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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of
1934
For the fiscal Year Ended December 31, 1999
OR
[ ] Transition Report Under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the transition period from _____ to _____
Commission File Number 0-19567
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CARDIAC SCIENCE, INC.
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(Exact Name of registrant as specified in its Charter)
Delaware 33-0465681
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
16931 Millikan Avenue, Irvine, California 92606
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number (949) 587-0357
Securities registered under Section 12(b) of the Exchange Act: None.
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$0.001 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days: YES /X/ NO / /
Indicate by check mark if there is no disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendments to this Form 10-K: [X]
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $76,845,000 as of March 27, 2000 based on
the closing price of the Common Stock on the OTC/Bulletin Board on March 27,
2000. Shares held by each officer and director and by each person who owns 10%
or more of the outstanding Common Stock have been excluded in that such persons
may be deemed to be affiliates. The determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were 12,313,127 shares of the registrant's Common Stock
outstanding as of March 27, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Definitive Proxy Statement for Issuer's Annual Meeting of
Stockholders to be held in 2000 are incorporated by reference to Part III of
this Form 10-K.
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TABLE OF CONTENTS
<TABLE>
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Page
Item Number and Caption Number
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PART I
Item 1. Description of Business................................................................... 3
Item 2. Description of Property................................................................... 18
Item 3. Legal Proceedings......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders....................................... 18
PART II
Item 5. Market for Common Equity
and Related Stockholder Matters......................................................... 19
Item 6. Selected Financial Data................................................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 21
Item 8. Financial Statements ..................................................................... 25
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................................................... 41
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act......................................... 41
Item 11. Executive Compensation.................................................................... 41
Item 12. Security Ownership of Certain Beneficial
Owners and Management................................................................... 41
Item 13. Certain Relationships and Related Transactions............................................ 41
Item 14. Exhibits, List and Reports on Form 8-K.................................................... 41
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
OVERVIEW
We have developed proprietary tachyarrhythmia detection and
discrimination software technology -- RHYTHMx ECD-TM- -- designed to be
incorporated into external defibrillator and patient monitoring devices. RHYTHMx
ECD technology enables these devices which are attached prophylactically to
hospitalized patients who are determined to be at temporary risk of cardiac
arrest, to
- - continuously monitor their heart rhythms
- - accurately and instantly detect life-threatening ventricular
tachyarrhythmias and,
- - when appropriate and without the aid of hospital staff, automatically
deliver potentially life saving defibrillation shocks within seconds to
convert a patient's heart back to its normal rhythm.
To date, we have licensed the RHYTHMx ECD technology to one third
party and plan to license it to others. 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 FDA cleared
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 30 other international markets giving us
representation in 41 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
- a small, wearable, "cell phone sized" fully automatic
defibrillator that is designed to be worn by patients who are
ambulatory in either a hospital or home environment.
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.
We have been issued one patent, and we have one additional patent under
exclusive license. In addition, we have three patents pending and we intend to
file additional patent applications relating to our proprietary technology.
From May 20, 1991 (inception) through December 31, 1999, we incurred
losses of approximately $18.9 million. Successful completion of our development
program and our transition to attaining profitable operations is dependent upon
achieving a level of revenues adequate to support our cost structure. We
currently are seeking financing. We cannot assure you that we will be successful
in any of these areas.
Our offices are located at 16931 Millikan Avenue, Irvine, California
92606 and the telephone number is (949) 587-0357.
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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. While the urgency of
response is known to be a critical factor in saving lives, numerous hospital
studies have documented delays of five minutes or more from the calling of the
arrest to arrival of the first medical team member. The ability to respond to a
life-threatening heart rhythm within seconds minimizes oxygen loss to the brain,
thereby eliminating potential neurological damage and a diminished quality of
life that often occurs when defibrillation is withheld for even a few minutes.
Overall, by responding promptly, lives may be saved, debilitation may be
lessened, recovery periods shortened and hospital stays reduced.
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.
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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, referred to as "AED's", 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.
RHYTHMx ECD
RHYTHMx ECD-TM- is designed to be incorporated into external
defibrillator and patient monitoring devices. RHYTHMx ECD technology enables
these devices, which are attached prophylactically to hospitalized patients who
are determined to be at temporary risk of cardiac arrest, to
- continuously monitor their heart rhythms
- accurately and instantly detect life-threatening ventricular
tachyarrhythmias, and
- when appropriate and without the aid of hospital staff,
automatically deliver potentially life saving defibrillation
shocks within seconds to convert a patient's heart back to its
normal rhythm.
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Patient specific parameters may 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 the 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 evaluates the rhythm 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 a pre-production version of Powerheart was conducted
between February 1993 and May 1997. The trial was divided into two phases. Phase
I tested the tachyarrhythmia detection and discrimination algorithms. 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.
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>
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AHA'S HIGHEST GOALS POWERHEART PERFORMANCE
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<S> <C> <C> <C>
Shockable Sensitivity > 90.0 % 100.0 %
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Nonshockable Specificity > 99.0 % 99.5 %
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</TABLE>
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Source: Cardiac Science 510(k) submission
PRODUCTS
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. To that end, we have designed, are
developing, and intend to market a number of non-invasive automatic external
cardiac defibrillation or "AECD-Registered Trademark-" devices that use
RHYTHMx ECD as well as our other proprietary technology.
Our initial product, the Powerheart, is a fully automatic external
defibrillator-monitor designed for bedside in-hospital use. We received European
regulatory clearance for Powerheart in late 1999 and we made our first
commercial shipment on December 31, 1999. We subsequently received 510(k)
clearance from the FDA for the commercial version of the Powerheart in January
2000. Shipments of Powerhearts to Medtronic Physio-Control, as well as our
international distributors, began in the first quarter of 2000. The second
product, currently under development, is an automatic defibrillator module
designed for integration into existing third party patient monitoring systems.
The third product, also under development, is a small, wearable, "cell phone
sized" fully automatic defibrillator that is designed to be worn by patients who
are ambulatory in either a hospital or home environment.
POWERHEART
The Powerheart utilizes RHYTHMx ECD to monitor in-hospital patients at
high risk of 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 and without the aid of hospital
staff 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 cart.
Moreover, it can be used when patients are being transported within the
hospital. In addition to the RHYTHMx ECD, the Powerheart 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. 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
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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.
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.
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<TABLE>
<CAPTION>
CAPABILITY POWERHEART STANDARD HOSPITAL DEFIBRILLATOR
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<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>
In March 2000, we entered into an exclusive two year Technology
Integration and Distribution Letter Agreement with Data Critical Corporation
("DCC") to interface DCC's wireless technology, the AlarmView-TM- system, with
our fully-automatic external cardiac defibrillator devices. We plan to integrate
Data Critical's AlarmView-TM- wireless alarm notification system into the
Powerheart. Under the terms of the agreement, we are obligated to make certain
minimum purchases of the AlarmView-TM- system and to pay $175,000 in technology
and non-recurring engineering fees.
AUTOMATIC DEFIBRILLATOR MODULE
The Automatic Defibrillator Module currently under development is being
designed for integration into third party manufactured patient monitoring
systems. The module will include RHYTHMx ECD software technology, optimized
biphasic defibrillator module, in addition to other necessary components.
Functionally, the Automatic Defibrillator Module will extend the capabilities of
patient monitoring systems beyond their current diagnostic role to allow it to
deliver therapy. It is intended that 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.
In December 1999, we entered into an exclusive license and development
agreement with HeartSine Technologies, Inc. to utilize HeartSine's biphasic
defibrillation waveform technology in our in-hospital defibrillation products,
including the Automatic Defibrillator Module. HeartSine Technologies is a
privately held research and development firm with its primary operations in
Northern Ireland.
WEARABLE EXTERNAL CARDIOVERTER DEFIBRILLATOR
Individuals experiencing cardiac arrest need immediate
defibrillation wherever the event occurs. To address this need, we were
seeking to design a public access defibrillator. We have revised this
original concept, and we are now seeking to design and develop a small,
wearable, "cell phone sized" fully automatic defibrillator to be worn by
patients who are ambulatory in a "step-down" unit in a hospital and for
at-home patients who are at temporary risk for a period ranging from days to
weeks. We intend to design the device to include our RHYTHMx ECD technology
and be small, lightweight, portable, battery-operated and very easy-to-use.
Other anticipated features will include optimized low energy biphasic
defibrillator, voice prompts to assist users, disposable defibrillator pads,
data recording, storage and retrieval, and self-test capabilities.
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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 have established a scientific advisory board consisting of expert
physicians and professors from around the world. Members of this group have
developed protocols and with our sponsporship, have initiated a number of
multi-center studies for the purpose of validating caregiver and patient
benefits and associated cost advantages of the Powerheart as compared to other
standards 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 February 2000, we had signed exclusive
distribution agreements for 41 international markets. 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
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. The first phase
of the agreement, which involved the development and completion of prototypes of
the Powerheart, was completed in October 1999. During the second phase of the
agreement, 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 $400,135 and $459,360 for the years ending December
31, 1999 and 1998, respectively.
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 to 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.
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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,
Agilent (a spin off from 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 Agilent), 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.
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.
In addition we have three patents pending, and we intend to file
additional patent applications relating to our proprietary technology.
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.
11
<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 January 2000, we received
clearance from the FDA 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.
RESEARCH AND DEVELOPMENT
Research and development expenses for the years ended December 31,
1999, 1998 and 1997 were $4,406,297, $2,209,524, and $756,936, respectively. We
intend to continue to devote resources and capital to research and development
so we can improve and refine our existing products and technology, develop and
commercialize our products currently under development, and develop new
applications for our technology.
BACKLOG
As of December 31, 1999, we had a backlog of firm orders of
approximately $1,200,000 compared to $0 as of December 31, 1998. We believe our
current backlog will be filled this year.
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.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (and ony other reports issued by us
from time tome) 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 tatements should not be regarded as a
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<PAGE>
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.
RISK FACTORS
An investment in our common stock involves a high degree of risk. If
any of the following risks actually occur, our business, financial condition, or
operating results could be materially adversely affected.
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 $ 7,720,000, $4,439,000 and
$1,825,000 and for the years ended December 31, 1999, 1998 and 1997,
respectively. As of December 31, 1999, we had an accumulated deficit of
$18,938,145, which has since increased. 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 product rollout of the Powerheart. The timing and amounts
of these expenditures will depend upon many factors, some of which are beyond
our control. As a result, we anticipate that we will continue to incur losses
for the foreseeable future.
We received a report on our consolidated financial statements from our
independent accountants, PricewaterhouseCoopers LLP, for the year ended December
31, 1999, 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;
- 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
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manufacturing agreement with Zevex International, Inc., a contract medical
device manufacturer. 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.
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,
- 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.
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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 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.;
- Agilent (a spin-off from Hewlett Packard Corporation)
and its subsidiary, HeartStream, Inc.; and
- Zoll Medical, Inc.
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 30 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.
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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 to hire and to 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,
- 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,
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- 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.
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
- other 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.
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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 1,460,591 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.
ITEM 2. DESCRIPTION OF PROPERTY.
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.
ITEM 3. LEGAL PROCEEDINGS.
We currently are not involved in any legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
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 $2.38 $1.13
</TABLE>
HOLDERS
As of March 27, 2000, there were approximately 700 holders of record of
our common stock.
DIVIDENDS
We have never paid any cash dividends on the Common Stock. We presently
intend to retain earnings, if any, to finance our operations and therefore do
not anticipate paying any cash dividends in the foreseeable future. The payment
of any dividends will depend upon, among other things, our earnings, assets and
general financial condition.
PRIVATE PLACEMENTS
During the quarter ending December 31, 1999, we sold
- 625,000 shares of common stock and three-year warrants to
purchase 93,750 shares of common stock at $5.00 per share, for
an aggregate purchase price of $2,500,000 to foreign investors
in an offshore transaction pursuant to Regulation S
promulgated under the Securities Act of 1933. We are 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 December 31, 1999. The finder will also receive three-year
warrants to purchase 62,500 shares of common stock at $5.00
per share.
- 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 of 1933.
- an aggregate of 124,020 shares of common stock to finders in
consideration for $401,880 of services rendered. The shares
were issued pursuant to Regulation S promulgated under the
Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information is derived from our
consolidated financial statements. You should read this summary financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
For the Year Ended December 31,
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales --- --- --- --- $ 103
---------- ---------- ---------- ---------- ----------
Gross Profit --- --- --- --- 5
---------- ---------- ---------- ---------- ----------
Operating expenses $ 1,020 $ 827 $ 1,776 $ 3,722 7,629
========== ========== ========== ========== ==========
Loss from continuing operations (940) (792) (1,781) (3,788) (7,720)
Loss from discontinued operations --- --- (44) (651) ---
---------- ---------- ---------- ---------- ----------
Net loss $ (940) $ (792) $ (1,825) $ (4,439) $ (7,720)
========== ========== ========== ========== ==========
Basic and diluted (loss) per share:
Continuing operations $ (0.28) $ (0.23) $ (0.46) $ (0.69) $ (0.85)
Discontinued operations --- --- (0.01) (0.12) ---
---------- ---------- ---------- ---------- ----------
Net loss per share $ (0.28) $ (0.23) $ (0.47) $ (0.81) $ (0.85)
========== ========== ========== ========== ==========
Weighted average shares used
in computing loss per share 3,327 3,395 3,876 5,460 9,113
========== ========== ========== ========== ==========
</TABLE>
SELECTED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
December 31,
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,178 $ 413 $ 561 $ 1,248 $ 5,902
Working capital (deficit) 969 241 (.3) (550) 4,384
Total assets 1,230 453 1,784 1,556 7,044
Long term debt, net of
current portion 102 --- --- 16 104
Total stockholders' equity
(deficit) 909 269 697 (288) 4,822
</TABLE>
20
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto set forth elsewhere herein.
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 developed proprietary tachyarrhythmia detection and
discrimination software technology -- RHYTHMx ECD-TM- -- designed to be
incorporated into external defibrillator and patient monitoring devices. RHYTHMx
ECD technology enables these devices, which are attached prophylactically to
hospitalized patients who are determined to be at temporary risk of cardiac
arrest, to
- continuously monitor their heart rhythms
- accurately and instantly detect life-threatening ventricular
tachyarrhythmias, and
- when appropriate and without the aid of hospital staff,
automatically deliver potentially life saving defibrillation
shocks within seconds to convert a patient's heart back to its
normal rhythm.
We commenced operations in May 1991. Our operations consisted primarily
of research and development activities and clinical FDA testing until our
acquisition of Diagnostic Monitoring in April 1997. 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 6 of the consolidated financial statements).
We have three products, two of which are still under development,
that utilize our proprietary technology. Our initial product, the
Powerheart-Registered Trademark-, is a fully automatic external bedside
defibrillator-monitor designed for bedside 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 heart
rhythms (ventricular tachyarrhythmias) that lead to cardiac arrest.
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 30
other international markets giving us representation in 41 countries.
We received 510(k) clearance from the U.S. Food and Drug Administration
for the clinical version of the Powerheart in October 1997. We received European
regulatory clearance for Powerheart in late 1999 and we made our first
commercial shipment on December 31, 1999. We subsequently received 510(k)
clearance from the FDA for the commercial version of the Powerheart in January
2000. Shipments of Powerhearts to Medtronic Physio-Control, as well as our
international distributors, began in the first quarter of 2000.
The second product, currently under development, is a fully automatic
defibrillator module that is designed for integration into third party
manufactured 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 the aid of hospital staff. The third
product, also under development, is a small, wearable, "cell phone sized" fully
automatic defibrillator that is designed to be worn by patients who are
ambulatory in either a hospital or home environment.
We have been issued one patent and we have one additional patent under
exclusive license. In addition we have three patents pending and we intend to
file additional patents relating to our proprietary technology.
21
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Sales were $102,900 for the year ended December 31, 1999 as compared to
no sales for the year ended December 31, 1998. We began shipments of the
Powerheart with sales of 20 units to Medtronic Physio-Control in December 1999.
Cost of sales were $98,001 for the year ended December 31, 1999 as
compared to no cost of sales for the year ended December 31, 1998. This amount
was attributable to the sale of Powerhearts only and did not include the sale of
accessories or disposable electrodes. We anticipate that our costs of sales as a
percentage of sales will decrease in the future due to improvements in
manufacturing and material procurement processes and changes in the blend of
product sales to include accessories and disposable electrodes.
Expenses for research and development increased to $4,406,207 for the
year ended December 31, 1999 compared to $2,209,524 for the year ended December
31, 1998. 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, payments to independent
engineering contractors and Zevex, Inc., our contract manufacturer and the
infrastructure necessary to support sustaining engineering for the Powerheart
and development of new products. Also included were initial costs associated
with the development of a fully automatic defibrillator module (see Note 14 to
the consolidated financial statements).
Sales and marketing expenses increased to $1,370,049 for the year ended
December 31, 1999, compared to $341,476 for the year ended December 31, 1998.
The increase was a result of pre-marketing expenses for 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 $1,852,672 for the
year ended December 31, 1999, compared to $1,170,551 for the year ended December
31, 1998. The increase was due to increases in personnel costs and related
fringes, insurance premiums for both product liability and directors and
officers insurance, and professional fees.
Net interest income was $20,870 for the year ended December 31, 1999 as
compared to net interest expense of ($65,353) for the year ended December 31,
1998. The increase in net interest income resulted from the investment of
proceeds from private placements throughout 1999 and the reduction of the bank
line of credit and debt discount in connection with the issuance of warrants
recorded in 1998.
For the year ended December 31, 1999, we incurred a net loss from
continuing operations of $7,719,759, as compared to $3,787,704 for the year
ended December 31, 1998. The increased loss for the year ended December 31, 1999
primarily was attributable to the increases in operating expenses, which
included expenses incurred in the process of commercializing the Powerheart and
expenses incurred for the market release of the Powerheart in December 1999.
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 begin initial
preparations for market release. Such expenses included personnel costs and
related fringes, insurance premiums for both product liability and directors and
officers insurance, and professional fees.
