expected to convert a patient's heart
rhythm back to normal within seconds of the onset of the event.
PUBLIC ACCESS DEFIBRILLATOR
Individuals experiencing cardiac arrest need immediate
defibrillation wherever the event occurs. Short of having a defibrillator
attached to them in advance of an event, the best public alternative is to
have one immediately available. This is the concept behind the automated
external defibrillator or public access defibrillator. Since 1994, the AHA
has focused on early defibrillation and has urged making these devices widely
accessible. The market for these devices includes
- first responders (i.e., EMTs, fire trucks, police cars),
- the clinical segment (i.e., out-patient clinics, doctor and
dentist offices),
- the industrial segment (i.e., stadiums, commercial
airlines, office buildings, retirement homes, health clubs
and golf courses), and
- numerous other market sectors (i.e., home, military and
other places where the public gathers).
We have developed a conceptual model of our public access
defibrillator. We intend to design our device to be small, lightweight,
portable, battery-operated and easy-to-use. In addition, it is anticipated
that this device will include our RHYTHMx ECD and the more traditional
semi-automatic rhythm analysis. Other anticipated features will include
state-of-the-art optimized low energy defibrillator waveform, voice prompts
to assist users, disposable defibrillator pads, data recording, storage and
retrieval, and self-test capabilities.
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<PAGE>
MARKETING STRATEGY
We believe that the key to adoption of our products will be a
combination of market awareness and clinical experience with the products. To
this end, we plan to initiate a multi-center study for the purpose of
validating patient benefits and associated cost advantages of the Powerheart
as compared to the current standard of care. We believe that the commercial
success of the Powerheart will require active marketing, education and sales
efforts to create market awareness of the product. We believe that decisions
to purchase our products generally will be made by cardiologists,
cardiovascular specialists (including those specializing in electrophysiology
and arrhythmia control), internists, nursing staffs, administrators and other
hospital personnel involved in product procurement and cost-benefit analysis.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with Medtronic Physio-Control, a subsidiary of
Medtronic, Inc. Medtronic Physio-Control is the world market leader in
external defibrillation with an estimated 50% market share worldwide. Under
the original agreement, Medtronic Physio-Control was to market the Powerheart
on an exclusive basis in the United States and Canada. In May 1999, the
agreement was expanded to include the United Kingdom, Germany, France, and
certain Scandinavian countries.
North American exclusivity is conditioned upon Medtronic
Physio-Control purchasing an aggregate of 14,000 Powerhearts or RHYTHMx ECD
software packages for incorporation into their own defibrillator monitor
products over the five-year term. Exclusivity in certain European countries
is conditioned upon Medtronic Physio-Control purchasing an aggregate of 2,175
Powerhearts or RHYTHMx ECD software packages over the five-year term. The
first year's minimum purchase commitment is 1,000 units for North America and
225 units for the certain European countries.
We plan to extend our international market coverage by establishing
a network of qualified international distributors managed by our employees on
a country-specific basis. As of December 1999, we had signed exclusive
distribution agreements for the following 27 international markets: China,
Korea, Taiwan, Australia, Italy, Spain, Portugal, Greece, Turkey, Argentina,
Brazil, Chile, Peru, Panama, Columbia, Venezuela, Mexico, Uruguay,
Hungary,Czech, Poland, Lithuania, Egypt, Saudi, Jordan, Pakistan, and Kuwait.
These agreements call for minimum purchase commitments in order for the
distributor to maintain exclusivity. We currently are negotiating with other
international distributors interested in marketing the Powerheart in the
remaining targeted markets.
MANUFACTURING
In September 1998, we entered into a development and manufacturing
agreement with Zevex International, Inc., a contract medical device
manufacturer to manufacture the commercial version of the Powerheart. The
agreement is a two-phase agreement:
- to develop and fabricate prototypes of the Powerheart; and
- to manufacture the commercial version of the Powerheart.
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<PAGE>
The term of the agreement is five years with three successive
options to extend the term of the agreement for a period of one additional
year each. Compensation for development fees included 90,000 shares of our
common stock and $339,360 payable upon completion of certain milestones.
The first phase was completed in October 1999. During the
manufacturing phase, we are required to provide Zevex with a six month
rolling forecast of our production needs, with a firm commitment to purchase
our initial three month product forecast. The development fees we paid to
Zevex have been expensed as part of the development phase of the contract.
The amounts expensed were $459,360 for the year ending December 31, 1998, $0,
during the quarter ending March 31, 1999, $74,063 for the quarter ending June
30, 1999, and $221,824 for the quarter ending September 30, 1999.
The materials to be used in manufacturing the Powerheart will
consist primarily of electronic, mechanical, and electromechanical components
that generally are available from various vendors and suppliers. However,
certain components require customization, could require considerable
lead-time, and their availability can not be assured. We intend to warehouse
necessary components to meet our monthly production requirements and to carry
an adequate inventory of finished goods to meet expected customer demand.
The FDA and foreign counterparts conduct periodic inspections of
manufacturing facilities 1to ensure compliance with "Quality System
Regulations," "Good Manufacturing Practices" and other regulations, such as
those promulgated by the International Standards Organization. Any concerns
raised by such inspections could result in regulatory action, delays, or
termination of production.
COMPETITION
To our knowledge, the Powerheart is the only external defibrillator
device that provides fully automatic detection and treatment of ventricular
tachyarrhythmias for in-hospital patients at risk of sudden cardiac arrest.
The Powerheart may compete with a variety of semi-automatic and manual
defibrillators presently in use which are marketed by Medtronic
Physio-Control, Hewlett Packard Corporation, and Zoll Medical, Inc. The
products sold by these companies require a trained medical technician to
deliver defibrillation therapy. Our products also may compete with products
from other companies, such as Heartstream, Inc. (a division of Hewlett
Packard), SurVivaLink, Inc., and Laerdal Corporation.
We believe our products will not compete with implantable
cardioverter or "ICD" devices --i.e., miniature cardioverter devices
permanently implanted in a patient's chest. Our products may be utilized by
patients waiting for implantable cardioverter device surgery or patients
temporarily unable to risk such surgery.
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INTELLECTUAL PROPERTY
We believe that our patent and trademark rights are valuable. We
also believe that our trade secrets, proprietary technology, and our ability
to develop a market for our products may be equally valuable. On December 12,
1995, the U.S. Patent and Trademark Office issued Patent No. 5,474,574 titled
"Automatic External Cardioverter Defibrillator." In general this patent
relates to a cardiac monitoring and defibrillation system which may be
embodied as a bedside unit or an ambulatory unit. The system includes
amplification and processing circuitry, which receives and conditions inputs
from a variety of sensing means such as an ECG. A noise and artifact filter
discrimination procedure is employed to prevent erroneous detection of the
onset of cardiac arrhythmias.
Based on these signals, the system automatically delivers or
withholds therapy according to parameters selected by the physician. A
microprocessor controls therapeutic electrical stimuli, which may be
delivered to a patient in accordance with a cardioverter/defibrillator step
therapy method. The microprocessor may be operated or programmed by means of
a control panel or external programming and monitoring unit. In one
embodiment, the system includes a bi-directional communication link, which
allows the microprocessor to be monitored and programmed by a physician at a
remote location. Furthermore, the system provides a method for detecting
cardiac arrhythmias and distinguishing between the different types of
arrhythmias, which may be detected. The inventors have assigned to us their
rights under the patent on a royalty-free basis.
In December 1993, we obtained an exclusive license to make, have
made, use and sell products covered by U.S. Patent No. 4,576,170, issued on
March 18, 1986, and titled "Heart Monitor and Defibrillator Device." We
believe that this patent relates to one or more of our products. Under this
license, we are required to pay royalties based upon sales of products
covered by the patent including minimum annual royalties, currently at the
rate of $20,000 per year, until expiration of the patent.
The U.S. Patent and Trademark Office has granted us registration of
the "AECD," "POWERHEART" and "MDF" marks. We have filed a trademark
application with the U.S. Patent and Trademark Office for the "AECD
ELECTRODES" mark. Additionally, Great Britain, France, Japan and China have
granted us registration of the "AECD," "AECD ELECTRODES" and "POWERHEART"
marks. Applications are pending in certain other foreign countries for the
registration of these marks.
In 1992, we were assigned all of the rights and titles to, and
interest in, 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., one of our
principal stockholders. The assignment excluded any such rights and
technology to the extent they have been used in the past or are presently
being used in the manufacture of Medstone's lithotripsy products, used for
the non-invasive disintegration of kidney stones.
33
<PAGE>
GOVERNMENT REGULATION
In the United States, clinical testing, manufacturing, packaging,
labeling, promotion, marketing, distribution, registration, record keeping
and reporting, clearance or approval of medical devices generally are 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 we believe cover our products, are subject
to the most stringent controls.
In October 1997, we received 510(k) clearance from the FDA to market
the clinical version of the Powerheart in the United States. In August 1998,
we received 510(k) clearance from the FDA to market RHYTHMx ECD and to
integrate it into other stand-alone defibrillator monitors. In October 1999,
we filed an application with the FDA seeking clearance to market the
commercial version of the Powerheart in the United States. Our products will
be subject to FDA review of labeling, advertising and promotional materials,
as well as record keeping and reporting requirements.
Failure to comply with any of the FDA's requirements, or the
discovery of a problem with any of the products, could result in FDA
regulatory or enforcement action. Further, any changes to the products or
their labeling may require additional FDA submissions, review, clearance or
approval.
EMPLOYEES AND CONTRACT ENGINEERS
As of December 31, 1999, we had 43 full-time employees and seven
contract engineers, of which a total of 25 employees and contract engineers
supported our research and development activities. None of our employees are
represented by a collective bargaining arrangement and we believe our
relationship with our employees is satisfactory. We intend to add additional
personnel as we implement our business strategy.
FACILITIES
We currently lease approximately 5,400 square feet of space in
Irvine, California, which comprise our executive offices, engineering
facility, and software and hardware laboratories. The annual rental for these
facilities is approximately $67,200 with the term of the lease expiring in
April 2000. We entered into a five-year lease for a 19,000 square foot
building with approximately 10,000 square feet of warehouse space beginning
in September 1999. The new location is located in Irvine, California. We
moved into this facility in December 1999. The annual rental for the new
facility is $183,000.
LEGAL PROCEEDINGS
We currently are not involved in any legal proceedings.
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<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position and Offices with the Company
---- --- -------------------------------------
<S> <C> <C>
Raymond W. Cohen 40 President, Chief Executive Officer and Director
Brett L. Scott 49 Chief Financial Officer and Secretary
Dongping Lin 41 Chief Technical Officer
Michael Gioffredi 48 Vice President of Sales and Marketing
Jeffery Blanton 43 Vice President of Operations
Paul D Quadros 52 Director
Peter Crosby 47 Director
Howard Evers 51 Director
</TABLE>
RAYMOND W. COHEN has served as our President, Chief Executive
Officer, and as a member of our Board of Directors of since January 1997.
