<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 4, 2000
REGISTRATION NO. 333-94425
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CARDIAC SCIENCE, INC.
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(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 3845 33-0465681
-------- ---- ----------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
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16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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RAYMOND W. COHEN, PRESIDENT
CARDIAC SCIENCE, INC.
16931 Millikan Avenue
Irvine, California 92606
(949) 587-0357
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(Name, Address Including Zip Code, and Telephone Number, Including
Area Code, of Agent For Service)
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Copies of all communications, including all communications sent to the agent for
service, should be sent to:
LEONARD J. BRESLOW, ESQ.
BRESLOW & WALKER, LLP
100 JERICHO QUADRANGLE, SUITE 230
JERICHO, NEW YORK 11753
TEL: (516) 822-6505
FAX: (516) 822-6544
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Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act, check
the following box X
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If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering ___________
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___________
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering ___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box ____________
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<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities Amount Proposed Proposed Amount of
to be Registered to be Maximum Maximum Registration
Registered Offering Aggregate Fee
Price Per Offering Price
Security(2)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $0.001 per share(1) 8,791,630 $4.69 $41,232,745 $10,886
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents shares of Common Stock, which may be sold by selling
stockholders. See "Selling Stockholders".
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of
1933, as amended. Represents the average of the high and the low prices
of the Common Stock as quoted on the OTC Bulletin Board on January 3,
2000.
Pursuant to Rule 416 of the Securities Act of 1933, this registration
statement also relates to such additional indeterminate number of shares of
Common Stock as may become issuable pursuant to the anti-dilution provisions of
the warrants held by certain of the selling stockholders.
The registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN
ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 4, 2000
CARDIAC SCIENCE, INC.
8,791,630 Shares
Common Stock
-----------
This prospectus relates to 8,791,630 shares of common stock of Cardiac
Science, Inc. which may be offered and sold, from time to time, by the selling
stockholders named in this prospectus. We will not receive any proceeds from the
sale of the shares by the selling stockholders.
Our common stock currently is quoted on the OTC Bulletin Board under
the symbol "DFIB." On February 2, 2000, the last reported sale price of our
common stock on the OTC Bulletin Board was $5.94 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 February , 2000
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED
ELSEWHERE IN THIS PROSPECTUS. THIS SUMMARY DOES NOT CONTAIN ALL OF THE
INFORMATION THAT YOU SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU
SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND THE
FINANCIAL STATEMENTS, BEFORE MAKING AN INVESTMENT DECISION.
OUR COMPANY
We have developed proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD-TM-,to be incorporated into devices that
are attached prophylactically to patients determined to be at risk of sudden
cardiac arrest. RHYTHMx ECD enables these devices, such as external
defibrillator monitors and patient monitoring systems, to provide patients
suffering sudden cardiac arrest with potentially lifesaving defibrillation
therapy in as little as 10 seconds without human intervention. We intend to
license RHYTHMx ECD to third parties. We also have designed, are developing, and
intend to market non-invasive automatic external cardiac defibrillation or
"AECD-Registered Trademark-" devices that use RHYTHMx ECD as well as our other
proprietary technology. We believe our proprietary technology will help to
create a new standard of care by significantly increasing the rate at which
patients survive sudden cardiac arrests.
Our first device, the Powerheart, is the only 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 27
other international markets giving us representation in 39 countries.
In addition to the Powerheart, we are developing two other products
based on our proprietary technology:
- a fully automatic defibrillator module that is designed to be
embedded and integrated into existing, third party patient
monitoring systems which typically are located in most acute care
areas within hospitals; and
- an automatic, portable, "public-access" external defibrillator
for use by early responders and non-medical personnel.
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Our strategy is to rapidly build a large installed base of products
using our proprietary technology through strategic alliances with established
industry leaders and by marketing through country-specific, independent
international distributors. We hope to generate revenue from licensing
RHYTHMx ECD, from selling devices that use our proprietary technology, and from
recurring sales of our single-use, disposable defibrillator pads. Both the
Powerheart and the automatic defibrillator module utilize these disposable
defibrillator pads which, for sanitary, safety, and performance reasons, must be
changed once every 24 hours. Our disposable defibrillator pads feature our
proprietary "smart chip" technology, designed to assure that only our pads will
be used with defibrillator and monitoring devices utilizing our proprietary
technology.
ABOUT US
We were incorporated in the State of Delaware in May 1991. Our
principal executive offices are located at 16931 Millikan Avenue, Irvine,
California 92606. Our phone number is 949-587-0357. Our website address is
cardiacscience.com. The information in our website is not a part of this
prospectus.
AECD, POWERHEART and MDF are our U.S. registered trademarks. AECD,
AECD ELECTRODES, and POWERHEART are our registered trademarks in Great Britain,
France, Japan, and China. Other service marks, trademarks, and trade names
referred to in this prospectus are the property of their respective owners.
THE OFFERING
<TABLE>
<S> <C>
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
</TABLE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should carefully review and consider the risks discussed under "Risk Factors" as
well as the other information set forth in this prospectus before buying our
common stock.
3
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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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<PAGE>
- the amount and timing of operating costs and capital expenditures
necessary to establish our business, operations, and
infrastructure;
- governmental regulation; and
- general economic conditions as well as economic conditions
specific to the medical industry.
OUR PRODUCTS, SOME OF WHICH ARE STILL UNDER DEVELOPMENT, MAY NOT BE READILY
ACCEPTED BY THE MARKET
Although defibrillation techniques are well known within the medical
community worldwide and are considered to be accepted and effective medical
therapy, we can not assure you that the market will recognize the benefits or
the potential applications of our products. Even if we are able to successfully
demonstrate to physicians and potential customers the benefits, safety,
efficacy, and cost-effectiveness of our products, we cannot assure you that
there will be sufficient market acceptance and demand of our products to allow
us to operate profitably.
WE HAVE LIMITED MANUFACTURING EXPERIENCE
We have limited manufacturing experience, and no experience in
manufacturing products in the volumes that will be necessary for us to achieve
significant commercial sales. In September 1998, we entered into a development
and manufacturing agreement with Zevex International, Inc., a contract medical
device manufacturer. Although Zevex is an established contract manufacturer, we
cannot assure you that Zevex will be able to provide reliable, high-volume
manufacturing at commercially reasonable costs. Zevex may encounter difficulties
in establishing its production capabilities, including problems involving
quality control and assurance, and shortages of qualified personnel. In
addition, Zevex's manufacturing facilities will be subject to applicable FDA
regulations, international quality standards, and other regulatory requirements.
Failure by Zevex or us to maintain our respective facilities in accordance with
FDA regulations, international quality standards, or other regulatory
requirements may result in delays or termination of production, which could have
a material adverse effect on our business, financial condition, and results of
operations.
WE MUST MAINTAIN AND ESTABLISH STRATEGIC ALLIANCES AND OTHER THIRD PARTY
RELATIONSHIPS TO IMPLEMENT OUR BUSINESS STRATEGY
Our strategy for manufacturing, marketing, and distributing our
products is dependent upon forming strategic alliances and relationships with
joint venture partners, contract manufacturers, or other third parties, and upon
the subsequent success of these parties in performing their responsibilities. We
cannot assure you that our existing arrangements or those which we may establish
in the future will be successful. There would be a material adverse effect on us
if
- any of our existing arrangements are cancelled or are
unsuccessful, and we are unable to secure new alliances in their
place; or
- we are unable to secure additional strategic alliances.
WE MUST COMPLY WITH GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
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We are subject to significant regulations by authorities in the United
States and foreign jurisdictions regarding the clearance of our products and the
subsequent manufacture, marketing, and distribution of our products once
approved. The design, efficacy, and safety of our products are subject to
extensive and rigorous testing before receiving marketing clearance from the
FDA. The FDA also regulates the registration, listing, labeling, manufacturing,
packaging, marketing, promotion, distribution, record keeping and reporting for
medical devices. The process of obtaining FDA clearances is lengthy and
expensive, and we cannot assure you that we will be able to obtain the necessary
clearances for marketing our products on a timely basis, if at all. Failure to
receive or delays in receipt of regulatory clearances would limit our ability to
commercialize our products, which would have a material adverse effect on our
business, financial condition, and results of operations. Even if such
clearances are granted by the FDA, our products will be subject to continual
review. Later discovery of previously undetected problems or failure to comply
with regulatory standards may result in restriction of the product's labeling, a
costly and time-consuming product recall, withdrawal of clearance, or other
regulatory or enforcement action. Moreover, future governmental statutes,
regulations, or policies, or changes in existing statutes, regulations, or
policies, may have an adverse effect on the development, production, or
distribution of our products.
Any regulatory clearance, if granted, may include significant
limitations on the uses for which our products may be marketed. FDA enforcement
policy strictly prohibits the marketing of cleared medical devices for
unapproved uses. In addition, the manufacturing processes used to produce our
products will be required to comply with the Good Manufacturing Practices or
"GMP" regulations of the FDA. These regulations cover design, testing,
production, control, documentation, and other requirements. Enforcement of GMP
regulations has increased significantly in the last several years, and the FDA
has publicly stated that compliance will be more strictly scrutinized. Our
facilities and manufacturing processes and those of certain of our third party
contract manufacturers and suppliers will be subject to periodic inspection by
the FDA and other agencies. Failure to comply with applicable regulatory
requirements could result in, among other things,
- warning letters,
- fines,
- injunctions,
- civil penalties,
- recalls or seizures of products,
- total or partial suspension of production,
- refusal of the government to grant pre-market clearance or
pre-market approval for devices,
- withdrawal of clearances, and
- criminal prosecution.
7
<PAGE>
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.;
- Hewlett Packard Corporation and its subsidiary, HeartStream,
Inc.; and
- Zoll Medical, Inc.
Other competitors in this market segment include Marquette Electronics,
Inc., SurVivaLink Corporation, and Laerdal Corporation. Many of the
manufacturers of competing external devices
- are well established in the medical device field,
- have substantially greater experience than us in research and
development, obtaining regulatory clearances, manufacturing, and
sales and marketing, and
- have significantly greater financial, research, manufacturing,
and marketing resources than us.