22
<PAGE>
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.
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
primarily was attributable to the increases in operating expenses, which
included expenses incurred in the process of commercializing the Powerheart.
On December 31, 1998 we sold substantially all of the assets of
Diagnostic Monitoring ("DM"). We have restated our prior financial statements to
present the operating results of DM as a discontinued operation (see note 6 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 DM's assets of $549,618. This non-cash loss primarily was attributable
to the write off of goodwill associated with the original purchase of DM.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $5,901,934
and working capital of $4,384,452 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
$18,938,145 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 product rollout of the Powerheart. The timing and amounts of these
expenditures will depend upon many factors, some of which are beyond our
control.
In 1999, we raised approximately $13 million in a series of private
equity placements and through the exercise of outstanding warrants. In
connection with these equity 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 balances will be sufficient to meet
our cash requirements into June 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.
INCOME TAXES
We have approximately $17,650,000 of federal net operating loss
carryforwards and $5,450,000 of California net operating loss carryforwards at
December 31, 1999 which will begin to expire in 2006 and 2000; respectively. We
have research and experimentation credit carryforwards for federal and state
purposes of approximately $190,000 and $135,000, respectively, which begin to
expire in 2010. The utilization of net operating losses and tax credit
carryforwards may be limited under the provision of Internal Revenue Code
Section 382 and similar state provisions. We had deferred tax assets of
approximately $7,372,000 at December 31, 1999. We have established a valuation
allowance to fully offset the deferred tax assets.
YEAR 2000 ISSUE
Many software applications and operational programs written in the past
may not properly recognize calendar dates beginning in the Year 2000. It is
possible that, even after January 1, 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
23
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
For an index to the financial statements and supplementary data, see
Item 14(a).
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. 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 auditing standards generally
accepted in the United States 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, and
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
Costa Mesa, California
February 25, 2000
25
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,901,934 $ 1,247,602
Accounts receivable 102,900 ---
Inventory 438,592 ---
Prepaid expenses 59,646 30,129
----------------- -----------------
Total current assets 6,503,072 1,277,731
Equipment, net of accumulated depreciation of $176,341 and $97,979 in 1999 391,085 117,710
and 1998, respectively
Investment in unconsolidated affiliate --- 115,000
Other assets 150,178 45,266
----------------- -----------------
$ 7,044,335 $ 1,555,707
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,092,903 $ 1,599,216
Current portion of capital lease obligation 25,717 3,413
Notes payable --- 225,000
---------------- -----------------
Total current liabilities 2,118,620 1,827,629
----------------- -----------------
Long term portion of capital lease obligation 103,507 16,001
----------------- -----------------
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, 12,031,252
and 7,014,738 shares, respectively, issued and outstanding 12,031 7,015
Common stock subscribed --- 100,000
Additional paid-in capital 23,748,322 10,823,448
Accumulated deficit (18,938,145) (11,218,386)
----------------- -----------------
Total stockholders' equity (deficit) 4,822,208 (287,923)
----------------- -----------------
$ 7,044,335 $ 1,555,707
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
26
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------- ----------------- ----------------
<S> <C> <C> <C>
Sales $ 102,900 $ --- $ ---
Cost of goods sold (98,001) --- ---
----------------- ----------------- -----------------
Gross profit 4,899 --- ---
Operating expenses:
Research and development 4,406,207 2,209,524 756,936
Marketing 1,370,049 341,476 251,777
General and administrative 1,852,672 1,170,551 766,991
----------------- ----------------- -----------------
Loss from continuing operations (7,624,029) (3,721,551) (1,775,704)
Interest income (expense), net 20,870 (65,353) (4,247)
Loss in unconsolidated affiliate (115,000) --- ---
----------------- ----------------- -----------------
Loss from continuing operations before provision
for income taxes (7,718,159) (3,786,904) (1,779,951)
Provision for income taxes 1,600 800 800
----------------- ----------------- -----------------
Loss from continuing operations (7,719,759) (1,780,751)
(3,787,704)
----------------- ----------------- -----------------
Discontinued operations:
Loss from discontinued operations, net
of income taxes --- (101,412) (43,847)
Loss on sale of assets --- (549,618) ---
----------------- ----------------- -----------------
Loss from discontinued operations --- (651,030) (43,847)
----------------- ----------------- -----------------
Net loss $ (7,719,759) $ (4,438,734) $ (1,824,598)
================= ================= =================
Basic and diluted loss per share:
Continuing operations $ (0.85) $ (0.69) $ (0.46)
Discontinued operations --- (0.12) (0.01)
----------------- ----------------- -----------------
Net loss per share $ (0.85) $ (0.81) $ (0.47)
================= ================= =================
Weighted average number of shares used in the
computation of net loss per share 9,112,564 5,459,793 3,875,656
================= ================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
27
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock Preferred Stock
-------------------- -------------------
Number Amount Number Amount
of of
Shares Shares
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 3,265,780 $ 3,266 --- $ ---
Issuance of preferred stock for the
acquisition of Diagnostic Monitoring 500 600,000
Issuance of common stock for
subscribed amount 158,958 159
Conversion of preferred stock into
common stock 500,000 500 (500) (600,000)
Issuance of common stock for cash
at $2.00 per share 1,000,000 1,000
Issuance costs (including 50,000 shares
of common stock at $2.00 per share) 50,000 50
Net loss
---------- --------- -------- ---------
Balance at December 31, 1997 4,974,738 4,975 --- ---
Issuance of common stock for cash
at $2.00 per share (net of cost
of issuances of $829,896) 1,800,000 1,800
Issuance of common stock warrants
Common stock warrants exercised at
$0.01 per share 175,000 175
Common stock subscribed at $2.00 per
share in cash
Issuance of common stock for license
fees and services at $2.00 per share 55,000 55
Issuance of common stock for compensation
at $2.00 per share 10,000 10
Compensation related to fair value of
options granted to non-employees
Net loss
---------- --------- -------- ---------
Balance at December 31, 1998 7,014,738 7,015 --- ---
Issuance of common stock for
common stock subscribed 50,000 50
Issuance of common stock for cash at
$2.00 per share (net of cost of
issuances of $712,307) 1,850,000 1,850
Issuance of common stock warrants
Issuance of common stock for finder's
fees at $2.00 per share 138,900 139
Issuance of common stock for cash at
$4.00 per share (net of cost of
issuances of $1,082,356) 1,757,500 1,757
Issuance of common stock warrants
Issuance of common stock for finder's fees
at $4.00 per share 61,220 61
Common stock warrants exercised at
$0.01 per share 30,625 30
Common stock warrants exercised at an
average of $2.45 per share (net of
issuance costs of $261,914) 907,500 908
Issuance of common stock for finder's fees
at $2.50 per share 62,800 63
Issuance of common stock for license fees
and services at an average of $2.67
per share 157,969 158
Compensation related to fair value of
options granted to non-employees
Net loss
---------- --------- -------- ---------
Balances, December 31, 1999 12,031,252 $ 12,031 --- $ ---
========== ========= ======== =========
<CAPTION>
Common Stock
Subscribed
--------------------
Number Amount Additional Accumulated
of Paid-In Deficit Total
Shares Capital
--------- ---------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 158,958 $ 268,000 $ 4,952,981 $(4,955,055) $ 269,192
Issuance of preferred stock for the
acquisition of Diagnostic Monitoring 600,000
Issuance of common stock for
subscribed amount (158,958) (268,000) 267,841 ---
Conversion of preferred stock into
common stock 599,500 ---
Issuance of common stock for cash
at $2.00 per share 1,999,000 2,000,000
Issuance costs (including 50,000 shares
of common stock at $2.00 per share) (347,215) (347,165)
Net loss (1,824,598) (1,824,598)
--------- ---------- ------------ ------------ -----------
Balance at December 31, 1997 --- --- 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) 2,768,303 2,770,104
Issuance of common stock warrants 433,416 433,416
Common stock warrants exercised at
$0.01 per share 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 109,945 110,000
Issuance of common stock for compensation
at $2.00 per share 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 50,000 100,000 10,823,448 (11,218,386) (287,923)
Issuance of common stock for
common stock subscribed (50,000) (100,000) 99,950 ---
Issuance of common stock for cash at
$2.00 per share (net of cost of
issuances of $712,307) 2,985,843 2,987,693
Issuance of common stock warrants 256,136 256,136
Issuance of common stock for finder's
fees at $2.00 per share 277,661 277,800
Issuance of common stock for cash at
$4.00 per share (net of cost of
issuances of $1,082,356) 5,945,887 5,947,644
Issuance of common stock warrants 405,994 405,994
Issuance of common stock for finder's fees
at $4.00 per share 244,819 244,880
Common stock warrants exercised at
$0.01 per share 320 350
Common stock warrants exercised at an
average of $2.45 per share (net of
issuance costs of $261,914) 1,963,428 1,964,336
Issuance of common stock for finder's fees
at $2.50 per share 156,937 157,000
Issuance of common stock for license fees
and services at an average of $2.67
per share 421,331 421,489
Compensation related to fair value of
options granted to non-employees 166,568 166,568
Net loss (7,719,759) (7,719,759)
--------- ---------- ------------ ------------ -----------
Balances, December 31, 1999 --- $ --- $ 23,748,322 $(18,938,145) $ 4,822,208
========= ========== ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
28
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ending December 31,
1999 1998 1997
----------------- ------------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (7,719,759) $ (4,438,734) $ (1,824,598)
Adjustments to reconcile net loss to net
cash used in operating activities from continuing operations:
Loss from discontinued operations --- 101,412 43,847
Loss on sale of assets --- 549,618 ---
Loss in unconsolidated affiliate 115,000 --- ---
Depreciation and amortization 78,362 35,114 20,762
Amortization of debt discount --- 44,785 ---
Fair value of options granted to
non-employees 166,568 17,862 ---
Expenses paid with common stock 421,681 130,000 ---
Changes in operating assets and liabilities,exclusive of Diagnostic
Monitoring:
Accounts receivable (102,900) --- ---
Inventory (438,592) --- ---
Prepaid expenses (29,516) --- (88,374)
Other assets (104,912) --- ---
Accounts payable and accrued expenses 464,617 137,505 536,180
----------------- ------------------- -----------------
Net cash used in operating activities from continuing operations (7,149,451) (3,422,438) (1,312,183)
----------------- ------------------- -----------------
Net cash provided by (used) in discontinued operations --- 530,438 (239,489)
----------------- ------------------- -----------------
Cash flows from investing activities:
Purchase of equipment (241,917) (53,218) (64,700)
Decrease in other assets --- 4,012 ---
Cash acquired in Diagnostic Monitoring acquisition --- --- 43,223
----------------- ------------------- -----------------
Net cash used in investing activities (241,917) (49,206) (21,477)
----------------- ------------------- -----------------
Cash flows from financing activities:
Proceeds (payment) on bank line of credit (125,000) 125,000 (18,903)
Payments of note payable to stockholder --- (70,233) (12,743)
Proceeds (payment) of note payable (100,000) 100,000 ---
Proceeds from sale of common stock 10,730,000 3,600,000 2,000,000
Proceeds from common stock subscribed --- 100,000 ---
Proceeds from exercise of common stock warrants 2,226,600 2,000 ---
Costs of equity issuances (685,900) (229,310) (247,165)
----------------- ------------------- -----------------
Net cash provided by financing activities 12,045,700 3,627,457 1,721,189
----------------- ------------------- -----------------
Net increase in cash and cash equivalents 4,654,332 686,251 148,040
Cash and cash equivalents at beginning of year 1,247,602 561,351 413,311
----------------- ------------------- -----------------
Cash and cash equivalents at end of year $ 5,901,934 $ 1,247,602 $ 561,351
----------------- ------------------- -----------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
29
<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 to treat persons
suffering from or at high risk of life-threatening arrhythmias. The Company has
developed proprietary tachyarrhythmia detection and discrimination software
technology -- RHYTHMx ECD-TM- -- designed to be incorporated into external
defibrillator and patient monitoring devices. RHYTHMx ECD technology enables
these devices, which are attached prophylactically to hospitalized patients who
are determined to be at temporary risk of cardiac arrest, to continuously
monitor their heart rhythms, accurately and instantly detect life-threatening
ventricular tachyarrhythmias and, when appropriate and without the aid of
hospital staff, automatically deliver potentially life saving defibrillation
shocks within seconds to convert a patient's heart back to its normal rhythm.
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 6).
2. CONTINUED EXISTENCE
Additional capital is needed to fulfill the Company's marketing,
research and product development goals. Through December 31, 1999, the Company
incurred losses of approximately $18.9 million. Recovery of the Company's assets
is dependent upon future events, the outcome of which is indeterminable.
Additionally, successful completion of the Company's development program and its
transition to attain profitable operations is dependent upon achieving a level
of revenues adequate to support the Company's cost structure. The Company
anticipates that its current cash balance will be sufficient to meet the
Company's cash requirements into June 2000. Further capital additions 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.
30
<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.
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 $5.8 million of its cash in a money market fund with
one major financial institution at December 31, 1999.
INVENTORY
Inventory, which consists of finished products and subassemblies, is
stated at the lower of cost (first-in, first-out) or market value. Inventory at
December 31, 1999 was comprised of finished goods.
EQUIPMENT
Property and equipment is carried at cost. Depreciation of equipment is
provided on the straight-line method over estimated useful lives of five years.
Repairs and maintenance are expensed as incurred while renewals or betterments
are capitalized. Upon the sale or retirement of equipment, the accounts are
relieved of the cost and related accumulated depreciation and any resulting gain
or loss is included in operations.
LONG-LIVED ASSETS
The 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
(see Notes 11 and 12).
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
31
<PAGE>
REVENUE RECOGNITION
The Company's customers are distributors which sell goods to third
party end users. The Company is not contractually obligated to repurchase any
inventory from distributors. Revenue is generally recognized when products are
shipped and the receivable is deemed collectible.
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.
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 shares 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. 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 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>
32
<PAGE>
5. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On December 31, 1998, the Company acquired a 7.7% voting interest in
Biotel, Inc. ("Biotel", previously Biosensor Corporation) a Minnesota
corporation, 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. As a result of recurring losses for the twelve month period ending December
31, 1999, Biotel had a negative net worth and management determined under SFAS
No. 121 that this investment has been impaired, accordingly the value of this
investment was written down to $0.
6. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of substantially
all of DM's assets to Biotel 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 Biotel valued at $115,000. In
addition, Biotel 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 presented 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. RECAPITALIZATION AND REVERSE SPLIT
In January 1997, the Company entered into an advisory and consulting
agreement (the "Sorbus Agreement") with Sorbus Asset Strategies, S.A., a Swiss
company ("Sorbus"). Sorbus agreed, among other things, to locate, on a best
efforts basis, potential investors to purchase shares of common stock, (the
"Financing"). As a condition precedent to the Financing, the Sorbus Agreement
provided, among other things, that the Company obtain the approval of its Board
of Directors and stockholders to amend the Company's Certificate of
Incorporation (i) to effectuate a one-for-11.42857143 reverse stock split of the
issued and outstanding shares of the common stock (the "Reverse Split") and (ii)
to reduce the number of authorized shares of common stock from 40,000,000 to
20,000,000 shares (the "Stock Reduction"). On April 9, 1997, the Board of
Directors of the Company unanimously approved the Reverse Split and the Stock
Reduction. Stockholders holding a majority of the issued and outstanding common
stock and all of the Preferred Stock approved the
33
<PAGE>
Reverse Split and the Stock Reduction on May 15, 1997. The Financing was
completed in 1997 when the Company sold 1,000,000 shares of common stock for
$2,000,000 in gross proceeds.
8. NOTES PAYABLE
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
included certain covenants. Through December 31, 1998 the Company had net
borrowings of $125,000 under the agreement. 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. No amounts were outstanding at
December 31, 1999.
In September 1998, the Company borrowed $100,000 from an investor which
was repaid in January 1999. The loan was non-interest bearing, and 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
12).
9. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE
The Company leases office equipment under capital lease
agreements which expire during fiscal 2004. Future minimum lease payments under
this capital lease obligation for the years ending December 31 are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 40,381
2001 40,381
2002 40,381
2003 38,102
2004 7,032
-----------------
166,277
Less: interest (37,053)
-----------------
$ 129,224
=================
</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,
1999, 1998 and 1997 was $91,676, $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>
2000 $ 199,587
2001 190,380
2002 198,000
2003 205,920
2004 214,152
-----------------
$ 1,008,039
=================
</TABLE>
34
<PAGE>
In connection with the Company's facility lease, the Company issued a
letter of credit in the amount of $80,000 as collateral for tenant improvements
provided by the lessor. The letter of credit is secured by a certificate of
deposit in the amount of $80,000 which is classified as an other asset at
December 31, 1999. The letter of credit reduces to $40,000 at December 31, 2000
and terminates at December 31, 2001.
10. 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>
1999 1998 1997
--------------- ---------------- -------------
<S> <C> <C> <C>
Property and equipment $ 6,301 $ (3,273) $ (951)
Capitalized costs (227,375) (124,181) (67,814)
Accrued liabilities (24,979) (10,429) 3,937
Allowance for doubtful accounts --- 6,866 (6,866)
Inventory reserve --- 4,284 (4,284)
State income taxes 272 (272) 272
Tax credit carryforwards (125,861) 1,247 (68,089)
Other (79,010) --- ---
Net operating loss carryforwards (2,740,387) (1,330,753) (639,508)
--------------- ---------------- -------------
(3,191,039) (1,456,511) (783,303)
Valuation allowance 3,191,039 1,456,511 783,303
---------------- --------------- -------------
$ 0 $ 0 $ 0
=============== ================ =============
</TABLE>
The temporary differences which give rise to deferred income tax assets
and liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
<S> <C> <C>
Property and equipment $ (1,322) $ 4,980
Capitalized costs 449,958 222,583
Accrued liabilities 36,426 11,447
State income taxes 544 816
Tax credit carryforwards 323,228 197,367
Other 79,010 ---
Net operating loss carryforwards 6,484,528 3,744,142
--------------- --------------
7,372,372 4,181,335
Valuation allowance (7,372,372) (4,181,335)
--------------- -------------
$ 0 $ 0
=============== ==============
</TABLE>
The provision for income taxes differs from the amount that would
result from applying the federal statutory rate for the years ended December 31
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory regular federal income tax rate (34.0%) (34.0%) (34.0%)
Nondeductible expenses 0.1 5.0 0.2
State income taxes 0.1 0.1 0.1
Tax credits (1.3) (0.3) (1.0)
Change in valuation allowance 35.1 29.3 34.8
----------- ----------- -----------
0.0% 0.1% 0.1%
=========== ============ ===========
</TABLE>
35
<PAGE>
As of December 31, 1999, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $190,000
and $135,000, respectively. These credits begin to expire in 2010 for federal
and state purposes. The Company also has approximately $17,650,000 and
$5,450,000 of federal and state net operating loss carryforwards which will
begin to expire in 2006 and 2000, 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.