Prior to 1997, Mr. Cohen was President of Diagnostic Monitoring, a privately
held manufacturer and international distributor of non-invasive cardiac
monitoring devices and was Vice President, Sales & Marketing of DM Software,
Inc., a developer of cardiac monitoring software. From 1988 to 1990, Mr.
Cohen was President of BioAnalogics, Inc., a publicly held development-stage
medical company located in Beaverton, Oregon. From 1982 to 1988, Mr. Cohen
was Vice President, Sales and Marketing for Brentwood Instruments, Inc., a
publicly held cardiology products distribution company based in Torrance,
California, where he was instrumental in the company being ranked in Inc.
Magazine's list of Fastest Growing Small Public Companies from 1986 through
1988. Mr. Cohen holds a B.S. in Business Management from the State University
of New York at Binghamton.
BRETT L. SCOTT has served as our Chief Financial Officer and
Secretary since October 1997. From 1992 to 1997, Mr. Scott was Chief
Financial Officer of Neuro Navigational Corporation, a publicly held company
located in Costa Mesa, California, which developed, manufactured and marketed
minimally-invasive neurosurgery and vascular surgery fiberoptic imaging
technology, software and disposables. Mr. Scott was Chief Financial Officer
of Western Energy Management, Inc. from 1991 to 1992 and of D&D Construction
Co., Inc. from 1989 to 1991. From 1982 to 1989, he was co-owner of Schneider
& Scott, Inc., certified public accountants. Mr. Scott is a certified public
accountant and holds a B.S. in Business administration from the University of
Southern California.
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<PAGE>
DONGPING LIN, PH.D. has been our Chief Technical Officer since July
1998. Dr. Lin held the position of Director of Software Engineering from
January 1997 until July 1998. Dr. Lin joined us as Senior Software Engineer
in January 1993. From 1988 to 1993, Dr. Lin held senior software engineering
positions at Del Mar Avionics located in Irvine, California. Dr. Lin received
his B.S. in Electrical Engineering from Beijing University in Beijing, China.
Dr. Lin received an M.S.E. in Computer Engineering and Ph.D. in Electrical
Engineering and Computer Science from the University of Michigan. Dr. Lin is
recognized as an expert in the field of computer arrhythmia analysis and
real-time ventricular fibrillation detection.
MICHAEL GIOFFREDI has served as our Vice President, Sales and
Marketing since September 1998. Mr. Gioffredi previously held the position of
Vice President Sales and Marketing for Britesmile, Inc., a publicly held
dental laser technology company located in Salt Lake City. Prior to 1997, Mr.
Gioffredi was Senior Vice President Marketing and Business Development for
the EMPath Group, a private emergency medicine consulting firm and Vice
President Marketing for Laserscope, Inc., a publicly held medical laser
company. From 1982 to 1993, Mr. Gioffredi held marketing management and sales
positions with the cardiology and cardiovascular divisions of C.R. Bard,
Inc., a Fortune 500 medical device company. Mr. Gioffredi has a B.A. in
Business administration and Marketing from California State University at
Fullerton.
JEFFERY W. BLANTON has served as our Vice President of Operations
since May 1998. From November 1994 to May 1998, Mr. Blanton held various
positions including Director of Engineering, Director of Project Engineering
and Director of Operations for Chiron Vision, a division of Chiron
Corporation. Chiron Vision develops and manufactures products for ophthalmic
surgery. From March 1994 to November 1994, Mr. Blanton was a consultant to
Ohmeda Medical Devices, a division of the British Oxygen Company. From 1987
to February 1994, Mr. Blanton held project and management engineering
positions at McGaw Inc., a drug delivery company. Prior to 1987, Mr. Blanton
worked for Honeywell Inc. Mr. Blanton is a certified project manager and has
a B.S. in Mechanical Engineering from Worcester Polytechnic Institute.
PAUL D. QUADROS has been our Chairman of the Board since May 1999
and a member of our Board of Directors since our formation in May 1991. He is
currently the Chairman of the Board of UroGen Corp., a developer of
pharmaceuticals to treat prostate cancer. Prior to joining UroGen in June
1995, Mr. Quadros served as Senior Vice President and Chief Financial Officer
of Thermatrix, Inc., a manufacturer of pollution control equipment. Prior to
joining Thermatrix in June 1994, Mr. Quadros was a general partner of
Technology Funding, a venture capital management organization. During his
tenure at Technology Funding, he was a member of the Commitments Committee
from 1986 to 1994, serving as its chairman from 1987 to 1990. From 1991 to
1994, he was chairman of Technology Funding's Medical Investment Committee
and was actively involved in managing Technology Funding's health care
portfolio. Mr. Quadros served on the board of directors of Medstone
International, Inc., from 1988 to 1995. Mr. Quadros has a B.A. in Finance
from California State University at Fullerton and an M.B.A. from U.C.L.A.
Graduate School of Management. He also serves on the board of directors of
Phenotypics Corporation and Quanta Vision Inc.
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<PAGE>
PETER CROSBY has been a member of our Board of Directors since
November 1997. Mr. Crosby has over 20 years of experience in the medical
device industry and is currently the Chief Executive Officer of Ischemia
Technology Inc. Mr. Crosby also serves as chairman of the board of Harley
Street Software, Inc., a Canadian developer of ECG software products. Mr.
Crosby was CEO and a director of NeoVision Corporation, an ultrasound imaging
system developer until NeoVision was sold to United States Surgical
Corporation in September 1997. From 1981 to 1996, Mr. Crosby held numerous
senior management positions for Nucleous Group, an Australian medical device
company and a division of Pacific Dunlop, Ltd. During his tenure at Nucleous,
he served as Vice President, R&D, and Vice President of Business Development
for Telectronics Pacing Systems, a global developer of implantable medical
devices such as defibrillators, pacemakers and cardiomyoplasty stimulators.
Mr. Crosby is the author of many publications, holds numerous patents in the
defibrillation technology field, and has a B.S. in Electrical Engineering and
a M.E.S. from the University of Melbourne, Australia.
HOWARD L. EVERS has been a member of our Board of Directors since
March 1998. From 1995 to 1996, Mr. Evers served as President, Chief Executive
Officer and Chairman of the Board of Diagnostics On Call, a mobile X-ray and
EKG services provider to the long-term care and home health care markets.
From 1992 to 1995, he was the Chief Executive Officer and Chairman of the
Board of PSI, a medical supply distribution company servicing the physician
office market. From 1988 to 1992, Mr. Evers was the Chief Executive Officer
and Chairman of the Board of Lake Industries, an environmental services
company. From 1973 to 1988, Mr. Evers was President and Chief Executive
Officer of Tru Green Corporation, a lawn, tree and shrub care and pest
control company sold to Waste Management Inc. in 1987.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation
paid by us to our Chief Executive Officer and to each of our other executive
officers, other than our Chief Executive Officer, who received salary and
bonus payments in excess of $100,000 during the year ended December 31, 1998.
SUMMARY OF COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- -------------------------- --------------------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING LTIP ALL
PRINCIPAL SALARY BONUS ANNUAL STOCK OPTIONS/SARS PAYOUT OTHER
POSITION YEAR ($) ($) COMP. AWARD (#)(1) ($) COMP.
-------- ---- --- --- ----- ----- ------ --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond W. Cohen 1998 161,500 -- -- -- 50,000 -- 6,000(2)
President and Chief 1997 101,083 -- -- -- -- -- 6,000(2)
Executive Officer
Dongping Lin 1998 110,496 20,000 -- -- 124,250 -- --
Chief Technical 1997 81,806 -- -- -- -- --
Officer
</TABLE>
- ------------------------------
(1) Represents shares of common stock underlying stock options. The grant
of the options disclosed in this column was made pursuant to the 1997
Stock Option/Stock Issuance Plan.
(2) Annual automobile allowance
OPTION GRANTS IN 1998
The following table provides information related to options granted
to each of the named executive officers during the year ended December 31,
1998:
<TABLE>
<CAPTION>
NO. OF SECURITIES PERCENTAGE OF TOTAL
UNDERLYING OPTIONS OPTIONS GRANTED TO EXERCISE PRICE EXPIRATION
NAME GRANTED (#)(1) EMPLOYEES IN YEAR ($/SH) DATE
---- -------------- ----------------- ------ ----
<S> <C> <C> <C> <C>
Dongping Lin 30,000 12.0% $2.00 12/8/07
</TABLE>
- -----------------------
(1) Represents shares of common stock underlying stock options. Such
options are exercisable 25% per year commencing in June 1999.
38
<PAGE>
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION VALUES
The following table sets forth certain information as of December
31, 1998 regarding options held by the named executive officers. These
executive officers did not exercise any options during the year ended
December 31, 1998.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
ON VALUE OPTIONS AT MONEY OPTIONS AT
NAME EXERCISE REALIZED YEAR-END YEAR-END ($)(1)
---- (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
--- --- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Raymond W. Cohen -- -- 50,000 $0
Dongping Lin -- -- 124,250 $0
</TABLE>
- -------------------------
(1) The closing bid price of the common stock on December 31, 1998 was
$2.00. Value is calculated on the difference between the exercise price
of in-the-money options and multiplied by the number of shares of
common stock underlying the option.
EMPLOYMENT AGREEMENTS
We are party to at-will employment agreements with Raymond W. Cohen,
Brett L. Scott, Dongping Lin, Michael Gioffredi and Jeffery Blanton. Each
agreement automatically renews annually unless either party shall give the
other written notice of termination. The agreements provide for a base
salary, plus such bonuses and stock options based on incentive plans approved
by the Board of Directors. Each agreement contains a non-competition
covenant, and Mr. Cohen's agreement provides that he shall receive a car
allowance of $6,000 per annum. The agreements also provide that in the event
of an involuntary termination or change of control,
- each employee shall receive his base salary and health
insurance benefits for six months (twelve months for Mr.
Cohen) following the event as well as his pro rata portion
of his target bonus; and
- any unvested stock option or shares of restricted stock
held on the date of event shall continue to vest over the
twelve-month period.
Mr. Scott's agreement also provides that in the event of a change of
control, Mr. Scott shall receive 50,000 shares of our common stock (as
adjusted for dividends, stock dividends, stock splits and other similar
changes).
39
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of our board of
directors are Paul Quadros, Howard Evers and Raymond Cohen. Compensation
decisions regarding Mr. Cohen are made by the non-employee directors of the
compensation committee. No interlocking relationship exists between any
member of our board of directors or our compensation committee and any member
of the board of directors or compensation committee of any other company.
