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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number 0-19567
CARDIAC SCIENCE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0465681
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16931 Millikan Avenue, Irvine, California 92606
(Address of principal executive offices)
Registrant's telephone number, including area code: (949) 587-0357
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No[ ]
The number of shares of the Common Stock of the registrant outstanding as
of August 13, 2002 was 67,295,151.
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CARDIAC SCIENCE, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
Page No.
--------
Item 1. Unaudited Financial Statements:
Consolidated Condensed Balance Sheets as of June 30, 2002 and December 31, 2001....................3
Consolidated Condensed Statements of Operations for the three and six months ended
June 30, 2002 and 2001.............................................................................4
Consolidated Condensed Statements of Comprehensive Loss for the three and six months ended
June 30, 2002 and 2001.............................................................................5
Consolidated Condensed Statements of Cash Flows for the six months ended
June 30, 2002 and 2001.............................................................................6
Consolidated Condensed Notes to Financial Statements............................................7-13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.....................................................................................14-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................21
Item 2. Changes in Securities and Use of Proceeds.........................................................21
Item 3. Defaults Upon Senior Securities...................................................................21
Item 4. Submission of Matters to a Vote of Security Holders...............................................21
Item 5. Other Information.................................................................................21
Item 6. Exhibits and Reports on Form 8-K..................................................................21
Signatures ...............................................................................................22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
In thousands, except share data
June 30, 2002 December 31, 2001
------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 24,022.7 $ 15,829.5
Accounts receivable, net of allowance for doubtful accounts of $777.7 at
June 30, 2002 and $858.8 at December 31, 2001 9,588.3 8,457.9
Inventories 7,736.7 3,479.9
Prepaid expenses 583.4 344.5
Assets held-for-sale 3,072.0 2,754.0
---------- ----------
Total current assets 45,003.1 30,865.8
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Property and equipment, net of accumulated depreciation 6,119.8 5,787.6
Goodwill 94,804.6 95,304.5
Identifiable intangibles, net of accumulated amortization 9,743.0 10,790.7
Other assets 3,489.1 2,720.4
---------- ----------
$159,159.6 $145,469.0
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,519.7 $ 6,646.9
Accrued expenses and other current liabilities 7,201.7 10,539.8
Liabilities held-for-sale 1,743.0 1,019.0
Current portion of long term obligations 768.0 271.9
---------- ----------
Total current liabilities 16,232.4 18,477.6
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Senior notes payable 38,582.6 27,300.0
Other long term obligations 384.7 479.9
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38,967.3 27,779.9
---------- ----------
Minority interest in subsidiary 856.8 867.2
---------- ----------
Commitments and contingencies -- --
Stockholders' equity:
Common stock - $.001 par value; 100,000,000 shares authorized, 67,272,651
and 67,158,531 shares, at June 30, 2002 and at December 31,
2001, respectively, issued and outstanding 67.3 67.2
Additional paid-in capital 188,254.8 176,297.8
Accumulated deficit (85,219.0) (78,020.7)
---------- ----------
Total stockholders' equity 103,103.1 98,344.3
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$159,159.6 $145,469.0
========== ==========
The accompanying notes are an integral part of the financial statements.
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
In thousands, except share and per share data
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net sales $ 12,841.1 $ 491.1 $ 22,202.2 $ 2,248.9
Cost of goods sold 6,666.8 402.4 11,576.7 2,019.6
----------- ----------- ----------- -----------
Gross profit 6,174.3 88.7 10,625.5 229.3
----------- ----------- ----------- -----------
Operating expenses:
Sales and marketing 3,852.0 2,077.1 7,465.8 3,597.0
Research and development 1,617.3 2,451.5 3,170.2 4,601.7
General and administrative 3,073.9 1,682.1 5,527.8 3,218.2
Amortization of goodwill and other
intangibles 556.7 331.1 1,058.5 661.9
Gain on settlement -- -- (832.4) --
----------- ----------- ----------- -----------
Total operating expenses 9,099.9 6,541.8 16,389.9 12,078.8
----------- ----------- ----------- -----------
Loss from operations (2,925.6) (6,453.1) (5,764.4) (11,849.5)
Interest income (expense), net (821.4) 40.8 (1,480.5) 171.9
Loss on sale of marketable securities -- (707.3) -- (707.3)
----------- ----------- ----------- -----------
Loss from operations before
provision for income taxes (3,747.0) (7,119.6) (7,244.9) (12,384.9)
----------- ----------- ----------- -----------
Provision for income taxes -- -- -- 2.0
Loss before minority interest (3,747.0) (7,119.6) (7,244.9) (12,386.9)
----------- ----------- ----------- -----------
Minority interest in loss (income) of
subsidiary (5.8) -- 10.5 --
----------- ----------- ----------- -----------
Net loss $ (3,752.8) $ (7,119.6) $ (7,234.4) $ (12,386.9)
=========== =========== =========== ===========
Net loss per share (basic and diluted) $ (0.06) $ (0.29) $ (0.11) $ (0.50)
=========== =========== =========== ===========
Weighted average number of shares used in
the computation of net loss per share 67,206,578 24,813,429 67,197,423 24,775,155
=========== =========== =========== ===========
The accompanying notes are an integral part of the financial statements.