Other companies can develop invasive or non-invasive products capable
of delivering comparable or greater therapeutic benefits than our products or
which offer greater safety or cost effectiveness than our products. Furthermore,
future technologies or therapies developed by others may render our products
obsolete or uneconomical, and we may not be successful in marketing our products
against such competitors.
IF WE SELL OUR PRODUCTS INTERNATIONALLY, WE WILL BE EXPOSED TO NUMEROUS RISK
ASSOCIATES WITH INTERNATIONAL OPERATIONS.
We intend to market our products in international markets.
International operations entail various risks, including
- political instability;
- economic instability and recessions;
8
<PAGE>
- exposure to currency fluctuations;
- difficulties of administering foreign operations generally;
- reduced protection for intellectual property rights;
- potentially adverse tax consequences; and
- obligations to comply with a wide variety of foreign laws and
other regulatory requirements.
WE HAVE LIMITED MARKETING AND SALES CAPABILITIES
We have limited sales and marketing resources. Although our executive
management team has extensive marketing and sales experience in the cardiology
field, we cannot assure you that our marketing and sales efforts will be
successful. We intend to market our products in the United States and certain
foreign countries via a strategic distribution alliance with Medtronic
Physio-Control, Inc. We intend to market our products in other foreign countries
through a network of international distributors, of which 24 distributors have
already entered into exclusive, country-specific agreements. We cannot assure
you that we will be able to consummate additional strategic distribution
partnerships with other companies for our products, or that distributors will
devote adequate time or resources to selling our products.
OUR BUSINESS IS DEPENDENT UPON OUR EXECUTIVE OFFICERS, AND OUR ABILITY TO
ATTRACT AND RETAIN OTHER KEY PERSONNEL
Our success is dependent in large part on the continued employment and
performance of our President and Chief Executive Officer, Raymond W. Cohen, as
well as other key management and operating personnel. The loss of any of these
persons could have a material adverse effect on the business. We do not have key
person life insurance on any of our employees.
Our future success also will depend upon our ability to retain existing
key personnel, and to hire and to retain additional qualified technical,
engineering, scientific, managerial, marketing, and sales personnel. The failure
to recruit such personnel, the loss of such existing personnel, or failure to
otherwise obtain such expertise would have a material adverse effect on our
business and financial condition.
WE MAY FACE PRODUCT LIABILITY CLAIMS
The testing, manufacturing, marketing and sale of medical devices
subjects us to the risk of liability claims or product recalls. For example, it
is possible that our products will fail to deliver an energy charge when needed
by the patient, or that they will deliver an energy charge when it is not
needed. As a result, we may be subject to liability claims or product recalls
for products to be distributed in the future or products that have already been
distributed. Although we maintain product liability insurance in the countries
in which we intend to conduct business, we cannot assure you that such coverage
is adequate or will continue to be available at affordable rates. Product
liability insurance is expensive and may not be available in the future on
acceptable terms, if at all. A successful product liability claim could inhibit
or prevent commercialization of our products, impose a significant financial
burden on us, or both, and could have a material adverse effect on our business
and financial condition.
9
<PAGE>
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.
An adverse determination in any such litigation could subject us to significant
liability to third parties
10
<PAGE>
or require us to seek licenses from third parties. Although patent and
intellectual property disputes in the medical device industry have often been
settled through licensing or similar arrangements, costs associated with such
arrangements may be substantial and could include ongoing royalties. Moreover,
we cannot assure you that necessary licenses would be available to us on
satisfactory terms, if at all. If such licenses cannot be obtained on acceptable
terms, we could be prevented from marketing our products. Accordingly, an
adverse determination in such litigation could have a material adverse effect on
our business and financial condition.
THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK
Our common stock is quoted on the OTC Bulletin Board with relatively
limited trading activity to date. Although we have applied to have the common
stock approved for quotation on the Nasdaq Small Cap Market, we cannot assure
you that the application will be approved. Moreover, we cannot assure you that
an active trading market will develop for our common stock, or that if one
develops, it will be sustained.
OUR STOCK PRICE MAY BE VOLATILE
The market prices of many publicly traded companies, including emerging
companies in the health care industry, have been and can be expected to be
highly volatile. The future market price of our common stock could be
significantly impacted by
- future sales of our common stock,
- announcements of technological innovations for new commercial
products by our present or potential competitors,
- developments concerning proprietary rights,
- adverse results in our field or with clinical tests,
- adverse litigation,
- unfavorable legislation or regulatory decisions,
- public concerns regarding our products,
- variations in quarterly operating results,
- general trends in the health care industry, and
- other factors outside of our control.
WE DO NOT ANTICIPATE PAYING DIVIDENDS
To date, we have not declared or paid dividends on our common stock. We
presently intend to retain earnings, if any, to finance our operations and do
not expect to pay cash dividends on our common stock in the foreseeable future.
The payment of dividends will depend, among other things, upon our earnings,
assets, general financial condition, and upon other relevant factors.
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<PAGE>
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."
OUR COMMON STOCK IS A "PENNY STOCK"
The Securities and Exchange Commission has adopted regulations which
define a "penny stock" to be any equity security that has a market price of less
than $5.00 per share, subject to certain exceptions, including an exception for
securities authorized for quotation on certain stock exchanges and on the Nasdaq
Small Cap Market. For any transaction involving a penny stock, the rules require
the delivery, prior to the transaction, of a disclosure schedule prepared by the
SEC relating to the penny stock market. Disclosure also must be made about
commissions payable to both the broker-dealer and the registered representative,
and about current quotations for the security. Finally, monthly statements must
be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks. Our common stock
currently falls within the definition of a "penny stock." If our common stock
were to continue to trade below $5.00 per share, the trading market for our
common stock would be materially adversely affected unless an exemption from the
penny stock rules is available.
FUTURE ISSUANCES OF OUR COMMON STOCK COULD CAUSE OUR STOCK PRICE TO DECLINE
We have reserved a total of 1,305,000 shares of our common stock for
issuance upon the exercise of options that may be granted under our Amended 1997
Stock Option/Stock Issuance Plan, and a total of 1,460,591 shares of our common
stock for issuance upon the exercise of outstanding warrants to purchase common
stock. The holders of these options or warrants may exercise them at a time when
we would otherwise be able to obtain additional equity capital on terms more
favorable to us. The exercise of these options or warrants and the sale of the
common stock obtained upon exercise would have a dilutive effect on our
stockholders, and may have a material adverse effect on the market price of our
common stock. In addition, the issuance of options pursuant to our Stock Option
Plan may adversely affect our ability to consummate future equity financings.
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."
12
<PAGE>
WARNING REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements, including
statements regarding:
- products under development;
- technological and competitive advantages;
- timetable for commercial introduction of our products;
- our ability to improve patient care, increase survival rates,
decrease recovery time, lessen patient debilitation, and reduce
patient care costs;
- markets, demand for our services, purchase orders and
commitments;
- strategic alliances; and
- the competitive and regulatory environment.
These forward-looking statements are based on current expectations that
involve numerous risks and uncertainties. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive, and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are beyond
our control. Although we believe that our assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, we cannot assure you that the results discussed or
implied in such forward-looking statements will prove to be accurate. In light
of the significant uncertainties inherent in such forward-looking statements,
the inclusion of such statements should not be regarded as a representation by
us or any other person that our objectives and plans will be achieved. Words
such as "believes," "anticipates," "expects," "intends," "may," and similar
expressions are intended to identify forward-looking statements, but are not the
exclusive means of identifying such statements. We undertake no obligation to
revise any of these forward-looking statements.
DIVIDEND POLICY
We have never declared or paid dividends, and do not intend to pay any
dividends in the foreseeable future on shares of our common stock. Our earnings,
if any, are expected to be retained for use in expanding our business. The
payment of dividends is within the discretion of our Board of Directors and will
depend upon our earnings, if any, capital requirements, financial condition, and
such other factors as are considered to be relevant by our Board of Directors
from time to time.
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> <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 February 2, 2000, there were approximately 700 holders of record
of the our common stock. On February 2, 2000, the last sale price reported on
the OTC Bulletin Board for our common stock was $5.94 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.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA:
(in thousands, except per share data)
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.
<TABLE>
<CAPTION>
SELECTED BALANCE SHEET DATA:
(in thousands)
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 fully-automatic public access
defibrillator that can be used by first responders and other non-technical
individuals outside of the hospital environment.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with the world leader in external defibrillation,
Medtronic Physio-Control, a subsidiary of Medtronic, Inc. Medtronic
Physio-Control will market the Powerheart in the U.S., Canada and selected
European countries, and also has been licensed to integrate RHYTHMx ECD into
Medtronic's LIFEPAK-Registered Trademark- line of in-hospital external
defibrillators. We have signed distribution agreements to date covering 27 other
international markets giving us representation in 39 countries.
We have received 510(k) clearance from the U.S. Food and Drug
Administration for the clinical version of the Powerheart and also have received
FDA 510(k) clearance for RHYTHMx ECD, which we plan to integrate into
third-party manufactured bedside monitoring and defibrillator systems.
17
<PAGE>
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. We are in the process of filing 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.
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
18
<PAGE>
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 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
19
<PAGE>
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 August 2000. Additional capital will be necessary to ensure
our viability. In this respect, we are considering a number of alternatives,
including additional equity financings and corporate partnerships. We cannot
assure you that any such transactions will be available on terms acceptable to
us, if at all, or that any financing transaction will not be dilutive to current
stockholders. We also cannot assure you that we will have sufficient working
capital to fund future operations. If we are not able to raise additional funds,
we may be required to significantly curtail or cease our operating activities.
The accompanying financial statements have been prepared assuming that we will
continue as a going concern.
