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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2000
REGISTRATION NO. 333-94425
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CARDIAC SCIENCE, INC.
---------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 3845 33-0465681
-------- ---- ----------
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
-----------
16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
-----------
RAYMOND W. COHEN, PRESIDENT
CARDIAC SCIENCE, INC.
16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
--------------
(Name, Address Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
-----------
Copies of all communications, including all communications sent to
the agent for service, should be sent to:
LEONARD J. BRESLOW, ESQ.
BRESLOW & WALKER, LLP
100 JERICHO QUADRANGLE, SUITE 230
JERICHO, NEW YORK 11753
TEL: (516) 822-6505 FAX: (516) 822-6544
-----------
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box X
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering ___
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box ___
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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CARDIAC SCIENCE, INC.
8,791,630 Shares
Common Stock
-----------
This prospectus relates to 8,791,630 shares of common stock of Cardiac
Science, Inc. which may be offered and sold, from time to time, by the selling
stockholders named in this prospectus. We will not receive any proceeds from the
sale of the shares by the selling stockholders.
Our common stock currently is quoted on the OTC Bulletin Board under the
symbol "DFIB." On April 24, 2000, the last reported sale price of our common
stock on the OTC Bulletin Board was $5.72 per share. We have applied to have the
common stock approved for quotation on the Nasdaq Small Cap Market.
SEE "RISK FACTORS" COMMENCING ON PAGE 5 TO READ ABOUT THE RISKS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OR THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We will bear all costs and expenses of the registration of the shares under
the Securities Act and certain state securities laws, other than fees of counsel
for the selling stockholders and any discounts or commissions payable with
respect to sales of the shares.
The date of this prospectus is April 27, 2000
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE
IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT
YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE FINANCIAL
STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
We have developed proprietary tachyarrhythmia detection and discrimination
software, RHYTHMx ECD-TM-, to be incorporated into devices that are attached
prophylactically to patients determined to be at risk of sudden cardiac arrest.
RHYTHMx ECD enables these devices, such as external defibrillator monitors and
patient monitoring systems, to provide patients suffering sudden cardiac arrest
with potentially lifesaving defibrillation therapy in as little as 10 seconds
without human intervention. We have licensed RHYTHMx ECD to one third party, and
intend 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
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performance reasons, must be changed once every 24 hours. Our disposable
defibrillator pads feature our proprietary "smart chip" technology, designed to
assure that only our pads will be used with defibrillator and monitoring devices
utilizing our proprietary technology.
ABOUT US
We were incorporated in the State of Delaware in May 1991. Our principal
executive offices are located at 16931 Millikan Avenue, Irvine, California
92606. Our phone number is 949-587-0357. Our website address is
cardiacscience.com. The information in our website is not a part of this
prospectus.
AECD, POWERHEART and MDF are our U.S. registered trademarks. AECD, AECD
ELECTRODES, and POWERHEART are our registered trademarks in Great Britain,
France, Japan, and China. Other service marks, trademarks, and trade names
referred to in this prospectus are the property of their respective owners.
THE OFFERING
Common Stock offered by the selling stockholders.... 8,791,630 shares
Common Stock outstanding prior to the offering...... 12,313,127 shares
Common Stock outstanding after the offering......... 12,313,127 shares
OTC Bulletin Board Symbol........................... DFIB
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully review and consider the risks discussed under "Risk Factors" as
well as the other information set forth in this prospectus before buying our
common stock.
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SUMMARY FINANCIAL DATA
The following summary financial information is derived from our
consolidated financial statements. You should read this summary financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
For the Year Ended December 31, September 30,
(Unaudited)
1994(1) 1995(1) 1996(1) 1997 1998 1999 1998
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses $ 454 $ 1,012 $ 827 $ 1,776 $ 3,722 $ 4,821 $ 2,493
------- ------- ------- ------- ------- -------- --------
Loss from continuing operations (488) (940) (792) (1,781) (3,788) (4,829) (2,510)
Extraordinary loss (245) --- --- --- --- --- ---
Loss from discontinued operations -- --- --- (44) (651) --- (88)
======= ======= ======= ======= ======= ======== ========
Net loss $ (733) $ (940) $ (792) $(1,825) $(4,439) $ (4,829) $ (2,598)
======= ======= ======= ======= ======= ======== ========
Basic and diluted (loss) per share:
Continuing operations $ (0.28) $ (0.28) $ (0.23) $ (0.46) $ (0.69) $ (0.52) $ ((0.47)
Extraordinary loss (0.13) --- --- --- --- --- ---
Discontinued operations --- --- --- (0.01) (0.12) --- (0.02)
------- ------- ------- ------- ------- -------- --------
Net loss per share $ (0.41) $ (0.28) $ (0.23) $ (0.47) $ (0.81) $ (0.52) $ (0.49)
======= ======= ======= ======= ======= ======== ========
Weighted average shares used
in Computing net loss per share 1,775 3,327 3,395 3,876 5,460 9,208 5,276
======= ======= ======= ======= ======= ======== ========
</TABLE>
(1) restated to give effect to a one-for-11.42857143 reverse stock split of the
issued and outstanding shares of the common stock effectuated in September
1997.
SELECTED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30, 1999
(Unaudited)
1994 1995 1996 1997 1998 Actual Pro Forma(1)
------- ------- ------ ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,950 $ 1,178 $ 413 $ 561 $ 1,248 $ 4,818 $ 8,491
Working capital (deficit) 1,767 969 241 (.3) (550) 4,619 7,280
Total assets 2,005 1,230 453 1,784 1,556 6,335 8,997
Long term debt, net of
current portion 102 102 --- --- 16 110 110
Total stockholders' equity
(deficit) 1,712 909 269 697 (288) 4,949 7,610
</TABLE>
(1) on a pro forma basis to give effect to the sale of 786,520 shares of common
stock and issuance of 257,500 shares of common stock for common stock
subscribed at September 30, 1999.
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RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY REVIEW AND CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW
AS WELL AS THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE INVESTING
IN OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS,
FINANCIAL CONDITION, OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY
AFFECTED. IN SUCH CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE AND
YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES, WE EXPECT TO INCUR
LOSSES IN THE FUTURE, AND OUR AUDITORS HAVE EXPRESSED DOUBT AS TO OUR ABILITY TO
CONTINUE AS A GOING CONCERN.
We were formed in 1991 and have been engaged primarily in organizational
activities, research and development, pre-clinical testing, human clinical
trials, and capital raising activities. In February 1994, we substantially
curtailed our operations due to lack of funds. In May 1994, we temporarily
ceased all activities except those related to obtaining financing. We resumed
operations upon the completion of a private placement financing in September
1994.
We incurred net losses of approximately $4,829,000 for the nine months
ended September 30, 1999, $4,438,700 for the year ended December 31, 1998, and
$1,824,600 for the year ended December 31, 1997. As of September 30, 1999, we
had an accumulated deficit of $16,047,279, which has since increased. Except for
sales by our former wholly owned subsidiary, Diagnostic Monitoring, we have not
generated any operating revenues to date. The development and commercialization
of our products will require substantial expenditures for research and
development, regulatory clearances, and the establishment of manufacturing,
marketing, and sales capabilities. As a result, we anticipate that we will
continue to incur losses for the foreseeable future.
We received a report on our consolidated financial statements from our
independent accountants, PricewaterhouseCoopers LLP, for the year ended December
31, 1998, that includes an explanatory paragraph expressing substantial doubt as
to our ability to continue as a going concern without, among other things,
obtaining additional financing adequate to support our research and development
activities, or achieving a level of revenues adequate to support our cost
structure.
OUR BUSINESS IS SUBJECT TO FACTORS OUTSIDE OUR CONTROL
Our business may be affected by a variety of factors, many of which are
outside our control. Factors that may affect our business include:
- the success of our product development efforts;
- the success of our marketing campaign;
- competition;
- our ability to attract qualified personnel;
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- the amount and timing of operating costs and capital expenditures
necessary to establish our business, operations, and infrastructure;
- governmental regulation; and
- general economic conditions as well as economic conditions specific to
the medical industry.
OUR PRODUCTS, SOME OF WHICH ARE STILL UNDER DEVELOPMENT, MAY NOT BE READILY
ACCEPTED BY THE MARKET
Although defibrillation techniques are well known within the medical
community worldwide and are considered to be accepted and effective medical
therapy, we can not assure you that the market will recognize the benefits or
the potential applications of our products. Even if we are able to successfully
demonstrate to physicians and potential customers the benefits, safety,
efficacy, and cost-effectiveness of our products, we cannot assure you that
there will be sufficient market acceptance and demand of our products to allow
us to operate profitably.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited manufacturing experience, and no experience in
manufacturing products in the volumes that will be necessary for us to achieve
significant commercial sales. In September 1998, we entered into a development
and manufacturing agreement with Zevex International, Inc., a contract medical
device manufacturer. 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.
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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
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- criminal prosecution.
To market our products in certain foreign jurisdictions, we (or our
distributors and agents) must obtain required regulatory clearances and
approvals and otherwise comply with extensive regulations regarding safety and
quality. Compliance with these regulations and the time required for regulatory
reviews vary from country to country. We cannot assure you that we will obtain
regulatory clearances and approvals in foreign countries, and we may be required
to incur significant costs in applying for, obtaining, or maintaining foreign
regulatory clearances and approvals.
WE 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;
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- economic instability and recessions;
- exposure to currency fluctuations; o 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.
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
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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,
- 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.
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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
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common stock in the foreseeable future. The payment of dividends will depend,
among other things, upon our earnings, assets, general financial condition, and
upon other relevant factors.
OUR RIGHT TO ISSUE PREFERRED STOCK COULD ADVERSELY AFFECT COMMON STOCKHOLDERS
Our certificate of incorporation authorizes the issuance of preferred stock
with such designations, rights, and preferences as may be determined from time
to time by our Board of Directors, without any further vote or action by our
stockholders. Therefore, our Board of Directors is empowered, without
stockholder approval, to issue a class of stock with dividend, liquidation,
conversion, voting, or other rights, which could adversely affect the voting
power or other rights of the holders of our common stock.
ANTI-TAKEOVER PROVISIONS MAY DISCOURAGE TAKEOVER ATTEMPTS
Provisions of the Delaware General Corporation Law and our charter may
discourage potential acquisition proposals or delay or prevent a change of
control. See "Description of Capital Stock."
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 1,822,351 shares of our common
stock for issuance upon the exercise of outstanding warrants to purchase common
stock. The holders of these options or warrants may exercise them at a time when
we would otherwise be able to obtain additional equity capital on terms more
favorable to us. The exercise of these options or warrants and the sale of the
common stock obtained upon exercise would have a dilutive effect on our
stockholders, and may have a material adverse effect on the market price of our
common stock. In addition, the issuance of options pursuant to our Stock Option
Plan may adversely affect our ability to consummate future equity financings.
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT OUR STOCK PRICE
A substantial number of our shares are available for future sale. If these
shares are sold in the public market, it may adversely affect prevailing market
prices for our common stock and could impair our ability to raise capital
through future sales of equity securities. See "Shares Eligible for Future
Sale."
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WARNING REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, including
statements regarding:
- products under development;
- technological and competitive advantages;
- timetable for commercial introduction of our products;
- our ability to improve patient care, increase survival rates, decrease
recovery time, lessen patient debilitation, and reduce patient care
costs;
- markets, demand for our services, purchase orders and commitments;
- strategic alliances; and
- the competitive and regulatory environment.
These forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive, and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, we cannot assure you that the results discussed or
implied in such forward-looking statements will prove to be accurate. In light
of the significant uncertainties inherent in such forward-looking statements,
the inclusion of such statements should not be regarded as a representation by
us or any other person that our objectives and plans will be achieved. Words
such as "believes," "anticipates," "expects," "intends," "may," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. We undertake no obligation to
revise any of these forward-looking statements.
DIVIDEND POLICY
We have never declared or paid dividends, and do not intend to pay any
dividends in the foreseeable future on shares of our common stock. Our earnings,
if any, are expected to be retained for use in expanding our business. The
payment of dividends is within the discretion of our Board of Directors and will
depend upon our earnings, if any, capital requirements, financial condition, and
such other factors as are considered to be relevant by our Board of Directors
from time to time.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis, and
- on a pro forma basis to give effect to the sale (subsequent to
September 30, 1999 and through December 15, 1999) of 786,520 shares of
common stock and issuance of 257,500 shares of common stock for common
stock subscribed at September 30, 1999.
<TABLE>
<CAPTION>
September 30, 1999
Actual (1) Pro Forma(1)
---------- ------------
(in thousands)
<S> <C> <C>
Long-term Debt $ 110 $ 110
-------- --------
Stockholders' equity
Series A preferred stock, $0.01 par value per
share: 1,000,000 shares authorized; none issued
or outstanding, actual; none issued and
outstanding, as adjusted --- ---
Common stock, $0.001 par value per share:
20,000,000 shares authorized; 10,987,232 shares
issued and outstanding, actual; 12,031,252 shares
issued and outstanding, pro forma 11 12
Common stock subscribed 1,011 ---
Additional paid-in capital 19,975 23,645
Accumulated deficit (16,047) (16,047)
-------- --------
Total stockholders' equity 4,949 7,610
-------- --------
Total capitalization $ 5,059 $ 7,720
======== ========
</TABLE>
(1) Excludes: (a) an aggregate of 1,742,466 shares purchasable pursuant to
warrants to purchase common stock outstanding as of September 30, 1999;
(b) an aggregate of 1,305,000 shares purchasable pursuant to options
under the Amended 1997 Stock Option/Issuance Plan.
14
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on the OTC Bulletin Board under the symbol
"DFIB". The following table sets forth for the periods indicated the high and
low bid quotations for our common stock as reported on the OTC Bulletin Board.
These quotations reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
4th Quarter 1999, ended 12/31/99 $5.13 $3.81
3rd Quarter 1999, ended 9/30/99 $5.31 $3.81
2nd Quarter 1999, ended 6/30/99 $4.00 $2.13
1st Quarter 1999, ended 3/31/99 $2.50 $1.63
4th Quarter 1998, ended 12/31/98 $2.50 $1.63
3rd Quarter 1998, ended 9/30/98 $2.38 $1.63
2nd Quarter 1998, ended 6/30/98 $2.38 $1.75
1st Quarter 1998, ended 3/31/98 $2.34 $1.19
4th Quarter 1997, ended 12/31/97 $3.34 $1.25
3rd Quarter 1997, ended 9/30/97 $2.63 $1.26
2nd Quarter 1997, ended 6/30/97 $2.63 $1.49
1st Quarter 1997, ended 3/31/97 $2.63 $1.26
</TABLE>
As of April 24, 2000, there were approximately 700 holders of record of the
our common stock. On April 24, 2000, the last sale price reported on the OTC
Bulletin Board for our common stock was $5.72 per share.
15
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial information is derived from our
consolidated financial statements. You should read this summary financial
information in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related notes.
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
For the Year Ended December 31, September 30,
(Unaudited)
1994(1) 1995(1) 1996(1) 1997 1998 1999 1998
------- ------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating expenses $ 454 $ 1,012 $ 827 $ 1,776 $ 3,722 $ 4,821 $ 2,493
------- ------- ------- ------- ------- -------- --------
Loss from continuing operations (488) (940) (792) (1,781) (3,788) (4,829) (2,510)
Extraordinary loss (245) --- --- --- --- --- ---
Loss from discontinued operations -- --- --- (44) (651) --- (88)
------- ------- ------- ------- ------- -------- --------
Net loss $ (733) $ (940) $ (792) $(1,825) $(4,439) $ (4,829) $ (2,598)
======= ======= ======= ======= ======= ======== ========
Basic and diluted (loss) per share:
Continuing operations $ (0.28) $ (0.28) $ (0.23) $ (0.46) $ (0.69) $ (0.52) $ ((0.47)
Extraordinary loss (0.13) --- --- --- --- --- ---
Discontinued operations --- --- --- (0.01) (0.12) --- (0.02)
------- ------- ------- ------- ------- -------- --------
Net loss per share $ (0.41) $ (0.28) $ (0.23) $ (0.47) $ (0.81) $ (0.52) $ (0.49)
======= ======= ======= ======= ======= ======== ========
Weighted average shares used
in Computing net loss per share 1,775 3,327 3,395 3,876 5,460 9,208 5,276
======= ======= ======= ======= ======= ======== ========
</TABLE>
(1) restated to give effect to a one-for-11.42857143 reverse stock split of the
issued and outstanding shares of the common stock effectuated in September
1997.