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
In thousands
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ----------
Net loss $(3,752.8) $(7,119.6) $(7,234.4) $(12,386.9)
Other comprehensive income (loss):
Foreign currency translation
adjustments 86.2 -- 36.2 --
--------- --------- -------- ----------
Comprehensive loss $(3,666.6) $(7,119.6) $(7,198.2) $(12,386.9)
========= ========= ========= ==========
The accompanying notes are an integral part of the financial statements
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
IN THOUSANDS
Six Months Ended
June 30, 2002 June 30, 2001
------------- -------------
Cash flows from operating activities:
Net loss $ (7,234.4) $(12,386.9)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation 972.2 306.8
Amortization of goodwill and other intangibles 1,058.5 661.9
Loss on sale of marketable securities -- 707.3
Provision for allowance for doubtful accounts 239.0 150.0
Gain on settlement (832.4) --
Amortization of debt discount and debt issuance costs 447.1 --
Minority interest (10.5) --
Changes in operating assets and liabilities:
Accounts receivable (1,717.9) (1,276.5)
Inventories (4,210.4) (243.9)
Prepaid expenses (238.9) (67.3)
Other assets (166.9) 44.2
Placement of Powerheart CRMs at customer locations (449.4) (580.3)
Accounts payable and accrued expenses (3,000.9) 889.0
Net assets and liabilities held-for-sale 406.0 --
---------- ----------
Net cash used in operating activities (14,738.9) (11,795.7)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (528.1) (672.9)
Advances to Inovise Medical, Inc. and Survivalink -- (760.0)
Refund of Survivalink shareholders tax escrow 2,108.5 --
Deferred acquisition costs -- (584.6)
Proceeds from sale of marketable securities -- 3,792.6
---------- ----------
Net cash provided by investing activities 1,580.4 1,775.1
---------- ----------
Cash flows from financing activities:
Proceeds from capital lease refinancing -- 73.4
Payments on capital leases (92.3) (26.7)
Payments on loan payable (18.0) (40.2)
Payment of Survivalink senior promissory notes (26,467.6) --
Payment of debt issuance costs (2,760.3) --
Proceeds from Senior Notes Payable 50,000.0 --
Proceeds from line of credit 511.2 --
Proceeds from exercise of common stock warrants -- 375.0
Proceeds from issuance of common stock 243.0 --
Proceeds from exercise of common stock options 17.4 261.7
Costs of equity issuances (117.9) (35.9)
---------- ----------
Net cash provided by financing activities 21,315.5 607.3
---------- ----------
Effect of exchange rates on cash and cash equivalents 36.2 --
---------- ----------
Net increase (decrease) in cash and cash equivalents 8,193.2 (9,413.3)
Cash and cash equivalents at beginning of period 15,829.5 13,537.0
---------- ----------
Cash and cash equivalents at end of period $ 24,022.7 $ 4,123.7
========== ==========
The accompanying notes are an integral part of the financial statements
CARDIAC SCIENCE, INC.
CONSOLIDATED CONDENSED NOTES TO FINANCIAL STATEMENTS
June 30, 2002
1. Organization and Description of the Business
Cardiac Science, Inc. (the "Company") was incorporated in May 1991 and
develops, manufactures and markets automated portable public access
defibrillators (AEDs), emergency defibrillators, vital signs monitors and the
only FDA-cleared therapeutic patient monitor that instantly and automatically
treats hospitalized cardiac patients who suffer life-threatening heart rhythms.
The Company's core technology platform consists of a number of proprietary and
patented technologies including: arrhythmia detection and discrimination
software ("RHYTHMx(TM)"), biphasic defibrillation hardware and disposable
defibrillation electrode pad technology. These technologies are the key
components in the Company's commercial line of Powerheart(R)-brand
defibrillation and monitoring products. The Company's Powerheart(R) Cardiac
Rhythm Module(TM), Powerheart(R) AED, Survivalink(R) AED, along with Diascope(R)
emergency defibrillators and patient monitoring products are marketed in the
United States by its 55-person direct sales force and by international
distributors in more than 50 countries around the world.
On September 26, 2001, the Company acquired Survivalink Corporation, a
privately held company for $10.5 million in cash, $25.8 million in senior
promissory notes, and 18,150,000 shares of the Company's common stock.
On November 30, 2001, the Company acquired 94.7% of Artema Medical AB for
4,151,000 shares of common stock plus approximately $215,000 in cash.
2. Continued Existence
The Company anticipates that its current cash balance will be sufficient to
meet the Company's operating cash requirements through 2003. From inception
through June 30, 2002, the Company incurred losses of approximately $85.2
million. Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Additionally, transition to attain
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure. On May 29, 2002, the Company entered
into a Senior Note and Warrant Purchase Agreement with investors pursuant to
which the investor loaned $50 million to the Company (note 8). The Company in
turn repaid the $26,467,600 plus accrued interest in senior promissory notes
relating to the Survivalink acquisition. The accompanying financial statements
have been prepared assuming that the Company will continue as a going concern.
3. Summary of Significant Accounting Policies
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 June 30, 2002 and results of operations and cash flows for
the periods presented. Although the Company believes that the disclosures in
these financial statements are adequate to make the information presented not
misleading, certain information and disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted and should be read in conjunction with the
Company's audited financial statements included in the Company's 2001 Annual
Report on Form 10-K and subsequent amendment. Results of operations for the
three months and six months ended June 30, 2002 are not necessarily indicative
of results for the full year.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
value. Inventory consists of the following (amounts in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
Raw materials $2,498.4 $1,351.1
Work in process 1,622.9 562.3
Finished goods 3,615.4 1,566.5
-------- --------
$7,736.7 $3,479.9
======== ========
During the three and six months ended June 30, 2002, the Company placed
$422,700 and $449,400 respectively, of Powerheart CRM units at customer
locations. The Company retains title to these units and such amounts were
transferred to property and equipment where they are being depreciated over a
five-year period.
5. Segment reporting
Financial information is reported and evaluated by the Company's Chief
Executive Officer, Chief Financial Officer, and senior executive officers, who
as a group make up the chief operating decision makers of the Company.
Based on the evaluation of the Company's financial information, management
believes that the Company operates in four reportable segments, determined by
the type of product. These segments include the sale of AEDs and related
accessories, Powerheart disposable defibrillator electrodes, Powerheart units
and related accessories and emergency defibrillators and patient monitors.
Currently, the Company's emergency defibrillators and patient monitors are sold
only outside the U.S. In order to make operating, strategic and resource
allocation decisions, the Company's chief operating decision makers evaluate
revenue performance across each reportable segment, both domestically and
internationally. Revenues are attributed to the country in which the product is
sold.
Based on the Company's decision to dispose of a segment of the business
acquired in the Artema acquisition, the net sales of the Artema MCS gas
division, located in Stockholm, Sweden, are not included herein.
The following is a breakdown of net sales by product line (amounts in
thousands):
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
AEDs and related accessories $ 9,279.5 $ -- $16,430.2 $ --
Powerheart electrodes 303.0 155.3 583.0 173.5
Powerheart units and related accessories 84.6 285.9 95.6 1,299.7
Emergency defibrillators & patient
monitors 3,174.0 49.9 5,093.4 775.7
--------- ------ --------- --------
$12,841.1 $491.1 $22,202.2 $2,248.9
========= ====== ========= ========
The following is a breakdown of net sales by geographic location (amounts in
thousands):
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
------------- ------------- ------------- -------------
United States $ 8,079.0 $ 62.8 $14,111.0 $ 146.5
International 4,762.1 428.3 8,091.2 2,102.4
--------- ------ --------- --------
$12,841.1 $491.1 $22,202.2 $2,248.9
========= ====== ========= ========
The following is a breakdown of the Company's long-lived assets by geographic
location (amounts in thousands):
June 30, 2002 December 31, 2001
------------- -----------------
United States $ 95,266.4 $ 95,758.2
International 18,890.1 18,845.0
---------- ----------
$114,156.5 $114,603.2
========== ==========
6. Business Combinations
Survivalink Corporation
On September 26, 2001, the Company acquired Survivalink Corporation
("Survivalink"), a privately held Minneapolis-based manufacturer of automated
public access defibrillators("AEDs"). As consideration, the Company paid $10.5
million in cash, issued $25.8 million in senior promissory notes and tendered
18,150,000 shares of common stock to Survivalink shareholders. Of this total
consideration, approximately $1.8 million of the senior promissory notes and
907,500 shares of the Company's common stock are being held in escrow pursuant
to an escrow agreement. The escrow amount is to protect the Company for claims
regarding breach of representation or warranty by Survivalink. These funds will
be released from escrow on September 26, 2002, providing that all claims, if
any, have been resolved.