NET OPERATING LOSS CARRYFORWARDS
We had approximately $10,110,000 of federal net operating loss
carryforwards and $2,875,000 of California net operating loss carryforwards
at December 31, 1998 which will begin to expire in 2007 and 1999,
respectively. We had deferred tax assets of $4,181,335 at December 31, 1998.
We have established a valuation allowance to fully offset the deferred tax
assets.
YEAR 2000 ISSUE
Many 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,
20
<PAGE>
this problem could force computers to either shut down or provide incorrect
information and could result in an inability to process transactions or engage
in normal business activities. Based on a recent assessment, we believe that the
software we use will not be impacted by the Year 2000 issue. We believe that our
existing information systems equipment, primarily composed of personal
computers, are Year 2000 compliant. In addition, we believe the Powerheart and
RHYTHMx ECD are Year 2000 compliant. We have received confirmation from our
major vendors that they are Year 2000 compliant. Costs spent to date on the Year
2000 issue are minimal and we do not expect to incur additional costs which
would be considered material. If we determine that a particular vendor will be
impacted by this problem, we may attempt to identify additional or replacement
vendors, which could delay accessibility of the products or services provided by
such vendors. A delay or failure to identify an additional or replacement vendor
could have a material adverse effect on our business, operating results and
financial condition.
21
<PAGE>
BUSINESS
We have developed proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that are
attached prophylactically to patients determined to be at risk of sudden cardiac
arrest. RHYTHMx ECD enables these devices to provide patients suffering sudden
cardiac arrest with potentially lifesaving defibrillation therapy in as little
as 10 seconds without human intervention. We intend to license RHYTHMx ECD to
third parties. We also have designed, are developing, and intend to market
non-invasive automatic external cardiac defibrillation, or "AECD," devices that
use RHYTHMx ECD as well as our other proprietary technology.
Our first device, the Powerheart, is the only 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
- an automatic, portable, "public-access" external defibrillator
for use by early responders and non-medical personnel.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with Medtronic Physio-Control, a subsidiary of
Medtronic, Inc. Medtronic Physio-Control will market the Powerheart in the U.S.,
Canada, and selected European countries, and also has been licensed to integrate
RHYTHMx ECD into Medtronic's LIFEPAK-Registered Trademark- line of in-hospital
external defibrillators. We also have signed distribution agreements covering 27
other international markets giving us representation in 39 countries.
BACKGROUND
The American Heart Association ("AHA") and numerous clinical
researchers have established that a patient's chance of survival decreases by
approximately 10% or more each minute after the onset of cardiac arrest. Early
defibrillation is the most critical factor in patient survival.
Clinical studies have shown that the average survival rate of patients
who have had an in-hospital cardiac arrest is about 15% -- a rate which has not
improved since the 1960's. The AHA has acknowledged that it has under-emphasized
the role of prompt defibrillation. The AHA and some of the world's major
resuscitation councils have determined that prompt defibrillation is the single
most important therapy for the treatment of cardiac arrest. Studies have
documented in-hospital delays of more than five minutes between recognition of
cardiac arrest and first defibrillation. Immediate defibrillation means a
significantly greater chance of survival and reduced damage to the heart and
other vital organs (including the brain), which may result in less debilitation
and more rapid recovery. Clinical studies where defibrillation was administered
in under one minute have shown survival rates in excess of 90%.
22
<PAGE>
ELECTROCARDIOGRAM BASICS
The heart is divided into four chambers. The two upper chambers that
take blood in from the body are called the left and right atria. The two lower
chambers that pump blood out are known as the left and right ventricles. For the
heart to operate properly, different parts of the heart must contract in the
proper sequence and certain parts, such as the ventricles, must contract
simultaneously. The pumping action of the heart is managed by conductive fibers
that "wire" the heart electrically. A normally beating heart produces a series
of regular electrical events.
Unfortunately, the heart does not always function in an organized
manner. Due to disease or other unknown causes, the wiring of the heart can lose
control of the ventricular contractions. When this occurs, the signal to
contract is processed unevenly through the heart muscle rather than through the
normal conduction path, resulting in an unstable cardiac rhythm. This generates
abnormal contractions of the heart known as "arrhythmias." While not all
arrhythmias are life threatening, the most common life-threatening arrhythmias
are ventricular tachycardia and ventricular fibrillation.
- VENTRICULAR TACHYCARDIA. This occurs when electrical disturbances
cause a dangerously fast heart rate. The increased heart rate and
the uneven nature of the contractions reduce the delivery of
blood and oxygen to the brain and body. This can result in
unconsciousness, and may lead to ventricular fibrillation
(described below) and subsequent death if left untreated.
Ventricular tachycardia may be treated with drugs, by a procedure
called pacing, or by electrical shock called "cardioversion."
Cardioversion depolarizes the entire heart causing the heart to
"reset." It is appropriate when the ventricular tachycardia rate
is very fast. Termination of the abnormal contractions returns
the cardiac rhythm back to normal.
- VENTRICULAR FIBRILLATION. This is a condition in which many
different locations of the heart contract at an extremely
disorganized and rapid rate of 150 to 500 beats per minute. These
different, rapid impulses cause an irregular and chaotic cardiac
rhythm with little or no delivery of blood and oxygen to the brain
and body. In this condition, a patient will quickly lose
consciousness and die within minutes unless the rhythm is
terminated by an electrical shock. This shock is called
defibrillation.
23
<PAGE>
IMPORTANCE OF EARLY DEFIBRILLATION
Early defibrillation is the single most important factor in reviving
patients in cardiac arrest. In the case of ventricular fibrillation, there is
approximately a 10% (or higher) decline in a patient's chance of survival with
each passing minute. If defibrillation is delayed longer than 10 to 12 minutes,
there is little probability of survival. The following graph from the Textbook
of Advanced Cardiac Life Support, published by the AHA in 1994, illustrates
resuscitation rates after defibrillation within the first ten minutes following
the onset of ventricular fibrillation.
[GRAPH]
CURRENT MODES OF TREATMENT
- IMPLANTABLE CARDIOVERTER DEFIBRILLATOR OR "ICD" DEVICES. These
devices, which are both automatic and ambulatory, are implanted
into patients at chronic risk for cardiac arrest. An ICD device
is a complex electronic instrument, consisting of a heart monitor
and defibrillator module, implanted in the abdominal cavity or
chest with electrodes attached directly to the heart. When the
monitor detects a dangerous arrhythmia that satisfies the
detection algorithm criteria, the defibrillator delivers an
electrical charge through the heart that provides nearly
instantaneous reversion to normal heart rhythm. ICD devices are
invasive and the procedure costs well over $40,000.
- EXTERNAL DEFIBRILLATORS. These are widely used to treat patients
in cardiac arrest. One type of device is the manual
defibrillator, which requires highly skilled medical personnel
(e.g., a physician or paramedic) to analyze and interpret the
patient's electrocardiogram to determine if defibrillation is
required and, if it is, to manually administer the electrical
shock. Recently, more sophisticated semi-automatic defibrillators
have been developed which perform the analysis of the patient's
heart rhythm and, if it is determined that the patient is in
cardiac arrest, advise the medical staff to administer the shock.
The common denominator among these existing devices is that they
require the intervention of a trained medical technician to
administer the shock.
24
<PAGE>
OUR PROPRIETARY SOFTWARE
We have developed a proprietary tachyarrhythmia detection and
discrimination software, RHYTHMx ECD, to be incorporated into devices that are
attached prophylactically to patients determined to be at risk of sudden cardiac
arrest. RHYTHMx ECD enables these devices, such as external
defibrillator-monitors and patient monitoring systems, to deliver potentially
life saving defibrillation therapy, in as little as 10 seconds, without the need
for human intervention. It allows patient specific parameters to be programmed
into the device's microcomputer in accordance with the physician's instructions.
We received FDA clearance for RHYTHMx ECD in August 1998.
To analyze a patient's heart rhythm, RHYTHMx ECD detects and captures
the electrical signal produced by the heart's activity. The incoming signal is
sampled every two milliseconds-- i.e., 2/1000th of a second. This signal is
filtered, manipulated, and processed mathematically to produce meaningful and
reliable data for analysis. The primary parameter in determining if a rhythm is
shockable or not is the rate at which electrical events occur. This rate is
called the Shockable Tachyarrhythmia Detection rate or simply the "detection
rate." Analysis of the detection rate occurs on a continuous basis.
RHYTHMx ECD is capable of distinguishing between unusually fast
"normal" rhythms and abnormal rhythms (e.g., ventricular tachyarrhythmias), the
latter of which requires electrical shock. This feature is called Modulation
Domain Function or "MDF-Registered Trademark-." MDF uses sophisticated
morphology differentiation techniques designed to reduce the probability of
mistakenly delivering defibrillation therapy for rapid, albeit normal, heart
rhythms.
When a device utilizing RHYTHMx ECD is ready to deliver a shock, it
first verifies that the defibrillation pads are properly attached to the
patient, that it can safely deliver the shock, and that the rhythm is still
shockable. If the life-threatening rhythm has changed on its own and no longer
requires a shock, the device safely disposes of the charge within the device
itself. After the shock is delivered, the device quickly re-acquires the
electrocardiogram signal and resumes analysis of the resulting rhythm. If the
life-threatening rhythm continues, the devise recharges and causes another shock
to be delivered, if so programmed. If the shock restores a normal rhythm, the
device waits for one minute, then resets to the beginning of its therapy
sequence. Should the abnormal rhythm recur during this one minute interval, the
device continues therapy by delivering the next programmed shock.
RESEARCH AND CLINICAL RESULTS
To validate the safety and efficacy of our technology, a multi-center
clinical trial using the Powerheart was conducted between February 1993 and May
1997. The trial was divided into two phases. Phase I tested the tachyarrhythmia
detection and discrimination algorithm. Phase II tested the entire system
including both the arrhythmia analysis algorithm and the prototype Powerheart
shock delivery system in which RHYTHMx ECD had been embedded. In the Phase II
trial, patients attached to the Powerheart were studied in either the
electrophysiology lab or in the critical care unit. A total of 155 patients were
enrolled.