SELECTED BALANCE SHEET DATA:
(in thousands)
<TABLE>
<CAPTION>
December 31, September 30, 1999
(Unaudited)
1994 1995 1996 1997 1998 Actual Pro Forma(1)
------- ------- ------ ------ ------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,950 $ 1,178 $ 413 $ 561 $ 1,248 $ 4,818 $ 8,491
Working capital (deficit) 1,767 969 241 (.3) (550) 4,619 7,280
Total assets 2,005 1,230 453 1,784 1,556 6,335 8,997
Long term debt, net of
current portion 102 102 --- --- 16 110 110
Total stockholders' equity
(deficit) 1,712 909 269 697 (288) 4,949 7,610
</TABLE>
(1) on a pro forma basis to give effect to the sale of 786,520 shares of common
stock and issuance of 257,500 shares of common stock for common stock
subscribed at September 30, 1999.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
the financial statements and notes thereto contained elsewhere in this
prospectus. The following information contains forward-looking statements which
are subject to risks and uncertainties. If one or more of these risks and
uncertainties materialize, actual results may differ from those expressed or
implied by the forward-looking statements.
GENERAL
We have developed proprietary tachyarrhythmia detection and discrimination
software, RHYTHMx ECD, to be incorporated into devices that are attached
prophylactically to patients determined to be at risk of sudden cardiac arrest.
We commenced operations in May 1991. Until our acquisition of Diagnostic
Monitoring in April 1997, our operations consisted primarily of research and
development activities and clinical FDA testing. Diagnostic Monitoring
manufactured PC-based Holter Electrocardiogram systems and Ambulatory Holter
recorders and distributed these products in over 40 countries. We sold
substantially all of the assets of Diagnostic Monitoring on December 31, 1998
(see note 6 of the consolidated financial statements).
Cardiac arrest is the single largest cause of death in the United States
and Europe. Our mission is to increase the survival rate of cardiac arrest
victims and create a new standard of care through the development and
commercialization of our proprietary technology.
We have three products, two of which are still under development, that
utilize our proprietary technology. Our initial product, the Powerheart, is a
bedside defibrillator-monitor designed for in-hospital use. The Powerheart
attaches prophylactically to at risk cardiac patients for the purpose of
providing fully automatic detection and treatment of life-threatening
tachyarrhythmias that lead to cardiac arrest. The second product, currently
under development, is a fully automatic defibrillator module that is designed
for integration into bedside patient monitoring systems. Functionally, this
module is designed to extend patient monitoring systems beyond diagnostics to
provide patients who suffer life-threatening tachyarrhythmias with the added
protection of automatic therapy delivery without human intervention. We believe
the Powerheart and the automatic defibrillator module will be ideally suited for
hospitalized patients temporarily at risk of suffering cardiac arrest. The third
product, also currently under development, is a 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.
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 have received 510(k) clearance from the U.S. Food and Drug
Administration for the clinical version of the Powerheart and also have received
FDA 510(k) clearance for RHYTHMx ECD,
17
<PAGE>
which we plan to integrate into third-party manufactured bedside monitoring and
defibrillator systems. In January 2000, we received clearance from the FDA to
market the commercial version of the Powerheart in the United States.
We have been issued one patent, and have one additional patent under
exclusive license. In addition, we have three patents pending and intend to file
additional patents relating to our proprietary technology.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Expenses for research and development increased to $756,936 for the year
ended December 31, 1997 compared to $422,360 for the year ended December 31,
1996. The increase was due to expenses incurred in the commercialization efforts
for the Powerheart.
Marketing expenses increased to $251,777 for the year ended December 31,
1997, compared to no marketing expenses incurred in 1996. The increase was a
result of pre-marketing expenses incurred for the Powerheart.
General and administrative expenses increased to $766,991 for the year
ended December 31, 1997, compared to $404,480 for the year ended December 31,
1996. The increase was a result of expenditures incurred to support the
infrastructure necessary to commercialize the Powerheart and begin initial
preparations for market release. Expenses, which increased in 1997 as compared
to 1996, included amortization of intangible assets, personnel costs and related
fringes, insurance premiums for both product liability and directors and
officers insurance, and professional fees.
Interest expense increased to $10,133 for the year ended December 31, 1997
as compared to $ 2,300 for the year ended December 31, 1996. The increase was
associated with the debt incurred as a result of the acquisition of Diagnostic
Monitoring.
Interest income decreased to $5,886 for the year ended December 31, 1997 as
compared to $38,183 for the year ended December 31, 1996, due to declining cash
balances (see "Liquidity And Capital Resources").
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.
18
<PAGE>
General and administrative expenses increased to $1,170,551 for the year
ended December 31, 1998, compared to $766,991 for the year ended December 31,
1997. The increase was a result of expenditures incurred to support the
infrastructure necessary to commercialize the Powerheart and to begin initial
preparations for market release. Expenses, which increased in 1998 as compared
to 1997, included personnel costs and related fringes, insurance premiums for
both product liability and directors and officers insurance, and professional
fees.
Net interest expense increased to $65,353 for the year ended December 31,
1998 as compared to $10,133 for the year ended December 31, 1997. The increase
was associated with the debt incurred as a result of the acquisition of
Diagnostic Monitoring, borrowings on the bank line of credit in 1998 and the
debt discount in connection with the issuance of warrants (see note 12 to the
consolidated financial statements).
Interest income was approximately the same at $6,470 for the year ended
December 31, 1998 as compared to $5,886 for the year ended December 31, 1997.
For the year ended December 31, 1998, we incurred a net loss from
continuing operations of $3,787,704, as compared to $1,780,751 for the year
ended December 31, 1997. The increased loss for the year ended December 31, 1998
was primarily attributable to the increases in operating expenses, which
included expenses incurred in commercializing the Powerheart.
On December 31, 1998 we sold substantially all of the assets of Diagnostic
Monitoring. We have restated our prior financial statements to present the
operating results of Diagnostic Monitoring as a discontinued operation (see note
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 Diagnostic Monitoring's assets of $549,618. This non-cash
loss primarily was attributable to the write off of goodwill associated with the
original purchase of Diagnostic Monitoring.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Research and development expenses increased to $1,126,098 and $2,795,408,
respectively, for the three and nine months ended September 30, 1999, from
$436,430 and $1,416,229, respectively, for the three and nine months ended
September 30, 1998. These increases were due to engineering and pre-production
costs associated with the commercialization of the Powerheart. Included in these
costs were increases in personnel costs and related fringes, and costs
associated with independent engineering contractors.
Marketing expenses increased to $252,871 and $932,792, respectively, for
the three and nine months ended September 30, 1999, from $82,460 and $204,454,
respectively, for the three and nine months ended September 30, 1998. The
increases were a result of pre-marketing expenses related to the Powerheart
including costs associated with the development of marketing literature and the
addition of personnel and related fringes.
General and administrative expenses increased to $342,917 and $1,092,542,
respectively, for the three and nine months ended September 30, 1999, from
$264,083 and $872,483 for the three
19
<PAGE>
and nine months ended September 30, 1998. The increases in expenses for the
quarter and nine months ended September 30, 1999 as compared to the same periods
in 1998 included personnel costs and related fringes, consulting and
professional fees.
Interest expense, net, decreased to $2,918 and $6,550 for the three month
and year to date period ended September 30, 1999 as compared to $5,645 and
$14,771, respectively, for the same periods in the prior year due to the
reduction of the bank line of credit and investment of the proceeds from private
placements.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had cash and cash equivalents of $4,818,475 and
working capital of $4,618,996 as compared to cash and cash equivalents of
$1,247,602 and negative working capital of $549,898 at December 31, 1998. From
inception, our sources of funding for operations were derived from equity
placements aggregating approximately $21 million. We have incurred losses of
$16,047,279 from inception through September 30, 1999, and we expect to incur
substantial additional operating losses as a result of expenditures related to
marketing and sales efforts, research and product development activities, and
costs associated with the commercialization and product rollout of the
Powerheart. The timing and amounts of these expenditures will depend upon many
factors, some of which are beyond our control.
In 1999 we raised approximately $12.9 million in a series of private equity
placements. In connection with these private placements we paid certain fees and
expenses. Additional capital will be needed to fulfill our marketing, research
and product development goals. Successful completion of our development program
for our products and transition to attain profitable operations is dependent
upon achieving a level of revenues adequate to support the required cost
structure.
We anticipate that the current cash balance and the proceeds from private
placements through December 31, 1999 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.
NET OPERATING LOSS CARRYFORWARDS
We had approximately $10,110,000 of federal net operating loss
carryforwards and $2,875,000 of California net operating loss carryforwards at
December 31, 1998 which will begin to expire in 2007 and 1999, respectively. We
had deferred tax assets of $4,181,335 at December 31, 1998. We have established
a valuation allowance to fully offset the deferred tax assets.
20
<PAGE>
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 activities. Based on a recent
assessment, we believe that the software we use will not be impacted by the Year
2000 issue. We believe that our existing information systems equipment,
primarily composed of personal computers, are Year 2000 compliant. In addition,
we believe the Powerheart and RHYTHMx ECD are Year 2000 compliant. We have
received confirmation from our major vendors that they are Year 2000 compliant.
Costs spent to date on the Year 2000 issue are minimal and we do not expect to
incur additional costs which would be considered material. If we determine that
a particular vendor will be impacted by this problem, we may attempt to identify
additional or replacement vendors, which could delay accessibility of the
products or services provided by such vendors. A delay or failure to identify an
additional or replacement vendor could have a material adverse effect on our
business, operating results and financial condition.
21
<PAGE>
BUSINESS
We have developed proprietary tachyarrhythmia detection and discrimination
software, RHYTHMx ECD, to be incorporated into devices that are attached
prophylactically to patients determined to be at risk of sudden cardiac arrest.
RHYTHMx ECD enables these devices to provide patients suffering sudden cardiac
arrest with potentially lifesaving defibrillation therapy in as little as 10
seconds without human intervention. We have licensed RHYTHMx ECD to one third
party, and we intend to license it to others. We also have designed, are
developing, and intend to market non-invasive automatic external cardiac
defibrillation, or "AECD," devices that use RHYTHMx ECD as well as our other
proprietary technology.
Our first device, the Powerheart, is the only FDA cleared non-invasive
external cardioverter defibrillator device that provides fully automatic
detection and treatment of ventricular tachyarrhythmias for in-hospital
patients. In addition to the Powerheart, we are developing two other products
based on our proprietary technology:
- a fully automatic defibrillator module which is designed to be
embedded and integrated into existing, third party patient monitoring
systems which typically are located in most acute care areas within
hospitals; and
- 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.
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.
BACKGROUND
The American Heart Association ("AHA") and numerous clinical researchers
have established that a patient's chance of survival decreases by approximately
10% or more each minute after the onset of cardiac arrest. Early defibrillation
is the most critical factor in patient survival.
Clinical studies have shown that the average survival rate of patients who
have had an in-hospital cardiac arrest is about 15% -- a rate which has not
improved since the 1960's. The AHA has acknowledged that it has under-emphasized
the role of prompt defibrillation. The AHA and some of the world's major
resuscitation councils have determined that prompt defibrillation is the single
most important therapy for the treatment of cardiac arrest. Studies have
documented in-hospital delays of more than five minutes between recognition of
cardiac arrest and first defibrillation. Immediate defibrillation means a
significantly greater chance of survival and reduced damage to the heart and
other vital organs (including the brain), which may result in less debilitation
and more rapid recovery. Clinical studies where defibrillation was administered
in under one minute have shown survival rates in excess of 90%.
22
<PAGE>
ELECTROCARDIOGRAM BASICS
The heart is divided into four chambers. The two upper chambers that take
blood in from the body are called the left and right atria. The two lower
chambers that pump blood out are known as the left and right ventricles. For the
heart to operate properly, different parts of the heart must contract in the
proper sequence and certain parts, such as the ventricles, must contract
simultaneously. The pumping action of the heart is managed by conductive fibers
that "wire" the heart electrically. A normally beating heart produces a series
of regular electrical events.
Unfortunately, the heart does not always function in an organized manner.
Due to disease or other unknown causes, the wiring of the heart can lose control
of the ventricular contractions. When this occurs, the signal to contract is
processed unevenly through the heart muscle rather than through the normal
conduction path, resulting in an unstable cardiac rhythm. This generates
abnormal contractions of the heart known as "arrhythmias." While not all
arrhythmias are life threatening, the most common life-threatening arrhythmias
are ventricular tachycardia and ventricular fibrillation.
- VENTRICULAR TACHYCARDIA. This occurs when electrical disturbances
cause a dangerously fast heart rate. The increased heart rate and the
uneven nature of the contractions reduce the delivery of blood and
oxygen to the brain and body. This can result in unconsciousness, and
may lead to ventricular fibrillation (described below) and subsequent
death if left untreated. Ventricular tachycardia may be treated with
drugs, by a procedure called pacing, or by electrical shock called
"cardioversion." Cardioversion depolarizes the entire heart causing
the heart to "reset." It is appropriate when the ventricular
tachycardia rate is very fast. Termination of the abnormal
contractions returns the cardiac rhythm back to normal.
- VENTRICULAR FIBRILLATION. This is a condition in which many different
locations of the heart contract at an extremely disorganized and rapid
rate of 150 to 500 beats per minute. These different, rapid impulses
cause an irregular and chaotic cardiac rhythm with little or no
delivery of blood and oxygen to the brain and body. In this condition,
a patient will quickly lose consciousness and die within minutes
unless the rhythm is terminated by an electrical shock. This shock is
called defibrillation.
23
<PAGE>
IMPORTANCE OF EARLY DEFIBRILLATION
Early defibrillation is the single most important factor in reviving
patients in cardiac arrest. In the case of ventricular fibrillation, there is
approximately a 10% (or higher) decline in a patient's chance of survival with
each passing minute. If defibrillation is delayed longer than 10 to 12 minutes,
there is little probability of survival. The following graph from the Textbook
of Advanced Cardiac Life Support, published by the AHA in 1994, illustrates
resuscitation rates after defibrillation within the first ten minutes following
the onset of ventricular fibrillation.
[GRAPH]
CURRENT MODES OF TREATMENT
- IMPLANTABLE CARDIOVERTER DEFIBRILLATOR OR "ICD" DEVICES. These
devices, which are both automatic and ambulatory, are implanted into
patients at chronic risk for cardiac arrest. An ICD device is a
complex electronic instrument, consisting of a heart monitor and
defibrillator module, implanted in the abdominal cavity or chest with
electrodes attached directly to the heart. When the monitor detects a
dangerous arrhythmia that satisfies the detection algorithm criteria,
the defibrillator delivers an electrical charge through the heart that
provides nearly instantaneous reversion to normal heart rhythm. ICD
devices are invasive and the procedure costs well over $40,000.
- EXTERNAL DEFIBRILLATORS. These are widely used to treat patients in
cardiac arrest. One type of device is the manual defibrillator, which
requires highly skilled medical personnel (e.g., a physician or
paramedic) to analyze and interpret the patient's electrocardiogram to
determine if defibrillation is required and, if it is, to manually
administer the electrical shock. Recently, more sophisticated
semi-automatic defibrillators have been developed which perform the
analysis of the patient's heart rhythm and, if it is determined that
the patient is in cardiac arrest, advise the medical staff to
administer the shock. The common denominator among these existing
devices is that they require the intervention of a trained medical
technician to administer the shock.
24
<PAGE>
OUR PROPRIETARY SOFTWARE
We have developed a proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that are
attached prophylactically to patients determined to be at risk of sudden cardiac
arrest. RHYTHMx ECD enables these devices, such as external
defibrillator-monitors and patient monitoring systems, to deliver potentially
life saving defibrillation therapy, in as little as 10 seconds, without the need
for human intervention. It allows patient specific parameters to be programmed
into the device's microcomputer in accordance with the physician's instructions.
We received FDA clearance for RHYTHMx ECD in August 1998.
To analyze a patient's heart rhythm, RHYTHMx ECD detects and captures the
electrical signal produced by the heart's activity. The incoming signal is
sampled every two milliseconds-- i.e., 2/1000th of a second. This signal is
filtered, manipulated, and processed mathematically to produce meaningful and
reliable data for analysis. The primary parameter in determining if a rhythm is
shockable or not is the rate at which electrical events occur. This rate is
called the Shockable Tachyarrhythmia Detection rate or simply the "detection
rate." Analysis of the detection rate occurs on a continuous basis.
RHYTHMx ECD is capable of distinguishing between unusually fast "normal"
rhythms and abnormal rhythms (e.g., ventricular tachyarrhythmias), the latter of
which requires electrical shock. This feature is called Modulation Domain
Function or "MDF-Registered Trademark-." MDF uses sophisticated morphology
differentiation techniques designed to reduce the probability of mistakenly
delivering defibrillation therapy for rapid, albeit normal, heart rhythms.