COMPENSATION OF DIRECTORS
The non-employee members of our Board of Directors receive $1,000
per board meeting attended and $250 per telephonic board meeting. Our
directors also are reimbursed for expenses incurred in attending meetings of
the Board of Directors and its committees. Non-employee directors also are
eligible to receive options under our 1997 Stock Option/Stock Issuance Plan.
STOCK OPTION PLAN
Our 1997 Stock Option/Stock Issuance Plan was adopted by our Board
of Directors in December 1997 and approved by our stockholders at our 1998
Annual Meeting of Stockholders. A maximum of 1,305,000 shares of common stock
may be issued pursuant to the Plan, of which 1,305,000 have been granted to
date to our employees, including executive officers, and our directors. The
Plan authorizes the granting of incentive stock options to our employees or
employees of any of our subsidiaries, and non-statutory stock options to our
employees, our directors and certain of our consultants and advisors. The
options to be granted under the Plan and designated as incentive stock
options are intended to receive incentive stock option tax treatment pursuant
to Section 422 of the Internal Revenue Code.
The Plan also authorizes direct issuance of stock to eligible
participants in the Plan at a price per share of not less than 85% of the
fair market value on the date of issuance, payable in cash, by check, or, if
permitted under the terms of the grant, by promissory note. The consideration
for such shares also may be past services rendered to us. Such stock
issuances may vest immediately or in one or more installments as determined
by our Board of Directors. The holder of such stock, however, shall have full
stockholder rights with respect to said stock, whether or not vested.
The exercise price for options granted under the Plan is determined
by the Board of Directors or a committee designated by the Board and
consisting of two or more members. The exercise price for incentive stock
options cannot be less than 100% of the fair market value of the common stock
on the date it is granted, or 110% in the case of optionees who own more than
10% of the voting power of all classes of our stock. The exercise price for
non-statutory options may be less than 100% of the fair market value of the
common stock on the date the option is granted. The fair market value
(determined at the time the option is granted) of the common stock with
respect to which incentive options are first exercisable by any individual
employee during any calendar year cannot exceed $100,000.
40
<PAGE>
No option granted under the Plan may be exercised after the
expiration of the option, which may not, in any case, exceed ten years from
the date of grant (five years in the case of incentive options granted to
persons who own more than 10% of the voting power of all classes of our
stock). Options granted under the Plan are exercisable on such basis as
determined by our Board of Directors.
If we liquidate or dissolve, or if there is a merger or
consolidation resulting in a transfer of more than 50% of the voting power of
our securities, any unexercised options theretofore granted under the Plan
shall, immediately prior to such transaction, become fully exercisable. If
not exercised prior to such transaction, all options shall be deemed
cancelled unless the surviving corporation in any such merger or
consolidation elects to assume the options under the Plan.
All shares of stock issued pursuant to the Plan shall also be
immediately vested in the event of such a transaction. Options granted under
the Plan may not be transferred by the participant other than by will or the
laws of descent and distribution and may be exercised during the holder's
lifetime only by such holder.
If any of our employees or directors, prior to the exercise of their
options, ceases to be an employee or director for any reason other than
disability or misconduct, the options granted to such employees or directors
automatically terminate 90 days from the date of termination. If any of our
employees or directors ceases to be an employee or a director by reason of
disability, he may exercise any option he holds at any time within twelve
months from the date of termination, but only to the extent the holder had
the right to exercise such option at the date of termination. If any of our
employees or directors dies while holding an outstanding option, his option
rights may be exercised by the person or persons to whom such rights under
the option are transferred by will or the laws of descent and distribution
within twelve months from the date of death.
The Plan provides that our Board of Directors, or a committee of the
Board, shall administer the Plan, and shall have the authority to interpret
the Plan and to prescribe, amend and rescind the rules and regulations
relating thereto. Unless previously terminated in certain circumstances, the
Plan will terminate in December 2007.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our certificate of incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. Delaware law provides that
directors of a corporation will not be personally liable for monetary damages
for breach of their fiduciary duties as directors, except for liability for
any of the following:
- any breach of their duty of loyalty to the corporation or
its stockholders,
- acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law,
41
<PAGE>
- unlawful payments of dividends or unlawful stock
repurchase, redemptions or other distributions, or
- any transaction from which the director derived an improper
personal benefit.
This limitation does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we must indemnify our directors, officers
and employees to the fullest extent permitted by Delaware law and California
Law. Our bylaws also provide for the prepayment of expenses to persons
entitled to indemnification (subject to certain conditions), and permit us to
purchase and maintain insurance on behalf of any director, officer, employee,
or agent against any liability asserted against them in any such capacity,
whether or not our bylaws would permit or require such indemnification.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information as of December
15, 1999, regarding beneficial ownership of the common stock by
- each stockholder known by us to be the beneficial owner of
more than five percent (5%) of the outstanding shares of
common stock;
- each of our directors;
- each of the named executive officers; and
- all of our current executive officers and directors as a
group.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
Beneficial Owner Beneficially Owned(1) Percent of Class (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
Dr. Ernst Muller Mohl 2,983,750 (2) 25%
Weinplatz 10
8001 Zurich Switzerland
Raymond W. Cohen 532,560 (3) 4%
16931 Millikan Avenue
Irvine California 92606
Dongping Lin
90,688 (4) *
Paul D. Quadros
33,269 (5) *
Peter Crosby
30,500 (6) *
Howard L. Evers
28,750 (7) *
LaMont Asset Management SA 883,750 (8)
Baarerstrasse 10
PO Box 4639
6304 Zug, Switzerland
All executive officers and directors as a group
(eight persons) 765,767 (9) 6%
</TABLE>
- -------------------------
* Less than 1%.
(1) Shares of common stock subject to options and warrants currently
exercisable or exercisable within 60 days of the date hereof are deemed
outstanding for computing the number of shares beneficially owned and
the percentage of outstanding shares of the class held by a person
holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other person. Except as indicated by
footnote, and subject to community property laws where applicable, the
persons named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by
them.
(2) Includes 56,250 shares issuable upon exercise of outstanding warrants.
(3) Includes 25,000 shares issuable upon exercise of outstanding vested
options.
(4) Includes 70,688 shares issuable upon exercise of outstanding vested
options.
(5) Includes 17,500 shares issuable upon exercise of outstanding warrants
and 8,594 shares issuable upon exercise of outstanding vested options.
(6) Includes 7,500 shares issuable upon exercise of outstanding vested
options.
(7) Includes 3,750 shares issuable upon exercise of outstanding vested
options.
(8) Includes 33,750 shares issuable upon exercise of outstanding warrants.
(9) Includes 17,500 shares issuable upon exercise of outstanding warrants
and 165,532 shares issuable upon exercise of outstanding vested
options.
43
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The following table sets forth the names and addresses of each of
the selling stockholders and the number of shares of common stock that may be
offered by each of the selling stockholders pursuant to this prospectus.
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF SELLING STOCKHOLDER SHARES+
---------------------- -------
<S> <C>
Thomas Girschweiler 586,125(1)
Wissmannstrasse 15
CH-8057 Zurich, Switzerland
Eduard P. Kauffmann 112,500
Hitzigweg 5
CH-8032-Zurich, Switzerland
Michele Martucci 62,500
Seeweg 16
CH-8593, Kesswil, Switzerland
Erhard Lee 62,500
c/o Actienvest AG
Weinplatz 10
8022 Zurich, Switzerland
Larry Koppes 11,310
c/o KPA Partners
19900 MacArthur Blvd., Suite 200
Irvine, CA 92612
Richard Potter 10,000
32732 Johnathan Circle
Dana Point, CA 92629
Jeff Turcotte 11,309
c/o KPA Partners
19900 MacArthur Blvd., Suite 200
Irvine, CA 92612
LaMont Asset Management SA 883,750(8)
Baarerstrasse 10
PO Box 4639
6304 Zug, Switzerland
Lava Investments Limited 125,000
c/o Ernst & Young
11/F, Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF SELLING STOCKHOLDER SHARES+
---------------------- -------
<S> <C>
AACPAC Holdings Limited 312,500
c/o Ernst & Young
11/F, Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
Medtronic Physio-Control Corp. 450,000(3)
11811 Willows Road NE
Redmond, WA 98052
Sally K. Bales 10,000
c/o Bales-Waugh Group Inc.
1301 Riverplace Tower, Suite 2016
Jacksonville, FL 32207
SMS Group, AG 125,000
[Sigg-Merkli-Schrodel AG]
Utoquai 31, Postfach,
CH-8024 Zurich, Switzerland
Wilfried Girschweiler 50,000
Schiedhaldensteig 2
8700 Kusnacht, Switzerland
Ernst Muller-Mohl 2,743,750(4)
Weinplatz 10
8001 Zurich, Switzerland
Swiss Bank Corporation 170,000(5)
Badstrasse 4
5401 Baden, Switzerland
Rush & Company 150,000
c/o Swiss American Securities
12 East 49th St., New York, NY 10017
Stuart Karten 15,000
4222D Glencoe Avenue
Marina Del Rey, CA 90292
Stiftung Nivata 228,000(6)
Bahnhofplatz 9
CH-8001, Zurich, Switzerland
Stiftung Obliva 20,000(7)
Bahnhofplatz 9
CH-8001, Zurich, Switzerland
Dongping Lin * 10,000
13 Glenn
Irvine, CA 92620
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF SELLING STOCKHOLDER SHARES+
---------------------- -------
<S> <C>
Don Hill **** 104,966(8)
2 Bridgeworth Lane
Sherman, CT 06784
BWM Investments *** 262,500(9)
14 Parkwood Lane
Dix Hills, NY 11746
Fran Daniels 87,500(10)
c/o Financial Sciences of America
9255 Doheny Road
Los Angeles, CA 90069
Howard Cooper ***** 43,750(11)
5940 Fairhaven Ave.
Woodland Hills, CA 91367
Paul Quadros ** 17,500
716 Columbia Drive
San Mateo, CA 94402
Global Asset Strategies 20,000
C/o Stradling, Yocca,Carlson, & Rauth
660 Newport Center Drive
Newport Beach, CA 92660
Trafina Privatbank, A.G. 20,000(12)
c/o Jones Day Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013
Australite Limited 5,000(13)
c/o Jones Day Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013
Clariden Bank, Zurich 37,500
Claridenstrasse 26
P.O. Box 5080
CH-8022 Zurich, Switzerland
Cantrade AG 28,750(14)
Morgartenstrasse 1
P.O. Box
CH-8039 Zurich, Switzerland
EB Research Institute AG 14,375(15)
Kalchbuhlstrasse 18
7007 Chur, Switzerland
Gandola Stiftung 287,500(16)
C/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF SELLING STOCKHOLDER SHARES+
---------------------- -------
<S> <C>
HD Fuchs 138,000(17)
c/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
Renee Heinen 143,750(18)
C/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
Actieninvest AG 142,845(19)
Weinplatz 10
8001 Zurich, Switzerland
de Greef & Company, Inc. 78,450(20)
c/o Stradling, Yocca,Carlson, & Rauth
660 Newport Center Drive
Newport Beach, CA 92660
A & A ActienBank 575,000(21)
Bahnofstrasse 92
CH-8023
Zurich, Switzerland
Suan Investments 175,000
911 Sterner Road
Hillside, NJ 07205
Zevex Incorporated 135,000
4314 Zevex Park Lane
Salt Lake City, Utah 84123
James W. Giddens, Trustee 43,750(22)
For the Liquidation of the Business of AR Baron Company
One Battery Park Plaza
New York, NY 10004
Michael Rappaport 43,750(23)
721 Fifth Avenue
New York, NY 10022
Ike R. Dweck 87,500(24)
c/o Berkshire
One West 37th Street, 4th Floor
New York, NY 10018
Lava Investments Limited 50,000(25)
c/o Ernst & Young
11/F Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS
OF SELLING STOCKHOLDER SHARES+
---------------------- -------
<S> <C>
Juliber Pty Ltd. 33,334
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
Laliber Pty Ltd. 33,333
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
NiliberPty Ltd. 33,333
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
</TABLE>
+ The number of shares listed indicates both the number of shares owned
by the selling stockholder prior to this offering and the number of
shares that may be offered for the selling stockholder's account.
