UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
FOR ANNUAL AND TRANSITION
REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31,
2009
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number:
000-51512
Cardiac Science
Corporation
(Exact Name of Registrant as
Specified in its Charter)
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Delaware
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94-3300396
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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3303 Monte Villa Parkway, Bothell, WA
(Address of Principal
Executive Offices)
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98021
(Zip Code)
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(425) 402-2000
(Registrants Telephone
Number, Including Area Code)
Securities Registered Pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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NASDAQ Global Market
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Securities Registered Pursuant to Section 12(g) of the
Act: None.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 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. þ Yes o No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). o Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See definition of
accelerated filer, large accelerated filer and
smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the voting and non-voting common
stock held by non-affiliates of the registrant, based on the
closing price of the registrants Common Stock on
June 30, 2009 as reported on the NASDAQ Global Market, was
approximately $81,565,474.
The number of shares of the registrants Common Stock
outstanding at March 8, 2010 was 23,621,445.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Report, to the
extent not set forth herein, is incorporated herein by reference
to the registrants definitive Proxy Statement relating to
the registrants 2010 annual meeting of shareholders. Such
definitive Proxy Statement or an amendment to this Report
providing the information required by Part III of this
Report shall be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year
to which this Report relates.
CARDIAC
SCIENCE CORPORATION
2009
FORM 10-K
ANNUAL REPORT
TABLE OF
CONTENTS
i
PART 1
This Annual Report on
Form 10-K
contains forward-looking statements relating to Cardiac Science
Corporation. Except for historical information, the following
discussion contains forward-looking statements for purposes of
the safe harbor provisions under the Private Securities
Litigation Reform Act of 1995. The words believe,
expect, intend,
anticipate, will, may,
variations of such words, and similar expressions identify
forward-looking statements, but their absence does not mean that
the statement is not forward-looking. These forward-looking
statements reflect managements current expectations and
involve risks and uncertainties. Our actual results could differ
materially from results that may be anticipated by such
forward-looking statements. The principal factors that could
cause or contribute to such differences include, but are not
limited to, those discussed under the heading Risk
Factors on Item 1A of this report and those discussed
elsewhere in this report. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date of this report. We undertake no obligation
to revise any forward-looking statements to reflect events or
circumstances that may subsequently arise. Readers are urged to
review and consider carefully the various disclosures made in
this report and in our other filings made with the SEC that
disclose and describe the risks and factors that may affect our
business, prospects and results of operations. The terms
the Company, us, we, and
our refer to Cardiac Science Corporation and its
majority-owned subsidiaries.
Overview
We develop, manufacture, and market a family of advanced
diagnostic and therapeutic cardiology devices and systems,
including automated external defibrillators (AEDs),
electrocardiograph devices (ECG/EKG), cardiac stress
testing treadmills and systems, Holter monitoring systems,
hospital defibrillators, cardiac rehabilitation telemetry
systems, vital signs monitors and cardiology data management
systems (Informatics) that connect with hospital
information (HIS), electronic medical record
(EMR), and other information systems. We sell a
variety of related products and consumables, and provide a
portfolio of training, maintenance, and support services. We are
the successor to the cardiac businesses that established the
trusted
Burdick®,
Quinton®
and
Powerheart®
brands and are headquartered in Bothell, Washington. With
customers in more than 100 countries worldwide, we have
operations in North America, Europe, and Asia.
We were incorporated in Delaware on February 24, 2005 as
CSQ Holding Company to effect the business combination of
Quinton Cardiology Systems, Inc. (Quinton) and
Cardiac Science, Inc. (CSI) pursuant to a merger
transaction. The merger was consummated on September 1,
2005 at which time the Companys name was changed to
Cardiac Science Corporation.
Industry
Background
The American Heart Association (AHA) reports that
there are more than 64 million patients in the
U.S. with active or developing heart disease.
Cardiovascular disease (CVD) is the leading cause of
death in the U.S. and statistics published by the AHA show
that one out of every three Americans has some form of CVD. In
2009, the AHA estimated that as many as 295,000 people in
the United States alone die each year from sudden cardiac arrest
(SCA). The AHA also estimates the direct cost of
treating CVD in the U.S. at more than $400 billion
annually. With risk factors such as obesity and sedentary
lifestyle on the rise, the prevalence of CVD is expected to
increase as well.
Our
Markets
We are a global leader in advanced cardiac diagnosis,
resuscitation, rehabilitation, and informatics products. We
characterize the systems used by healthcare providers to
diagnose, monitor, and manage heart disease as the cardiac
monitoring market. We characterize the devices used to
automatically or manually resuscitate victims of cardiac arrest
as the defibrillation market.
Based on industry reports and management estimates, we believe
that sales in the markets in which we compete will approach or
exceed $3 billion during the next several years. We believe
the worldwide market for
2
cardiac monitoring systems is at least $1 billion and is
growing at 2-3% annually, with portions of that market,
cardiology management systems and certain international markets,
growing at more than 5% annually. We believe the worldwide
market for AEDs currently exceeds $350 million and will
more than double over the next five years. We believe the
worldwide market for manual (or traditional) external
defibrillators is currently more than $700 million and is
growing at approximately 5% annually.
Cardiac
Monitoring Market
What is
Cardiac Monitoring?
Cardiac monitoring systems are crucial to cardiovascular care.
Clinicians use cardiac monitoring systems to assess the presence
and severity of cardiac disease and to evaluate the efficacy of
treatments such as drugs, interventions, operations, and device
implants. Effective delivery of cardiovascular care requires
that the entire process of recording, storing, analyzing,
retrieving, and distributing cardiology data be as rapid and
cost effective as possible.
How is
Cardiac Monitoring Performed?
The core of cardiac monitoring is the electrocardiogram, or ECG
waveform, a representation of the electrical activity of the
heart. Clinicians use ECG waveform recordings and analyses to
assess the presence and severity of cardiac disease and to
monitor the efficacy of treatments such as drugs, interventions,
operations, and device implants.
What are
the Challenges Related to Cardiac Monitoring?
Despite the technological and clinical advances in cardiology,
healthcare providers face significant challenges in delivering
consistent and high quality cardiovascular care. Healthcare
reform and declining reimbursement rates continue to place
increasing pressure on providers to treat more patients faster.
In addition, the need to control costs, increase efficiencies,
and manage data introduces new factors into the decision making
process for technology utilization.
These healthcare changes prompt a number of emerging critical
needs and create opportunities for Cardiac Science. These
include creating systems and services tailored to the clinician
workflow, developing products that are intuitive and easy to
use, using proven communication standards for connectivity,
improving the management of healthcare delivery resources, and
utilizing emerging technologies from multiple
vendors all within a security structure that meets
Health Insurance Portability and Accountability Act of 1996
(HIPAA) requirements.
Defibrillation
Market
What is
Defibrillation?
Defibrillation is the delivery of electrical current to the
heart to restore a normal heartbeat. Defibrillation systems
enable the detection and identification of life-threatening
arrhythmias which can lead to death from SCA and, when
appropriate, deliver a shock to restore the normal heartbeat.
Sophisticated algorithms within defibrillators filter noise and
artifact from a patients electrocardiogram signal to
enable correct identification of heart rhythms that are
life-threatening (i.e. shockable), or non-life-threatening (i.e.
not shockable).
How is
Defibrillation Performed?
A normal electrocardiogram consists of wave forms that are
referred to as P-QRS-T waves. The QRS wave complexes correspond
with a persons heart rate. In the case of the chaotic and
disorganized rhythm, which can lead to SCA, these QRS complexes
are absent or indistinguishable.
Analysis performed by a defibrillator determines the type of
arrhythmia, whether a shock is required, and the appropriate
type of shock (either synchronous or asynchronous). A shock will
be indicated if the heart rhythm is considered shockable, and
the condition persists. During the delivery of any
defibrillation shock, the cell
3
membranes of the heart are charged until the cells depolarize.
This allows normal electrical pathways to reestablish control
and produce a coordinated rhythm.
What Are
the Challenges Related to Defibrillation?
Technical challenges abound in delivering current to the heart
with external defibrillation. Impedance is one. Tissue such as
skin, fat, muscle, and bone, surround the heart and impede the
energy flow from a defibrillator. Impedance varies from person
to person, so adjustments must be made to accommodate each
persons impedance. Another technical challenge is
overcoming the victims defibrillation threshold, the
minimum current required to defibrillate the victims heart
and establish a normal rhythm. Finally, to provide effective
defibrillation, the cell membranes of the heart must be fully
depolarized to minimize the likelihood of re-fibrillation and
provide an optimal environment to defibrillate the heart. If any
residual charge remains on the cells (i.e., they do not fully
depolarize), re-fibrillation may occur.
Death from SCA occurs without warning or immediately after the
onset of symptoms. The AHA estimates that 50% of SCA victims
have no prior indication of heart disease, so the first symptom
is the SCA event. For those with a known history of cardiac
disease, the chance of sudden cardiac death is four to six times
greater than that of the general population.
Surviving SCA is linked directly to the amount of time between
the onset of SCA and defibrillation shock. Following SCA, the
AHA estimates that every minute without a defibrillation shock
decreases chance of survival by approximately 10%. Approximately
two thirds of the estimated annual deaths from SCA occur outside
a hospital in the United States. Almost 60% of these incidents
are witnessed, yet 95% of these victims do not survive,
according to the AHA.
In hospital and pre-hospital (e.g. ambulance) settings, trained
professionals typically deploy manual or semi-automatic
defibrillators to treat SCA victims. These standard
defibrillators require operation or supervision by highly
skilled medical personnel to analyze and interpret the
patients electrocardiogram and to manually deliver a shock
using handheld paddles.
Over the past several years, more people have become aware that
AEDs can be used safely by lay people. Communities that
strategically place AEDs in public buildings, arenas, airports,
and emergency vehicles reduce response times and, therefore,
improve survival rates for SCA. According to the AHA,
communities with public access defibrillation (PAD)
programs report community survival rates approaching 50%. In
highly trafficked or monitored venues such as casinos and
corporate workplaces, survival rates have ranged even higher
since the time for the first defibrillation shock can be
accelerated in these venues.
Numerous AED-related laws and regulations at the federal and
state level and in some countries outside the United States have
facilitated significant growth in both new and existing markets
for AEDs. During the last several years, these initiatives have
resulted in certain protections from civil liability arising
from emergency use of AEDs, funding programs for PAD program
implementation and the mandatory deployment of AEDs in some
settings. In addition, the AHA has publicly encouraged
widespread deployment of AEDs in workplaces, communities, and
homes.
Our
Products and Services
We address our markets through a broad range of cardiac
monitoring and defibrillation products and services. In recent
years, we introduced new versions of products or upgraded
capabilities in most of our product lines, and we are currently
developing additional new versions of products in many of these
product lines.
See Note 3 Segment Reporting, to our
Consolidated Financial Statements included elsewhere in this
report for a list of product lines contributing revenues of 10%
or more in each of the last three fiscal years.
Cardiac
Monitoring Products
Our cardiac monitoring products deliver reliable, cost-effective
solutions and improve workflow for healthcare providers
worldwide in multiple settings. Our cardiac monitoring products
are easy to use, with simple, intuitive
4
user interfaces. Many of our cardiac monitoring products are
built on a Microsoft Windows-based software architecture
designed to integrate critical data capture, provide enterprise
level access to data, and scale to meet the requirements of a
variety of cardiovascular care environments.
Our principal cardiac monitoring products include:
Resting
ECG systems
We offer a variety of ECG systems that allow physicians to
record and analyze patient ECG waveforms at rest to assess the
presence of cardiac disease. These products are designed to
improve workflow and are offered at various price points and
configurations, and cover the spectrum of market needs, ranging
from low-cost units targeting physicians offices to fully
featured units that are designed for the most rigorous clinical
and hospital settings.
Cardiac
stress testing systems
Our stress testing systems allow cardiologists and other
healthcare providers to monitor and analyze the performance of
the heart under stress. Our stress systems record a
patients heart rate, heart rhythm, blood pressure, and
other vital signs during induced stress. Our treadmills,
specifically designed for cardiac monitoring procedures, provide
precise and replicable levels of exertion. Our systems provide
real time analysis, charting, and reporting, all of which enable
cardiologists and other healthcare providers to diagnose
patients heart disease more accurately and efficiently.
Holter
monitoring systems
Our Holter products and systems record and assess the
performance of a patients heart during various activities
over extended periods of time. The Holter recorder, an
ambulatory monitor typically worn for 24 hours or more,
records the patients heart rate, heart rhythm, and ECG
waveform data. Our Holter offering includes systems with
multiple diagnostic capabilities.
Cardiac
rehabilitation telemetry systems
Our telemetry devices and database products monitor the
patients heart rate, heart rhythm, and ECG waveform data
during rehabilitation exercises. These rehabilitation devices
and database products, used with our treadmills, provide
real-time clinical data and trend analysis to enable
cardiologists and other healthcare providers to track and assess
improvements in cardiovascular function.
Vital
signs monitors
In October 2009, we introduced a line of vital signs and spot
check monitors under the Cardiac Science brand based on proven
technology from Omron Healthcare, Inc. The devices monitor
noninvasive blood pressure, pulse rate, temperature, and oxygen
saturation
(SpO2).
Cardiology
data management systems (informatics)
We provide cardiology data management systems that automate the
processing, storage, retrieval, and editing of
electrocardiograms and other patient data. Our open architecture
strategy provides customers with the flexibility to integrate
with an increasing number of devices and data management systems
while retaining their current equipment.
Related
products and supplies
Cardiac monitoring products often require lead wires and
electrodes to be attached to the patient to retrieve and process
patient ECGs, as well as thermal chart paper to generate
reports. We sell these items, including our Quik-Prep
electrodes, and provide an array of complementary products, such
as temperature and blood pressure monitors, spirometers and
pulse oximeters.
5
Services
We provide a comprehensive portfolio of training, maintenance,
and other services to medical and non-medical customers. Our
services organization provides installation, repair,
maintenance, and technical services, as well as hardware and
software upgrades to our installed base of products. We provide
call-center access 24 hours per day, seven days per week,
depot repair, and
on-site
maintenance and repair through our extensive field service
organization.
Advantages
of our cardiac monitoring products:
We believe our cardiac monitoring products provide our customers
with solutions for overcoming many of the challenges they face,
including the following key benefits:
Ease of use. Our user interfaces, designed
with significant input from clinicians and technologists, are
intuitive and easy to use. Many of our products automate the
data collection functions, use standard computer components, and
require minimal configuration. We generally design our
interfaces to conform to the particular clinical procedure
rather than adapting the procedure to the device, and users can
customize the interface to meet their unique requirements. We
believe this functionality enhances clinical success by allowing
the user to concentrate on the patient and procedure. In
addition, we believe the ease of use features of our products
enable our customers to use our systems with significantly lower
training requirements and higher productivity than competing
products that do not offer customizable user interfaces.
Effective data capture. Many of our products
automate and assist in the collection, interpretation, and
retrieval of data and can effectively display, for
side-by-side
comparison, the results of tests performed over an extended
period. These products improve clinical productivity and
throughput, which is the number of reimbursable procedures
completed per hour of system use. For our customers, greater
throughput translates into greater return on investment from our
products.
Improved diagnostic speed and accuracy. As a
result of easy to use controls, effective data capture, and
computer assisted diagnosis, we believe our products allow for
improved diagnostic accuracy. The availability of historical
results for comparison allows for a greater understanding of
changes in a patients physical condition. In addition, we
believe that by enabling the review and assessment of test
results remotely, our systems can greatly speed the time of
diagnosis.
Wireless and network compatibility. Arguably
the next most important feature after accuracy and
dependability, most of our monitoring products support a
clinical network environment. This enables cardiologists to
assimilate, collate, and interpret data and disseminate results
to facilitate diagnosis, patient monitoring and patient
management. These products collect data that may be stored in a
local or network server database. Most of our monitoring
products also connect to larger enterprise networks that allow
data to be shared with other users, both within the facility and
remotely via secure networks.
To facilitate these connections, we rely primarily on commonly
used formats and protocols. These formats, such as portable
document format (PDF) and extensible markup language
(XML) enable the storage and dissemination of
clinical information.
Flexible open technology for integration with EMR, HIS, and
other information systems. Our Microsoft
Windows-based technology adheres to established standards for
image, waveform, data and report generation, and dissemination,
enabling healthcare providers to share data across a private
network or via the Internet. This Windows-based technology
platform was designed to support data integration activities
with other third-party clinical systems. We believe this
technology will permit our customers to easily integrate our
products and systems with their existing infrastructure, and
scale to meet the needs of larger healthcare organizations.
Defibrillation
Products
We design our defibrillation products using advanced technology
in order to deliver superior performance, reliability,
flexibility, and ease of use. All of our defibrillation products
incorporate our proprietary RHYTHMx technology. This platform
technology is designed to detect ventricular fibrillation and
other life-threatening
6
arrhythmias. Our Self-Tracking Active Response
(STAR®)
biphasic technology is designed to optimize the delivery of a
potentially life-saving electric shock to victims of SCA.
We have integrated our core technology, along with other
proprietary technology, into our AEDs and hospital
defibrillation product lines. We also market our proprietary
disposable defibrillator electrode pads and a variety of
accessories, including long-life batteries, carrying cases, wall
cabinets, and other related items. In addition, we also license
certain components of our core technology to third-parties for
integration into other products. Our AEDs comply with the latest
CPR and defibrillation protocols established by the AHA and
related organizations in 2005.
Our principal defibrillation products include:
Public
Access AEDs
AEDs designed for public access are deployed in numerous
settings, including educational institutions, federal, state and
local municipal agencies, fire and police departments,
ambulances, railroads, airports, airlines, military bases,
hospitals, nursing homes, health clubs, physician and dental
offices, and leading corporations. Our AEDs have also been
chosen by many local governments and municipalities for use in
community based PAD programs in cities such as London, England,
San Diego, California, Miami, Florida, Minneapolis,
Minnesota, St. Louis, Missouri, and throughout the entire
state of Nevada.
Public access AEDs are available in both automatic and
semi-automatic models with varying levels of cardiopulmonary
resuscitation (CPR) voice prompts. Our advanced
voice prompts include detailed rescue code voice prompts and
metronome guidance for CPR compressions which are designed to
direct a minimally trained user through CPR and AED use to
potentially save a life.
Professional
AEDs
Our professional AEDs are technologically advanced and are
designed for use by sophisticated users of lifesaving equipment,
such as hospital personnel, medical professionals, and emergency
medical technicians. These products display the victims
heart rhythm on a built-in high resolution color ECG display and
give professional users the option of delivering defibrillation
shocks either semi-automatically or manually during the
emergency treatment of a victim of sudden cardiac arrest. These
products also include continuous cardiac monitoring capability
via an ECG patient cable, multiple rescue data storage, clear
and comprehensive voice prompts, infrared data transfer, and
optional rechargeable batteries.
Traditional
Defibrillators
Traditional defibrillators are typically positioned in the
hospital at locations such as critical care and cardiac care
units, emergency and operating rooms, electrophysiology labs,
medical transport environments and alternate care facilities.
Our Powerheart ECD, a traditional hospital crash
cart defibrillator. The product is designed for use in
hospital settings by skilled medical personnel and incorporates
our proprietary technology. The Powerheart ECD, which received
510(k) clearance in early 2006, is sold exclusively through GE
Healthcare, a division of General Electric (GE). GE
markets this product in North America and in the rest of the
world as the GE Responder 2000.
Defibrillation
Supplies and Accessories
We provide an extensive line of supplies and accessories to
support our customers defibrillation programs. These
include replacement electrodes and batteries, training devices,
wall cabinets, carrying cases, and more.
Services
We provide a full range of AED training, maintenance, and
support services. Our services include training in the use of
AEDs and related training in CPR. We deliver these AED/CPR
training services in the field through a U.S. field staff
of over 120 part-time employees. We also provide medical
direction and information management necessary for AED users to
be in compliance with various state laws and regulations.
7
Advantages
of our defibrillation products:
We believe that our defibrillation products offer the following
competitive advantages:
Dependability. Our patented Rescue
Ready®
technology distinguishes us among competitors. Every day, to
ensure anytime functionality, the Powerheart AED self checks all
main components (battery, hardware, software, and electrode
pads). Every week, the AED completes a partial charge of the
high-voltage electronics. And every month, the AED charges the
high-voltage electronics to full energy. If anything is amiss,
the Rescue Ready status indicator on the AED handle changes from
green to red and the device emits an audible alert for the owner
to service the unit. This is important because a Powerheart AED
may not be used for months or even years.
Arrhythmia Detection. Our patented RHYTHMx
software algorithm technology allows for the accurate detection
and discrimination of life-threatening ventricular
tachyarrhythmias and can also be used to treat patients with
supraventricular arrhythmias. RHYTHMx filters noise and artifact
from a patients electrocardiogram signal without
compromising sensitivity or specificity. RHYTHMx technology has
been clinically validated by leading researchers in numerous
clinical studies and received clearance from the U.S. Food
and Drug Administration (FDA) in 1998. In these
studies, RHYTHMx demonstrated 100% sensitivity (correct
identification of shockable rhythms) and 99.4% specificity (the
ability to identify and not shock non-lethal rhythms).
Variable Escalating Biphasic Defibrillation
Energy. Our patented STAR biphasic waveform
technology instantly determines a patients impedance,
defibrillation threshold, and cellular response characteristics
in order to optimize and adjust the magnitude of the
defibrillation shock based on a patients unique size and
weight. STAR biphasic also facilitates the escalation of energy
if subsequent shocks are necessary. We believe this feature
reduces the total number of shocks required to convert patients
to a normal rhythm. In addition to the use of STAR biphasic
waveform technology in our defibrillator devices, we also
license this technology to selected partners.
Ease of Use. Time is critical during cardiac
defibrillation. Our defibrillators are recognized as having
industrial designs and user interfaces that facilitate ease of
use. This uncompromising commitment to ease of use allows a wide
variety of users in a multitude of medical and public access
environments to successfully operate our devices. Our AEDs have
one button or no button operation and provide clear, concise
voice prompts that provide detailed instructions to guide the
user through the rescue process.
Flexibility. Our various defibrillators allow
for fully-automatic, semi-automatic, or manual delivery of
defibrillation therapy. Operators can easily customize their
device settings to suit their particular requirements. Our most
popular AED offers patented, fully-automatic delivery of shocks,
which differentiates it from competitive devices.
Rugged design. Durability and low cost of
ownership are key features of our defibrillators. Designed for
the most rugged applications our devices can withstand the
demands of daily use by hospitals as well as deployments in
military settings, fire trucks, police vehicles, and ambulances.
Growth
Strategy
Our growth strategy is to: (1) enhance
our cardiac monitoring product portfolio; (2) broaden our
AED portfolio to include products at multiple price points;
(3) bring new and simplified procedures to primary care
physicians; (4) deepen our distribution into international
markets; (5) leverage our services capabilities; and
(6) pursue strategic mergers or acquisitions.
Enhance
our monitoring portfolio
We believe our distribution capabilities into the US acute care
(hospitals and cardiology clinics) and, especially, primary care
(physician general practice and family health clinics) markets
represent a unique strategic asset. We believe that we can
successfully reach smaller hospitals, cardiology clinics and
approximately 200,000 primary care physicians through our
distribution channels and that we can successfully grow our
revenue by selling additional cardiology and related monitoring
products through these channels.
8
Broaden
our AED portfolio
We currently sell products that are positioned at the higher end
of the pricing spectrum in the public access AED market. We
believe we compete effectively in this segment of the market due
to superior features of our products compared to those of our
competitors. We believe that a significant component of the
future growth of the AED market will be at the lower end of the
pricing spectrum, as the number of state and local mandates
requiring that AEDs be available in certain venues such as
schools, assisted living centers and other facilities increases.
We believe that buyers who are acting in response to these
mandates are driven more by price than by product features.
Accordingly, we intend to develop and add lower priced AEDs to
complement our existing line in the future and expect that this
will lead to additional revenue growth.
Bring
new and simplified procedures to primary care
physicians
Using currently available technology and under established
billing codes, we intend to simplify and otherwise make
available to primary care physicians diagnostic procedures that
have more traditionally been performed by physician specialists.
We believe that we can help physicians improve effectiveness and
enhance medical care by performing diagnostic and monitoring
procedures earlier, before patients are referred downstream to
specialists. We believe that our research and development
capabilities, combined with our distribution, make us uniquely
well positioned to either develop these procedures ourselves or
to be sought out as a partner to others with compelling
technologies that can be so developed.
Deepen
our distribution into international markets
We believe that we can increase sales of both cardiac monitoring
and defibrillation products outside of the United States by
continuing to develop and improve our international distribution
network through increased direct presence and oversight in
countries in Western Europe, Asia and Latin America.
Leverage
our services capabilities
We believe our focused repair, call center, and field service
capabilities distinguish us from our competitors in cardiac
monitoring. In addition, we believe our extensive capabilities
to provide training, medical direction and information
management relating to the deployment and maintenance of AEDs
allows us to provide a unique, single source, turnkey solution
to our customers. These capabilities offer the potential for
additional revenue growth as part of new product selling
efforts, as well as independently with existing customers,
through billable training, maintenance and other activities.
Pursue
strategic mergers and acquisitions
Our growth strategy contemplates mergers and other acquisitions
of businesses, product lines, assets, or technologies that are
complementary to our business or offer us other strategic
benefits, such as enhanced clinical or technological value,
expanded geographical reach, and additional sales or research
and development capabilities. We plan to expand our product
lines, leverage the capabilities of our existing sales force and
increase sales of our existing and new product lines by
selectively acquiring those companies, or assets of companies,
with strong differentiated technologies or complementary product
lines. In addition to acquisitions of distinct product lines or
smaller companies, we may pursue growth through merger with
companies of more significant size. We believe the fragmentation
of many areas of the cardiology industry offers an excellent
opportunity for growth through selective acquisitions. We also
believe our product brands and distribution capabilities, as
well as the acquisition integration experience of our management
team; put us in a position to take advantage of these
opportunities.
9
Business
Advantages
We believe our business has several advantages, including:
Cardiology
focus
We concentrate principally on noninvasive cardiac care and
thoroughly know our categories. We believe this focus elevates
our product and service offerings and differentiates us in the
medical devices field. Our management and research and
development teams have significant experience in cardiology
products, which enables rapid innovation and commercialization
of products and services. Similarly, our sales and service
organizations also possess substantial domain knowledge.
Leading
brands and market positions
The Burdick, Quinton and Powerheart brands are highly respected
names in the field of cardiology and we believe we have a
leading position in several domestic and international market
segments in both cardiac monitoring and defibrillation.
In cardiac monitoring, we believe we have the number one market
share in US primary care markets for ECG, Holter and cardiac
stress testing products. We also believe we have the number one
worldwide market share for cardiac rehabilitation monitoring
products. We estimate that our installed base of cardiac
monitoring devices and systems exceeds 65,000 units
worldwide.
In AEDs, we believe we have the number two worldwide market
share. We have a substantial presence in U.S. schools,
corporate and government workplaces, as well as internationally
in the United Kingdom, France, Germany and Japan. We believe our
AED installed base exceeds 325,000 units worldwide.
Our installed base presents an excellent target market for
future sales of products, systems, software upgrades, and
related services and consumables.
Global
distribution and service network
We believe that our comprehensive global distribution network
focused on cardiology products and services distinguishes us
from our competitors.
We believe our U.S. cardiac monitoring distribution is
particularly strong, especially in primary care physician
offices. We have approximately 129 U.S. based sales and
support representatives that possess extensive experience and
expertise in advanced cardiology products. We believe that our
U.S. monitoring distribution is among the strongest in the
markets which we serve.
We believe we have the largest independent sales force selling
AEDs into the public access market in North America. Our sales
force, consisting of approximately 160 professionals, sells both
directly to end customers and through third party distributors
that extend our coverage of the market.
Our international distribution blends a direct presence in
countries such as China, Denmark, Germany, France and the United
Kingdom with an extensive distributor network that reaches
nearly 100 countries.