11. 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.
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 1,305,000 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.
36
<PAGE>
Stock option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1999 1998 1997
------------------ ------------------- -------------------
<S> <C> <C> <C>
Outstanding, beginning of year 704,892 33,688 148,315
Granted 632,308 739,892 ---
Exercised --- --- ---
Canceled (32,200) (68,688) (114,627)
------------------ ------------------- -------------------
Outstanding, end of year 1,305,000 704,892 33,688
================== =================== ===================
Exercisable, end of year 327,433 134,946 24,588
================== =================== ===================
As of the end of the year:
Option price per share $1.88 - $3.88 $1.88 - $2.00 $2.97 - $ 21.43
Weighted average option price
per share $2.32 $1.99 $4.17
</TABLE>
At December 31, 1999 there were no shares reserved or available for
issuance under the 1997 Plan. The weighted average remaining contractual life as
of December 31, 1999 is approximately 106 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 1,000,000 shares. This amendment to the 1997 Plan is subject to
stockholder approval at the Annual Meeting of Stockholders to be held in 2000.
For stock options granted in 1999 and 1998 to non-employees
(consultants), the Company has recognized compensation cost of $166,568 and
$17,862, respectively, using a Black-Scholes option pricing model.
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 years ended December 31, 1999, 1998 and 1997: risk free
interest rate with a range of 4.1% to 6.5%; dividend yield of 0%; volatility of
the expected market prices of the Company's common stock of 67%, 61.4% and
85.1%; respectively, and expected life of the options of 4 years.
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,
1999 1998 1997
--------------------- ------------------- -------------------
<S> <C> <C> <C>
Pro forma net loss $ (8,000) $ (4,573) $ (1,837)
Pro forma net loss per share $ (0.88) $ (0.84) (0.47)
</TABLE>
37
<PAGE>
12. WARRANTS
Historically the Company has granted warrants in connection with fund
raising activities and as consideration for certain services. Warrants to
purchase 1,837,351 shares of common stock were outstanding and exercisable at
December 31, 1999. A summary follows:
<TABLE>
<CAPTION>
Number of Per Share Expiration
Grant Date Warrants Exercise Date
Price
---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
1992 156,101 $4.57 2002
1994 844,375 $0.01 2004
1996 17,500 $2.00 2001
1997 80,000 $2.25 2007
1998 50,000 $2.00 2001
1998 200,000 $3.00 2001
1999 50,000 $2.50 2002
1999 439,375 $5.00 2002
------------------
Total 1,837,351
==================
</TABLE>
The Company granted 939,375 warrants, of which 450,000 were exercised
in 1999, in connection with private placements in 1999. These warrants were
assigned a fair value of $662,130 determined using a Black-Scholes model and
were charged to equity as a cost of raising capital.
13. 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, as subsequently amended, 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 integrate
the RHYTHMx ECD technology 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 the Company 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
RHYTHMx ECD.
Pursuant to the agreement, Medtronic Physio-Control was granted
warrants to purchase 200,000 shares of common stock at $3.00 per share. These
warrants were assigned a fair value of $49,380 determined using a Black-Scholes
model, and recorded as an other asset to be amortized over the five-year life of
the Distribution and License Agreement. 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.
This agreement was amended in May 1999 to expand the exclusive
territory to include the United Kingdom (including Northern Ireland and
Scotland), Ireland, France, Germany, the Netherlands, Norway, Finland, Denmark
and Sweden. The amendment also extended the expiration date for the initial
grant of 200,000 warrants from November 1999 to November 30, 2000.
14. DEVELOPMENT AND LICENSE AGREEMENT
In December 1999, the Company entered into an exclusive license and
development agreement with HeartSine Technologies, Inc. to utilize HeartSine's
biphasic defibrillation waveform technology in the Company's in-hospital
defibrillation products. HeartSine Technologies is a privately held research and
development firm with its primary operations in Northern Ireland. Pursuant to
the agreement, the Company will pay to HeartSine a total of $650,000 payable
upon the attainment of agreed upon milestones. Included in the amount is a one
time license fee of $250,000 which was paid in December 1999 and included in
research and development expense for the year
38
<PAGE>
ended December 31, 1999.
In July 1999 the Company terminated its agreement in principle to
acquire HeartSine. During 1999, the Company advanced cash to HeartSine in the
amount of $189,360. The Company has obtained a promissory note and security
agreement with regard to these advances. The principal amount plus interest at
10% is due and payable on December 31, 2001. The Company has fully reserved this
amount, of which $ 169,360 and $20,000 were included in research and development
expense for the years ended December 31, 1999 and 1998, respectively.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ ----------------- -----------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 1,600 $ 1,600 $ 1,600
Interest $ 20,903 $ 27,038 $ 10,133
Supplemental schedule of noncash investing and
financing activities:
Conversion of preferred stock into common stock $ 600,000
Costs of equity issuances paid with common stock $ 679,680
Exchange of common stock subscribed for
common stock $ 100,000 $ 268,000
Purchase of equipment with a capital lease $ 109,820 $ 19,414
Costs of equity issuances not yet paid $ 290,395 $ 261,335
Costs of equity issuances associated with fair
value of warrants issued $ 662,130 $ 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>
39
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the information to be provided under the captions "Election of Directors,"
Executive Officers of the Registrant," and "Other Matters" in our definitive
Proxy Statement for our Annual Meeting of Stockholders to be held in 2000 (the
"Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the information to be provided under the caption "Executive Compensation" in the
Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the information to be provided under the caption "Beneficial Ownership of the
Company's Securities" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the information to be provided under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement.
ITEM 14 EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(A) INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
1. Financial Statements Page
<S> <C>
Report of Independent Accountants 25
Consolidated Balance Sheets at December 31, 1999 and 1998 26
Consolidated Statements of Operations for the years ended 27
December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity 28
for the years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended 30
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements 31
</TABLE>
(B) REPORTS ON FORM 8-K
There were no reports filed on Form 8-K for the quarter ended
December 31, 1999.
40
<PAGE>
(C) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<C> <S>
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.2 Form of Warrant Certificates of A.R. Baron, Breslow & Walker, Howard K. Cooper, J. Donald
Hill, Fran Daniels and Medstone, Inc. (2)
4.3 Form of Warrant Certificate held by various foreign investors (15)
4.4 Form of Warrant Certificate held by Medtronic Physio-Control Corporation (16)
10.1 1997 Stock Option/Stock Issuance Plan(4)
10.2 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 (3)
10.3 Employment Agreement, dated May 1, 1998 between the Company and Raymond Cohen (5)
10.4 Employment Agreement, dated September 14, 1998 between the Company and Michael Gioffredi (6)
10.5 Employment Agreement, dated July 1, 1998 between the Company and Dongping Lin (7)
10.6 Employment Agreement, dated May 1, 1998 between the Company and Jeffery Blanton (8)
10.7 Employment Agreement, dated May 1, 1998 between the Company and Brett L. Scott (9)
10.8 Development and Manufacturing Agreement with Zevex, Inc. dated August 21, 1998 (10)
10.9 Agreement for Purchase and Sale of Assets Between Innovative Physician Services, Inc. (DBA
Diagnostic Monitoring), and Biosensor Corporation, dated December 31, 1998 (11)
10.10+ Distribution and License Agreement with Medtronic Physio-Control Corporation dated December
2, 1998 (12)
10.11 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. (13)
10.12 Facility lease dated September 9, 1999 for 16931 Millikan Avenue, Irvine, CA (14)
10.15*+ Data Critical Corporation Technology Integration and Distribution Letter Agreement dated
March 17, 2000
23* Consent of Independent Accountants
27* Financial Data Schedule
99.1* Development and License Agreement with HeartSine Technologies, Inc. dated December 6, 1999
99.2* HeartSine Technologies, Inc. Promissory Note and Security Agreement dated October 1, 1999
</TABLE>
* Filed herewith
(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 10.8 to Form 10-K for the year
ended December 31, 1996.
(4) Incorporated by reference to the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders held on May 12, 1998
(5) Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the year
ended December 31, 1998.
(6) Incorporated by reference to Exhibit 10.6 to Form 10-KSB for the year
ended December 31, 1998.
(7) Incorporated by reference to Exhibit 10.7 to Form 10-KSB for the year
ended December 31, 1998.
(8) Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the year
ended December 31, 1998.
(9) Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the year
ended December 31, 1998.
(10) Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the year
ended December 31, 1998.
(11) Incorporated by reference to Exhibit 10.12 to Form 10-KSB for the year
ended December 31, 1998.
(12) Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the year
ended December 31, 1998.
(13) Incorporated by reference to Exhibit 10.14 to Form 10-QSB for the
quarter ended June 30, 1999.
(14) Incorporated by reference to Exhibit 10.15 to Form 10-QSB for the
quarter ended September 30, 1999.
41
<PAGE>
(15) Incorporated by reference to Exhibit 4.2 to Form S-1 dated February 4,
2000.
(16) Incorporated by reference to Exhibit 4.3 to Form S-1 dated February 4,
2000.
+ Portions have been omitted pursuant to a request for confidential
treatment
SIGNATURES
IN ACCORDANCE WITH SECTION 13 OR 15(d) OF THE EXCHANGE ACT , THE
REGISTRANT CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED.
CARDIAC SCIENCE, INC.
By: /s/ RAYMOND W. COHEN
-------------------------------
Raymond W. Cohen
President & Chief
Executive Officer
By: /s/ BRETT L. SCOTT
----------------------------
Brett L. Scott
Chief Financial Officer
& Secretary (Principal
Financial and
Accounting Officer)
Date: March 29, 2000
IN ACCORDANCE WITH THE EXCHANGE ACT, THIS REPORT HAS BEEN SIGNED BELOW
BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND
ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ RAYMOND W. COHEN Director March 29, 2000
- ----------------------------
Raymond W. Cohen
/s/ PAUL QUADROS Director March 29, 2000
- ----------------------------
Paul Quadros
/s/ PETER CROSBY Director March 29, 2000
- ----------------------------
Peter Crosby
/s/ HOWARD EVERS Director March 29, 2000
- ----------------------------
Howard Evers
42
<PAGE>
Exhibit 10.15
Technology Integration and Distribution
Letter Agreement
CARDIAC SCIENCE INC. AND DATA CRITICAL CORPORATION
This Letter Agreement ("Agreement") is made between Cardiac Science Inc.
("CSI"), a Delaware Corporation and Data Critical Corporation (" Data Critical
or "DCC"), a Delaware Corporation. Both have executed a Non-Disclosure Agreement
regarding this Agreement and the technologies involved.
1. DCC WIRELESS NOTIFICATION TECHNOLOGY (CURRENTLY "ALARMVIEW(TM)")
INTEGRATION. DCC, with engineering help from CSI, will perform the work
necessary to interface DCC's wireless technology (currently the
AlarmView system and any improvements to the Alarm View product under
the term of this agreement) to the CSI's Powerheart -Registered
Trademark- product and, at DCC's discretion, all future CSI automatic
external cardioverter defibrillator devices ("AECD") technology. In the
event that CSI's AECD technology is integrated into a third party
manufactured product, CSI agrees to exclusively offer the DCC's
wireless alarm notification technology, which DCC at its sole
discretion may provide. Note that any customization beyond the DCC
standard AlarmView product is above and beyond the time and money scope
of this proposal. DCC will provide the technical expertise, hardware,
software and (if appropriate and agreed to by both parties) regulatory
acceptance and approvals necessary to provide CSI with a wireless alarm
notification system for in-hospital use with the Powerheart product
and, in DCC's sole discretion, all future CSI AECD technology products.
2. TECHNOLOGY FEE. DCC will charge CSI a non-refundable Technology Fee of
$150,000.00 (one hundred fifty thousand dollars) upon DCC's acceptance
of this Agreement. This Technology Fee is for past services rendered in
connection with the development of this proposal. CSI will pay DCC this
non-refundable fee within three (3) months of signing this Agreement.
3. ALARMVIEW DISTRIBUTION. CSI will quote, sell, install and support the
AlarmView product directly to CSI's U.S. and Canadian customers. Upon
regulatory release, CSI will also quote, sell, install and support the
AlarmView product to specific international customers. CSI will offer
AlarmView with its Powerheart products to end-users and Distributors.
4. CO-MARKETING AND TRADE SHOW SUPPORT. DCC and CSI will co-market the
AlarmView system at appropriate trade shows and industry meetings. CSI
will demonstrate, when applicable, the AlarmView product with the
Powerheart to customers, distributors (including, but not exclusive to,
Medtronic Physio-Control) and when applicable, at sales meetings. DCC
will, if requested by CSI, attend CSI's national sales meeting and
regional meetings at DCC's expense.
5. TECHNOLOGY TRANSFER PRICING & PAYMENT TERMS. ***
6. RELEASE DATE OF PRODUCT: Release Date of Product shall be defined as
the date when all necessary work to integrate the Alarm View into the
Powerheart and regulatory clearance is completed enabling the products
to be sold in the U.S.
7. EXCLUSIVITY, PURCHASE MINIMUMS AND TERM. ***
8. DCC DEVELOPMENT OBLIGATIONS/NON-RECURRING ENGINEERING (NRE): DCC will
perform the required development, engineering, and testing work
necessary to interface DCC's AlarmView system into CSI's Powerheart
such that the resulting product can be sold, distributed and supported
to end user customers in the U.S. and Canada. Such work will be
targeted to be completed within ninety (90)
<PAGE>
days of the signing of this agreement, though this timeframe might be
shortened or extended upon completion of a technical review by both
parties. In return for such obligations, CSI shall agree to purchase
and distribute AlarmView products in accordance with the terms of this
Agreement and shall pay DCC a Non-Recurring Engineering ("NRE") fee of
$25,000 at the Release Date of Product.
9. ONGOING OBLIGATIONS: DCC will provide CSI with ongoing engineering
support for the AlarmView product during the term of the agreement at
DCC's cost after the Release Date of Product.
10. WARRANTY: DCC shall warrant the AlarmView product to be free from
defects for a period of fifteen (15) months from date of shipment to
CSI.
11. REGULATORY: DCCA agrees to provide CSI with the necessary information
that CSI will require in order for CSI to complete any regulatory work
and/or filings (i.e. Letter to File, or 510(k), if applicable) to the
U.S. FDA or any other applicable regulatory bodies. DCC acknowledges
that its AlarmView product is being integrated into CSI's product, and
therefore, responsibility for regulatory reporting matters likely rests
with CSI. CSI agrees that it will inform DCC of any customer complaints
that may arise pertaining to the DCC's AlarmView.
12. FILES AND DEMONSTRATION EQUIPMENT: CSI will make available at no cost
to DCC all files, file structures, and any demonstration/ simulation
equipment needed for DCC to write and complete interface code. CSI will
provide an engineering contact/liaison for technical support. All
proprietary CSI documentation will be kept in the DCC Oklahoma City or
Bothell offices under security and pursuant to the terms of that
certain Confidentially Agreement previously executed by and between the
parties. Further, CSI will make demonstration Powerheart product
available to DCC as required for the AlarmView technology Integration
work.
13. INTERNATIONAL SALES. DCC will evaluate and may, at its sole discretion,
provide the necessary regulatory, testing and engineering work for
non-U.S. country sales (primarily Europe). If DCC completes such work
to make its products available in any international markets for any
other customer, then, DCC will use its best efforts to provide an
AlarmView product with said capability for the CSI.
14. TERMINATION: This Agreement may be terminated as follows:
(a) IMMEDIATE FOR CAUSE. In the event of any of the following, the
non-breaching party may terminate this Agreement if:
- Any employee or representative of the other party commits any illegal
or unethical act in the course of carrying out any of its duties under
this Agreement, or
- Either party or its parent or any of its principal owners becomes
insolvent or is the subject of a bankruptcy or other insolvency
proceeding.
(b) FOR CAUSE. Either party may terminate this Agreement if the other
party is in default of any representation, warranty, covenant or other
obligation in this Agreement and fails to cure such default within
twenty (20) days of written notice from the other party specifying the
nature of such default. Thereafter, the party giving such notice may
terminate this Agreement by a separate thirty (30) days notice.
15. EFFECT OF TERMINATION. Upon the effective date of termination or
expiration of this Agreement for any reason, the obligations and
responsibilities of the parties one to the other contained herein shall
cease; provided, however, that the same shall not release CSI from
payments which may be due to DCC as a result of prior sales or prior
obligations incurred, and these shall be paid as they become due; and,
provided, further, however, that all obligations with respect to
confidentiality, and other obligations which by their nature are
continuing or which are specifically stated to survive the termination
or expiration of the Agreement shall survive the termination or
expiration of this Agreement. In the event CSI terminates for cause,
CSI may, at its option, cancel any outstanding
<PAGE>
order for purchase which has not been shipped by the effective date of
termination. In the event DCC terminates for cause, CSI will be
obligated to fulfill all obligations, including but not limited to
full compensation under Sections 5, 7 and 8.
16. ANNOUNCEMENT OF THIS AGREEMENT. CSI and DCC will issue a mutually
agreed upon joint press release regarding this Letter Agreement within
five business days of signing.