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
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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>
Shockable Sensitivity > 90.0 % 100.0 %
- ----------------- -------------- --------------------- ------------------------
Nonshockable Specificity > 99.0 % 99.5 %
- ----------------- -------------- --------------------- ------------------------
</TABLE>
Source: Cardiac Science 510(k) submission
PRODUCTS
We have designed three products that use our proprietary software. Our
initial product, the Powerheart, is a defibrillator-monitor designed for
in-hospital use. We received 510(k) clearance for the clinical version of the
Powerheart in late 1997 and began shipping the product in the fourth quarter of
1999 to Medtronic Physio-Control at their European headquarters located in the
United Kingdom. We plan to continue shipments of the Powerheart to our European
distributors and intend to begin shipments 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 fully automatic public access defibrillator for use by first
responders and non-technical personnel outside the hospital environment.
POWERHEART (HOSPITAL BEDSIDE DEFIBRILLATOR-MONITOR)
The Powerheart utilizes RHYTHMx ECD to monitor in-hospital patients at
high risk of 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.
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The Powerheart is a non-invasive device attached externally to the
patient's chest via disposable electrodes and disposable defibrillator pads.
Patient-specific parameters are programmed into its microcomputer in accordance
with the physician's instructions. The Powerheart then continuously monitors the
patient's cardiac activity and, if it detects a life-threatening abnormality,
transmits a defibrillation shock within seconds, without human interaction, to
convert the patient's heart rhythm back to normal.
In clinical trials, the average response time for the Powerheart to
deliver a defibrillation shock was 21 seconds as compared to approximately five
to seven minutes with the current standard of care. It is widely recognized that
the most effective way to increase survival from sudden cardiac arrest is to
reduce time to defibrillation.
We believe that implementation of the Powerheart in a hospital
environment will result in an increase in the quality of care with a
simultaneous reduction in patient care costs. Many patients suspected to be at
risk of cardiac problems are admitted to a cardiac care unit for no reason other
than the ability to receive prompt defibrillation therapy in the event of
cardiac arrest. For these patients, the Powerheart provides yet another
advantage. These patients may be attached to a Powerheart and then moved down to
a less expensive monitoring unit or even a standard hospital bed. This would
allow for more cost-effective use of cardiac care beds, and would provide
appropriate care when the critical care unit becomes overcrowded.
The Powerheart can be wall mounted or attached to a mobile "pole cart."
Moreover, it can be used when patients are being transported within the
hospital. In addition to the RHYTHMx ECD, the 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.
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- 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
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- FULLY AUTOMATIC MODE. This is the primary intended mode of
operation for the Powerheart. The automatic mode of the
Powerheart delivers optimal benefits to the patient and
healthcare provider in terms of its instant analysis and rapid
response features.
The table below compares the Powerheart to existing semi-automatic
external defibrillators used in most hospitals.
<TABLE>
<CAPTION>
CAPABILITY POWERHEART STANDARD HOSPITAL DEFIBRILLATOR
- -------------------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C>
Indication for use Patients at risk for cardiac arrest Patient is unconscious, has no pulse
and is not breathing
Conditions for attachment Normal rhythm Patient assumed to be in ventricular
tachycardia or Ventricular fibrillation
Time to first defibrillation 21 seconds (average) 5 - 7 minutes
Unattended use Yes No
Automatic shock Yes No
Prophylactic Monitoring Yes No
Signal interference Designed to reject signal interference Not suitable for patients that are
and allow patient motion moving or being moved
Length of use Long-term For emergencies only
Accuracy-- Specificity: >99.0% >99.0%
Sensitivity: >99.0% 75.0%-95.0%
- -------------------------------------- ------------------------------------------ ------------------------------------------
</TABLE>
AUTOMATIC DEFIBRILLATOR MODULE (PATIENT MONITORING MODULE)
The Automatic Defibrillator Module currently under development is being
designed for integration into patient monitoring systems. Our conceptual model
of the Automatic Defibrillator Module includes RHYTHMx ECD embedded in a high
voltage defibrillator module. Functionally, the Automatic Defibrillator Module
extends the capabilities of patient monitoring systems beyond diagnostics to
delivering therapy automatically and without human intervention. We believe the
Automatic Defibrillator Module will enable a patient monitoring system to
accurately and instantly detect the onset of ventricular tachyarrhythmias,
discriminate between a shockable and non-shockable rhythm, and direct the high
voltage defibrillator module to automatically deliver a therapeutic shock
without the need for human intervention. This therapeutic shock is expected to
convert a patient's heart rhythm back to normal within seconds of the onset of
the event.
PUBLIC ACCESS DEFIBRILLATOR
Individuals experiencing cardiac arrest need immediate defibrillation
wherever the event occurs. Short of having a defibrillator attached to them in
advance of an event, the best public alternative is to have one immediately
available. This is the concept behind the automated external defibrillator or
public access defibrillator. Since 1994, the AHA has focused on early
defibrillation and has urged making these devices widely accessible. The market
for these devices includes
- first responders (e.g., EMTs, fire trucks, police cars),
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- the clinical segment (e.g., out-patient clinics, doctor and
dentist offices),
- the industrial segment (e.g., stadiums, commercial airlines,
office buildings, retirement homes, health clubs and golf
courses), and
- numerous other market sectors (e.g., home, military and other
places where the public gathers).
We have developed a conceptual model of our public access
defibrillator. We intend to design our device to be small, lightweight,
portable, battery-operated and easy-to-use. In addition, it is anticipated that
this device will include our RHYTHMx ECD and the more traditional semi-automatic
rhythm analysis. Other anticipated features will include state-of-the-art
optimized low energy defibrillator waveform, voice prompts to assist users,
disposable defibrillator pads, data recording, storage and retrieval, and
self-test capabilities.
MARKETING STRATEGY
We believe that the key to adoption of our products will be a
combination of market awareness and clinical experience with the products. To
this end, we plan to initiate a multi-center study for the purpose of validating
patient benefits and associated cost advantages of the Powerheart as compared to
the current standard of care. We believe that the commercial success of the
Powerheart will require active marketing, education and sales efforts to create
market awareness of the product. We believe that decisions to purchase our
products generally will be made by cardiologists, cardiovascular specialists
(including those specializing in electrophysiology and arrhythmia control),
internists, nursing staffs, administrators and other hospital personnel involved
in product procurement and cost-benefit analysis.
In December 1998, we entered into a five-year exclusive distribution
and licensing agreement with Medtronic Physio-Control, a subsidiary of
Medtronic, Inc. Medtronic Physio-Control is the world market leader in external
defibrillation with an estimated 50% market share worldwide. Under the original
agreement, Medtronic Physio-Control was to market the Powerheart on an exclusive
basis in the United States and Canada. In May 1999, the agreement was expanded
to include the United Kingdom, Germany, France, and certain Scandinavian
countries.
North American exclusivity is conditioned upon Medtronic Physio-Control
purchasing an aggregate of 14,000 Powerhearts or RHYTHMx ECD software packages
for incorporation into their own defibrillator monitor products over the
five-year term. Exclusivity in certain European countries is conditioned upon
Medtronic Physio-Control purchasing an aggregate of 2,175 Powerhearts or
RHYTHMx ECD software packages over the five-year term. The first year's minimum
purchase commitment is 1,000 units for North America and 225 units for the
certain European countries.
We plan to extend our international market coverage by establishing a
network of qualified international distributors managed by our employees on a
country-specific basis. As of December 1999, we had signed exclusive
distribution agreements for the following 27 international markets: China,
Korea, Taiwan, Australia, Italy, Spain, Portugal, Greece, Turkey, Argentina,
Brazil, Chile, Peru, Panama, Columbia, Venezuela, Mexico, Uruguay, Hungary,
Czech Republic, Poland, Lithuania, Egypt, Saudi, Jordan, Pakistan, and Kuwait.
These agreements call for minimum
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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,
Hewlett Packard Corporation, and Zoll Medical, Inc. The products sold by these
companies require a trained medical technician to deliver defibrillation
therapy. Our products also may compete with products from other companies, such
as Heartstream, Inc. (a division of Hewlett Packard), SurVivaLink, Inc., and
Laerdal Corporation.
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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 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.
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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.
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.
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MANAGEMENT
The following table sets forth the names, ages and positions of our
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Position and Offices with the Company
---- --- -------------------------------------
<S> <C> <C>
Raymond W. Cohen 40 President, Chief Executive Officer and Director
Brett L. Scott 49 Chief Financial Officer and Secretary
Dongping Lin 41 Chief Technical Officer
Michael Gioffredi 48 Vice President of Sales and Marketing
Jeffery Blanton 43 Vice President of Operations
Paul D Quadros 52 Director
Peter Crosby 47 Director
Howard Evers 51 Director
</TABLE>
RAYMOND W. COHEN has served as our President, Chief Executive Officer,
and as a member of our Board of Directors of since January 1997. Prior to 1997,
Mr. Cohen was President of Diagnostic Monitoring, a privately held manufacturer
and international distributor of non-invasive cardiac monitoring devices and was
Vice President, Sales & Marketing of DM Software, Inc., a developer of cardiac
monitoring software. From 1988 to 1990, Mr. Cohen was President of BioAnalogics,
Inc., a publicly held development-stage medical company located in Beaverton,
Oregon. From 1982 to 1988, Mr. Cohen was Vice President, Sales and Marketing for
Brentwood Instruments, Inc., a publicly held cardiology products distribution
company based in Torrance, California, where he was instrumental in the company
being ranked in Inc. Magazine's list of Fastest Growing Small Public Companies
from 1986 through 1988. Mr. Cohen holds a B.S. in Business Management from the
State University of New York at Binghamton.