Commitment
to innovation
We invest a significant percentage of our revenues on research
and development efforts to release new versions of most of our
major product categories. We believe many of our products
represent the leading technology in many of the principal
markets we serve. We have also been recognized for our product
innovation by various industry organizations.
10
Our
Organization
Sales and
Marketing
We have structured our sales organization into four primary
channels: (1) our U.S. acute care sales force, which
sells cardiac monitoring products and services directly to
hospitals; (2) our U.S. primary care sales force,
which supports a network of independent distributors in selling
both cardiac monitoring and defibrillation products to primary
care physicians and cardiologists; (3) our North American
defibrillation sales force, which consists of an integrated
network of direct sales representatives and third party
distributors who work together to optimize our sales of AEDs in
this market; and (4) our international sales team, which
consists of direct presences in countries such as China,
Denmark, France, Germany and the United Kingdom, with a network
of distributors that provide sales and service relating to all
of our products in nearly 100 countries.
Our U.S. acute care sales team principally sells cardiac
monitoring products to hospitals. Each sales representative is
responsible for a region and a sales quota for that region. Our
sales efforts in the acute care market increasingly target
system sales opportunities. Our sales efforts have historically
promoted stand-alone product sales and were most successful in
small and midsize hospitals, and rehabilitation clinics.
Our U.S. primary care sales force principally sells cardiac
monitoring and defibrillation products outside of hospitals.
Each sales specialists within this channel is responsible for a
specific geographic territory and has a sales quota in
supporting our independent distributor network in making sales
to primary care physicians, cardiology offices, and all other
alternate care facilities in that territory. We provide our
distributors with discounts and promotional marketing support,
based on a variety of factors including the annual volume of
orders.
Our North American defibrillation sales force sells our
defibrillation products, primarily AEDs and training services to
corporate and government workplace markets, as well as through
school, military, and first responder (police/fire) markets. Our
sales representatives in this channel are responsible for
territories that are defined by a combination of geographic and
market segment characteristics. Each sales representative,
selling directly and working with distributors in their
territories, is responsible for a sales quota in that territory.
Internationally, we sell both our cardiac monitoring and
defibrillation products primarily through country specific
distributors, except in areas where we have direct sales
operations or where we have a strategic selling alliance, such
as Japan. Our international distribution network is managed by a
team of employees and agents living abroad.
In addition to these sales channels, we have distribution
arrangements with various partners such as GE, whereby we sell
our AEDs and in-hospital defibrillation products in the North
American hospital market and in all international markets.
We support all of our sales efforts with a variety of targeted
marketing activities, including direct mail, telemarketing,
publications, trade shows, training, and other promotional
activities.
We do not have significant sales backlog. At both
December 31, 2009 and 2008, our total sales backlog
represented less than 30 days of anticipated sales volume.
Customer
Service and Support
We believe that our comprehensive training and services
capabilities differentiate us from our competitors. Our
extensive capabilities to provide AED and CPR training, medical
direction, and information management relating to the deployment
and maintenance of AEDs allows us to provide a unique, single
source, turnkey AED solution to our customers. In addition, we
believe our focused, dedicated cardiology customer and field
service capabilities distinguish us from our competitors in
competing for advanced cardiac monitoring product sales.
Our large installed base facilitates the sale of service
contracts and post warranty support and presents a
cross-selling opportunity for products that are complementary to
our customers existing installations. In international
markets, our distributors provide support and other services.
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Research
and Development
We believe that strong product development capabilities are
essential to our strategy of enhancing, developing, and
incorporating improved functionality into our products and
maintaining the competitiveness of our products in our core
markets. We believe our team of experienced engineers is on the
leading edge of software and other technologies in our core
markets. Our research and development process is dependent on
assessment of customer needs, identification, and evaluation of
new technologies, and monitoring market acceptance and demand.
We have a structured process for undertaking product development
projects that involves functional groups at all levels within
our company. This process is designed to provide a framework for
defining and addressing the steps, tasks, and activities
required to bring product concepts and development projects to
market.
Our research and development expenses were $15.0 million in
2009, $16.4 million in 2008 and $13.0 million in 2007.
This represents approximately 8.1% of our revenues over that
three-year period. From 2007 to 2009, our research and
development efforts focused on enhancing and expanding the
proven capabilities of our existing product lines, introducing
new versions of our products and reducing costs relating to our
existing products. We use a blend of internal employees,
independent contractors and outsourced partners to optimize our
spending and the effectiveness of our development efforts.
Technology
Our engineering teams have specific expertise in ECG algorithms,
signal processing, artifact filtering, electrical systems,
software development, high voltage waveforms, and data
management. Software algorithms for analyzing the electrical
activity of the heart are the basis for both our cardiac
monitoring and our defibrillation product lines. Almost all of
our products include hardware components that connect to the
patient and digitize ECG waveform signals.
In our cardiac monitoring systems we generally use
object-oriented design based on Microsoft technologies to create
the software. We develop our systems user interfaces for
many of our products using Microsoft tools. Many of our systems
have been designed for network operation and many of our
software modules have also been developed as objects that can be
reused in our other products as needed. In addition, we have
designed many of our cardiac monitoring systems to meet emerging
industry standards, from reports rendered in PDF or XML format,
to the use of Health Level 7 (HL7) and Serial
Communication Protocol format for communications and ECG
waveform data.
All of our defibrillation products incorporate our proprietary
RHYTHMx technology. This platform technology is designed to
detect and discriminate life-threatening arrhythmias. Our STAR
biphasic technology is designed to optimize the delivery of a
potentially life-saving electric shock to victims of SCA. We
integrated our core technology, along with other proprietary
technology, into our AED and hospital defibrillation product
lines. We license certain components of our core technology to
third-parties for integration into other products.
Manufacturing
and Supply
Our manufacturing process consists primarily of assembly and
testing of AEDs, electrocardiograph devices, stress test
systems, Holter monitoring systems, cardiac rehabilitation
telemetry systems, medical treadmills, electrodes, and various
other products. During 2009, we performed these manufacturing
activities at our Deerfield, Wisconsin facility and, to a lesser
extent, at the facilities of our majority-owned joint venture
operation in Shanghai, China.
We also rely upon other third-party suppliers to provide us with
various materials used in the production and assembly of our
devices and systems. We have long-standing supply relationships
for essentially all of our outsourced product components. We
purchase a portion of our products from third parties on an
original equipment manufacturer (OEM) basis.
We maintain a comprehensive quality assurance and quality
control program that includes documentation of all material
specifications, operating procedures, equipment maintenance, and
quality control methods. Our quality systems are based on and
are in compliance with the requirements of the Quality
Management Standards for
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Medical Devices and Related Services (ISO 13485:2003) and the
applicable U.S. laws and regulations governing medical
device manufacturers.
Our
Competition
The following chart indicates who we believe are the most
significant competitors for each of our major product lines:
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Product
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Competitors
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AEDs
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Philips, Medtronic, Zoll Medical, Schiller, Welch Allyn
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Resting ECG systems
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General Electric, Philips, Midmark, Welch Allyn, Schiller
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Cardiac stress testing systems
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General Electric, Philips, Midmark, Welch Allyn, Schiller
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Holter monitoring systems
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SpaceLabs, General Electric, Philips, Midmark, Schiller
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Cardiac rehabilitation telemetry systems
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Life Sensing Instruments, Scott Care
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Cardiology data management systems
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General Electric, Philips
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Traditional (non-AED) defibrillators
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Zoll, Medtronic, Philips
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We believe that, depending on the products and situation, our
customers consider some or all of the following factors in
determining which products to purchase:
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quality, accuracy, and reliability;
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reputation of the provider;
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relative ease of use;
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depth and breadth of features;
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quality of customer support;
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capability to assist in deployment and training;
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frequency of updates;
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flexibility to integrate products with other devices and systems
from multiple vendors;
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availability of third-party reimbursement;
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conformity to standards of care; and
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price.
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We believe our products compete favorably on these factors. We
believe that our Rescue Ready, RHYTHMx, and STAR biphasic
technologies set our AEDs apart from the competition. We believe
our investment in connected data informatics and corresponding
new EMR system alliances will also benefit us. We believe our
service capabilities, comprehensive program management services,
warranties, service plans, and technical support distinguish us
and provide us with a competitive advantage over some of our
competitors. However, products and services offered by some of
our competitors offer features that may compete favorably on
these factors as well. Our markets are highly competitive and
competition may intensify. Some competitors enjoy advantages,
including greater resources that can be devoted to the
development, promotion, and sale of their products; more
established sales channels; deeper product development
experience;
and/or
greater name recognition.
Third-Party
Reimbursement
In the U.S., as well as in foreign countries, government-funded
or private insurance programs, commonly known as third-party
payers, pay a significant portion of the cost of a
patients medical expenses. A uniform policy of
reimbursement does not exist among all these payers. We believe
that reimbursement is an important factor in the success of many
medical devices.
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All U.S. and foreign third-party reimbursement programs,
whether government funded or commercially insured, are
developing increasingly sophisticated methods of controlling
healthcare costs through prospective reimbursement and
capitation programs, group purchasing, redesign of benefits,
second opinions required prior to major surgery, careful review
of bills, encouraging healthier lifestyles, and exploring more
cost-effective methods of delivering healthcare. These types of
programs can potentially limit the amount which healthcare
providers may be willing to pay for medical devices.
Government
Regulation of Medical Devices
Our products are medical devices subject to extensive regulation
by the FDA, as well as other global regulatory agencies. FDA
regulations govern, among other things, the following activities
we perform and will continue to perform in connection with
medical devices:
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product design and development;
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product testing;
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product manufacturing;
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product labeling and packaging;
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product handling, storage, and installation;
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pre-market clearance or approval;
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advertising and promotion;
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product sales, distribution, and servicing; and
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post-market surveillance.
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FDAs Pre-market Clearance and Approval
Requirements. Each medical device we seek to
commercially distribute in the U.S. must first receive
510(k) clearance or pre-market approval from the FDA, unless
specifically exempted by the agency. The FDA classifies all
medical devices into one of three classes. Devices deemed to
pose lower risk are categorized as either Class I or II,
which requires the manufacturer to submit to the FDA a 510(k)
pre-market notification requesting clearance of the device for
commercial distribution in the U.S. Some low risk devices
are exempted from this requirement. Devices deemed by the FDA to
pose the greatest risk, such as life sustaining, life-supporting
or implantable devices, or devices deemed not substantially
equivalent to a previously 510(k) cleared device are categorized
as Class III, requiring pre-market approval. In rare cases,
as with our AEDs, the devices are categorized as Class III
and still cleared under the 510(k) pre-market notification
process. Class III devices which can be marketed with a
pre-market notification 510(k) are those that are
post-amendment
(i.e., introduced to the U.S. market after May 28,
1976), Class III devices which are substantially equivalent
to
pre-amendment
(i.e., introduced to the U.S. market before May 28,
1976) Class III devices and for which the regulation
calling for the pre-market approval application has not been
published in 21 CFR.
510(k) Clearance Process. The 510(k) clearance
process is the process applicable to our current products. To
obtain 510(k) clearance, we must submit a pre-market
notification to the FDA demonstrating the proposed device to be
substantially equivalent to a previously cleared 510(k) device,
a device that was in commercial distribution before May 28,
1976 for which the FDA has not yet called for the submission of
pre-market approval applications, or is a device that has been
reclassified from Class III to either Class II or I.
In rare cases, as described in the prior paragraph,
Class III devices, including our AEDs, are cleared through
the 510(k) process. The FDAs 510(k) clearance process
usually takes at least three months from the date the
application is submitted and filed with the FDA, but may take
significantly longer.
After a device receives 510(k) clearance, any subsequent
modification of the device that could significantly affect its
safety or effectiveness, or that would constitute a major change
in its intended use, will require a new 510(k) clearance or
could require pre-market approval. The FDA requires each
manufacturer to make this determination initially, but the FDA
can review any such decision and can disagree with a
manufacturers determination. If the FDA disagrees with a
manufacturers determination, the FDA may require the
manufacturer
14
to cease marketing
and/or
recall the modified device until 510(k) clearance or pre-market
approval is obtained. We have modified aspects of some of our
devices since receiving regulatory clearance. Some of those
modifications we believe are not significant, and therefore, new
510(k) clearances or pre-market approvals are not required.
Other modifications we believe are significant and we have
obtained new 510(k) clearances from the FDA for these
modifications. In the future, we may make additional
modifications to our products after they have received FDA
clearance or approval, and in appropriate circumstances,
determine if new clearance or approval is unnecessary. However,
the FDA may disagree with our determination and if the FDA
requires us to seek 510(k) clearance or pre-market approval for
any modifications to a previously cleared product, we may be
required to cease marketing or recall the modified device until
we obtain the required clearance or approval. Under these
circumstances, we may also be subject to significant regulatory
fines or other penalties.
Pre-market Approval Process. A pre-market
approval application must be submitted if the medical device is
in Class III (although the FDA has the discretion to
continue to allow certain
pre-amendment
Class III devices to use the 510(k) process) or cannot be
cleared through the 510(k) process. A pre-market approval
application must be supported by, among other things, extensive
technical, preclinical, clinical trials, manufacturing and
labeling data to demonstrate to the FDAs satisfaction the
safety and effectiveness of the device.
After a pre-market approval application is submitted and filed,
the FDA begins an in-depth review of the submitted information,
which typically takes between one and three years, but may take
significantly longer. During this review period, the FDA may
request additional information or clarification of information
already provided. Also during the review period, an advisory
panel of experts from outside the FDA will usually be convened
to review and evaluate the application and provide
recommendations to the FDA as to the approvability of the
device. In addition, the FDA will conduct a pre-approval
inspection of the manufacturing facility to ensure compliance
with Quality System regulations. New pre-market approval
applications or pre-market approval application supplements are
required for significant modifications to the manufacturing
process, labeling of the product and design of a device that is
approved through the pre-market approval process. Pre-market
approval supplements often require submission of the same type
of information as a pre-market approval application, except that
the supplement is limited to information needed to support any
changes from the device covered by the original pre-market
approval application, and may not require as extensive clinical
data or the convening of an advisory panel.
As described previously, certain of our devices have been
classified as Class III
pre-amendment
devices. These devices include our AED product line. Although we
currently have 510(k) clearance for these devices, the FDA has
the discretion at any time to request pre-market approval
applications from us and all manufacturers of similar devices.
If the FDA calls for pre-market approval applications, we will
be required to submit and obtain approvals for such devices
within a specified period of time. If we fail to do so, we will
not be allowed to continue marketing these products.
Clinical or Market Trials. A clinical or
market trial is typically required to support a pre-market
approval application and is sometimes required for a 510(k)
pre-market notification. Clinical and market trials generally
require submission of an application for an Investigational
Device Exemption (IDE) to the FDA. The IDE
application must be supported by appropriate data, such as
animal and laboratory testing results, showing that it is safe
to test the device in humans and that the investigational
protocol is scientifically sound. The IDE application must be
approved in advance by the FDA for a specified number of
patients, unless the product is deemed a non-significant risk
device and eligible for more abbreviated investigational device
exemption requirements. Clinical and market trials for a
significant risk device may begin once the investigational
device exemption application is approved by the FDA as well as
the appropriate institutional review boards at the clinical or
market trial sites, and the informed consent of the patients
participating in the clinical trial is obtained.
Pervasive and Continuing FDA Regulation. After
a medical device is placed on the market, numerous FDA
regulatory requirements apply, including, but not limited to the
following:
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Quality System regulation, which requires manufacturers to
follow design, testing, control, documentation and other quality
assurance procedures during the manufacturing process;
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Establishment Registration, which requires establishments
involved in the production and distribution of medical devices,
intended for commercial distribution in the U.S., to register
with the FDA;
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Medical Device Listing, which requires manufacturers to list the
devices they have in commercial distribution with the FDA;
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Labeling regulations, which prohibit misbranded
devices from entering the market, as well as prohibit the
promotion of products for unapproved or off-label
uses and impose other restrictions on labeling; and
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Post-market surveillance including Medical Device Reporting
(MDR), which requires manufacturers report to the FDA if their
device may have caused or contributed to a death or serious
injury, or malfunctioned in a way that would likely cause or
contribute to a death or serious injury if it were to recur.
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Failure to comply with applicable regulatory requirements may
result in enforcement action by the FDA, which may include one
or more of the following sanctions:
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fines, injunctions, and civil penalties;
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mandatory recall or seizure of our products;
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administrative detention or banning of our products;
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operating restrictions, partial suspension or total shutdown of
production;
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refusing our request for 510(k) clearance or pre-market approval
of new product versions;
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revocation of 510(k) clearance or pre-market approvals
previously granted; and
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criminal penalties.
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In late June 2009, we voluntarily ceased shipments of certain of
our AED products due to two instances we became aware of
involving the failure of our AEDs to deliver therapy, apparently
as a consequence of a malfunction of one of the components used
in the manufacture of the affected AED. On August 10, 2009,
we resumed production and shipments of the affected AED products
after implementing a more stringent process to test for defects
in the component at issue. As a result of a thorough review and
analysis performed during the third quarter of 2009, we
determined that the component at issue has the potential to fail
and that routine self-tests performed by the AED may not detect
a malfunctioning component. We also determined that
approximately 300,000 AEDs shipped between June 2003 and June
2009 are potentially impacted by the component issue. Although
we determined that the probability that an AED would fail to
deliver therapy as a result of a malfunction of the component
issue was low, we decided to implement a field corrective action
to enhance the reliability of the affected AED units in the
field. We publicly announced our proposed corrective action to
address this component issue in November 2009.
In February 2010, we received a warning letter from the FDA
noting, among other things, that the proposed field corrective
action is inadequate since it is intended to improve the
products ability to detect the potential component
problem, but is not designed to prevent component failure. The
FDA letter also asserts other inadequacies, including our
procedures relating to the evaluation, investigation and follow
up of complaints, procedures to verify the effectiveness of
corrective and preventative actions and procedures relating to
certain design requirements. We are in ongoing discussions with
the FDA regarding these issues. If we are unable to correct the
inadequacies asserted in the FDAs letter or otherwise
satisfy the FDAs concerns, we may be subject to regulatory
action by the FDA, including seizure, injunction
and/or civil
monetary penalties. Any such actions could significantly disrupt
our ongoing business and operations and have a material adverse
impact on our financial position and results of operations. See
Note 2 Corrective Action Liabilities to the
Consolidated Financial Statements in Item 8 of this report
for further discussion on this matter.
International Regulation. Sales of medical
devices outside the United States are subject to foreign
government regulations, which vary substantially from country to
country. The time required to obtain approval by a foreign
country may be longer or shorter than that required for FDA
approval, and the requirements may differ significantly.
European Union. The European Union has adopted
legislation, in the form of directives to be implemented in each
member state, concerning the regulation of medical devices
within the European Union. The directives include, among others,
the Medical Device Directive that establishes standards for
regulating the design, manufacture, clinical trials, labeling,
and vigilance reporting for medical devices. Under the European
Union Medical
16
Device Directive, medical devices are classified into four
Classes, I, IIa, IIb, and III, with Class I
being the lowest risk and Class III being the highest risk.
Under the Medical Device Directive, a competent authority is
nominated by the government of each member state to monitor and
ensure compliance with the Directive. The competent authority of
each member state then designates a notified body to oversee the
conformity assessment procedures set forth in the Directive,
whereby manufacturers demonstrate that their devices comply with
the requirements of the Directive and are entitled to bear the
CE mark. CE is an abbreviation for Conformité
Européene (or European Conformity) and the CE mark, when
placed on a product, indicates compliance with the requirements
of the applicable directive. Medical devices properly bearing
the CE mark may be commercially distributed throughout the
European Union. We have received CE certification from the
British Standards Institute for conformity with the European
Union Medical Device Directive allowing us to place the CE mark
on our product lines. This quality system has been developed by
the International Organization for Standardization to ensure
companies are aware of the standards of quality to which their
products will be held worldwide. Additional pre-market approvals
in individual European Union countries are sometimes required
prior to marketing of a product. Failure to maintain the CE mark
would preclude us from selling our products in the European
Union, as could failure to comply with the specific requirements
of member states.
Canada. Under the Canadian Medical Devices
Regulations, all medical devices are classified into four
classes, Class I being the lowest risk class and
Class IV being the highest risk. Class I devices
include among others, devices that make only non-invasive
contact with the patient. Classes II, III and IV
include devices of increasingly higher risk as determined by
such factors as degree of invasiveness and the potential
consequences to the patient if the device fails or malfunctions.
Our current products sold in Canada generally fall into
Classes II and III. All Class II, III and IV
medical devices must have a valid Medical Device License issued
by the Therapeutic Products Directorate of Health Canada before
they may be sold in Canada (Class I devices do not require
such a license). We have obtained applicable Medical Device
Licenses for many of our products. Failure to maintain required
Medical Device Licenses in Canada or to meet other requirements
of the Canadian Medical Devices Regulations (such as quality
system standards and labeling requirements) for our products
will preclude us from selling our products in Canada. We may not
be successful in continuing to meet the medical device licensing
requirements necessary for distribution of our products in
Canada.
Other Countries. Many other countries have
specific requirements for classification, registration, and
post-marketing surveillance that are independent of the
countries already listed. We obtain what we believe is the
appropriate clearances and conduct business in accordance with
the applicable laws of each country. This landscape is
constantly changing, and, we could be found in violation if we
interpret the laws incorrectly or fail to keep pace with
changes. In the event of either of these occurrences, we could
be instructed to recall products, cease distribution,
and/or be
subject to civil or criminal penalties.
Intellectual
Property
We believe that our intellectual property assets, including
trademarks, patents, trade secrets and proprietary technology,
are extremely valuable and constitute a cornerstone of our
business. As of December 31, 2009, we held 142
U.S. and foreign patents, which expire at various times
between 2010 and 2026. We also have 37 patent applications
pending before U.S. and foreign governmental bodies. We
believe our patents and proprietary technology provide us with a
competitive advantage over our competitors. We intend to
continue to aggressively defend our inventions and also look for
opportunities to license our technology to generate royalty
income.
Our wide range of patents and patent applications cover much of
the technology found in our defibrillation products, including
our Rescue Ready technology, which features one button
operation, pre-connected disposable therapy electrode pads, and
self-test capabilities. Other patents relating to our
defibrillation products include our proprietary RHYTHMx
arrhythmia detection software technology, our STAR biphasic
defibrillation waveform technology, and our disposable therapy
electrode pads. Our patents protect many features of our cardiac
monitoring products, including filters for ECG signals,
monitoring electrodes and methods of interfacing the monitoring
electrodes to a patient, and devices and methods for obtaining,
analyzing, and presenting certain physiological data. We also
have perpetual rights to certain patented technology relating to
our medical treadmills. In addition, we have registered or
applied to register certain trademarks with domestic and certain
foreign trademark authorities.
17
Our business also depends, in part, on licenses to use third
parties software in our product offerings. We believe the
agreements we have in place with third parties generally
provides for such software at fair market value and that, if any
such agreements expire or terminate, we would be able to obtain
alternative software at comparable prices.
Customers
In the U.S. and abroad, we sell many of our products
through distributors and other third party organizations. One of
these distributors is located in Japan, Nihon Kohden Corporation
(Nihon Kohden), and accounted for approximately 7%,
19% and 11% of the Companys revenues in 2009, 2008 and
2007, respectively. On June 15, 2009, we notified Nihon
Kohden, our distributor of AEDs in Japan, that our OEM Supply
and Purchase Agreement dated effective as of January 1,
2008 will terminate June 15, 2010.
Employees
As of December 31, 2009, we had 556 full time employees
plus 61 contract employees. This combined total of 617 full time
positions includes 71 in research and development, 225 in sales
and marketing, 99 in technical and support services, 110 in
manufacturing and supplies operations, 26 in regulatory affairs
and 86 in finance and administration. These employee totals
include 26 employees in our majority owned Cardiac Science
Shanghai joint venture. In addition, we had approximately
121 part-time employees, most of whom provide training to
our customers on an as-needed basis. None of our employees are
represented by a labor union, except in China, where
substantially all employees are represented by a labor union. We
have not experienced any work stoppages and consider our
relations with our employees to be good.
Foreign
Operations
Sales to customers located outside the United States were
approximately $51.0 million, $81.0 million and
$46.5 million for the years ended December 31, 2009,
2008 and 2007, respectively. Additional financial information is
provided in Item 8, Note 3 to the Consolidated
Financial Statements, Segment Reporting. Also, for a
discussion of risks associated with our foreign operations see
Item 1A Risk Factors Our international
business is subject to risk that could adversely affect our
profitability and operating results.
Available
Information
We maintain an Internet site at
http://www.cardiacscience.com.
We make available free of charge on or through our Internet
site, our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such
material with, or furnish it to, the SEC. We will voluntarily
provide electronic or paper copies of our filings free of charge
upon request. Our web site and the information contained therein
or connected thereto are not incorporated by reference into this
report. These reports may also be obtained at the SECs
public reference room at 100 F Street, NE Washington,
DC 20549. The SEC also maintains a web site at www.sec.gov that
contains reports, proxy statements and other information
regarding SEC registrants, including the Company.
We are
subject to many laws and governmental regulations and any
adverse regulatory action may materially adversely affect our
business operations and financial results.
Our medical devices are subject to regulation by numerous
government agencies, including the FDA and comparable foreign
agencies. To varying degrees, each of these agencies requires us
to comply with laws and regulations governing the development,
testing, manufacturing, labeling, marketing and distribution of
our medical
18
devices. We cannot guarantee that we will be able to obtain
marketing clearance from the FDA for our new products, or
enhancements or modifications to existing products, and if we
do, such approval may:
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take a significant amount of time;
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require the expenditure of substantial resources;
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involve stringent clinical and pre-clinical testing;
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involve modifications, repairs or replacements of our
products; and
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result in limitations on the proposed uses of our products.
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Both before and after a product is commercially released, we
have ongoing responsibilities under FDA regulations. If the FDA
were to conclude that we are not in compliance with applicable
laws or regulations, or that any of our medical devices are
ineffective or pose an unreasonable health risk, the FDA could
ban such medical devices, detain or seize adulterated or
misbranded medical devices, order a recall, repair, replacement,
or refund of such devices and require us to notify health
professionals and others that the devices present unreasonable
risks of substantial harm to the public health. The FDA may also
impose operating restrictions, enjoin and restrain certain
violations of applicable law pertaining to medical devices and
assess civil or criminal penalties against our officers,
employees, or us. The FDA may also recommend prosecution to the
Department of Justice. Any adverse regulatory action, depending
on its magnitude, may restrict us from effectively marketing and
selling our products.
Foreign governmental regulations have become increasingly
stringent, and we may become subject to more rigorous regulation
by foreign governmental authorities in the future. Penalties for
a companys noncompliance with foreign governmental
regulation could be severe, including revocation or suspension
of a companys business license and criminal sanctions. Any
domestic or foreign governmental law or regulation imposed in
the future may have a material adverse effect on us.
We
face numerous challenges in implementing a field initiative to
address the component issue that led to our AED ship-hold in
late June 2009 and our business, financial position and results
of operations may be negatively impacted by the costs and other
commitments needed to carry out the initiative.
In late June 2009, we voluntarily ceased shipments of certain of
our AED products due to two instances we became aware of
involving the failure of our AEDs to deliver therapy, apparently
as a consequence of a malfunction of one of the components used
in the manufacture of the affected AED. On August 10, 2009,
we resumed production and shipments of the affected AED products
after implementing a more stringent process to test for defects
in the component at issue. As a result of a thorough review and
analysis performed during the third quarter of 2009, we
determined that the component at issue has the potential to fail
and that routine self-tests performed by the AED may not detect
a malfunctioning component. We also determined that
approximately 300,000 AEDs shipped between June 2003 and June
2009 are potentially impacted by the component issue. Although
we determined that the probability that an AED would fail to
deliver therapy as a result of a malfunction of the component
issue was low, we decided to implement a field corrective action
to enhance the reliability of the affected AED units in the
field. We publicly announced our proposed corrective action to
address this component issue in November 2009.