Agreed to:
CARDIAC SCIENCE INC. DATA CRITICAL CORPORATION
/s/ Raymond W. Cohen /s/ Michael E. Singer
- -------------------- ----------------------
President & CEO Chief Financial Officer
Date March 17, 2000 Date March 17, 2000
SECTIONS MARKED FOR CONFIDENTIAL TREATMENT
All sections marked as "***" have been omitted pursuant to a request for
confidential treatment. The omitted sections have been filed separately.
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File No. 333- 70171 and 333-90169) of our report dated
February 25, 2000, which contains an explanatory paragraph regarding the
Company's ability to continue as a going concern, relating to the consolidated
financial statements which appear in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Costa Mesa, California
March 28, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1999 JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1999 DEC-31-1998 DEC-31-1997
<CASH> 5,901,934 1,247,602 0
<SECURITIES> 0 0 0
<RECEIVABLES> 102,900 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 438,592 0 0
<CURRENT-ASSETS> 6,503,072 1,277,731 0
<PP&E> 514,447 215,689 0
<DEPRECIATION> 176,341 97,979 0
<TOTAL-ASSETS> 6,991,396 1,555,707 0
<CURRENT-LIABILITIES> 2,065,681 1,827,629 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 12,031 7,015 0
<OTHER-SE> 4,810,177 (294,938) 0
<TOTAL-LIABILITY-AND-EQUITY> 6,991,396 1,555,707 0
<SALES> 102,900 0 0
<TOTAL-REVENUES> 102,900 0 0
<CGS> 98,001 0 0
<TOTAL-COSTS> 98,001 0 0
<OTHER-EXPENSES> 7,743,928 3,721,551 1,775,704
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (20,870) 65,353 4,247
<INCOME-PRETAX> 0 0 0
<INCOME-TAX> 1,600 800 800
<INCOME-CONTINUING> (7,719,759) (3,787,704) (1,780,751)
<DISCONTINUED> 0 (651,030) (43,847)
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (7,719,759) (4,438,734) (1,824,598)
<EPS-BASIC> (0.85) (0.81) (0.47)
<EPS-DILUTED> 0 0 0
</TABLE>
<PAGE>
Exhibit 99.2
PROMISSORY NOTE
U.S. $189,360 Dated: October 1, 1999
1. PRINCIPAL.
FOR VALUE RECEIVED, the undersigned, HEARTSINE TECHNOLOGIES, INC., a
California corporation ("Borrower"), hereby promises to pay to the order of
CARDIAC SCIENCE, INC., a Delaware corporation ("Lender"), the principal sum of
one hundred eighty-nine three hundred sixty United States Dollars (U.S.
$189,360) (the "Loan") with interest from the date of this Note on the unpaid
principal at the rate of ten percent (10%) per annum.
2. PAYMENT OF PRINCIPAL AND INTEREST.
Unless accelerated pursuant to the terms of this Note, the unpaid
balance of this Note, together with all then unpaid interest accrued on the
unpaid principal balance, shall be due and payable on the earlier to occur of
(i) the date of acquisition of a majority of Borrower's stock or assets by a
person or entity other than Lender, or (ii) [December 31, 2001] (the "Maturity
Date"), provided, however, that in the event all, or substantially all, of
Borrower's stock or assets are bought by lender, then the Loan shall be deemed
to be part of the purchase price paid by Lender to Borrower therefor.
All interest due hereunder shall be computed on the basis of a year of
365 days for the actual number of days elapsed.
Except as provided in the immediately following paragraph, all payments
received by Lender under this Note shall be credited first to any charges or
other expenses for which Lender is entitled to payment hereunder, next to
accrued but unpaid interest, and third to unpaid principal.
Notwithstanding anything to the contrary set forth in this Note, if at
any time until payment in full of all amounts due Lender hereunder, the rate of
interest payable by Borrower pursuant to this Note (the "Stated Rate") exceeds
the amount payable under the highest rate of interest permissible under any law
which a court of competent jurisdiction shall, in a final determination, deem
applicable hereto (the "Maximum Lawful Rate"), then in such event and so long as
the Maximum Lawful Rate would be so exceeded, the rate of interest payable
hereunder shall be equal to the amount payable under the Maximum Lawful Rate;
provided, however, that if at any time thereafter the Stated Rate is less than
the Maximum Lawful Rate, Borrower shall continue to pay interest hereunder at
the Maximum Lawful Rate until such time as the total interest received by Lender
hereunder is equal to the total interest which Lender would have received had
the Stated Rate been (but for the operation of this paragraph) the interest rate
payable since the date hereof. Thereafter, the interest rate payable hereunder
shall be the Stated Rate unless and until the Stated Rate again exceeds the
Maximum Lawful Rate, in which event this paragraph shall again apply. In no
event shall the total interest payable by Borrower hereunder exceed the amount
payable under the Maximum Lawful Rate. In the event that a court of competent
jurisdiction shall make a final determination that Lender has received interest
hereunder in excess of the amount payable under the Maximum Lawful Rate, Lender
shall, to the extent permitted by applicable law, promptly apply such excess in
the following order: (i) then due and payable fees and expenses; (ii) then due
and payable interest payments; (iii) then due and payable principal payments on
the Loan; (iv) then to any other unpaid obligations of Borrower to Lender under
this Note; and (v) thereafter as a refund to Borrower or as a court of competent
jurisdiction may otherwise order.
3. MANNER OF PAYMENT.
-1-
<PAGE>
Principal and interest on the Loan, and all other amounts payable
hereunder, are payable in lawful currency of the United States of America in
immediately available funds at Lender's address, provided to Borrower from time
to time, payable to Lender.
4. EVENTS OF DEFAULT/REMEDIES.
(a) EVENTS OF DEFAULT. Any of the following events shall constitute an
Event of Default:
(i) breach by Borrower of any of Borrower's obligations
or covenants under this Note; or
(ii) Borrower (A) becomes insolvent or admits in writing
Borrower's inability to pay Borrower's debts as they mature, (B) makes any
assignment for the benefit of creditors, or (C) applies for or consents to the
appointment of a receiver or trustee for Borrower or for a substantial part of
Borrower's property or business, or a receiver or trustee otherwise is appointed
and is not discharged within thirty (30) calendar days after such appointment;
or
(iii) any of Borrower's representations or warranties made
herein or in any statement or certificate at any time given by Borrower pursuant
hereto or in connection herewith is false or misleading in any material respect;
or
(iv) any bankruptcy, insolvency, reorganization or liquidation
proceeding or other proceeding for relief under any bankruptcy law or any law
for the relief of debtors is instituted by or against Borrower; or
(v) any money judgment, writ or warrant of attachment, or
similar process (singly or, if more than one, cumulatively in excess of $20,000)
is entered or filed against Borrower or any of the assets of Borrower and (A)
remains unvacated, unbonded, unstayed, undismissed or undischarged for a period
of thirty (30) calendar days or in any event later than five (5) calendar days
before the date of any proposed sale thereunder, or (B) Borrower has not
appealed the same in good faith to Lender's satisfaction; or
(vi) the condition, financial or otherwise, of Borrower
suffers any material adverse change, in the reasonable opinion of Lender; or
(vii) breach by Borrower of any obligation, agreement,
covenant, representation or warranty of Borrower made in or arising under the
Security Agreement (as defined in Section 12 hereof).
(viii) if without Lender's prior written consent, Borrower
enters into any agreement, reconstruction or composition with any of its
creditors, or proposes to do so;
(ix) any written statement or certificate given by Borrower
pursuant hereto or in connection herewith is false or misleading in any material
respect;
(x) if the Borrower sells or parts with the possession of its
business or a substantial portion of it without the prior written consent of
Lender.
(b) REMEDIES. Upon demand or upon the occurrence and during the
continuance of an Event of Default described in Subsections 4(a)(2) or 4(a)(4)
above, all indebtedness under this Note shall automatically be immediately due
and payable. In addition, Lender, at its option, and without notice to Borrower,
may take one or more of the actions described below. Upon the occurrence and
during the continuance of any other Event of Default, Lender at its option and,
unless otherwise specified below, without notice to Borrower, may do any one or
more of the following:
(i) declare all indebtedness under this Note immediately due
and payable and credit any sums received thereafter in such manner as it elects
upon such indebtedness; provided, however, that such
-2-
<PAGE>
application of sums so received shall not serve to waive or cure any default
existing under this Note nor to invalidate any notice of default or any act done
pursuant to such notice and shall not prejudice any rights of Lender; and
(ii) exercise any or all rights provided or permitted by law
or granted pursuant to this Note in such order and in such manner as Lender may,
in its sole judgment, determine.
(c) NO WAIVER OF REMEDIES. No waiver of any breach of or default
under any provision of this Note shall constitute or be construed as a waiver by
Lender of any subsequent breach of or default under that or any other provision
of this Note.
(d) REMEDIES NOT EXCLUSIVE. No remedy herein conferred upon Lender
is intended to be exclusive of any other remedy herein or in any other agreement
between the parties hereto or by law provided or permitted, but each shall be
cumulative and shall be in addition to every other remedy given hereunder or now
or hereafter existing at law, in equity or by statute.
5. COVENANTS AND AGREEMENTS.
Borrower hereby makes the following covenants, which shall be deemed to
be continuing covenants until payment in full of all indebtedness of Borrower to
Lender arising under this Note:
(a) Borrower agrees to furnish to Lender, upon request, such other
information relating to the affairs, the operations and/or the financial
condition of Borrower as Lender may from time to time request.
(b) Borrower shall promptly notify Lender in writing of the occurrence
of any act or event including, without limitation, the commencement or threat of
any action, suit, claim or proceeding against or investigation of Borrower,
which could materially and adversely affect Borrower or which could impair the
validity, effectiveness or enforceability of, or impair Borrower's ability to
perform its obligations under, this Note, and of the occurrence of any Event of
Default or any event which with the giving of notice, the lapse of time, or
both, would become an Event of Default and the action Borrower proposes to take
with respect thereto.
(c) Borrower shall, at any time and from time to time, upon the written
request of Lender, execute and deliver to Lender such further documents and
instruments and do such other acts and things as Lender may reasonably request
in order to effectuate fully the purpose and intent of this Note.
6. REPRESENTATIONS AND WARRANTIES OF BORROWER.
Borrower hereby makes the following representations and warranties,
which shall be deemed to be continuing representations and warranties until
payment in full of all indebtedness of Borrower to Lender arising pursuant to
this Note:
(a) NO CONFLICT. The execution, delivery and performance of this Note
are not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which Borrower or any of
Borrower's assets or property may be bound or affected and do not cause any
security interest, lien or other encumbrance to be created or imposed upon any
such property by reason thereof.
(b) NO DEFAULT. There has occurred and is continuing no Event of
Default or any event which with the giving of notice or the lapse of time, or
both, would constitute an Event of Default.
(c) LITIGATION. There is no action, suit or proceeding pending or, to
the best of Borrower's knowledge and belief, threatened against or affecting
Borrower which could impair the validity, effectiveness or enforceability of, or
impair Borrower's ability to perform its obligations under, this Note, whether
said actions, suits or proceedings are at law or in equity or before or by any
governmental authority.
-3-
<PAGE>
7. DEFAULT RATE.
Any amounts not paid when due hereunder shall there-after bear interest
at a rate per annum equal to the interest rate set forth in Section 2 above,
plus two percent (2%).
8. WAIVER.
Borrower hereby waives any right of offset Borrower may now or
hereafter have against Lender, and Borrower hereby also waives diligence,
presentment, protest and demand, notice of protest, dishonor and nonpayment of
this Note and expressly agrees that, without in any way affecting the liability
of Borrower hereunder, Lender may extend any maturity date or the time for
payment of any installment due hereunder, accept additional security, release
any party liable hereunder and release any security now or hereafter securing
this Note. Borrower further waives, to the full extent permitted by law, the
right to plead any and all statutes of limitations as a defense to any demand on
this Note, or on any deed of trust, security agreement, lease assignment,
guaranty or other agreement now or hereafter securing this Note.
9. RIGHT OF SETOFF.
Upon and after demand or the occurrence of any Event of Default, Lender
is hereby authorized by Borrower, at any time and from time to time, without
notice to Borrower, to set off against, and to appropriate and apply to the
payment of, the obligations and liabilities of Borrower hereunder (whether
matured or unmatured), any accounts maintained with it by Borrower and/or any
and all amounts owing by Lender to Borrower (whether matured or unmatured, and
however evidenced).
10. JURISDICTION.
For any action related to the judicial enforcement or interpretation of
this Note, Borrower expressly submits to the nonexclusive jurisdiction of the
state or federal courts located in the County of Orange in the State of
California at the election of Lender, which election may be made from time to
time. Borrower further irrevocably consents to the service of process out of any
of the aforementioned courts in any such action or proceeding by mailing of
copies thereof by registered or certified mail, postage prepaid, to Borrower at
Borrower's address for notice furnished to Lender, such service to become
effective five (5) days after such mailing. Nothing herein shall affect the
right to serve process in any other manner permitted by law or the right of
Lender to bring legal action or proceedings in any other jurisdiction.
11. WAIVER OF JURY TRIAL.
BORROWER HEREBY AGREES TO WAIVE ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM
OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS NOTE, OR ANY DEALINGS
RELATING TO THE SUBJECT MATTER OF THIS NOTE OR THE SECURITY AGREEMENT (AS
DEFINED BELOW) AND THE LENDER/BORROWER RELATIONSHIP THAT IS BEING ESTABLISHED.
The scope of this waiver is intended to be all-encompassing of any and all
disputes that may be filed in any court and that relate to the subject matter of
this trans-action, including without limitation, contract claims, tort claims,
breach of duty claims, and all other common law and statutory claims. Borrower
acknowledges that this waiver is a material inducement to Lender to make the
Loan and that Lender has already relied on this waiver in entering into this
transaction, and that Lender will continue to rely on this waiver in its related
future dealings. Borrower further warrants and represents that it has reviewed
this waiver with its legal counsel, and that it knowingly and voluntarily waives
its jury trial rights following consultation with legal counsel. THIS WAIVER IS
IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS,
SUPPLEMENTS OR MODIFICATIONS TO THIS NOTE, OR TO ANY OTHER DOCUMENTS OR
AGREEMENTS RELATING THERETO. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED
AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
12. SECURITY AGREEMENT.
-4-
<PAGE>
This Note is secured by, and entitled to the benefits of, that certain
Security Agreement dated of even date herewith, between Borrower and Lender (the
"Security Agreement").
13. LEGAL FEES.
Borrower agrees to pay all costs and expenses, including without
limitation reasonable attorneys' fees, incurred by Lender in connection with the
enforcement of any obligation of Borrower under this Note.
14. SEVERABILITY.
In case any term or any provision of this Note shall be invalid,
illegal or unenforceable, such provision shall be severable from the rest of
this Note and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
15. HEADINGS.
Headings used in this Note are inserted for convenience only and shall
not be deemed to constitute a part hereof.
16. GOVERNING LAW.
This Note shall be governed by and construed in accordance with the
laws of the State of California.
BORROWER:
HEARTSINE TECHNOLOGIES, INC.,
a California corporation
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
-5-
<PAGE>
SECURITY AGREEMENT
THIS SECURITY AGREEMENT is made and entered into as of October 1, 1999 by and
between HEARTSINE TECHNOLOGIES, INC., a California corporation (hereinafter
called "Debtor"), and CARDIAC SCIENCE, INC., a Delaware corporation (hereinafter
called "Creditor").
WHEREAS, Creditor requires Debtor to execute and deliver this Security Agreement
as a condition to Creditor extending loans in the principal amount of $189,360
to Debtor, evidenced by a certain promissory note dated as of the date hereof
(as may be amended from time to time, the "Note") in favor of Creditor;
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Debtor and Creditor hereby agrees as follows:
17. As used herein, the following terms shall have the following meanings.
Terms not otherwise defined herein shall have the meanings ascribed to them, if
any, under the California Commercial Code in effect from time to time.
(a) "Accounts" shall mean any and all rights of Debtor now existing or
hereafter arising to payment for merchandise, goods, or commodities sold or
leased or to be sold or leased or for services rendered or to be rendered, no
matter how evidenced, including accounts, accounts receivable, general
intangibles, instruments, documents, purchase orders, notes, drafts,
acceptances, chattel paper and other forms of obligations owing to Debtor, all
guaranties and security therefor, all merchandise, goods, or commodities
returned to or reclaimed by Debtor and all of Debtor's Books (as that term is
defined below) relating to any of the foregoing.
(b) "Books" shall mean all of Debtor's books and records, including
without limitation: ledgers; records indicating, summarizing, or evidencing
Debtor's assets, Accounts, business operations or financial condition; computer
programs; computer discs or tape files; computer runs and other computer
printouts; and any other computer prepared information and equipment of any
kind.
(c) "Chattel Paper" shall mean a writing or writings of whatever sort
which evidence a monetary obligation and a security interest in or lease of
specific goods in favor of Debtor.
(d) "Collateral" shall mean those items in which a security interest is
granted hereunder pursuant to Paragraph 2 below.
(e) "Contracts" shall mean any and all agreements, contracts, and
assignments of Debtor.
(f) "Deposit Accounts" shall mean any demand, time, savings, passbook
or like accounts maintained by Debtor with a bank, savings and loan association,
credit union or like organization and any renewals, extensions and/or
replacements thereof, and all proceeds and accretions, including without
limitation interest and other property at any time and from time to time
receivable or otherwise entitled to be received on account thereof.
(g) "Documents" shall mean any and all documents of title, bills of
lading, dock warrants, dock receipts, and warehouse receipts owned by Debtor, or
issued in favor of Debtor, and shall include without limitation other documents
which purport to be issued by a bailee and purport to cover goods in the
bailee's possession which are either identified or are fungible portions of an
identified mass.
(h) "Equipment" shall mean any and all things moveable or which are
fixtures owned by Debtor, which are used or bought for use primarily in
business, wherever located, now or hereafter existing, and all parts thereof and
all additions and accessions thereto and replacements thereof.