When a device utilizing RHYTHMx ECD is ready to deliver a shock, it first
verifies that the defibrillation pads are properly attached to the patient, that
it can safely deliver the shock, and that the rhythm is still shockable. If the
life-threatening rhythm has changed on its own and no longer requires a shock,
the device safely disposes of the charge within the device itself. After the
shock is delivered, the device quickly re-acquires the electrocardiogram signal
and resumes analysis of the resulting rhythm. If the life-threatening rhythm
continues, the devise recharges and causes another shock to be delivered, if so
programmed. If the shock restores a normal rhythm, the device 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 the Powerheart was conducted
between February 1993 and May 1997. The trial was divided into two phases. Phase
I tested the tachyarrhythmia detection and discrimination algorithm. Phase II
tested the entire system including both the arrhythmia analysis algorithm and
the prototype Powerheart shock delivery system in which RHYTHMx ECD had been
embedded. In the Phase II trial, patients attached to the Powerheart were
studied in either the electrophysiology lab or in the critical care unit. A
total of 155 patients were enrolled.
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
25
<PAGE>
Southern California Medical Center. The Powerheart was utilized for 1,216 hours
during this study.
Overall results from both phases of the clinical trial found that:
- Powerheart had
* a SENSITIVITY of 100% -- i.e., it correctly identified shockable
episodes, and
* a SPECIFICITY of 99.5% -- i.e., it did not allow a non-shockable
rhythm to be shocked in 99.5% of the episodes:
- the average time to first shock using Powerheart was approximately 21
seconds, and
- normal rhythm was restored by the first shock with the Powerheart in
96.2% of the cases.
The table below presents performance data for the Powerheart in relation to
AHA-recommended goals. As illustrated, the Powerheart exceeded both stipulated
AHA performance goals.
<TABLE>
<CAPTION>
----------------------------------------------------------------
AHA'S HIGHEST GOALS POWERHEART PERFORMANCE
----------------------------------------------------------------
<S> <C> <C> <C>
Shockable Sensitivity Greater than 90.0 % 100.0 %
- --------------------------------------------------------------------------------------------------------------------
Nonshockable Specificity Greater than 99.0 % 99.5 %
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Cardiac Science 510(k) submission
PRODUCTS
We have designed three products that use our proprietary software. Our
initial product, the Powerheart, is a defibrillator-monitor designed for
in-hospital use. We received 510(k) clearance for the clinical version of the
Powerheart in late 1997 and began shipping the product in the fourth quarter of
1999 to Medtronic Physio-Control at their European headquarters located in the
United Kingdom. We began shipments of the Powerheart to our international
distributors and to Medtronic Physio-Control in the United States in the first
quarter of 2000. The second product, currently under development, is on
automatic defibrillator module designed for integration into existing third
party patient monitoring systems. The third product, also under development, is
a 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 (HOSPITAL BEDSIDE DEFIBRILLATOR-MONITOR)
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.
26
<PAGE>
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 "pole 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
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.
27
<PAGE>
- 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
28
<PAGE>
- FULLY AUTOMATIC MODE. This is the primary intended mode of operation
for the Powerheart. The automatic mode of the Powerheart delivers
optimal benefits to the patient and healthcare provider in terms of
its instant analysis and rapid response features.
The table below compares the Powerheart to existing semi-automatic external
defibrillators used in most hospitals.
<TABLE>
<CAPTION>
CAPABILITY POWERHEART STANDARD HOSPITAL DEFIBRILLATOR
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Indication for use Patients at risk for cardiac arrest Patient is unconscious, has no pulse
and is not breathing
Conditions for attachment Normal rhythm Patient assumed to be in ventricular
tachycardia or Ventricular fibrillation
Time to first defibrillation 21 seconds (average) 5 - 7 minutes
Unattended use Yes No
Automatic shock Yes No
Prophylactic Monitoring Yes No
Signal interference Designed to reject signal interference Not suitable for patients that are
and allow patient motion moving or being moved
Length of use Long-term For emergencies only
Accuracy-- Specificity: Greater than 99.0% Greater than 99.0%
Sensitivity: Greater than 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 wireless alarm notification system into the
Powerheart. Under the terms of the agreement, we are obligated to make certain
minimum purchases of the AlarmView system and to pay $175,000 in technology and
non-recurring engineering fees.
AUTOMATIC DEFIBRILLATOR MODULE (PATIENT MONITORING MODULE)
The Automatic Defibrillator Module currently under development is being
designed for integration into patient monitoring systems. Our conceptual model
of the Automatic Defibrillator Module includes RHYTHMx ECD, an optimized
biphasic defibrillator module, and other necessary components. Functionally, the
Automatic Defibrillator Module extends the capabilities of patient monitoring
systems beyond diagnostics to delivering therapy automatically and without human
intervention. We believe the Automatic Defibrillator Module will enable a
patient monitoring system to accurately and instantly detect the onset of
ventricular tachyarrhythmias, discriminate between a shockable and non-shockable
rhythm, and direct the high voltage defibrillator module to automatically
deliver a therapeutic shock without the need for human intervention. This
therapeutic shock is expected to convert a patient's heart rhythm back to normal
within seconds of the onset of the event.
29
<PAGE>
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 our 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.
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.
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<PAGE>
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
agreement is a two-phase agreement:
- to develop and fabricate prototypes of the Powerheart; and
- 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.
Compensation for development fees included 90,000 shares of our common stock and
$339,360 payable upon completion of certain milestones.
The first phase was completed in October 1999. During the manufacturing
phase, we are required to provide Zevex with a six month rolling forecast of our
production needs, with a firm commitment to purchase our initial three month
product forecast. The development fees we paid to Zevex have been expensed as
part of the development phase of the contract. The amounts expensed were
$459,360 for the year ending December 31, 1998, $0 during the quarter ending
March 31, 1999, $74,063 for the quarter ending June 30, 1999, and $221,824 for
the quarter ending September 30, 1999.
The materials to be used in manufacturing the Powerheart will consist
primarily of electronic, mechanical, and electromechanical components that
generally are available from various vendors and suppliers. However, certain
components require customization, could require considerable lead-time, and
their availability can not be assured. We intend to warehouse necessary
components to meet our monthly production requirements and to carry an adequate
inventory of finished goods to meet expected customer demand.
The FDA and foreign counterparts conduct periodic inspections of
manufacturing facilities 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.
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
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<PAGE>
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.
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 right and title to, and interest in,
any and all trade secret rights and technology concerning the manufacture of
defibrillator devices for the treatment of
32
<PAGE>
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.
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
510(k) 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, 1998,
1997 and 1996 were $2,209,524, $756,936, and $422,360, 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 backog 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.
33
<PAGE>
FACILITIES
We currently lease approximately 5,400 square feet of space in Irvine,
California which, prior to our move into our new facilities, comprised our
executive offices, engineering facility, and software and hardware laboratories.
The annual rental for these facilities is approximately $67,200 with the term of
the lease expiring in April 2000. We entered into a five-year lease for a 19,000
square foot building with approximately 10,000 square feet of warehouse space
beginning in September 1999. The new location is located in Irvine, California.
We moved all of our operations into this facility in December 1999. The annual
rental for the new facility is $183,000.
LEGAL PROCEEDINGS
We currently are not involved in any legal proceedings.
34
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position and Offices with the Company
---- --- -------------------------------------
<S> <C> <C>
Raymond W. Cohen 40 President, Chief Executive Officer and Director
Brett L. Scott 49 Chief Financial Officer and Secretary
Dongping Lin 41 Chief Technical Officer
Michael Gioffredi 48 Vice President of Sales and Marketing
Jeffery Blanton 43 Vice President of Operations
Paul D Quadros 52 Director
Peter Crosby 47 Director
Howard Evers 51 Director
</TABLE>
RAYMOND W. COHEN has served as our President, Chief Executive Officer, and
as a member of our Board of Directors since January 1997. Prior to 1997, Mr.
Cohen was President of Diagnostic Monitoring, a privately held manufacturer and
international distributor of non-invasive cardiac monitoring devices and was
Vice President, Sales & Marketing of DM Software, Inc., a developer of cardiac
monitoring software. From 1988 to 1990, Mr. Cohen was President of BioAnalogics,
Inc., a publicly held development-stage medical company located in Beaverton,
Oregon. From 1982 to 1988, Mr. Cohen was Vice President, Sales and Marketing for
Brentwood Instruments, Inc., a publicly held cardiology products distribution
company based in Torrance, California, where he was instrumental in the company
being ranked in Inc. Magazine's list of Fastest Growing Small Public Companies
from 1986 through 1988. Mr. Cohen holds a B.S. in Business Management from the
State University of New York at Binghamton.
BRETT L. SCOTT has served as our Chief Financial Officer and Secretary
since October 1997. From 1992 to 1997, Mr. Scott was Chief Financial Officer of
Neuro Navigational Corporation, a publicly held company located in Costa Mesa,
California, which developed, manufactured and marketed minimally-invasive
neurosurgery and vascular surgery fiberoptic imaging technology, software and
disposables. Mr. Scott was Chief Financial Officer of Western Energy Management,
Inc. from 1991 to 1992 and of D&D Construction Co., Inc. from 1989 to 1991. From
1982 to 1989, he was co-owner of Schneider & Scott, Inc., certified public
accountants. Mr. Scott is a certified public accountant and holds a B.S. in
Business administration from the University of Southern California.
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<PAGE>
DONGPING LIN, PH.D. has been our Chief Technical Officer since July 1998.
Dr. Lin held the position of Director of Software Engineering from January 1997
until July 1998. Dr. Lin joined us as Senior Software Engineer in January 1993.
From 1988 to 1993, Dr. Lin held senior software engineering positions at Del Mar
Avionics located in Irvine, California. Dr. Lin received his B.S. in Electrical
Engineering from Beijing University in Beijing, China. Dr. Lin received an
M.S.E. in Computer Engineering and Ph.D. in Electrical Engineering and Computer
Science from the University of Michigan. Dr. Lin is recognized as an expert in
the field of computer arrhythmia analysis and real-time ventricular fibrillation
detection.
MICHAEL GIOFFREDI has served as our Vice President, Sales and Marketing
since September 1998. Mr. Gioffredi previously held the position of Vice
President Sales and Marketing for Britesmile, Inc., a publicly held dental laser
technology company located in Salt Lake City. Prior to 1997, Mr. Gioffredi was
Senior Vice President Marketing and Business Development for the EMPath Group, a
private emergency medicine consulting firm and Vice President Marketing for
Laserscope, Inc., a publicly held medical laser company. From 1982 to 1993, Mr.
Gioffredi held marketing management and sales positions with the cardiology and
cardiovascular divisions of C.R. Bard, Inc., a Fortune 500 medical device
company. Mr. Gioffredi has a B.A. in Business administration and Marketing from
California State University at Fullerton.
JEFFERY W. BLANTON has served as our Vice President of Operations since May
1998. From November 1994 to May 1998, Mr. Blanton held various positions
including Director of Engineering, Director of Project Engineering and Director
of Operations for Chiron Vision, a division of Chiron Corporation. Chiron Vision
develops and manufactures products for ophthalmic surgery. From March 1994 to
November 1994, Mr. Blanton was a consultant to Ohmeda Medical Devices, a
division of the British Oxygen Company. From 1987 to February 1994, Mr. Blanton
held project and management engineering positions at McGaw Inc., a drug delivery
company. Prior to 1987, Mr. Blanton worked for Honeywell Inc. Mr. Blanton is a
certified project manager and has a B.S. in Mechanical Engineering from
Worcester Polytechnic Institute.
PAUL D. QUADROS has been our Chairman of the Board since May 1999 and a
member of our Board of Directors since our formation in May 1991. He is
currently the Chairman of the Board of UroGen Corp., a developer of
pharmaceuticals to treat prostate cancer. Prior to joining UroGen in June 1995,
Mr. Quadros served as Senior Vice President and Chief Financial Officer of
Thermatrix, Inc., a manufacturer of pollution control equipment. Prior to
joining Thermatrix in June 1994, Mr. Quadros was a general partner of Technology
Funding, a venture capital management organization. During his tenure at
Technology Funding, he was a member of the Commitments Committee from 1986 to
1994, serving as its chairman from 1987 to 1990. From 1991 to 1994, he was
chairman of Technology Funding's Medical Investment Committee and was actively
involved in managing Technology Funding's health care portfolio. Mr. Quadros
served on the board of directors of Medstone International, Inc., from 1988 to
1995. Mr. Quadros has a B.A. in Finance from California State University at
Fullerton and an M.B.A. from U.C.L.A. Graduate School of Management. He also
serves on the board of directors of Phenotypics Corporation and Quanta Vision
Inc.
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<PAGE>
PETER CROSBY has been a member of our Board of Directors since November
1997. Mr. Crosby has over 20 years of experience in the medical device industry
and is currently the Chief Executive Officer of Ischemia Technology Inc. Mr.
Crosby also serves as chairman of the board of Harley Street Software, Inc., a
Canadian developer of ECG software products. Mr. Crosby was CEO and a director
of NeoVision Corporation, an ultrasound imaging system developer until NeoVision
was sold to United States Surgical Corporation in September 1997. From 1981 to
1996, Mr. Crosby held numerous senior management positions for Nucleous Group,
an Australian medical device company and a division of Pacific Dunlop, Ltd.
During his tenure at Nucleous, he served as Vice President, R&D, and Vice
President of Business Development for Telectronics Pacing Systems, a global
developer of implantable medical devices such as defibrillators, pacemakers and
cardiomyoplasty stimulators. Mr. Crosby is the author of many publications,
holds numerous patents in the defibrillation technology field, and has a B.S. in
Electrical Engineering and a M.E.S. from the University of Melbourne, Australia.
HOWARD L. EVERS has been a member of our Board of Directors since March
1998. From 1995 to 1996, Mr. Evers served as President, Chief Executive Officer
and Chairman of the Board of Diagnostics On Call, a mobile X-ray and EKG
services provider to the long-term care and home health care markets. From 1992
to 1995, he was the Chief Executive Officer and Chairman of the Board of PSI, a
medical supply distribution company servicing the physician office market. From
1988 to 1992, Mr. Evers was the Chief Executive Officer and Chairman of the
Board of Lake Industries, an environmental services company. From 1973 to 1988,
Mr. Evers was President and Chief Executive Officer of Tru Green Corporation, a
lawn, tree and shrub care and pest control company sold to Waste Management Inc.
in 1987.
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EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid by
us to our Chief Executive Officer and to each of our other executive officers,
other than our Chief Executive Officer, who received salary and bonus payments
in excess of $100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
LONG TERM COMPENSATION
-----------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------- ---------------------------- -------------------
SECURITIES
NAME AND OTHER RESTRICTED UNDERLYING LTIP
PRINCIPAL SALARY BONUS ANNUAL STOCK OPTIONS/SARS PAYOUT ALL OTHER
POSITION YEAR ($) ($) COMP. AWARD (#)(1) ($) COMP.
-------- ---- --- --- ----- ----- ------ --- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Raymond W. Cohen 1999 189,626 40,000 -- -- 150,000 -- 9,750(2)
President and Chief 1998 161,500 -- -- -- 50,000 -- 6,000(2)
Executive Officer 1997 101,083 -- -- -- -- -- 6,000(2)
Dongping Lin 1999 125,013 -- 164,250 -- --
Chief Technical 1998 110,496 20,000 -- -- 124,250 -- --
Officer 1997 81,806 -- -- -- -- -- --
Brett L. Scott 1999 119,723 15,000 -- -- 100,000 -- --
Chief Financial 1998 99,336 -- -- -- 50,000 -- --
Officer and Secretary 1997 21,000 -- -- -- -- -- --
Michael Gioffredi 1999 108,110 25,000 -- -- 100,000 -- 10,634(3)
Vice President of Sales 1998 32,331 -- -- -- 50,000 -- 2,885(4)
and Marketing 1997 -- -- -- -- --
Jeffrey Blanton 1999 130,228 -- -- -- 100,000 -- --
Vice President of 1998 73,634 -- -- -- 50,000 -- --
Operations 1997 -- -- -- -- -- -- --
</TABLE>
- ------------------------------
(1) Represents shares of common stock underlying stock options. The grant of
the options disclosed in this column was made pursuant to the 1997 Stock
Option/Stock Issuance Plan.