Our proposed voluntary corrective action is subject to numerous
risks and uncertainties, including the following:
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since we have no experience designing and carrying out a field
initiative or other corrective action plan of the magnitude
under contemplation, we are likely to encounter challenges that
could cause a delay in the implementation of the field
initiative or negatively impact its effectiveness;
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the actual costs to implement the proposed field initiative
could exceed the $18.5 million estimate taken as a charge
in the third quarter of 2009 due to a variety of factors,
including the number of impacted devices, the customer and
geographical segments related to the impacted devices, the
logistical processes we employ to carry out any field upgrades
involved in the initiative, the customer response rate in
implementing any field upgrades involved in the process and the
level of required follow up with customers, the extent to which
we may rely on third parties to carry out the field initiative
and associated costs, and the length of time and other
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resources required to complete the field initiative, among
others, see Note 2 Corrective Action
Liabilities to the Consolidated Financial Statements in
Item 8 of this report for further discussion on this matter;
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implementation of the proposed field initiative, as well as
attendant publicity, may create a negative perception of our AED
products in the market, leading to a decline in sales that could
materially adversely impact our financial position and results
of operations;
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we will need to devote technical, management, logistics and
other resources to the implementation of the proposed field
initiative, which could detract from our ability to operate our
core business and hinder our ability to carry out initiatives
relating to new products or product enhancements;
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despite implementation of the field initiative, some devices may
still fail at a time when they are being used to deliver
therapy, which could lead to product liability claims against us
that, if successful, could adversely impact our financial
position and results of operations or negatively impact the
markets perception of our products;
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the plan will require the expenditure of significant amounts of
cash which, in combination with expected operating losses in
2010, may negatively impact our liquidity or at least constrain
our ability to pursue strategic initiatives such as
acquisitions, new product development, or other growth
initiatives; and
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Moreover, in February 2010, we received a warning letter from
the FDA noting, among other things, that the proposed field
corrective action is inadequate since it is intended to improve
the products ability to detect the potential component
problem, but is not designed to prevent component failure. The
FDA letter also asserts other inadequacies, including our
procedures relating to the evaluation, investigation and follow
up of complaints, procedures to verify the effectiveness of
corrective and preventative actions and procedures relating to
certain design requirements. We are in ongoing discussions with
the FDA regarding these issues. If we are unable to correct the
inadequacies asserted in the FDAs letter or otherwise
satisfy the FDAs concerns, we may be subject to regulatory
action by the FDA, including seizure, injunction
and/or civil
monetary penalties. Any such actions could significantly disrupt
our ongoing business and operations and have a material adverse
effect on our financial position and operating results.
We
face numerous challenges in implementing a recall announced on
February 3, 2010, and our business, financial position and
results of operations may be negatively impacted by the costs
and other commitments needed to carry out the recall and correct
the product issue.
On February 3, 2010, we announced a worldwide voluntary
recall after determining that approximately 12,200 automated
external defibrillators (AEDs) manufactured or serviced between
October 19, 2009 and January 15, 2010 may not be
able to deliver therapy during a resuscitation attempt, which
may lead to serious adverse events or death. These AEDs were
manufactured in a way that makes them potentially susceptible to
failure under certain conditions. In connection with the
corrective action, we intend to replace all affected AEDs at no
charge to the customer. We recorded a charge of
$2.5 million in the fourth quarter of 2009, reflecting our
current estimate of the expected costs relating to this action.
Actual costs may vary based on a variety of factors. Cash
expenditures relating to replacement of the affected AEDs will
occur primarily in the first half of 2010. See
Note 2 Corrective Action Liabilities to the
Consolidated Financial Statements in Item 8 of this report
for further discussion on this matter.
This recall, and the estimated costs, are subject to numerous
risks and uncertainties, including the following:
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we may encounter challenges that could cause a delay in the
implementation of the recall or manufacture of replacement units;
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the actual costs to implement the recall may exceed the
$2.5 million charge taken in the fourth quarter of 2009 due
to a variety of factors, including the number of impacted
devices, the customer and geographical segments related to the
impacted devices, the logistical processes we employ to carry
out the recall, the customer response rate and customer
cooperation and the level of required follow up with customers,
the extent to which we may rely on third parties to assist and
associated costs, and the length of time and other resources
required to complete the field initiative, among others;
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implementation of the recall, as well as attendant publicity,
may create a negative perception of our AED products in the
market, leading to a decline in sales that could materially
adversely impact our financial position and results of
operations;
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we will need to devote technical, management, logistics and
other resources to the implementation of the recall, which could
detract from our ability to operate our core business and hinder
our ability to carry out initiatives relating to new products or
product enhancements;
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despite implementation of the recall, some devices may still
fail at a time when they are being used to deliver therapy,
which could lead to product liability claims against us that, if
successful, could adversely impact our financial position and
results of operations or negatively impact the markets
perception of our products;
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the recall will require the expenditure of significant amounts
of cash which, in combination with expected operating losses in
2010, may negatively impact our liquidity or at least constrain
our ability to pursue strategic initiatives such as
acquisitions, new product development, or other growth
initiatives; and
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the FDA may require us to implement a more costly corrective
action plan or recall, or require us to stop shipments of our
AEDs for a period of time, if it does not concur with our
proposed corrective action plan, including changes to our
manufacturing process, in which case our business could be
subject to severe disruption and the cost involved could have a
material adverse effect on our liquidity.
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Our
cash and cash equivalents may not be sufficient to fund future
operations and we may not be able to secure additional sources
of financing or obtain financing on acceptable
terms.
Our cash and cash equivalents as of December 31, 2009,
totaled $26.9 million. We expect to incur operating losses
in 2010 and to use cash in operations. Additionally, we have
recently initiated two voluntary corrective actions relating to
our AED products, the costs of which have been estimated at
$21.0 million, of which $15.2 million remains as an
accrued liability as of December 31, 2009. We expect to
spend substantially all of the remained accrued costs associated
with these corrective actions during 2010 which will negatively
impact our cash position. We believe our existing cash and cash
equivalents will be sufficient to fund our anticipated operating
losses, meet working capital requirements and fund anticipated
capital expenditures needs and other obligations, including the
remaining estimated costs of the ongoing corrective actions,
through at least December 31, 2010.
However, we cannot be certain our cash and cash equivalents will
be sufficient to meet our operating needs in 2010 as we may be
affected by economic, financial, competitive, legislative,
regulatory, business and other factors beyond our control.
Accordingly, we may be required to reduce costs, which could
adversely impact our forecasts for revenue growth in future
periods which in turn could also adversely impact our forecasts
for cash and cash equivalents throughout the year. Additionally,
we may be forced to borrow or obtain additional sources of
financing in order to sustain our operations. Our current line
of credit agreement with Silicon Valley Bank will expire in
March 2010. There can be no assurance that we will be successful
in securing a renewed line of credit with Silicon Valley Bank
and, if not, we may be required to seek alternative sources of
financing that may be more expensive and have more restrictive
covenants and conditions. As such, we may not be able to obtain
any additional financing, or may not be able to obtain
additional financing on acceptable terms.
We may
be required to implement other costly product recalls or
corrective actions.
In the event that any of our products prove to be defective or
deficient, we can voluntarily recall or otherwise take
corrective action, or the FDA could require us to redesign or
implement a recall of or take other action regarding, any of our
products. Should we be required or choose to implement any
additional recalls or corrective actions in future periods, we
could incur substantial costs as well as face significant
adverse publicity or regulatory consequences, which could harm
our business, including our ability to market our products in
the future. The financial impact of a recall could have a
material adverse effect on our business, financial position and
results of operations.
21
Quality
problems with our processes, goods and services could harm our
reputation for producing high quality products and erode our
competitive advantage.
Quality is extremely important to us and our customers due to
the serious and costly consequences of product failure. Our
quality certifications are critical to the marketing success of
our goods and services. If we fail to meet these standards our
reputation could be damaged, we could lose customers and our
revenue could decline. Aside from specific customer standards,
our success depends generally on our ability to manufacture to
exact tolerances, precision engineered components, subassemblies
and finished devices from multiple materials. If our components
fail to meet these standards or fail to adapt to evolving
standards, our reputation as a manufacturer of high quality
components will be harmed, our competitive advantage could be
damaged, and we could lose customers and market share. For
example, the component issues that led to the field corrective
action we announced in November, 2009 and the recall we
announced in February, 2010 may lead to reduced demand for
our AED products.
Warranty
and product liability claims could adversely impact our earnings
and reputation.
The manufacturing, marketing and sale of medical devices expose
us to the risk of warranty claims, product liability claims or
product recalls. We are, from time to time, subject to warranty
claims with regard to product performance, which expose us to
unexpected repair and replacement costs. In addition, component
failures, manufacturing flaws, design defects or inadequate
disclosure of product-related risks or product-related
information with respect to products we manufacture or sell
could result in an unsafe condition or injury to, or death of, a
patient. The occurrence of such a problem could result in
product liability claims, product recalls or a safety alert
relating to one or more of our products. Although we maintain
product liability insurance, the coverage may not be adequate or
may not be available at affordable rates. Warranty claims,
product liability claims or product recalls in the future,
regardless of their ultimate outcome, could have a material
adverse effect on our business and reputation and on our ability
to attract and retain customers for our products.
Our
business may be adversely affected by deteriorating economic
conditions.
Economic conditions in both the United States and other
countries in which we sell our products have deteriorated
significantly in recent years and may continue to deteriorate in
the foreseeable future. If economic conditions in the markets in
which we operate continue to deteriorate, it may result in
declining demand for our products and services, longer sales
cycles, increased order cancellations and declining pricing due
to customers reduced capital budgets, difficulties
encountered in securing financing needed to purchase our
products, or other factors. Moreover, such conditions may result
in increased excess or obsolete inventories and difficulties
collecting customer receivables. All of these factors could
materially adversely affect our future operating results and
financial condition.
We
rely significantly on our distributors and strategic selling
alliances to generate sales of our products; if we do not
maintain our relationships with these parties or they fail to
successfully distribute our products, our sales and operating
results will likely suffer.
In the U.S. and abroad, we sell many of our products
through distributors, strategic selling alliances and other
third party organizations. Generally, we have little or no
control over these sales processes, and in many cases our
contracts are short-term or may be terminated on little or no
notice. If any of our key distributor agreements or selling
alliance agreements are cancelled or if we are unable to renew
them as they expire, or if our distributors or selling alliances
fail to develop relationships with important target customers,
our sales and operating results may suffer materially.
On June 15, 2009, we notified Nihon Kohden Corporation, our
distributor of AEDs in Japan, that our OEM Supply and Purchase
Agreement dated effective as of January 1, 2008 will
terminate effective June 15, 2010. Under our agreement with
Nihon Kohden, Nihon Kohden has had the exclusive right in Japan
to distribute a Nihon Kohden-branded version of our AED product
(model 9231) designed for the Japanese market, as
well as certain related consumables. Because Nihon Kohden has
decided to build and market its own AED products, we elected to
terminate the agreement in order to explore alternative means of
distributing our AED products in Japan. In 2009, the percentage
of our net sales from the Japanese market decreased from 19% in
2008 to 7%. If our efforts to
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establish alternative distribution arrangements for our AED
products in Japan, our operating results may be adversely
affected. Moreover, the introduction of Nihon Kohdens own
AED products may further erode sales of our products in Japan.
We are
dependent upon licensed and purchased technology for some of our
products, and we may not be able to renew these licenses or
purchase agreements in the future.
We license and purchase technology from third parties for
features in some of our products. We anticipate that we will
need to license and purchase additional technology to remain
competitive. We may not be able to renew existing licenses and
purchase agreements or to license and purchase other
technologies on commercially reasonable terms or at all. If we
are unable to renew existing licenses and purchase agreements or
to license or purchase new technologies, we may not be able to
offer competitive products, which could negatively impact our
revenues.
Our
international business is subject to risks that could adversely
affect our profitability and operating results.
Our international operations, which accounted for 33% of our
revenues in 2009, are accompanied by certain financial and other
risks. In recent years, we have pursued growth opportunities
internationally and intend to continue pursuing such
opportunities in the future, which could expose us to greater
risks associated with international sales and operations. Our
international operations are, and will continue to be, subject
to a number of risks and potential costs, including:
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changes in foreign medical reimbursement programs and policies;
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changes in foreign regulatory requirements;
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local product preferences and product requirements;
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longer-term receivables than are typical in the U.S.;
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fluctuations in foreign currency exchange rates;
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less protection of intellectual property in some countries
outside of the U.S.;
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trade protection measures and import and export licensing
requirements;
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work force instability;
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political and economic instability;
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inherent control risks associated with operations based outside
the U.S.; and
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complex tax and cash management issues.
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Also, like the U.S., economic conditions in the foreign
countries in which we operate have deteriorated significantly in
recent years and may continue declining for the foreseeable
future. For example, in 2009, sales of our products in Japan
accounted for 7% of our net sales, down from 19% in 2008. This
reduction in sales in Japan can be attributed in part to weak
economic conditions in that market. Economic conditions in Japan
are expected to remain weak for the foreseeable future. As a
result, our sales in this market may decline, perhaps
significantly, during 2010 and beyond. We may also experience
declining sales in other international markets due to
deteriorating economic conditions.
Our
business is subject to intense competition, which may reduce the
demand for our products.
The cardiac monitoring and defibrillation markets are highly
competitive, and we expect competition to intensify in the
future. Some of our competitors are larger companies, such as
General Electric Company, Medtronic
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Emergency Response Systems, a unit of Medtronic, Inc., and
Philips Medical Systems, a unit of Koninklijke Philips
Electronics N.V., who may have:
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greater financial and technical resources;
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greater variety of products;
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greater product pricing, discounting and bundling flexibility;
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patent portfolios that may present an obstacle to our conduct of
business;
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stronger brand recognition and marketing resources; and
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larger distribution and sales networks.
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In addition, the timing of the introduction of competing
products into the market could affect the market acceptance and
market share of our products. If we are unable to develop
competitive products that obtain market acceptance, our revenues
and financial results may suffer.
We may
be unable to increase sales of our cardiac monitoring products
and services, which could cause our stock price to
decrease.
The market for cardiac monitoring products and services is
generally mature and stable. However, our 2009 revenues from
products and services in this market decreased 15.3% from 2008.
Our ability to revitalize this line of products and services
depends on our restructuring efforts, the development and
commercialization of competitive new products and service
offerings, and our success in increasing sales and gaining
market share from our competitors. Current economic conditions
may provide particular challenges to our efforts to revitalize
this line. If we are unsuccessful in these efforts, our sales
revenues from this line of products and services may decrease,
our financial results may suffer, and our stock price may
decline.
Our
financial results could be impacted by the credit risk of our
customers.
We have exposure to the credit risks of some of our customers.
Although we have programs in place that are designed to monitor
and mitigate the associated risk, there can be no assurance that
such programs will be effective in reducing our credit risks
adequately. We monitor individual payment capability in granting
credit arrangements, seek to limit the total credit to amounts
we believe our customers can pay, and maintain reserves we
believe are adequate to cover exposure for potential losses. If
there is a deterioration of a major customers
creditworthiness or actual defaults are higher than expected,
future resulting losses, if incurred, could harm our business
and have a material adverse effect on our operating results.
These risks may become more pronounced if economic conditions
continue to deteriorate.
Our
stock price is volatile, and you may not be able to sell your
shares for a profit.
The trading price of our common stock is volatile. Our common
stock price could be subject to fluctuations in response to a
number of factors, including:
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actual or anticipated variations in operating results;
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changes in our business, operations, or prospects;
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product issues necessitating recalls or other corrective actions
and related regulatory actions;
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changes in financial estimates or recommendations by securities
analysts;
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conditions or trends in medical devices and diagnostic
cardiology products markets;
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announcements by us or our competitors of significant customer
wins or losses, gains or losses of distributors, technological
innovations, new products or services;
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announcements by us or our competitors of significant
acquisitions, strategic partnerships, joint ventures or capital
commitments;
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additions or departures of key personnel;
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sales of a large number of shares of our common stock;
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adverse litigation;
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unfavorable legislative or regulatory decisions; and
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general market conditions.
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In the past, companies that have experienced volatility in the
market price of their stock have been the target of securities
class action litigation. We may become the target of this type
of litigation in the future. Securities litigation against us
could result in substantial costs and divert management
attention, which could seriously harm our business.
We
were not profitable in 2008 or 2009 and we may be unable to
return to profitability in the future, which could result in a
decline in our stock price.
We had a net loss of $77.0 million in 2009 due largely to a
non cash charge of approximately $42.2 million related to a
valuation allowance on our deferred tax assets as well as costs
totaling $21.0 million related to two separate voluntary
corrective actions which we announced between November 2009 and
February 2010. In 2008, we had a net loss $98.4 million due
to a pre tax, non cash impairment charge related to goodwill of
$107.7 million. We had net income of $8.5 million in
2007. Although we expect to become profitable again in future
periods, our ability to return to profitability will depend on
our ability to increase our revenues and manage our expenses. In
order to generate additional revenues, we will need to continue
developing and offering competitive products and services,
maintain our sales and distribution network and expand our
customer base. Our ability to increase revenues may be impacted
by current economic conditions and other factors, such as the
impact on customer demand from product quality issues and
related corrective actions that we have announced in the last
several months. Also, we will need to manage costs associated
product development and marketing, protecting our intellectual
property, and handling product quality issues and related
corrective actions. We may be unable to accomplish some, or any,
of these goals because of the risks identified in this report or
for other unforeseen reasons. If we are unable to attain
profitability in the future, our stock price could decline.
Our
business may be adversely affected by
restructurings.
On January 14, 2009, we announced a restructuring involving
a 12% reduction in our staff, and have had subsequent
restructurings and reductions. The reductions primarily affected
customer service, product development and manufacturing.
Implementation of past restructurings and reductions, as well as
any future restructurings or reductions, may adversely affect
the effectiveness of the functional areas impacted by the staff
reductions, as well as adversely impact our relationships with
customers and suppliers. The costs of implementing past and
future restructurings and reductions may adversely affect our
results of operations. Finally, past or future restructuring may
not result in all of the cost savings and operational and
strategic benefits that we anticipate.
Our
quarterly revenues and operating results are unpredictable and
may vary significantly.
Our quarterly revenues and operating results have varied in the
past and our quarterly revenues and operating results may
continue to vary in the future due to a number of factors, many
of which are outside of our control. Factors contributing to
these fluctuations may include:
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effects of domestic and foreign economic conditions on our
industry
and/or
customers, which conditions have significantly deteriorated in
the last year and are expected to continue to decline for the
foreseeable future;
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the impact of a ship-hold, recalls or other corrective actions,
or regulatory actions resulting from quality concerns relating
to our products;
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the impact of acquisitions, divestitures, strategic alliances,
and other significant corporate events;
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25
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changes in our ability to obtain products and product components
that are manufactured for us by third parties;
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delays in the development or commercial introduction of new
versions of products;
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the ability to attain and maintain production volumes and
quality levels for our products and product components;
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the impact of a ship-hold on any of our products due to quality
control concerns;
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changes in the demand for our products;
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varying sales cycles that can take up to a year or more;
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changes in the mix of products we sell, which could affect our
revenue levels as well as our gross margins;
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unpredictable budgeting cycles of our customers;
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delays in obtaining regulatory clearance for new versions of our
products;
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increased product and price competition;
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the impact of regulatory changes on the availability of
third-party reimbursement to customers of our products;
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the loss of key personnel;
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the loss of key distributors or distribution companies;
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seasonality in the sales of our products;
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the impact of longer buying cycles; and
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the impact of employee turnover.
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Historically, our quarterly financial results have often been
impacted by the receipt of a large number of customer orders in
the last weeks of a quarter. If these orders are delayed to the
following quarter or canceled, our sales could fall short of our
targets and our stock price could decline. Due to the factors
summarized above, we believe that
period-to-period
comparisons of our operating results are not a good indication
of future performance and should not be relied upon to predict
future operating results.
If we
are unsuccessful in developing and commercializing new versions
of our products, our operating results will
suffer.
To be successful, we must develop and commercialize new versions
of our products for both domestic and international markets. Our
products must keep pace with rapid industry change, comply with
rapidly evolving industry standards and government regulations
and compete effectively with new product introductions of our
competitors. Because our products are technologically complex,
developing new products requires extensive design, development
and testing at the technological, product and manufacturing
stages. To successfully develop and commercialize new versions
of our products, we need to:
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accurately assess and provide compelling solutions to customer
needs;
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develop products that are functional and easy to use;
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quickly and cost-effectively obtain regulatory clearance or
approval;
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price competitively;
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manufacture and deliver on time;
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control costs associated with manufacturing, installation,
warranty and maintenance;
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manage customer acceptance and payment;
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26
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limit demands by our customers for retrofits;
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access new interface standards needed for product connectivity;
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anticipate and meet demands of our international customers for
products featuring local language capabilities; and
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anticipate and compete effectively with our competitors
efforts.
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Our failure to accomplish any of these items, or others involved
in developing and commercializing new products, could delay or
prevent the release of new products. These difficulties and
delays could cause our development expenses to increase and harm
our financial and operating results.
Interruption
or cancellation of supply, and our inability to secure
alternative suppliers on a timely basis, would likely harm our
ability to ship products to our customers, decrease our revenues
and increase our costs.
If our suppliers reduce, delay or discontinue production of
component parts for our products, we will be forced to seek
replacement parts from alternative sources. We purchase many of
the components and raw materials used in manufacturing our
products from numerous suppliers in various countries. Generally
we have been able to obtain adequate supplies of such raw
materials and components. In some cases, for reasons of quality
assurance, cost effectiveness or availability, we procure
certain components and raw materials only from a sole supplier.
While we work closely with our suppliers to try to ensure
continuity of supply while maintaining high quality and
reliability, we cannot guarantee that our supplies will be
uninterrupted. In addition, due to the stringent regulations and
requirements of the FDA regarding the manufacture of our
products, we may not be able to quickly establish additional or
replacement sources for certain components or materials. A
reduction or interruption in supply, and an inability to develop
alternative sources for such supply, could result in significant
delays or cancellations of product shipments and the need to
modify our products to utilize available components. This could
result in reduced revenues, higher costs or both.
Inadequate
levels of reimbursement from governmental or other third-party
payers for procedures using our products may cause revenues to
decrease.
Healthcare costs have risen significantly over the past decade.
Federal, state and local governments have adopted a number of
healthcare policies intended to curb rising healthcare costs.
There have been and may continue to be proposals by legislators,
regulators and third-party payers to keep these costs down.
Certain proposals, if passed, could impose limitations on the
prices we will be able to charge for our products, or the
amounts of reimbursement available for our products from
governmental agencies or third-party payers. These limitations
could have a material adverse effect on our financial position
and results of operations.
In the U.S., healthcare providers that purchase certain of our
products often rely on governmental and other third-party
payers, such as federal Medicare, state Medicaid, and private
health insurance plans to pay for all or a portion of the cost
of the procedures that utilize those products. The availability
of this reimbursement affects customers decisions to
purchase capital equipment. Denial of coverage or reductions in
levels of reimbursement for procedures performed using our
products by governmental or other third-party payers would cause
our revenues to decrease.
If we
do not maintain or grow revenues from our support services or
consumables, our operating and financial results may be
negatively impacted.
A significant portion of our revenues is generated from
post-sale support services we provide for our products and from
the sale of ancillary cardiology products and consumables
related to our products, such as patented electrodes, pads,
cables, leads, and thermal chart paper. As hospitals expand
their in-house capabilities to service diagnostic equipment and
systems, they may be able to service our products without
additional support from us. In addition, our customers may
express an increasing preference for ancillary cardiology
products and consumables that are manufactured or provided by
other vendors. Any of these events could result in a decline in
our revenues and adversely affect our financial and operating
results.
27
Our
lack of customer purchase contracts and our limited order
backlog make it difficult to predict sales and plan
manufacturing requirements, which can lead to lower revenues,
higher expenses and reduced margins.
Our customers typically order products on a purchase order
basis, and we do not generally have long-term purchase
contracts. In limited circumstances, customer orders may be
cancelled, changed or delayed on short notice. Lack of
significant order backlog makes it difficult for us to forecast
future sales with certainty. Long and varying sales cycles with
our customers make it difficult to accurately forecast component
and product requirements. These factors expose us to a number of
risks:
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if we overestimate our requirements we may be obligated to
purchase more components or third-party products than is
required;
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if we underestimate our requirements, our third-party
manufacturers and suppliers may have an inadequate product or
product component inventory, which could interrupt manufacturing
of our products and result in delays or cancellations in
shipments and loss of revenues;
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we may also experience shortages of product components from time
to time, which also could delay the manufacturing of our
products; and
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over or under production can lead to higher expense, lower than
anticipated revenues, and reduced margins.
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If
market conditions cause us to reduce the selling price of our
products, or our market share is negatively affected by the
activities of our competitors, our margins and operating results
will decrease.
The selling price of our products and our market share are
subject to market conditions. Major shifts in industry market
share have occurred in connection with product problems,
physician advisories and safety alerts, reflecting the
importance of product quality in the medical device industry.
Many healthcare industry companies, including medical device
companies, are consolidating to create new companies with
greater market power. As the healthcare industry consolidates,
competition to provide goods and services to industry
participants will become more intense. These industry
participants may try to use their market power to negotiate
price concessions or reductions for medical devices that
incorporate components produced by us. We may experience
decreasing prices for the goods and services we offer due to
pricing pressure experienced by our customers from managed care
organizations and other third-party payers; increased market
power of our customers as the medical device industry
consolidates; and increased competition among medical
engineering and manufacturing services providers. If the prices
for our goods and services decrease and we are unable to reduce
our expenses, we may lose market share and our results of
operations will be adversely affected.
If we
are unable to retain our executive officers and hire and retain
other key personnel, we may not be able to sustain or grow our
business.
Our success is dependent in large part on the continued
employment and performance of key executive, managerial, sales
and technical personnel and our ability to attract and retain
additional highly qualified personnel. We compete for key
personnel with other companies, academic institutions,
government entities and other organizations. Our ability to
maintain and expand our business may be impaired if we are
unable to retain our key personnel, hire or retain other
qualified personnel in the future, or if our key personnel
decide to join a competitor or otherwise compete with us.
Failure
to adequately protect our intellectual property rights may cause
our expenses to increase and our business to
suffer.
Our success depends in part on obtaining, maintaining, and
enforcing our patents, trademarks and other proprietary rights,
and our ability to avoid infringing the proprietary rights of
others. We take precautionary steps to protect our technological
advantages and intellectual property rights and rely, in part,
on patent, trade secret, copyright, know-how, trademark laws,
license agreements and contractual provisions to establish our
intellectual property rights and protect our products. We
require our new employees, consultants, and corporate partners
to execute confidentiality agreements at the commencement of
their employment or consulting relationship with us.
28
However, these agreements may be breached or, in the event of
unauthorized use or disclosure, they may not provide adequate
remedies. While we intend to defend against any threats to our
intellectual property, there can be no assurance that these
patents, trade secrets or other agreements will adequately
protect our intellectual property.
In addition, the validity and breadth of claims covered in
medical technology patents involve complex legal and factual
questions and are often highly uncertain. There can also be no
assurance that pending patent applications owned by us will
result in patents to be issued to us, that patents issued to or
licensed by us in the past or in the future will not be
challenged or circumvented by competitors or that such patents
will be found to be valid or sufficiently broad to protect our
technology or to provide us with any competitive advantage.
Third parties could also obtain patents that may require us to
negotiate licenses to conduct our business, and there can be no
assurance that the required licenses would be available on
reasonable terms or at all. In some cases, we rely upon trade
secrets instead of patents 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. If we are not able to
adequately protect our intellectual property and other
proprietary rights, our product offerings may lose their
competitive edge, which would negatively impact our revenues.