BRETT L. SCOTT has served as our Chief Financial Officer and Secretary
since October 1997. From 1992 to 1997, Mr. Scott was Chief Financial Officer of
Neuro Navigational Corporation, a publicly held company located in Costa Mesa,
California, which developed, manufactured and marketed minimally-invasive
neurosurgery and vascular surgery fiberoptic imaging technology, software and
disposables. Mr. Scott was Chief Financial Officer of Western Energy Management,
Inc. from 1991 to 1992 and of D&D Construction Co., Inc. from 1989 to 1991. From
1982 to 1989, he was co-owner of Schneider & Scott, Inc., certified public
accountants. Mr. Scott is a certified public accountant and holds a B.S. in
Business administration from the University of Southern California.
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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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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.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
by us to our Chief Executive Officer and to each of our other executive
officers, other than our Chief Executive Officer, who received salary and bonus
payments in excess of $100,000 during the year ended December 31, 1999.
<TABLE>
<CAPTION>
SUMMARY OF COMPENSATION TABLE
LONG TERM COMPENSATION
------------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------ ---------------------------- ---------------------
SECURITIES
NAME AND OTHER UNDERLYING LTIP
PRINCIPAL SALARY BONUS ANNUAL RESTRICTED OPTIONS/SARS PAYOUT ALL OTHER
POSITION YEAR ($) ($) COMP. STOCK AWARD (#)(1) ($) 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
37
<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>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NO. OF SECURITIES PERCENTAGE OF TOTAL EXERCISE RATE OF STOCK PRICE
UNDERLYING OPTIONS OPTIONS GRANTED TO PRICE EXPIRATION APPRECIATION FOR
NAME GRANTED (#)(1) EMPLOYEES IN YEAR ($/SH) DATE OPTION TERM
---- -------------- ----------------- ------ ---- -----------
5% 10%
-- ---
<S> <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
38
<PAGE>
difference between the exercise price of in-the-money options and
multiplied by the number of shares of common stock underlying the option.
EMPLOYMENT AGREEMENTS
We are party to at-will employment agreements with Raymond W. Cohen,
Brett L. Scott, Dongping Lin, Michael Gioffredi and Jeffery Blanton. Each
agreement automatically renews annually unless either party shall give the other
written notice of termination. The agreements provide for a base salary, plus
such bonuses and stock options based on incentive plans approved by the Board of
Directors. Each agreement contains a non-competition covenant, and Mr. Cohen's
agreement provides that he shall receive a car allowance of $6,000 per annum.
The agreements also provide that in the event of an involuntary termination or
change of control,
- each employee shall receive his base salary and health insurance
benefits for six months (twelve months for Mr. Cohen) following
the event as well as his pro rata portion of his target bonus;
and
- any unvested stock option or shares of restricted stock held on
the date of event shall continue to vest over the twelve-month
period.
Mr. Scott's agreement also provides that in the event of a change of
control, Mr. Scott shall receive 50,000 shares of our common stock (as adjusted
for dividends, stock dividends, stock splits and other similar changes).
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
39
<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
40
<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.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, certain information, as of February 2,
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) *
LaMont Asset Management SA 883,750 (8) 7.2%
Baarerstrasse 10
PO Box 4639
6304 Zug, Switzerland
Brett L. Scott 25,000 (9) *
Michael Gioffredi 12,500 (10) *
Jeffrey Blanton 12,500 (11) *
All executive officers and directors 765,767 (12) 6.1%
as a group (eight persons)
</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.
42
<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> <C> <C>
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
43
<PAGE>
LaMont Asset Management SA 883,750(2) 883,750 -- +
Baarerstrasse 10
PO Box 4639
6304 Zug, 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
c/o Bales-Waugh Group Inc. 10,000 10,000 -- +
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
44
<PAGE>
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 ***** 89,980(11) 43,750 46,230 +
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
45
<PAGE>
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
de Greef & Company, Inc. 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>
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> <C> <C>
James W. Giddens, Trustee 43,750(22) 43,750 -- +
For the Liquidation of the Business
of AR Baron Company
One Battery Park Plaza
New York, NY 10004
Michael Rappaport 43,750(23) 43,750 -- +
721 Fifth Avenue
New York, NY 10022
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) 100,000 516,500 4.2%
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
Walter Villiger 50,000 50,000 -- +
Hurdnerstrasse 10
Postfach 1474
Ch-8640
Hurden Switzerland
NiliberPty Ltd. 33,333 33,333 -- +
Level 9
161 Collins Street
Melbourne Victoria 3000
Australia
</TABLE>
47
<PAGE>
+ 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 43,750 shares of common stock underlying currently
exercisable warrants.
(12) Consists of 20,000 shares of common stock underlying currently
exercisable warrants.
(13) Consists of 5,000 shares of common stock underlying currently
exercisable warrants.
(14) Includes 3,750 shares of common stock underlying currently exercisable
warrants.
(15) Includes 1,875 shares of common stock underlying currently exercisable
warrants.
(16) Includes 37,500 shares of common stock underlying currently exercisable
warrants.
(17) Includes 18,000 shares of common stock underlying currently exercisable
warrants.
(18) Includes 18,750 shares of common stock underlying currently exercisable
warrants.
(19) Includes 81,625 shares of common stock underlying currently exercisable
warrants.
(20) Consists of 47,050 shares of common stock underlying currently
exercisable warrants.
(21) Includes 75,000 shares of common stock underlying currently exercisable
warrants.
(22) Consists of 43,750 shares of common stock underlying currently
exercisable warrants.
(23) Consists of 43,750 shares of common stock underlying currently
exercisable warrants.
(24) Consists of 87,500 shares of common stock underlying currently
exercisable warrants.
(25) Includes 25,000 shares of common stock underlying currently exercisable
warrants.
(26) Includes 17,500 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.
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
48
<PAGE>
- 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.
49
<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 December 31, 1999, 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 1,460,591 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
50
<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
51
<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.
Copies of the registration statement may be obtained from the
Commission in Washington, D.C., upon payment of the requisite fees, or from the
Commission's Website at http://www.sec.gov. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance we refer you to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by the more complete
description of the matters involved.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CARDIAC SCIENCE, INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Report of Independent Auditors F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998
and September 30, 1999 (unaudited) F-4
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) F-5
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
------------------ ----------------- ------------------
<S> <C> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 561,351 $ 1,247,602 $ 4,818,475
Trade accounts receivable, net of allowances of $16,028
at December 31, 1997 216,162 --- ---
Inventory 209,413 --- ---
Common stock subscriptions receivable --- --- 1,011,250
Prepaid expenses 99,267 30,129 65,222
----------------- ----------------- ------------------
Total current assets 1,086,193 1,277,731 5,894,947
Equipment, net 85,927 117,710 259,275
Investment in unconsolidated affiliate --- 115,000 115,000
Intangible assets, net of amortization of $49,285 at
December 31, 1997 607,853 --- ---
Other assets 4,012 45,266 65,632
----------------- ----------------- ------------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
============= ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligation $ --- $ 3,413 $ 24,939
Accounts payable and accrued expenses 1,016,323 1,599,216 1,219,765
Note payable to stockholder 70,233 --- ---
Notes payable --- 225,000 31,247
----------------- ----------------- ------------------
Total current liabilities 1,086,556 1,827,629 1,275,951
----------------- ----------------- ------------------
Long term portion of capital lease obligation --- 16,001 110,231
----------------- ----------------- ------------------
Commitments and contingencies
Stockholders'equity (deficit):
Preferred stock - $.001 par value; 1,000,000 shares authorized,
none issued or outstanding
Common stock - $.001 par value; 20,000,000 shares authorized,
issued and outstanding shares -4,974,560 as of December 31,
1997, 7,014,738 as of December 31, 1998 and 10,987,232 as of
September 30, 1999 4,975 7,015 10,987
Common stock subscribed --- 100,000 1,011,250
Additional paid-in capital 7,472,107 10,823,448 19,973,713
Accumulated deficit (6,779,653) (11,218,386) (16,047,278)
----------------- ----------------- ------------------
Total stockholders' equity (deficit) 697,429 (287,923) 4,948,672
----------------- ----------------- ------------------
$ 1,783,985 $ 1,555,707 $ 6,334,854
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-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)
---------------- --------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
(Unaudited)
(unaudited)
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 Number Number
of of of
Shares Amount Shares Amount Shares Amount
---------- --------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995
(restated-see Note 7) 2,795,947 $2,796 --- $ --- 541,333 $ 924,134
Issuance of common stock for
subscribed amount 395,500 396 (395,500) (674,134)
Common stock subscribed for
license fees at $1.37
per share 13,125 18,000
Common stock options
exercised at $0.34 per
share 11,375 11
Common stock warrants
exercised at $1.71 per
share 59,500 60
Common stock warrants
exercised at $4.57 per
share 3,280 3
Net loss
---------- --------- -------- ----------- ---------- -----------
Balance at December 31, 1996 3,265,780 3,266 --- --- 158,958 268,000
Issuance of preferred stock for
the acquisition of Diagnostic
Monitoring 500 600,000
Issuance of common stock for
subscribed amount 158,958 159 (158,958) (268,000)
Conversion of preferred
stock into common stock 500,000 500 (500) (600,000)
Issuance of common stock
for cash at $2.00 per
share 1,000,000 1,000
Issuance costs (including
50,000 shares of common
stock at $2.00 per share) 50,000 50
Net loss
---------- --------- -------- ----------- ---------- -----------
Balance at December 31, 1997 4,974,738 4,975 --- --- --- ---
Issuance of common stock
for cash at $2.00 per
share
(net of cost of
issuances of $829,896) 1,800,000 1,800
Issuance of common stock
warrants
Common stock warrants
exercised at $0.01 per
share 175,000 175
Common stock subscribed
at $2.00 per share in
cash 50,000 100,000
Issuance of common stock
for license fees and
services at $2.00 per
share 55,000 55
Issuance of common stock
for compensation at
$2.00 per share 10,000 10
Compensation related to fair
value of options
granted to non-employees
Net loss
---------- --------- -------- ----------- ---------- -----------
Balance at December 31, 1998 7,014,738 7,015 --- --- 50,000 100,000
Issuance of common stock
for cash at $2.00 per
share 1,850,000 1,850
Issuance of common stock
for cash at $4.00 per
share 887,500 887
Issuance of common stock for
common stock subscribed 50,000 50 (50,000) (100,000)
<CAPTION>
Additional
Paid-In Accumulated
Capital Deficit Total
------------- -------------- -----------
<S> <C> <C> <C>
Balance at December 31, 1995