(2) Annual automobile allowance
(3) Reimbursement for relocation expenses
(4) Consulting services
38
<PAGE>
OPTION GRANTS IN 1999
The following table provides information related to options granted to each
of the named executive officers during the year ended December 31, 1999:
<TABLE>
<CAPTION>
PERCENTAGE OF POTENTIAL REALIZABLE
NO. OF SECURITIES TOTAL OPTIONS VALUE AT ASSUMED
UNDERLYING GRANTED TO EXERCISE ANNUAL RATE OF STOCK
OPTIONS GRANTED EMPLOYEES IN PRICE EXPIRATION PRICE APPRECIATION FOR
NAME (#)(1) YEAR ($/SH) DATE OPTION TERM
---- ------ ---- ------ ---- -----------
5% 10%
-- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Raymond W. Cohen 150,000 16.7% $2.00 5/05/09 $188,668 $478,123
Dongping Lin 164,550 6.7% $2.00 5/05/09 $206,969 $524,501
Brett L. Scott 100,000 8.3% $2.00 5/05/09 $125,779 $318,748
Michael Gioffredi 100,000 8.3% $2.00 5/05/09 $125,779 $318,748
Jeffery Blanton 100,000 8.3% $2.00 5/05/09 $125,779 $318,748
</TABLE>
- -----------------------
(1) Represents shares of common stock underlying stock options. Such options
are exercisable 25% per year commencing in June 1999.
AGGREGATED OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
The following table sets forth certain information as of December 31, 1999
regarding options held by the named executive officers. These executive officers
did not exercise any options during the year ended December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
ACQUIRED ON VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
EXERCISE REALIZED YEAR-END YEAR-END ($)(1)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- --- --- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Raymond W. Cohen -- -- 25,000/125,000 $50,000/$250,000
Dongping Lin -- -- 70,688/93,862 $141,376/$187,724
Brett L. Scott -- 25,000/75000 $50,000/$150,000
Michael Gioffredi -- 12,500/87,500 $25,000/$175,000
Jeffery Blanton -- 12,500/87,500 $25,000/$175,000
</TABLE>
- -------------------------
(1) The closing bid price of the common stock on December 31, 1999 was $4.00.
Value is calculated on the difference between the exercise price of
in-the-money options and multiplied by the number of shares of common stock
underlying the option.
39
<PAGE>
EMPLOYMENT AGREEMENTS
We are party to at-will employment agreements with Raymond W. Cohen, Brett
L. Scott, Dongping Lin, Michael Gioffredi and Jeffery Blanton. Each agreement
automatically renews annually unless either party shall give the other written
notice of termination. The agreements provide for a base salary, plus such
bonuses and stock options based on incentive plans approved by the Board of
Directors. Each agreement contains a non-competition covenant, and Mr. Cohen's
agreement provides that he shall receive a car allowance of $6,000 per annum.
The agreements also provide that in the event of an involuntary termination or
change of control,
- each employee shall receive his base salary and health insurance
benefits for six months (twelve months for Mr. Cohen) following the
event as well as his pro rata portion of his target bonus; and
- any unvested stock option or shares of restricted stock held on the
date of event shall continue to vest over the twelve-month period.
Mr. Scott's agreement also provides that in the event of a change of
control, Mr. Scott shall receive 50,000 shares of our common stock (as adjusted
for dividends, stock dividends, stock splits and other similar changes).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the compensation committee of our board of directors
are Paul Quadros, Howard Evers and Raymond Cohen. Compensation decisions
regarding Mr. Cohen are made by the non-employee directors of the compensation
committee. No interlocking relationship exists between any member of our board
of directors or our compensation committee and any member of the board of
directors or compensation committee of any other company.
COMPENSATION OF DIRECTORS
The non-employee members of our Board of Directors receive $1,000 per board
meeting attended and $250 per telephonic board meeting. Our directors also are
reimbursed for expenses incurred in attending meetings of the Board of Directors
and its committees. Non-employee directors also are eligible to receive options
under our 1997 Stock Option/Stock Issuance Plan.
STOCK OPTION PLAN
Our 1997 Stock Option/Stock Issuance Plan was adopted by our Board of
Directors in December 1997 and approved by our stockholders at our 1998 Annual
Meeting of Stockholders. A maximum of 1,305,000 shares of common stock may be
issued pursuant to the Plan, of which 1,305,000 have been granted to date to our
employees, including executive officers, and our directors. The Plan authorizes
the granting of incentive stock options to our employees or
40
<PAGE>
employees of any of our subsidiaries, and non-statutory stock options to our
employees, our directors and certain of our consultants and advisors. The
options to be granted under the Plan and designated as incentive stock options
are intended to receive incentive stock option tax treatment pursuant to Section
422 of the Internal Revenue Code.
The Plan also authorizes direct issuance of stock to eligible participants
in the Plan at a price per share of not less than 85% of the fair market value
on the date of issuance, payable in cash, by check, or, if permitted under the
terms of the grant, by promissory note. The consideration for such shares also
may be past services rendered to us. Such stock issuances may vest immediately
or in one or more installments as determined by our Board of Directors. The
holder of such stock, however, shall have full stockholder rights with respect
to said stock, whether or not vested.
The exercise price for options granted under the Plan is determined by the
Board of Directors or a committee designated by the Board and consisting of two
or more members. The exercise price for incentive stock options cannot be less
than 100% of the fair market value of the common stock on the date it is
granted, or 110% in the case of optionees who own more than 10% of the voting
power of all classes of our stock. The exercise price for non-statutory options
may be less than 100% of the fair market value of the common stock on the date
the option is granted. The fair market value (determined at the time the option
is granted) of the common stock with respect to which incentive options are
first exercisable by any individual employee during any calendar year cannot
exceed $100,000.
No option granted under the Plan may be exercised after the expiration of
the option, which may not, in any case, exceed ten years from the date of grant
(five years in the case of incentive options granted to persons who own more
than 10% of the voting power of all classes of our stock). Options granted under
the Plan are exercisable on such basis as determined by our Board of Directors.
If we liquidate or dissolve, or if there is a merger or consolidation
resulting in a transfer of more than 50% of the voting power of our securities,
any unexercised options theretofore granted under the Plan shall, immediately
prior to such transaction, become fully exercisable. If not exercised prior to
such transaction, all options shall be deemed cancelled unless the surviving
corporation in any such merger or consolidation elects to assume the options
under the Plan. All shares of stock issued pursuant to the Plan shall also be
immediately vested in the event of such a transaction. Options granted under the
Plan may not be transferred by the participant other than by will or the laws of
descent and distribution and may be exercised during the holder's lifetime only
by such holder.
If any of our employees or directors, prior to the exercise of their
options, ceases to be an employee or director for any reason other than
disability or misconduct, the options granted to such employees or directors
automatically terminate 90 days from the date of termination. If any of our
employees or directors ceases to be an employee or a director by reason of
disability, he may exercise any option he holds at any time within twelve months
from the date of termination, but only to the extent the holder had the right to
exercise such option at the date of termination. If any of our employees or
directors dies while holding an outstanding option, his option rights may be
exercised
41
<PAGE>
by the person or persons to whom such rights under the option are transferred by
will or the laws of descent and distribution within twelve months from the date
of death.
The Plan provides that our Board of Directors, or a committee of the Board,
shall administer the Plan, and shall have the authority to interpret the Plan
and to prescribe, amend and rescind the rules and regulations relating thereto.
Unless previously terminated in certain circumstances, the Plan will terminate
in December 2007.
INDEMNIFICATION AND LIMITATION OF LIABILITY
Our certificate of incorporation provides that our directors will not be
personally liable to our company or our stockholders for monetary damages for
breach of their fiduciary duties as directors, except for liability for any of
the following:
- any breach of their duty of loyalty to our company or our
stockholders,
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- unlawful payments of dividends or unlawful stock repurchase,
redemptions or other distributions, or
- any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we must indemnify our directors, officers and
employees to the fullest extent permitted by Delaware law and California Law.
Our bylaws also provide for the prepayment of expenses to persons entitled to
indemnification (subject to certain conditions), and permit us to purchase and
maintain insurance on behalf of any director, officer, employee, or agent
against any liability asserted against them in any such capacity, whether or not
our bylaws would permit or require such indemnification.
42
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information, as of April 12, 2000,
regarding beneficial ownership of the common stock by
- each stockholder known by us to be the beneficial owner of more than
five percent (5%) of the outstanding shares of common stock;
- each of our directors;
- each of the named executive officers; and
- all of our current executive officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address of Number of Shares
BENEFICIAL OWNER BENEFICIALLY OWNED(1) PERCENT OF CLASS (1)
- ---------------- --------------------- --------------------
<S> <C> <C>
Dr. Ernst Muller Mohl 2,983,750 (2) 24.1%
Weinplatz 10
8001 Zurich Switzerland
Raymond W. Cohen 532,560 (3) 4.3%
Dongping Lin 90,688 (4) *
Paul D. Quadros 33,269 (5) *
Peter Crosby 30,500 (6) *
Howard L. Evers 28,750 (7) *
Walter Villiger 933,750 (8) 7.6%
Hurdnerstrasse 10
Postfach 1474
Ch-8640
Hurden Switzerland
Brett L. Scott 25,000 (9) *
Michael Gioffredi 12,500 (10) *
Jeffrey Blanton 12,500 (11) *
All executive officers and directors as a group
(eight persons) 765,767 (12) 6.1%
</TABLE>
- -------------------------
* Less than 1%.
(1) Shares of common stock subject to options and warrants currently
exercisable or exercisable within 60 days of the date hereof are deemed
outstanding for computing the number of shares beneficially owned and the
percentage of outstanding shares of the class held by a person holding such
options or warrants, but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them.
(2) Includes 56,250 shares issuable upon exercise of outstanding warrants.
(3) Includes 25,000 shares issuable upon exercise of outstanding vested
options.
(4) Includes 70,688 shares issuable upon exercise of outstanding vested
options.
(5) Includes 17,500 shares issuable upon exercise of outstanding warrants and
8,594 shares issuable upon exercise of outstanding vested options.
(6) Includes 7,500 shares issuable upon exercise of outstanding vested options.
(7) Includes 3,750 shares issuable upon exercise of outstanding vested options.
(8) Includes 33,750 shares issuable upon exercise of outstanding warrants.
(9) Includes 25,000 shares issuable upon exercise of outstanding vested
options.
(10) Includes 12,500 shares issuable upon exercise of outstanding vested
options.
(11) Includes 12,500 shares issuable upon exercise of outstanding vested
options.
(12) Includes 17,500 shares issuable upon exercise of outstanding warrants and
165,532 shares issuable upon exercise of outstanding vested options.
43
<PAGE>
SELLING STOCKHOLDERS AND PLAN OF DISTRIBUTION
The following table sets forth
- the names and addresses of each of the selling stockholders,
- the number of shares of common stock beneficially owned by each
Selling Stockholder prior to the offering,
- the number of shares of common stock that may be offered by each of
the selling stockholders pursuant to this prospectus, and
- the number of shares of common stock beneficially owned by each
Selling Stockholder after completion of the offering, assuming all of
the shares covered by this prospectus as sold.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
Thomas Girschweiler 323,625(1) 323,625 -- +
Wissmannstrasse 15
CH-8057 Zurich, Switzerland
Eduard P. Kauffmann 112,500 112,500 -- +
Hitzigweg 5
CH-8032-Zurich, Switzerland
Michele Martucci 62,500 62,500 -- +
Seeweg 16
CH-8593, Kesswil, Switzerland
Erhard Lee 62,500 62,500 -- +
c/o Actienvest AG
Weinplatz 10
8022 Zurich, Switzerland
Larry Koppes 11,310 11,310 -- +
c/o KPA Partners
19900 MacArthur Blvd., Suite 200
Irvine, CA 92612
Richard Potter 10,000 10,000 -- +
32732 Johnathan Circle
Dana Point, CA 92629
Jeff Turcotte 11,309 11,309 -- +
c/o KPA Partners
19900 MacArthur Blvd., Suite 200
Irvine, CA 92612
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
Walter Villiger 933,750(2) 933,750 -- +
Hurdnerstrasse 10
Postfach 1474
Ch-8640
Hurden Switzerland
AACPAC Holdings Limited 519,000 312,500 206,500 1.7%
c/o Ernst & Young
11/F, Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
Medtronic Physio-Control Corp. 450,000(3) 450,000 -- +
11811 Willows Road NE
Redmond, WA 98052
Sally K. Bales 10,000 10,000 -- +
c/o Bales-Waugh Group Inc.
1301 Riverplace Tower, Suite 2016
Jacksonville, FL 32207
SMS Group, AG 125,000 125,000 -- +
Sigg-Merkli-Schrodel AG
Utoquai 31, Postfach,
CH-8024 Zurich, Switzerland
Wilfried Girschweiler 50,000 50,000 -- +
Schiedhaldensteig 2
8700 Kusnacht, Switzerland
Ernst Muller-Mohl 2,983,750(4) 2,743,750 240,000 1.9%
Weinplatz 10
8001 Zurich, Switzerland
Swiss Bank Corporation 170,000(5) 170,000 -- +
Badstrasse 4
5401 Baden, Switzerland
Rush & Company 150,000 150,000 -- +
c/o Swiss American Securities
12 East 49th St., New York, NY 10017
Stuart Karten 15,000 15,000 -- +
4222D Glencoe Avenue
Marina Del Rey, CA 90292
Stiftung Nivata 228,000(6) 228,000 -- +
Bahnhofplatz 9
CH-8001, Zurich, Switzerland
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
Stiftung Obliva 20,000(7) 20,000 -- +
Bahnhofplatz 9
CH-8001, Zurich, Switzerland
Dongping Lin * 10,000 10,000 -- +
13 Glenn
Irvine, CA 92620
Don Hill **** 115,289(8) 104,966 10,323 +
2 Bridgeworth Lane
Sherman, CT 06784
BWM Investments *** 264,688(9) 262,500 2,188 +
14 Parkwood Lane
Dix Hills, NY 11746
Fran Daniels 126,875(10) 87,500 39,375 +
c/o Financial Sciences of America
9255 Doheny Road
Los Angeles, CA 90069
Howard Cooper ***** 151,195(11) 43,750 107,445 +
5940 Fairhaven Ave.
Woodland Hills, CA 91367
Paul Quadros ** 33,269 (26) 17,500 16,129 +
716 Columbia Drive
San Mateo, CA 94402
Global Asset Strategies 511,000 20,000 491,000 4.0%
C/o Stradling, Yocca,Carlson, & Rauth
660 Newport Center Drive
Newport Beach, CA 92660
Trafina Privatbank, A.G. 20,000(12) 20,000 -- +
c/o Jones Day Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013
Australite Limited 5,000(13) 5,000 -- +
c/o Jones Day Reavis & Pogue
555 West Fifth Street, Suite 4600
Los Angeles, CA 90013
Clariden Bank, Zurich 37,500 37,500 -- +
Claridenstrasse 26
P.O. Box 5080
CH-8022 Zurich, Switzerland
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
Cantrade AG 28,750(14) 28,750 -- +
Morgartenstrasse 1
P.O. Box
CH-8039 Zurich, Switzerland
EB Research Institute AG 14,375(15) 14,375 -- +
Kalchbuhlstrasse 18
7007 Chur, Switzerland
Gandola Stiftung 287,500(16) 287,500 -- +
C/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
HD Fuchs 138,000(17) 138,000 -- +
c/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
Renee Heinen 143,750(18) 143,750 -- +
C/o Actieninvest AG
Weinplatz 10
8001 Zurich, Switzerland
Actieninvest AG 305,345(19) 305,345 -- +
Weinplatz 10
8001 Zurich, Switzerland
Roderick de Greef 78,450(20) 78,450 -- +
c/o Stradling, Yocca,Carlson, & Rauth
660 Newport Center Drive
Newport Beach, CA 92660
A & A ActienBank 575,000(21) 575,000 -- +
Bahnofstrasse 92
CH-8023
Zurich, Switzerland
Suan Investments 175,000 175,000 -- +
911 Sterner Road
Hillside, NJ 07205
Zevex Incorporated 135,000 135,000 -- +
4314 Zevex Park Lane
Salt Lake City, Utah 84123
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
James W. Giddens, Trustee 28,438(22) 28,438 -- +
For the Liquidation of the Business
of AR Baron Company
One Battery Park Plaza
New York, NY 10004
Michael Rapaport 26,250(23) 26,250 -- +
721 Fifth Avenue
New York, NY 10022
Leo Fox 8,750(27) 8,750
630 Third Avenue
New York, New York 10017
John Kinder 17,500(28) 17,500
C/o Charles A. Damato, Esq
61 Broadway, 18th Floor
New York, New York 10006
William J. Hunt, As Trustee of the 6,562(29) 6,562
Estate of Roman Okin
C/o David Catuogno, Esq.