Additionally, third parties may assert intellectual property
claims and related claims against the Company, whether through
civil litigation, administrative proceedings, or otherwise, in
the United States or abroad, which may result in a narrowing or
invalidation of our intellectual property rights or freedom to
operate, significant damage awards and costs of litigation or
other legal proceedings, injunctive relief against us, the
necessity of costly or disadvantageous licenses, and may be
disruptive to our business operations.
Our
technology may become obsolete, which would negatively impact
our ability to sell our products.
The medical equipment and healthcare 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 existing products and to develop new products. If these
efforts are not successful, we may not be able to meet our
financial goals and our stock price may suffer.
Our
reliance on a principal manufacturing facility may impair our
ability to respond to natural disasters or other unforeseen
catastrophic events.
We manufacture substantially all of our products in one
principal manufacturing facility, located in a single building
in Deerfield, Wisconsin. Despite precautions taken by us, a
natural disaster or other unanticipated catastrophic events at
this building could significantly impair our ability to
manufacture our products and operate our business. Our facility
and certain manufacturing equipment located in that facility
would be difficult to replace and could require substantial
replacement lead-time. Catastrophic events may also destroy any
inventory of product or components located in our facility.
While we carry insurance for natural disasters and business
interruption, the occurrence of such an event could result in
losses that exceed the amount of this insurance coverage, which
would impair our financial results.
We may
make future acquisitions, which involve numerous risks that
could impact our business and results of
operations.
As part of our growth strategy, we intend to selectively acquire
other businesses, product lines, assets, or technologies, which
are complementary to our product offerings. Successful execution
of our acquisition strategy depends upon our ability to
identify, negotiate, complete and integrate suitable
acquisitions. Acquisitions involve numerous risks, including:
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difficulties in integrating the operations, technologies, and
products of the acquired companies;
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the risk of diverting managements attention from normal
daily operations of the business;
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potential difficulties in completing projects associated with
in-process research and development;
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29
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risks of entering markets in which we have no, or limited,
direct prior experience and where competitors in such markets
have stronger market positions;
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initial dependence on unfamiliar supply chains or relatively
small supply partners;
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insufficient revenues to offset increased expenses associated
with acquisitions;
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the risk that acquired lines of business may reduce or replace
the sales of existing products; and
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the potential loss of key employees of the acquired companies.
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Future acquisitions may not be successful and, if we are unable
to effectively manage the risks described above, our business,
operating results or financial condition may be negatively
affected.
We may
need additional capital to continue our acquisition growth
strategy.
Successful continued execution of our acquisition strategy may
also depend upon our ability to obtain satisfactory debt or
equity financing. We likely would require additional debt or
equity financing to make any further significant acquisitions.
Such financing may not be available on terms that are acceptable
to us or at all, particularly in light of current adverse
conditions in the capital markets. If we are required to incur
additional indebtedness to fund acquisitions in the future, our
cash flow may be negatively affected by additional debt
servicing requirements and the terms of such indebtedness may
impose covenants and restrictions that provide us less
flexibility in how we operate our business. Fluctuations in our
stock price may make it difficult to make acquisitions using our
stock as consideration. Moreover, use of our stock to fund
acquisitions may have a significant dilutive effect on existing
shareholders.
Our
internal research and product development activities are
complemented by acquisitions, investments and alliances. We
cannot guarantee that any previous or future acquisitions,
investments or alliances will be successful for the purpose of
complementing our internal research and product development
activities.
A component of our growth strategy is to enter into strategic
alliances in order to complement and expand our current product
and service offerings and distribution. The rapid pace of
technological development in the medical industry and the
specialized expertise required in different areas of medicine
make it difficult for one company alone to develop a broad
portfolio of technological solutions. In addition to internally
generated growth through our research and development efforts,
historically we have relied, and expect to continue to rely,
upon acquisitions, investments and alliances to provide us
access to new technologies both in areas served by our existing
businesses as well as in new areas. We may make future
investments where we believe that we can stimulate the
development of, or acquire, new technologies and products to
further our strategic objectives and strengthen our existing
businesses. Investments and alliances in and with medical
technology companies are inherently risky, and we cannot
guarantee that any of our previous or future acquisitions,
investments or alliances will be successful or will not
materially adversely affect our consolidated earnings, financial
condition or cash flows.
Future
issuances of our common stock could dilute existing stockholders
and cause our stock price to decline.
As of December 31, 2009 we have reserved
5,054,144 shares of common stock for issuance under our
stock-based compensation plans and arrangements, including
pursuant to options that are outstanding or may be granted in
the future. Future stock awards under our plans and the issuance
of stock upon exercise of options would have a dilutive effect
on our stockholders and may adversely affect the market price of
our common stock.
Our
charter documents and Delaware law contain provisions that could
make it more difficult for a third party to acquire
us.
Certain provisions of our certificate of incorporation and
bylaws could make it harder for a third party to acquire us
without the consent of our board of directors. Our certificate
of incorporation authorizes the issuance of preferred stock with
the 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. In addition, our board of
directors is divided into
30
three classes with staggered terms, which makes it difficult for
stockholders to change the control of our board. Lastly,
Section 203 of the Delaware General Corporation Law limits
business combination transactions with interested stockholders
that have not been previously approved by the issuers
board of directors. Our board of directors could choose not to
negotiate with an acquirer that it did not feel was in our
strategic interest. If the acquirer was discouraged from
offering to acquire us or prevented from successfully completing
a hostile acquisition by the anti-takeover measures described
above, our stockholders could lose the opportunity to sell their
shares at a favorable price.
Realization
of our deferred tax assets is uncertain.
During 2009, we evaluated our ability to realize our net
deferred tax assets, primarily our net operating losses and tax
credit carryforwards and determined that the realization of
these deferred tax assets is uncertain as of the year ended
December 31, 2009. We assessed both positive and negative
evidence as well as objective and subjective evidence, including
but not limited to such factors as past performance, recent
history of operating results on a GAAP basis, recent history of
generating taxable income, history of recovering net operating
loss carryforwards for tax purposes, and expectations of future
taxable income as well as current conditions and issues facing
our industry and its customers. Based on our evaluation, we
determined it was not more likely than not that we would be able
to realize all or a portion of its deferred tax assets and as
such, we recorded a valuation allowance against deferred tax
assets resulting in a non cash charge to income tax expense of
approximately $42.2 million. Our ability to realize these
deferred tax assets in the future is dependent upon our ability
to generate taxable income. If in future periods we generate
taxable income, then the valuation allowance may be released in
part, or in total, when it becomes more likely than not that the
deferred tax assets will be realized.
Changes
in tax laws and unanticipated tax liabilities could adversely
affect our effective income tax rate and
profitability.
President Obamas administration has announced several
proposals for to reform U.S. tax laws that would
fundamentally change how U.S. multinational corporations
are taxed on their global income. These proposals have been
carried forward from proposals which did not pass Congress.
Although adjusted since the original proposals, the new
proposals include a proposal to defer tax deductions for
interest expense allocable to
non-U.S. earnings
until earnings are repatriated and a proposal to further limit
foreign tax credits. In addition, the latest proposals also
include taxing currently any excess returns as Subpart F income
associated with transfers of intangible assets offshore to a
related controlled foreign corporation. These proposals, if
passed, would be effective for tax years beginning after 2010.
It is unclear whether these proposed tax reforms will be
enacted, or, if enacted, what the scope of the reforms will be.
Depending on their content, such reforms may have an adverse
impact to our worldwide tax expense in future periods.
Our
future financial results could be adversely impacted by asset
impairments.
We are required not to amortize goodwill and other intangible
assets determined to have indefinite lives, and have established
a method of testing these assets for impairment on an annual or
on an interim basis if certain events occur or circumstances
change that would reduce the fair value of a reporting unit
below its carrying value or if the fair value of intangible
assets with indefinite lives falls below their carrying value.
We also need to evaluate intangible assets determined to have
finite lives for recoverability whenever events or changes in
circumstances indicate that their carrying amounts may not be
recoverable. These events or circumstances could include a
significant change in the business climate, legal factors,
operating performance indicators, competition, sale or
disposition of a significant portion of the business, or other
factors such as a decline in our market value below its book
value for an extended period of time. A significant decline in
our stock price could require us to evaluate intangible assets
for recoverability during the quarter in which the decline
occurred. In the case of intangible assets with indefinite
lives, we will need to evaluate whether events or circumstances
continue to support an indefinite useful life. We will need to
evaluate the estimated lives of all intangible assets on an
annual basis, including those with indefinite lives, to
determine if events and circumstances continue to support an
indefinite useful life or the remaining useful life, as
applicable, or if a revision in the remaining period of
amortization is required. The amount
31
of any such annual or interim impairment charge could be
significant, and could have a material adverse effect on our
reported financial results for the period in which the charge is
taken.
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Item 1B.
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Unresolved
Staff Comments
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None.
We lease a facility in Bothell, Washington, which houses our
corporate offices and certain of our research and development
and customer support services, as well as marketing, finance and
administrative functions. This facility occupies approximately
56,000 square feet and is under lease through 2013.
We also lease a facility in Deerfield, Wisconsin, which houses
our manufacturing operations and certain of our research and
development, customer support services, marketing, finance and
administrative functions. This facility is approximately
100,000 square feet. The lease expires in 2018 with two
five-year renewal options.
We have other facilities under lease in Laguna Hills,
California, which houses certain of our research and development
operations, as well as in other locations such as Manchester,
United Kingdom, Shanghai, China, Copenhagen, Denmark, Cologne,
Germany and Paris, France.
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Item 3.
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Legal
Proceedings
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We are subject to various legal proceedings arising in the
normal course of business. In the opinion of management, the
ultimate resolution of these proceedings is not expected to have
a material effect on our consolidated financial position,
results of operations or cash flows.
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Our common stock is traded on the NASDAQ Global Market (symbol
CSCX). The number of shareholders of record of our
common stock at March 8, 2010, was 944.
Quarterly high and low bid closing prices for our common stock
as reported on NASDAQ for the periods indicated are set forth in
the table below.
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Stock Price
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High
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Low
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Fiscal 2009
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First Quarter
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$
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7.70
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$
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2.56
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Second Quarter
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4.58
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2.83
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Third Quarter
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4.42
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3.00
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Fourth Quarter
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4.09
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2.09
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Fiscal 2008
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First Quarter
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$
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9.75
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$
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7.60
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Second Quarter
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9.75
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7.60
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Third Quarter
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11.00
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7.57
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Fourth Quarter
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10.31
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5.00
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We have never declared or paid any cash dividends on our common
stock. We currently anticipate that we will retain any future
earnings for use in the expansion and operations of our business
and do not anticipate paying cash dividends in the foreseeable
future.
32
Recent
Sales of Unregistered Securities
In November 2009, we issued 100,000 shares of our common
stock, par value $0.001 per share, to Gust H. Bardy, M.D.
in exchange for an undivided 20% ownership interest in certain
patents and patent applications and rights thereto. The shares
of our common stock issued to Dr. Bardy were not registered
under the Securities Act of 1933, as amended (the
Securities Act), and were issued in reliance on an
exemption from registration under Section 4(2) of the
Securities Act.
Performance
Comparison Graph
The following graph depicts the Companys total return to
stockholders from August 31, 2005 through December 31,
2009, relative to the performance of the NASDAQ Composite Index
and the Standard & Poors Health Care Equipment
Index. All indices shown in the graph have been reset to a base
of 100 as of September 1, 2005 (the date of the merger of
Quinton and CSI), and assume an investment of $100 on that date
and the reinvestment of dividends paid since that date. We have
never paid a dividend on our common stock. The stock price
performance shown in the graph is not necessarily indicative of
future price performance.
COMPARISON
OF 52 MONTH CUMULATIVE TOTAL RETURN*
Among Cardiac Science Corporation, The NASDAQ Composite Index
And The S&P Health Care Equipment Index
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* |
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$100 invested on 9/1/05 in stock or 8/31/05 in index, including
reinvestment of dividends. Fiscal year ending December 31. |
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
33
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Item 6.
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Selected
Financial Data
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The following selected consolidated financial data should be
read in conjunction with the consolidated financial statements
and the notes thereto and the information contained herein in
Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations. Historical
results are not necessarily indicative of future results. Our
company is the result of the combination of Quinton and CSI
pursuant to a merger transaction that was completed on
September 1, 2005. Since we are deemed to be the successor
to Quinton for accounting purposes, our selected consolidated
financial data in the table below represents the historical
financial data of Quinton through September 1, 2005 the
results of operations of the combined company since
September 1, 2005.
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Year Ended December 31,
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2009
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2008
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2007
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2006
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2005
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(In thousands, except share and per share data)
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Consolidated Statements of Operations Data(1):
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Revenues
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$
|
156,848
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$
|
206,153
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$
|
182,131
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$
|
155,429
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$
|
106,650
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Cost of revenues
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80,665
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103,870
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|
|
93,715
|
|
|
|
82,195
|
|
|
|
59,794
|
|
Corrective action costs
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55,183
|
|
|
|
102,283
|
|
|
|
88,416
|
|
|
|
73,234
|
|
|
|
46,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
14,950
|
|
|
|
16,426
|
|
|
|
13,020
|
|
|
|
11,733
|
|
|
|
9,353
|
|
Sales and marketing
|
|
|
48,047
|
|
|
|
50,733
|
|
|
|
46,195
|
|
|
|
39,960
|
|
|
|
24,957
|
|
General and administrative
|
|
|
26,134
|
|
|
|
22,417
|
|
|
|
19,176
|
|
|
|
19,072
|
|
|
|
14,233
|
|
Impairment of goodwill
|
|
|
|
|
|
|
107,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation and related expenses
|
|
|
|
|
|
|
|
|
|
|
3,808
|
|
|
|
3,855
|
|
|
|
893
|
|
Licensing income and litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
89,131
|
|
|
|
197,247
|
|
|
|
76,199
|
|
|
|
74,620
|
|
|
|
49,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(33,948
|
)
|
|
|
(94,964
|
)
|
|
|
12,217
|
|
|
|
(1,386
|
)
|
|
|
(2,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
66
|
|
|
|
489
|
|
|
|
402
|
|
|
|
(16
|
)
|
|
|
325
|
|
Other income (expense), net
|
|
|
102
|
|
|
|
635
|
|
|
|
799
|
|
|
|
782
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
168
|
|
|
|
1,124
|
|
|
|
1,201
|
|
|
|
766
|
|
|
|
(162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax (expense) benefit
|
|
|
(33,780
|
)
|
|
|
(93,840
|
)
|
|
|
13,418
|
|
|
|
(620
|
)
|
|
|
(2,742
|
)
|
Income tax (expense) benefit
|
|
|
(42,462
|
)
|
|
|
(4,093
|
)
|
|
|
(4,924
|
)
|
|
|
615
|
|
|
|
1,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(76,242
|
)
|
|
|
(97,933
|
)
|
|
|
8,494
|
|
|
|
(5
|
)
|
|
|
(1,269
|
)
|
Less: net income attributable to noncontrolling interests
|
|
|
(755
|
)
|
|
|
(451
|
)
|
|
|
(4
|
)
|
|
|
54
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cardiac Science Corporation
|
|
$
|
(76,997
|
)
|
|
$
|
(98,384
|
)
|
|
$
|
8,490
|
|
|
$
|
49
|
|
|
$
|
(1,238
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Cardiac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Science Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
$
|
(3.31
|
)
|
|
$
|
(4.30
|
)
|
|
$
|
0.37
|
|
|
$
|
0.00
|
|
|
$
|
(0.08
|
)
|
Diluted(2)
|
|
$
|
(3.31
|
)
|
|
$
|
(4.30
|
)
|
|
$
|
0.37
|
|
|
$
|
0.00
|
|
|
$
|
(0.08
|
)
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
22,697,113
|
|
|
|
22,502,040
|
|
|
|
14,695,261
|
|
Diluted(2)
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
23,197,911
|
|
|
|
22,555,326
|
|
|
|
14,695,261
|
|
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
|
|
$
|
(4,943
|
)
|
|
$
|
17,743
|
|
|
$
|
13,297
|
|
|
$
|
8,764
|
|
|
$
|
(850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in investing activities
|
|
$
|
(4,170
|
)
|
|
$
|
(4,262
|
)
|
|
$
|
(3,788
|
)
|
|
$
|
(3,307
|
)
|
|
$
|
(18,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by financing activities
|
|
$
|
864
|
|
|
$
|
769
|
|
|
$
|
828
|
|
|
$
|
816
|
|
|
$
|
547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
$
|
460
|
|
|
$
|
246
|
|
|
$
|
3
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,866
|
|
|
$
|
34,655
|
|
|
$
|
20,159
|
|
|
$
|
9,819
|
|
|
$
|
3,546
|
|
Total assets
|
|
|
116,060
|
|
|
|
170,208
|
|
|
|
262,671
|
|
|
|
247,645
|
|
|
|
248,557
|
|
Current liabilities
|
|
|
50,442
|
|
|
|
37,960
|
|
|
|
35,219
|
|
|
|
31,294
|
|
|
|
33,832
|
|
Long-term liabilities
|
|
|
5,389
|
|
|
|
|
|
|
|
54
|
|
|
|
679
|
|
|
|
1,806
|
|
Total Cardiac Science Corporation shareholders equity
|
|
$
|
58,936
|
|
|
$
|
131,703
|
|
|
$
|
227,271
|
|
|
$
|
215,597
|
|
|
$
|
212,791
|
|
|
|
|
(1) |
|
The business combination of Quinton and CSI in September 2005
materially affects the comparability of information contained in
this table. |
|
(2) |
|
Shares prior to September 1, 2005 have been retroactively
adjusted to reflect the conversion of Quinton shares into
Cardiac Science Corporation shares at a ratio of 0.77184895
Cardiac Science Corporation shares for each Quinton share. See
Item 8, Note 1 to the Consolidated Financial
Statements for a reconciliation of the denominators used in
computing basic and diluted income (loss) per share for 2009,
2008 and 2007. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
You should read the following discussion and analysis in
conjunction with our consolidated financial statements and
related notes included elsewhere in this report. Except for
historical information, the following discussion contains
forward-looking statements within the meaning of the safe harbor
provisions under the Private Securities Litigation Reform Act of
1995. All statements other than statements of historical fact,
including future results of operations or financial position,
made in this Annual Report on
Form 10-K
are forward looking. The words believe,
expect, intend, anticipate,
will, may, variations of such words, and
similar expressions identify forward-looking statements, but
their absence does not mean that the statement is not
forward-looking. These forward-looking statements reflect
managements current expectations and involve risks and
uncertainties. Our actual results could differ materially from
results that may be anticipated by such forward-looking
statements due to various uncertainties. The principal factors
that could cause or contribute to such differences include, but
are not limited to, the factors discussed in the section
entitled Risk Factors and those discussed elsewhere
in this report. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only
as of the date of this report. We undertake no obligation to
revise any forward-looking statements to reflect events or
circumstances that may subsequently arise. Readers are urged to
review and consider carefully the various disclosures made in
this report and in our other filings made with the SEC that
disclose and describe the risks and factors that may affect our
business, prospects and results of operations. The terms
the Company, us, we and
our refer to Cardiac Science Corporation and our
majority-owned subsidiaries.
Business
Overview
We develop, manufacture, and market a family of advanced
diagnostic and therapeutic cardiology devices and systems,
including automated external defibrillators (AEDs),
electrocardiograph devices (ECG/EKG), cardiac stress
testing treadmills and systems, Holter monitoring systems,
hospital defibrillators, cardiac rehabilitation telemetry
systems, vital signs and spot check monitors and cardiology data
management systems (Informatics) that connect with
hospital information (HIS), electronic medical
record (EMR), and other information systems. We sell
a variety of related products and consumables, and provide a
portfolio of training, maintenance, and support services. We are
the successor to the cardiac businesses that established the
trusted
Burdick®,
Quinton®
and
Powerheart®
brands and are headquartered in Bothell, Washington. With
customers in more than 100 countries worldwide, we have
operations in North America, Europe, and Asia.
35
Critical
Accounting Estimates and Policies
To prepare financial statements that conform with
U.S. generally accepted accounting principles, we must
select and apply accounting policies and make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base our accounting
estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances, the results of which form our basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
There are certain critical accounting estimates that we believe
require significant judgment in the preparation of our
consolidated financial statements. We consider an accounting
estimate to be critical if it requires us to make assumptions
because information was not available at the time or it included
matters that were highly uncertain at the time we were making
the estimate, and changes in the estimate or different
estimates that we reasonably could have selected would have had
a material impact on our financial condition or results of
operations.
Deferred Tax Assets and Income Taxes. We
account for income taxes under the asset and liability method
under which deferred income taxes are provided for the temporary
differences between the financial reporting basis and the tax
basis of our assets and liabilities and operating losses and tax
credit carryforwards. This process involves calculating our
current tax obligation or refund and assessing the nature and
measurements of temporary differences resulting from differing
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities. In
each period, we assess the likelihood that our deferred tax
assets will be recovered from existing deferred tax liabilities
or future taxable income. If required, we will recognize a
valuation allowance to reduce such deferred tax assets to
amounts that are more likely than not to be ultimately realized.
To the extent that we establish a valuation allowance or change
this allowance in a period, we adjust our tax provision or tax
benefit in the consolidated statements of operations. We use our
judgment to determine estimates associated with the calculation
of our provision or benefit for income taxes, and in our
evaluation of the need for a valuation allowance recorded
against our net deferred tax assets.
During 2009, we evaluated the expected realization of our
deferred tax assets and determined an increase to our valuation
allowance of $54.6 million was required of which
$42.2 million was included in the consolidated statements
of operations as deferred tax expense. Factors we considered in
making such an assessment included, but were not limited to past
performance, including our recent history of operating results
on a U.S. GAAP basis, our recent history of generating
taxable income, our history of recovering net operating loss
carryforwards for tax purposes and our expectation of future
taxable income, both considering our past history in predicting
future results and considering current macroeconomic conditions
and issues facing our industry and customers.
Stock-Based Compensation. We account for
stock-based compensation based on fair value of the options or
restricted stock units at the date of grant. Share-based
compensation cost is measured at the grant date and is
recognized as expense over the related vesting period.
Determining the fair value of share-based awards at the grant
date requires judgment, including estimating future volatility,
expected term and the amount of share-based awards that are
expected to be forfeited during the vesting period. If actual
results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be
materially impacted.
Indefinite Lived Intangible Assets. Our
indefinite lived intangible assets are comprised primarily of
trade names, which were acquired in our acquisition of Burdick
in 2003 and the merger transaction with CSI in 2005. We use our
judgment to estimate the fair value of each of these indefinite
lived intangible assets. Our judgment about fair value is based
on our expectation of future cash flows and an appropriate
discount rate.
We believe the Burdick and Cardiac Science trade names have
indefinite lives and, accordingly, we do not amortize the trade
names. We evaluate this conclusion annually or more frequently
if events and circumstances indicate that the asset(s) might be
impaired and make a judgment about whether there are factors
that would limit our ability to benefit from the trade name in
the future. If there were such factors, we would start
amortizing the trade name over the expected remaining period in
which we believed it would continue to provide benefit.
36
Additionally, we periodically evaluate whether the carrying
value of our intangible assets might be impaired. For our trade
names, this evaluation is performed annually, or more frequently
if events occur that suggest there may be an impairment loss,
and involves comparing the carrying amount to our estimate of
fair value.
We evaluated our indefinite lived intangible assets for
impairment during 2009 and 2008 and we determined no impairment
was necessary for our indefinite lived intangible assets and
therefore, we did not record an impairment charge in either
period.
Valuation of Long-Lived Assets. We review
long-lived assets, such as machinery and equipment, and
intangible assets subject to amortization, for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset group may not be recoverable.
Recoverability of asset groups to be held and used is measured
by a comparison of the carrying amount of an asset group to
estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment
charge is recognized on our consolidated statements of
operations and as a reduction to value of the asset group on our
consolidated balance sheets. We use our judgment to estimate the
useful lives of our intangible assets subject to amortization
and evaluate the remaining useful lives annually.
Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as
held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
We evaluated our long-lived assets for impairment during 2009
and 2008 and we determined no impairment was necessary for our
long-lived assets and therefore, we did not record an impairment
charge in either period.
Accounts Receivable. Accounts receivable
represent a significant portion of our assets. We make estimates
of the collectability of accounts receivable, including
analyzing historical write-offs, changes in our internal credit
policies and customer concentrations when evaluating the
adequacy of our allowance for doubtful accounts. Different
estimates regarding the collectability of accounts receivable
may have a material impact on the timing and amount of reported
bad debt expense and on the carrying value of accounts
receivable.
Inventories. Inventories represent a
significant portion of our assets. We value inventories at the
lower of cost, on an average cost basis, or market. We regularly
perform a detailed analysis of our inventories to determine
whether adjustments are necessary to reduce inventory values to
estimated net realizable value. We consider various factors in
making this determination, including the salability of
individual items or classes of items, recent sales history and
predicted trends, industry market conditions and general
economic conditions. Different estimates regarding the net
realizable value of inventories could have a material impact on
our reported net inventory and cost of revenues, and thus could
have a material impact on the consolidated financial statements
as a whole.
Warranty. We provide warranty service covering
many of the products and systems we sell. We estimate and accrue
for future costs of providing warranty service, which relate
principally to the hardware components of the systems, when the
systems are sold. Our estimates are based, in part, on our
warranty claims history and our cost to perform warranty
service. Differences could result in the amount of the recorded
warranty liability and cost of revenues if we made different
judgments or used different estimates.
Corrective Action Costs. We provide for
additional warranty costs associated with field corrective
actions and recalls when the likelihood of incurring costs
associated with these matters becomes probable and estimable. We
record estimated warranty costs associated with field corrective
actions and recalls as part of cost of revenues on the
consolidated statements of operations and within corrective
action liabilities on the consolidated balance sheets.
During 2009, we recorded expenses of $21.0 million related
to two separate voluntary corrective actions associated with our
AEDs. The costs of these voluntary corrective actions are
estimates. The actual costs incurred to implement the voluntary
corrective actions could vary significantly based on a number of
factors, including the number of impacted devices, the customer
and geographical segments related to the impacted devices, the
logistical processes we employ to address the issues, the
customer response rate in implementing the corrective action
plans, the level of required follow up with customers, the
extent to which we rely on third party assistance to carry out
the corrective actions, and the length of time and other
resources required to complete the corrective actions, among
others.
37
In February 2010, we received a warning letter from the FDA
noting, among other things, that the voluntary field corrective
action we announced in November 2009 is inadequate since it is
intended to improve the products ability to detect the
potential component problem, but is not designed to prevent
component failure. The FDA letter also asserts other
inadequacies, including our procedures relating to the
evaluation, investigation and follow up of complaints,
procedures to verify the effectiveness of corrective and
preventative actions and procedures relating to certain design
requirements. We are in ongoing discussions with the FDA
regarding these issues. We may need to take different or
additional actions than anticipated depending on the outcome of
those discussions, in which case the amounts we record in
connection with these initiatives may need to be adjusted. We
evaluate the adequacy of our accruals for these initiatives on a
regular basis and will make adjustments to our estimates if
facts and circumstances indicate that changes to our initial
estimates would be appropriate.
Goodwill. We performed a test for goodwill
impairment at November 30, 2008 in accordance with our
policy for performing this test annually. During the fourth
quarter of 2008, we recorded a pre-tax impairment charge of
$107.7 million, equivalent to the full amount of previously
acquired goodwill resulting primarily from our acquisitions of
Burdick and CSI. See Note 9 Goodwill to the
Consolidated Financial Statements in Item 8 of this report
for further discussion of the impairment charge. We did not
enter into any business combinations during the year ended
December 31, 2009 and thus no new goodwill has been
recorded since this impairment charge was recorded.
Application of the goodwill impairment test applied at
November 30, 2008 required judgment, including the
identification of reporting units, assigning assets and
liabilities to reporting units, assigning goodwill to reporting
units, and determining the fair value of each reporting unit.