(restated-see Note 7) $ 4,145,015 $ (4,163,110) $ 908,835
Issuance of common stock for
subscribed amount 673,738 ---
Common stock subscribed for
license fees at $1.37
per share 18,000
Common stock options
exercised at $0.34 per
share 3,889 3,900
Common stock warrants
exercised at $1.71 per
share 115,342 115,402
Common stock warrants
exercised at $4.57 per
share 14,997 15,000
Net loss (791,945) (791,945)
------------- -------------- -----------
Balance at December 31, 1996 4,952,981 (4,955,055) 269,192
Issuance of preferred stock for
the acquisition of Diagnostic
Monitoring 600,000
Issuance of common stock for
subscribed amount 267,841 ---
Conversion of preferred
stock into common stock 599,500 ---
Issuance of common stock
for cash at $2.00 per
share 1,999,000 2,000,000
Issuance costs (including
50,000 shares of common
stock at $2.00 per share) (347,215) (347,165)
Net loss (1,824,598) (1,824,598)
------------- -------------- -----------
Balance at December 31, 1997 7,472,107 (6,779,653) 697,429
Issuance of common stock
for cash at $2.00 per share
(net of cost of
issuances of
$829,896) 2,768,303 2,770,104
Issuance of common stock
warrants 433,416 433,416
Common stock warrants
exercised at $0.01 per share 1,825 2,000
Common stock subscribed
at $2.00 per share in
cash 100,000
Issuance of common stock
for license fees and
services at $2.00 per
share 109,945 110,000
Issuance of common stock
for compensation at
$2.00 per share 19,990 20,000
Compensation related to fair
value of options
granted to non-employees 17,862 17,862
Net loss (4,438,734) (4,438,734)
------------- -------------- -----------
Balance at December 31, 1998 10,823,4482 (11,218,386) (287,923)
Issuance of common stock
for cash at $2.00 per
share 3,698,150 3,700,000
Issuance of common stock
for cash at $4.00 per
share 3,549,112 3,549,999
Issuance of common stock for
common stock subscribed 99,950 ---
F-6
<PAGE>
Common stock warrants
exercised at $0.01 per
share 30,625 30
Common stock warrants
exercised at an average
of $2.45 per share 857,500 858
Common stock subscribed
at $4.00 per share in
cash 245,000 980,000
Common stock subscribed
at $2.50 per share in
cash 12,500 31,250
Issuance of common stock
for license fees and
services at an average of
$2.67 per share 157,969 158
Costs of equity issuances
(including 138,900
shares at $2.00) 138,900 139
Compensation related to fair
value of options
granted to
non-employees
Net loss for the nine months
ended September 30, 1999
---------- --------- -------- ----------- ---------- -----------
Balances, September 30,
1999
(unaudited) 10,987,232 $10,987 $ --- $ --- 257,500 1,011,250
========== ========= ======== =========== ========== ===========
<S> <C> <C> <C>
Common stock warrants
exercised at $0.01 per
share 320 350
Common stock warrants
exercised at an average
of $2.45 per share 2,100,392 2,101,250
Common stock subscribed
at $4.00 per share in
cash 980,000
Common stock subscribed
at $2.50 per share in
cash 31,250
Issuance of common stock
for license fees and
services at an average of
$2.67 per share 421,331 421,489
Costs of equity issuances
(including 138,900
shares at $2.00) (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) $ 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
options grantedto non-employees --- --- 17,862 14,100 ---
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 credit --- (18,903) 125,000 --- 175,000
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
--------------- ---------------- ---------------- ---------------- ----------------
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
period 1,177,806 413,311 561,351 1,247,602 561,351
--------------- ---------------- ---------------- ---------------- ----------------
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-8
<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-9
<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-10
<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-11
<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-12
<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.
8. NOTES PAYABLE
F-13
<PAGE>
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>
<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>
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
F-14
<PAGE>
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> <C>
Property and equipment $ 4,980 $ 1,707
Capitalized costs 222,583 98,402
Accrued liabilities 11,447 1,018
Allowance for doubtful accounts --- 6,866
Inventory reserve --- 4,284
State income taxes 816 544
Tax credit carryforwards 197,367 198,614
Net operating loss carryforwards 3,744,142 2,413,389
--------------- --------------
4,181,335 2,724,824
Valuation allowance (4,181,335) (2,724,824)
--------------- --------------
$ 0 $ 0
=============== ==============
</TABLE>
The provision for income taxes differs from the amount that would result from
applying the federal statutory rate for the year ended December 31, as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Statutory regular federal income tax rate (34.0%) (34.0%)
Nondeductible expenses 5.0 0.2
State income taxes 0.1 0.1
Tax credits (0.3) (1.0)
Change in valuation allowance 29.3 34.8
----------- -----------
0.1% 0.1%
=========== ===========
</TABLE>
As of December 31, 1998, the Company has research and experimentation
credit carryforwards for federal and state purposes of approximately $124,000
and $73,000, respectively. These credits begin to expire in 2010 for federal and
state purposes. The Company also has approximately $10,110,000 and $2,875,000 of
federal and state net operating loss carryforwards which will begin to expire in
2007 and 1999, respectively.
The utilization of net operating loss and tax credit carryforwards may
be limited under the provisions of Internal Revenue Code Section 382 and similar
state provisions.
11. STOCK OPTIONS
F-15
<PAGE>
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
================== ===================
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>
F-16
<PAGE>
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>
Per Share
Number of Exercise Expiration
Grant Date Warrants Price Date
---------------- ------------------ ---------------- ---------------
<S> <C> <C> <C>
1992 61,216 $4.57 2002
1994 875,000 $0.01 2004
1996 17,500 $2.00 2001
1997 100,000 $2.25 2007
1998 487,500 $2.00-$2.50 2001
1998 200,000 $3.00 1999
------------------
Total 1,741,216
==================
</TABLE>
The Company granted 437,500 warrants in connection with a private placement in
1998, 200,000 warrants to Medtronic-Physio Control pursuant to a Distribution
and License Agreement dated December 2, 1998 (Note 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.
F-17
<PAGE>
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>
15. CONCENTRATIONS OF RISK
Approximately 81% of the Company's revenues for the year ended December
31, 1997 are export sales to international countries.
F-18
<PAGE>
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-19
<PAGE>
You should rely only on the information contained in this prospectus. We have
not, and the selling stockholders have not, authorized any person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the selling
stockholders are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing the this prospectus is accurate as of the date on the
front cover of this prospectus only. Our business, financial condition, results
of operations and prospects may have changed since that date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.......................................................................................... 2
Risk Factors................................................................................................ 5
Dividend Policy............................................................................................. 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.................................................................................................. 34
Principal Stockholders...................................................................................... 42
Selling Stockholders and Plan of Distribution............................................................... 43
Certain Transactions........................................................................................ 50
Description of Securities................................................................................... 50
Shares Eligible for Future Sale............................................................................. 51
Legal Matters............................................................................................... 52
Experts..................................................................................................... 52
Where You Can Find More Information......................................................................... 52
Index to Financial Statements............................................................................... F-1
</TABLE>
-----------
Until __________, 2000, all dealers that effect transactions in our
common stock, whether or not participating in this offering, may be required to
deliver a prospectus. This requirement is in addition to the dealer's obligation
to deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
Cardiac Science, Inc.
8,791,630 Shares of Common Stock
-----------
PROSPECTUS
, 2000
-----------
<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.
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
II-3
<PAGE>
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)
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
</TABLE>
* Filed herewith.
1. Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
2. Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the
year ended December 31, 1993.
3. Incorporated by reference to Exhibit 10.1 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
II-5
<PAGE>
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.
+ Portions have been omitted pursuant to a request for confidential treatment
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by final adjudication of
such issue.
The undersigned Registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the
Securities Act, treat the information omitted from the form of
Prospectus filed as part of this Registration Statement in reliance
upon Rule 430A and contained in a form of Prospectus filed by the
Registrant pursuant to Rule 424(b)(1), or (4) or 497(h) under the
Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of Prospectus
as a new registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
(3) File, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement
to:
II-6
<PAGE>
(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 February 4, 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Raymond W. Cohen
- ------------------------
Raymond W. Cohen Director February 4, 2000
/s/ Paul Quadros
- ------------------------
Paul Quadros Director February 4, 2000
/s/ Peter Crosby
- ------------------------
Peter Crosby Director February 4, 2000
/s/ Howard Evers
- ------------------------
Howard Evers Director February 4, 2000
II-8
<PAGE>
CARDIAC SCIENCE, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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) Amended and
Restated Loan and Security Agreement with Silicon
10.10 Valley Bank, dated December 30, 1998 (13)
10.11 Development and Manufacturing Agreement with Zevex,
Inc. dated August 21, 1998 (14)
10.12 Agreement for Purchase and Sale of Assets Between
Innovative Physician Services, Inc. (DBA
Diagnostic Monitoring), and Biosensor Corporation,
dated December 31, 1998 (15)
10.13+ Distribution and License Agreement with Medtronic
Physio-Control Corporation dated December 2,
1998 (16)
10.14 Addendum and Modification to the Distribution and
License Agreement, dated the 2nd day of December,
1998 by and between Medtronic Physio-Control
Corporation and Cardiac Science, Inc. (17)
10.15 Facility lease dated September 9, 1999 for 16931
Millikan Avenue, Irvine, CA (18)
23.1* Consent of 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
* Filed herewith
(1) Incorporated by reference to Exhibits 3.1 and 3.2 to the Company's
Application for Registration on Form 10 dated October 2, 1991.
(2) Incorporated by reference to Exhibit 4.1 to the Company's Form 10-K for the
year ended December 31, 1993.
(3) Incorporated by reference to Exhibit 10.1 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.
<PAGE>
(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.