155 Polifly Road, Suite 200
Hackensack, New Jersey 07601
Ike R. Dweck 87,500(24) 87,500 -- +
c/o Berkshire
One West 37th Street, 4th Floor
New York, NY 10018
Lava Investments Limited 566,500(25) 225,000 341,500 2.8%
c/o Ernst & Young
11/F Tower 2, The Gateway
25-27 Canton Road
Kowloon, Hong Kong
Juliber Pty Ltd. 33,334 33,334 -- +
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
Laliber Pty Ltd. 33,333 33,333 -- +
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SECURITIES NUMBER OF
SECURITIES OFFERED FOR SECURITIES
BENEFICIALLY SELLING OWNED OF PERCENTAGE
NAME AND ADDRESS OWNED PRIOR TO STOCKHOLDER'S RECORD AFTER OWNED AFTER
OF SELLING STOCKHOLDER OFFERING ACCOUNT OFFERING OFFERING
---------------------- -------- ------- -------- --------
<S> <C> <C> <S> <S>
NiliberPty Ltd. 33,333 33,333 -- +
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
</TABLE>
+ Less than 1%
(1) Includes 90,825 shares of common stock underlying currently exercisable
warrants.
(2) Includes 33,750 shares of common stock underlying currently exercisable
warrants.
(3) Includes 200,000 shares of common stock underlying currently exercisable
warrants.
(4) Includes 56,250 shares of common stock underlying currently exercisable
warrants.
(5) Includes 20,000 shares of common stock underlying current exercisable
warrants.
(6) Consists of 15,000 shares of common stock underlying currently exercisable
warrants.
(7) Consists of 20,000 shares of common stock underlying currently exercisable
warrants.
(8) Consists of 104,966 shares of common stock underlying currently
exercisable warrants.
(9) Consists of 262,500 shares of common stock underlying currently
exercisable warrants.
(10) Consists of 87,500 shares of common stock underlying currently exercisable
warrants.
(11) Consists of 104,965 shares of common stock underlying currently
exercisable warrants.
(12) Consists of 20,000 shares of common stock underlying currently exercisable
warrants.
(13) Consists of 5,000 shares of common stock underlying currently exercisable
warrants.
(14) Includes 3,750 shares of common stock underlying currently exercisable
warrants.
(15) Includes 1,875 shares of common stock underlying currently exercisable
warrants.
(16) Includes 37,500 shares of common stock underlying currently exercisable
warrants.
(17) Includes 18,000 shares of common stock underlying currently exercisable
warrants.
(18) Includes 18,750 shares of common stock underlying currently exercisable
warrants.
(19) Includes 81,625 shares of common stock underlying currently exercisable
warrants.
(20) Consists of 47,050 shares of common stock underlying currently exercisable
warrants.
(21) Includes 75,000 shares of common stock underlying currently exercisable
warrants.
(22) Consists of 28,438 shares of common stock underlying currently exercisable
warrants.
(23) Consists of 26,250 shares of common stock underlying currently exercisable
warrants.
(24) Consists of 87,500 shares of common stock underlying currently exercisable
warrants.
(25) Includes 25,000 shares of common stock underlying currently exercisable
warrants.
(26) Includes 17,500 shares of common stock underlying currently exercisable
warrants.
(27) Consists of 8,750 shares of common stock underlying currently exercisable
warrants.
(28) Consists of 17,500 shares of common stock underlying currently exercisable
warrants.
(29) Consists of 6,562 shares of common stock underlying currently exercisable
warrants.
* Executive officer
** Director
*** BWM Investments is an affiliate of Breslow & Walker, LLP, legal counsel
to us.
**** Former Director.
***** Former Officer and Director.
49
<PAGE>
The selling stockholders are entitled to receive all of the proceeds from
the future sale of their shares.
The selling stockholders, from time to time, depending on market conditions
and other factors, may offer or sell their shares in the over-the-counter
market, or otherwise, at prices and terms then prevailing or at prices related
to the then-current market price, or in negotiated transactions. The shares may
be sold by various methods, including:
- block trades in which a broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the broker
solicits purchases; and
- face to face transactions between sellers and purchasers without a
broker or dealer.
In effecting sales, brokers or dealers engaged by the selling stockholders
may arrange for other brokers or dealers to participate. These brokers or
dealers may receive commissions or discounts from the selling stockholders in
amounts to be negotiated. These brokers, dealers and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act, in connection with these sales.
We will bear all costs and expenses of the registration of the shares under
the Securities Act and certain state securities laws, other than fees of counsel
for the selling stockholders and any discounts or commissions payable with
respect to sales of the shares.
The selling stockholders are not restricted as to the number of shares that
may be sold at any one time, and it is possible that a significant number of
shares could be sold at the same time. Sales of the shares by the selling
stockholders may have an adverse effect on the market price of the common stock.
50
\
<PAGE>
CERTAIN TRANSACTIONS
On April 11, 1997, we acquired from Raymond W. Cohen, our President and
Chief Executive Officer, Innovative Physicians Services, Inc. d/b/a Diagnostic
Monitoring, a Nevada corporation engaged in the sale of medical diagnostic
equipment. We sold substantially all of the assets of Diagnostic Monitoring on
December 31, 1998.
During 1998 and 1999, Ernst Muller-Mohl, one of our principal
stockholders, acquired 2,687,500 shares of common stock and 56,250 warrants to
purchase common stock.
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 20,000,000 shares of common
stock, par value $.001 per share, and 1,000,000 shares of preferred stock, par
value $.001 per share. As of February 4, 2000, there were 12,313,127 shares of
common stock issued and outstanding, and no shares of preferred stock were
issued. In addition, options to purchase 1,305,000 shares of common stock and
warrants to purchase 1,555,476 shares of common stock also were outstanding.
COMMON STOCK
All holders of common stock have one vote per share on all matters
submitted to a vote of stockholders. Stockholders do not have rights to cumulate
their votes in the election of directors under our certificate of incorporation
or applicable provisions of the General Corporation Law of the State of
Delaware. However, under Section 2115 of the California General Corporation Law,
specific provisions of the California General Corporation Law, including
cumulative voting rights of stockholders, are made applicable to
"pseudo-California" corporations incorporated under laws of other states but
which meet certain tests. The tests are that the average of specified property,
payroll and sales factors, generally relating to the extent of activities in
California, exceed 50% of the total of such factors on a consolidated basis
during the corporation's latest year and that more than one-half of the
corporation's outstanding voting securities are held of record by persons having
addresses in California. We do not believe that we currently are a
pseudo-California corporation.
The holders of common stock have the right to receive dividends, when,
and if declared, by our Board of Directors out of funds legally available
therefor. We have never paid any cash dividends on our common stock. We
presently intend to retain earnings, if any, to finance our operations, and
therefore do not anticipate paying any cash dividends in the future. If we
liquidate, holders of our common stock would share ratably in any assets
available for distribution to stockholders after payment of all our obligations.
Our common stock neither is redeemable nor has any preemptive,
subscription, sinking fund or conversion rights. All outstanding shares of
common stock are fully paid and non-assessable.
PREFERRED STOCK
Our Board of Directors may authorize the issuance up to 1,000,000
shares of preferred stock without any further stockholder approval. The Board is
expressly authorized to provide for the issuance of shares of preferred stock in
one or more classes or series, and to fix for each such class or
51
<PAGE>
series the powers, rights, privileges, preferences, qualifications,
limitations or restrictions, including dividend rights, dividend rates,
conversion rights, voting rights, redemption rights, redemption prices,
liquidation preferences, and the designation of and the number of shares
constituting any class or series.
WARRANTS
Of the 8,791,630 shares of common stock covered by this prospectus,
1,460,591 shares are issuable pursuant of the exercise of warrants. The
warrants expire at various times during the next four years, and are
exercisable at prices ranging from $0.01 to $5.00 per share. All of the
warrants contain anti-dilution provisions, and approximately 439,000 of these
warrants can be redeemed by us at $5.00 per share if our common stock trades
at $6.00 per share or higher for a period of 90 consecutive days.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation, Glendale, California, serves as transfer
agent and registrar for the common stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW AND OUR CHARTER
Provisions of Delaware law and our certificate of incorporation could
discourage takeover attempts. These include:
- - DELAWARE ANTITAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a business combination with an
interested stockholders for a period of three years from the date the
stockholder became an interested stockholder, unless the business
combination or the transaction in which the person became an interested
stockholder is approved in the manner provided in Section 203. Generally, a
business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an interested stockholder is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status did own 15% or more of the
corporation's outstanding voting stock.
- - OUR RIGHT TO ISSUE PREFERRED STOCK. Our certificate of incorporation
authorizes the issuance of preferred stock with such designations, rights,
and preferences as may be determined from time to time by our Board of
Directors, without any further vote or action by our stockholders.
Therefore, our Board of Directors is empowered, without stockholder
approval, to issue preferred stock with voting rights or preferences that
could prevent or discourage unsolicited takeover attempts.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date of this prospectus, we had 12,313,127 shares of common
stock outstanding, 4,982,088 of which are freely tradable, and 7,331,039 of
which are restricted shares. In addition, there are warrants outstanding to
purchase 1,460,591 of our shares, and options outstanding to
52
<PAGE>
purchase 1,305,000 of our shares.
The resale of the restricted shares and the shares underlying the
warrants is covered by the registration statement of which this prospectus is a
part. These shares may be resold in the open market at any time, subject to
- - the continued effectiveness of the registration statement;
- - and our ability to suspend sales under the registration statement in
certain instances.
The shares of common stock reserved for issuance upon the exercise
of outstanding options and options that may issued in the future are covered
by a registration statement on Form S-8. Upon exercise, these shares will be,
subject to Rule 144 volume limitations applicable to affiliates, available
for immediate resale in the open market.
No prediction can be made as to what effect, if any, the sale of
these shares will have on the prevailing market price. The possibility that
substantial amounts of common stock may be sold in the public market may
adversely affect prevailing market prices for the common stock, and could
impair our ability to raise capital through future sales of equity securities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon
for us by Breslow & Walker, LLP, New York, New York. BWM Investments, an
affiliate of Breslow & Walker, LLP, owns 2,188 shares of common stock and
warrants to purchase 262,500 of common stock. The re-sale of the shares
underlying the warrants is covered by this prospectus. Howard Breslow, a
member of Breslow & Walker, LLP, owns 875 shares of common stock.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997
and for each of the two years in the period ended December 31, 1998 included in
this Prospectus have been so included in reliance on the report (which includes
an explanatory paragraph relating to the Company's ability to continue as a
going concern as described in Note 2 to the consolidated financial statements)
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C., a registration statement on Form S-1 under the Securities
Act of 1933, with respect to the shares to be sold in this offering. This
prospectus, which is part of the registration statement, does not contain all
of the information contained in the registration statement. For further
information with respect to us and the shares of our common stock offered
hereby, we refer you to the registration statement, including the exhibits
thereto, which may be inspected, without charge, at the office of the
Securities and Exchange Commission.
53
<PAGE>
Copies of the registration statement may be obtained from the
Commission in Washington, D.C., upon payment of the requisite fees, or from the
Commission's Website at http://www.sec.gov. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance we refer you to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by the more complete
description of the matters involved.
54
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CARDIAC SCIENCE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Report of Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-4
and September 30, 1999 (unaudited)
Consolidated Statements of Operations for the Years Ended F-5
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
Consolidated Statements of Stockholders' Equity (Deficit) F-6
for the Years Ended December 31, 1996, 1997 and 1998 and the
Nine Months Ended September 30, 1999 (unaudited)
Consolidated Statements of Cash Flows for the Years Ended F-8
December 31, 1996, 1997 and 1998 and the Nine Months Ended
September 30, 1999 and 1998 (unaudited)
Notes to the Consolidated Financial Statements F-9
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders
Cardiac Science, Inc.
Irvine, California
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and
cash flows present fairly, in all material respects, the financial position
of Cardiac Science, Inc. (the "Company") at December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has suffered recurring losses from operations which raises substantial doubt
about the Company's ability to continue as a going concern. Management's
plans with regard to this matter are also described in Note 2. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
PricewaterhouseCoopers LLP
Newport Beach, California
February 17, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cardiac Science, Inc.
We have audited the statements of operations, stockholders' equity and cash
flows of Cardiac Science, Inc., (a development stage company), for the year
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in
all material respects, the results of operations, stockholders' equity and
cash flows of Cardiac Science, Inc. for the year ended December 31, 1996, in
conformity with accounting principles generally accepted in the United States.
The accompanying financial statements have been prepared assuming that
Cardiac Science, Inc. will continue as a going concern. As discussed in Note
2, the Company is in the development stage and realization of the Company's
assets is dependent upon future events, the outcome of which is
indeterminable. Additionally, successful completion of the Company's
development program and its transition, ultimately, to attaining profitable
operations is dependent upon obtaining additional financing adequate to
fulfill its research and development activities, and achieving a level of
revenues adequate to support the Company's cost structure. Accordingly, these
conditions raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result
from the possible inability of Cardiac Science, Inc. to continue as a going
concern.