As part consideration for the acquisition of Survivalink, the Company
issued senior promissory notes to Survivalink shareholders in the principal
amount of $25.8 million with simple interest payable upon maturity at the rate
of 10% per annum. In addition, the Company assumed $1.5 million plus accrued
interest of bridge notes from certain shareholders of Survivalink. The Company
and the bridge note holders agreed to convert the bridge notes into a senior
note payable with terms and conditions similar to the notes issued as merger
consideration. During the six months ended June 30, 2002, the Company issued $50
million of Senior Notes (note 8) and the proceeds of the Notes were used to
redeem the senior promissory notes issued to the Survivalink shareholders and
held in escrow, the assumed bridge loan and all accrued interest.
The Company had entered into an agreement with Survivalink shareholders to
establish a tax escrow fund to make loans to employees of Survivalink who owned
options to purchase Survivalink common stock to help them meet their tax
obligations arising from the exercise of their employee stock options. The
Company had deposited $2,108,500 of cash into this fund. This amount is included
in other long-term assets in the Company's Consolidated Balance Sheet as of
December 31, 2001. Each loan from the fund was documented by an individual tax
note. The tax notes were collateralized by any amounts payable to the
Survivalink employee under the senior promissory notes issued to the employee as
consideration in the acquisition of Survivalink. In connection with the
redemption of the senior promissory notes payable in the second quarter ended
June 30, 2002, all loans to employees were paid back to the Company and the tax
escrow fund was returned to the Company.
Artema Medical AB
On November 30, 2001, the Company acquired a 94.7% ownership interest in
Artema Medical AB ("Artema"), a Swedish based manufacturer of patient monitors
and emergency defibrillator devices with operations in Denmark and Sweden. As
consideration, the Company paid approximately $215,000 in cash and issued
4,151,000 shares of common stock to Artema shareholders.
The following pro forma data summarizes the results of operations for the
six months ended June 30, 2001 as if the Survivalink and Artema acquisitions had
been completed on January 1, 2001. The pro forma data gives effect to actual
operating results prior to the acquisition, adjusted to include the pro forma
effect of amortization of identified intangible assets and interest on the
senior notes payable (dollar amounts in thousands).
Six Months Ended June 30, 2001
------------------------------
Net sales $ 18,405.0
Net loss $ (18,549.0)
Pro forma net loss per share (basic and diluted) $ (0.35)
Pro forma weighted-averaged shares 52,325,800
The above pro forma calculations do not include goodwill amortization for
the Survivalink and Artema acquisitions in accordance with SFAS No. 141.
7. Artema Restructuring and Planned Sale of the MCS Gas Business
As part of the Artema acquisition, the Company has developed a plan to
restructure the operations of the manufacturing facility in Denmark ("the
plan"), which is expected to be complete during the third quarter of 2002. The
Company has implemented plans to close the manufacturing facility in Northern
Denmark and move out of the current facility in Copenhagen. The manufacturing of
certain products will be moved to different Company facilities, contracted to
certain manufacturers or discontinued. The Company has recorded certain purchase
price adjustments in connection with the plan totaling $3,064,000. The plan
includes plant and facility closure costs that are either contractually
obligated or are incremental in nature, adjustments to fair market value for
owned facilities to be disposed of based on market assessments, adjustments to
fair value for raw materials that will not be converted into finished goods and
certain severance related costs for employees in closed facilities that the
Company is obligated to pay upon execution of the plan.
The Company identified the MCS gas division, located in Stockholm, Sweden,
as a business segment acquired in a business combination accounted for as a
purchase, to be disposed of. The MCS gas division designs, develops and
manufactures gas analyzers, which are sold to patient monitoring OEM customers.
The MCS gas division is a distinct and separate business unit and the sale is
anticipated to be complete within 2002. The Company is accounting for this in
accordance with EITF 87-11, Allocation of Purchase Price to Assets to be Sold,
which requires that the operations of the MCS gas division be excluded from the
consolidated operating results of the Company. The Company had initially
estimated that the net loss of the MCS gas business from the acquisition date
until disposition would be approximately $1,017,000 and had included this as a
liability assumed in the acquisition and included it in the purchase price
allocation. This estimated net loss has been subsequently revised in the quarter
ended June 30, 2002 to an estimated loss of $517,100. Accordingly, a net loss of
$267,100 has been excluded for the period from acquisition through June 30,
2002. No adjustment for gain or loss on the ultimate disposition has been made.
An adjustment to the purchase price allocation will be made upon final gain or
loss upon disposition. The following is a breakdown of the purchase price
adjustments made in the Artema acquisition (amounts in thousands):
Balances at Balance at
Original December 31, Cash Adjustments June 30,
Adjustment 2001 Payments to Goodwill 2002
---------- ------------ -------- ----------- ----------
Restructuring:
Building and other impairments $1,052.0 $1,052.0 $ -- $ -- $1,052.0
Inventory obsolescence 648.0 648.0 -- -- 648.0
Loss on closure Copenhagen facility 648.0 648.0 -- -- 648.0
Accounts receivable impairments 196.0 196.0 -- -- 196.0
Severance and other miscellaneous costs 520.0 520.0 (34.0) -- 486.0
-------- -------- ------- ------- --------
$3,064.0 $3,064.0 $ (34.0) $ -- $3,030.0
Estimated future losses from MCS gas
division 1,017.0 872.0 (122.1) (499.9) 250.0
-------- -------- ------- ------- --------
Total estimated plant closure costs and
losses $4,081.0 $3,936.0 $(156.1) $(499.9) $3,280.0
======== ======== ======= ======= ========
The following is a breakdown of the MCS gas business net assets and
liabilities held-for-sale at June 30, 2002 (amounts in thousands):
Accounts receivables, net $ 616.0
Inventories, net 441.0
Other assets 237.0
Property, plant and equipment 352.0
Identifiable intangible asset of MCS gas business 1,426.0
---------
Assets held-for-sale $ 3,072.0
=========
Accounts payable and accrued expenses $(1,743.0)
---------
Liabilities held-for-sale $(1,743.0)
=========
As a part of this acquisition, the Company has an available line of credit
with a Swedish bank that allows the Swedish and Danish subsidiaries to borrow up
to approximated $1 million each. As of June 30, 2002, $639,000 was drawn by the
Swedish subsidiary and is included in liabilities held-for-sale.