Assuming all of the shares are sold, none of the selling stockholders
will own any shares after completion of this offering.
(1) Includes 353,325 shares of common stock underlying currently
exercisable warrants.
(2) Includes 33,750 shares of common stock underlying currently exercisable
warrants.
(3) Includes 250,000 shares of common stock underlying currently
exercisable warrants.
(4) Includes 56,250 shares of common stock underlying currently exercisable
warrants.
(5) Includes 20,000 shares of common stock underlying current exercisable
warrants.
(6) Consists of 15,000 shares of common stock underlying currently
exercisable warrants.
(7) Consists of 20,000 shares of common stock underlying currently
exercisable warrants.
(8) Consists of 104,966 shares of common stock underlying currently
exercisable warrants.
(9) Consists of 262,500 shares of common stock underlying currently
exercisable warrants.
(10) Consists of 87,500 shares of common stock underlying currently
exercisable warrants.
(11) Consists of 43,750 shares of common stock underlying currently
exercisable warrants.
(12) Consists of 20,000 shares of common stock underlying currently
exercisable warrants.
(13) Consists of 5,000 shares of common stock underlying currently
exercisable warrants.
(14) Includes 3,750 shares of common stock underlying currently exercisable
warrants.
(15) Includes 1,875 shares of common stock underlying currently exercisable
warrants.
(16) Includes 37,500 shares of common stock underlying currently exercisable
warrants.
(17) Includes 18,000 shares of common stock underlying currently exercisable
warrants.
(18) Includes 18,750 shares of common stock underlying currently exercisable
warrants.
(19) Includes 81,625 shares of common stock underlying currently exercisable
warrants.
(20) Consists of 47,050 shares of common stock underlying currently
exercisable warrants.
(21) Includes 75,000 shares of common stock underlying currently exercisable
warrants.
(22) Consists of 43,750 shares of common stock underlying currently
exercisable warrants.
(23) Consists of 43,750 shares of common stock underlying currently
exercisable warrants.
(24) Consists of 87,500 shares of common stock underlying currently
exercisable warrants.
(25) Includes 25,000 shares of common stock underlying currently exercisable
warrants.
48
<PAGE>
* Executive officer
** Director
*** BWM Investments is an affiliate of Breslow & Walker, LLP, legal
counsel to us.
**** Former Director.
***** Former Officer and Director.
The selling stockholders are entitled to receive all of the proceeds
from the future sale of their shares.
The selling stockholders, from time to time, depending on market
conditions and other factors, may offer or sell their shares in the
over-the-counter market, or otherwise, at prices and terms then prevailing or
at prices related to the then-current market price, or in negotiated
transactions. The shares may be sold by various methods, including:
- block trades in which a broker or dealer so engaged will
attempt to sell the shares as agent but may position and
resell a portion of the block as principal to facilitate
the transaction;
- purchases by a broker or dealer as principal and resale by
such broker or dealer for its account pursuant to this
prospectus;
- ordinary brokerage transactions and transactions in which
the broker solicits purchases; and
- face to face transactions between sellers and purchasers
without a broker or dealer.
In effecting sales, brokers or dealers engaged by the selling
stockholders may arrange for other brokers or dealers to participate. These
brokers or dealers may receive commissions or discounts from the selling
stockholders in amounts to be negotiated. These brokers, dealers and any
other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Securities Act, in connection with these sales.
We will bear all costs and expenses of the registration of the
shares under the Securities Act and certain state securities laws, other than
fees of counsel for the selling stockholders and any discounts or commissions
payable with respect to sales of the shares.
Sales of the shares by the selling stockholders may have an adverse
effect on the market price of the common stock. Moreover, the selling
stockholders are not restricted as to the number of shares that may be sold
at any one time, and it is possible that a significant number of shares could
be sold at the same time, which also may have an adverse effect on the market
price of the common stock.
CERTAIN TRANSACTIONS
On April 11, 1997, we acquired from Raymond W. Cohen, our President
and Chief Executive Officer, Innovative Physicians Services, Inc. d/b/a
Diagnostic Monitoring, a Nevada corporation engaged in the sale of medical
diagnostic equipment. We sold substantially all of the assets of Diagnostic
Monitoring on December 31, 1998.
During 1998 and 1999, Ernst Muller-Mohl, one of our principal
stockholders, acquired 2,687,500 shares of common stock and 56,250 warrants
to purchase common stock.
49
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 20,000,000 shares of common
stock and 1,000,000 shares of preferred stock. As of December 31, 1999, there
were 12,031,252 shares of common stock issued and outstanding, and no shares
of preferred stock were issued. In addition, options to purchase 1,305,000
shares of common stock and warrants to purchase 1,742,466 shares of common
stock also were outstanding.
COMMON STOCK
All holders of common stock have one vote per share on all matters
submitted to a vote of stockholders. Stockholders do not have rights to
cumulate their votes in the election of directors under our certificate of
incorporation or applicable provisions of the General Corporation Law of the
State of Delaware. However, under Section 2115 of the California General
Corporation Law, specific provisions of the California General Corporation
Law, including mandatory cumulative voting rights of stockholders, are made
applicable to "pseudo-California" corporations incorporated under laws of
other states but which meet certain tests. The tests are that the average of
specified property, payroll and sales factors, generally relating to the
extent of activities in California, exceed 50% of the total of such factors
on a consolidated basis during the corporation's latest year and that more
than one-half of the corporation's outstanding voting securities are held of
record by persons having addresses in California. We do not believe that we
currently are a pseudo-California corporation.
The holders of common stock have the right to receive dividends,
when, and if declared, by our Board of Directors out of funds legally
available therefor. We have never paid any cash dividends on our common
stock. We presently intend to retain earnings, if any, to finance its
operations, and therefore does not anticipate paying any cash dividends in
the future. If we liquidate, holders of our common stock would share ratably
in any assets available for distribution to stockholders after payment of all
our obligations.
Our common stock neither is redeemable nor has any preemptive,
subscription, sinking fund or conversion rights. All outstanding shares of
common stock are fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors may authorize the issuance up to 1,000,000
shares of preferred stock without any further stockholder approval. The Board
is expressly authorized to provide for the issuance of shares of preferred
stock in one or more classes or series, and to fix for each such class or
series the powers, rights, privileges, preferences, qualifications,
limitations or restrictions, including dividend rights, dividend rates,
conversion rights, voting rights, redemption rights, redemption prices,
liquidation preferences, and the designation of and the number of shares
constituting any class or series.
WARRANTS
Of the 8,791,630 shares of common stock covered by this prospectus,
1,742,466 shares are issuable pursuant of the exercise of warrants. The
warrants expire at various times during the next four years, and are
exercisable at prices ranging from $0.01 to $5.00 per share. All of the
warrants contain anti-dilution provisions, and approximately 439,000 of these
warrants can be redeemed by us at $5.00 per share if our common stock trades
at $6.00 per share or higher for a period of 90
50
<PAGE>
consecutive days.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation, Glendale, California, serves as
transfer agent and registrar for the common stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER
Provisions of Delaware law and our certificate of incorporation
could discourage takeover attempts. These include:
- DELAWARE ANTITAKEOVER LAW. We are subject to Section 203 of
the Delaware General Corporation Law. In general, Section
203 prohibits a publicly-held Delaware corporation from
engaging in a business combination with an interested
stockholders for a period of three years from the date the
stockholder became an interested stockholder, unless the
business combination or the transaction in which the person
became an interested stockholder is approved in the manner
provided in Section 203. Generally, a business combination
includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the
interested stockholder. Generally, an interested
stockholder is a person who, together with affiliates and
associates, owns or within three years prior to the
determination of interested stockholder status did own 15%
or more of the corporation's outstanding voting stock.
- OUR RIGHT TO ISSUE PREFERRED STOCK. Our certificate of
incorporation authorizes the issuance of preferred stock
with such designations, rights, and preferences as may be
determined from time to time by our Board of Directors,
without any further vote or action by our stockholders.
Therefore, our Board of Directors is empowered, without
stockholder approval, to issue preferred stock with voting
rights or preferences that could prevent or discourage
unsolicited takeover attempts.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we had 12,031,252 shares of
common stock outstanding, 4,982,088 of which are freely tradable, and
7,049,164 of which are restricted shares. In addition, there are warrants
outstanding to purchase 1,742,466 of our shares, and options outstanding to
purchase 1,305,000 of our shares.
The resale of the restricted shares and the shares underlying the
warrants is covered by the registration statement of which this prospectus is
a part. These shares may be resold in the open market at any time, subject to
- the continued effectiveness of the registration statement;
- and our ability to suspend sales under the registration
statement in certain instances.
The shares of common stock reserved for issuance upon the exercise
of outstanding options and options that may issued in the future are covered
by a registration statement on Form S-8. Upon exercise, these shares will be,
subject to Rule 144 volume limitations applicable to affiliates, available
51
<PAGE>
for immediate resale in the open market.
No prediction can be made as to what effect, if any, the sale of
these shares will have on the prevailing market price. The possibility that
substantial amounts of common stock may be sold in the public market may
adversely affect prevailing market prices for the common stock, and could
impair our ability to raise capital through future sales of equity securities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon
for us by Breslow & Walker, LLP, New York, New York. BWM Investments, an
affiliate of Breslow & Walker, LLP, owns warrants to purchase 262,500 of
common stock. The re-sale of these shares is covered by this prospectus.