Ernst & Young LLP
Orange County, California
April 14, 1997
F-3
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
-------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents $ 561,351 $ 1,247,602 $ 4,818,475
Trade accounts receivable, net of allowances of $16,028
at December 31, 1997 216,162 --- ---
Inventory 209,413 --- ---
Common stock subscriptions receivable --- --- 1,011,250
Prepaid expenses 99,267 30,129 65,222
------------- ------------- -------------
Total current assets 1,086,193 1,277,731 5,894,947
Equipment, net 85,927 117,710 259,275
Investment in unconsolidated affiliate --- 115,000 115,000
Intangible assets, net of amortization of $49,285 at
December 31, 1997 607,853 --- ---
Other assets 4,012 45,266 65,632
------------- ------------- -------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Current portion of capital lease obligation $ --- $ 3,413 $ 24,939
Accounts payable and accrued expenses 1,016,323 1,599,216 1,219,765
Note payable to stockholder 70,233 --- ---
Notes payable --- 225,000 31,247
------------- ------------- -------------
Total current liabilities 1,086,556 1,827,629 1,275,951
------------- ------------- -------------
Long term portion of capital lease obligation --- 16,001 110,231
------------- ------------- -------------
Commitments and contingencies
Stockholders'equity (deficit):
Preferred stock - $.001 par value; 1,000,000 shares
authorized,
none issued or outstanding
Common stock - $.001 par value; 20,000,000 shares
authorized,
issued and outstanding shares -4,974,560 as of December
31,
1997, 7,014,738 as of December 31, 1998 and 10,987,232 4,975 7,015 10,987
as of
September 30, 1999
Common stock subscribed --- 100,000 1,011,250
Additional paid-in capital 7,472,107 10,823,448 19,973,713
Accumulated deficit (6,779,653) (11,218,386) (16,047,278)
------------- ------------- -------------
Total stockholders' equity (deficit) 697,429 (287,923) 4,948,672
------------- ------------- -------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-4
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year For the Year For the Nine
Ended Ended Months Ended
December 31, December 31, For the Year For the Nine September 30,
1996 1997 Ended Months Ended 1998
(Restated see (Restated-see December 31, September 30, (Restated -see
Note 7) Note 6) 1998 1999 Note 6)
-------------- ------------- ------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Research and development $ 422,360 $ 756,936 $ 2,209,524 $ 2,795,408 $1,416,229
Marketing --- 251,777 341,476 932,792 204,454
General and administrative 404,480 766,991 1,170,551 1,092,542 872,483
----------- ----------- ------------ ------------ ----------
Loss from continuing operations (826,840) (1,775,704) (3,721,551) (4,820,742) (2,493,166)
Interest income (expense), net 35,883 (4,247) (65,353) (6,550) (14,771)
----------- ----------- ------------ ------------ ----------
Loss from continuing operations
before provision for income taxes (790,957) (1,779,951) (3,786,904) (4,827,292) (2,507,937)
Provision for income taxes 988 800 800 1,600 1,600
----------- ----------- ------------ ------------ ----------
Net loss from continuing operations (791,945) (1,780,751) (3,787,704) (4,828,892) (2,509,537)
----------- ----------- ------------ ------------ ----------
Discontinued operations:
Loss from discontinued
operations,
net of income taxes --- (43,847) (101,412) --- (88,310)
Loss on sale of assets --- --- (549,618) --- ---
----------- ----------- ------------ ------------ ----------
Loss from discontinued operations --- (43,847) (651,030) --- (88,310)
=========== ----------- ------------ ------------ ----------
Net loss $ (791,945) $(1,824,598) $ (4,438,734) $ (4,828,892) $(2,597,847)
=========== =========== ============ ============ ==========
Basic and diluted loss per share:
Continuing operations $ (0.23) $ (0.46) $ (0.69) $ (0.52) $ (0.47)
Discontinued operations --- (0.01) (0.12) --- (0.02)
----------- ----------- ------------ ------------ ----------
Net loss per share $ (0.23) $ (0.47) $ (0.81) $ (0.52) $ (0.49)
=========== =========== ============ ============ ==========
Weighted average number of shares
used in the computation of
net loss per share 3,395,466 3,875,656 5,459,793 9,208,182 5,276,117
=========== =========== ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Stock
Common Stock Preferred Stock Subscribed
-------------------- -------------------- ----------------------
Number Amount Number Amount Number Amount Additional Accumulated
of of of Paid-In Deficit Total
Shares Shares Shares Capital
---------- --------- -------- ----------- ---------- ----------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995
(restated-see Note 7) 2,795,947 $2,796 --- $ --- 541,333 $ 924,134 $ 4,145,015 $ (4,163,110) $ 908,835
Issuance of common stock
for subscribed amount 395,500 396 (395,500) (674,134) 673,738 ---
Common stock subscribed
for license fees at
$1.37 per share 13,125 18,000 18,000
Common stock options
exercised at $0.34
per share 11,375 11 3,889 3,900
Common stock warrants
exercised at $1.71
per share 59,500 60 115,342 115,402
Common stock warrants
exercised at $4.57
per share 3,280 3 14,997 15,000
Net loss (791,945) (791,945)
--------- --------- -------- ----------- ---------- ----------- ------------- -------------- ----------
Balance at
December 31, 1996 3,265,780 3,266 --- --- 158,958 268,000 4,952,981 (4,955,055) 269,192
Issuance of preferred
stock for the
acquisition of
Diagnostic Monitoring 500 600,000 600,000
Issuance of common stock
for subscribed amount 158,958 159 (158,958) (268,000) 267,841 ---
Conversion of preferred
stock into common stock 500,000 500 (500) (600,000) 599,500 ---
Issuance of common stock
for cash at $2.00
per 1,000,000 share 1,000 1,999,000 2,000,000
Issuance costs
(including 50,000
shares of common
stock at $2.00 per
share) 50,000 50 (347,215) (347,165)
Net loss (1,824,598)(1,824,598)
--------- --------- -------- ----------- ---------- ----------- ------------- -------------- -----------
Balance at
December 31, 1997 4,974,738 4,975 --- --- --- --- 7,472,107 (6,779,653) 697,429
Issuance of common stock
for cash at $2.00 per
share (net of cost of
issuances of $829,896) 1,800,000 1,800 2,768,303 2,770,104
Issuance of common
stock warrants 433,416 433,416
Common stock warrants
exercised at $0.01
per share 175,000 175 1,825 2,000
Common stock subscribed
at $2.00 per share in
cash 50,000 100,000 100,000
Issuance of common stock
for license fees and
services at $2.00 per
share 55,000 55 109,945 110,000
Issuance of common stock
for compensation at
$2.00 per share 10,000 10 19,990 20,000
Compensation related to fair
value of options
granted to 17,862 17,862
non-employees
Net loss (4,438,734) (4,438,734)
--------- --------- -------- ----------- ---------- ----------- ------------- -------------- -----------
Balance at
December 31, 1998 7,014,738 7,015 --- --- 50,000 100,000 10,823,448 2 (11,218,386) (287,923)
Issuance of common stock
for cash at $2.00 per 1,850,000 1,850 3,698,150 3,700,000
share
Issuance of common stock
for cash at $4.00 per 887,500 887 3,549,112 3,549,999
share
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock for
common stock subscribed 50,000 50 (50,000) (100,000) 99,950 ---
Common stock warrants
exercised at $0.01 per 30,625 30 320 350
share
Common stock warrants
exercised at an average
of $2.45 per share 857,500 858 2,100,392 2,101,250
Common stock subscribed
at $4.00 per share in 245,000 980,000 980,000
cash
Common stock subscribed
at $2.50 per share in 12,500 31,250 31,250
cash
Issuance of common stock
for license fees and
services at an average
of $2.67 per share 157,969 158 421,331 421,489
Costs of equity issuances
(including 138,900
shares at $2.00) 138,900 139 (733,090) (732,951)
Compensation related to fair
value of options
granted to non-employees 14,100 14,100
Net loss for the nine
months ended
September 30, 1999
(4,828,892) (4,828,892)
-------- --------- -------- ----------- ---------- ----------- ------------- -------------- -----------
Balances, September 30,
1999 (unaudited) 10,987,232 $10,987 --- $ --- 257,500 $ 1,011,250 $ 19,973,713 (16,047,278) $ $4,948,672
========== ========= ======== =========== ========== =========== ============= ============== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
CARDIAC SCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year For the Nine
Ended Months Ended
For the Year December 31, For the Year For the Nine September 30,
Ended 1997 Ended Months Ended 1998
December 31, (Restated-see December 31, September 30, (Restated-see
1996 Note 6) 1998 1999 Note 6)
---------------------------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (791,945) $ (1,824,598) $ (4,438,734) $ (4,828,892) $ (2,597,847)
Adjustments to reconcile net loss to net
cash used in operating activities from
continuing operations:
Loss from discontinued operations --- 43,847 101,412 --- 88,310
Loss on sale of assets --- --- 549,618 --- ---
Depreciation and amortization 12,830 20,762 35,114 44,976 21,769
Amortization of debt discount --- --- 44,785 --- ---
Compensation related to fair value of --- --- 17,862 14,100 ---
options grantedto non-employees
Expenses paid with common stock 18,000 --- 130,000 421,680 50,000
Changes in operating assets and
liabilities, exclusive of
Diagnostic Monitoring:
Prepaid expenses 327 (88,374) --- (35,092) 82,206
Increase in other assets --- --- --- (20,366) ---
Accounts payable and accrued expenses (36,009) 536,180 137,505 (681,091) 569,610
---------------- ---------------- --------------- ---------------- -----------
Net cash used in operating activities from
continuing operations (796,797) (1,312,183) (3,422,438) (5,084,685) (1,785,952)
--------------- ---------------- ---------------- ---------------- ----------------
Net cash provided by (used in) discontinued
operations --- (239,489) 530,438 --- 69,515
--------------- ---------------- ---------------- ---------------- ----------------
Cash flows from investing activities:
Purchase of equipment --- (64,700) (53,218) (70,785) (32,620)
Decrease in other assets --- --- 4,012 --- ---
Cash acquired in Diagnostic Monitoring ---
acquisition 43,223 --- --- ---
--------------- ---------------- ---------------- ---------------- ----------------
Net cash used by investing activities --- (21,477) (49,206) (70,785) (32,620)
--------------- ---------------- ---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds (payment) on bank line of --- (18,903) 125,000 --- 175,000
credit
Payments of note payable to stockholder (102,000) (12,743) (70,233) ---
Proceeds (payments) from note payable --- --- 100,000 (193,753) 71,554
Proceeds from sale of common stock --- 2,000,000 3,600,000 7,250,000 1,100,000
Proceeds from common stock options 3,900 --- --- --- ---
Proceeds from common stock subscribed --- --- 100,000 --- 100,000
Proceeds from exercise of common stock
Warrants 130,402 --- 2,000 2,101,600 2,000
Costs of equity issuances --- (247,165) (229,310) (431,504) (107,160)
--------------- ---------------- ---------------- ---------------- ---------------
Net cash provided by financing activities 32,302 1,721,189 3,627,457 8,726,343 1,341,394
--------------- ---------------- ---------------- ---------------- ---------------
</TABLE>
F-8
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (764,495) 148,040 686,251 3,570,873 (407,663)
Cash and cash equivalents at beginning of 1,177,806 413,311 561,351 1,247,602 561,351
period
--------------- ---------------- ---------------- ---------------- ----------------
Cash and cash equivalents at end of period $ 413,311 $ 561,351 $ 1,247,602 $ 4,818,475 $ 153,688
=============== ================ ================ ================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-9
<PAGE>
CARDIAC SCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND CAPITALIZATION OF THE COMPANY
Cardiac Science, Inc. (the "Company") was incorporated on May 20, 1991 to
develop, manufacture and market software driven non-invasive (non-surgical)
Automatic External Cardioverter Defibrillator ("AECD") devices (the
"Products") to treat persons suffering from or at high risk of
life-threatening arrhythmias. The Products, all of which are still under
development, are designed to continuously monitor, quickly detect and then
automatically, through transmission of electrical energy charges to the
patient's heart, terminate the ventricular tachyarrhythmia (dangerously fast
heart rate) and/or ventricular fibrillation (quivering of the heart following
tachyarrhythmia, which usually results in death).
On April 11, 1997, the Company acquired Innovative Physician Services, Inc.
(d.b.a. Diagnostic Monitoring) ("DM") for 500 shares of the Company's Series
A Convertible Preferred Stock (the "Preferred Stock") plus a non-interest
bearing promissory note in the principal amount of $100,000 that was repaid
during 1998. On September 8, 1997, the Company effectuated a
one-for-11.42857413 reverse stock split and the shares of Preferred Stock
automatically converted into 500,000 shares of common stock. All share and
per share amounts have been adjusted to give retroactive effect to the
Reverse Split for all periods presented. The Company sold substantially all
of the assets of Diagnostic Monitoring on December 31, 1998 (see notes 4 and
6).
2. CONTINUED EXISTENCE
Additional capital is needed to fulfill the Company's current marketing,
research and product development goals. Through September 30, 1999, the
Company incurred losses of approximately $16 million (unaudited). Recovery of
the Company's assets is dependent upon future events, the outcome of which is
indeterminable. Additionally, successful completion of the Company's
development program and its transition to attain profitable operations is
dependent upon achieving a level of revenues adequate to support the
Company's cost structure. The Company anticipates that its current cash
balance and the cash received from equity placements through December 31,
1999 will be sufficient to meet the Company's cash requirements into August
2000. Given the current applications of cash, the Company expects that
additional capital will be necessary to sustain growth and viability. In this
respect, the Company is considering a number of alternatives, including
additional equity financings and corporate partnerships. There can be no
assurance that any such transactions will be available at terms acceptable to
the Company, if at all, or that any financing transaction will not be
dilutive to current stockholders, or that the Company will have sufficient
working capital to fund future operations. If the Company is not able to
raise additional funds, it may be required to significantly curtail or cease
its operating activities. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and of
its wholly-owned subsidiary, Diagnostic Monitoring. All inter-company accounts
and transactions have been eliminated in consolidation. The Company accounts for
its investment in Biosensor Corporation ("Biosensor") under the equity method of
accounting (see note 5).
F-10
<PAGE>
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION
In the opinion of the Company's management, the accompanying consolidated
condensed unaudited financial statements include all adjustments (which
consist only of normal recurring adjustments) necessary for a fair
presentation of its financial position at September 30, 1999 and results of
operations and cash flows for the periods presented. Results of operations
for the nine months ended September 30, 1999 are not necessarily indicative
of results for the full year.
RECLASSIFICATIONS
Certain prior period balances have been reclassified to conform to the
December 31, 1998 presentation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three
months or less when purchased to be cash equivalents. The Company maintained
approximately $1,011,000 of its cash in a money market fund with one major
financial institution at December 31, 1998.
INVENTORY
Inventory, which consists of finished products and subassemblies, is stated
at the lower of cost (first-in, first-out) or market value. The components of
inventory at December 31, 1997 consisted of the following:
<TABLE>
<S> <C>
Raw Materials $ 43,099
Work in process 20,912
Finished Goods 155,402
-------------
219,413
Less: Reserve (10,000)
=============
Total Inventory $ 209,413
=============
</TABLE>
EQUIPMENT
Property and equipment is carried at cost. Depreciation of equipment is
provided on the straight-line method over estimated useful lives of five
years. Repairs and maintenance are expensed as incurred while renewals or
betterments are capitalized. Upon the sale or retirement of equipment, the
accounts are relieved of the cost and related accumulated depreciation and
any resulting gain or loss is included in operations. The components of
property and equipment consist of the following:
F-11
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1997 1998 1999
----------------- ----------------- ----------------
(unaudited)
<S> <C> <C> <C>
Property and equipment $ 180,484 $ 215,687 $ 402,230
Accumulated depreciation (94,557) (97,977) (142,955)
----------------- ----------------- ----------------
Property and equipment, net $ 85,927 $ 117,710 $ 259,275
================= ================= ================
</TABLE>
LONG-LIVED ASSETS
The Company evaluates the recoverability of its long lived assets in accordance
with Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which requires long-lived assets and certain intangibles held and used by the
Company to be reviewed for impairment whenever events or circumstances indicate
that the carrying amount of an asset may not be recoverable. The recoverability
test is to be performed at the lowest level at which undiscounted net cash flow
can be directly attributable to long-lived assets.
PER SHARE INFORMATION
The Company has adopted SFAS No. 128, EARNINGS PER SHARE. This statement
requires the presentation of basic and diluted earnings per share, as defined,
on the statement of operations for companies whose capital structure includes
convertible securities and options.
Net loss per share as presented in the accompanying statements of operations is
computed based on the weighted average number of common shares outstanding and
subscribed. Shares issuable upon exercise of outstanding stock options and
warrants are not included since the effects would be anti-dilutive.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
REVENUE RECOGNITION
Prior to the sale of substantially all the assets of DM, sales and related costs
of goods sold were recognized when goods were shipped to customers. The majority
of the Company's customers were distributors who sold goods to third party end
users. The Company is not contractually obligated to repurchase any inventory
from distributors.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS No. 123 defines a fair value based
method of accounting for an employee stock option. Fair value of the stock
option is determined considering factors such as the exercise price, the
expected life of the option, the current price of the underlying stock, expected
dividends on the stock, and the risk-free interest rate for the expected term of
the option. Under the fair value based method, compensation cost is measured at
the grant date based on the fair value of the award and is recognized over the
service period. Pro forma disclosures are required for entities that elect to
continue to measure compensation cost under the intrinsic method provided by
Accounting Principles Board Opinion No. 25.
F-12
<PAGE>
INCOME TAXES
The Company follows SFAS No. 109, ACCOUNTING FOR INCOME TAXES, which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax basis of assets
and liabilities and their financial reporting amounts at each year-end based on
enacted tax laws and statutory rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
4. ACQUISITION OF DIAGNOSTIC MONITORING
On April 11, 1997, the Company acquired Diagnostic Monitoring for 500 shares
(5,714.285 pre-split) of the Company's Series A Convertible Preferred Stock (the
"Preferred Stock") plus a non-interest bearing promissory note (the "Note") in
the principal amount of $100,000, payable in eighteen (18) equal consecutive
monthly installments commencing upon the earlier of April 9, 1999 or the
completion of an equity financing by the Company of not less than $2,000,000 of
gross proceeds. Each share of Preferred Stock was entitled to 1,000 votes per
share; was convertible into 1,000 shares of the Company's common stock, at any
time, and from time to time, at the holder's option, without the payment of any
additional consideration, and was automatically convertible into 1,000 shares of
common stock (subject to adjustment for any reverse stock split, etc.) upon
there being a sufficient number of authorized but unissued shares of common
stock to allow such conversion. There were no dividend rights on the Preferred
Stock. On September 8, 1997, the Company effectuated a one-for-11.42857413
reverse stock split and the shares of Preferred Stock automatically converted
into 500,000 shares of common stock.
The total purchase price was $682,975, the fair market value of the Preferred
Stock issued and the Note. The fair market value of the Preferred Stock issued
was estimated based on the trading value of the common stock less a 30% discount
to take into consideration the lack of the ability to trade and other features
of the Preferred Stock. The fair market value of the Note represents the
discounted value (at 11.25%) of the Note over 20 months.
The transaction was accounted for under the purchase method of accounting and
the purchase price was allocated to the fair market value of the assets acquired
and liabilities assumed as follows:
<TABLE>
<S> <C>
Cash $ 43,223
Accounts receivable 129,575
Inventory 122,006
Other assets 13,232
Property and equipment 17,341
Intangible assets 657,138
Bank line of credit (18,903)
Accounts payable and accrued expenses (280,637)
Note payable to stockholder (82,975)
--------------------
Preferred stock issued $ 600,000
====================
</TABLE>
The intangible assets resulting from the purchase price allocation is being
amortized over 10 years using the straight-line method.
F-13
<PAGE>
5. INVESTMENT IN UNCONSOLIDATED AFFILIATE
On December 31, 1998, the Company acquired a 7.7% voting interest in
Biosensor as consideration for the sale of substantially all of the assets of
DM (see note 6). The Company accounts for this investment using the equity
method of accounting in accordance with Accounting Principles Board Opinion
No. 18.
6. DISCONTINUED OPERATIONS
On December 31, 1998, the Company completed the sale of substantially all of
DM's assets to Biosensor, a Minnesota corporation, pursuant to an Agreement
for Purchase and Sale of Assets dated December 31, 1998. The Company
received, in consideration of the sale, 1,440,000 shares of common stock of
Biosensor valued at $115,000. In addition, Biosensor assumed certain
liabilities amounting to approximately $107,000. The Company recognized a
loss of $549,618 on the sale of assets, consisting primarily of the
unamortized balance of goodwill, as the net book value of the net assets sold
exceeded the fair value of the consideration received.