8. Senior Notes
On May 29, 2002, the Company entered into a Senior Note and Warrant
Purchase Agreement ("the Agreement") with investors, pursuant to which the
investors loaned the Company $50 million. The Senior Notes (the "Notes") are due
and payable in cash on May 30, 2007, unless accelerated pursuant to the terms of
the Agreement. The Notes accrue interest at 6.9% per annum. During the first
three years of the term of the Notes, accrued and unpaid interest on the Notes
will, at the option of the Company, a) be due and payable in cash, or b) accrue
and be paid in kind, in each case quarterly in arrears, and on the termination
date of the Notes. After the end of the third year of the term of the Notes, any
additional accrued and unpaid interest on the Notes will be due and payable in
cash quarterly in arrears, and on the termination date of the Notes. The Notes
have certain monthly and quarterly financial and non-financial covenants. As of
June 30, 2002, the Company is in compliance with all covenants.
The Notes are collateralized by all the assets of the Company and its
subsidiaries, to the extent permitted by law. Proceeds from the Notes were used
by the Company to repay $26,467,600 of senior promissory notes plus accrued
interest issued in connection with the acquisition of Survivalink Corporation.
The remaining proceeds will be used for working capital purposes.
In connection with the Notes, the investors were issued warrants (the
"Warrants") for the purchase of an aggregate of 10,000,000 shares of common
stock at an exercise price of $3.00 per share, and an aggregate of 3,000,000
shares of Common Stock at an exercise price of $4.00 per share. The Warrants are
immediately exercisable, expire May 30, 2009 and are subject to certain limited
antidilution adjustments. After two years, the Company has the right to force
the exercise of the warrants pursuant to the terms of the Agreement. The
proceeds of the Notes were allocated between the Notes and the Warrants based on
their relative fair values at the date of issuance which was determined by a
third party valuation. Such allocation resulted in a discount being recorded on
the Notes in the amount of $11,814,600, which will be amortized over the
five-year term of the Notes using the effective interest method. In addition,
the Company paid approximately $2,760,300 in debt issuance costs which will be
amortized over the five-year term of the Notes using the effective interest
method.
9. Settlement Agreement with Medtronic Physio-Control
In February 2002, the Company entered into a Settlement Agreement and
Mutual Release (the "Settlement Agreement") with Medtronic, Inc. ("Medtronic")
and Medtronic Physio-Control Corp. ("MPC"). The Settlement Agreement is a
compromise between the parties of certain private contractual obligations
described below, and did not arise as a result of any litigation, arbitration or
other formal dispute resolution procedure. The Company and MPC entered into a
distribution and licensing agreement ("DLA") in December 1998, which was
subsequently amended in May 2000. Under the terms of the DLA agreement, MPC
agreed to distribute the Company's Powerheart(R) defibrillator product, and the
Company agreed to grant MPC a license to incorporate the Company's
proprietary software into certain of MPC's defibrillator-monitoring products.
The Company and MPC also entered into an original equipment manufacturing and
license agreement ("OEM") in August 2000. Under the terms of the OEM agreement,
MPC agreed to license and supply its proprietary biphasic defibrillation
technology to the Company for use in the Company's automatic defibrillator
products.
The Company and MPC were not satisfied with each other's performance under
the DLA and OEM agreements, and have agreed to resolve these differences and
terminate the DLA and OEM agreements pursuant to the Settlement Agreement.
The terms of this Settlement Agreement provide that MPC return to the
Company, at no charge, approximately 220 Powerheart units, which MPC had
previously purchased and paid for, in substantially the same condition in which
the units were originally sold to MPC. Separately, the Company owed Medtronic
$1,132,400 pursuant to a senior promissory note issued by the Company to
Medtronic in the merger transaction between the Company and Survivalink. This
$1,132,400 was part of the $25.8 million of senior promissory notes issued in
the Survivalink merger. Pursuant to this Settlement Agreement, Medtronic agreed
to forgive and release payment of $832,400 of the amount owing under the
promissory note to Medtronic. This $832,400 gain is reflected in operating
income on the Company's Statement of Operations for the six months ended June
30, 2002.
10. Promissory Note and Security Agreement
In July 1999, the Company terminated its agreement to acquire HeartSine
Technologies, Inc. ("HeartSine") During 1999, the Company advanced cash to
HeartSine in the amount of $189,400. The Company obtained a promissory note and
security agreement with regard to these advances. The principal amount plus
interest at 10% was due and payable on December 31, 2001.
In prior periods, the Company wrote-off to research and development expense
this $189,400, as the Company believed that this asset was permanently impaired
and uncollectible. In February 2002, the Company received from HeartSine
$235,600 which represented full repayment of the original promissory note plus
accrued interest and late fees. The Company has included this recovery of
$235,600 as an offset to research and development expense in the statement of
operations for the six months ended June 30, 2002.
11. Goodwill and Other Intangibles
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
Nos. 141 and 142. SFAS No. 141, Business Combinations, is effective for all
business combinations for which the date of acquisition is after June 30, 2001,
and requires that the purchase method of accounting be used for all business
combinations, and establishes specific criteria for the recognition of
intangible assets separately from goodwill. SFAS No. 142, Goodwill and Other
Intangible Assets, requires that goodwill and indefinite long-lived intangible
assets will no longer be amortized, goodwill will be tested for impairment at
least annually at the reporting unit level, intangible assets deemed to have an
indefinite life will be tested for impairment at least annually, and the
amortization period of intangible assets with finite lives will no longer be
limited to forty years.
The Company adopted these statements effective January 1, 2002 and
determined that the identifiable intangibles assets of customer base, developed
technology, trade names and patents were appropriately valued and would continue
to be amortized. In adopting SFAS No. 142, the Company discontinued amortizing
goodwill associated with the acquisition of Cadent, which occurred in July 2000.