EXPERTS
The consolidated financial statements as of December 31, 1998 and
1997 and for each of the two years in the period ended December 31, 1998
included in this Prospectus have been so included in reliance on the report
(which includes an explanatory paragraph relating to the Company's ability to
continue as a going concern as described in Note 2 to the consolidated
financial statements) of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C., a registration statement on Form S-1 under the Securities
Act of 1933, with respect to the shares to be sold in this offering. This
prospectus, which is part of the registration statement, does not contain all
of the information contained in the registration statement. For further
information with respect to us and the shares of our common stock offered
hereby, we refer you to the registration statement, including the exhibits
thereto, which may be inspected, without charge, at the office of the
Securities and Exchange Commission.
Copies of the registration statement may be obtained from the
Commission in Washington, D.C., upon payment of the requisite fees, or from
the Commission's Website at http://www.sec.gov. Statements contained in this
prospectus as to the contents of any contract or other document referred to
are not necessarily complete, and in each instance we refer you to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by the more
complete description of the matters involved
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CARDIAC SCIENCE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
and September 30, 1999 (unaudited)
Consolidated Statements of Operations for the Years Ended F-4
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Stockholders' Equity (Deficit) F-5
for the Years Ended
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1999 (unaudited)
Consolidated Statements of Cash Flows for the Years Ended F-7
December 31, 1997 and 1998 and the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
Notes to the Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cardiac Science, Inc.
Irvine, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows present fairly, in all material respects, the financial position
of Cardiac Science, Inc. (the "Company") at December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company 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 with regard 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.
PricewaterhouseCoopers LLP
Newport Beach, California
February 17, 1999
F-2
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------ ------------ --------------
ASSETS (Unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 561,351 $ 1,247,602 $ 4,818,475
Trade accounts receivable, net of allowances of $16,028
at December 31, 1997 216,162 --- ---
Inventory 209,413 --- ---
Common stock subscriptions receivable --- --- 1,011,250
Prepaid expenses 99,267 30,129 65,222
------------ ------------ -------------
Total current assets 1,086,193 1,277,731 5,894,947
Equipment, net 85,927 117,710 259,275
Investment in unconsolidated affiliate --- 115,000 115,000
Intangible assets, net of amortization of $49,285 at
December 31, 1997 607,853 --- ---
Other assets 4,012 45,266 65,632
------------ ------------ -------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
------------ ------------ -------------
------------ ------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligation $ --- $ 3,413 $ 24,939
Accounts payable and accrued expenses 1,016,323 1,599,216 1,219,765
Note payable to stockholder 70,233 --- ---
Notes payable --- 225,000 31,247
------------ ------------ -------------
Total current liabilities 1,086,556 1,827,629 1,275,951
------------ ------------ -------------
Long term portion of capital lease obligation --- 16,001 110,231
------------ ------------ -------------
Commitments and contingencies
Stockholders'equity (deficit):
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued or outstanding
Common stock - $.001 par value; 20,000,000 shares authorized,
issued and outstanding shares -4,974,560 as of December 31,
1997, 7,014,738 as of December 31, 1998 and 10,987,232 as of
September 30, 1999 4,975 7,015 10,987
Common stock subscribed --- 100,000 1,011,250
Additional paid-in capital 7,472,107 10,823,448 19,973,713
Accumulated deficit (6,779,653) (11,218,386) (16,047,278)
------------ ------------ -------------
Total stockholders' equity (deficit) 697,429 (287,923) 4,948,672
------------ ------------ -------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Months Ended
December 31, For the Year For the Nine September 30,
1997 Ended Months Ended 1998
(Restated-see December 31, September 30, (Restated -see
Note 6) 1998 1999 Note 6)
------------- ------------ ------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Research and development $ 756,936 $ 2,209,524 $ 2,795,408 $ 1,416,229
Marketing 251,777 341,476 932,792 204,454
General and administrative 766,991 1,170,551 1,092,542 872,483
-------------- ------------- -------------- ---------------
Loss from continuing operations (1,775,704) (3,721,551) (4,820,742) (2,493,166)
Interest expense, net (4,247) (65,353) (6,550) (14,771)
-------------- ------------- -------------- ---------------
Loss from continuing operations before
provision for income taxes (1,779,951) (3,786,904) (4,827,292) (2,507,937)
Provision for income taxes 800 800 1,600 (1,600)
-------------- ------------- -------------- ---------------
Net loss from continuing operations (1,780,751) (3,787,704) (4,828,892) (2,509,537)
-------------- ------------- -------------- ---------------
Discontinued operations:
Loss from discontinued operations,
net of income taxes (43,847) (101,412) --- (88,310)
Loss on sale of assets --- (549,618) --- ---
-------------- ------------- -------------- ---------------
Loss from discontinued operations (43,847) (651,030) --- (88,310)
-------------- ------------- -------------- ---------------
Net loss $ (1,824,598) $ (4,438,734) $ (4,828,892) $ (2,597,847)
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
Basic and diluted loss per share:
Continuing operations $ (0.46) $ (0.69) $ (0.52) $ (0.47)
Discontinued operations (0.01) (0.12) --- (0.02)
-------------- ------------- -------------- ---------------
Net loss per share $ (0.47) $ (0.81) $ (0.52) $ (0.49)
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
Weighted average number of shares
used in the computation of
net loss per share 3,875,656 5,459,793 9,208,182 5,276,117
-------------- ------------- -------------- ---------------
-------------- ------------- -------------- ---------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
Common Stock Preferred Stock Subscribed
------------------ ---------------- -------------------
Number Amount Number Amount Number Amount Additional Accumulated
of of of Paid-In Deficit Total
Shares Shares Shares Capital
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,265,780 $ 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) (347,165)
Net loss (1,824,598) (1,824,598)
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
Balance at December 31, 1997 4,974,738 4,975 --- --- --- --- 7,472,107 (6,779,653) 697,429
Issuance of common stock
for cash at $2.00 per
share (net of cost of
issuances of $829,896) 1,800,000 1,800 2,768,303 2,770,104
Issuance of common stock
warrants 433,416 433,416
Common stock warrants
exercised at $0.01 per
share 175,000 175 1,825 2,000
Common stock subscribed
at $2.00 per share in
cash 50,000 100,000 100,000
Issuance of common stock
for license fees and
services at $2.00 per
share 55,000 55 109,945 110,000
Issuance of common stock
for compensation at
$2.00 per share 10,000 10 19,990 20,000
Compensation related to fair
value of options granted
to non-employees 17,862 17,862
Net loss (4,438,734) (4,438,734)
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
Balance at December 31, 1998 7,014,738 7,015 --- --- 50,000 100,000 10,823,4482 (11,218,386) (287,923)
Issuance of common stock
for cash at $2.00 per
share 1,850,000 1,850 3,698,150 3,700,000
Issuance of common stock
for cash at $4.00 per
share 887,500 887 3,549,112 3,549,999
Issuance of common stock for
common stock subscribed 50,000 50 (50,000) (100,000) 99,950 ---
Common stock warrants
exercised at $0.01 per
share 30,625 30 320 350
Common stock warrants
exercised at an average
of $2.45 per share 857,500 858 2,100,392 2,101,250
Common stock subscribed
at $4.00 per share in cash 245,000 980,000 980,000
Common stock subscribed
at $2.50 per share in cash 12,500 31,250 31,250
Issuance of common stock
for license fees and
services at an average
of $2.67 per share 157,969 158 421,331 421,489
F-5
<PAGE>
Costs of equity issuances
(including 138,900
shares at $2.00) 138,900 139 (733,090) (732,951)
Compensation related to fair
value of options granted
to non-employees 14,100 14,100
Net loss for the nine months
ended September 30, 1999 (4,828,892) (4,828,892)
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
Balances, September 30, 1999
(unaudited) 10,987,232 $10,987 --- $ --- 257,500 $1,011,250 $19,973,713 $(16,047,278) $4,948,672
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
--------- ------- ------ -------- -------- ---------- ----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Months Ended
December 31, For the Year For the Nine September 30,
1997 Ended Months Ended 1998
(Restated-see December 31, September 30, (Restated-see
Note 6) 1998 1999 Note 6)
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(1,824,598) $(4,438,734) $(4,828,892) $(2,597,847)
Adjustments to reconcile net loss to net
cash used in operating activities from
continuing operations:
Loss from discontinued operations 43,847 101,412 --- 88,310
Loss on sale of assets --- 549,618 --- ---
Depreciation and amortization 20,762 35,114 44,976 21,769
Amortization of debt discount --- 44,785 --- ---
Compensation related to fair value of options granted --- 17,862 14,100 ---
to non-employees
Expenses paid with common stock --- 130,000 421,680 50,000
Changes in operating assets and liabilities,exclusive of
Diagnostic Monitoring:
Prepaid expenses (88,374) --- (35,092) 82,206
Increase in other assets --- --- (20,366) ---
Accounts payable and accrued expenses 536,180 137,505 (681,091) 569,610
------------- ------------ ------------- -------------
Net cash used in operating activities from
continuing operations (1,312,183) (3,422,438) (5,084,685) (1,785,952)
------------- ------------ ------------- -------------
Net cash provided by (used) in discontinued operations (239,489) 530,438 --- 69,515
------------- ------------ ------------- -------------
Cash flows from investing activities:
Purchase of equipment (64,700) (53,218) (70,785) (32,620)
Decrease in other assets --- 4,012 --- ---
Cash acquired in Diagnostic Monitoring acquisition 43,223 --- --- ---
------------- ------------ ------------- -------------
Net cash used by investing activities (21,477) (49,206) (70,785) (32,620)
------------- ------------ ------------- -------------
Cash flows from financing activities:
Proceeds (payment) on bank line of credit (18,903) 125,000 --- 175,000
Payments of note payable to stockholder (12,743) (70,233) ---
Proceeds (payments) from note payable --- 100,000 (193,753) 71,554
Proceeds from sale of common stock 2,000,000 3,600,000 7,250,000 1,100,000
Proceeds from common stock subscribed --- 100,000 --- 100,000
Proceeds from exercise of common stock warrants --- 2,000 2,101,600 2,000
Costs of equity issuances (247,165) (229,310) (431,504) (107,160)
------------- ------------ ------------- -------------
Net cash provided by financing activities 1,721,189 3,627,457 8,726,343 1,341,394
------------- ------------ ------------- -------------
Net increase (decrease) in cash and cash
equivalents 148,040 686,251 3,570,873 (407,663)
Cash and cash equivalents at beginning of period 413,311 561,351 1,247,602 561,351
------------- ------------ ------------- -------------
Cash and cash equivalents at end of period $ 561,351 $ 1,247,602 $ 4,818,475 $ 153,688
------------- ------------ ------------- -------------
------------- ------------ ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<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 software driven 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 Products, all of which are still under development, 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).