+ Portions have been omitted pursuant to a request for confidential treatment
<PAGE>
EXHIBIT 4.3
FORM OF WARRANT CERTIFICATE HELD BY VARIOUS FOREIGN INVESTORS
THE ISSUANCE OF THE SECURITIES EVIDENCED HEREBY HAS NOT BEEN REGISTERED WITH THE
UNITED STATES SECURITIES AND EXCHANGE COMMISSION UNDER THE U.S. SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES COMMISSION OF ANY STATE UNDER
ANY STATE SECURITIES LAW. THE SECURITIES WERE ISSUED PURSUANT TO A SAFE HARBOR
FROM REGISTRATION UNDER REGULATION S ("REGULATION S") PROMULGATED UNDER THE ACT.
THE SECURITIES MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED IN THE UNITED
STATES OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S) UNLESS SUCH
OFFERS, SALES, AND TRANSFERS ARE REGISTERED UNDER THE ACT AND APPLICABLE STATE
SECURITIES LAWS OR ARE MADE PURSUANT TO AN AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THOSE LAWS.
WARRANT TO PURCHASE COMMON STOCK
OF
CARDIAC SCIENCE, INC.
This is to certify that, for value received, _________, or assigns
("Holder"), is entitled to purchase, subject to the provisions of this Warrant,
from CARDIAC SCIENCE, INC., a Delaware corporation ("Company"), ___________
(____) fully paid, validly issued and nonassessable shares of Common Stock, par
value $.001 per share, of the Company ("Common Stock") at any time or from time
to time during the period from issuance until 5:00 p.m. New York City time on
____________, 2002 (the "Termination Date") at $2.50 per share. The number of
shares of Common Stock to be received upon the exercise of this Warrant and the
price to be paid for each share of Common Stock underlying this Warrant may be
adjusted from time to time as hereinafter set forth. The shares of Common Stock
deliverable upon exercise of this Warrant, and as adjusted from time to time,
are hereinafter sometimes referred to as "Warrant Shares" and the exercise price
of a share of Common Stock in effect at any time and as adjusted from time to
time is hereinafter sometimes referred to as the "Exercise Price."
(a) EXERCISE OF WARRANT. This Warrant may be exercised in whole or in
part at any time or from time to time on or after issuance until the Termination
Date; provided, however, that if such day is a day on which banking institutions
in the State of New York are authorized by law to close, then on the next
succeeding day which shall not be such a day. This Warrant may be exercised by
presentation and surrender hereof to the Company at its principal office, or, at
the Company's option, at the office of its stock transfer agent, if any, with
the Purchase Form annexed hereto duly executed and accompanied by payment of the
Exercise Price for the number of Warrant Shares specified in such form. As soon
as practicable after each such exercise of the Warrants, but not later than
seven (7) days from the date of such exercise, the Company shall issue and
deliver to the Holder a certificate or certificates for the Warrant Shares
issuable upon such exercise, registered in the name of the Holder or its
designee. If this Warrant should
<PAGE>
be exercised in part only, the Company shall, upon surrender of this Warrant
for cancellation, execute and deliver a new Warrant evidencing the rights of
the Holder thereof to purchase the balance of the Warrant Shares purchasable
thereunder. Upon receipt by the Company of this Warrant at its office, or by
the stock transfer agent of the Company at its office, in proper form for
exercise, the Holder shall be deemed to be the holder of record of the
Warrant Shares issuable upon such exercise, notwithstanding that the stock
transfer books of the Company shall then be closed or that certificates
representing such Warrant Shares shall not then be physically delivered to
the Holder.
(b) RESERVATION OF SHARES. The Company shall at all times reserve
for issuance and/or delivery upon exercise of this Warrant such number of
shares of its Common Stock as shall be required for issuance and delivery
upon exercise of the Warrant.
(c) FRACTIONAL SHARES. No fractional shares or scrip representing
fractional shares shall be issued upon the exercise of this Warrant. With
respect to any fraction of a share called for upon any exercise hereof, the
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of a share, determined as follows:
(1) If the Common Stock is listed on a National
Securities Exchange or admitted to unlisted trading privileges
on such exchange or listed for trading on the NASDAQ system,
the current market value shall be the last reported sale price
of the Common Stock on such exchange or system on the last
business day prior to the date of exercise of this Warrant or
if no such sale is made on such day, the average closing bid
and asked prices for such day on such exchange or system; or
(2) If the Common Stock is not so listed or admitted
to unlisted trading privileges, the current market value shall
be the mean of the last reported bid and asked prices reported
by the National Quotation Bureau, Inc. on the last business
day prior to the date of the exercise of this Warrant; or
(3) If the Common stock is not so listed or admitted
to unlisted trading privileges and bid and asked prices are
not so reported, the current market value shall be an amount,
not less than book value thereof as at the end of the most
recent fiscal year of the Company ending prior to the date of
the exercise of the Warrant, determined in such reasonable
manner as may be prescribed by the Board of Directors of the
Company.
(d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is
exchangeable and transferable, without expense, at the option of the Holder,
upon presentation and surrender hereof to the Company or, at the Company's
option, at the office of its stock transfer agent, if any, for other Warrants of
different denominations entitling the holder thereof to purchase in the
aggregate the same number of shares of Common Stock purchasable hereunder. Upon
surrender of this Warrant to the Company at its principal office or at the
office of its stock transfer agent, if any, with the Assignment Form annexed
hereto duly executed and funds sufficient to pay any transfer tax, the Company
shall, without charge, execute and deliver a new Warrant in the name of the
assignee named in such instrument of assignment and this Warrant shall promptly
be cancelled. This Warrant may be divided or combined with other Warrants which
carry the same rights upon presentation hereof at the principal office of the
Company or at the office of its stock transfer agent, if any, together with a
written notice specifying the names and denominations in which new Warrants are
to be issued and signed by the Holder hereof. The term "Warrant" as used herein
includes any Warrants into which this Warrant may be divided or exchanged. Upon
receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Warrant, if mutilated, the Company will execute and deliver
a new Warrant of like tenor and date. Any such new Warrant executed and
delivered shall constitute an additional contractual obligation on the part of
the Company, whether or not this Warrant so lost, stolen, destroyed, or
mutilated shall be at any time enforceable by anyone.
(e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a
<PAGE>
shareholder in the Company, either at law or equity, and the rights of the
Holder are limited to those expressed in the Warrant and are not enforceable
against the Company except to the extent set forth herein.
(f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time
and the number and kind of securities purchasable upon the exercise of the
Warrants shall be subject to adjustment from time to time upon the happening of
certain events as follows:
(1) In case the Company shall (i) declare a dividend
or make a distribution on its outstanding shares of Common
Stock in shares of Common Stock, (ii) subdivide or reclassify
its outstanding shares of Common Stock into a greater number
of shares, or (iii) combine or reclassify its outstanding
shares of Common Stock into a smaller number of shares, the
Exercise Price of the Warrants in effect at the time of the
record date for such dividend or distribution or of the
effective date of such subdivision, combination or
reclassification shall be proportionately adjusted so that the
Holder of this Warrant exercising this Warrant after such date
shall be entitled to receive the aggregate number and kind of
shares which, if this Warrant had been exercised by such
Holder immediately prior to such date, the Holder would have
owned upon such exercise and been entitled to receive upon
such dividend, subdivision, combination or reclassification.
(2) In case the Company shall fix a record date for
the issuance of rights or warrants to all holders of its
Common Stock entitling them to subscribe for or purchase
shares of Common Stock (or securities convertible into Common
Stock) at a price (or having a conversion price per share)
less than the current market price of the Common Stock (as
defined in Subsection (6) below) on the record date mentioned
below or less than the Exercise Price in effect immediately
prior to the date of such issuance, then the Exercise Price
shall be adjusted so that the same shall equal the price
determined by multiplying the Exercise Price in effect
immediately prior to the date of such issuance by a fraction,
the numerator of which shall be the sum of the number of
shares of Common Stock outstanding on the record date
mentioned below and the number of additional shares of Common
Stock which the aggregate subscription price of the total
number of shares of Common Stock so offered (or the aggregate
conversion price of the convertible securities so offered)
would purchase at such current market price per share of the
Common Stock or the Exercise Price in effect immediately prior
to such issuance, whichever is higher, and the denominator of
which shall be the sum of the number of shares of Common Stock
outstanding on such record date and the number of additional
shares of Common Stock offered for subscription or purchase
(or into which the convertible securities so offered are
convertible). Such adjustment shall be made successively
whenever such rights or warrants are issued and shall become
effective immediately after the record date for the
determination of shareholders entitled to receive such rights
or warrants; and to the extent that shares of Common Stock are
not delivered (or securities convertible into Common Stock are
not delivered) after the expiration of such rights or warrants
the Exercise Price shall be readjusted to the Exercise Price
which would then be in effect had the adjustments made upon
the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Common Stock
(or securities convertible into Common Stock) actually
delivered.
(3) In case the Company shall hereafter distribute to
the holders of its Common Stock evidences of its indebtedness
or assets (excluding cash dividends or distributions and
dividends or distributions referred to in Subsection (1)
above) or subscription rights or warrants (excluding those
referred to in Subsection (2) above), then in each such case
the Exercise Price in effect thereafter shall be determined by
multiplying the Exercise Price in effect immediately prior
thereto by a fraction, the numerator of which shall be the
total number of shares of Common Stock outstanding multiplied
by the current market price per share of Common Stock (as
defined in Subsection (6) below), less the fair market value
(as determined by the Company's Board of Directors) of said
assets or evidences of indebtedness so distributed or of such
rights or warrants, and the denominator of which shall be the
total number of shares of Common Stock outstanding multiplied
by such current
<PAGE>
market price per share of Common Stock. Such adjustment shall
be made successively whenever such a record date is fixed.
Such adjustment shall be made whenever any such distribution
is made and shall become effective immediately after the
record date for the determination of shareholders entitled
to receive such distribution.