The Company has restated its prior financial statements to present the operating
results of DM as a discontinued operation. Included in the loss from
discontinued operations is amortization of goodwill of $65,713 and $49,285 for
1998 and 1997, respectively. Operating results from discontinued operations are
as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
------------------- -------------------
<S> <C> <C>
Sales $ 1,437,499 $ 1,213,071
Cost of sales 941,732 753,693
------------------- -------------------
Gross profit 495,767 459,378
Operating expenses:
Research and development 20,361 10,182
Selling 373,073 206,826
General and administrative 202,145 285,417
------------------- -------------------
Loss from discontinued operations (99,812) (43,047)
Interest income (expense), net --- ---
------------------- -------------------
Loss from discontinued operations before
provision for income taxes (99,812) (43,047)
Provision for income taxes 1,600 800
------------------- ------------------
Net loss from discontinued operations $ (101,412) $ (43,847)
=================== ==================
</TABLE>
7. RECAPITALIZATION AND REVERSE SPLIT
In January 1997, the Company entered into an advisory and consulting agreement
(the "Sorbus Agreement") with Sorbus Asset Strategies, S.A., a Swiss company
("Sorbus"). Sorbus agreed, among other things, to locate, on a best efforts
basis, potential investors to purchase shares of common stock, (the
"Financing"). As a condition precedent to the Financing, the Sorbus Agreement
provided, among other things, that the Company obtain the approval of its Board
of Directors and stockholders to amend the Company's Certificate of
Incorporation (i) to effectuate a one-for-11.42857143 reverse stock split of the
issued and outstanding shares of the common stock (the "Reverse Split") and (ii)
to reduce the number of authorized shares of common stock from 40,000,000 to
20,000,000 shares (the "Stock Reduction"). On April 9, 1997, the Board of
Directors of the Company unanimously approved the Reverse Split and the Stock
Reduction. Stockholders holding a majority of the issued and outstanding common
stock and all of the Preferred Stock approved the Reverse Split and the Stock
Reduction on May 15, 1997. The Financing was completed in 1997 when the Company
sold 1,000,000 shares of common stock for $2,000,000 in gross proceeds.
F-14
<PAGE>
8. NOTES PAYABLE
Notes payable consist of the following at December 31, 1998:
The Company entered into a Loan and Security Agreement with a bank
dated November 14, 1997. The agreement provided for a revolving line of
credit up to $200,000 collateralized by substantially all assets of the
Company and includes certain covenants. Through December 31, 1998 the Company
had net borrowings of $125,000. The Company restructured this loan as a term
loan with twelve equal installments of $10,417 plus interest at prime plus 2%
payable beginning in January 1999.
In September 1998, the Company borrowed $100,000 from an investor
which was repaid in January 1999. The loan was non-interest bearing, however
in consideration for the loan the Company issued three-year warrants to
purchase 50,000 shares of common stock at a per share price of $2.00. Such
warrants were assigned a fair value of $44,785 using a Black-Scholes model
and recorded as additional paid-in capital, resulting in a debt discount. The
debt discount was charged to interest expense during the year ended December
31, 1998 (see note 12).
9. COMMITMENTS AND CONTINGENCIES
CAPITAL LEASE
The Company leases office equipment under a capital lease
agreement which expires during fiscal 2003. Future minimum lease payments
under this capital lease obligation for the years ending December 31 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 5,471
2000 5,471
2001 5,471
2002 5,471
2003 3,192
-------------
25,076
Less amounts representing interest (5,662)
-------------
$ 19,414
=============
</TABLE>
OPERATING LEASES
The Company leases office space and equipment under the terms of
operating lease agreements. Total rent expense for the years ended December 31,
1998 and 1997 was $65,082 and $55,664, respectively. The minimum lease payments
under the terms of these lease agreements are as follows:
<TABLE>
<CAPTION>
Years Ending December 31,
<S> <C>
1999 $ 70,536
2000 25,624
2001 3,168
2002 1,320
-------------
$ 100,648
=============
</TABLE>
F-15
<PAGE>
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>
1998 1997
--------------- -------------
<S> <C> <C>
Property and equipment $ (3,273) $ (951)
Capitalized costs (124,181) (67,814)
Accrued liabilities (10,429) 3,937
Allowance for doubtful accounts 6,866 (6,866)
Inventory reserve 4,284 (4,284)
State income taxes (272) 272
Tax credit carryforwards 1,247 (68,089)
Net operating loss carryforwards (1,330,753) (639,508)
---------------
-------------
(1,456,511) (783,303)
Valuation allowance 1,456,511 783,303
--------------- -------------
$ 0 $ 0
=============== =============
</TABLE>
The temporary differences which give rise to deferred income tax assets and
liabilities at December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C>
Property and equipment $ 4,980 $1,707
Capitalized costs 222,583 98,402
Accrued liabilities 11,447 1,018
Allowance for doubtful accounts --- 6,866
Inventory reserve --- 4,284
State income taxes 816 544
Tax credit carryforwards 197,367 198,614
Net operating loss carryforwards 3,744,142 2,413,389
--------------- -- --------------
4,181,335 2,724,824
Valuation allowance (4,181,335) (2,724,824)
--------------- --------------
$ 0 $ 0
=============== ==============
</TABLE>
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the year ended December 31, as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Statutory regular federal income tax rate (34.0%) (34.0%)
Nondeductible expenses 5.0 0.2
State income taxes 0.1 0.1
Tax credits (0.3) (1.0)
Change in valuation allowance 29.3 34.8
----------- -----------
0.1% 0.1%
=========== ===========
</TABLE>
As of December 31, 1998, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $124,000
and $73,000, respectively. These credits begin to expire in 2010 for federal and
state purposes. The Company also has approximately $10,110,000 and $2,875,000 of
federal and state net operating loss
F-16
<PAGE>
carryforwards which will begin to expire in 2007 and 1999, respectively.
The utilization of net operating loss and tax credit carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.
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 705,000 shares of common stock may be issued
under the 1997 Plan, subject to adjustment upon the occurrence of certain
events, including, but not limited to, stock dividends, stock splits,
combinations, mergers, consolidations, reorganizations, reclassifications,
exchanges, or other capital adjustments. The 1997 Plan limits to $100,000 the
fair market value (determined at the time the option is granted) of the
common stock with respect to which incentive stock options are first
exercisable by any individual employee during any calendar year.
The 1997 Plan incorporates the federal tax law requirements for incentive
stock options. Among other such requirements, the per share exercise price of
an incentive stock option granted under the 1997 Plan must not be less than
100% of the fair market value of a share of the common stock on the date of
grant and the option may not be exercised more than 10 years after its grant
date. If an incentive stock option is granted to an employee owning more than
10% of the total combined voting power of all classes of stock of the
Company, the exercise price may not be less than 110% of such fair market
value and the option may not be exercised more than five years after its
grant date. Option grants under the 1997 Plan generally vest over a period of
four years.
Outstanding options may be terminated or accelerated in the event of certain
corporate acquisitions or other change of control events. An option granted
under the 1997 Plan will not be assignable or transferable by the grantee
other than by will or the laws of inheritance, except that a non-statutory
option will be transferable by the grantee pursuant to a qualified domestic
relations order as defined in the Code, Title I of the Employee Retirement
Income Security Act or the rules thereunder. Other vesting, termination and
payment provisions for incentive and non-statutory options may be determined
by the Committee.
Stock option activity under the Plan is summarized as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1997
------------------ -------------------
<S> <C> <C>
Outstanding, beginning of year 33,688 148,315
Granted 739,892 ---
Exercised --- ---
Canceled (68,688) (114,627)
------------------ -------------------
Outstanding, end of year 704,892 33,688
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
================== ===================
Exercisable, end of year 134,946 24,588
================== ===================
As of the end of the year:
Option price per share $1.88 - $2.00 $2.97 - $ 21.43
Weighted average option price
per share $1.99 $4.17
</TABLE>
At December 31, 1998 the number of shares reserved and available for issuance
under the 1997 Plan was 108. The weighted average remaining contractual life as
of December 31, 1998 is approximately 108 months.
The Board of Directors approved an amendment to the 1997 Plan which increases
the number of shares reserved and available for issuance under the 1997 Plan by
600,000 shares. This amendment was approved by stockholders at the Annual
Meeting of Stockholders held in May 1999.
For stock options granted in 1998 to non-employees (consultants), the Company
has recognized compensation cost of $17,862 for the year ended December 31, 1998
using a Black-Scholes option pricing model.
PRO FORMA EFFECT OF STOCK-BASED COMPENSATION
In calculating pro forma information as required by SFAS No. 123, the fair value
was estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions for the options on the Company's common stock for
the year ended December 31, 1998: risk free interest rate with a range of 4.1%
to 5.9%; dividend yield of 0%; volatility of the expected market prices of the
Company's common stock of 61.4%; and expected life of the options of 4 years.
There were no option grants in the year ended December 31, 1997.
For purpose of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the options' vesting period. The Company's pro forma
information follows (in thousands, except per share information):
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997
--------------------- -------------------
<S> <C> <C>
Pro forma net loss $(4,573) $(1,837)
Pro forma net loss per share $ (0.84) $ (0.47)
</TABLE>
12. WARRANTS
Historically the Company has granted warrants in connection with fund raising
activities and as consideration for certain services. Warrants to purchase
1,741,216 shares of common stock were outstanding and exercisable at December
31, 1998. A summary follows:
<TABLE>
<CAPTION>
Number of Per Share Expiration
Grant Date Warrants Exercise Date
Price
---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
1992 61,216 $4.57 2002
1994 875,000 $0.01 2004
1996 17,500 $2.00 2001
1997 100,000 $2.25 2007
1998 487,500 $2.00-$2.50 2001
1998 200,000 $3.00 1999
------------------
Total 1,741,216
==================
</TABLE>
F-18
<PAGE>
The Company granted 437,500 warrants in connection with a private placement
in 1998, 200,000 warrants to Medtronic-Physio Control pursuant to a
Distribution and License Agreement dated December 2, 1998 (Note 13), and
50,000 warrants in connection with a short term loan in 1998 (Note 8), for a
total of 687,500 warrants granted in 1998. These warrants were assigned a
fair value of $433,416 determined using a Black-Scholes model. Of this
amount, $339,251 was charged to equity as a cost of raising capital, $49,380
was recorded as an other asset and will be amortized over the five-year life
of the Distribution and License Agreement and $44,785 was charged to interest
expense.
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, Medtronic Physio-Control
will market the Powerheart on an exclusive basis in the United States and
Canada. Medtronic Physio-Control also obtained a license to the AECD
Technology for integration into their in-hospital LIFEPAK-Registered
Trademark- defibrillator-monitor products. This license is non-exclusive
outside of the United States. The agreement also provides for Cardiac Science
to share profits from the sale of proprietary disposable defibrillator pads
that are used with the Powerheart as well as Physio-Control LIFEPAK
defibrillators that include the AECD Technology.
Pursuant to the agreement, Medtronic Physio-Control was granted
warrants to purchase 200,000 shares of Cardiac Science common stock at $3.00
per share. These warrants will expire in November 1999. Medtronic
Physio-Control also will receive warrants to purchase an additional 200,000
shares of common stock at $3.00 per share upon the sale of the 1,000th unit
by Medtronic Physio-Control.
14. SUPPLEMENTAL CASH FLOW DISCLOSURES:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ----------------- -----------------
<S> <C> <C> <C>
Cash paid during the year for:
Income taxes $ 1,600 $ 1,600 $ 988
Interest $ 27,038 $ 10,133 2,300
Supplemental schedule of noncash investing and financing activities:
Conversion of preferred stock into common stock $ 600,000
Exchange of common stock subscribed for
Common stock $ 268,000
Common stock issued in payment of fees $ 18,000
Purchase of equipment with a capital lease $ 19,414
Costs of equity issuances not yet paid $ 261,335
Costs of equity issuances associated with fair
value of warrants issued $ 339,251
Acquisition of Diagnostic Monitoring:
Fair value of noncash assets acquired $ 282,154
Liabilities assumed and incurred (382,515)
Intangible assets 657,138
Preferred stock issued (600,000)
Cash acquired $ (43,223)
Sale of net assets of Diagnostic Monitoring:
Fair value of assets sold $ (222,172)
Liabilities assumed by purchaser 107,122
Fair value of stock received 115,000
--------------------
Cash received $ -0-
====================
</TABLE>
F-19
<PAGE>
15. CONCENTRATIONS OF RISK
Approximately 81% of the Company's revenues for the year ended December
31, 1997 are export sales to international countries.
16. PRIVATE PLACEMENTS (UNAUDITED)
For the quarter ending September 30, 1999, the Company sold 887,500
shares of common stock and three-year warrants to purchase 133,125 shares of
common stock at $5.00 per share, for an aggregate purchase price of $3,550,000
to foreign investors in an offshore transaction pursuant to Regulation S
promulgated under the Securities Act of 1933. The Company also received
subscriptions from various foreign investors for an additional 245,000 shares of
common stock and three-year warrants to purchase 36,750 shares of common stock
at $5.00 per share, for an aggregate purchase price of $980,000. The funds for
these subscribed shares were received on October 4, 1999. In connection with
these financings, the Company is obligated to pay a finder a fee equal to 7.5
percent of the gross proceeds of the sale, payable in cash or common stock
accrued at September 30, 1999. The finder will also receive three-year warrants
to purchase 113,250 shares of common stock at $5.00 per share.
During the three-month period ending September 30, 1999 the Company
received $2,101,250 for the exercise of warrants to purchase 857,500 shares of
common stock. The Company also received a notice to exercise warrants for 12,500
shares of common stock. The proceeds of this warrant exercise of $31,250 were
received on October 4, 1999.
On September 15, 1999, the Company issued 52,500 shares of common stock
to a consultant in consideration for $203,438 of services rendered.
On July 7, 1999, the Company issued 138,900 shares of common stock to a
finder in consideration for $277,800 of services rendered. These services were
in connection with a private placement completed in May 1999.
F-20
<PAGE>
You should rely only on the information contained in this prospectus. We have
not, and the selling stockholders have not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing the this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
-----------
TABLE OF CONTENTS
PAGE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................................................................... 2
Risk Factors................................................................................................ 5
Dividend Policy............................................................................................. 13
Capitalization.............................................................................................. 14
Price Range of Common Stock................................................................................. 15
Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17
Business.................................................................................................... 22
Management.................................................................................................. 35
Principal Stockholders...................................................................................... 43
Selling Stockholders and Plan of Distribution............................................................... 44
Certain Transactions........................................................................................ 51
Description of Securities................................................................................... 51
Shares Eligible for Future Sale............................................................................. 52
Legal Matters............................................................................................... 53
Experts..................................................................................................... 53
Where You Can Find More Information......................................................................... 53
Index to Financial Statements............................................................................... F-1
</TABLE>
-----------
Cardiac Science, Inc.
8,791,630 Shares of Common Stock
-----------
PROSPECTUS
April 27, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the Registrant in connection with the
issuance and distribution of the securities being registered hereby (other than
underwriting discounts and commissions) are as follows:
<TABLE>
<S> <C>
Registration Fee (Securities and Exchange Commission)................ $ 10,886
Accounting Fees and Expenses ........................................ $ 15,000
Legal Fees and Expenses.............................................. $ 25,000
Transfer Agent's Fees................................................ $ 2,000
Miscellaneous Expenses .............................................. $ 5,000
-------------
Total................................................................ $ 57,886
-------------
</TABLE>
The Registrant will bear all costs and expenses of the registration of the
shares under the Securities Act and certain state securities laws, other than
fees of counsel for the selling stockholders and any discounts or commissions
payable with respect to sales of the shares.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a
corporation may indemnify directors and officers as well as other employees and
individuals against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with any threatened, pending or completed actions, suits or
proceedings in which such person is made a party by reason of such person being
or having been a director, officer, employee or agent to the Registrant. The
Delaware General Corporation Law provides that Section 145 is not exclusive of
other rights to which those seeking indemnification may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise.
Article VIII of the Registrant's Bylaws provides for indemnification by
the Registrant of its directors, officers and employees to the fullest extent
permitted by the Delaware General Corporation Law and California Law.
Article VIII of the Registrant's Bylaws also provides for the
prepayment of expenses to persons entitled to indemnification (subject to
certain conditions), and permits the Registrant to purchase and maintain
insurance on behalf of any director, officer, employee, or agent against any
II-1
<PAGE>
liability asserted against or incurred by them in any such capacity, or
arising out of their status as such, whether or not the Registrant would have
the power or obligation to indemnify them against such liability under the
Registrant's Bylaws.