The net book value of the Cadent goodwill at January 1, 2002 was $5,435,000. The
acquisitions of Survivalink and Artema, which occurred on September 26, 2001 and
November 30, 2001, respectively, were accounted for using SFAS Nos. 141 and 142
at the time of acquisition and therefore no goodwill has been amortized. The
Company has determined that they have a single reporting unit for the purpose of
performing an annual impairment analysis of these assets. The Company had
amortization expense for identifiable intangibles of $1,058,500 and $167,900 for
the six months ended June 30, 2002 and 2001, respectively and amortization
expense for goodwill of $494,000 for the six months ended June 30, 2001.
12. Recent Accounting Pronouncement
In April 2002, the FASB issued SFAS No. 145 Rescission of FASB Statements
No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections. Among
other matters, SFAS No. 145 rescinds SFAS No. 4, Reporting Gains and Losses from
Extinguishment of Debt thereby eliminating the requirement that gains and losses
from the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. As a result, the
criteria in APB opinion No. 30, Reporting Results of Operations Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions will be used to classify those
gains and losses. SFAS No. 145 is effective for financial statements issued on
or about May 15, 2002. The effects of adopting this pronouncement have not been
material.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue 94-3 Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity.
(including Certain Costs Incurred in Restructuring). SFAS No. 146 is effective
for exit or disposal activities initiated after December 31, 2002. The
provisions of EITF 94-3 shall continue to apply for exit activities initiated
under an exit plan that met the criteria of EITF 94-3 prior to the initial
application of SFAS No. 146.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto set forth elsewhere herein.
General
Sudden cardiac arrest ("SCA") is the leading cause of death in the United
States and Europe. According to the Centers for Disease Control and Prevention
(the "CDC") approximately 450,000 people die annually in the U.S. from sudden
cardiac arrest. Of that number, approximately one-third die from SCA inside a
hospital. For every minute that passes from the onset of sudden cardiac arrest,
a person's survival rate decreases by 10% or more. Clinical studies have shown
that the average survival rate for individuals suffering SCA outside the
hospital is estimated at 5% and for patients suffering SCA in-hospital is about
15% - a rate that has not changed since the 1960's. The American Heart
Association and other major resuscitation councils around the world have
acknowledged that immediate defibrillation therapy is the single most important
factor in determining the survival rate of sudden cardiac arrest victims.
Our core technology platform consists of proprietary arrhythmia detection
and discrimination software ("RHYTHMx(R)"), which is combined with proprietary
biphasic defibrillation hardware and disposable defibrillation electrode
technology to create the only fully automatic in-hospital cardioverter
defibrillator, the "Powerheart(R) Cardiac Rhythm Module(TM)" (the "CRM(TM)") and
an automated public access defibrillator, (the "Powerheart(R) AED") for use in
out of hospital settings. The RHYTHMx technology allows our line of
defibrillators to:
. continuously monitor a patient's heart rhythms,
. instantly and accurately detect the onset of life-threatening
arrhythmias, and
. in the case of Powerheart CRM, automatically deliver a potentially
life saving defibrillation shock within seconds of the onset of SCA
and with no human intervention, or in the case of our Powerheart AED
product, advise the operator to deliver the therapy.
Our initial product, the Powerheart AECD(R), was introduced into the United
States in February 2000. This first generation product was replaced by our
second-generation device, the Powerheart CRM, which received market clearance
from the U.S. Food and Drug Administration ("FDA") in February 2002. We began
shipping the CRM in limited quantities in March 2002. The Powerheart CRM is
approximately 25% of the size of the original Powerheart and costs approximately
60% less to manufacture. Based on the safety and efficacy of the RHYTHMx
technology, the Powerheart CRM is the only hospital bedside monitor
defibrillator cleared by the FDA to be prophylactically attached to hospital
patients and provide automatic defibrillation without human intervention. The
Powerheart CRM is a compact, portable, fully-automatic defibrillator, which
utilizes a proprietary and patented biphasic defibrillation waveform and is
designed to provide complete cardiac rhythm management capabilities, including
fully automatic, semi-automatic and manual defibrillation therapy modes and
external pacing and function as a stand-alone defibrillator, or in conjunction
with existing third party patient monitoring systems. We believe that the
Powerheart CRM can create a new standard of care for hospitalized cardiac
patients and significantly increase the survival rate of patients suffering
sudden cardiac arrest.
In September 2001, we acquired Survivalink Corporation, a Minneapolis,
Minnesota based developer, manufacturer and marketer of automated public access
defibrillators ("AEDs") and related accessories and products. These devices are
portable, emergency defibrillators intended for use by minimally trained
rescuers in the treatment of SCA in a wide variety of settings. The
Survivalink(R) AED is distinct from the competition and features one-button
operation and pre-connected, interchangeable electrodes and RescueReady(R)
self-testing capabilities that ensure that the battery, circuitry and electrodes
are functioning properly.
In early 2002, we successfully integrated our RHYTHMx algorithm technology
into the Survivalink AED, and made other improvements in the device. Among other
things, the Powerheart AED is now capable of being attached to people exhibiting
symptoms of cardiac arrest and providing continuous monitoring of patients
post-resuscitation. In February 2002, we received FDA clearance to market and
began shipping the Powerheart AED.
While the Powerheart AED currently accounts for the overwhelming majority of our
AED sales, we plan to continue to manufacture and make available the original
Survivalink AED to customers.
In December 2001, we acquired approximately 95% of the outstanding shares
of Artema Medical AB, a Stockholm, Sweden based developer and manufacturer of
emergency defibrillators and patient monitoring equipment, which are sold via
distributors exclusively outside the U.S. In addition to broadening our product
line, the acquisition increased our international distribution channel.
We are currently developing the Personal Wearable Defibrillator(R), (the
"PWD"), a small wearable, fully automatic defibrillator designed to be worn by
patients at temporary risk of SCA for a period of days or weeks, who are
ambulatory within a hospital setting or home environment. We anticipate that the
development of the PWD will be completed late in 2003.
We own 68 issued patents and have 8 patent applications pending relating to
our core defibrillation and software technology, wearable defibrillation
technology, disposable defibrillation electrode pad technology and to the AED
technology originally developed by Survivalink. We believe strongly in the value
of our intellectual property and intend to continue to file additional patent
applications relating to our technology.