Significant judgments required to estimate the fair value of
reporting units include estimating future cash flows,
determining appropriate discount rates and other assumptions.
Changes in these estimates and assumptions could materially
affect the determination of fair value for each reporting unit
and ultimately impact the results of our goodwill impairment
test.
Software Revenue Recognition. We account for
the licensing of software and arrangements where software is
considered more than incidental to the product as software
revenue arrangements. We use judgment when determining the
appropriate accounting for our software revenue arrangements,
including whether an arrangement includes multiple elements, and
if so, whether vendor-specific objective evidence
(VSOE) of fair value exists for those elements. A
portion of software revenue is recorded as unearned due to
undelivered elements including, in some cases, software
implementation and post-delivery support. The amount of revenue
allocated to undelivered elements is based on the sales price of
each element when sold seperately (VSOE) using the residual
method.
Revenue from post-delivery support is recognized over the
service period, which is typically a year and revenue from
software implementation services is recognized as the services
are provided (based on VSOE of fair value). When significant
implementation activities are required, we recognize revenue
from software and services upon installation. Changes to the
elements in a software arrangement and the ability to identify
VSOE of fair value for those elements could materially impact
the amount of earned and unearned revenue.
Revenue Recognition. Revenue from sales of
hardware products is generally recognized when title transfers
to the customer, typically upon shipment. Some of our customers
are distributors that sell goods to third party end users.
Except for certain identified distributors where collection may
be contingent on distributor resale, we recognize revenue on
sales of products made to distributors when title transfers to
the distributor and all significant obligations have been
satisfied. In making a determination of whether significant
obligations have been met, we evaluate any installation or
integration obligations to determine whether those obligations
are inconsequential or perfunctory. In cases where the remaining
installation or integration obligation is not determined to be
inconsequential or perfunctory, we defer the portion of revenue
associated with the fair value of the installation and
integration obligation until these services have been completed.
Distributors do not have price protection and generally do not
have product return rights, except if the product is defective
upon shipment or shipped in error, and in some cases upon
termination of the distributor agreement. For certain identified
distributors where collection may be contingent on the
distributors resale, revenue recognition is deferred and
recognized on a sell through or cash basis. The
determination of whether sales to distributors are contingent on
resale is subjective because we must assess the financial
wherewithal of the distributor to pay regardless of resale. For
sales to distributors, we consider several factors, including
past payment history, where available, trade references, bank
account balances, Dun & Bradstreet reports and any
other financial information
38
provided by the distributor, in assessing whether the
distributor has the financial wherewithal to pay regardless of,
or prior to, resale of the product and that collection of the
receivable is not contingent on resale.
We offer limited volume price discounts and rebates to certain
distributors. Volume price discounts are on a per order basis
based on the size of the order and are netted against the
revenue recorded at the time of shipment. We have some
arrangements with key distributors that provide for volume
discounts based on meeting certain quarterly or annual purchase
levels or based on sales volumes of certain of our products
during a defined period in which we offer a promotion. Rebates
are paid quarterly or annually and are accrued for as incurred.
We consider program management packages and training and other
services as separate units of accounting when sold with an AED
based on the fact that the items have value to the customer on a
stand alone basis and could be acquired from another vendor.
Fair value is determined to be the price at which they are sold
to customers on a stand alone basis. Training revenue is
deferred and recognized at the time the training occurs. AED
program management services revenue, pursuant to annual or
multi-year agreements that exist with some customers, is
deferred and amortized on a straight-line basis over the related
contract period.
We offer optional extended service contracts to customers. Fair
value is determined to be the price at which they are sold to
customers on a stand alone basis. Service contract revenues are
recognized on a straight-line basis over the term of the
extended service contracts, which generally begin after the
expiration of the original warranty period. For services
performed, other than pursuant to warranty and extended service
contract obligations, revenue is recognized when the service is
performed and collection of the resulting receivable is
reasonably assured.
Recent
Accounting Pronouncements
In January 2010, the FASB issued guidance to amend the
disclosure requirements related to recurring and nonrecurring
fair value measurements. The guidance requires new disclosures
on the transfers of assets and liabilities between Level 1
(quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the
guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3
fair value measurements). The guidance will become effective for
us with the reporting period beginning January 1, 2010,
except for the disclosure on the roll forward activities for
Level 3 fair value measurements, which will become
effective for us with the reporting period beginning
January 1, 2011. Other than requiring additional
disclosures, adoption of this new guidance will not have a
material impact on our consolidated financial statements.
In September 2009, the Emerging Issues Task Force (EITF) reached
a consensus related to revenue arrangements with multiple
deliverables, which the FASB then issued as an Accounting
Standards Update (ASU),
2009-13. The
ASU amends Accounting Standards Codification (ASC)
Subtopic
605-25,
Revenue Recognition Multiple Element
Arrangements and provides application guidance on whether
multiple deliverables exist in a revenue arrangement, how the
deliverables should be separated and how the consideration
should be allocated to one or more units of accounting. This ASU
establishes a selling price hierarchy for determining the
selling price of a deliverable based on vendor-specific
objective evidence, if available, third-party evidence, or
estimated selling price if neither vendor-specific nor
third-party evidence is available. The ASU can be applied on a
prospective basis or in certain circumstances on a retrospective
basis. We plan to adopt this ASU on a prospective basis
beginning January 1, 2011. We believe the adoption of this
ASU may have an impact on our financial position and results of
operations, however we are uncertain whether the impact will be
material. We are continuing to evaluate this ASU as of
December 31, 2009.
In September 2009, the EITF reached a consensus related to
revenue arrangements that include software elements, which the
FASB issued as ASU,
2009-14. The
ASU amends ASC Subtopic
985-605,
Software Revenue Recognition.
Previously, companies that sold tangible products with
more than incidental software were required to apply
software revenue recognition guidance. This guidance often
delayed revenue recognition for the delivery of the tangible
product. Under the new guidance, tangible products that have
software components that are essential to the
functionality of the tangible product will be excluded
from the software revenue recognition guidance. The new guidance
will include factors to help companies determine what is
essential to the functionality. Software-enabled
products will now be subject to other revenue guidance and will
likely follow the guidance
39
for multiple deliverable arrangements issued by the FASB in
September 2009 in ASU
2009-13. The
new guidance is to be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier
application permitted. We plan to adopt this ASU on a
prospective basis beginning January 1, 2011. We believe the
adoption of this ASU may have an impact on our financial
position and results of operations, however we are uncertain
whether the impact will be material. We are continuing to
evaluate this ASU as of December 31, 2009.
Results
of Operations
Overview
of 2009 Results
During 2009, we:
|
|
|
|
|
Generated revenue of $156.8 million, a decrease of
approximately 24% compared to 2008. This decrease was mostly due
to reduced AED sales in Japan as a result of weak local market
conditions combined with the introduction of a competitive
product by our sole Japanese distributor. In addition, we
experienced reduced sales of our AEDs in North America and of
cardiac monitoring products globally as a result of a weakened
economy. Sales of AEDs outside of North America, excluding
Japan, increased by 8%, despite the weak economy.
|
|
|
|
Recorded charges totaling $21.0 million during the year
ended December 31, 2009 related to two separate voluntary
corrective actions associated with our AEDs. These charges
related to: (1) a corrective action to deploy a field
software update, which we announced in November 2009, associated
with approximately 300,000 AEDs manufactured between June 2003
and June 2009, for which a charge of $18.5 million was
recorded in the third quarter, and (2) a voluntary recall,
which we announced in February 2010, of approximately 12,200
AEDs manufactured between October 2009 and January 2010, for
which a charge of $2.5 million was recorded in the fourth
quarter.
|
|
|
|
Incurred a non cash charge to income tax expense of
$42.2 million to increase the valuation allowance against
our deferred tax assets.
|
|
|
|
Incurred a net loss per share of $3.31, as compared to a net
loss per share of $4.30 for 2008.
|
|
|
|
Used cash from operations of $4.9 million, compared to the
generation of positive cash from operations of
$17.7 million for 2008. We ended the year with a cash
balance of $26.9 million.
|
|
|
|
Progressed in our efforts to position the company for improved
future results, including the recruitment of several new
executives, improved R&D effectiveness, enhancements to IT
and quality system infrastructure and more active corporate
development.
|
Looking
Forward
We expect
flat-to-modest
overall revenue growth in 2010, with growth in our cardiac
monitoring revenue likely offset by decreases in defibrillation
revenue; service revenue will likely be flat.
After several years of decline, we expect our cardiac monitoring
revenues to grow in 2010 as a result of planned new product
introductions and as a result of improved marketing and demand
generation capabilities which we put into place in 2009. We
expect continued growth after 2010, as we continue to develop
and introduce new products, either internally or in partnership
with third parties. If we are unable to successfully execute on
our new product development plans or if the market is not
receptive to our new products, our cardiac monitoring revenues
could be adversely affected in future periods.
Our AED revenues in 2010 may be adversely affected by recent
events and, as a result, we may experience a further decline in
defibrillation revenue. Factors that may negatively affect AED
revenue in 2010 include the potential for loss of market share
as a result of the recent voluntary corrective actions
associated with our AEDs, a warning letter that we received from
the FDA in February 2010 and the recent re-entry into the market
of the former AED market leader, Physio Control. Further, if we
are unable to address to the satisfaction of the FDA the issues
raised in the warning letter, we could be required to implement
a more costly corrective action plan or recall,
40
temporarily cease shipments of our products, which could
ultimately impact our ability to fulfill customer orders and
maintain market share, or we may be subject to regulatory action
by the FDA, including seizure, injunction
and/or civil
monetary penalties. Any such regulatory actions could
significantly disrupt our ongoing business and operations and
have a material adverse effect on our financial position and
results of operations.
Additionally, we continue to face challenges in the global
economy. However, we expect the global market for AEDs to grow
over time, as awareness of the benefits of AEDs continues to
increase and as the prevalence of mandates requiring deployment
of AEDs in public venues continues to rise. As the market
continues to grow and as we overcome what we believe to be
temporary challenges associated with our quality and regulatory
issues, we believe that we will be able to grow our AED revenues
over time, both domestically and overseas. We believe our direct
presence in several countries in Europe will result in continued
growth in sales in these markets over time, though again we may
experience softness in the near term due to the quality and
regulatory issues, the return of a competitor to the market and
continued general economic factors.
We expect our revenues in Japan to decline further in 2010, as
we continue to explore and hopefully finalize alternative
distribution. On June 15, 2009, we notified Nihon Kohden,
our current exclusive distributor of AEDs in Japan, that our OEM
Supply and Purchase Agreement dated as of January 1, 2008
(the OEM Agreement) will terminate effective
June 15, 2010. We elected to terminate the OEM Agreement in
order to explore alternative means of distributing AED products
in that market, largely in response to Nihon Kohdens
release of a competing AED. At this point, it is unclear whether
we will continue to distribute through Nihon Kohden after
termination of our existing agreement. If we do not continue our
relationship with Nihon Kohden, we expect to begin selling
products in Japan via an alternative partner sometime in 2010.
We do not expect to realize significant revenue in Japan until
such time as this transition occurs or we define a more
advantageous relationship with Nihon Kohden.
Our future gross profits and gross margins will be dependent
upon our overall revenue volume (by product mix), market pricing
and our costs. Increasing volumes provide economies of scale and
tend to enhance our gross margin. AEDs generally have a higher
gross margin than our monitoring products. Accordingly, if our
product mix shifts toward a relatively higher proportion of
AEDs, our overall gross margin increases and if the mix shifts
toward a relatively higher proportion of monitoring products,
our overall gross margin is likely to decline. Market pricing
for our products has declined slightly in recent years. As we
face challenges in retaining our AED market share in the face of
circumstances discussed elsewhere in this report, we may
experience additional pricing pressure, which may, in turn,
result in a reduction of our gross margins. Finally, any
increases in costs, including any unexpected additional costs
associated with the ongoing or new corrective actions or recalls
relating to our AEDs, or any other quality issues related to our
products that may arise in the future, would also negatively
affect our gross margins. Our actual gross profit and margins
will be dependent on the aggregation of these and other factors.
We expect our operating expenses to increase in 2010 due to
increased expenses associated with regulatory and quality
assurance as we continue to upgrade our internal capabilities in
these areas. We also expect to incur higher research and
development and marketing expenses associated with new product
development initiatives. Further, we expect to see operating
expenses increase over time due to our estimates for modest
revenue growth in future periods. We will continue to monitor
our operating expenses in light of our actual and anticipated
future revenues and gross profit and we may need to take steps
to reduce operating expenses in the future if our revenues and
gross profit do not grow over time.
We expect to realize an operating loss in 2010, as we continue
to invest in new product development, new product launches and
as we improve our quality systems.
41
Revenues
We derive our revenues primarily from the sale of our
non-invasive cardiology products and related consumables, and to
a lesser extent, from services related to these products,
including training. We categorize our revenues as
(1) defibrillation products, which include our AEDs,
hospital defibrillators and related accessories;
(2) cardiac monitoring products, which include capital
equipment, software products and related accessories and
supplies; and (3) service, which includes service
contracts, CPR/AED training services, AED program management
services, equipment maintenance and repair, replacement part
sales and other services. We derive a portion of our service
revenue from sales of separate extended maintenance
arrangements. We defer and recognize these revenues over the
applicable maintenance period.
Revenues for the years ended December 31, 2009, 2008 and
2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008 to 2009
|
|
|
2008
|
|
|
2007 to 2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Defibrillation products
|
|
$
|
85,858
|
|
|
|
(29.6
|
)%
|
|
$
|
121,946
|
|
|
|
25.2
|
%
|
|
$
|
97,382
|
|
% of total revenue
|
|
|
54.8
|
%
|
|
|
|
|
|
|
59.2
|
%
|
|
|
|
|
|
|
53.5
|
%
|
Cardiac monitoring products
|
|
|
53,378
|
|
|
|
(18.6
|
)%
|
|
|
65,556
|
|
|
|
(4.5
|
)%
|
|
|
68,624
|
|
% of total revenue
|
|
|
34.0
|
%
|
|
|
|
|
|
|
31.8
|
%
|
|
|
|
|
|
|
37.7
|
%
|
Service
|
|
|
17,612
|
|
|
|
(5.6
|
)%
|
|
|
18,651
|
|
|
|
15.7
|
%
|
|
|
16,125
|
|
% of total revenue
|
|
|
11.2
|
%
|
|
|
|
|
|
|
9.0
|
%
|
|
|
|
|
|
|
8.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
156,848
|
|
|
|
(23.9
|
)%
|
|
$
|
206,153
|
|
|
|
13.2
|
%
|
|
$
|
182,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Revenue from defibrillation products declined by
$36.1 million, or 30%, for 2009 compared to 2008.
Approximately $27.8 million of this decrease was due to
reduced AED shipments to Nihon Kohden, our exclusive Japanese
distribution partner, due to our relationship with that partner
beginning to wind down, their introduction of competing AED
products in the Japanese market and overall weakened demand in
Japan. The remainder of the decrease in defibrillation products
revenue was due primarily to the impact of the weak economy on
demand for our AEDs in North America. Our AED sales increased
slightly outside of North America and Japan, as the overall
market continued to grow somewhat, despite a weak global economy.
Revenue from cardiac monitoring products decreased by
$12.2 million or 19% for, 2009 as compared to 2008. The
decrease in cardiac monitoring revenue in 2009 compared to the
prior year was primarily due to weakness in the worldwide
medical products markets as a result of the weakened global
economy.
Service revenue for 2009 decreased 6%, as compared to 2008 due
primarily to lower AED training and program management services
related to declines in AED product sales during these same
periods.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Defibrillation products revenue increased significantly for 2008
as compared to 2007 due to strong growth throughout Europe and
Asia (particularly in Japan), which increased by 86% during the
period. This increase was partially offset by decreases in
domestic defibrillation products revenue of 18% during 2008, as
compared to 2007. This decrease was due in part to exceptionally
high revenue in the prior year that included multi-million
dollar school and corporate AED deployments, which did not recur
at the same levels in 2008. The weak U.S. economy
negatively impacted defibrillation product sales, especially in
the latter part of 2008.
Cardiac monitoring products revenue decreased by 4.5% for 2008
from the comparable period in 2007. We believe this was due, in
part, to weakening of general economic conditions, resulting in
longer buying cycles and deferred purchasing decisions for
customers in this portion of our business.
42
Service revenue increased for 2008 as compared to 2007 due
primarily to the success of our continued focus on, and
promotion of, our AED training and program management services,
and to a lesser extent on growth in our cardiac monitoring
service contract sales.
Gross
Profit
Gross profit is revenues less the cost of revenues. Cost of
revenues consists primarily of the costs associated with
manufacturing, assembling and testing our products, amortization
of certain intangibles, overhead costs, compensation, including
stock-based compensation and other costs related to
manufacturing support and logistics. Cost of revenues also
includes costs associated with voluntary corrective actions
related to field initiatives and recalls. We rely on third
parties to manufacture certain of our product components.
Accordingly, a significant portion of our cost of revenues
consists of payments to these manufacturers. Cost of service
revenue consists of customer support costs, training and
professional service expenses, parts and compensation. Our
hardware products include a warranty period that includes
factory repair services or replacement parts. We accrue
estimated expenses for warranty obligations at the time products
are shipped.
Gross profit for the years ended December 31, 2009, 2008
and 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008 to 2009
|
|
|
2008
|
|
|
2007 to 2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Defibrillation products
|
|
$
|
49,487
|
|
|
|
(26.2
|
)%
|
|
$
|
67,053
|
|
|
|
27.3
|
%
|
|
$
|
52,664
|
|
% of defibrillation products revenue
|
|
|
57.6
|
%
|
|
|
|
|
|
|
55.0
|
%
|
|
|
|
|
|
|
54.1
|
%
|
Corrective action costs
|
|
|
(21,000
|
)
|
|
|
n/m
|
|
|
|
|
|
|
|
n/m
|
|
|
|
|
|
Cardiac monitoring products
|
|
|
21,641
|
|
|
|
(26.0
|
)%
|
|
|
29,260
|
|
|
|
(8.6
|
)%
|
|
|
32,000
|
|
% of cardiac monitoring products revenue
|
|
|
40.5
|
%
|
|
|
|
|
|
|
44.6
|
%
|
|
|
|
|
|
|
46.6
|
%
|
Service
|
|
|
5,055
|
|
|
|
(15.3
|
)%
|
|
|
5,970
|
|
|
|
59.1
|
%
|
|
|
3,752
|
|
% of service revenue
|
|
|
28.7
|
%
|
|
|
|
|
|
|
32.0
|
%
|
|
|
|
|
|
|
23.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit
|
|
$
|
55,183
|
|
|
|
(46.0
|
)%
|
|
$
|
102,283
|
|
|
|
15.7
|
%
|
|
$
|
88,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total revenue
|
|
|
35.2
|
%
|
|
|
|
|
|
|
49.6
|
%
|
|
|
|
|
|
|
48.5
|
%
|
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
Total gross profit from defibrillation products in 2009
decreased significantly compared to 2008 due primarily to:
(1) significant declines in revenue and gross profit from
the Japanese market compared to the prior year, and (2) the
impact of the charges for our voluntary corrective actions
related to AEDs in the field, totaling $21.0 million. To a
lesser extent, gross profit from defibrillation products also
declined due to lower overall AED sales, resulting from the
weakened global economy. However, gross margin on defibrillation
products in 2009 increased by 2.6% compared to 2008, due largely
to lower sales volumes in the Japanese market, for which our
gross margins are typically lower than for other geographic
markets.
Charges associated with corrective action costs of
$21.0 million incurred in 2009 represent estimated costs
associated with two separate voluntary corrective actions
associated with our AEDs. During the third quarter of 2009, we
recorded a charge of $18.5 million related to estimated
costs associated with a voluntary field corrective action
intended to enhance the reliability of approximately 300,000
AEDs shipped to customers between June 2003 and June 2009.
Additionally, during the fourth quarter of 2009, we recorded a
charge of $2.5 million related to a voluntary recall of
approximately 12,200 AEDs manufactured between October 2009 and
January 2010. The estimated costs associated with these
corrective actions include development expenses as well as
materials, shipping and other logistical costs required to
manage the corrective actions. There were no similar charges
during the years ended December 31, 2008 or 2007. See the
Looking Forward section above for additional
information regarding the impact of possible corrective actions
on gross profit in future periods.
43
Gross profit from cardiac monitoring products decreased for 2009
as compared to 2008 due principally to lower sales volumes
resulting from weakened conditions in the global economy. Gross
margins on cardiac monitoring products decreased for 2009 as
compared to 2008 due primarily to changes in product mix toward
an increased proportion of lower margin products and, to a
lesser extent, to increased component parts in certain products.
Gross profit from service decreased for 2009 as compared to 2008
due principally to lower service revenues associated with our
AED training and program management services related to declines
in AED product sales during these same periods.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Gross profit from defibrillation products increased for 2008 as
compared to 2007 due principally to higher sales to Nihon Kohden
during the period, and to a lesser extent to cost efficiencies
associated with increased volumes of production related to our
defibrillation products.
Gross profit and gross margin from cardiac monitoring products
decreased for 2008 as compared to 2007 due principally to
changes in product mix as well as challenges resulting from
deteriorating economic conditions during 2008.
Gross profit from service in 2008 increased as a percentage of
service revenue for 2008 as compared to 2007 due in part to
increased sales of higher value-added offerings and general
growth in service revenue while costs remained relatively fixed.
Operating
Expenses
Operating expenses include expenses related to research and
development, sales, marketing and other general and
administrative expenses required to run our business, including
stock-based compensation.
Research and development expenses consist primarily of salaries
and related expenses for development and engineering personnel,
fees paid to consultants, and prototype costs related to the
design, development, testing and enhancement of products.
Several components of our research and development activities
require significant funding, the timing of which can cause
significant quarterly variability in our expenses.
Sales and marketing expenses consist primarily of salaries,
commissions and related expenses for personnel engaged in sales,
marketing and sales support functions as well as costs
associated with corporate and product branding, promotional and
other marketing activities.
General and administrative expenses consist primarily of
employee salaries and related expenses for executive, finance,
accounting, information technology, regulatory and human
resources personnel as well as bad debt expense, professional
fees, legal fees, excluding fees associated with significant
litigation matters, and other corporate expenses.
Impairment of goodwill consists of pre-tax charges of
$107.7 million taken in 2008, representing a write-off of
the entire amount of our previously acquired goodwill, primarily
resulting from our merger transaction with CSI in 2005. See
Note 9 Goodwill to the Consolidated Financial
Statements in Item 8 of this report for further discussion
of the impairment charge.
Litigation and related expenses include settlement costs and
legal fees related primarily to three cases which were settled
in the first half of 2007.
Licensing income and litigation settlement consists of non cash
income of $5.5 million for the license rights given to
Philips as part of the litigation settlement and a non cash gain
on the transaction of $0.5 million. See
Note 1 Summary of Significant Accounting
Policies to the Consolidated Financial Statements in Item 8
of this report for further discussion.
44
Operating expenses for the years ended December 31, 2009,
2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008 to 2009
|
|
|
2008
|
|
|
2007 to 2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Research and development
|
|
$
|
14,950
|
|
|
|
(9.0
|
)%
|
|
$
|
16,426
|
|
|
|
26.2
|
%
|
|
$
|
13,020
|
|
% of total revenue
|
|
|
9.5
|
%
|
|
|
|
|
|
|
8.0
|
%
|
|
|
|
|
|
|
7.1
|
%
|
Sales and marketing
|
|
|
48,047
|
|
|
|
(5.3
|
)%
|
|
|
50,733
|
|
|
|
9.8
|
%
|
|
|
46,195
|
|
% of total revenue
|
|
|
30.6
|
%
|
|
|
|
|
|
|
24.6
|
%
|
|
|
|
|
|
|
25.4
|
%
|
General and administrative
|
|
|
26,134
|
|
|
|
16.6
|
%
|
|
|
22,417
|
|
|
|
16.9
|
%
|
|
|
19,176
|
|
% of total revenue
|
|
|
16.7
|
%
|
|
|
|
|
|
|
10.9
|
%
|
|
|
|
|
|
|
10.5
|
%
|
Impairment of goodwill
|
|
|
|
|
|
|
n/m
|
|
|
|
107,671
|
|
|
|
n/m
|
|
|
|
|
|
% of total revenue
|
|
|
0.0
|
%
|
|
|
|
|
|
|
52.2
|
%
|
|
|
|
|
|
|
0.0
|
%
|
Litigation and related expenses
|
|
|
|
|
|
|
n/m
|
|
|
|
|
|
|
|
n/m
|
|
|
|
3,808
|
|
% of total revenue
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
2.1
|
%
|
Licensing income and litigation settlement
|
|
|
|
|
|
|
n/m
|
|
|
|
|
|
|
|
n/m
|
|
|
|
(6,000
|
)
|
% of total revenue
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
(3.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
$
|
89,131
|
|
|
|
(54.8
|
)%
|
|
$
|
197,247
|
|
|
|
158.9
|
%
|
|
$
|
76,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of total revenue
|
|
|
56.8
|
%
|
|
|
|
|
|
|
95.7
|
%
|
|
|
|
|
|
|
49.0
|
%
|
Year
Ended December 31, 2009 Compared to Year Ended
December 31, 2008
The decrease in research and development expenses in 2009 as
compared to 2008 was due primarily to decreased labor costs
resulting from restructuring programs we implemented during the
first quarter of 2009 for which estimated costs were recorded in
the fourth quarter of 2008. These restructuring programs
resulted in lower cost structures during 2009, partially offset
by increased consulting, outsourcing and severance costs during
the last six months of 2009.
The decrease in sales and marketing expenses for 2009 as
compared to 2008 was due in part to lower commissions related to
lower total revenues, which decreased 24%. In addition, employee
related labor and other costs decreased for the year ended
December 31, 2009 as a result of efforts to reduce costs
and prioritize spending during 2009.
The increase in general and administrative expenses for 2009 as
compared to 2008 was due primarily to increases in staffing and
professional services in our regulatory affairs and quality
assurance functions and transition and separation costs
associated with turnover of our President and Chief Executive
Officer and two members of our Board of Directors during 2009.
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
The increase in research and development expenses for 2008
compared to 2007 was due primarily to higher labor and outside
contractor costs related to increased investment in future
versions of our products. Additionally, research and development
expenses included significant costs resulting from a planned
reduction in the number of research and development personnel in
order to reduce internal staffing in favor of external resources
for certain products.
The increase in sales and marketing expenses for 2008 compared
to 2007 was due primarily to higher commissions related to
higher total revenues and higher selling expenses from foreign
subsidiaries where we have added a direct presence. In addition,
payroll and benefit related costs increased due to higher
staffing.
The increase in general and administrative expenses for 2008
compared to 2007 was due primarily to increases in payroll and
benefit related costs, including temporary labor as well as
increased bad debt expense and legal expenses, partially offset
by lower professional service fees related to audit, tax and
consulting fees.
45
Impairment of goodwill during 2008 totaled $107.7 million
and represented a pre-tax full write-off of previously acquired
goodwill related primarily to the merger transaction with CSI in
2005. The impairment was a result of a number of factors that
existed during the fourth quarter of 2008, and primarily driven
by the significant downtown in global economic conditions during
this period and the related impact on our market capitalization.
See Note 9 Goodwill to the Consolidated
Financial Statements in Item 8 of this report for further
discussion. We had no similar expense related to impairment of
goodwill or other intangible assets in 2009 or in 2007.
Litigation and related expenses for 2007 totaled
$3.8 million which were comprised of settlement costs and
legal fees related primarily to three cases which were settled
between April and July. We had no expenses related to these same
cases for the years ended December 31, 2009 or 2008.
We had no licensing income and litigation settlement benefit in
2009 or 2008. Licensing income and litigation settlement for
2007 included non cash income of $5.5 million for the
license rights granted to Philips as part of the litigation
settlement and a non cash gain on the transaction of
$0.5 million.