Section 102(b)(7) of the Delaware General Corporation Law permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) for unlawful payments of dividends or unlawful stock repurchase,
redemptions or other distributions, or (iv) for any transaction from which
the director derived an improper personal benefit. Article SIXTH of the
Registrant's Certificate of Incorporation provides for such limitation of
liability.
The general effect of the foregoing provisions is to reduce the
circumstances in which an officer, director, agent, or employee may be
required to bear the economic burdens of the foregoing liabilities and
expenses.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
During the last three years, the Registrant has made the following
issuances of securities, none of which were registered under the Securities
Act of 1933, as amended (the "Securities Act"):
On April 11, 1997, the Registrant issued 500 shares of convertible
preferred stock in connection with the acquisition of Diagnostic Monitoring
pursuant to Section 4(2) promulgated under the Securities Act. These shares
were converted into 500,000 shares of common stock on September 30, 1997.
On August 29, 1997, the Registrant sold 750,000 shares of common
stock for a purchase price of $1,500,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On September 30, 1997, the Registrant sold 50,000 shares of common
stock to a finder in consideration for $100,000 of services rendered. The
shares were issued pursuant to Regulation S promulgated under the Securities
Act.
On December 4, 1997, the Registrant sold 250,000 shares of common
stock for a purchase price of $500,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On April 26, 1998, the Registrant sold 150,000 shares of common
stock for a purchase price of $300,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
II-2
<PAGE>
On May 15, 1998, the Registrant sold 100,000 shares of common stock
for a purchase price of $200,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On June 16, 1998, the Registrant sold 50,000 shares of common stock
for a purchase price of $100,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On June 30, 1998, the Registrant sold 200,000 shares of common stock
for a purchase price of $400,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On August 10, 1998, the Registrant sold 50,000 shares of common
stock for a purchase price of $100,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On October 4, 1998, the Registrant sold 50,000 shares of common
stock for a purchase price of $100,000 to foreign investors in an offshore
transaction pursuant to Regulation S promulgated under the Securities Act.
On October 21, 1998, the Registrant sold 500,000 shares of common
stock and three-year warrants to purchase 125,000 shares of common stock at
$2.50 per share, for an aggregate purchase price of $1,000,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated
under the Securities Act.
On December 22, 1998, the Registrant sold 750,000 shares of common
stock and three-year warrants to purchase 187,500 shares of common stock at
$2.50 per share, for an aggregate purchase price of $1,500,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated
under the Securities Act.
On July 7, 1999, the Registrant sold 138,900 shares of common stock
to a finder in consideration for $277,800 of services rendered. The shares
were issued pursuant to Regulation S promulgated under the Securities Act.
For the period of August 27, 1999 through September 13, 1999, the
Registrant sold an aggregate of 857,500 shares of common stock through the
exercise of warrants for an aggregate purchase price of $2,101,250. These
shares were sold to foreign investors in an offshore transaction pursuant to
Regulation S promulgated under the Securities Act.
On September 15, 1999, the Registrant sold 52,500 shares of common
stock to Zevex, Inc., its contract manufacturer, in consideration for
$203,438 of services rendered. The shares were sold pursuant to Section 4(2)
of the Securities Act.
II-3
<PAGE>
For the quarter ending September 30, 1999, the Registrant sold
887,500 shares of common stock and three-year warrants to purchase 133,125
shares of common stock at $5.00 per share, for an aggregate purchase price of
$3,550,000 to foreign investors in an offshore transaction pursuant to
Regulation S promulgated under the Securities Act.
On October 4, 1999, the Registrant sold 245,000 shares of common
stock and three-year warrants to purchase 36,750 shares of common stock at
$5.00 per share, for an aggregate purchase price of $980,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated
under the Securities Act.
For the period of October 4, 1999 through November 3, 1999, the
Registrant sold an aggregate of 50,000 shares of common stock through the
exercise of warrants for an aggregate purchase price of $125,000. These
shares were sold to foreign investors in an offshore transaction pursuant to
Regulation S promulgated under the Securities Act.
On November 5, 1999, the Registrant sold 500,000 shares of common
stock and three-year warrants to purchase 75,000 shares of common stock at
$5.00 per share, for an aggregate purchase price of $2,000,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated
under the Securities Act.
On November 15, 1999, the Registrant sold 92,620 shares of common
stock to finders in consideration for $323,280 of services rendered. The
shares were issued pursuant to Regulation S promulgated under the Securities
Act.
On December 10, 1999, the Registrant sold 125,000 shares of common
stock and three-year warrants to purchase 18,750 shares of common stock at
$5.00 per share, for an aggregate purchase price of $500,000 to foreign
investors in an offshore transaction pursuant to Regulation S promulgated
under the Securities Act.
On December 15, 1999, the Registrant sold 31,400 shares of common
stock to finders in consideration for $78,500 of services rendered. The
shares were issued pursuant to Regulation D promulgated under the Securities
Act.
On January 21, 2000, the Registrant sold an aggregate of 231,875
shares of common stock through the exercise of warrants for an aggregate
purchase price of $232. These shares were sold to foreign investors in an
offshore transaction pursuant to Regulation S promulgated under the
Securities Act.
On January 25, 2000, the Registrant sold an aggregate of 50,000
shares of common stock through the exercise of warrants for an aggregate
purchase price of $125,000. The shares were sold pursuant to Section 4(2) of
the Securities Act.
II-4
<PAGE>
ITEM 16. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
---------- -----------
<S> <C>
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
5 Opinion of Counsel
10.1 Facility Lease dated May 1, 1997 for 1176 Main St, Bldg C,
Irvine, CA (7)
10.2 1997 Stock Option/Stock Issuance Plan(6)
10.3 Agreement and Plan of Merger, dated April 9, 1997, by
and among the Company, Raymond W. Cohen, Innovative
Physicians Service, Inc. d/b/a Diagnostic Monitoring and
CSI Merging Corporation (4)
10.4 Promissory Note, dated April 9, 1997 in principal amount
of $100,000 payable to Raymond W. Cohen (4)
10.5 Employment Agreement, dated May 1, 1998 between the
Company and Raymond Cohen (8)
10.6 Employment Agreement, dated September 14, 1998 between
the Company and Michael Gioffredi (9)
10.7 Employment Agreement, dated July 1, 1998 between the
Company and Dongping Lin (10)
10.8 Employment Agreement, dated May 1, 1998 between the
Company and Jeffery Blanton (11)
10.9 Employment Agreement, dated May 1, 1998 between the
Company and Brett L. Scott (12)
10.10 Amended and Restated Loan and Security Agreement with
Silicon Valley Bank, dated December 30, 1998 (13)
10.11 Development and Manufacturing Agreement with Zevex, Inc.
dated August 21, 1998 (14)
10.12 Agreement for Purchase and Sale of Assets Between
Innovative Physician Services, Inc. (DBA Diagnostic
Monitoring), and Biosensor Corporation, dated December
31, 1998 (15)
10.13+ Distribution and License Agreement with Medtronic
Physio-Control Corporation dated December 2, 1998 (16)
10.14 Addendum and Modification to the Distribution and
License Agreement, dated the 2nd day of December, 1998
by and between Medtronic Physio-Control Corporation and
Cardiac Science, Inc. (17)
10.15 Facility lease dated September 9, 1999 for 16931
Millikan Avenue, Irvine, CA (18)
10.16+ Data Critical Corporation Technology Integration and
Distribution Letter Agreement dated March 17, 2000 (19)
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of Ernst & Young LLP
23.3 Consent of Counsel (contained in opinion of counsel
filed as Exhibit 5)
27 Financial Data Schedule
99.1 Development and License Agreement with HeartSine
Technologies, Inc. dated December 6, 1999 (20)
99.2 HeartSine Technologies, Inc. Promissory Note and
Security Agreement dated October 1, 1999 (21)
</TABLE>
* Filed herewith.
II-5
<PAGE>
1. Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
2. Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for
the year ended December 31, 1993.
3. Incorporated by reference to Exhibit 10.1 to Amendment No. 1, dated
April 18, 1992, to Application For Registration on Form 10.
4. Incorporated by reference to Exhibit 10.8 to Form 10-K for the year
ended December 31, 1996.
5. Incorporated by reference to Exhibit 10.10 to Company's Form 10-QSB\A
No.1 for the quarter ended June 30, 1998
6. Incorporated by reference to the Company's Definitive Proxy Statement
for the Annual Meeting of Stockholders held on May 12, 1998
7. Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the year
ended December 31, 1997.
8. Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the year
ended December 31, 1998.
9. Incorporated by reference to Exhibit 10.6 to Form 10-KSB for the year
ended December 31, 1998.
10. Incorporated by reference to Exhibit 10.7 to Form 10-KSB for the year
ended December 31, 1998.
11. Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the year
ended December 31, 1998.
12. Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the year
ended December 31, 1998.
13. Incorporated by reference to Exhibit 10.10 to Form 10-KSB for the year
ended December 31, 1998.
14. Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the year
ended December 31, 1998.
15. Incorporated by reference to Exhibit 10.12 to Form 10-KSB for the year
ended December 31, 1998.
16. Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the year
ended December 31, 1998.
17. Incorporated by reference to Exhibit 10.14 to Form 10-QSB for the
quarter ended June 30, 1999.
18. Incorporated by reference to Exhibit 10.15 to Form 10-QSB for the
quarter ended September 30, 1999.
19. Incorporated by reference to Exhibit 10.15 to Form 10-K for the year
ended December 31, 1999.
20. Incorporated by reference to Exhibit 99.1 to Form 10-K for the year
ended December 31, 1999.
21. Incorporated by reference to Exhibit 99.2 to Form 10-K for the year
ended December 31, 1999.
+ Portions have been omitted pursuant to a request for confidential treatment
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by final adjudication of such issue.
The undersigned Registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the
Registrant
II-6
<PAGE>
pursuant to Rule 424(b)(1), or (4) or 497(h) under the Securities Act as
part of this Registration Statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of Prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
(3) File, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement
to:
(i) Include any prospectus required by Section
10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or together, represent a fundamental change in
the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) Include any material information with respect
to the plan of distribution not previously discussed in the
registration statement or any material change to such
information in the registration statement.
(4) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on April 27, 2000.
CARDIAC SCIENCE, INC.
By: /s/ RAYMOND W. COHEN
-------------------------------
Raymond W. Cohen
PRESIDENT, (PRINCIPAL EXECUTIVE OFFICER)
By: /s/ BRETT L. SCOTT
-------------------------------
Brett L. Scott
CHIEF FINANCIAL OFFICER, (PRINCIPAL
FINANCIAL AND ACCOUNTING OFFICER)
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Raymond Cohen, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agent, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue thereof.
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ RAYMOND W. COHEN
- -----------------------------
Raymond W. Cohen Director April 27, 2000
/S/ PAUL QUADROS
- -----------------------------
Paul Quadros Director April 27, 2000
/S/ PETER CROSBY
- -----------------------------
Peter Crosby Director April 27, 2000
/S/ HOWARD EVERS
- -----------------------------
Howard Evers Director April 27, 2000
</TABLE>
II-8
<PAGE>
CARDIAC SCIENCE, INC.
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
3.1 Certificate of Incorporation (1)
3.2 Bylaws (1)
4.1 Form of Common Stock Certificate (1)
4.1 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
5 Opinion of Counsel
10.1 Facility Lease dated May 1, 1997 for 1176 Main St,
Bldg C, Irvine, CA (7)
10.2 1997 Stock Option/Stock Issuance Plan(6)
10.3 Agreement and Plan of Merger, dated April 9, 1997,
by and among the Company, Raymond W. Cohen,
Innovative Physicians Service, Inc. d/b/a
Diagnostic Monitoring and CSI Merging Corporation
(4)
10.4 Promissory Note, dated April 9, 1997 in principal
amount of $100,000 payable to Raymond W. Cohen (4)
10.5 Employment Agreement, dated May 1, 1998 between
the Company and Raymond Cohen (8)
10.6 Employment Agreement, dated September 14, 1998
between the Company and Michael Gioffredi (9)
10.7 Employment Agreement, dated July 1, 1998 between
the Company and Dongping Lin (10)
10.8 Employment Agreement, dated May 1, 1998 between
the Company and Jeffery Blanton (11)
10.9 Employment Agreement, dated May 1, 1998 between
the Company and Brett L. Scott (12) 10.10 Amended
and Restated Loan and Security Agreement with
Silicon Valley Bank, dated December 30, 1998 (13)
10.11 Development and Manufacturing Agreement with
Zevex, Inc. dated August 21, 1998 (14)
10.12 Agreement for Purchase and Sale of Assets Between
Innovative Physician Services, Inc. (DBA
Diagnostic Monitoring), and Biosensor Corporation,
dated December 31, 1998 (15)
10.13+ Distribution and License Agreement with Medtronic
Physio-Control Corporation dated December 2, 1998 (16)
10.14 Addendum and Modification to the Distribution and
License Agreement, dated the 2nd day of December,
1998 by and between Medtronic Physio-Control
Corporation and Cardiac Science, Inc. (17)
10.15 Facility lease dated September 9, 1999 for 16931
Millikan Avenue, Irvine, CA (18)
10.16+ Data Critical Corporation Technology Integration
and Distribution Letter Agreement dated March 17,
2000 (19)
10.17 Security Agreement to Promissory Note dated
October 1, 1999
23.1* Consent of PricewaterhouseCoopers LLP
23.2* Consent of Ernst & Young LLP
23.3 Consent of Counsel (contained in opinion of
counsel filed as Exhibit 5)
27 Financial Data Schedule
99.1 Development and License Agreement with HeartSine
Technologies, Inc. dated December 6, 1999 (20)
99.2 HeartSine Technologies, Inc. Promissory Note and
Security Agreement dated October 1, 1999 (21)
</TABLE>
* Filed herewith
II-9
<PAGE>
(1) Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
(2) Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for
the year ended December 31, 1993.
(3) Incorporated by reference to Exhibit 10.1 to Amendment No. 1, dated April
18, 1992, to Application For Registration on Form 10.
(4) Incorporated by reference to Exhibit 10.8 to Form 10-K for the year ended
December 31, 1996.
(5) Incorporated by reference to Exhibit 10.10 to Company's Form 10-QSB\A No.1
for the quarter ended June 30, 1998
(6) Incorporated by reference to the Company's Definitive Proxy Statement for
the Annual Meeting of Stockholders held on May 12, 1998
(7) Incorporated by reference to Exhibit 10.4 to Form 10-KSB for the year
ended December 31, 1997.
(8) Incorporated by reference to Exhibit 10.5 to Form 10-KSB for the year
ended December 31, 1998.
(9) Incorporated by reference to Exhibit 10.6 to Form 10-KSB for the year
ended December 31, 1998.
(10) Incorporated by reference to Exhibit 10.7 to Form 10-KSB for the year
ended December 31, 1998.
(11) Incorporated by reference to Exhibit 10.8 to Form 10-KSB for the year
ended December 31, 1998.
(12) Incorporated by reference to Exhibit 10.9 to Form 10-KSB for the year
ended December 31, 1998.
(13) Incorporated by reference to Exhibit 10.10 to Form 10-KSB for the year
ended December 31, 1998.
(14) Incorporated by reference to Exhibit 10.11 to Form 10-KSB for the year
ended December 31, 1998.
(15) Incorporated by reference to Exhibit 10.12 to Form 10-KSB for the year
ended December 31, 1998.
(16) Incorporated by reference to Exhibit 10.13 to Form 10-KSB for the year
ended December 31, 1998.
(17) Incorporated by reference to Exhibit 10.14 to Form 10-QSB for the quarter
ended June 30, 1999.
(18) Incorporated by reference to Exhibit 10.15 to Form 10-QSB for the quarter
ended September 30, 1999.
(19) Incorporated by reference to Exhibit 10.15 to Form 10-K for the year ended
December 31, 1999.
(20) Incorporated by reference to Exhibit 99.1 to Form 10-K for the year ended
December 31, 1999.
(21) Incorporated by reference to Exhibit 99.2 to Form 10-K for the year ended
December 31, 1999.
+ Portions have been omitted pursuant to a request for confidential
treatment
II-10
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 (File
No. 333-94425) of our report dated February 17, 1999, which contained an
explanatory paragraph regarding the Company's ability to continue as a going
concern, relating to the consolidated financial statements, which appears in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers LLP
Newport Beach, California
April 24, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated April 14, 1997, with respect to the
statements of operations, stockholders' equity and cash flows of Cardiac
Science, Inc. (a development stage company) for the year ended December 31,
1996 included in Post Effective Amendment No. 1 to the Registration Statement
(Form S-1 No. 333-94425) and related Prospectus of Cardiac Science, Inc. for
the registration of 8,791,630 shares of its common stock.
Ernst & Young LLP
Orange County, California
April 24, 2000