<PAGE>
(i) "Event of Default" shall mean any of those events described in
Paragraph 9 below.
(j) "Fixtures" shall mean all plant fixtures, business fixtures, and
other fixtures, storage and office facilities, wherever located, now or
hereafter existing, and all additions and accessions thereto and replacements
therefor and products thereof, owned by Debtor.
(k) "General Intangibles" shall mean, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to payment for credit
extended; deposits; amounts due to the Debtor; credit memoranda in favor of the
Debtor; warranty claims; all means and vehicles of investment or hedging,
including, without limitation, options, warrants, and futures contracts;
records; customer lists; goodwill; causes of action; judgments; payments under
any settlement or other agreement; literary rights; rights to performance;
royalties; license fees; franchise fees; rights of admission; licenses;
franchises; permits, certificates of convenience and necessity, and similar
rights granted by any governmental authority; copyrights; trademarks,
tradenames, service marks; patents, patent applications, patents pending; and
other intellectual property; developmental ideas and concepts; proprietary
processes; blueprints; drawings; designs; diagrams, plans, reports, charts;
catalogs; manuals; technical data; computer programs, computer records, computer
software, rights of access to computer record service bureaus, service bureau
computer contracts, and computer data; proposals; costs estimates, and other
reproductions on paper, or otherwise, of any and all concepts or ideas, and any
matter related to, or connected with, the design, development, manufacture,
sale, marketing, leasing, or use of any or all property produced, sold, or
leased, by the Debtor or credit extended or services performed, by the Debtor,
whether intended for an individual customer or the general business of the
Debtor, or used or useful in connection with research by the Debtor.
(l) "Instruments" shall mean any and all negotiable instruments,
securities and every other writing which evidences a right of Debtor to the
payment of money.
(m) "Insurance" shall mean any and all policies of insurance and the
proceeds thereof on or covering any or all of the Collateral.
(n) "Inventory" shall mean any and all of Debtor's goods, merchandise
and other personal property, wherever located, now or hereafter existing,
including without limitation products which are held for sale or lease,
including those held for display or demonstration or out on lease or consignment
or to be furnished under a contract of service or are raw materials, work in
progress, finished goods, or materials used or consumed, or to be used or
consumed, in Debtor's business, and shall include without limitation all packing
and shipping materials, wherever located, and all other items hereafter acquired
by Debtor by way of substitution, replacement, return, repossession or
otherwise, and all additions and accessions thereto, and the resulting product
or mass, and any documents of title representing any of the above.
(o) "Obligations" shall mean any and all liabilities, debts, and
obligations of Debtor to Creditor under the Note and under any other document
executed by Debtor reciting that it is secured hereby and shall include without
limitation any and all amounts (including without limitation interest) which
would become due to Creditor or would accrue but for the filing of a petition in
bankruptcy with respect to Debtor or but for the operation of the automatic stay
under Section 362(a) of the Bankruptcy Code, 11 U.S.C. ss. 362(a), and all
covenants and duties (whether or not for the payment of money) owing by Debtor
to Creditor under the Note and under any other document executed by Debtor
reciting that it is secured hereby, whether or not any of the foregoing are
direct, indirect, absolute, contingent, joint or several, determined or
inchoate, due or to become due, now existing or hereafter arising, and whether
or not evidenced by any agreement, note, or other instrument, whether acquired
by assignment or otherwise, and shall include extensions and renewals or
modifications of any of the foregoing.
(p) "Other Property" shall mean all of Debtor's personal property other
than Accounts, Contracts, Chattel Paper, Deposit Accounts, Documents, Equipment,
Instruments Inventory and General Intangibles.
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<PAGE>
18. As security for the full payment and performance by Debtor to Creditor
of the Obligations, Debtor hereby grants to Creditor a continuing security
interest in all of the following: the Inventory, Accounts, Books, Chattel Paper,
Contracts, Deposit Accounts, Documents, Equipment, Fixtures, General
Intangibles, Instruments, Insurance and Other Property, whether now held or
hereafter acquired by Debtor (including all returns, rejections and
repossessions and whether raw materials, work in progress, finished goods, or
materials used or consumed in Debtor's business), whether or not such be in the
actual or constructive possession of Debtor, and together with all proceeds
arising from any of the foregoing. Debtor hereby grants to Creditor an
irrevocable and royalty-free license to use, so long as any of the Obligations
are outstanding, any and all trademarks, trade names, service marks, patents,
patent applications, copyrights, and other intellectual property of Debtor or in
which Debtor has any rights, for the purpose of disposing of the Collateral upon
an Event of Default.
19. Debtor represents and warrants to Creditor, and agrees, that:
(a) Debtor is, or at the time any after-acquired Collateral becomes
subject to Creditor's security interest will be, the true and lawful owner of
the Collateral, and Debtor has, or at the time the Collateral becomes subject to
Creditor's security interest;
(b) will have, good and clear title to the Collateral, free and clear
of any lien, security interest, charge or encumbrance, except for the security
interest created by this Security Agreement;
(c) The Collateral is located only in the State of California and in
Northern Ireland;
(d) Debtor shall inform Creditor of all locations at which the
Collateral is kept;
(e) The name of Debtor appearing in the first paragraph of this
Security Agreement is the true, complete and correct name of Debtor; and Debtor
conducts business only under the following trade names and styles:
HEARTSINE TECHNOLOGIES, INC.
(f) Debtor does now keep and hereafter at all times shall keep and
furnish to Creditor on demand its records itemizing and describing the kind,
type, quality and quantity of the Inventory and Accounts, including without
limitation the records of Debtor, if any, regarding the age and amount of each
Account, the name and address of each account debtor, and the merchandise giving
rise to such Account.
20. Until Creditor exercises its rights to collect proceeds and amounts
with respect to the Collateral pursuant to Paragraph 8 hereof, Debtor will
collect with diligence any and all proceeds with respect to the Collateral, at
its own expense. Upon the occurrence and continuance of any Event of Default,
upon Creditor's written request, subject to the rights of creditors having
perfected senior secured liens on the Collateral, any collection of proceeds
with respect to the Collateral by Debtor, whether in the form of cash, checks,
notes or other instruments for the payment of money (properly endorsed or
assigned where required to enable Creditor to collect same) or otherwise, shall
be in trust for Creditor, and Debtor shall keep all such collections separate
and apart from all other funds and property so as to be capable of
identification as the property of Creditor and shall deliver them together with
the proceeds of all cash sales, daily to Creditor in the identical form
received.
21. Until Creditor exercises its rights to collect the Accounts, Inventory
and Instrument proceeds pursuant to Paragraph 8 hereof, Debtor may continue its
respective present policies with respect to returned merchandise and
adjustments. However, upon request by Creditor, Debtor shall immediately notify
Creditor of all cases involving returns, rejections, repossessions and loss or
damage of or to merchandise represented by the Accounts or Instruments or
constituting Inventory and of any credits, adjustments or disputes arising in
connection with the goods or services represented by the Accounts or Instruments
or constituting Inventory and, in any of such events, subject to the rights of
creditors having perfected senior secured liens on the Collateral, Debtor will
immediately
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<PAGE>
pay to Creditor from its own funds (and not from the proceeds of Accounts,
Inventory or Instruments) for application to any Obligation, the amount of any
credit for such returned or repossessed merchandise and adjustments made. Until
released by Creditor from its security interest, but upon prior notice from
Creditor, subject to the rights of creditors having perfected senior secured
liens on the Collateral, all merchandise returned to or repossessed by Debtor
shall be set aside and identified as the property of Creditor, and Creditor
shall be entitled to enter upon any premises where such merchandise is located
and take immediate possession thereof and remove same.
22. Anything herein to the contrary notwithstanding:
(a) Debtor shall remain liable under the Contracts to perform all of
its duties and obligations thereunder to the same extent as if this Security
Agreement had not been executed;
(b) The exercise by Creditor of any of its rights hereunder shall not
release Debtor from any of its duties or obligations under the Contracts; and
(c) Creditor shall not have any obligation or liability under the
Contracts by reason of this Security Agreement, nor shall Creditor be obligated
to perform any of the obligations or duties of Debtor thereunder or to take any
action to collect or enforce any claim for payment assigned hereunder.
23. Debtor shall (i) permit representatives of Creditor to inspect the
Collateral and the respective Books and records relating to the Collateral and
make extracts therefrom at any reasonable time and to arrange for verification
of the Accounts, under reasonable procedures, acceptable to Creditor, directly
with the account debtors or otherwise at Debtor's expense; (ii) promptly notify
Creditor of any attachment or other legal process levied against any of the
Collateral and any information received by Debtor relative to the Collateral,
the account debtors or other persons obligated in connection therewith, which
may in any way affect the value of the Collateral or the rights and remedies of
Creditor in respect thereto; (iii) reimburse Creditor upon demand for any and
all legal costs, including attorneys' fees and experts' fees, and other expenses
actually incurred in collecting any sums payable by Debtor under any Obligation
secured hereby, enforcing any term or provision of this Security Agreement or
otherwise or in the checking, handling and collection of the Collateral and the
preparation and enforcement of any agreement relating thereto; (iv) promptly
notify Creditor of each location at which the Collateral is or will be kept,
other than for temporary processing, storage or similar purposes, and of any
removal thereof to a new location, including without limitation each office of
Debtor at which Books or records relating to the Accounts are kept; (v) provide,
maintain and deliver to Creditor policies of insurance insuring the Collateral
against loss or damage by such risks and in such amounts, forms and with
companies as Creditor may require and with loss payable solely to Creditor, and,
in the event Creditor takes possession of the Collateral, the insurance policy
or policies and any unearned or returned premium thereon shall at the option of
Creditor become the sole property of Creditor, and Creditor may without waiving
its rights hereunder obtain and maintain such insurance and take any other
action in connection therewith, and all expenses thereby incurred by Creditor
shall become part of the Obligations and payable on demand; (vi) do all acts
necessary to maintain, preserve and protect all Collateral, keep all Collateral
in good condition and repair and prevent any waste or unusual or unreasonable
depreciation thereof; and (vii) join with Creditor at its request from time to
time in executing financing statements, amendments thereto and continuation
statements, and pay the cost of the filing of the same whenever Creditor deems
desirable, and execute and deliver to Creditor further documents and instruments
and do such other acts and things as Creditor may reasonably request in order to
effectuate fully the purpose and intent of this Security Agreement. Debtor
hereby irrevocably makes and appoints Creditor (and any of Creditor's officers,
employees, or agents) as Debtor's true and lawful attorney with power to sign on
behalf of Debtor on any financing statements, continuation statements, security
agreement, mortgage, assignment, certificate of title, affidavit, letter of
authority, notice or similar document which must be executed and/or filed in
order to perfect or continue perfected Creditor's security interest in the
Collateral. Debtor hereby recognizes and agrees that the power of attorney
herein granted is coupled with an interest and shall not be revocable.
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<PAGE>
24. Creditor may, subject to the rights of creditors having perfected
senior secured liens on the Collateral, at any time, without prior notice to
Debtor, collect proceeds and amounts in respect of the Collateral and may give
notice of assignment to any and all account debtors, and Debtor hereby
irrevocably constitutes and appoints Creditor (and any of Creditor's officers,
employees or agents) its irrevocable, true and lawful attorney-in-fact to
enforce in Debtor's name or in Creditor's name or otherwise all rights of Debtor
in the Collateral and to do any and all things necessary and proper to carry out
the purpose of this Security Agreement, provided, however, that Creditor may
exercise said collection rights and its rights and powers as said
attorney-in-fact only upon the occurrence and continuance of an Event of
Default. Debtor hereby recognizes and agrees that the power of attorney herein
granted is coupled with an interest and shall not be revocable.
25. It shall be an Event of Default under this Security Agreement if (i)
any Event of Default (as that term is defined in the Note) shall occur under the
Note, including without limitation any failure of the Debtor to pay, or to
perform, any of the Obligations when due under the Note, or (ii) Debtor breaches
any obligation, agreement, covenant, representation or warranty of Debtor made
in or arising under this Security Agreement.
26. Upon the occurrence and continuance of any Event of Default, Creditor
may, at its election, without notice of its election and without demand, do any
one or more of the following, successively or concurrently, all of which are
hereby authorized by Debtor:
(a) Declare all of the Obligations for payment of money, whether
evidenced by installment notes, demand notes or otherwise, immediately due and
payable.
(b) Cease advancing money or extending credit to Debtor under any
agreement between Debtor and Creditor and terminate any agreement for financial
accommodation to or for the benefit of Debtor.
(c) Immediately or from time to time enter the premises where the
Collateral is located, take possession of all or any part of the Collateral,
wherever it may be found, using all necessary force to do so, and Debtor waives
all claims for damages due to or arising from or connected with any such taking.
(d) Require Debtor to assemble the Collateral, or any part of it, at a
place designated by Creditor which is reasonably convenient to Debtor and
Creditor.
(e) Pay, purchase, contest or compromise any encumbrance, charge or
lien which in the opinion of Creditor appears to be prior or superior to its
security interest in the Collateral and to pay all expenses incurred therewith.
Any payment or expense so incurred shall become part of the Obligations, payable
to Creditor on demand, and secured hereby.
(f) Do such other acts as Creditor deems reasonable to protect its
interest in the Collateral, including without limitation repair or recondition,
finish, maintain, prepare for sale, or store such Collateral. Any expenses
thereof shall become part of the Obligations, payable to Creditor on demand, and
secured hereby.
(g) From time to time, by way of one or more contracts or transactions,
proceed in the foreclosure of Creditor's security interest and sale of the
Collateral or any part of it, in any manner permitted by law or provided for
herein.
(h) Sell, lease, or otherwise dispose of the Collateral or any part of
it, with or without having the Collateral, or any part of it, at the place of
sale, upon terms and in such manner as Creditor may determine, and Creditor may
purchase same at any such sale. Any notice of sale, disposition or other
intended action sent to Debtor at least five (5) days prior to such action shall
constitute reasonable notice.
(i) Retain the Collateral, or any of it, in full satisfaction of the
Obligations secured thereby.
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<PAGE>
(j) Exercise any remedies of a secured party under the California
Commercial Code, and any other remedies available at law, in equity, or by
separate agreement with the Debtor.
27. If sufficient sums are not realized upon any disposition of the
Collateral to pay all Obligations to Creditor and any expenses, including
reasonable attorneys' fees, of such disposition, Debtor hereby promises to pay
immediately any resulting deficiency.
28. Creditor shall in no way or manner be liable or responsible for: (a)
the safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in value
thereof; or (d) any act of default of any carrier, warehouseman, bailee,
forwarding agency, or any other person whomsoever. All risk of loss, damage or
destruction of Inventory shall be borne by Debtor.
29. Any notice described in this Security Agreement shall be deemed
effective upon receipt by the party to whom it is addressed.
30. This Security Agreement shall be governed by and construed in
accordance with the laws of the State of California.
31. This Security Agreement may be executed in any number of counterparts,
and each counterpart shall be deemed an original, but all such separate
counterparts together shall constitute only one and the same instrument.
32. Any provision of this Security Agreement which is held to be invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
33. Failure by either party at any time to require the other party's
performance of any obligation under this Security Agreement shall not affect its
right to require performance of that obligation. Any waiver of any breach of any
provision of this Security Agreement shall not be construed as a waiver of any
continuing or succeeding breach of such provision, a waiver or modification of
the provision itself, or a waiver or modification of any right under this
Security Agreement. No waiver shall be binding unless executed in writing by the
party making the waiver.
34. The remedies herein provided are cumulative and not exclusive of any
remedies provided by law or contained within other agreements between the
parties hereto. No single or partial exercise of any right, power or remedy
precludes any other or further exercise thereof or the exercise of any other
right, power or remedy hereunder.
35. No modification, amendment or supplement to this Security Agreement
shall be effective for any purpose unless in writing and signed by Debtor and
Creditor, and then such modification, amendment or supplement shall be effective
only in the specific instances and for the specific purposes for which given.
36. This Security Agreement shall be binding upon and shall inure to the
benefit of the parties hereto, their successors and assigns, but shall not be
assigned, transferred or set over in whole or in part by any party without the
prior written consent of each party.
37. This Security Agreement constitutes the entire agreement between the
parties pertaining to the subject matter of this Security Agreement, and
supersedes all prior and contemporaneous agreements, representations, and
understandings of the parties. No party is relying upon any warranties,
representations, definitions, or inducements not set forth in this Security
Agreement or the Note.
38. Waiver of Jury Trial.
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<PAGE>
DEBTOR HEREBY AGREES TO WAIVE ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION BASED UPON OR ARISING OUT OF THE NOTE, OR ANY DEALINGS RELATING TO THE
SUBJECT MATTER OF THE NOTE OR THIS SECURITY AGREEMENT AND THE DEBTOR/CREDITOR
RELATIONSHIP THAT IS BEING ESTABLISHED. The scope of this waiver is intended to
be all-encompassing of any and all disputes that may be filed in any court and
that relate to the subject matter of this transaction, including without
limitation, contract claims, tort claims, breach of duty claims, and all other
common law and statutory claims. Debtor acknowledges that this waiver is a
material inducement to Creditor to make the Loan (as defined in the Note) and
that Creditor has already relied on this waiver in entering into this
transaction, and that Creditor will continue to rely on this waiver in its
related future dealings. Debtor further warrants and represents that it has
reviewed this waiver with its legal counsel, and that it knowingly and
voluntarily waives its jury trial rights following consultation with legal
counsel. THIS WAIVER IS IRREVOCABLE, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THE NOTE OR
THIS SECURITY AGREEMENT, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING
THERETO. IN THE EVENT OF LITIGATION, THIS NOTE MAY BE FILED AS A WRITTEN CONSENT
TO A TRIAL BY THE COURT.
39. Debtor waives the right to plead the statute of limitations as a
defense to any and all obligations contained in this Security Agreement or
secured by it to the full extent permissible by law. Time and exactitude of each
of the terms, obligations, covenants and conditions are declared to be of the
essence of this Security Agreement.