Other
Income and Expense
Other income, net for 2009 was $0.1 million and consisted
primarily of $0.5 million income from royalty agreements
and $0.1 million income associated with the implementation
of a new purchase card program, substantially offset by
$0.5 million in net foreign currency exchange losses.
Other income, net for 2008 was $0.6 million and consisted
primarily of income from royalty agreements of $0.5 million
and interest income on invested cash of $0.5 million.
Additionally, other income included realized foreign currency
gains related to forward exchange contracts associated with cash
and accounts receivable that are denominated in currencies other
than the U.S. Dollar. These realized gains were
substantially offset by foreign currency losses on intercompany
payables denominated in U.S. dollars owed by foreign
subsidiaries.
Other income, net for 2007 was $0.8 million and consisted
primarily of income from
sub-lease
agreements at facilities, royalty income, and foreign currency
transaction gains. Interest income on invested cash was
$0.5 million in 2007.
Income
Taxes
During 2009 we recorded income tax expense of
$42.5 million. Our worldwide effective tax rate for 2009
was 125.8% which was substantially affected by an increase to
our valuation allowance against our net deferred tax assets of
$54.6 million for the year ended December 31, 2009 of
which $42.2 million was included in the statement of operations
as deferred tax expense. We evaluated both the positive and
negative evidence which existed during 2009 in making our
determination to increase our valuation allowance against our
deferred tax assets. Based on our evaluation of recent
cumulative book losses, including the unfavorable impact of the
voluntary corrective actions described above, as well as giving
consideration to uncertainty regarding estimates of future
profitability, we concluded that an increase to our valuation
allowance was required during 2009 to reduce gross deferred tax
assets to an amount that is more likely than not to be realized.
As of December 31, 2009, after consideration of the
valuation allowance recorded against gross deferred tax assets,
the consolidated balance sheet includes a noncurrent deferred
tax liability of $5.4 million relating primarily to
indefinite-lived intangible assets acquired from Quinton and CSI
that are not expected to reverse unless the related assets
become amortizable or are impaired in future periods.
As a result of recording the valuation allowance, we effectively
have not recognized a deferred tax benefit for domestic losses
incurred during 2009. If in future periods we generate taxable
income, we will evaluate the positive and negative evidence
available at the time in order to support our analysis of the
need for a valuation allowance, and as a result we may release
our valuation allowance in part, or in total, when it becomes
more likely than not that the deferred tax assets will be
realized. Until this occurs, we will continue to record a
deferred tax benefit for any domestic losses that might be
incurred in the future and will increase the recorded valuation
allowance for any such additional losses. We expect to record
additional tax expense in future periods related primarily to
profits generated in our foreign jurisdictions in which we
operate, which generally are forecasted to be marginally
profitable on a financial reporting and taxable basis. Tax
expense related to foreign jurisdictions was $1.0 million
for the year ended December 31, 2009.
46
During 2008 we recorded income tax expense of $4.1 million
compared to income tax expense of $4.9 million in 2007. Our
worldwide effective tax rate for 2008 was 4% and was materially
affected by the pre-tax goodwill impairment charge of
$107.7 million, of which substantially all was
nondeductible for federal and state income tax purposes.
Accordingly, substantially all of our 2008 income tax expense
was based on income excluding this impairment charge. Our
worldwide effective tax rate applicable to income excluding the
goodwill impairment charge was approximately 31%. This worldwide
effective tax rate was down from our 2007 worldwide effective
tax rate of 37% due in part to a shift in income from the
U.S. to foreign jurisdictions with lower income tax rates,
an increase in federal and state research and development
credits as well as a slight decrease in our 2008 state
effective tax rate.
The worldwide effective tax rate for 2007 was 37% and resulted
from our federal and state effective tax rates, partially offset
by research and development credits earned during the same
period.
Liquidity
and Capital Resources
Cash
flows for the years ended December 31, 2009, 2008 and 2007
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
% Change
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008 to 2009
|
|
|
2008
|
|
|
2007 to 2008
|
|
|
2007
|
|
|
|
(Dollars in thousands)
|
|
|
Cash provided by (used in) operating activities
|
|
$
|
(4,943
|
)
|
|
|
(127.9
|
)%
|
|
$
|
17,743
|
|
|
|
33.4
|
%
|
|
$
|
13,297
|
|
Cash used in investing activities
|
|
|
(4,170
|
)
|
|
|
2.2
|
%
|
|
|
(4,262
|
)
|
|
|
(12.5
|
)%
|
|
|
(3,788
|
)
|
Cash provided by financing activities
|
|
|
864
|
|
|
|
12.4
|
%
|
|
|
769
|
|
|
|
(7.1
|
)%
|
|
|
828
|
|
Effect of exchange rate changes on cash
|
|
|
460
|
|
|
|
87.0
|
%
|
|
|
246
|
|
|
|
n/m
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total change in cash and cash equivalents
|
|
$
|
(7,789
|
)
|
|
|
(153.7
|
)%
|
|
$
|
14,496
|
|
|
|
40.2
|
%
|
|
$
|
10,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in operating activities of $4.9 million in 2009
resulted from our net loss of $77.0 million, substantially
offset by non cash items included in net income, excluding cash,
of $51.2 million, a decrease in accounts receivable of
$8.9 million, and an increase in current liabilities, most
notably the $15.2 million estimate for the corrective
action liabilities, for which cash will be expended in future
periods. Cash provided by operating activities of
$17.7 million for 2008 resulted from our net loss of
$98.4 million plus net non cash items included in net loss
of $119.3 million (including the pre-tax goodwill
impairment charge of $107.7 million) and a net increase in
working capital, excluding cash, of $3.6 million. Cash
provided by operating activities of $13.3 million for 2007
resulted from our net income of $8.5 million plus net non
cash items included in net income of $7.5 million, reduced
by a net increase in working capital of $2.7 million.
We anticipate that we will continue to use cash in operations
during 2010 due in part to our anticipation of operating losses
for the year and also due to the cash requirements associated
with satisfying our obligations under the two previously
mentioned voluntary corrective actions associated with our AEDs.
Our use of cash to fund operations may be further impacted by
other general business factors such as our ability to
successfully sell our products and deliver our services, collect
our accounts receivables, optimize lead times and inventory
levels, and manage our expenses. Our ability to grow the
business through possible acquisitions funded by cash or other
borrowing has been reduced substantially in the foreseeable
future as we plan to use a significant amount of our existing
cash and cash equivalents during 2010.
Net cash used in investing activities of $4.2 million and
$4.3 million for 2009 and 2008, respectively, consisted
primarily of payments for capital expenditures related to
investments in information technology and new manufacturing
equipment and tooling for products under development, and to a
lesser extent, expenditures related to leasehold improvements at
our facility in Laguna Hills, CA during 2008.
Net cash used in investing activities in 2007 consisted of
payments for capital expenditures of $2.0 million,
purchases of short-term investments of $1.2 million,
payments of acquisition related costs associated with the
47
merger transaction of $1.0 million, and payment of
$1.0 million in consideration of certain patent rights
received as part of the Philips settlement agreement. These
investing outflows were partially offset by proceeds from
maturities of short-term investments of $1.4 million.
Net cash provided by financing activities for 2009, 2008 and
2007 consisted primarily of proceeds from exercises of stock
options and sales of common stock under our Employee Stock
Purchase Plan less minimum tax withholdings on restricted stock
awards remitted to taxing authorities.
As of December 31, 2009, we had cash and cash equivalents
totaled $26,9 million. We expect to incur operating losses
in 2010 and to use cash in operations. We have recently
initiated two voluntary corrective actions relating to its AED
products, the costs of which have been estimated at
$21.0 million. The costs recorded are estimates and actual
costs that the company will incur to carry out the corrective
actions could be more or less than the $15.2 million that
is remaining in our accrued corrective action liabilities on the
consolidated balance sheets as of December 31, 2009.
However, we expect to spend substantially all of the required
costs associated with these two voluntary corrective actions
during 2010 which will negatively impact our cash position. We
believe our existing cash and cash equivalents will be
sufficient to fund our anticipated operating losses, meet
working capital requirements and fund anticipated capital
expenditures and other obligations, including the estimated
remaining costs of the ongoing corrective actions, through at
least December 31, 2010.
However, we may be affected by economic, financial, competitive,
legislative, regulatory, business and other factors beyond our
control. As discussed in Note 2, in February 2010, we
received a warning letter from the FDA noting, among other
things, that the voluntary field corrective action undertaken in
November 2009 is inadequate. While we are in ongoing discussions
with the FDA regarding this issue, we may need to take different
or additional actions than anticipated depending on the outcome
of those discussions. If we are unable to satisfy the FDAs
concerns, we may be subject to regulatory action by the FDA,
including but not limited to seizure, injunction, halting
shipment of our products
and/or civil
monetary penalties. Any such actions could significantly disrupt
its ongoing business and operations and have a material adverse
effect on its financial position and results of operations.
Additionally, the above issues and other matters, such as the
recent re entry into the market of the former AED market leader,
may adversely impact our projected revenues in the near term.
Accordingly, we may be required to reduce costs, which could
adversely impact our forecasts for revenue growth in future
periods.
At December 31, 2009, we did not have any borrowings under
our existing $10.0 million line of credit agreement with
Silicon Valley Bank. This line of credit agreement, which
originally expired in January 2010, has been extended through
March 2010 and we are currently negotiating for a renewed line
of credit that would extend for a year or more. There can be no
assurance that we will be successful in securing a renewed line
of credit and, if not, we may be required to seek alternative
sources of financing that may be more expensive and have more
restrictive covenants and conditions.
Given the above factors, we plan to closely monitor our
projected operating results and cash balances during 2010. If we
are not successful in obtaining additional financing and, to the
extent our operating results are not in line with our projected
results, we would have the intent to reduce costs, to the extent
necessary, to enable us to continue operations through at least
December 31, 2010. While such cost reductions might
negatively impact future growth opportunities, we believe we
have the ability to make such reductions, should they be
necessary.
In addition, we may be affected by economic, financial,
competitive, legislative, regulatory, business and other factors
beyond our control. For more information on the factors that may
impact our financial results, please see Part I,
Item 1A Risk Factors included in this Annual Report on
Form 10-K.
In addition, we are continually considering other acquisitions
that would complement or expand our existing business or that
may enable us to expand into new markets. Future acquisitions
may require additional debt, equity financing, or both. We may
not be able to obtain any additional financing, or may not be
able to obtain additional financing on acceptable terms.
48
Contractual
Obligations
The table below summarizes our contractual obligations and other
commercial commitments as of December 31, 2009 (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating leases
|
|
$
|
12,786
|
|
|
$
|
2,133
|
|
|
$
|
4,210
|
|
|
$
|
3,258
|
|
|
$
|
3,185
|
|
Purchase obligations
|
|
|
32,916
|
|
|
|
32,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$
|
45,702
|
|
|
$
|
35,049
|
|
|
$
|
4,210
|
|
|
$
|
3,258
|
|
|
$
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase obligations consist of outstanding purchase orders
issued in the normal course of business.
At December 31, 2009 we had performance bonds of
$0.1 million outstanding which were collateralized by
letters of credit issued by Silicon Valley Bank in connection
with various sales contracts or financing arrangements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
We develop products in the U.S. and sell them worldwide. As
a result, our financial results could be affected by factors
such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Since the majority of
our revenues are currently priced in U.S. dollars and are
translated to local currency amounts, a strengthening of the
dollar could make our products less competitive in foreign
markets.
49
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
CARDIAC
SCIENCE CORPORATION
AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
50
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework as of December 31, 2009 in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations (COSO) of the
Treadway Commission. Based on our evaluation under the COSO
framework, our management concluded that our internal control
over financial reporting was effective as of December 31,
2009.
KPMG LLP, an independent registered public accounting firm, has
issued an attestation report on the Companys internal
control over financial reporting as of December 31, 2009,
which is included on page 52.
51
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Cardiac Science Corporation:
We have audited the accompanying consolidated balance sheets of
Cardiac Science Corporation and subsidiaries as of
December 31, 2009 and 2008, and the related consolidated
statements of operations, equity and comprehensive income
(loss), and cash flows for each of the years in the three-year
period ended December 31, 2009. In connection with our
audits of the consolidated financial statements, we also have
audited financial statement schedule II. We also have
audited Cardiac Science Corporations internal control over
financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Cardiac Science
Corporations management is responsible for these
consolidated financial statements and financial statement
schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying Managements Report on Internal Control over
Financial Reporting on page 51. Our responsibility is to
express an opinion on these consolidated financial statements
and financial statement schedule and an opinion on the
Companys internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements
included examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
consolidated financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Cardiac Science Corporation and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2009, in conformity
with U.S. generally accepted accounting principles. As
discussed in Note 1 to the consolidated financial
statements, the Company changed its accounting for minority
interests as required by Statement of Financial Accounting
Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements an amendment of
ARB No. 51 (included in FASB ASC Topic 810,
Consolidation), effective January 1, 2009. Also
in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein. Also in our
opinion, Cardiac Science Corporation maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2009, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
Seattle, Washington
March 15, 2010
52
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
26,866
|
|
|
$
|
34,655
|
|
Accounts receivable, net of allowance for doubtful accounts of
$1,017 and $1,186, respectively
|
|
|
24,228
|
|
|
|
31,665
|
|
Inventories
|
|
|
23,581
|
|
|
|
24,692
|
|
Deferred income taxes
|
|
|
|
|
|
|
8,366
|
|
Prepaid expenses and other current assets
|
|
|
3,702
|
|
|
|
3,144
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
78,377
|
|
|
|
102,522
|
|
Other assets
|
|
|
872
|
|
|
|
428
|
|
Machinery and equipment, net of accumulated depreciation and
amortization
|
|
|
|
|
|
|
|
|
of $17,490 and $15,190, respectively
|
|
|
8,406
|
|
|
|
6,994
|
|
Deferred income taxes
|
|
|
31
|
|
|
|
28,452
|
|
Intangible assets, net of accumulated amortization of $17,876
and $13,889, respectively
|
|
|
27,988
|
|
|
|
31,278
|
|
Investments in unconsolidated entities
|
|
|
386
|
|
|
|
534
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
116,060
|
|
|
$
|
170,208
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,030
|
|
|
$
|
12,711
|
|
Accrued liabilities
|
|
|
12,216
|
|
|
|
13,535
|
|
Warranty liability
|
|
|
4,028
|
|
|
|
3,796
|
|
Deferred revenue
|
|
|
7,919
|
|
|
|
7,918
|
|
Corrective action liabilities
|
|
|
15,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
50,442
|
|
|
|
37,960
|
|
Deferred income taxes
|
|
|
5,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
55,831
|
|
|
|
37,960
|
|
Equity:
|
|
|
|
|
|
|
|
|
Cardiac Science Corporation shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock (10,000,000 shares authorized),
$0.001 par value, no shares issued or outstanding as of
December 31, 2009 and 2008, respectively
|
|
|
|
|
|
|
|
|
Common stock (65,000,000 shares authorized),
$0.001 par value, 23,566,320 and 22,998,364 shares
issued and outstanding at December 31, 2009 and 2008,
respectively
|
|
|
231,159
|
|
|
|
227,303
|
|
Accumulated other comprehensive income (loss)
|
|
|
304
|
|
|
|
(70
|
)
|
Accumulated deficit
|
|
|
(172,527
|
)
|
|
|
(95,530
|
)
|
|
|
|
|
|
|
|
|
|
Total Cardiac Science Corporation shareholders equity
|
|
|
58,936
|
|
|
|
131,703
|
|
Noncontrolling interests
|
|
|
1,293
|
|
|
|
545
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
60,229
|
|
|
|
132,248
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
116,060
|
|
|
$
|
170,208
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
53
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
139,236
|
|
|
$
|
187,502
|
|
|
$
|
166,006
|
|
Service
|
|
|
17,612
|
|
|
|
18,651
|
|
|
|
16,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
156,848
|
|
|
|
206,153
|
|
|
|
182,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
68,108
|
|
|
|
91,189
|
|
|
|
81,342
|
|
Corrective action costs
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
Service
|
|
|
12,557
|
|
|
|
12,681
|
|
|
|
12,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenues
|
|
|
101,665
|
|
|
|
103,870
|
|
|
|
93,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
55,183
|
|
|
|
102,283
|
|
|
|
88,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
14,950
|
|
|
|
16,426
|
|
|
|
13,020
|
|
Sales and marketing
|
|
|
48,047
|
|
|
|
50,733
|
|
|
|
46,195
|
|
General and administrative
|
|
|
26,134
|
|
|
|
22,417
|
|
|
|
19,176
|
|
Impairment of goodwill
|
|
|
|
|
|
|
107,671
|
|
|
|
|
|
Litigation and related expenses
|
|
|
|
|
|
|
|
|
|
|
3,808
|
|
Licensing income and litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
89,131
|
|
|
|
197,247
|
|
|
|
76,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(33,948
|
)
|
|
|
(94,964
|
)
|
|
|
12,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
66
|
|
|
|
489
|
|
|
|
479
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
(77
|
)
|
Other income, net
|
|
|
102
|
|
|
|
635
|
|
|
|
799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
168
|
|
|
|
1,124
|
|
|
|
1,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(33,780
|
)
|
|
|
(93,840
|
)
|
|
|
13,418
|
|
Income tax expense
|
|
|
(42,462
|
)
|
|
|
(4,093
|
)
|
|
|
(4,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
(76,242
|
)
|
|
|
(97,933
|
)
|
|
|
8,494
|
|
Less: net income attributable to noncontrolling interests
|
|
|
(755
|
)
|
|
|
(451
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cardiac Science Corporation
|
|
$
|
(76,997
|
)
|
|
$
|
(98,384
|
)
|
|
$
|
8,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Science Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.31
|
)
|
|
$
|
(4.30
|
)
|
|
$
|
0.37
|
|
Diluted
|
|
$
|
(3.31
|
)
|
|
$
|
(4.30
|
)
|
|
$
|
0.37
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
22,697,113
|
|
Diluted
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
23,197,911
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
54
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF EQUITY AND COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Retained
|
|
|
Science
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
Earnings
|
|
|
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Shareholders
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Income (Loss)
|
|
|
Deficit)
|
|
|
Equity
|
|
|
Interests
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance, December 31, 2006
|
|
|
22,598
|
|
|
$
|
221,213
|
|
|
$
|
20
|
|
|
$
|
(5,636
|
)
|
|
$
|
215,597
|
|
|
$
|
75
|
|
|
$
|
215,672
|
|
Issuance of common stock upon exercise of stock options
|
|
|
74
|
|
|
|
368
|
|
|
|
|
|
|
|
|
|
|
|
368
|
|
|
|
|
|
|
|
368
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,257
|
|
|
|
|
|
|
|
|
|
|
|
2,257
|
|
|
|
|
|
|
|
2,257
|
|
Proceeds from issuance of stock under employee stock purchase
plan
|
|
|
80
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
553
|
|
|
|
|
|
|
|
553
|
|
Stock awards
|
|
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum tax withholding on stock awards
|
|
|
(14
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
|
(141
|
)
|
|
|
|
|
|
|
(141
|
)
|
Investment in consolidated joint venture by noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
48
|
|
Comprehensive income :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,490
|
|
|
|
8,490
|
|
|
|
4
|
|
|
|
8,494
|
|
Unrealized gain on
available-for-sale
securities, net of income tax effect of $87
|
|
|
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,637
|
|
|
|
4
|
|
|
|
8,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
22,782
|
|
|
|
224,250
|
|
|
|
167
|
|
|
|
2,854
|
|
|
|
227,271
|
|
|
$
|
127
|
|
|
|
227,398
|
|
Issuance of common stock upon exercise of stock options
|
|
|
86
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
500
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,194
|
|
|
|
|
|
|
|
|
|
|
|
2,194
|
|
|
|
|
|
|
|
2,194
|
|
Proceeds from issuance of stock under employee stock purchase
plan
|
|
|
90
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
603
|
|
|
|
|
|
|
|
603
|
|
Stock awards
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum tax withholding on stock awards
|
|
|
(20
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
(244
|
)
|
|
|
|
|
|
|
(244
|
)
|
Purchase of noncontrolling interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
(33
|
)
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,384
|
)
|
|
|
(98,384
|
)
|
|
|
451
|
|
|
|
(97,933
|
)
|
Unrealized loss on
available-for-sale
securities, net of income tax effect of ($65)
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(128
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(98,621
|
)
|
|
|
451
|
|
|
|
(98,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
22,998
|
|
|
|
227,303
|
|
|
|
(70
|
)
|
|
|
(95,530
|
)
|
|
|
131,703
|
|
|
|
545
|
|
|
|
132,248
|
|
Issuance of common stock upon
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
exercise of stock options
|
|
|
193
|
|
|
|
528
|
|
|
|
|
|
|
|
|
|
|
|
528
|
|
|
|
|
|
|
|
528
|
|
Stock-based compensation
|
|
|
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
2,670
|
|
|
|
|
|
|
|
2,670
|
|
Proceeds from issuance of stock under employee stock purchase
plan
|
|
|
169
|
|
|
|
464
|
|
|
|
|
|
|
|
|
|
|
|
464
|
|
|
|
|
|
|
|
464
|
|
Stock awards
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum tax withholding on stock awards
|
|
|
(42
|
)
|
|
|
(128
|
)
|
|
|
|
|
|
|
|
|
|
|
(128
|
)
|
|
|
|
|
|
|
(128
|
)
|
Issuance of common stock in asset acquisition
|
|
|
100
|
|
|
|
322
|
|
|
|
|
|
|
|
|
|
|
|
322
|
|
|
|
|
|
|
|
322
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,997
|
)
|
|
|
(76,997
|
)
|
|
|
755
|
|
|
|
(76,242
|
)
|
Unrealized loss on
available-for-sale
securities, net of income tax effect of ($37)
|
|
|
|
|
|
|
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
(110
|
)
|
|
|
|
|
|
|
(110
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
484
|
|
|
|
|
|
|
|
484
|
|
|
|
(7
|
)
|
|
|
477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76,623
|
)
|
|
|
748
|
|
|
|
(75,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
23,566
|
|
|
$
|
231,159
|
|
|
$
|
304
|
|
|
$
|
(172,527
|
)
|
|
$
|
58,936
|
|
|
$
|
1,293
|
|
|
$
|
60,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
55
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(76,242
|
)
|
|
$
|
(97,933
|
)
|
|
$
|
8,494
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
2,645
|
|
|
|
2,173
|
|
|
|
2,233
|
|
Gain on disposal of machinery and equipment
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Depreciation and amortization
|
|
|
6,294
|
|
|
|
6,327
|
|
|
|
6,746
|
|
Impairment of goodwill
|
|
|
|
|
|
|
107,671
|
|
|
|
|
|
Licensing income and litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(6,000
|
)
|
Deferred income taxes
|
|
|
42,215
|
|
|
|
3,093
|
|
|
|
4,494
|
|
Changes in operating assets and liabilities, net of businesses
acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
8,939
|
|
|
|
(2,825
|
)
|
|
|
(2,468
|
)
|
Inventories
|
|
|
1,100
|
|
|
|
(2,877
|
)
|
|
|
(4,153
|
)
|
Prepaid expenses and other assets
|
|
|
(2,545
|
)
|
|
|
(645
|
)
|
|
|
(304
|
)
|
Accounts payable
|
|
|
(1,511
|
)
|
|
|
(543
|
)
|
|
|
1,031
|
|
Accrued liabilities
|
|
|
(1,320
|
)
|
|
|
2,940
|
|
|
|
1,531
|
|
Warranty liability
|
|
|
232
|
|
|
|
585
|
|
|
|
679
|
|
Corrective action liabilities
|
|
|
15,249
|
|
|
|
|
|
|
|
|
|
Deferred revenue
|
|
|
1
|
|
|
|
(223
|
)
|
|
|
1,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(4,943
|
)
|
|
|
17,743
|
|
|
|
13,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(845
|
)
|
|
|
(1,240
|
)
|
Maturities of short-term investments
|
|
|
|
|
|
|
1,195
|
|
|
|
1,437
|
|
Purchases of machinery and equipment
|
|
|
(3,856
|
)
|
|
|
(3,911
|
)
|
|
|
(2,014
|
)
|
Purchases of intangibles
|
|
|
(370
|
)
|
|
|
|
|
|
|
|
|
Purchase of patents as part of litigation settlement
|
|
|
|
|
|
|
|
|
|
|
(1,000
|
)
|
Proceeds from repayment of notes
|
|
|
110
|
|
|
|
38
|
|
|
|
|
|
Cash paid for acquisitions
|
|
|
(54
|
)
|
|
|
(739
|
)
|
|
|
(971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(4,170
|
)
|
|
|
(4,262
|
)
|
|
|
(3,788
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options and issuance of shares
under employee stock purchase plan
|
|
|
992
|
|
|
|
1,103
|
|
|
|
921
|
|
Minimum tax withholding on stock awards
|
|
|
(128
|
)
|
|
|
(244
|
)
|
|
|
(141
|
)
|
Investment in consolidated joint venture by noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
48
|
|
Purchase of shares from noncontrolling interest
|
|
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
864
|
|
|
|
769
|
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
460
|
|
|
|
246
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(7,789
|
)
|
|
|
14,496
|
|
|
|
10,340
|
|
Cash and cash equivalents, beginning of period
|
|
|
34,655
|
|
|
|
20,159
|
|
|
|
9,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
26,866
|
|
|
$
|
34,655
|
|
|
$
|
20,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes, net of refunds
|
|
$
|
420
|
|
|
$
|
1,026
|
|
|
$
|
338
|
|
Cash paid for interest
|
|
|
|
|
|
|
|
|
|
$
|
25
|
|
Supplemental disclosures of noncash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets acquired in licensing income and litigation
settlement
|
|
$
|
|
|
|
|
|
|
|
$
|
6,000
|
|
Increase (decrease) in accrued machinery and equipment purchases
|
|
$
|
(212
|
)
|
|
$
|
396
|
|
|
|
|
|
Conversion of accounts receivable to note receivable
|
|
$
|
228
|
|
|
$
|
330
|
|
|
|
|
|
Acquisitions of intangible assets
|
|
$
|
322
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
56
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
|
|
1.
|
Summary
of Significant Accounting Policies
|
Organization
and Description of Business
Cardiac Science develops, manufactures, and markets a family of
advanced diagnostic and therapeutic cardiology devices and
systems, including automated external defibrillators (AED),
electrocardiograph devices (ECG/EKG), cardiac stress test
treadmills and systems, Holter monitoring systems, hospital
defibrillators, cardiac rehabilitation telemetry systems, vital
signs and spot check monitors, and cardiology data management
systems (informatics) that connect with hospital information
(HIS), electronic medical record (EMR), and other information
systems. The company sells a variety of related products and
consumables and provides a portfolio of training, maintenance,
and support services. Cardiac Science, the successor to the
cardiac businesses that established the trusted
Burdick®,
Quinton®
and
Powerheart®
brands, is headquartered in Bothell, Washington. With customers
in more than 100 countries worldwide, the company has operations
in North America, Europe, and Asia.
The Company is the result of the combination of Quinton
Cardiology Systems, Inc. (Quinton) and Cardiac
Science, Inc. (CSI) pursuant to a merger transaction
(Merger) that was completed on September 1,
2005.
Basis
of Presentation
Basis of
Presentation
The Company follows accounting standards set by the Financial
Accounting Standards Board, commonly referred to as the
FASB. The FASB sets U.S. generally accepted
accounting principles (U.S. GAAP) that the
Company follows to ensure it consistently reports its financial
position, results of operations, and cash flows. References to
U.S. GAAP issued by the FASB in the Companys notes to
its consolidated financial statements are to the FASB Accounting
Standards Codification, sometimes referred to as the
Codification or ASC. The Codification
was implemented on July 1, 2009 and is effective for
interim and annual periods ending after September 15, 2009.
The Company adopted the Codification and has conformed its
consolidated financial statements and related notes to the
Codification for the year ended December 31, 2009.