On April 11, 1997, the Company acquired Innovative Physician Services, Inc.
(d.b.a. Diagnostic Monitoring) ("DM") for 500 shares of the Company's Series A
Convertible Preferred Stock (the "Preferred Stock") plus a non-interest bearing
promissory note in the principal amount of $100,000 that was repaid during 1998.
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. All share and per share amounts have been
adjusted to give retroactive effect to the Reverse Split for all periods
presented. The Company sold substantially all of the assets of Diagnostic
Monitoring on December 31, 1998 (see notes 4 and 5).
2. CONTINUED EXISTENCE
Additional capital is needed to fulfill the Company's current marketing,
research and product development goals. Through September 30, 1999, the Company
incurred losses of approximately $16 million (unaudited). 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 anticipates that its current cash balance and the cash received in
October 1999 from common stock subscriptions will be sufficient to meet the
Company's cash requirements into April 2000. Given the current applications of
cash, the Company expects that additional capital will be necessary to sustain
growth and viability. 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, if at all, 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. If the Company is not able to raise
additional funds, it may be required to significantly curtail or cease its
operating activities. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern.
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. The Company accounts for
its investment in Biosensor Corporation ("Biosensor") under the equity method of
accounting (see note 5).
F-8
<PAGE>
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.
INTERIM FINANCIAL INFORMATION
In the opinion of the Company's management, the accompanying consolidated
condensed unaudited financial statements include all adjustments (which consist
only of normal recurring adjustments) necessary for a fair presentation of its
financial position at September 30, 1999 and results of operations and cash
flows for the periods presented. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of results for the full year.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the December
31, 1998 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintained
approximately $1,011,000 of its cash in a money market fund with one major
financial institution at December 31, 1998.
INVENTORY
Inventory, which consists of finished products and subassemblies, is stated at
the lower of cost (first-in, first-out) or market value. The components of
inventory at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Raw Materials $ 43,099
Work in process 20,912
Finished Goods 155,402
--------
219,413
Less: Reserve (10,000)
--------
Total Inventory $209,413
--------
--------
</TABLE>
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. The components of property and equipment consist of
the following:
F-9
<PAGE>
<TABLE>
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
<S> <C> <C> <C>
(unaudited)
Property and equipment $180,484 $215,687 $402,230
Accumulated depreciation (94,557) (97,977) (142,955)
------------ ------------ -------------
Property and equipment, net $85,927 $117,710 $259,275
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long lived assets in accordance
with Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which 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.
PER SHARE INFORMATION
The Company has adopted SFAS 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
Prior to the sale of substantially all the assets of DM, sales and related costs
of goods sold were recognized when goods were shipped to customers. The majority
of the Company's customers were distributors who sold 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 are required for entities that elect to
continue to measure compensation cost under the intrinsic method provided by
Accounting Principles Board Opinion No. 25.
F-10
<PAGE>
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 consequences in future years of differences between the tax basis 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.
F-11
<PAGE>
5. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On December 31, 1998, the Company acquired a 7.7% voting interest in Biosensor
as consideration for the sale of substantially all of the assets of DM (see note
6). The Company accounts for this investment using the equity method of
accounting in accordance with Accounting Principles Board Opinion No. 18.
6. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of substantially all of
DM's assets to Biosensor, a Minnesota corporation, pursuant to an Agreement for
Purchase and Sale of Assets dated December 31, 1998. The Company received, in
consideration of the sale, 1,440,000 shares of common stock of Biosensor valued
at $115,000. In addition, Biosensor assumed certain liabilities amounting to
approximately $107,000. The Company recognized a loss of $549,618 on the sale of
assets, consisting primarily of the unamortized balance of goodwill, as the net
book value of the net assets sold exceeded the fair value of the consideration
received.
The Company has restated its prior financial statements to present the operating
results of DM as a discontinued operation. Included in the loss from
discontinued operations is amortization of goodwill of $65,713 and $49,285 for
1998 and 1997, respectively. Operating results from discontinued operations are
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
Sales $ 1,437,499 $ 1,213,071
Cost of sales 941,732 753,693
----------- -----------
Gross profit 495,767 459,378
Operating expenses:
Research and development 20,361 10,182
Selling 373,073 206,826
General and administrative 202,145 285,417
----------- -----------
Loss from discontinued operations (99,812) (43,047)
Interest income (expense), net --- ---
----------- -----------
Loss from discontinued operations before
provision for income taxes (99,812) (43,047)
Provision for income taxes 1,600 800
----------- -----------
Net loss from discontinued operations $ (101,412) $ (43,847)
----------- -----------
----------- -----------
</TABLE>
7. NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
The Company entered into a Loan and Security Agreement with a bank
dated November 14, 1997. The agreement provided for a revolving line of credit
up to $200,000 collateralized by substantially all assets of the Company and
includes certain covenants. Through November 14, 1998 the Company had net
borrowings of $125,000. The Company restructured this loan as a term loan with
twelve equal installments of $10,417 plus interest at prime plus 2% payable
beginning in January 1999.
In September 1998, the Company borrowed $100,000 from an investor which
was repaid in January 1999. The loan was non-interest bearing, however in
consideration for the loan the Company issued three-year warrants to purchase
50,000 shares of common stock at a per share price of $2.00. Such warrants were
assigned a fair value of $44,785 using a Black-Scholes model and recorded as
additional paid-in capital, resulting in a debt discount. The debt discount was
charged to interest expense during the year ended December 31, 1998 (see note
10).
F-12
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE
The Company leases office equipment under a capital lease
agreement which expires during fiscal 2003. Future minimum lease payments under
this capital lease obligation for the years ending December 31 are as follows:
<TABLE>
<S> <C>
1999 $ 5,471
2000 5,471
2001 5,471
2002 5,471
2003 3,192
-------
25,076
Less amounts representing interest (5,662)
-------
$19,414
-------
-------
</TABLE>
OPERATING LEASES
The Company leases office space and equipment under the terms of
operating lease agreements. Total rent expense for the years ended December 31,
1998 and 1997 was $65,082 and $55,664, respectively. The minimum lease payments
under the terms of these lease agreements are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1999 $ 70,536
2000 25,624
2001 3,168
2002 1,320
--------
$100,648
--------
--------
</TABLE>
9. INCOME TAXES
The Company's provision for income tax represents the current state minimum
taxes. There is no deferred income tax provision due to the valuation allowance.
The temporary differences which give rise to the deferred tax provision
(benefit) consist of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Property and equipment $ (3,273) $ (951)
Capitalized costs (124,181) (67,814)
Accrued liabilities (10,429) 3,937
Allowance for doubtful accounts 6,866 (6,866)
Inventory reserve 4,284 (4,284)
State income taxes (272) 272
Tax credit carryforwards 1,247 (68,089)
Net operating loss carryforwards (1,330,753) (639,508)
----------- -----------
(1,456,511) (783,303)
Valuation allowance 1,456,511 783,303
----------- -----------
----------- -----------
$ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
F-13
<PAGE>
The temporary differences which give rise to deferred income tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Property and equipment $ 4,980 $ 1,707
Capitalized costs 222,583 98,402
Accrued liabilities 11,447 1,018
Allowance for doubtful accounts --- 6,866
Inventory reserve --- 4,284
State income taxes 816 544
Tax credit carryforwards 197,367 198,614
Net operating loss carryforwards 3,744,142 2,413,389
----------- -----------
4,181,335 2,724,824
Valuation allowance (4,181,335) (2,724,824)
----------- -----------
$ 0 $ 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, as follows:
<TABLE>
<CAPTION>
1998 1997
----- -----
<S> <C> <C>
Statutory regular federal income tax rate (34.0)% (34.0)%
Nondeductible expenses 5.0 0.2
State income taxes 0.1 0.1
Tax credits (0.3) (1.0)
Change in valuation allowance 29.3 34.8
----- -----
0.1% 0.1%
----- -----
----- -----
</TABLE>
As of December 31, 1998, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $124,000
and $73,000, respectively. These credits begin to expire in 2010 for federal and
state purposes. The Company also has approximately $10,110,000 and $2,875,000 of
federal and state net operating loss carryforwards which will begin to expire in
2007 and 1999, respectively.
The utilization of net operating loss and tax credit carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.
10. STOCK OPTIONS
1997 STOCK OPTION/STOCK ISSUANCE PLAN
In May 1998, the Company's 1997 Stock Option/Stock Issuance Plan (the "1997
Plan") was approved by stockholders at the Annual Meeting of Stockholders. All
outstanding stock options under the Company's 1991 Stock Option Plan and 1993
Stock Option Plan were exchanged for stock options in the 1997 Plan. The 1997
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") 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.
F-14
<PAGE>
The 1997 Plan is administered by a Compensation Committee (the "Committee")
which is comprised of three members appointed by the Company's Board of
Directors. 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 1997 Plan the Committee determines is in the Company's best
interest. Up to 705,000 shares of common stock may be issued under the 1997
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 1997 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 1997 Plan incorporates 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 1997 Plan must not be less than 100% of
the fair market value of a share of the common stock on the date of grant and
the option may not be exercised more than 10 years after its grant date. If an
incentive stock option is granted to an employee owning more than 10% of the
total combined voting power of all classes of stock of the Company, 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. Option grants under the
1997 Plan generally vest over a period of four years.
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 1997 Plan 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 Plan is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------- ---------------
<S> <C> <C>
Outstanding, beginning of year 33,688 148,315
Granted 739,892 ---
Exercised --- ---
Canceled (68,688) (114,627)
------------- ---------------
Outstanding, end of year 704,892 33,688
------------- ---------------
------------- ---------------
Exercisable, end of year 134,946 24,588
------------- ---------------
------------- ---------------
As of the end of the year:
Option price per share $1.88 - $2.00 $2.97 - $ 21.43
Weighted average option price
per share $ 1.99 $ 4.17
</TABLE>
At December 31, 1998 the number of shares reserved and available for issuance
under the 1997 Plan was 108. The weighted average remaining contractual life as
of December 31, 1998 is approximately 108 months.
The Board of Directors approved an amendment to the 1997 Plan which increases
the number of shares reserved and available for issuance under the 1997 Plan by
600,000 shares. This amendment was approved by stockholders at the Annual
Meeting of Stockholders held in May 1999.
For stock options granted in 1998 to non-employees (consultants), the Company
has recognized compensation cost of $17,862 for the year ended December 31, 1998
using a Black-Scholes option pricing model.
F-15
<PAGE>
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 assumptions for the options on the Company's common stock for
the year ended December 31, 1998: risk free interest rate with a range of 4.1%
to 5.9%; dividend yield of 0%; volatility of the expected market prices of the
Company's common stock of 61.4%; and expected life of the options of 4 years.