(4) To the extent that an adjustment has been made
for purposes of determining the Exercise Price of the Warrant
upon issuance of any rights, options or warrants to purchase
Common Stock, then the subsequent issuance of Common Stock
upon actual exercise of the right, option or warrant shall be
excluded from the adjustment provisions hereof.
(5) Whenever the Exercise Price payable upon exercise
of each Warrant is adjusted pursuant to Subsections (1), (2)
and (3) above, the number of Warrant Shares purchasable upon
exercise of this Warrant shall simultaneously be adjusted by
multiplying the number of Warrant Shares initially issuable
upon exercise of this Warrant by the Exercise Price in effect
on the date hereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(6) For the purpose of any computation under
Subsections (2) and (3) above, the current market price per
share of Common Stock at any date shall be deemed to be the
average of the daily closing prices for 20 consecutive
business days before such date. The closing price for each day
shall be the last sale price regular way or, in case no such
reported sale takes place on such day, the average of the last
reported bid and asked prices regular way, in either case on
the principal national securities exchange on which the Common
Stock is admitted to trading or listed, or if not listed or
admitted to trading on such exchange, the average of the
highest reported bid and lowest reported asked prices as
reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available,
the fair market price as determined by the Board of Directors.
(7) No adjustment in the Exercise Price shall be
required unless such adjustment would require an increase or
decrease of at least two cents ($0.02) in such price;
provided, however, that any adjustments which by reason of
this Subsection (7) are not required to be made shall be
carried forward and taken into account in any subsequent
adjustment required to be made hereunder. All calculations
under this Section (f) shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be.
Anything in this Section (f) to the contrary notwithstanding,
the Company shall be entitled, but shall not be required, to
make such changes in the Exercise Price, in addition to those
required by this Section (f), as it shall determine, in its
sole discretion, to be advisable in order that any dividend or
distribution in shares of Common Stock, or any subdivision,
reclassification or combination of Common Stock, hereafter
made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities
convertible into Common Stock (including the Warrants).
(8) In the event that at any time, as a result of an
adjustment made pursuant to Subsection (1) above, the Holder
of this Warrant thereafter shall become entitled to receive
any shares of the Company, other than Common Stock, thereafter
the number of such other shares so receivable upon exercise of
this Warrant shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained
in Subsections (1) to (7), inclusive above.
(9) Irrespective of any adjustments in the Exercise
Price or the number or kind of shares purchasable upon
exercise of this Warrant, Warrants theretofore or thereafter
issued may continue to express the same price and number and
kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant.
<PAGE>
(g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be
adjusted as required by the provisions of the foregoing Section, the Company
shall forthwith file in the custody of its Secretary or an Assistant Secretary
at its principal office and with the stock transfer agent responsible for this
Warrant, if any, an officer's certificate showing the adjusted Exercise Price
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment, including a statement of the number of additional
shares of Common Stock, if any, and such other facts as shall be necessary to
show the reason for and the manner of computing such adjustment. Each such
officer's certificate shall be made available at all reasonable times for
inspection by the Holder or any holder of a Warrant executed and delivered
pursuant to Section (a) and the Company shall, forthwith after each such
adjustment, mail a copy of such certificate to the Holder or any such holder.
(h) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any
reclassification, capital reorganization or other change of outstanding shares
of Common Stock of the Company, or in case of any consolidation or merger of the
Company with or into another corporation (other than a merger with a subsidiary
in which merger the Company is the continuing corporation and which does not
result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock of the class issuable upon exercise of this
Warrant) or in case of any sale, lease or conveyance to another corporation of
the property of the Company as an entirety, the Company shall, as a condition
precedent to such transaction, cause effective provisions to be made so that the
Holder shall have the right thereafter by exercising this Warrant at any time
prior to the expiration of the Warrant, to purchase the kind and amount of
shares of stock and other securities and property receivable upon such
reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been purchased upon exercise of this Warrant immediately prior
to such reclassification, change, consolidation, merger, sale or conveyance. Any
such provision shall include provision for adjustments which shall be as nearly
equivalent as, may be practicable to the adjustments provided for in this
Warrant. The foregoing provisions of this Section (h) shall similarly apply to
successive reclassifications, capital reorganizations and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances. In
the event that in connection with any such capital reorganization or
reclassification, consolidation, merger, sale or conveyance, additional shares
of Common Stock shall be issued in exchange, conversion, substitution or
payment, in whole or in part, for a security of the Company other than Common
Stock, any such issue shall be treated as an issue of Common Stock covered by
the provisions of Subsection (1) of Section (f) hereof.
(i) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be
outstanding, (i) if the Company shall pay any dividend or make any distribution
upon the Common Stock or (ii) if the Company shall offer to all of the holders
of Common Stock for subscription or purchase by them any share of any class or
any other rights or (iii) if any capital reorganization of the Company,
reclassification of the capital stock of the Company, consolidation or merger of
the Company with or into another corporation, sale, lease or transfer of all or
substantially all of the property and assets of the Company to another
corporation, or voluntary or involuntary dissolution, liquidation or winding up
of the Company shall be effected, then in any such case, the Company shall cause
to be mailed by certified mail to the Holder, at least ten days prior the date
specified in (x) or (y) below, as the case may be, a notice containing a brief
description of the proposed action and stating the date on which (x) a record is
to be taken for the purpose of such dividend, distribution or rights, or (y)
such reclassification, reorganization, consolidation, merger, conveyance, lease,
dissolution, liquidation or winding up is to take place and the date, if any is
to be fixed, as of which the holders of Common Stock or other securities shall
receive cash or other property deliverable upon such reclassification,
reorganization, consolidation, merger, conveyance, dissolution, liquidation or
winding up.
(j) REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(1) The Company hereby covenants and agrees to
register the Warrant Shares under the Securities Act of 1933,
as amended (the "Act") and to qualify same under such state
securities laws as the Holder may reasonably request, at the
Company's expense, within ninety (90) days from the date
hereof, and to keep such registration and qualification
effective until all such Warrant Shares have been sold, and in
connection therewith, the Company shall supply prospectuses
and such other documents as the Holder may request in order to
facilitate the sale or other disposition of the Warrant
<PAGE>
Shares, and do any and all other acts and things which may be
necessary or desirable to enable such Holders to consummate
the sale or other disposition of the Warrant Shares.
(2) INDEMNIFICATION. The Company shall indemnify and
hold harmless each Holder and each underwriter, within the
meaning of the Act, who may purchase from or sell for any such
Holder any Warrant Shares from and against any and all losses,
claims, damages and liabilities caused by any untrue statement
or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment
thereto or any registration statement under the Act or any
prospectus included therein required to be filed or furnished
by reason of this Section (j) or caused by any omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, except insofar as such losses, claims, damages
or liabilities are caused by any such untrue statement or
alleged untrue statement or omission or alleged omission based
upon information furnished or required to be furnished to the
Company by such Holder or underwriter expressly for use
therein, which indemnification shall include each person, if
any, who controls any such underwriter within the meaning of
the Act; provided, however, that the Company shall not be
obligated so to indemnify any such underwriter or controlling
person unless such Holder or underwriter shall at the same
time indemnify the Company, its directors, each officer
signing the related registration statement and each person, if
any, who controls the Company within the meaning of such Act,
from and against any and all losses, claims, damages and
liabilities caused by any untrue statement or alleged untrue
statement of material fact contained in any registration
statement or any prospectus required to be filed or furnished
by reason of this Section (j) or caused by any omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading,
insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or
omission based upon information furnished to the Company by
any such underwriter or Holder expressly for use therein.
(k) REDEMPTION OF WARRANT. This Warrant is subject to redemption by the
Company at $.01 per Warrant on 15 days' prior written notice provided that the
closing bid price (or last sales price) of the Company's Common Stock as
reported by NASDAQ (or such exchange on which the Common Stock is traded)
exceeds $3.50 for 90 consecutive days.
(l) AMENDMENT; WAIVER OF PROVISIONS. This Warrant may not be amended
by, or compliance with any provision hereof waived, except pursuant to a written
instrument signed by the parties hereto.
CARDIAC SCIENCE, INC.
By:
-------------------------------------
Title:
Dated: , 1999
----------
Attest:
- ---------------------------
Secretary
<PAGE>
PURCHASE FORM
Dated
-----,---
The undersigned hereby irrevocably elects to exercise the within
Warrant to the extent of purchasing _____ shares of Common Stock and hereby
makes payment of_________________ in payment of the actual exercise price
thereof.
-----------
INSTRUCTIONS FOR REGISTRATION OF STOCK
--------------------------------------
Name
----------------------------------------------------------------------------
(Please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
Signature
-----------------------------------------------------
-----------
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED,___________ hereby sells, assigns and transfers unto
Name
----------------------------------------------------------------------------
(Please typewrite or print in block letters)
Address
-------------------------------------------------------------------------
the right to purchase Common Stock represented by this Warrant to the extent
of_______ shares as to which such right is exercisable and does hereby
irrevocably constitute and appoint________ Attorney, to transfer the same on the
books of the Company with full power of substitution in the premises.
Date ,
------- --
Signature
------------------------
<PAGE>
EXHIBIT 5
February 4, 2000
Board of Directors
Cardiac Science, Inc.
16931 Millikan Avenue
Irvine, CA 92606
Gentlemen:
It is our opinion that, under the General Corporation Law of the State of
Delaware, the securities being registered with the Securities and Exchange
Commission pursuant to the Registration Statement of Cardiac Science, Inc. on
Form S-1 will, when sold, be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion as an exhibit to the aforesaid
Registration Statement and further consent to the reference made to us under the
caption "Legal Matters" in the Prospectus constituting part of such Registration
Statement.
Very truly yours,
/s/ Breslow & Walker, LLP
Breslow & Walker, LLP
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated February 17, 1999, which contained an explanatory paragraph
regarding the Company's ability to continue as a going concern, relating to the
consolidated financial statements, which appears in such Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
PricewaterhouseCoopers LLP
Newport Beach, California
February 1, 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 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
February 1, 2000