The accompanying consolidated financial statements present the
Company on a consolidated basis, including the Companys
wholly owned subsidiaries and its majority owned joint ventures.
All intercompany accounts and transactions have been eliminated.
Effective January 1, 2009, the Company adopted Statement of
Financial Accounting Standards No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of ARB No. 51
(included in FASB ASC Topic 810, Consolidation). The
guidance requires, among other things, that noncontrolling
interests be separately presented as a component of equity on
the consolidated balance sheets, and applied prospectively with
the exception of presentation and disclosure requirements. As a
result of the adoption of this guidance, the Company
reclassified $545,000, $127,000, and $75,000 of minority
interests previously classified in the mezzanine section (after
total liabilities and before shareholders equity) as of
December 31, 2008, 2007, and 2006, respectively, to
noncontrolling interests within Equity on the
consolidated balance sheets and included changes to
noncontrolling interests in the statements of equity and
comprehensive income (loss). The Company also modified the
format of the consolidated statements of operations to conform
to the disclosure requirements of this guidance for all periods
presented. The presentation and disclosure requirements have
been retrospectively applied for all periods presented. The
adoption of this guidance had no impact on net income (loss)
attributable to Cardiac Science Corporation.
Liquidity
As of December 31, 2009, the Companys cash and cash
equivalents totaled $26,900,000. The Company expects to incur
operating losses in 2010 and to use cash in operations. The
Company has recently initiated two voluntary corrective actions
relating to its AED products, the costs of which have been
estimated at $21,000,000. The costs recorded are estimates and
actual costs that the company will incur to carry out the
corrective actions could be more or less than the $15,249,000
that is remaining in the Companys accrued corrective
action liabilities on the consolidated
57
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
balance sheets as of December 31, 2009. However, the
Company expects to spend substantially all of the required costs
associated with these two voluntary corrective actions during
2010 which will negatively impact the Companys cash
position. The Company believes its existing cash and cash
equivalents will be sufficient to fund its anticipated operating
losses, meet working capital requirements and fund anticipated
capital expenditures and other obligations, including the
estimated remaining costs of the ongoing corrective actions,
through at least December 31, 2010.
However, the Company may be affected by economic, financial,
competitive, legislative, regulatory, business and other factors
beyond the Companys control. As discussed in Note 2,
in February 2010, the Company received a warning letter from the
FDA noting, among other things, that the voluntary field
corrective action undertaken in November 2009 is inadequate.
While the Company is in ongoing discussions with the FDA
regarding this issue, the Company may need to take different or
additional actions than anticipated depending on the outcome of
those discussions. If the Company is unable to satisfy the
FDAs concerns, the Company may be subject to regulatory
action by the FDA, including but not limited to seizure,
injunction, halting shipment of our products
and/or civil
monetary penalties. Any such actions could significantly disrupt
its ongoing business and operations and have a material adverse
effect on its financial position and results of operations.
Additionally, the above issues and other matters, such as the
recent re entry into the market of the former AED market leader,
may adversely impact the Companys projected revenues in
the near term. Accordingly, the Company may be required to
reduce costs, which could adversely impact the Companys
forecasts for revenue growth in future periods.
Furthermore, the Company may be forced to borrow or obtain
additional sources of financing in order to sustain its
operations. At December 31, 2009, the Company did not have
any borrowings under its existing $10,000,000 line of credit
agreement with Silicon Valley Bank. This line of credit
agreement, which originally expired in January 2010, has been
extended through March 2010 and the Company is currently
negotiating for a renewed line of credit that would extend for a
year or more. There can be no assurance that the Company will be
successful in securing a renewed line of credit and, if not, it
may be required to seek alternative sources of financing that
may be more expensive and have more restrictive covenants and
conditions. The Company may not be able to obtain any additional
financing, or may not be able to obtain additional financing on
acceptable terms.
Given the above factors, the Company plans to closely monitor
its projected operating results and cash balances during 2010.
If the Company is not successful in obtaining additional
financing and, to the extent the Companys operating
results are not in line with its projected results, the Company
would have the intent to reduce costs, to the extent necessary,
to enable the Company to continue operations through at least
December 31, 2010. While such cost reductions might
negatively impact future growth opportunities, the Company
believes it has the ability to make such reductions, should they
be necessary.
Use of
Estimates
The preparation of the consolidated financial statements and
related disclosures in conformity with U.S. generally
accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues
and expenses during the periods reported. These estimates
include the collectibility of accounts receivable, the
recoverability of inventory, the adequacy of warranty
liabilities, the adequacy of our liabilities for corrective
actions, the valuation of stock awards, the fair value of patent
rights, intra-period tax allocation, the realizability of
investments, the realizability of deferred tax assets and
valuation and useful lives of tangible and intangible assets,
including goodwill, among others. The market for the
Companys products is characterized by intense competition,
rapid technological development and frequent new product
introductions, all of which could affect the future
realizability of the Companys assets. Estimates and
assumptions are reviewed periodically, and the effects of
revisions are reflected in the consolidated financial statements
in the period they are determined to be necessary.
58
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Cash
Equivalents
Highly liquid investments with a maturity at the date of
purchase of three months or less are considered cash equivalents.
Short-term
Investments
The Companys short-term investments are classified as
available-for-sale.
At December 31, 2007 short-term investments consisted of
investment grade commercial paper and U.S. government and
agencies discount notes maturing within one year. The
securities are carried at fair value, with the unrealized gains
and losses included in accumulated other comprehensive income
(loss), net of tax. Realized gains or losses on the sale of
marketable securities are identified on a specific
identification basis and are reflected as a component of
interest income or expense.
The Company had no short-term investments at December 31,
2009 or December 31, 2008. There were no significant
realized gains or losses on the sale of short-term investments
during the years ended December 31, 2009 and 2008. Gross
unrealized gains and losses at December 31, 2009 and 2008
were not significant.
Accounts
Receivable
Accounts receivable represent a significant portion of the
Companys assets. Management makes estimates of the
collectability of accounts receivable, including analyzing
historical write-offs, changes in the Companys internal
credit policies and customer concentrations when evaluating the
adequacy of the Companys allowance for doubtful accounts.
Different estimates regarding the collectability of accounts
receivable may have a material impact on the timing and amount
of reported bad debt expense and on the carrying value of
accounts receivable.
Inventories
Inventory is valued at the lower of cost or market. Cost is
determined using a standard cost method, including material,
labor and factory overhead. The Company records inventory
write-downs based on its estimate of excess
and/or
obsolete inventory.
Machinery
and Equipment
Machinery and equipment are stated at cost. Machinery and
equipment are depreciated using the straight-line method over
the estimated useful lives of the assets of 2 to 14 years.
Leasehold improvements are capitalized and amortized over the
shorter of the estimated useful lives or the remaining lease
term. Expenditures for maintenance and repairs are expensed as
incurred. Upon retirement or disposal, the cost and accumulated
depreciation of machinery and equipment are reduced and any gain
or loss is recorded relative to cash proceeds received, if any.
The Company capitalizes direct development costs associated with
internal-use software, including external direct costs of
materials and services, and payroll costs for employees devoting
time to the software projects. These costs are included within
Machinery and Equipment and are amortized on a
straight-line basis over the estimated useful life of the
software once it is available for use. Costs incurred during the
preliminary project stage, as well as maintenance and training
costs, are expensed as incurred.
Indefinite
Lived Intangible Assets
The Companys indefinite lived intangible assets are not
subject to amortization but are tested for impairment annually
or whenever events or changes in circumstances indicate that the
asset might be impaired.
The Companys indefinite lived intangible assets are
comprised primarily of the Burdick and Cardiac Science trade
names which were acquired in the Companys acquisitions of
Spacelabs Burdick, Inc. (Burdick) in 2003 and the
merger transaction between Quinton Cardiology Systems, Inc.
(Quinton) and Cardiac Science, Inc.
(CSI) in 2005. Management uses judgment to estimate
the useful lives of each intangible asset. The Company believes
the Burdick and Cardiac Science trade names have indefinite
lives, and accordingly, values of the trade names are not
amortized.
59
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company periodically reevaluates its conclusion that the
trade names have indefinite lives and makes a judgment about
whether there are factors that would limit the ability to
benefit from the trade names in the future. If there were such
factors, the Company would amortize the value of the trade
names. Trade name indefinite lived intangible assets are tested
for impairment annually or whenever events or changes in
circumstances indicate the asset may be impaired. Trade name
intangible assets are reviewed for impairment by comparing the
fair value of the asset to its carrying value. The Company uses
judgment to estimate the fair value of trade names. The judgment
about fair value is based primarily on expectations of future
cash flows and an appropriate discount rate.
The Company evaluated their indefinite lived intangible assets
for impairment during 2009 and 2008 and determined no impairment
was necessary for its indefinite lived intangible assets and did
not record an impairment charge during either period.
Valuation
of Long-Lived Assets
Long-lived assets, such as property and equipment, and
intangible assets subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset group may not be
recoverable. Recoverability of asset groups to be held and used
is measured by a comparison of the carrying amount of an asset
group to estimated undiscounted future cash flows expected to be
generated by the asset group. If the carrying amount of an asset
group exceeds its estimated future cash flows, an impairment
charge is recognized on the Companys consolidated
statements of operations and as a reduction to the asset group
if it is concluded that the fair market value of the asset group
is less than its carrying value. The Company uses judgment to
estimate the useful lives of its intangible assets subject to
amortization and evaluate the remaining useful lives annually.
Assets to be disposed of would be separately presented in the
balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell, and are no longer depreciated.
The assets and liabilities of a disposal group classified as
held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
The Company evaluated their long-lived assets for impairment
during 2009 and 2008 and determined no impairment was necessary
for its long-lived assets and did not record an impairment
charge during either period.
Goodwill
Goodwill recorded through 2008, represented the excess of cost
over the estimated fair value of net assets acquired primarily
in connection with Quintons acquisitions of a medical
treadmill manufacturing line in 2002, the acquisition of Burdick
in 2003 and in connection with the merger transaction between
Quinton and CSI in September 2005. In accordance with
authoritative guidance issued by the FASB, goodwill is not
amortized and the Company tests goodwill for impairment at the
reporting unit level on an annual basis and between annual tests
in certain circumstances. The Company determined that it has one
reporting unit, consisting of general cardiology products, which
also includes the product service business.
Authoritative guidance issued by the FASB requires a two-step
goodwill impairment test whereby the first step, used to
identify potential impairment, compares the fair value of a
reporting unit with its carrying amount including goodwill. If
the estimated fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit is potentially
impaired, thus the second step of the goodwill impairment test
is used to quantify the amount of any impairment that exists.
Management estimated the fair value of the Companys
reporting unit was less than the carrying value during the
fourth quarter of 2008 and ultimately recorded a write-off of
all previously acquired goodwill totaling $107,671,000. See
Note 9 for further discussion of the impairment charge. The
Company did not enter into any business combinations during the
year ended December 31, 2009 and thus no new goodwill has
been recorded since this impairment charge was recorded.
60
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Tax Assets and Income Taxes
The Company accounts for income taxes under the asset and
liability method under which deferred income taxes are provided
for the temporary differences between the financial reporting
basis and the tax basis of the Companys assets and
liabilities and operating loss and tax credit carryforwards. A
valuation allowance is established when necessary to reduce
deferred tax assets to the amount expected to be realized.
Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in
which those temporary differences and operating loss and tax
credit carryforwards are expected to be recovered or settled.
Litigation
and Other Contingencies
The Company regularly evaluates its exposure to threatened or
pending litigation and other business contingencies. Because of
the uncertainties related to the amount of loss from litigation
and other business contingencies, the recording of losses
related to such exposures requires significant judgment about
the potential range of outcomes. As additional information about
current or future litigation or other contingencies becomes
available, the Company will assess whether such information
warrants the recording of additional expense relating to these
contingencies. A loss contingency, to be recorded as an expense,
must be both probable and measurable.
Restructuring
Costs
In December 2008, the Company decided to implement a
restructuring plan. The restructuring plan included a 12%
reduction in work force, primarily impacting the Companys
product development, manufacturing, and customer service
organizations. The restructuring was implemented in order to
realign the Companys cost structure, become more flexible
and efficient in operations, and operate profitably in a range
of scenarios related to economic uncertainty. The Company
recorded severance charges of approximately $1,203,000 in the
fourth quarter of 2008 related to this restructuring and other
terminations resulting from the realignment of the research and
development organization. As of December 31, 2009, all
obligations related to this restructuring had been paid.
Revenue
Recognition
Revenue from sales of hardware products is generally recognized
when title transfers to the customer, typically upon shipment.
Some of the Companys customers are distributors that sell
goods to third party end users. Except for certain identified
distributors where collection may be contingent on distributor
resale, the Company recognizes revenue on sales of products made
to distributors when title transfers to the distributor and all
significant obligations have been satisfied. In making a
determination of whether significant obligations have been met,
the Company evaluates any installation or integration
obligations to determine whether those obligations are
inconsequential or perfunctory. In cases where the remaining
installation or integration obligation is not determined to be
inconsequential or perfunctory, the Company defers the portion
of revenue associated with the fair value of the installation
and integration obligation until these services have been
completed.
Distributors do not have price protection and generally do not
have product return rights, except if the product is defective
upon shipment or shipped in error, and in some cases upon
termination of the distributor agreement. For certain identified
distributors where collection may be contingent on the
distributors resale, revenue recognition is deferred and
recognized on a sell through or cash basis. The
determination of whether sales to distributors are contingent on
resale is subjective because the Company must assess the
financial wherewithal of the distributor to pay regardless of
resale. For sales to distributors, the Company considers several
factors, including past payment history, where available, trade
references, bank account balances, Dun & Bradstreet
reports and any other financial information provided by the
distributor, in assessing whether the distributor has the
financial wherewithal to pay regardless of, or prior to, resale
of the product and that collection of the receivable is not
contingent on resale.
The Company offers limited volume price discounts and rebates to
certain distributors. Volume price discounts are on a per order
basis based on the size of the order and are netted against the
revenue recorded at the time of
61
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shipment. The Company has some arrangements with key
distributors that provide for volume discounts based on meeting
certain quarterly or annual purchase levels or based on sales
volumes of certain of our products during a defined period when
they offer a promotion. Rebates are accrued for as incurred and
are recorded as offset to revenue.
The Company accounts for the licensing of software and
arrangements where software is considered more than incidental
to the product as software revenue arrangements. The Company
uses judgment when determining the appropriate accounting for
our software revenue arrangements, including whether an
arrangement includes multiple elements, and if so, whether
vendor-specific objective evidence (VSOE) of fair
value exists for those elements. A portion of software revenue
is recorded as unearned due to undelivered elements including,
in some cases, software implementation and post-delivery
support. The amount of revenue allocated to undelivered elements
is based on the sales price of each element when sold separately
(VSOE) using the residual method.
Revenue from post-delivery support is recognized over the
service period, which is typically one year and revenue from
software implementation services is recognized as the services
are provided (based on VSOE of fair value). When significant
implementation activities are required, the Company recognizes
revenue upon completion of the installation. Changes to the
elements in a software arrangement and the ability to identify
VSOE of fair value for those elements could materially impact
the amount of earned and unearned revenue.
The Company considers program management packages and training
and other services as separate units of accounting when sold
with an AED based on the fact that the items have value to the
customer on a stand alone basis and could be acquired from
another vendor. Fair value is determined to be the price at
which they are sold to customers on a stand alone basis.
Training revenue is deferred and recognized at the time the
training occurs. AED program management services revenue,
pursuant to annual or multi-year agreements that exist with some
customers pursuant to annual or multi-year terms, is deferred
and amortized on a straight-line basis over the related contract
period.
The Company offers optional extended service contracts to
customers. Fair value is determined to be the price at which
they are sold to customers on a stand alone basis. Service
contract revenues are recognized on a straight-line basis over
the term of the extended service contracts, which generally
begin after the expiration of the original warranty period. For
services performed, other than pursuant to warranty and extended
service contract obligations, revenue is recognized when the
service is performed and collection of the resulting receivable
is reasonably assured.
Upfront license fees are deferred and recognized as revenue
using the straight-line method over the term of the related
license agreement. Royalty revenues are due and payable
quarterly (generally 60 days after period end) pursuant to
the related license agreements. An estimate of royalty revenues
is recorded quarterly in the period earned based on the prior
quarters historical results adjusted for any new
information or trends known to management at the time of
estimation.
Freight charges billed to customers and included in revenue were
approximately $1,837,000, $2,259,000 and $2,306,000 in 2009,
2008 and 2007, respectively. The associated expense is
classified within cost of revenues in the accompanying
consolidated statements of operations.
Sales
Returns
The Company provides a reserve against revenue for estimated
product returns. The amount of this reserve is evaluated
quarterly based upon historical trends.
Segment
Reporting
Authoritative guidance issued by the FASB requires public
companies to disclose certain information about each of their
reportable segments. Based on the similar economic and operating
characteristics of the components of
62
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the Companys business, the Company has one reportable
segment, which markets various non-invasive cardiology products
and services. See Note 3, Segment Reporting, for further
discussion.
Export
Sales
For the years ended December 31, 2009, 2008 and 2007,
export sales were 33%, 39% and 26%, respectively, of total
revenues. Export sales are primarily denominated in
U.S. dollars. Accordingly, the Company did not incur
significant foreign currency transaction gains or losses.
Foreign
Currency Transactions and Translation
The functional currency of the Companys foreign operations
in Denmark is the U.S. dollar and therefore, the financial
statements of this entity are maintained in U.S. dollars.
Any assets and liabilities in foreign currencies, such as bank
accounts and certain payables, are re-measured in
U.S. dollars at period-end exchange rates in effect. Any
transactions in foreign currencies, such as wages paid in local
currencies, are re-measured in U.S. dollars using an
average monthly exchange rate. Any resulting gains and losses
are included in operations and were not significant in any
period.
The Company maintains the financial statements in the local
currency of the countries in which its consolidated joint
ventures, Cardiac Science Shanghai and Cardiac Science France
are located, as well as its wholly owned subsidiaries in the
U.K. and Germany. Thus, assets and liabilities are translated to
U.S. dollars at exchange rates in effect at period end for
consolidated reporting. Translation adjustments are included in
accumulated other comprehensive income (loss) in
shareholders equity and in noncontrolling interests within
total equity. Gains and losses on foreign currency transactions
are included in operations and were not significant in any
period.
Advertising
Costs
The cost of advertising is expensed as incurred. During the
years ended December 31, 2009, 2008 and 2007, the Company
incurred advertising expenses of $671,000, $870,000 and
$1,327,000, respectively.
Warranty
and Corrective Action Costs
The Company provides warranty service covering many of the
products and systems it sells. Estimated future costs of
providing warranty service, which relate principally to the
hardware components of the systems, are provided when the
systems are sold. Estimated future costs are based on warranty
claims history and other relevant information.
The Companys sales to customers generally include certain
provisions for indemnifying customers against liabilities if the
Companys software products infringe a third partys
intellectual property rights. To date, the Company has not
incurred any material costs as a result of such indemnifications
and has not accrued any liabilities related to such obligations
in the consolidated financial statements.
The Company provides for additional warranty costs associated
with field corrective actions and other product recalls when the
likelihood of incurring costs associated with these matters
becomes probable and estimable. The Company records estimated
warranty costs associated with field corrective actions and
product recalls as part of cost of revenues on the consolidated
statements of operations and within corrective action
liabilities on the consolidated balance sheets.
During 2009, the Company recorded estimated costs of $21,000,000
related to two separate voluntary corrective actions associated
with its AEDs classified in the consolidated statements of
operations as corrective action costs. The estimated costs
associated with these corrective actions required significant
judgment related to the nature and timing of costs that will be
incurred, including the number of impacted devices, the customer
and geographical segments related to the impacted devices, the
logistical processes employed by them to carry out the
63
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
initiatives, the customer response rate in implementing any
field upgrades or recalls, the level of required follow up with
customers, the extent to which the Company may rely on third
parties to assist with portions of executing on its plans to
carry out the corrective actions, and the length of time and
other resources required to complete the corrective actions,
among others. The Company evaluates the adequacy of its accruals
for these corrective actions on a regular basis and will make
adjustments to its estimates if facts and circumstances indicate
that changes to the initial estimates are appropriate.
Research
and Development Costs
Research and development costs are expensed as incurred.
Noncontrolling
Interests
The Company reports its noncontrolling interests in consolidated
subsidiaries and joint ventures (previously referred to as
minority interests) as a component of equity in the
Companys consolidated balance sheets separate from the
parents equity. Transactions that do not result in the
deconsolidation of the subsidiary are recorded as equity
transactions, while those transactions that do result in a
change from noncontrolling to controlling ownership, or a
deconsolidation of the subsidiary, are recorded in net income
(loss) with the gain or loss measured at fair value.
Comprehensive
Income (Loss)
For the Company, components of other comprehensive income
consist of unrealized gains and losses on
available-for-sale
securities, net of related income tax effects and translation
adjustments related to consolidation of financial statements
from international operations.
Accumulated other comprehensive income (loss) consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Unrealized gain on securities, net of income tax effect of zero
and ($37), respectively
|
|
$
|
(71
|
)
|
|
$
|
39
|
|
Foreign currency translation adjustments
|
|
|
375
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income (loss)
|
|
$
|
304
|
|
|
$
|
(70
|
)
|
|
|
|
|
|
|
|
|
|
Financial
Instruments and Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist of cash and cash
equivalents, accounts receivable, accounts payable and accrued
liabilities. Financial instruments that are short-term
and/or that
have little or no market risk are estimated to have a fair value
equal to book value. The assets and liabilities listed above
fall under this category.
Stock-Based
Compensation
Stock-based compensation expense is recognized in the
consolidated financial statements for granted stock options and
for expense related to the Employee Stock Purchase Plan
(ESPP), since the related purchase discounts
exceeded the amount allowed for non-compensatory treatment.
Compensation expense recognized included the estimated expense
for stock options granted on and subsequent to January 1,
2006, based on the grant date fair value and the estimated
expense for the portion vesting in the period for options
granted prior to, but not vested as of December 31, 2005,
based on the grant date fair value. Further, forfeitures are
estimated for share-based
64
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
awards that are not expected to vest. Compensation expense for
non-vested stock awards is based on the market price on the
grant date and is recorded equally over the vesting period.
Determining the fair value of share-based awards at the grant
date requires judgment, including estimating future volatility,
expected term and the amount of share-based awards that are
expected to be forfeited. If actual results differ significantly
from these estimates, stock-based compensation expense and the
Companys results of operations could be materially
impacted.
Net
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing net income
(loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted income (loss) per share
is computed by dividing net income (loss) attributable to
Cardiac Science Corporation by the weighted average number of
common and dilutive common equivalent shares outstanding during
the period. Common equivalent shares consist of shares issuable
upon the exercise of stock options, non-vested stock awards,
warrants and issuance of shares under the ESPP using the
treasury stock method. Common equivalent shares are excluded
from the calculation if their effect is antidilutive.
The following table sets forth the computation of basic and
diluted net income (loss) per share attributable to Cardiac
Science Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share data)
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cardiac Science Corporation
|
|
$
|
(76,997
|
)
|
|
$
|
(98,384
|
)
|
|
$
|
8,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for basic calculation
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
22,697,113
|
|
Incremental shares from employee stock options, non-vested stock
awards and ESPP
|
|
|
|
|
|
|
|
|
|
|
500,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares for diluted calculation
|
|
|
23,263,717
|
|
|
|
22,869,920
|
|
|
|
23,197,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the number of antidilutive shares
issuable upon exercise of stock options, non-vested stock
awards, ESPP and warrants excluded from the computation of
diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Antidilutive shares issuable upon exercise of stock options
|
|
|
3,129,923
|
|
|
|
2,896,877
|
|
|
|
2,459,875
|
|
Antidilutive shares issuable upon exercise of warrants
|
|
|
|
|
|
|
237,775
|
|
|
|
288,984
|
|
Antidilutive shares related to non-vested stock awards and ESPP
|
|
|
1,215,460
|
|
|
|
289,836
|
|
|
|
194,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,345,383
|
|
|
|
3,424,488
|
|
|
|
2,943,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
for Licensing Income and Litigation Settlement
During the second quarter of fiscal 2007, the Company entered
into a Settlement Agreement with Koninklijke Philips Electronics
N.V. (Philips) pursuant to which the parties agreed
to dismiss all pending claims between the parties in
consideration for cross-licenses of certain patents between the
parties and a $1,000,000 payment from the Company to Philips.
The fair value of the intangible assets acquired of $7,000,000
and royalty income received of
65
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$5,500,000 was measured based upon estimated future royalty
streams that would have been due to both parties for the use of
their patents. The Company determined that because there are no
future activities or obligations required by the Company with
respect to the patent rights granted to Philips the $5,500,000
was realized and earned at completion of the transaction. This
fair value was then limited to the net present value of the
payment streams. The Company also recorded a gain on the
transaction of $500,000, included in licensing income and
litigation settlement, because the fair value of the intangible
assets received in the transaction was estimated to exceed the
fair value of the intangible assets given up and, in the case of
the Company, the cash paid. The intangible assets value
will be amortized to cost of product revenues based upon the
estimated remaining economic life of the patents of
13 years, which will approximate $500,000 annually.
Litigation
and Related Expenses
Litigation and related expenses included settlement costs and
legal fees related primarily to three cases which were settled
between April 2007 and July 2007, including the case with
Philips.
On April 30, 2007, the Company entered into a Settlement
Agreement and Mutual Release (Agreement) with the
Institute of Applied Management and Law, Inc. (IAML)
in connection with the Companys previously disclosed
arbitration against CSI for alleged failure to perform on a
marketing agreement. The Agreement was a complete and final
resolution and settlement of respective differences, positions
and claims. As consideration for the Agreement, the Company paid
IAML $500,000, which has been included as part of litigation and
related expenses in 2007.
On July 26, 2007, the Company entered into a settlement
agreement with William S. Parker (Parker) in
connection with the Companys previously disclosed patent
litigation, providing for a full release of the Company from all
claims made in the lawsuit. Costs relating to this settlement
were included as part of litigation and related expenses in 2007.
Customer
and Vendor Concentrations
The following table summarizes the customers accounting for 10%
or more of our total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Customer
|
|
2009
|
|
2008
|
|
2007
|
|
Nihon Kohden Corporation
|
|
|
|
*
|
|
|
19
|
%
|
|
|
11
|
%
|
On June 15, 2009, the Company notified Nihon Kohden
Corporation (Nihon Kohden), its exclusive
distributor of AEDs in Japan, that its OEM Supply and Purchase
Agreement dated effective as of January 1, 2008 (the
OEM Agreement) will terminate effective
June 15, 2010. The Company elected to terminate the OEM
Agreement in order to explore alternative means of distributing
its AED products in Japan, which may or may not include further
collaboration with Nihon Kohden.
The following table summarizes the vendors accounting for 10% or
more of our purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Vendor
|
|
2009
|
|
2008
|
|
2007
|
|
Vendor 1
|
|
|
14
|
%
|
|
|
18
|
%
|
|
|
16
|
%
|
Although components are available from other sources, a key
vendors inability or unwillingness to supply components in
a timely manner or on terms acceptable to the Company could
adversely affect the Companys ability to meet
customers demands.
66
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Taxes
Collected from Customers and Remitted to Governmental
Authorities
The Company uses the net method (excluded from revenue) for
reporting taxes that are assessed by a governmental authority
that are directly imposed on revenue-producing transactions,
i.e. sales, use and value-added taxes.
Reclassifications
Certain reclassifications of 2008 and 2007 amounts have been
made for consistent presentation with 2009.
Recent
Accounting Pronouncements
In January 2010, the FASB issued guidance to amend the
disclosure requirements related to recurring and nonrecurring
fair value measurements. The guidance requires new disclosures
on the transfers of assets and liabilities between Level 1
(quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the
reasons and the timing of the transfers. Additionally, the
guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3
fair value measurements). The guidance will become effective for
the Company with the reporting period beginning January 1,
2010, except for the disclosure on the roll forward activities
for Level 3 fair value measurements, which will become
effective for the Company with the reporting period beginning
January 1, 2011. Other than requiring additional
disclosures, adoption of this new guidance will not have a
material impact on the Companys financial statements.