We are highly focused on increasing revenue and gaining additional market
share in the fast growing AED or public access defibrillation market in our
domestic U.S. market as well as other countries around the world. We estimate
that we currently hold approximately 22% of the worldwide market for AEDs, which
we estimate will be approximately $175 million in 2002 and growing at a rate of
30% per year. According to the market analysis published by Frost & Sullivan in
2000, it is estimated that the worldwide market for AEDs will expand to over
250,000 units a year by 2006, accounting for over $650 million in annual market
revenue. Currently, we estimate that over 85% of the revenue generation from the
worldwide AED market is attributable to the U.S. market with the balance coming
from the nascent, but emerging, international AED market.
Our multi-faceted growth strategy includes sales and marketing initiatives
designed to take advantage of fast growing segments such as the U.S. corporate
workplace market segment, municipal public access programs, schools, law
enforcement, fire departments and government and continued increases in our
direct and in-direct distribution channels, and by offering what we believe is
the easiest to use and most technologically sophisticated line of AEDs on the
market. We are currently marketing the Survivalink and Powerheart AEDs in the
U.S. through a direct sales force and over 30 independent distributors.
Since the acquisition of Survivalink in September 2001, we have tripled the
size of our direct sales force. At the end of June, there were 38 direct sales
and 5 sales managers in the U.S. and 8 employee sales managers supporting
international distributors in overseas markets. We intend to continue to
increase the number of dedicated sales representatives and expect to recruit,
hire and train approximately 20 additional representatives by the end of
September 2002. Internationally, we are selling our complete line of products,
including our AEDs, through independent medical device distributors on a
country-by-country basis with over 45 distributors selling the Company's
products in over 50 countries.
Our strategy for the hospital based Powerheart CRM is centered on building
an installed base of devices in order to maximize the potential recurring
revenue associated from the sale of our proprietary, single use, disposable
defibrillator electrode pads. The Powerheart CRM is designed to utilize these
defibrillator electrodes, which for sanitary, safety and performance reasons,
must be changed once every 24 hours. Our defibrillator electrodes feature
proprietary "smart chip" technology, designed to ensure that only our electrodes
will be used with the Powerheart CRM. In April 2001, we began direct marketing
activities to hospitals in the United States, and are currently marketing the
Powerheart CRM through a 6 person direct sales force, supported by 7 clinical
specialists. We offer the Powerheart CRM to hospitals on a traditional outright
purchase basis as well as on a "no-cap" program, which allows the customer to
adopt the technology without up-front capital expenditure. Under this model, we
market the Powerheart CRM to U.S. hospitals directly, and agree to place units
in a customer's facility, while retaining ownership of the unit, with no upfront
capital equipment charge, in exchange for an agreement to purchase a specific
number of our proprietary, disposable defibrillation electrodes monthly or
quarterly. We believe this model will increase the rate of our adoption of our
Powerheart CRM technology by addressing the capital budget constraints many U.S.
hospitals face and will ultimately result in higher levels of recurring revenue
from disposable electrodes.
Internationally, the Powerheart CRM is sold to end users via distributors.
We also intend to enter into strategic alliances or OEM relationships with third
party patient monitoring equipment manufacturers to increase the adoption rate
of our in-hospital technology.
Nihon Kohden Corporation
In January 2002, we entered into a strategic relationship with Nihon Kohden
Corporation ("NK") of Japan. NK is Japan's largest medical device manufacturer
and market share leader in emergency defibrillator and patient monitoring sales.
The distribution and OEM agreement calls for us to supply NK, on an OEM private
label basis, with our AED and Powerheart CRM. The agreement provides NK the
exclusive right to sell our Powerheart CRM in Japan and the NK-branded
monophasic and biphasic version AEDs in Japan and other worldwide markets. We
also sell its monophasic version Survivalink(R)-branded AEDs in Japan to a local
Japanese distributor. For the quarter ended June 30, 2002, sales of AEDs to NK
accounted for less than 2% of our total revenue.
Results of Operations
Three Months Ended June 30, 2002 Compared to the Three Months Ended June 30,
2001
Net sales for the quarter ended June 30, 2002 were $12.8 million, an
increase of $12.4 million as compared to $491,100 for the quarter ended June 30,
2001. The increase in sales in 2002 consisted primarily of approximately 4,150
AEDs and related accessories for $9.3 million resulting from the acquisition of
Survivalink and approximately $3.1 million in emergency defibrillators and
monitors resulting from the acquisition of Artema.
For the quarter ended June 30, 2002, approximately 63% or $8.1 million of
revenue was attributable to U.S. sales with 37%, or $4.8 million attributable to
sales to independent medical device distributors in international countries.
Worldwide sales of AEDs were $9.3 million or 73% of total second quarter
revenue. Sales of AEDs in the U.S. accounted for $7.9 million or 85% of total
AED sales. Of the U.S. AED sales, approximately 45% of sales were made to the
U.S. corporate workplace segment, approximately 23% to first responders such as
police and fire departments, approximately 20% to municipalities, schools,
colleges, and military and 9% to the medical segment including office-based
physicians, dentists and hospitals with the remaining balance of AEDs being sold
to a wide variety of other customer types.
Of the $4.8 million in international sales, 71% was attributable to sales
of emergency defibrillators, patient monitors and related spare parts and
accessories with the balance of approximately $1.4 million or 29% of
international sales attributable to sales of AEDs and related accessories. Of
the international AED sales, the United Kingdom and Japan accounted for
approximately 55% of the revenue.
Sales from Powerheart disposable electrodes increased $147,700 or 95% to
$303,000 for the quarter ended June 30, 2002 compared to $155,300 for the
comparable period in 2001. Sales of Powerheart CRMs were $84,600 in the quarter
ended June 30, 2002 compared to $285,900 for the comparable period in 2001. This
decrease was a result of the transition from our previous domestic distribution
model to our strategy of placing Powerheart CRM units in exchange for sales of
disposable electrodes. In the quarter ended June 30, 2002, a total of 176 CRMs
were shipped under the "no cap" model bringing the total number of Powerhearts
shipped under the "no cap" to approximately 500 units.
Cost of goods sold for the quarter ended June 30, 2002 were $6,666,800 as
compared to $402,400 for the quarter ended June 30, 2001. Gross margins as a
percent of total sales improved to 48.1% from 18.1% in the comparable period in
2001. Gross margins on sales of AEDs and related accessories were approximately
57% and gross margins on sales of emergency defibrillators and patient monitors
were approximately 21%. The improvement in overall gross margin was primarily a
result of a shift in the product mix to higher margin AEDs and accessories
compared to a product mix of lower margin first generation Powerheart devices
sold in 2001. Gross margin for the period was offset by sales of lower margin
emergency defibrillator and patient monitoring equipment.