40. This Security Agreement shall take effect immediately upon the
execution thereof by Debtor, and the execution hereof by Creditor shall not be
required as a condition to the effectiveness of this Security Agreement. This
Security Agreement shall terminate at such time as Debtor repays in full to
Creditor all amounts due Creditor under the Note and this Security Agreement.
IN WITNESS WHEREOF, the parties have executed this Security Agreement, effective
as of the date first written above.
"Debtor"
HEARTSINE TECHNOLOGIES, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
Creditor"
CARDIAC SCIENCE, INC.
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
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<PAGE>
EXHIBIT 1
Debtor's Name: HEARTSINE TECHNOLOGIES, INC.
Continuation of Item 6: DESCRIPTION OF COLLATERAL
All of the following property of Debtor: the Inventory, Accounts, Books,
Insurance, Contracts, Documents, Equipment, Deposit Accounts, Instruments,
Fixtures, Chattel Paper, General Intangibles, and Other Property, whether now
held or hereafter acquired by Debtor (including all returns, rejections and
repossessions and whether raw materials, work in progress, finished goods, or
materials used or consumed in Debtor's business), whether or not such be in the
actual or constructive possession of Debtor, and together with all products and
proceeds arising from any of the foregoing.
The above-capitalized terms shall have the following meanings. Terms not
otherwise defined herein shall have the meanings ascribed to them, if any, under
the California Commercial Code (the "UCC").
(a) "Accounts" shall mean any and all rights of Debtor now existing or
hereafter arising to payment for merchandise, goods, or commodities sold or
leased or to be sold or leased or for services rendered or to be rendered, no
matter how evidenced, including accounts, accounts receivable, general
intangibles, instruments, documents, purchase orders, notes, drafts,
acceptances, chattel paper and other forms of obligations owing to Debtor, all
guaranties and security therefor, all merchandise, goods, or commodities
returned to or reclaimed by Debtor and all of Debtor's Books (as that term is
defined below) relating to any of the foregoing.
(b) "Books" shall mean all of Debtor's books and records, including
without limitation: ledgers; records indicating, summarizing, or evidencing
Debtor's assets, Accounts, business operations or financial condition; computer
programs; computer discs or tape files; computer runs and other computer
printouts; and any other computer prepared information and equipment of any
kind.
(c) "Chattel Paper" shall mean a writing or writings of whatever sort
which evidence a monetary obligation and a security interest in or lease of
specific goods in favor of Debtor.
(d) "Contracts" shall mean any and all agreements, contracts, and
assignments of Debtor.
(e) "Deposit Accounts" shall mean any demand, time, savings, passbook
or like accounts maintained by Debtor with a bank, savings and loan association,
credit union or like organization and any renewals, extensions and/or
replacements thereof, and all proceeds and accretions, including without
limitation interest and other property at any time and from time to time
receivable or otherwise entitled to be received on account thereof.
(f) "Documents" shall mean any and all documents of title, bills of
lading, dock warrants, dock receipts, and warehouse receipts owned by Debtor, or
issued in favor of Debtor, and shall include without limitation other documents
which purport to be issued by a bailee and purport to cover goods in the
bailee's possession which are either identified or are fungible portions of an
identified mass.
(g) "Equipment" shall mean any and all things moveable or which are
fixtures owned by Debtor, which are used or bought for use primarily in
business, wherever located, now or hereafter existing, and all parts thereof and
all additions and accessions thereto and replacements thereof.
(h) "Fixtures" shall mean all plant fixtures, business fixtures, and
other fixtures and storage and office facilities, wherever located, now or
hereafter existing, and all additions and accessions thereto and replacements
therefor and products thereof, owned by Debtor.
E-1
<PAGE>
(i) General Intangibles shall include, without limitation, "general
intangibles" as defined in the UCC; and also all: rights to payment for credit
extended; deposits; amounts due to the Debtor; credit memoranda in favor of the
Debtor; warranty claims; all means and vehicles of investment or hedging,
including, without limitation, options, warrants, and futures contracts;
records; customer lists; goodwill; causes of action; judgments; payments under
any settlement or other agreement; literary rights; rights to performance;
royalties; license fees; franchise fees; rights of admission; licenses;
franchises; permits, certificates of convenience and necessity, and similar
rights granted by any governmental authority; copyrights; trademarks,
tradenames, service marks; patents, patent applications, patents pending; and
other intellectual property; developmental ideas and concepts; proprietary
processes; blueprints; drawings; designs; diagrams, plans, reports, charts;
catalogs; manuals; technical data; computer programs, computer records, computer
software, rights of access to computer record service bureaus, service bureau
computer contracts, and computer data; proposals; costs estimates, and other
reproductions on paper, or otherwise, of any and all concepts or ideas, and any
matter related to, or connected with, the design, development, manufacture,
sale, marketing, leasing, or use of any or all property produced, sold, or
leased, by the Debtor or credit extended or services performed, by the Debtor,
whether intended for an individual customer or the general business of the
Debtor, or used or useful in connection with research by the Debtor.
(j) "Instruments" shall mean any and all negotiable instruments,
securities and every other writing which evidences a right of Debtor to the
payment of money.
(k) "Insurance" shall mean any and all policies of insurance and the
proceeds thereof on or covering any or all of the Collateral.
(l) "Inventory" shall mean any and all of Debtor's goods, merchandise
and other personal property, wherever located, now or hereafter existing,
including without limitation products which are held for sale or lease,
including those held for display or demonstration or out on lease or consignment
or to be furnished under a contract of service or are raw materials, work in
progress, finished goods, or materials used or consumed, or to be used or
consumed, in Debtor's business, and shall include without limitation all packing
and shipping materials, wherever located; and all other items hereafter acquired
by Debtor by way of substitution, replacement, return, repossession or
otherwise, and all additions and accessions thereto, and the resulting product
or mass, and any documents of title representing any of the above.
(m) "Other Property" shall mean all of Debtor's personal property other
than Accounts, Contracts, Chattel Paper, Deposit Accounts, Documents, Equipment,
Instruments Inventory and General Intangibles.
E-2
<PAGE>
Exhibit 99.1
DEVELOPMENT AND LICENSE AGREEMENT
THIS DEVELOPMENT AND LICENSE AGREEMENT (the "ADM Agreement") is
effective as of the 6th day of December, 1999 (the "Effective Date"), by and
between Cardiac Science, Inc. a Delaware corporation having its principal place
of business at 1176 Main Street, Building "C", Irvine, California 92714
("Cardiac Science"), and HeartSine Technologies, Inc., a California corporation,
having its principal place of business at 25892 Jamon Lane, Mission Viejo,
California 92691 ("HeartSine").
RECITALS
HeartSine has developed and owns certain intellectual property related
to external defibrillation that utilizes biphasic waveform technology and solid
state switching technology (the "HeartSine Technology").
Cardiac Science is engaged in the design, manufacture and sale of
external automatic defibrillator devices, including a stand-alone
defibrillator device, registered under the product name, Powerheart-Registered
Trademark- AECD-Registered Trademark- defibrillator monitor (the "Powerheart").
Cardiac Science and HeartSine desire to use their respective expertise
to collaborate in the development of an Automatic Defibrillator Module which
shall operate as a sub-component of a Patient Monitoring System, and Cardiac
Science shall retain the right to manufacture, distribute and sell the Automatic
Defribillation Module once it is developed.
Cardiac Science desires to obtain an exclusive license to use the
HeartSine Technology to develop, manufacture and commercialize Automatic
Defibrillator Modules which shall operate as a subcomponent of a Patient
Monitoring System for use in hospitals and in freestanding medical or surgical
clinics which provide cardiovascular services to patients.
Cardiac Science desires to obtain an option to an exclusive license to
use the HeartSine Technology to develop, manufacture and commercialize stand
alone defibrillation devices which shall operate as a prophylactic diagnostic
and therapeutic monitor for patients in hospitals and in free-standing medical
or surgical clinics which provide cardiovascular services to patients,
including, but not limited to, the Powerheart.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants, terms and conditions hereinafter expressed, Cardiac Science and
HeartSine agree as follows.
DEFINITIONS.
The following capitalized terms shall have the meanings given below:
"ADM Fee" shall have the meaning set forth in Section 4.3.
"ADM Royalty" shall have the meaning set forth in Section 4.4.
"Affiliate" shall mean, with respect to any Person, any other Person
which controls, is controlled by, or is under common control with the first
Person. For purposes of this definition, "control" means: (a) in the case of
corporate entities, direct or indirect ownership of more than fifty percent
(50%) of the stock or shares entitled to vote for the election of directors; and
(b) in the case of non-corporate entities, direct or indirect ownership of more
than fifty percent 50% of the equity interest with the power to direct the
management and policies of such non-corporate entities.
"Automatic Defibrillator Module" or "ADM" shall mean an external
automatic cardiac defibrillator device which is a subcomponent of a Patient
Monitoring System, which is utilized in the Field.
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"Confidential Information" shall mean any and all information of or
about a party to this ADM Agreement including all information relating to any
technology, product, process or intellectual property of such party (including,
but not limited to, owned or licensed intellectual property rights, data,
Know-How, samples, technical and non-technical materials, and specifications) as
well as any business plan, financial information, or other commercial
information. "Confidential Information" shall also include the terms and
conditions of this ADM Agreement. Notwithstanding the foregoing, specific
information shall not be considered "Confidential Information" with respect to
such party to the extent that the other party to this ADM Agreement possessing
such information may demonstrate by written record or other suitable evidence
that:
(i) such specific information was lawfully in such other party's possession or
control prior to the time such information was disclosed to such other
party by the party to whom the information relates;
(ii) such specific information was independently developed by such other party
without such party having relied upon the Confidential Information;
(iii) such specific information was lawfully obtained by such other party from a
third party under no obligation of confidentiality to the party to whom
such information relates; or
(iv) such specific information was at the time it was disclosed or obtained by
such other party, or thereafter became, publicly known otherwise than
through a breach by such other party of such other party's obligations to
the party to whom such information relates.
"Development Project" shall mean the joint cooperation of HeartSine and
Cardiac Science in (i) the development of the Automatic Defibrillator Module,
and (ii) the modification of the AECD(R) tachyarrthymia detection and
discrimination software package to accommodate the collection and analysis of
electrocardiographic ("ECG") data directly from disposable defibrillator pads.
"Development Schedule" shall have the meaning set forth in Section 3.1.
"Effective Date" shall have the meaning set forth in the Preamble to
this ADM Agreement.
"Exploit" and "Exploitation" shall mean shall mean the utilization of
any Intellectual Property in any manner including, without limitation, making,
having made, using, selling, and leasing.
"Field" shall mean the application of the HeartSine Technology for the
development and manufacture of Licensed Products for use in hospitals and in
freestanding medical or surgical clinics as a subcomponent of a Patient
Monitoring System.
"HeartSine Patent Rights" shall mean any United States Patent
applications, any foreign Patent applications, and any continuations,
continuations-in-part, divisions, reissues or extensions of the foregoing, and
any Patents issuing from the foregoing applications and any Patent now or
hereinafter owned or controlled by HeartSine necessary or useful for the
development and/or commercialization of the Licensed Product.
"HeartSine Technology" shall mean any and all Know-How and Intellectual
Property owned or controlled by HeartSine as of the date hereof and hereafter
acquired, which is related to biphasic wave form technology and solid state
switching technology.
"Improvements" shall have the meaning set forth in Section 2.3.
"Independent Termination" shall mean termination of the Development
Project by Cardiac Science independent from the License.
"Intellectual Property" shall mean all proprietary rights, including
all Patents, HeartSine Patents, copyrights, trade secrets, licenses and
proprietary information, whether existing now or in the future.
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"Jointly Held Technology" shall mean inventions, discoveries and other
technology jointly developed or reduced to practice during, and as a result of,
the Development Program by the employees of Cardiac Science and HeartSine, which
are directed to the development, manufacture or use of a product that is neither
a Stand-Alone Device or an Automatic Defibrillation Module.
"Know-How" shall mean any proprietary knowledge and information which
is not generally publicly known, including without limitation all preclinical,
clinical, chemical, biochemical, toxicological, manufacturing, formulation and
scientific research information, whether or not capable of precise separate
description but which alone or when accumulated gives to the one acquiring it an
ability to study, test, produce, formulate, manufacture or market something
which one otherwise would not have known to study, test, produce, formulate,
manufacture or market in the same way, owned or controlled by HeartSine as of
the date hereof and hereafter .
"License" shall have the meaning set forth in Section 2.1.
"License Fee" shall mean the one-time license fee of $250,000 as set
forth in Section 4.1.
"Licensed Product" shall mean any product in the Field which utilizes
or incorporates, in whole or in part, the HeartSine Technology.
"Milestone" shall have the meaning set forth in Section 4.2.
"Milestone Payment" shall have the meaning set forth in Section 4.2.
"Net Sales" shall mean the amount invoiced for sales, leases or other
dispositions of Licensed Products by Cardiac Science or its Affiliates and
Sublicensees (other than sales, leases or other dispositions to Affiliates
unless such Affiliate is the end user) less the following deductions (to the
extent they are not already reflected in the amount billed):
(i) Discounts, refunds, and wholesaler chargebacks allowed
and taken in amounts customary in the trade;
(ii) Import, export, excise, sales or use taxes, tariffs and
duties directly imposed and with reference to particular sales;
(iii) Outbound transportation prepaid or allowed, including
insurance;
(iv) Amounts allowed or credited on rebates, returns or
retroactive price deductions;
(v) Amounts invoiced or received for the sale or other
disposition of any monitoring or defibrillation leads, pads or other
accessories which connect to or from the Licensed Product to the
patient.
Licensed Products shall be considered "sold" when the amount
billed out or invoiced to a third party has been received by Cardiac Science or
its Affiliates or Sublicensees. If a Licensed Product is incorporated into
another product or is sold in combination with other products or services and
not invoiced separately, such Licensed Product shall be included in the Net
Sales at the then current list price for such quantities of such Licensed
Product with any discount from list price being applied proportionately to the
discount from list price of the product into which the Licensed Product was
incorporated or the list price of the other product sold, as the case may be. If
there is then no current list price for such Licensed Product, the Net Sales
shall be based on the separate value of such Licensed Product and such other
products or services.
"Option" shall have the meaning set forth in Section 6.1
"Option Technology" shall have the meaning set forth in Section 6.1.
"Patent" shall mean any: (i) United States or foreign patent, patent
application, patent disclosure or other patent right; (ii) any division,
continuation, continuation-in-part or similar extension of an application that
is a Patent; and (iii) any patent or other patent right that issues or is based
upon an application that is a Patent.
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"Patient Monitoring System" shall mean a device which is capable of
monitoring of physiologic functions of a patient and displaying those
physiologic functions locally (on an attached monitor) or through transmission
to a monitor external to the system.
"Person" shall mean any person, corporation, organization, body or
other legal entity.
"Powerheart" shall have the meaning set forth in Recital B.
"Stand-Alone Device" shall mean a device which is not a sub-component
of a Patient Monitoring System and which is utilized for prophylactic monitoring
of patients in the Field.
"Stand-Alone Device Agreement" shall have the meaning set forth in
Section 6.1.
"Termination Date" shall have the meaning set forth in Section 8.2(a).
"Territory" shall mean the world.
LICENSE TERMS.
LICENSE GRANT TO CARDIAC SCIENCE. Subject to the terms and conditions
of this ADM Agreement, HeartSine hereby grants to Cardiac Science a fully-paid,
worldwide, exclusive license to Exploit the HeartSine Technology in the Field
(the "License"). HeartSine further agrees to refrain from asserting against
Cardiac Science, with respect to Cardiac Science's activities any other patent
or proprietary right owned or controlled by HeartSine which covers the Licensed
Products that might otherwise be infringed by Cardiac Science in the
Exploitation of the HeartSine Technology.
SUBLICENSE. The License granted hereby includes the right for Cardiac
Science to grant sublicenses to its Affiliates for purposes of the manufacture,
distribution and/or sale of the Licensed Products. Cardiac Science shall give
HeartSine notice of any sublicense granted by Cardiac Science and shall be
responsible for all obligations of the sublicensees hereunder.
IMPROVEMENTS.
If, during the term of this ADM Agreement, HeartSine
conceives, develops, acquires or otherwise obtains rights and any improvements
or enhancement to the HeartSine Technology (collectively, "Improvements")
HeartSine shall immediately notify Cardiac Science and disclose to Cardiac
Science in writing each such Improvement, including all information relating to,
or necessary to practice such Improvement. HeartSine hereby grants to Cardiac
Science an exclusive royalty-free, irrevocable, perpetual, sublicensable and
assignable license (subject to Section 10.2 below) to the Improvements and all
related patents and other proprietary rights thereto, to design, develop,
manufacture, have manufactured, import, export, use, offer to sell, sell or
otherwise dispose of products inside the Field.
If, during the term of this ADM Agreement, Cardiac Science
conceives or develops any Improvements within the Field, Cardiac Science solely
shall own and control such Improvements.
TRANSFER OF TECHNOLOGY. HeartSine shall supply Cardiac Science with
such information of materials in its possession relating to the HeartSine
Technology which is reasonably necessary or useful to enable Cardiac Science to
develop, design, manufacture, have manufactured, use and sale Licensed Products
in the Field. Thereafter, HeartSine shall supply assistance as is reasonably
requested by Cardiac Science, subject to the parties agreement regarding payment
therefor.
DEVELOPMENT OF PRODUCTS.
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DEVELOPMENT SCHEDULE. The parties each agree to undertake the
development and engineering work required to develop the pre-production
prototype Automatic Defibrillator Module, suitable for clinical or field trials
pursuant to the time table set forth in SCHEDULE A (the "Development Schedule")
attached hereto and incorporated herein, and to seek regulatory approvals for
the Exploitation thereof (the "Development Project"). Each party agrees to use
its best efforts to perform the tasks for which it is responsible.