There were no option grants in the year ended December 31, 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 pro forma
information follows (in thousands, except per share information):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
------- -------
<S> <C> <C>
Pro forma net loss $(4,573) $(1,837)
Pro forma net loss per share $ (0.84) $ (0.47)
</TABLE>
11. WARRANTS
Historically the Company has granted warrants in connection with fund raising
activities and as consideration for certain services. Warrants to purchase
1,741,216 shares of common stock were outstanding and exercisable at December
31, 1998. A summary follows:
<TABLE>
<CAPTION>
Number of Per Share Expiration
Grant Date Warrants Exercise Date
Price
---------- --------- --------- ----------
<S> <C> <C> <C>
1992 61,216 $4.57 2002
1994 875,000 $0.01 2004
1996 17,500 $2.00 2001
1997 100,000 $2.25 2007
1998 487,500 $2.00-$2.50 2001
1998 200,000 $3.00 1999
---------
Total 1,741,216
---------
---------
</TABLE>
The Company granted 437,500 warrants in connection with a private placement in
1998, 200,000 warrants to Medtronic-Physio Control pursuant to a Distribution
and License Agreement dated December 2, 1998 (Note 11), and 50,000 warrants in
connection with a short term loan in 1998 (Note 6), for a total of 687,500
warrants granted in 1998. These warrants were assigned a fair value of $433,416
determined using a Black-Scholes model. Of this amount, $339,251 was charged to
equity as a cost of raising capital, $49,380 was recorded as an other asset and
will be amortized over the five-year life of the Distribution and License
Agreement and $44,785 was charged to interest expense.
12. DISTRIBUTION AND LICENSE AGREEMENT
In December 1998, Cardiac Science entered into a five-year exclusive
distribution and licensing agreement with Medtronic Physio-Control, a subsidiary
of Medtronic Inc. Under the agreement, Medtronic Physio-Control will market the
Powerheart on an exclusive basis in the United States and Canada. Medtronic
Physio-Control also obtained a license to the AECD Technology for integration
into their in-hospital LIFEPAK-Registered Trademark- defibrillator-monitor
products. This license is non-exclusive outside of the United States. The
agreement also provides for Cardiac Science to share profits from the sale of
proprietary disposable defibrillator pads that are used with the Powerheart as
well as Physio-Control LIFEPAK defibrillators that include the AECD Technology.
F-16
<PAGE>
Pursuant to the agreement, Medtronic Physio-Control was granted
warrants to purchase 200,000 shares of Cardiac Science common stock at $3.00 per
share. These warrants will expire in November 1999. Medtronic Physio-Control
also will receive warrants to purchase an additional 200,000 shares of common
stock at $3.00 per share upon the sale of the 1,000th unit by Medtronic
Physio-Control.
13. SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Cash paid during the year for:
Income taxes $ 1,600 $ 1,600
Interest $ 27,038 $ 10,133
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
Purchase of equipment with a capital lease $ 19,414
Costs of equity issuances not yet paid $ 261,335
Costs of equity issuances associated with fair
value of warrants issued $ 339,251
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)
---------
---------
Sale of net assets of Diagnostic Monitoring:
Fair value of assets sold $(222,172)
Liabilities assumed by purchaser 107,122
Fair value of stock received 115,000
----------
Cash received $ -0-
----------
----------
</TABLE>
14. CONCENTRATIONS OF RISK
Approximately 81% of the Company's revenues for the year ended December
31, 1997 are export sales to international countries.
F-17
<PAGE>
15. PRIVATE PLACEMENTS (UNAUDITED)
For the quarter ending September 30, 1999, the Company sold 887,500
shares of common stock and three-year warrants to purchase 133,125 shares of
common stock at $5.00 per share, for an aggregate purchase price of $3,550,000
to foreign investors in an offshore transaction pursuant to Regulation S
promulgated under the Securities Act of 1933. The Company also received
subscriptions from various foreign investors for an additional 245,000 shares of
common stock and three-year warrants to purchase 36,750 shares of common stock
at $5.00 per share, for an aggregate purchase price of $980,000. The funds for
these subscribed shares were received on October 4, 1999. In connection with
these financings, the Company is obligated to pay a finder a fee equal to 7.5
percent of the gross proceeds of the sale, payable in cash or common stock
accrued at September 30, 1999. The finder will also receive three-year warrants
to purchase 113,250 shares of common stock at $5.00 per share.
During the three-month period ending September 30, 1999 the Company
received $2,101,250 for the exercise of warrants to purchase 857,500 shares of
common stock. The Company also received a notice to exercise warrants for 12,500
shares of common stock. The proceeds of this warrant exercise of $31,250 were
received on October 4, 1999.
On September 15, 1999, the Company issued 52,500 shares of common stock
to a consultant in consideration for $203,438 of services rendered.
On July 7, 1999, the Company issued 138,900 shares of common stock to a
finder in consideration for $277,800 of services rendered. These services were
in connection with a private placement completed in May 1999.
F-18
<PAGE>
You should rely only on the information contained in this prospectus. We have
not, and the selling stockholders have not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing the this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary..................................................... 2
Risk Factors........................................................... 5
Dividend Policy........................................................ 14
Capitalization......................................................... 15
Price Range of Common Stock............................................ 16
Management's Discussion and Analysis or Plan of Operation.............. 19
Business............................................................... 23
Management............................................................. 36
Principal Stockholders................................................. 44
Selling Stockholders and Plan of Distribution.......................... 45
Certain Transactions................................................... 50
Description of Securities.............................................. 51
Shares Eligible for Future Sale........................................ 52
Legal Matters.......................................................... 53
Experts................................................................ 53
Where You Can Find More Information.................................... 53
Index to Financial Statements.......................................... F-1
</TABLE>
-----------
Until __________, 2000, all dealers that effect transactions in our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealer's obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Cardiac Science, Inc.
8,791,630 Shares of Common Stock
-----------
PROSPECTUS
__________, 2000
F-19
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the Registrant in connection with the
issuance and distribution of the securities being registered hereby (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<S> <C>
Registration Fee (Securities and Exchange Commission)...................... $10,886
Printing and Engraving Expenses............................................ $ *
Accounting Fees and Expenses .............................................. $ *
Legal Fees and Expenses.................................................... $ *
Transfer Agent's Fees...................................................... $ *
Miscellaneous Expenses .................................................... $ *
Total...................................................................... $ *
</TABLE>
* To be filed by amendment
The Registrant will bear all costs and expenses of the registration of the
shares under the Securities Act and certain state securities laws, other than
fees of counsel for the selling stockholders and any discounts or commissions
payable with respect to sales of the shares.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article VIII of the Registrant's Bylaws provides for indemnification by
the Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law and California Law.
<PAGE>
Article VIII of the Registrant's Bylaws also provides for the
prepayment of expenses to persons entitled to indemnification (subject to
certain conditions), and permits the Registrant to purchase and maintain
insurance on behalf of any director, officer, employee, or agent against any
liability asserted against or incurred by them in any such capacity, or arising
out of their status as such, whether or not the Registrant would have the power
or obligation to indemnify them against such liability under the Registrant's
Bylaws.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
unlawful payments of dividends or unlawful stock repurchase, redemptions or
other distributions, or (iv) for any transaction from which the director derived
an improper personal benefit. Article SIXTH of the Registrant's Certificate of
Incorporation provides for such limitation of liability.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer, director, agent, or employee may be required
to bear the economic burdens of the foregoing liabilities and expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Registrant has made the following
issuances of securities, none of which were registered under the Securities Act
of 1933, as amended (the "Securities Act"):
On April 11, 1997, the Registrant issued 500 shares of convertible
preferred stock in connection with the acquisition of Diagnostic Monitoring
pursuant to Section 4(2) promulgated under the Securities Act. These shares were
converted into 500,000 shares of common stock on September 30, 1997.
On August 29, 1997, the Registrant sold 750,000 shares of common stock
for a purchase price of $1,500,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On September 30, 1997, the Registrant sold 50,000 shares of common
stock to a finder in consideration for $100,000 of services rendered. The shares
were issued pursuant to Regulation S promulgated under the Securities Act.
<PAGE>
On December 4, 1997, the Registrant sold 250,000 shares of common stock
for a purchase price of $500,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On April 26, 1998, the Registrant sold 150,000 shares of common stock
for a purchase price of $300,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On May 15, 1998, the Registrant sold 100,000 shares of common stock for
a purchase price of $200,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On June 16, 1998, the Registrant sold 50,000 shares of common stock for
a purchase price of $100,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On June 30, 1998, the Registrant sold 200,000 shares of common stock
for a purchase price of $400,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On August 10, 1998, the Registrant sold 50,000 shares of common stock
for a purchase price of $100,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On October 4, 1998, the Registrant sold 50,000 shares of common stock
for a purchase price of $100,000 to foreign investors in an offshore transaction
pursuant to Regulation S promulgated under the Securities Act.
On October 21, 1998, the Registrant sold 500,000 shares of common stock
and three-year warrants to purchase 125,000 shares of common stock at $2.50 per
share, for an aggregate purchase price of $1,000,000 to foreign investors in an
offshore transaction pursuant to Regulation S promulgated under the Securities
Act.
On December 22, 1998, the Registrant sold 750,000 shares of common
stock and three-year warrants to purchase 187,500 shares of common stock at
$2.50 per share, for an aggregate purchase price of $1,500,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated under
the Securities Act.
On July 7, 1999, the Registrant sold 138,900 shares of common stock to
a finder in consideration for $277,800 of services rendered. The shares were
issued pursuant to Regulation S promulgated under the Securities Act.
<PAGE>
For the period of August 27, 1999 through September 13, 1999, the
Registrant sold an aggregate of 857,500 shares of common stock through the
exercise of warrants for an aggregate purchase price of $2,101,250. These shares
were sold to foreign investors in an offshore transaction pursuant to Regulation
S promulgated under the Securities Act.
On September 15, 1999, the Registrant sold 52,500 shares of common
stock to Zevex, Inc., its contract manufacturer, in consideration for $203,438
of services rendered. The shares were sold pursuant to Section 4(2) of the
Securities Act.
For the quarter ending September 30, 1999, the Registrant sold 887,500
shares of common stock and three-year warrants to purchase 133,125 shares of
common stock at $5.00 per share, for an aggregate purchase price of $3,550,000
to foreign investors in an offshore transaction pursuant to Regulation S
promulgated under the Securities Act.
On October 4, 1999, the Registrant sold 245,000 shares of common stock
and three-year warrants to purchase 36,750 shares of common stock at $5.00 per
share, for an aggregate purchase price of $980,000 to foreign investors in an
offshore transaction pursuant to Regulation S promulgated under the Securities
Act.