Sales and marketing expenses were $3,852,000 which is 30% of net sales for
the quarter ended June 30, 2002. This compares to sales and marketing expenses
of $2,077,100 on revenue of $491,100 for the quarter ended June 30, 2001, an
increase of $1,774,900. The increase is a direct result of higher revenue in the
quarter.
Research and development expenses for the quarter ended June 30, 2002
decreased $834,200 or 34.0% to $1,617,300, which is 12.6% of net sales, as
compared to $2,451,500 for the quarter ended June 30, 2001. This decrease is
primarily a result of a reduction in product development and design costs of
$357,500 and a reduction in $205,700 in supplies and materials due to the
completion and launch of the Powerheart CRM in the first quarter of 2002, along
with $128,500 in personnel costs due to reduced headcount, and $50,600 in
clinical studies.
General and administrative expenses increased $1,391,800 or 82.7% to
$3,073,900, which is 23.9% of net sales, for the quarter ended June 30, 2002 as
compared to $1,682,100 for the quarter ended June 30, 2001. This increase was
primarily a result of an increase in legal expenses from patent related matters
of $403,900, salaries and benefits of $295,400 due to increased headcount as
compared the same period of last year, an increase in overall insurance premiums
of $146,100, higher depreciation expense of $117,800 and $358,300 of incremental
general and administrative costs.
Amortization of goodwill and other intangibles increased $225,600 or 68.1%
to $556,700 for the quarter ended June 30, 2002 from $331,100 for the quarter
ended June 30, 2001. The increase is primarily a result of amortization of
identifiable intangibles from the Survivalink and Artema acquisitions, which
were completed on September 26, and November 30, 2001, respectively, offset by
the termination of the goodwill amortization beginning January 1, 2002 related
to our acquisition of Cadent Medical due to the adoption of new accounting
rules.
Interest income decreased $862,200 to interest expense of $821,400 for the
quarter ended June 30, 2002 compared to interest income of $40,800 for the
quarter ended June 30, 2001. The decrease was a result of interest expense from
the senior promissory notes of $441,100 and non-cash interest expense of
$447,100 from the amortization of the debt discount and debt issuance costs
using the effective interest method, offset by interest income from cash on
hand.
In the three months ended June 30, 2001, the Company realized a loss on the
sale of marketable securities of $707,300 resulting from the sale of shares in
Spacelabs Medical, Inc., at prices below the original basis.
Six Months ended June 30, 2002 Compared to the Six Months Ended June 30, 2002
Net sales for the six months ended June 30, 2002 increased $20.0 million or
887.2% to $22.2 million as compared to $2.2 million for the six months ended
June 30, 2001. The increase in net sales was a result of approximately 7,200
AEDs and related accessories for $16.4 million from the acquisition of
Survivalink and $5.1 million of emergency defibrillators and monitors from the
acquisition of Artema. Sales of Powerheart disposable electrodes were $583,000
for the six months ended June 30, 2002, which represents an increase of 236%
from $173,500 in the comparable period in 2001. Sales of Powerheart CRMs and
related accessories for the six months ended June 30, 2002 were $95,600 compared
to Powerheart equipment sales of $1.3 million in the comparable period in 2001.
The increase in sales of Powerheart disposable electrodes and the decrease in
equipment sales was a result of the transition from our previous domestic
distribution model to our strategy of placing Powerheart CRM units in exchange
for sales of disposables.
Cost of goods sold for the six months ended June 30, 2002 were $11,576,700
as compared to $2,019,600 for the six months ended June 30, 2001. Gross margins
improved to 47.9% from 10.2% for the comparable period in 2001. The improvement
was primarily a result of the shift in product mix to the higher margin AEDs and
accessories.
Sales and marketing expense for the six months ended June 30, 2002 was
$7,465,800, which is 33.6% of net sales compared to $3,597,000 for the same six
months period in 2001. Sales and marketing expense increased $3,868,800 or
107.6% for the period. The increase is a direct result of higher revenue in the
six months period.
Research and development expenses for the six months ended June 30, 2002
decreased $1,431,500 or 31.1% to $3,170,200, which is 14.3% of net sales, as
compared to $4,601,700 for the comparable period in 2001. This decrease is
primarily a result of a reduction in product development and design costs of
$780,200 and $302,100 in supplies and materials due to the completion and launch
of the Powerheart CRM in the first quarter of 2002. In addition, we recorded the
recovery of a previously written off note receivable from Heartsine Technologies
in the amount of $235,600 in the six months ended June 30, 2002.
General and administrative expenses for the six months ended June 30, 2002
increased $2,309,600 or 71.8% to $5,527,800, which is 24.9% of net sales, as
compared to $3,218,200 for the comparable period in 2001. The increase is
primarily a result of an increase in legal expenses from patent related matters
of $464,100, higher costs related to salaries, benefits and travel expenses of
$727,800 due to an increase in headcount, an increase in overall insurance
premiums of $297,400, higher depreciation expense of $264,200 and $611,000 of
incremental general and administrative costs.
Amortization of goodwill and other intangibles increased $396,600 or 59.9%
to $1,058,500 for the six months ended June 30, 2002 from $661,900 for the
comparable period in 2001. The increase is primarily a result of amortization of
identifiable intangibles from the Survivalink and Artema acquisitions, which
were completed on September 26, and November 30, 2001, respectively offset by
the termination of the goodwill amortization beginning January 1, 2002 related
to our acquisition of Cadent Medical due to the adoption of new accounting
rules.
In the six months ended June 30, 2002, we entered into a settlement
agreement and mutual release with Medtronic Physio-Control (MPC). Pursuant to
this settlement agreement, MPC has agreed to forgive and release payment of
$832,400 of the amount owing under the senior promissory note to MPC. This gain
of $832,400 reflected in operating income on our Statement of Operations for the
six months ended June 30, 2002.
Interest income decreased $1,652,400 to interest expense of $1,480,500 for
the six months ended June 30, 2002 compared to interest income of $171,900 for
the comparable period in 2001. The decrease was a result of interest expense
from the senior promissory notes of $1,102,800 and non-cash interest expense of
$447,100 from the amortization of the debt discount and debt issuance costs
using the effective interest method, offset by interest income from cash on
hand.