EXCLUSIVE RESPONSIBILITY. With regards to the development of the
Automatic Defibrillator Module, Cardiac Science shall have the exclusive
responsibility for those tasks set forth in SCHEDULE B attached hereto and
incorporated herein.
PERIODIC REVIEW. The scope, coordination and direction of the
Development Project shall be solely under Cardiac Science's control. As soon as
practicable after the Effective Date, Cardiac Science shall appoint a
Development Project Manager to oversee the Development Project. During the
development of the Automatic Defibrillator Module, HeartSine shall keep Cardiac
Science informed of its progress towards completion of the Milestones. Cardiac
Science shall be entitled to inspect HeartSine's progress under the Development
Project during normal business hours, or require the delivery to it of
documentation reflecting such progress.
PUBLICATIONS. Cardiac Science shall determine the timing, content and
manner of any publications relating specifically to the Development Project.
HeartSine shall determine the timing, content and manner of any publication
specifically relating to the HeartSine Technology but not related to the
Development Project. HeartSine and Cardiac Science each agree to provide to the
other a copy of the proposed publication at least two (2) days prior written
notice of any such publication.
COSTS OF DEVELOPMENT. Each party shall bear and be responsible for all
expenses it directly incurs in its completion of the Development Project
including, without limitation, its internal expenses allocable to the
Development Project (such as salaries and allocable overhead, and materials).
JOINTLY HELD TECHNOLOGY.
To the extent Jointly Held Technology is patentable, and there
is a desire on the part of both parties to pursue patent protection, Cardiac
Science and HeartSine agree to share in all aspects of the patent application
process, including costs and expenses relating thereafter, provided, however,
that Cardiac Science shall control the patent prosecution of any such
Technology. Notwithstanding the aforesaid, each party shall have the right to
use, royalty free, such Jointly Held Technology for its own products, and to
sublicense the Jointly Held Technology to third parties with the prior written
consent of the other party, such consent not be unreasonably withheld or
delayed.
Should either party decide not to pursue patent protection of
the Jointly Held Technology as set forth in Section 3.6(a) above (the "declining
party"), the other party (the "pursuing party") may, upon notice to declining
party, take any steps the pursuing party deems appropriate in order to pursue
patent protection of the Jointly Held Technology, with the acknowledgement and
agreement by both parties that the pursuing party solely shall own and control
any patents prosecuted under this Section 3.6(b) covering such Jointly Held
Technology.
MANUFACTURING RIGHTS. Cardiac Science shall have the right under
the License to manufacture or have manufactured the Licensed Products.
COOPERATION. The parties shall provide reasonable assistance to one
another in connection with implementing the Development Project, fulfilling
their obligations under this ADM Agreement, achieving the Milestones, and
obtaining regulatory approvals. The parties shall provide copies of all filings
with regulatory authorities contemplated by this ADM Agreement to one another
prior to filing. The parties shall keep one another apprised of the status of
all necessary approvals, and each party shall have the right to attend meetings
of the other party with regulatory officials held in connection with obtaining
such approvals.
MEETINGS; TRAINING. If requested by Cardiac Science, HeartSine shall
provide technical training and technical support to Cardiac Science personnel at
periodic intervals, with the frequency and content of the training
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to be determined by agreement between Cardiac Science and HeartSine. Cardiac
Science shall each pay the costs of travel, food, and lodging for HeartSine
personnel during the training period.
CONSIDERATION.
LICENSE FEE. As consideration for the grant by HeartSine of the License
to Cardiac Science on the Effective Date, Cardiac Science shall pay to HeartSine
a one-time fee of $250,000 (the "License Fee").
MILESTONE PAYMENTS. In consideration of the research and development
efforts of HeartSine under the Development Project, the payments set forth on
SCHEDULE A ("Milestone Payments") shall be payable by Cardiac Science to
HeartSine upon the occurrence of the respective milestones set forth on SCHEDULE
A (each, a "Milestone"). Upon achieving a Milestone, HeartSine shall notify
Cardiac Science promptly but in no event later than ten (10) days after the
achievement thereof. Each such Milestone Payment payable by Cardiac Science to
HeartSine shall be paid within ten (10) business days following the occurrence
of the relevant Milestone.
ADM FEE. The total amount which may be paid by Cardiac Science to
HeartSine under this ADM Agreement for the License and for HeartSine's
participation in the Development Project is $650,000 (the "ADM Fee"), which
amount shall include the aggregate of the License Fee set forth above in Section
4.1 as well as all potential Milestone Payments paid pursuant to the Development
Project as set forth in Section 4.2 above.
ADM ROYALTY RATE. Subject to the terms and conditions of Section 8.2
hereof, for each calendar quarter this ADM Agreement is in effect, Cardiac
Science shall pay to HeartSine, in arrears, sixty (60) days after the end of
such calendar quarter, an earned royalty of one percent (1%) of the Net Sales of
Licensed Products which are sold by Cardiac Science or its Affiliates during
such calendar quarter (the "ADM Royalty").
REPORTS, EXCHANGE RATES. During the term of this ADM Agreement, Cardiac
Science shall furnish to HeartSine a written quarterly report setting forth: (i)
the gross sales of Licensed Products sold by Cardiac Science and its Affiliates
during the reporting period for which royalties are payable hereunder and the
calculation of Net Sales therefrom; (ii) the royalties payable in United States
dollars which shall have accrued hereunder in respect of such sales; (iii)
withholding taxes, if any, required by law to be deducted in respect of such
sales, as applicable; and (iv) the exchange rates used in determining the amount
of United States dollars. Reports, together with the royalties payable for the
periods to which the reports relate shall be due on the sixtieth (60th) day
following the close of each calendar quarter. If no royalty is due for any
period hereunder, Cardiac Science shall so report. Cardiac Science shall keep,
in accordance with United States generally accepted accounting principles
consistently applied, complete and accurate records concerning sales of the
Licensed Products in the Territory in sufficient detail to enable the royalties
payable hereunder to be determined.
AUDITS. Upon the written request of HeartSine, but not more than once
each calendar year, Cardiac Science shall permit an independent public
accountant selected by HeartSine and acceptable to Cardiac Science to have
access during normal business hours to such of the records of Cardiac Science as
may be reasonably necessary to verify the accuracy of the royalty and profit
reports hereunder (in respect of any fiscal year ending not more than thirty-six
(36) months prior to the date of such request). If any additional ADM Royalty is
found due and owing pursuant to such audit, such additional royalties shall be
paid within ninety (90) days of the date HeartSine delivers to Cardiac Science
such accountant's written report so concluding. The fees charged by such
accountant shall be paid by HeartSine. HeartSine agrees that all information
subject to review under this Section 4.6 is confidential and that it shall cause
its accountant to retain all such information in confidence.
WITHHOLDING OF TAXES. Any withholding of taxes levied by tax
authorities on the payments hereunder shall be borne by HeartSine and deducted
by Cardiac Science from the sums otherwise payable by it hereunder for payment
to the proper tax authorities on behalf of HeartSine. Cardiac Science agrees to
cooperate with HeartSine in the event HeartSine claims exemption from such
withholding, or seeks deductions under any double taxation or other similar
treaty or agreement from time to time in force, such cooperation to consist of
providing receipts of payment of such withheld tax or other documents reasonably
available to Cardiac Science.
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EXCHANGE CONTROLS. Except as hereinafter provided in this Article 4,
all payments to be made pursuant to this Article 4 shall be paid in United
States dollars.
INTELLECTUAL PROPERTY.
OWNERSHIP OF INTELLECTUAL PROPERTY. Except to the extent licenses or
rights are granted herein, HeartSine retains the entire right, title and
interest, including all Intellectual Property, in and to the HeartSine
Technology. HeartSine shall retain the right to use HeartSine Technology free of
cost for its own research and for Exploitation outside the Field. Each party
shall require all employees, consultants and agents who participate in the
Development Project to execute suitable proprietary rights agreements providing
for ownership of Intellectual Property developed by such person to be conveyed
to it.
LICENSE TO BACKGROUND INTELLECTUAL PROPERTY. To the extent necessary to
give effect to this ADM Agreement, the licenses and other rights granted herein
by HeartSine shall include rights under any applicable Intellectual Property
belonging to HeartSine or under which it has acquired rights but only to the
extent and subject to any conditions pursuant to which it is authorized to do
so.
ENFORCEMENT OF INTELLECTUAL PROPERTY RIGHTS. In the case of any
infringement of any HeartSine Patent or other violation of any intellectual
property right contained in the HeartSine Technology by any third party during
the term of this ADM Agreement, HeartSine shall have the right, at HeartSine's
expense, to cause such party to cease such infringement and to otherwise enforce
such HeartSine Patent or such other intellectual property right. Cardiac Science
shall assist HeartSine as reasonably requested in taking any such actions
against any such infringer. Should HeartSine fail to take all action within
thirty (30) days after having been notified of any alleged infringement or
violation, Cardiac Science may, upon notice to HeartSine, take any steps Cardiac
Science may deem appropriate against such infringer at Cardiac Science's own
expense. HeartSine shall assist Cardiac Science as reasonably requested in
taking any such action against any such infringer. Any amount recovered as a
result of any action taken by Cardiac Science or HeartSine hereunder shall be
first applied to reimbursing the party taking such action for its out-of-pocket
expenses, and then to reimbursing the other party for its out-of-pocket
expenses, if any, and the remainder, if any, shall be divided equally between
the parties.
DEFENSE OF INVALIDITY OR NON-INFRINGEMENT ACTION. In the event that a
declaratory judgment action alleging invalidity or non-infringement of any of
the HeartSine Patents shall be brought against Cardiac Science, and in such
event HeartSine does not elect to defend against such action, Cardiac Science,
at its option, shall have the right, within thirty (30) days after commencement
of such action, to intervene and take over the defense of the action at its own
expense; PROVIDED, HOWEVER, that Cardiac Science shall consult with HeartSine on
material aspects of such litigation. No settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without the consent
of Cardiac Science which consent shall not be unreasonably withheld or delayed.
ABANDONMENT. Should HeartSine or Cardiac Science commence a suit under
the foregoing provisions and thereafter elect to abandon the same, the
abandoning party shall give timely written notice to the other party and such
other party may continue prosecution of such suit, with the expenses and
recovery being allocated as set forth in Section 5.4.
COOPERATION. In the event of any infringement suit against a third
party brought by either party pursuant to this Article 5, the party not bringing
such suit shall cooperate in all respects, execute any documents reasonably
necessary to permit the other party to prosecute such suit, and to the extent
reasonable shall make available its employees and relevant records to provide
evidence for such suit.
ALLEGED INFRINGEMENT. If, during the term of this ADM Agreement, any
third party (other than an Affiliate of a party) claims that Cardiac Science's
making, using or selling of Licensed Products hereunder infringes on a
third-party patent, or other proprietary right of a third party, within sixty
(60) days after notice by Cardiac Science, HeartSine shall either (i) procure
for Cardiac Science the right to exercise all rights HeartSine under this ADM
Agreement without any additional payment therefor by Cardiac Science, or (ii)
advise Cardiac Science that it elects not to procure such rights itself. If
HeartSine does not procure such right within such sixty
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(60) day notice period, Cardiac Science shall have the right, but not the
obligation, to procure such rights and shall be entitled to deduct any costs and
expenses incurred in such procurement from any royalties due to HeartSine.
PATENT RIGHTS. HeartSine shall file, prosecute and maintain, and pay
the cost thereof, of all HeartSine Patents in the Territory. HeartSine shall
file, prosecute and maintain, at Cardiac Science's expense, all HeartSine
Patents in the foreign jurisdictions as Cardiac Science may from time to time
determine. However, notwithstanding the foregoing, if HeartSine determines not
to file or continue to prosecute any such applications, or to maintain in effect
any patent resulting from any of such applications, then HeartSine shall
promptly so notify Cardiac Science in writing, and Cardiac Science shall have
the option to file, prosecute or maintain such patent applications at its
expense, in which case HeartSine shall assign its rights to such applications
and patents to Cardiac Science without any further consideration therefor.
HeartSine shall advise Cardiac Science in a timely manner as to the status of
all patent applications included in HeartSine Patents, and upon request provide
Cardiac Science with copies of the complete patent prosecution files of such
patent applications and patents issued therefrom.
HeartSine shall, at all times during the life of HeartSine
Patents, provide Cardiac Science in a timely manner with copies of all material
notices and correspondence from governmental departments, agencies and courts
pertaining to matters covered in such patents or patent applications, including
but not limited to notices of tax and maintenance payments due.
INTELLECTUAL PROPERTY REPRESENTATIONS AND WARRANTIES. HeartSine
represents, warrants and covenants to Cardiac Science as follows:
It is the sole and exclusive owner or exclusive licensee of
the entire right, title and interest in the HeartSine Patents and HeartSine
Know-How, with the right to license the same to Cardiac Science, free and clear
of all encumbrances, liens, claims, licenses and security interests of any kind.
There are no actions, suits or proceedings pending or, to
HeartSine's knowledge, threatened against HeartSine or any of its Affiliates, at
law or in equity before any court or administrative office or agency relating in
any manner to the HeartSine Patents, the HeartSine Know-How or the Licensed
Products.
To HeartSine's knowledge, Cardiac Science's practice of the
HeartSine Patents as contemplated by this ADM Agreement shall not involve any
infringement or constitute an unauthorized use of any patent, copyright, trade
secret, proprietary information, license or right therein belonging to any third
party.
Each of the patent applications included in the HeartSine
Patents is currently pending and in good standing, and has not been abandoned.
HeartSine has no knowledge of any fact or circumstance that could adversely
affect HeartSine's ability to obtain patents based on such applications or the
validity of such patents if any are issued.
OPTION.
GRANT OF OPTION. HeartSine hereby grants to Cardiac Science an
exclusive option (the "Option") to extend the Field of the License granted in
this ADM Agreement to include products designed for prophylactic monitoring of
patients (such a device a "Stand-Alone Device") and allow Cardiac Science a
world-wide, exclusive license to Exploit the HeartSine Technology for the
development and manufacture of a Stand-Alone Device, including but not limited
to the Powerheart, for use in the Field (the "Option Technology"). If, and only
if, Cardiac Science exercises the Option set forth in this Section 6.1, the
definition of "Licensed Product" set forth in Section 1.21 shall extend to such
Stand-Alone Device. Except as set forth below in Section 6.5, the terms and
conditions of the Option Technology shall be as set forth for the License under
this ADM Agreement. Notwithstanding the previous sentence, Cardiac Science may,
in its sole discretion, elect to enter into a separate agreement for the
development of the Stand-Alone Device and license of the Option Technology, on
substantially the same terms as this ADM Agreement (the "Stand-Alone Device
Agreement").
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OPTION PERIOD; EXERCISE OF OPTION. The Option granted in Section 6.1
shall be for the term of five (5) years (the "Option Period") from the Effective
Date. Cardiac Science may exercise the Option by delivering to HeartSine, during
the Option Period, the executed Notice of Option, a form of which is set forth
in ANNEX 1 hereto.
EXCLUSIVITY OF OPTION PERIOD. During the Option Period, HeartSine
shall not license, sell, transfer or in any manner encumber the Option
Technology.
TERMINATION OF OPTION. If Cardiac Science does not exercise the Option
hereunder prior to the expiration of the option period, or if prior to the
expiration of the option period, Cardiac Science shall advise HeartSine that it
does not desire to exercise this Option, neither party shall thereafter be under
any further obligation under this ADM Agreement, and at such time as the option
period expires or when Cardiac Science has provided HeartSine with written
notice of its non-election of the Option, HeartSine shall be free to license the
Option Technology to third parties, without any obligation to Cardiac Science
whatsoever.
STAND-ALONE DEVICE ROYALTY RATES AND FEES.
If Cardiac Science exercises the Option without entering into
the Stand-Alone Device Agreement, Cardiac Science shall pay HeartSine a one-time
Option Technology fee of $50,000 and a royalty fee equal to 3% of Cardiac
Science's Net Sales of Stand-Alone Devices which incorporates the Option
Technology. The terms and conditions of the royalty paid on the Net Sales of
Stand-Alone Device shall be as set forth in Sections 4.5, 4.6, 4.7 and 4.8
In the event that Cardiac Science exercises the Option and
agrees to enter into a Stand-Alone Device Agreement, then Cardiac Science shall
pay to HeartSine a one-time Option Technology fee of $50,000 and a royalty fee
equal to 1% of Cardiac Science's Net Sales of Stand-Alone Devices which
incorporates the Option Technology. The terms and conditions of the royalty paid
on the Net Sales of the Stand-Alone Device shall be as set forth in the
Stand-Alone Device Agreement.
CONFIDENTIAL INFORMATION.
TREATMENT OF CONFIDENTIAL INFORMATION. Each party hereto shall maintain
the Confidential Information of the other party in confidence, and shall not
disclose, divulge or otherwise communicate such Confidential Information to
others, or use it for any purpose, except pursuant to, and in order to carry
out, the terms and objectives of this ADM Agreement, and each party hereby
agrees to exercise every reasonable precaution to prevent and restrain the
unauthorized disclosure of such Confidential Information by any of its
directors, officers, employees, consultants, subcontractors, sublicensees or
agents.
RELEASE FROM RESTRICTIONS. The provisions of Section 7.1 shall not
apply to any Confidential Information disclosed hereunder which is: required to
be disclosed by the receiving party to comply with applicable laws, or to comply
with laws or regulations (including without limitation testing and marketing
regulations), in each case only to the extent required to the extent required by
law and to carry out the provisions of this ADM Agreement and further provided
that the party making such disclosure provides prior written notice of such
disclosure to the other party sufficiently in advance of such disclosure to
allow such party to respond and takes reasonable and lawful actions to avoid
and/or minimize the degree of such disclosure.
CONFIDENTIALITY AGREEMENTS. Each party shall maintain agreements with
their respective employees and representatives providing for confidentiality and
nonuse commitments consistent with its obligations hereunder and shall require
all of their employees, consultants, clinical collaborators, agents or others
who have access to any Confidential Information of the other party to execute
confidentiality and non-use agreements covering all Confidential Information and
shall exercise its reasonable best efforts to obtain compliance therewith.