For the period of October 4, 1999 through November 3, 1999, the
Registrant sold an aggregate of 50,000 shares of common stock through the
exercise of warrants for an aggregate purchase price of $125,000. These shares
were sold to foreign investors in an offshore transaction pursuant to Regulation
S promulgated under the Securities Act.
On November 5, 1999, the Registrant sold 500,000 shares of common stock
and three-year warrants to purchase 75,000 shares of common stock at $5.00 per
share, for an aggregate purchase price of $2,000,000 to foreign investors in an
offshore transaction pursuant to Regulation S promulgated under the Securities
Act.
On November 15, 1999, the Registrant sold 92,620 shares of common stock
to finders in consideration for $323,280 of services rendered. The shares were
issued pursuant to Regulation S promulgated under the Securities Act.
On December 10, 1999, the Registrant sold 125,000 shares of common
stock and three-year warrants to purchase 18,750 shares of common stock at $5.00
per share, for an aggregate purchase price of $500,000 to foreign investors in
an offshore transaction pursuant to Regulation S promulgated under the
Securities Act.
On December 15, 1999, the Registrant sold 31,400 shares of common stock
to finders in consideration for $78,500 of services rendered. The shares were
issued pursuant to Regulation D promulgated under the Securities Act.
<PAGE>
ITEM 16. 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)
5 Opinion of Counsel*
10.1 Facility Lease dated May 1, 1997 for 1176 Main St,
Bldg C, Irvine, CA (7)
10.2 1997 Stock Option/Stock Issuance Plan(6)
10.3 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)
10.4 Promissory Note, dated April 9, 1997 in principal
amount of $100,000 payable to Raymond W. Cohen (4)
10.5 Employment Agreement, dated May 1, 1998 between the
Company and Raymond Cohen (8)
10.6 Employment Agreement, dated September 14, 1998
between the Company and Michael Gioffredi (9)
10.7 Employment Agreement, dated July 1, 1998 between the
Company and Dongping Lin (10)
10.8 Employment Agreement, dated May 1, 1998 between the
Company and Jeffery Blanton (11)
10.9 Employment Agreement, dated May 1, 1998 between the
Company and Brett L. Scott (12)
10.10 Amended and Restated Loan and Security Agreement with
Silicon Valley Bank, dated December 30, 1998 (13)
10.11 Development and Manufacturing Agreement with Zevex,
Inc. dated August 21, 1998 (14)
10.12 Agreement for Purchase and Sale of Assets Between
Innovative Physician Services, Inc. (DBA Diagnostic
Monitoring), and Biosensor Corporation, dated
December 31, 1998 (15)
10.13+ Distribution and License Agreement with Medtronic
Physio-Control Corporation dated December 2, 1998
(16)
10.14 Addendum and Modification to the Distribution and
License Agreement, dated the 2nd day of December,
1998 by and between Medtronic Physio-Control
Corporation and Cardiac Science, Inc. (17)
10.15 Facility lease dated September 9, 1999 for 16931
Millikan Avenue, Irvine, CA (18)
23.1 Consent of Independent Accountants
23.2 Consent of Counsel (contained in opinion of counsel
filed as Exhibit 5)
27 Financial Data Schedule
</TABLE>
* To be filed by amendment.
1. Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
2. Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for
the year ended December 31, 1993.
3. Incorporated by reference to Exhibit 10.1 to Amendment No. 1, dated
April 18, 1992, to Application For Registration on Form 10.
4. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year
ended December 31, 1996.
5. Incorporated by reference to Exhibit 10.10 to Company's Form 10-QSB\A
No.1 for the quarter ended June 30, 1998
6. Incorporated by reference to the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders held on May 12, 1998
7. Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the year
ended December 31, 1997.
8. Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the year
ended December 31, 1998.
9. Incorporated by reference to Exhibit 10.6 to Form 10-KSB for the year
ended December 31, 1998.
10. Incorporated by reference to Exhibit 10.7 to Form 10-KSB for the year
ended December 31, 1998.
11. Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the year
ended December 31, 1998.
12. Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the year
ended December 31, 1998.
<PAGE>
13. Incorporated by reference to Exhibit 10.10 to Form 10-KSB for the year
ended December 31, 1998.
14. Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the year
ended December 31, 1998.
15. Incorporated by reference to Exhibit 10.12 to Form 10-KSB for the year
ended December 31, 1998.
16. Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the year
ended December 31, 1998.
17. Incorporated by reference to Exhibit 10.14 to Form 10-QSB for the
quarter ended June 30, 1999.
18. Incorporated by reference to Exhibit 10.15 to Form 10-QSB for the
quarter ended September 30, 1999.
+ Portions have been omitted pursuant to a request for confidential
treatment
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by final adjudication of such issue.
The undersigned Registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of Prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
(3) File, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or together, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any
<PAGE>
increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) Include any material information with respect
to the plan of distribution not previously discussed in the
registration statement or any material change to such
information in the registration statement.
(4) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on January 10th, 2000.
CARDIAC SCIENCE, INC.
By: /s/ Raymond W. Cohen
----------------------------------------------
Raymond W. Cohen
PRESIDENT, (PRINCIPAL EXECUTIVE OFFICER)
By: /s/ Brett L. Scott
-----------------------------------------------
Brett L. Scott
CHIEF FINANCIAL OFFICER, (PRINCIPAL FINANCIAL
AND ACCOUNTING OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Raymond Cohen, as his true and lawful
attorney-in-fact and agent, with full power of substitution and
resubstitution, for him and his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Raymond Cohen
- ------------------------
Raymond Cohen Director 1/10/00
/s/ Paul Quadros
- ------------------------
Paul Quadros Director 1/10/00
/s/ Peter Crosby
- ------------------------
Peter Crosby Director 1/10/00
/s/ Howard Evers
- ------------------------
Howard Evers Director 1/10/00
</TABLE>
CARDIAC SCIENCE, INC.
<PAGE>
EXHIBIT INDEX
<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)
5 Opinion of Counsel*
10.1 Facility Lease dated May 1, 1997 for 1176 Main St, Bldg C,
Irvine, CA (7)
10.2 1997 Stock Option/Stock Issuance Plan(6)
10.3 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)
10.4 Promissory Note, dated April 9, 1997 in principal amount of
$100,000 payable to Raymond W. Cohen (4)
10.5 Employment Agreement, dated May 1, 1998 between the Company
and Raymond Cohen (8)
10.6 Employment Agreement, dated September 14, 1998 between the
Company and Michael Gioffredi (9)
10.7 Employment Agreement, dated July 1, 1998 between the Company
and Dongping Lin (10)
10.8 Employment Agreement, dated May 1, 1998 between the Company
and Jeffery Blanton (11)
10.9 Employment Agreement, dated May 1, 1998 between the Company
and Brett L. Scott (12)
10.10 Amended and Restated Loan and Security Agreement with Silicon
Valley Bank, dated December 30, 1998 (13)
10.11 Development and Manufacturing Agreement with Zevex, Inc. dated
August 21, 1998 (14)
10.12 Agreement for Purchase and Sale of Assets Between Innovative
Physician Services, Inc. (DBA Diagnostic Monitoring), and
Biosensor Corporation, dated December 31, 1998 (15)
10.13+ Distribution and License Agreement with Medtronic
Physio-Control Corporation dated December 2, 1998 (16)
10.14 Addendum and Modification to the Distribution and License
Agreement, dated the 2nd day of December, 1998 by and
between Medtronic Physio-Control Corporation and Cardiac
Science, Inc. (17)
10.15 Facility lease dated September 9, 1999 for 16931 Millikan
Avenue, Irvine, CA (18)
23.1 Consent of Independent Accountants
23.2 Consent of Counsel (contained in opinion of counsel filed as
Exhibit 5)
27 Financial Data Schedule
</TABLE>
* To be filed by amendment
(1) Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
(2) Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for
the year ended December 31, 1993.
(3) Incorporated by reference to Exhibit 10.1 to Amendment No. 1, dated
April 18, 1992, to Application For Registration on Form 10.
(4) Incorporated by reference to Exhibit 10.8 to Form 10-K for the year
ended December 31, 1996.
(5) Incorporated by reference to Exhibit 10.10 to Company's Form 10-QSB\A
No.1 for the quarter ended June 30, 1998
(6) Incorporated by reference to the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders held on May 12, 1998
(7) Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the year
ended December 31, 1997.
(8) Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the year
ended December 31, 1998.
(9) Incorporated by reference to Exhibit 10.6 to Form 10-KSB for the year
ended December 31, 1998.
(10) Incorporated by reference to Exhibit 10.7 to Form 10-KSB for the year
ended December 31, 1998.
<PAGE>
(11) Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the year
ended December 31, 1998.
(12) Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the year
ended December 31, 1998.
(13) Incorporated by reference to Exhibit 10.10 to Form 10-KSB for the year
ended December 31, 1998.
(14) Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the year
ended December 31, 1998.
(15) Incorporated by reference to Exhibit 10.12 to Form 10-KSB for the year
ended December 31, 1998.
(16) Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the year
ended December 31, 1998.
(17) Incorporated by reference to Exhibit 10.14 to Form 10-QSB for the
quarter ended June 30, 1999.
(18) Incorporated by reference to Exhibit 10.15 to Form 10-QSB for the
quarter ended September 30, 1999.
+ Portions have been omitted pursuant to a request for confidential
treatment
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of
our report dated February 17, 1999, which contained an explanatory paragraph
regarding the Company's ability to continue as a going concern, relating to
the consolidated financial statements, which appears in such Registration
Statements. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Newport Beach, California
January 10, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1997 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1997 DEC-31-1998 SEP-30-1999
<CASH> 561,351 1,247,602 4,818,475
<SECURITIES> 0 0 0
<RECEIVABLES> 232,190 0 0
<ALLOWANCES> (16,028) 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 1,086,193 1,277,731 5,894,947
<PP&E> 180,484 215,687 402,230
<DEPRECIATION> (94,557) (97,977) (142,955)
<TOTAL-ASSETS> 1,783,985 1,555,707 6,334,854
<CURRENT-LIABILITIES> 1,086,556 1,827,629 1,275,951
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 4,975 7,015 10,987
<OTHER-SE> 692,454 (294,938) 4,937,685
<TOTAL-LIABILITY-AND-EQUITY> 1,783,985 1,555,707 6,334,854
<SALES> 0 0 0
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 1,775,704 3,721,551 4,820,742
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 4,247 65,353 6,550
<INCOME-PRETAX> (1,779,951) (3,786,904) (4,827,292)
<INCOME-TAX> 800 800 1600
<INCOME-CONTINUING> (1,780,751) (3,787,704) (4,828,892)
<DISCONTINUED> (43,847) (651,030) 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (1,824,598) (4,438,734) (4,828,892)
<EPS-BASIC> (0.47) (0.81) (0.52)
<EPS-DILUTED> 0 0 0
</TABLE>