As a part of the acquisition of Artema, we developed a plan to dispose of
certain acquired assets and restructure certain manufacturing and general
operations of the business. The formulation of the plan began prior to the close
of the transaction and was completed and finalized in December 2001. The plan
includes the closure of the manufacturing facility, transferring or
discontinuing the production of products and moving from certain office
locations. We initially recorded certain estimated purchase price adjustments in
connection with the plan totaling $3,064,000. Adjustments have been made to the
fair market value of owned buildings and other fixed assets, raw materials that
will not be converted to finished goods, contractual or incremental facility
costs and employee related severance costs related to involuntarily terminated
employees upon facility closure. We anticipate the plan will be executed and
completed in the third quarter 2002.
Liquidity and Capital Resources
At June 30, 2002, we had cash and cash equivalents of $24.0 million and
working capital of $28.8 million as compared to cash and cash equivalents of
$15.8 million and working capital of $12.4 million at December 31, 2001. At June
30, 2002 our current days sales outstanding on accounts receivable was 67.2
days. From inception, our sources of funding for operations were derived from
securities placements aggregating approximately $89 million. In 2001, we raised
approximately $38 million in a series of private equity placements and through
the exercise of outstanding options and warrants. In the six months ended June
30, 2002, we have raised $50 million from the sale of Senior Notes.
The Company anticipates that its current cash balance will be sufficient to
meet the Company's operating cash requirements through 2003. From inception
through June 30, 2002, the Company incurred losses of approximately $85.2
million. Recovery of the Company's assets is dependent upon future events, the
outcome of which is indeterminable. Additionally, transition to attain
profitable operations is dependent upon achieving a level of revenues adequate
to support the Company's cost structure. On May 29, 2002, the Company entered
into a Senior Note and Warrant Purchase Agreement with investors pursuant to
which the investors loaned $50 million to the Company. The Company in turn
repaid the $26,467,600 plus accrued interest in senior promissory notes relating
to the Survivalink acquisition. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern.
We do not engage in any off-balance sheet financing activities, nor do we
have any special purpose entities engaged in off-balance sheet financing
activities.
Income Taxes
As of December 31, 2001, the Company has research and experimentation
credit carry forwards for federal and state purposes of approximately $1.7
million and $1.1 million respectively. These credits begin to expire in 2006 for
federal and state purposes. The Company also has approximately $105.9 million
and $59.2 million of federal and state net operating loss carry forwards which
will begin to expire in 2006 and 2002, respectively. The utilization of net
operating loss and tax credit carry forwards may be limited under the provisions
of Internal Revenue Code Sections 382 and 1503 and similar state provisions.
A Warning About Forward-Looking Information and the Safe Harbor Under the
Securities Litigation Reform Act of 1995
This Quarterly Report on Form 10-Q and the other reports, releases, and
statements (both written and oral) issued by us and our officers from time to
time may contain statements concerning our future results, future performance,
intentions, objectives, plans, and expectations that are deemed to be
"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;
.. the competitive and regulatory environment;
.. planned integration of technologies with products; and
.. marketing strategies.
Such statements are made in reliance upon safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Our actual results,
performance, and achievements may differ significantly from those discussed or
implied in the forward-looking statements as a result of a number of known and
unknown risks and uncertainties including, without limitation, those discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the "Risk Factors" section of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2001, as amended. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate and Market Risk. Our exposure to market risk for changes in
interest rates relates primarily to our line of credit held by our Danish
manufacturing subsidiary. The interest rate on this line is variable and adverse
movements in interest rates may expose us to interest rate risk. We do not use
derivative financial instruments in our investment portfolio. We are averse to
principal loss and try to ensure the safety and preservation of our invested
funds by limiting default risk, market risk, and reinvestment risk. We attempt
to mitigate default risk by investing in only the safest and highest credit
quality securities. At June 30, 2002, we invested our available cash in money
market securities of high credit quality financial institutions.
Foreign Currency Exchange Rate Risk. Our international sales of
Artema-branded products, are made through our international distributors in
foreign currencies, and thus may be adversely affected by fluctuations in
currency exchange rates. Sales of U.S. based products are made through our
international distributors in U.S. dollars. Additionally, fluctuations in
currency exchange rates may adversely affect foreign demand for our products by
increasing the price of our products in the currency of the countries in which
the products are sold.
CARDIAC SCIENCE, INC.
PART II. OTHER INFORMATION
Item1. Legal Proceedings
On March 27, 2002 we filed a patent infringement suit against Zoll
Medical Corporation. Our suit alleges that Zoll's new automated
external defibrillator sold under the name "AED Plus," infringes our
United States Patent numbers 5,579,919 and 6,125,299, entitled
"Medical Electrode Packaging Technology," and "AED With Force Sensor,"
respectively. We are seeking an injunction prohibiting further
manufacture, use, sale, or offer for sale of the product and an
unspecified amount of damages.
Item2. Changes in Securities and Use of Proceeds
On May 30, 2002, the Company issued warrants for the purchase of
10,000,000 shares of Common Stock at an exercise price of $3.00 per
share, and warrants for the purchase of 3,000,000 shares of Common
Stock at an exercise price of $4.00 per share. The warrants were
issued to Perseus, LLC-related funds in connection with our
$50,000,000 Senior Note placement (see Note 8 to the Consolidated
Condensed Notes to Financial Statements). The warrants are immediately
exercisable, expire May 30, 2009, and are subject to certain limited
antidilution adjustments. After two years, the Company has the right
to force the exercise of the warrants. The warrants were issued in a
private placement and were exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933, as amended.
On June 13, 2002, the Company issued 78,333 shares of Common Stock to
Nihon Kohden Corporation of Japan for $235,000. The shares were issued
in a private placement and were exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933, as amended.
Item3. Defaults Upon Senior Securities
Not Applicable
Item4. Submission of Matters to a Vote of Security Holders
Not applicable
Item5. Other Information
Not Applicable
Item6. Exhibits and Reports on Form 8-K
a) Exhibits:
Exhibit 99.1 Certification of Periodic Report
Exhibit 99.2 Certification of Periodic Report
b) Reports on Form 8-K:
Form 8-K, filed on June 6, 2002 relating to the Senior Note and
Warrant Purchase Agreement with Perseus
Acquisition/Recapitalization Fund, L.L.C., Perseus Market
Opportunity Fund L.P. and Cardiac Science Co-Investment, L.P.
(collectively, the "Perseus Funds"), pursuant to which the
Perseus Funds loaned $50 million to the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
CARDIAC SCIENCE, INC.
Date: August 14, 2002 /s/ Roderick de Greef
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Roderick de Greef
(Authorized Officer and
Principal Financial Officer)