9
<PAGE>
TERM AND TERMINATION.
LICENSE.
Term of License. The term of the License (the "Term") shall
commence as of the Effective Date, and shall continue until the later of (i)
expiration of all HeartSine Patents hereunder, or (ii) twenty (20) years, unless
terminated pursuant to this Section 8.1(b). Upon such expiration, Cardiac
Science shall have a fully paid, worldwide non-exclusive license to use the
HeartSine Technology in the Field.
Termination of License. Upon notice to HeartSine, Cardiac
Science may terminate the License granted hereunder for any reason or for no
reason, and all rights and obligations of the parties under this ADM Agreement
and the development of Licensed Products with respect thereto. To the extent
HeartSine has received any Milestone Payment or other payment which was to be
used to fund development efforts hereunder after such termination, it may retain
such payment.
Development Project.
Termination of Development Project. At the sole discretion of
Cardiac Science, at any time upon forty-five (45) days notice to HeartSine,
Cardiac Science may terminate the Development Project (the date of termination
hereinafter the "Termination Date"), provided, however, Cardiac Science shall
not be permitted to terminate the Development Project under this Section 8.2(a)
unless the License Fee has been paid in full to HeartSine (such event, an
"Independent Termination").
Effect of Termination. In the event of an Independent
Termination, Cardiac Science shall not be required to make any Milestone
Payments under Section 4.2 that are not due and payable prior to the Termination
Date to HeartSine. However, in the event of an Independent Termination, the ADM
Royalty owed to HeartSine for the Net Sales by Cardiac Science of Licensed
Products shall increase from one percent (1%) to seven and one-half percent
(7.5%), provided that, the ADM Royalty shall not increase under this Section
8.2(b) if the total ADM Fee has been paid to HeartSine.
DEFAULT AND EFFECTS THEREOF. Upon any failure of either party to comply
with its obligations under the ADM Agreement in any material respect, which
failure shall continue for more than sixty (60) days after notice thereof from
the non-defaulting party to the defaulting party, the non-defaulting party shall
be entitled, without prejudice to any of its other rights under this ADM
Agreement, and in addition to any other remedies available to it by law or in
equity, to terminate this ADM Agreement by giving notice to that effect to the
defaulting party. The right of either party to effect such termination of the
ADM Agreement shall not in any way affect or terminate the License.
INSOLVENCY OR BANKRUPTCY. Cardiac Science may, in addition to any other
remedies available to it by law or in equity, terminate this ADM Agreement by
written notice to HeartSine in the event (i) HeartSine shall have become
insolvent or bankrupt, or shall have made an assignment for the benefit of its
creditors, or (ii) there shall have been appointed a trustee or receiver of
HeartSine or for all or a substantial part of its property, or (iii) any case or
proceeding shall have been commenced or some other action taken by or against
HeartSine in bankruptcy or seeking reorganization, liquidation, dissolution,
winding-up, arrangement, composition or readjustment of its debts or any other
relief under any bankruptcy, insolvency, reorganization or other similar act or
law of any jurisdiction now or hereafter in effect or there shall have been
issued a warrant of attachment, execution, distraint or similar process against
any substantial part of the property of the other party, and any such event or
action shall have continued for ninety (90) days undismissed, unbounded and
undischarged; PROVIDED, HOWEVER, that no such right to terminate shall pertain
solely by virtue of a voluntary reorganization for the purpose of solvent
amalgamation or reconstruction.
EFFECT OF TERMINATION. Upon termination of this ADM Agreement or of
the License granted hereunder for any reason:
Neither party shall be released from any obligation that
matured prior to the effective date of such termination.
Each party shall return and deliver to the other party all
materials and documents containing Confidential Information of the other party,
and all copies and facsimiles of such materials, documents,
10
<PAGE>
information and files, in each case with respect to all Licensed Products or
with respect to such Field, as the case may be.
The provisions of Article 7 shall survive any termination
of this ADM Agreement or the License hereunder.
REPRESENTATIONS AND WARRANTIES.
REPRESENTATIONS AND WARRANTIES OF HEARTSINE. HeartSine represents and
warrants to Cardiac Science as follows:
ORGANIZATION AND AUTHORITY. HeartSine is a corporation duly
organized, validly existing and in good standing under the laws of California
and has the corporate power to own its property and to carry on its business as
now being conducted by it. HeartSine has the corporate power and authority to
execute, deliver and perform its obligations under this ADM Agreement.
DUE AUTHORIZATION. The execution, delivery and performance by
HeartSine of this ADM Agreement have been duly authorized by all requisite
corporate proceedings. HeartSine has duly executed and delivered this ADM
Agreement and this ADM Agreement constitutes a valid and binding agreement
enforceable against HeartSine in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, and similar laws of general application
affecting the rights and relief of creditors and secured parties and to the
further extent that the availability of the remedies of specific performance and
injunctive relief and other equitable remedies is subject to the discretion of
the court before which any proceeding therefor may be brought.
NO CONFLICT WITH OTHER AGREEMENTS. The execution, delivery and
performance by HeartSine of this ADM Agreement do not and shall not conflict
with or result in a breach of the terms, conditions or provisions of, or give
rise to a right of termination or constitute a default under, or result in any
violation of, (i) its Articles of Incorporation or Bylaws, (ii) any mortgage or
other material agreement or instrument to which it is a party, (iii) any order,
judgment or decree binding on it or any of its property, or (iv) any applicable
law, rule or regulation to which HeartSine or any of its respective property and
assets are subject, or (v) any material license, waiver or permit currently held
by HeartSine.
ACTIONS PENDING; COMPLIANCE WITH LAW. Except as otherwise
disclosed in writing to Cardiac Science, there is no action, suit or proceeding
pending or, to the knowledge of HeartSine, threatened against HeartSine before
any court, arbitrator or governmental body, agency or official, which (i)
questions the validity of any of the transactions contemplated in this ADM
Agreement or (ii) would, if adversely determined, have a material adverse effect
on the business, financial position or results of operations of HeartSine and
its consolidated subsidiaries, taken as a whole.
REPRESENTATIONS AND WARRANTIES OF CARDIAC SCIENCE. Cardiac Science
represents and warrants to HeartSine as follows:
ORGANIZATION AND AUTHORITY. Cardiac Science is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power to own its property and to carry
on its business as now being conducted by it. Cardiac Science has the corporate
power and authority to execute, deliver and perform its obligations under this
ADM Agreement.
DUE AUTHORIZATION. The execution, delivery and performance by
Cardiac Science of this ADM Agreement have been duly authorized by all requisite
corporate proceedings. Cardiac Science has duly executed and delivered this ADM
Agreement and this ADM Agreement constitutes a valid and binding agreement
enforceable against Cardiac Science in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, and similar laws of general application
affecting the rights and relief of creditors and secured parties and to the
further extent that the availability of the remedies of specific performance and
injunctive relief and other equitable remedies is subject to the discretion of
the court before which any proceeding therefor may be brought.
11
<PAGE>
NO CONFLICT WITH OTHER AGREEMENTS. The execution, delivery and
performance by Cardiac Science of this ADM Agreement do not and shall not
conflict with or result in a breach of the terms, conditions or provisions of,
or give rise to a right of termination or constitute a default under, or result
in any violation of, (i) its Certificate of Incorporation or Bylaws, (ii) any
mortgage or other material agreement or instrument to which it is a party, (iii)
any order, judgment or decree binding on it or any of its property, or (iv) any
applicable law, rule or regulation to which Cardiac Science or any of its
respective property and assets are subject, or (v) any material license, waiver
or permit currently held by Cardiac Science.
ACTIONS PENDING; COMPLIANCE WITH LAW. Except as otherwise
disclosed in writing to HeartSine, there is no action, suit or proceeding
pending or, to the knowledge of Cardiac Science, threatened against Cardiac
Science before any court, arbitrator or governmental body, agency or official,
which (i) questions the validity of any of the transactions contemplated in this
ADM Agreement or (ii) would, if adversely determined, have a material adverse
effect on the business, financial position or results of operations of Cardiac
Science and its consolidated subsidiaries, taken as a whole.
MISCELLANEOUS PROVISIONS.
NO PARTNERSHIP. Nothing in this ADM Agreement is intended or shall be
deemed to constitute a partnership, agency, employer, employee or joint venture
relationship between the parties. Neither party shall incur any debts or make
any commitments for the other.
ASSIGNMENTS. Except as otherwise provided herein, neither this ADM
Agreement nor any interest hereunder shall be assignable by either party by
operation of law or otherwise without the prior written consent of the other
(which shall not be unreasonably withheld), provided, however, that no consent
shall be required for any assignment of this ADM Agreement by Cardiac Science
(i) to an Affiliate of Cardiac Science or (ii) in connection with the transfer
of the business to which this ADM Agreement relates.
FORCE MAJEURE. Neither party shall be liable to the other for loss or
damages or shall have any right to terminate this ADM Agreement for any default
or delay (including, without limitation, an inability to supply Licensed
Products) attributable to any material act of God, earthquake, flood, fire,
explosion, strike, lockout, war, revolution, civil commotion, act of public
enemies, blockage or embargo, injunction, law, order, proclamation, regulation,
ordinance, demand or requirement of any government or subdivision, authority
(including, without limitation, drug regulatory authorities) or representative
of any such government if the party affected shall give prompt notice of any
such cause to the other party. The party given such notice shall thereupon be
excused from such of its obligations hereunder as it is so disabled from
performing and for thirty (30) days thereafter.
NO TRADEMARK RIGHTS. Except as set forth above, no right, express or
implied, is granted by this ADM Agreement to use in any manner any trade name or
trademark of HeartSine or Cardiac Science in connection with the performance of
this ADM Agreement or the Exploitation of any license granted hereunder.
PUBLIC ANNOUNCEMENTS. Copies of press releases or similar written
communications containing a party's name shall be provided to that party for
approval prior to release.
ENTIRE OF THE PARTIES; AMENDMENT. This ADM Agreement constitutes and
contains the entire understanding and agreement of the parties and supersedes
any and all prior negotiations, correspondence and understandings and
agreements, whether verbal or written, between the parties respecting the
subject matter hereof. No waiver, modification or amendment of any provision of
this ADM Agreement shall be valid or effective unless made in writing and signed
by a duly authorized officer of each of the parties.
12
<PAGE>
SEVERABILITY. In the event any one or more of the provisions of this
ADM Agreement should for any reason be held by any court or authority having
jurisdiction over this ADM Agreement or either of the parties to be invalid,
illegal or unenforceable, such provision or provisions shall be validly reformed
by addition or deletion of wording as appropriate to avoid such result and as
nearly as possible approximate the intent of the parties and, if unreformable,
shall be divisible and deleted in such jurisdiction; elsewhere, this ADM
Agreement shall not be affected.
CAPTIONS. The captions to this ADM Agreement are for convenience
only, and are to be of no force or effect in construing or interpreting any of
the provisions of this ADM Agreement.
NOTICE AND DELIVERY. Any notice, requests, delivery, approval or
consent required or permitted to be given under this ADM Agreement shall be in
writing and shall be deemed to have been sufficiently given if delivered in
person, transmitted by internationally recognized courier or telecopier (with
confirmed answer-back) to the party to whom it is directed at its address shown
below or such other address as such party shall have last given by notice to the
other party.
If to HeartSine, addressed to:
25892 Jamon Lane
Mission Viejo, California 92691
Attn: Drew Hofmann
If to Cardiac Science, addressed to:
1176 Main Street
Building "C"
Irvine, CA 92614
Attn: Brett Scott
LIMITATION OF LIABILITY. Neither party shall be liable to the other for
indirect, incidental, consequential, punitive or explemplary damages arising out
of any of the terms or conditions of this ADM Agreement or with respect to their
performance or lack thereof.
INFORMAL DISPUTE RESOLUTION. In an effort to resolve informally and
amicably any claim, controversy, or dispute arising out of or related to the
interpretation, performance, or breach of this ADM Agreement (a "Dispute")
without resorting to litigation, each party shall notify the other party to the
Dispute in writing of any Dispute hereunder that requires resolution. Such
notice shall set forth the nature of the Dispute, the amount involved, if any,
and the remedy sought. Each party shall promptly designate an executive-level
employee to investigate, discuss and seek to settle the matter between them. If
the two designated representatives are unable to settle the matter within thirty
(30) days after such notification, the matter shall be submitted to Cardiac
Science's Chief Executive Officer and HeartSine's Chief Executive Officer for
consideration. If settlement cannot be reached through their efforts within an
additional thirty (30) days (or such longer time period as they shall agree upon
in writing) then either party may thereafter take such actions as they deem
appropriate. The parties agree that any applicable statute of limitations shall
be tolled during the pendency of such informal dispute resolution process and
that neither party shall raise or assert any claim of laches or other legal or
equitable principle of limitation or repose of action based upon such process.
ATTORNEYS' FEES. Except as otherwise provided herein, each party shall
bear its own legal fees incurred in connection with the transactions
contemplated hereby, provided, however, that if any party to this ADM Agreement
seeks to enforce its rights under this ADM Agreement by legal proceedings or
otherwise, the non-prevailing party shall pay all costs and expenses incurred by
the prevailing party, including, without limitation, all reasonable attorneys'
fees.
13
<PAGE>
GOVERNING LAW. This ADM Agreement shall be governed by and construed in
accordance with the laws of the State of California without regard to the
conflict of laws provisions thereof.
COUNTERPARTS. This ADM Agreement may be executed in counterparts,
and all of the executed counterparts, taken together, shall constitute one
original.
REPRESENTED BY COUNSEL. Each party represents and acknowledges that it
has fully read and understood the terms of the ADM Agreement; that each is
represented by its respective legal counsel; that each has had the opportunity
to have the legal effect of the ADM Agreement as fully explained to it by its
respective legal counsel; and that each has entered into the ADM Agreement
without relying upon any statement of fact or opinion by any other person.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this ADM Agreement to be
executed by their respective duly authorized officers as of the Effective Date.
CARDIAC SCIENCE, INC.
By:
----
Raymond Cohen,
President and Chief Executive Officer
HEARTSINE TECHNOLOGIES, INC.
By:
-----
Its:
----
15
<PAGE>
DEVELOPMENT AND LICENSE AGREEMENT
between
CARDIAC SCIENCE, INC.
and
HEARTSINE TECHNOLOGIES, INC.
dated as of December 6, 1999
<PAGE>
SCHEDULE A
DEVELOPMENT PROJECT MILESTONES AND MILESTONE PAYMENTS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------- ------------------------- ------------------
Milestone Date of Milestone
Completion Payment
- ------------------------------------------------------------------------- ------------------------- ------------------
<S> <C> <C>
PHASE 0: EXECUTION OF DEVELOPMENT AND LICENSE AGREEMENT U.S. $250,000
- ------------------------------------------------------------------------- ------------------------- ------------------
PHASE I: DEVELOPMENT PHASE TO BENCH PROTOTYPE WITH MOCK ENCLOSURES.
- ------------------------------------------------------------------------- ------------------------- ------------------
Starts & Cardiac Science supply final Concept document, MRD, and PRD.
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine approves Concept document, MRD, and PRD after review.
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase I Electrical and software specifications.
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies final Phase I Mechanical and Rhythm X.
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies Rhythm X Phase I design.
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase I Electrical and software design
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies Mechanical Phase I design
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase I review U.S.$100,000
- ------------------------------------------------------------------------- ------------------------- ------------------
PHASE II: DEVELOPMENT PHASE TO PCB PROTOTYPE WITH PROTOTYPE ENCLOSURES.
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase II Electrical and software design
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies Mechanical Phase II design
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies Mechanical Phase II prototype
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase II review U.S.$100,000
- ------------------------------------------------------------------------- ------------------------- ------------------
PHASE III: PHASE TO STANDARDS TESTING.
- ------------------------------------------------------------------------- ------------------------- ------------------
Produce a prototype capable of being displayed for marketing
purposes and demonstrated to potential customers
- ------------------------------------------------------------------------- ------------------------- ------------------
Cardiac Science supplies overall project review
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase III Electrical and software production
prototype
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase III review U.S.$100,000
- ------------------------------------------------------------------------- ------------------------- ------------------
S-A
<PAGE>
- ------------------------------------------------------------------------- ------------------------- ------------------
Milestone Date of Milestone Payment
Completion
- ------------------------------------------------------------------------- ------------------------- ------------------
PHASE IV: PHASE TO PRODUCTION
- ------------------------------------------------------------------------- ------------------------- ------------------
Allows Start of Production
- ------------------------------------------------------------------------- ------------------------- ------------------
HeartSine supplies Phase IV review U.S.$100,000
- ------------------------------------------------------------------------- ------------------------- ------------------
</TABLE>
Any delay in the start of the Development Project delays the end of each Phase
as set forth above. All necessary equipment required for each Phase must be
purchased and commissioned by HeartSine and all personnel required must be in
place no later than two months prior to the start of the Development Project.
Exclusive Responsibilities of Cardiac Science, Inc.
Determination of product requirements.
Determination of mechanical design of product.
Overall design integration, reviews and risk analysis.
RhythmX ECD(TM) module design and specification.
Standards testing.
Technical file.
User manual.
Master device record.
Custom production equipment.
S-A
<PAGE>
Annex 1
Form of Notice of Option
NOTICE OF EXERCISE OF LICENSE OPTION
By this Notice of Exercise of License Option and pursuant to Article 6 of that
certain Development and License Agreement dated December 6, 1999 between Cardiac
Science, Inc. and HeartSine Technologies, Inc. (the "ADM Agreement"), Cardiac
Science hereby exercises the Option (as defined in Section 6.1 of the ADM
Agreement), subject to the terms and provisions of the ADM Agreement.
Dated: CARDIAC SCIENCES, INC.
---------------------
By:
------------------------------
Name:
----------------------------
Its:
-----------------------------
S-A