In September 2009, the Emerging Issues Task Force
(EITF) reached a consensus related to revenue
arrangements with multiple deliverables, which the FASB then
issued as an Accounting Standards Update (ASU),
2009-13. The
ASU amends Accounting Standards Codification (ASC)
Subtopic
605-25,
Revenue Recognition Multiple Element
Arrangements and provides application guidance on whether
multiple deliverables exist in a revenue arrangement, how the
deliverables should be separated and how the consideration
should be allocated to one or more units of accounting. This ASU
establishes a selling price hierarchy for determining the
selling price of a deliverable based on vendor-specific
objective evidence, if available, third-party evidence, or
estimated selling price if neither vendor-specific nor
third-party evidence is available. The ASU can be applied on a
prospective basis or in certain circumstances on a retrospective
basis. The Company plans to adopt this ASU on a prospective
basis beginning January 1, 2011. The Company believes the
adoption of this ASU may have an impact its financial position
and results of operations, however it is uncertain whether the
impact will be material. The Company is continuing to evaluate
this ASU as of December 31, 2009.
In September 2009, the EITF reached a consensus related to
revenue arrangements that include software elements, which the
FASB issued as ASU,
2009-14. The
ASU amends ASC Subtopic
985-605,
Software Revenue Recognition.
Previously, companies that sold tangible products with
more than incidental software were required to apply
software revenue recognition guidance. This guidance often
delayed revenue recognition for the delivery of the tangible
product. Under the new guidance, tangible products that have
software components that are essential to the
functionality of the tangible product will be excluded
from the software revenue recognition guidance. The new guidance
will include factors to help companies determine what is
essential to the functionality. Software-enabled
products will now be subject to other revenue guidance and will
likely follow the guidance for multiple deliverable arrangements
issued by the FASB in September 2009 in ASU
2009-13. The
new guidance is to be applied on a prospective basis for revenue
arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with earlier
application permitted. The Company plans to adopt this ASU on a
prospective basis beginning January 1, 2011. The Company
believes the adoption of this ASU may have an impact on its
financial position and results of operations, however it is
uncertain whether the impact will be material. The Company is
continuing to evaluate this ASU as of December 31, 2009.
67
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Corrective
Action Liabilities
|
The Company recorded estimated charges totaling $21,000,000
during the year ended December 31, 2009 related to two
separate voluntary corrective actions associated with the
Companys AED products. These estimated charges were
comprised of $18,500,000 for a field initiative associated with
nearly 300,000 AEDs manufactured between June 2003 and June 2009
and $2,500,000 for a voluntary medical device recall of
approximately 12,200 AEDs manufactured between October 2009 and
January 2010. These charges are included in cost of revenues on
the consolidated statements of operations and in corrective
action liabilities on the consolidated balance sheets.
The Companys corrective action liabilities are summarized
as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
Beginning
|
|
Product Cost
|
|
|
|
|
|
End of
|
|
|
of Period
|
|
of Revenues
|
|
Adjustments
|
|
Expenditures
|
|
Period
|
|
|
(In thousands)
|
|
Year ended December 31, 2009
|
|
$
|
|
|
|
$
|
21,000
|
|
|
$
|
|
|
|
$
|
(5,751
|
)
|
|
$
|
15,249
|
|
At the end of the second quarter of 2009, the Company had
voluntarily ceased shipments of certain of its AED products due
to two instances the Company became aware of involving the
failure of AEDs to deliver therapy, apparently as a consequence
of a malfunction of one of the components used in the
manufacture of the affected AED products. On August 10,
2009, the Company resumed production and shipments of the AED
products after implementing a more stringent process to test for
defects in the component at issue. As a result of the
implementation of this more stringent testing process, the
Company believes that all products shipped after August 10,
2009 are unaffected by this quality issue. Substantially all of
the orders received prior to and during the period of time in
which the Company was not shipping its AED products were
fulfilled and shipped to customers by the end of the third
quarter of 2009.
During the third quarter of 2009, the Company conducted a
thorough review and analysis of the potential for certain of its
AED products shipped prior to August 10, 2009 to fail to
perform a rescue due to the component issue described above. The
Company determined that the component at issue has the unlikely
potential to fail and that routine self-tests performed by the
AED may not detect a malfunctioning component. The Company also
determined that approximately 300,000 AEDs shipped between June
2003 and June 2009 are potentially impacted by the component
issue. The Company has initiated a field corrective action to
enhance the reliability of the affected AED units in the field
through a software update related to the AEDs routine self
test functionality. The Company is in the process of developing
the software update and planning the logistics associated with
addressing this field initiative which is anticipated to begin
during the first quarter of 2010.
During the first quarter of 2010, the Company announced it was
initiating a worldwide voluntary medical device recall after
determining that approximately 12,200 AEDs may not be able to
deliver therapy during a resuscitation attempt, which may lead
to serious adverse events or death. These AEDs were manufactured
in a way that makes them potentially susceptible to failure
under certain conditions. The Food & Drug
Administration (FDA) has been informed of this
situation. Relating to this announcement, the Company recorded a
charge of $2,500,000 in the fourth quarter of 2009, reflecting
its current estimate of the expected costs relating to this
matter.
The costs of these voluntary corrective actions are estimates.
The actual costs incurred by the Company to implement the
voluntary corrective actions could vary significantly based on
an number of factors, including the number of impacted devices,
the customer and geographical segments related to the impacted
devices, the logistical processes employed by the Company to
address the issues, the customer response rate in implementing
the corrective action plans, the level of required follow up
with customers, the extent to which the Company relies on third
party assistance to carry out the corrective actions, and the
length of time and other resources required to complete the
corrective actions, among others. Moreover, the Company cannot
be certain whether its proposed plan to address the component
issues described above will be acceptable, or whether it may
need to address other issues relating to the reliability of its
AED products, until it concludes discussions with the FDA and
other stakeholders.
68
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2010, the Company received a warning letter from the
FDA noting, among other things, that the voluntary field
corrective action it announced in November 2009 is inadequate
since it is intended to improve the products ability to
detect the potential component problem, but is not designed to
prevent component failure. The FDA letter also asserts other
inadequacies, including the Companys procedures relating
to the evaluation, investigation and follow up of complaints,
procedures to verify the effectiveness of corrective and
preventative actions and procedures relating to certain design
requirements. The Company is in ongoing discussions with the FDA
regarding these issues. The Company may need to take different
or additional actions than anticipated depending on the outcome
of those discussions.
Although the estimated costs of the voluntary corrective actions
have been charged to the consolidated statement of operations
and recorded as liabilities on the consolidated balance sheet as
of December 31, 2009, the Company expects that the majority
of the funds needed to carry out the corrective actions will be
expended in 2010, which will likely have a negative impact on
cash flows during 2010 and possibly later periods. Further, as a
result of these charges, the Company also considered the impact
the corrective actions could have on the carrying value of
indefinite lived intangible assets or other long lived assets
including property and equipment and intangible assets subject
to amortization, or the realizability of its inventories as of
December 31, 2009. Based on the Companys analysis, it
was determined that no additional adjustments were required to
be made to the carrying value of these assets as of
December 31, 2009.
The results of the Companys evaluation of the component
issues described herein and any responsive actions taken by the
Company are subject to significant uncertainty. The
Companys policy is to assess the likelihood of any
potential corrective actions, voluntary or not, associated with
its products as well as ranges of possible or probable costs
associated with such activities, when appropriate. A
determination of the amount of the liability required for this
or other contingencies is made after an analysis of each known
issue. A liability is recorded and charged to cost of revenues
if and when the Company determines that a loss is probable and
the amount of the loss can be reasonably estimated.
Additionally, the Company discloses contingencies for which a
material loss is reasonably possible, but not probable.
The Company is required to disclose selected information about
operating segments. The Company also reports related disclosures
about products and services, geographic areas and major
customers. An operating segment is defined as a component of an
enterprise that engages in business activities from which it may
earn revenues and incur expenses whose separate financial
information is available and is evaluated regularly by the
Companys chief operating decision makers, or decision
making group, to perform resource allocations and performance
assessments.
The Companys chief operating decision makers are the Chief
Executive Officer and other senior executive officers of the
Company. Based on evaluation of the Companys financial
information, management believes that the Company operates in
one reportable segment with its various cardiology products and
services.
The Companys chief operating decision makers evaluate
revenue performance of product lines, both domestically and
internationally. However, operating, strategic and resource
allocation decisions are based primarily on the Companys
overall performance in its operating segment.
69
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes revenues by product line:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Defibrillation products
|
|
$
|
85,858
|
|
|
$
|
121,946
|
|
|
$
|
97,382
|
|
Cardiac monitoring products
|
|
|
53,378
|
|
|
|
65,556
|
|
|
|
68,624
|
|
Service
|
|
|
17,612
|
|
|
|
18,651
|
|
|
|
16,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,848
|
|
|
$
|
206,153
|
|
|
$
|
182,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes revenues, which are attributed
based on the geographic location of the customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
105,811
|
|
|
$
|
125,172
|
|
|
$
|
135,646
|
|
Foreign
|
|
|
51,037
|
|
|
|
80,981
|
|
|
|
46,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
156,848
|
|
|
$
|
206,153
|
|
|
$
|
182,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign revenues include $11,308,000, $39,033,000 and
$19,787,000 attributed to Nihon Kohden, our exclusive
distributor of AEDs in Japan, during 2009, 2008 and 2007,
respectively.
On June 15, 2009, the Company notified Nihon Kohden, its
distributor of AEDs in Japan, that its exclusive OEM Supply and
Purchase Agreement dated effective as of January 1, 2008
(the OEM Agreement) will terminate effective
June 15, 2010. The Company elected to terminate the OEM
Agreement in order to explore alternative means of distributing
its AED products in Japan, which may or may not include further
collaboration with Nihon Kohden.
Substantially all intangible assets are domestic. Long-lived
assets located outside of the United States are not material.
In December 2008, the Company implemented a restructuring plan
which included a 12% reduction in work force, primarily
impacting the Companys product development, manufacturing,
and customer service organizations. The restructuring was
implemented in order to realign the Companys cost
structure, become more flexible and efficient in operations, and
operate profitably in a range of scenarios related to economic
uncertainty. The Company recorded severance charges of
approximately $1,203,000 in the fourth quarter of 2008 as
management having the appropriate authority determined the
amount of benefits were probable and estimable as of
December 31, 2008. As of December 31, 2009, all costs
associated with this restructuring were paid. There were no
similar restructuring costs accrued at December 31, 2009.
The Companys 2005 merger transaction with CSI resulted in
excess facilities and redundant employee positions totaling
$2,709,000, which was reduced to zero as of January 2009 as a
result of cash expenditures over time.
Cash payments relating to the excess facilities and redundant
employee accrual for the Companys 2005 merger transaction
with CSI have been classified as a component of cash paid for
acquisitions in the accompanying consolidated statements of cash
flows, which totaled $54,000, $625,000, and $971,000 for the
years ended December 31, 2009, 2008, and 2007,
respectively. Cash payments relating to the December 2008
restructuring have been classified as a component of the change
in accrued liabilities as part of operating activities in the
70
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accompanying statements of cash flows, totaling $955,000 and
$248,000 during the years ended December 31, 2009 and 2008,
respectively.
Inventory is valued at the lower of cost or market. Cost is
determined using a standard cost method, including material,
labor and factory overhead. Inventories were comprised of the
following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Raw materials
|
|
$
|
18,752
|
|
|
$
|
20,871
|
|
Finished goods
|
|
|
4,829
|
|
|
|
3,821
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
23,581
|
|
|
$
|
24,692
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
|
Machinery
and Equipment
|
Machinery and equipment includes the following as of December 31
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciable
|
|
|
|
|
|
|
|
|
|
Lives
|
|
|
2009
|
|
|
2008
|
|
|
Equipment
|
|
|
(2-14 years
|
)
|
|
$
|
20,019
|
|
|
$
|
16,853
|
|
Furniture and fixtures
|
|
|
(2-13 years
|
)
|
|
|
2,609
|
|
|
|
2,444
|
|
Leasehold improvements
|
|
|
(1-10 years
|
)
|
|
|
3,268
|
|
|
|
2,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
25,896
|
|
|
|
22,184
|
|
Less: Accumulated depreciation and amortization
|
|
|
|
|
|
|
(17,490
|
)
|
|
|
(15,190
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net machinery and equipment
|
|
|
|
|
|
$
|
8,406
|
|
|
$
|
6,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the years ended December 31, 2009, 2008 and 2007,
the Company recorded depreciation and amortization expense
related to machinery and equipment of $2,303,000, $2,369,000 and
$2,930,000, respectively.
71
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the balances of intangible assets
at December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Useful life
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Burdick trade name
|
|
|
|
$
|
3,400
|
|
|
$
|
|
|
|
$
|
3,400
|
|
Cardiac Science trade name
|
|
|
|
|
11,380
|
|
|
|
|
|
|
|
11,380
|
|
Cardiac Science Deutschland trade name
|
|
|
|
|
192
|
|
|
|
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization
|
|
|
|
|
14,972
|
|
|
|
|
|
|
|
14,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac Science customer relationships
|
|
5 years
|
|
|
8,650
|
|
|
|
(7,497
|
)
|
|
|
1,153
|
|
Cardiac Science developed technology
|
|
8 years
|
|
|
11,330
|
|
|
|
(6,137
|
)
|
|
|
5,193
|
|
Burdick distributor relationships
|
|
10 years
|
|
|
1,400
|
|
|
|
(980
|
)
|
|
|
420
|
|
Burdick developed technology
|
|
7 years
|
|
|
860
|
|
|
|
(860
|
)
|
|
|
|
|
Patents and patent applications
|
|
5-10 years
|
|
|
960
|
|
|
|
(933
|
)
|
|
|
27
|
|
Patent rights
|
|
6-13 years
|
|
|
7,692
|
|
|
|
(1,469
|
)
|
|
|
6,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
|
|
|
30,892
|
|
|
|
(17,876
|
)
|
|
|
13,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
45,864
|
|
|
$
|
(17,876
|
)
|
|
$
|
27,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded amortization expense related to
identifiable intangibles of $3,991,000, $3,958,000, and
$3,816,000 for the years ended December 31, 2009, 2008 and
2007, respectively.
The Companys estimated expense for the amortization of
intangibles for each of the next five years is summarized as
follows (in thousands):
|
|
|
|
|
2010
|
|
$
|
3,343
|
|
2011
|
|
|
2,190
|
|
2012
|
|
|
2,187
|
|
2013
|
|
|
1,567
|
|
2014
|
|
|
623
|
|
Thereafter
|
|
|
3,106
|
|
|
|
|
|
|
Total:
|
|
$
|
13,016
|
|
|
|
|
|
|
|
|
8.
|
Investments
in Unconsolidated Entities
|
In connection with the establishment and acquisition of certain
entities, the Company has made or received investments in
certain unconsolidated entities. These are generally accounted
for under either the cost method, for illiquid investments, or
as
available-for-sale,
for investments with a readily determinable market value.
72
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, the Company held the following
investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
ScImage
|
|
$
|
84
|
|
|
$
|
84
|
|
Biotel
|
|
|
217
|
|
|
|
371
|
|
Other
|
|
|
85
|
|
|
|
79
|
|
|
|
|
|
|
|
|
|
|
Total investment in unconsolidated entities
|
|
$
|
386
|
|
|
$
|
534
|
|
|
|
|
|
|
|
|
|
|
ScImage
The Company owns a preferred ownership investment in ScImage, a
privately held company. The Company is entitled to earn
commissions if it sells ScImages products. The Company has
accounted for this investment using the cost method.
Biotel,
Inc.
As of December 31, 2009 the Company owns approximately 6.5%
of the outstanding shares of Biotel, a publicly traded company
engaged in the development, manufacturing, and marketing of
medical devices and related software. These shares were received
through the merger transaction with CSI in 2005 and are valued
based on quoted market price.
During the period from October 2002 through December 2008, the
Company had completed several acquisitions and other
transactions which generated goodwill totaling $107,671,000. The
majority of this goodwill resulted from the Companys
acquisition of Burdick in 2003 and its merger transaction with
CSI in 2005 resulting in goodwill of $9,027,000 and $98,541,000,
respectively. In November 2008, the Company purchased an
additional 10% ownership in the Cardiac Science Shanghai joint
venture for $90,000 and increased its ownership in the joint
venture to 66%. The Company recorded goodwill of $58,000 related
to this transaction.
The following table summarizes changes in goodwill (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases Due to
|
|
|
|
|
|
|
Beginning of Period
|
|
Acquisitions
|
|
Impairment
|
|
End of Period
|
|
Year ended December 31, 2008
|
|
$
|
107,613
|
|
|
$
|
58
|
|
|
$
|
(107,671
|
)
|
|
$
|
|
|
The Company did not enter into any business combinations during
2009 and thus no new goodwill was recorded on the Companys
consolidated balance sheet.
Goodwill
Impairment
Goodwill is tested for impairment annually or more frequently
when events or circumstances indicate that the carrying value of
a reporting unit more likely than not exceeds its fair value.
The Companys annual goodwill impairment testing date is
November 30. The Company has determined that it has a
single reporting unit, general cardiology products and services.
Authoritative guidance issued by the FASB requires a two-step
goodwill impairment test whereby the first step, used to
identify potential impairment, compares the fair value of a
reporting unit with its carrying amount including goodwill.
Goodwill is considered potentially impaired if the carrying
value of a reporting unit exceeds the estimated fair value. Upon
an indication of impairment from step one, step two is performed
to determine the amount of the impairment. The second step
involves an analysis reflecting the allocation of the fair value
determined in the first step (as if it was the purchase price in
a business combination). This process may result in the
determination of a new amount of goodwill. If the calculated
fair value of the goodwill resulting from this allocation
73
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is lower than the carrying value of the goodwill in the
reporting unit, the difference is reflected as an impairment
loss.
To estimate the fair value of the reporting unit for step-one,
the Company utilized a combination of market and
income valuation approaches. Under the market
approach, the estimated fair value of the single reporting
unit is based on the Companys market capitalization using
quoted market prices of its stock, and the number of shares
outstanding for the Companys common stock. The Company
also considers a control premium that represents the estimated
amount an investor would pay for our equity securities to obtain
a controlling interest. Under the income approach,
the company estimates the fair value of our single reporting
unit using a net present value model, which discounts projected
free cash flows (DCF) of the business at a computed
weighted average cost of capital as the discount rate.
Estimating the fair value of reporting units is a subjective
process that involves the use of estimates and judgments,
particularly related to cash flows, the appropriate discount
rates and an applicable control premium. The Company considered
the following assumptions, among others, in performing the DCF
analysis: forecasted revenues, gross profit margins, operating
profit margins, working capital cash flow, growth rates, new
product release dates and long term discount rates. All of these
assumptions require significant judgments by the Company.
The requirements of the goodwill impairment testing process are
such that, in the Companys situation, if the first step of
the impairment testing process indicates that the fair value of
our single reporting unit is below its carrying value, the
requirements of the second step of the test result in a
significant decrease in the amount of goodwill recorded on the
balance sheet. During the fourth quarter ended December 31,
2008, the Company experienced a significant decline in its stock
price due primarily to the continued weakness in the global
economic environment and the potential future impact of that
weakness on the Company. As a result, the Companys market
capitalization fell significantly below the recorded value of
its consolidated net equity.
In conducting an annual impairment test during the fourth
quarter of 2008, as a result of completing the first step of the
goodwill impairment test, the Company determined that the
carrying value of its single reporting unit exceeded its fair
value, which required us to perform the second step of the
goodwill impairment test. After completing step two and
allocating the estimated fair value to the net assets, the
remaining fair value that was allocated to goodwill was reduced
to zero and the Company recorded a non cash charge to impair all
previously acquired goodwill totaling $107,671,000 before tax;
net of tax the non cash goodwill impairment charge totaled
$93,609,000.
In connection with the 2005 merger transaction with CSI, the
Company recorded goodwill of $98,541,000. Goodwill associated
with the merger transaction of approximately $38,036,000 was
deductible for tax purposes. In accordance with authoritative
guidance for income taxes as well as business combinations,
first component goodwill is determined to be the
lesser of financial statement goodwill or tax deductible
goodwill. The second component or nondeductible
goodwill is the excess, if any, of financial statement goodwill
over tax deductible goodwill or tax deductible goodwill over
financial statement goodwill. Since book goodwill of $98,541,000
was in excess of tax deductible goodwill, first component
goodwill was determined to be $38,036,000, and second component
goodwill was determined to be $60,505,000. Generally, deferred
taxes are only recognized for first component goodwill as second
component goodwill is not deductible for tax purposes. When
financial statement goodwill is in excess of tax deductible
goodwill, deferred taxes do not result at the time of
acquisition. However, deferred taxes should be recognized for
any basis difference that arises subsequent to the acquisition
related to the first component of goodwill. Deferred taxes
should not be recognized for basis differences related to
nondeductible goodwill. When the tax goodwill was amortized
subsequent to the merger transaction, a deferred tax liability
was recognized because goodwill was not being amortized for
financial statement purposes under the accounting guidance for
goodwill and other intangibles. However, when the financial
statement goodwill became impaired in the fourth quarter of
2008, a deferred tax asset was recognized for the excess of
tax-deductible goodwill over financial statement goodwill, which
was fully impaired.
74
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The net of tax charge of $93,609,000 noted above includes
deferred tax benefits of approximately $14,062,000 representing
the aggregate reversal of previously recorded deferred tax
liabilities and recognition of deferred tax assets representing
the remaining tax basis of first component or tax deductible
goodwill primarily from the merger transaction with CSI at
December 31, 2008.
|
|
10.
|
Accrued
Liabilities and Warranty
|
Accrued liabilities are comprised of the following as of
December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Accrued compensation and benefits
|
|
$
|
5,619
|
|
|
$
|
5,862
|
|
Other accrued liabilities
|
|
|
6,597
|
|
|
|
7,673
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities
|
|
$
|
12,216
|
|
|
$
|
13,535
|
|
|
|
|
|
|
|
|
|
|
The Companys warranty liability is summarized as follows
(amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged to
|
|
|
|
|
|
|
Beginning
|
|
Product Cost
|
|
Warranty
|
|
End of
|
|
|
of Period
|
|
of Revenues
|
|
Expenditures
|
|
Period
|
|
|
(In thousands)
|
|
Year ended December 31, 2007
|
|
$
|
2,532
|
|
|
$
|
2,986
|
|
|
$
|
(2,307
|
)
|
|
$
|
3,211
|
|
Year ended December 31, 2008
|
|
$
|
3,211
|
|
|
$
|
3,890
|
|
|
$
|
(3,305
|
)
|
|
$
|
3,796
|
|
Year ended December 31, 2009
|
|
$
|
3,796
|
|
|
$
|
2,866
|
|
|
$
|
(2,634
|
)
|
|
$
|
4,028
|
|
The domestic and foreign components of income (loss) before
income tax expense and noncontrolling interests were as follows
for the years ended December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S.
|
|
$
|
(36,926
|
)
|
|
$
|
(94,968
|
)
|
|
$
|
12,866
|
|
Foreign
|
|
|
3,146
|
|
|
|
1,128
|
|
|
|
552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(33,780
|
)
|
|
$
|
(93,840
|
)
|
|
$
|
13,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense (benefit) for 2009, 2008 and 2007 includes
the following components (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(819
|
)
|
|
$
|
492
|
|
|
$
|
338
|
|
State
|
|
|
68
|
|
|
|
190
|
|
|
|
84
|
|
Foreign
|
|
|
998
|
|
|
|
318
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
|
|
247
|
|
|
|
1,000
|
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
35,329
|
|
|
|
3,383
|
|
|
|
4,452
|
|
State
|
|
|
6,917
|
|
|
|
(290
|
)
|
|
|
42
|
|
Foreign
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense
|
|
|
42,215
|
|
|
|
3,093
|
|
|
|
4,494
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
42,462
|
|
|
$
|
4,093
|
|
|
$
|
4,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the United States statutory rate of 34% to
the effective tax rates attributable to continuing operations
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Federal income tax provision (benefit) at U.S. statutory rates
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
|
|
34.0
|
%
|
Nondeductible impairment of goodwill
|
|
|
|
|
|
|
22.5
|
%
|
|
|
|
|
Meals and entertainment
|
|
|
0.5
|
%
|
|
|
0.2
|
%
|
|
|
1.3
|
%
|
Stock-based compensation
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
|
|
2.1
|
%
|
Research and development credits
|
|
|
(1.8
|
)%
|
|
|
(0.8
|
)%
|
|
|
(4.4
|
)%
|
State income taxes, net of federal benefit
|
|
|
(1.4
|
)%
|
|
|
0.2
|
%
|
|
|
2.9
|
%
|
Foreign rate difference
|
|
|
(0.5
|
)%
|
|
|
(0.1
|
)%
|
|
|
(0.7
|
)%
|
Increase in valuation allowance
|
|
|
161.5
|
%
|
|
|
16.1
|
%
|
|
|
|
|
Other, net
|
|
|
1.2
|
%
|
|
|
0.1
|
%
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
125.8
|
%
|
|
|
4.3
|
%
|
|
|
36.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company is required to reduce the value of its deferred tax
assets by a valuation allowance if, based on the weight of the
available evidence, it is more likely than not that some portion
or all of the deferred tax assets will not be realized. In each
period, the Company assesses the likelihood that its deferred
tax assets will be recovered from existing deferred tax
liabilities or future taxable income. If required, the Company
will recognize a valuation allowance to reduce such deferred tax
assets to amounts that are more likely than not to be ultimately
realized. To the extent the Company establishes a valuation
allowance or changes this allowance in a period, it will adjust
its tax provision or tax benefit in the consolidated statements
of operations. The Company uses its judgment to determine
estimates associated with the calculation of its provision or
benefit for income taxes, and in its evaluation of the need for
a valuation allowance recorded against its net deferred tax
assets.
During 2009, the Company evaluated both the positive and
negative evidence which existed in making its determination to
increase its valuation allowance against deferred tax assets.
Based on the Companys evaluation of its recent cumulative
book losses, including the unfavorable impacts of the voluntary
corrective actions described in Note 2, as well as giving
consideration to uncertainty regarding estimates of future
profitability, the Company concluded that an increase to its
valuation allowance was required during 2009 to reduce gross
deferred tax assets to
76
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
an amount that is more likely than not to be realized. As a
result, the Company recorded a non cash charge to federal and
state deferred income tax expense of $42,231,000 which is
included in income tax expense on the consolidated statements of
operations for the year ended December 31, 2009. As of
December 31, 2009, after consideration of the valuation
allowance recorded against gross deferred tax assets, the
consolidated balance sheet includes a noncurrent deferred tax
liability of $5,389,000 relating primarily to indefinite lived
intangible assets acquired from Quinton and CSI that are not
expected to reverse unless the related assets become amortizable
or become impaired in future periods.
As a result of recording the valuation allowance, the Company
effectively has not recognized a deferred tax benefit for
domestic losses incurred during 2009. If in future periods it
generates taxable income, the Company will evaluate the positive
and negative evidence available at the time in order to support
its analysis of the need for a valuation allowance, and as a
result the Company may release its valuation allowance in part,
or in total, when it becomes more likely than not that the
deferred tax assets will be realized. Until this occurs, the
Company will continue to record a deferred tax benefit for any
domestic losses that might be incurred in the future and will
increase the recorded valuation allowance for any such
additional losses. The Company expects to record additional tax
expense in future periods related primarily to profits generated
in foreign jurisdictions in which it operates, which generally
are forecasted to be marginally profitable on a financial
reporting and taxable basis.
At December 31, 2009 and 2008, the Company had federal net
operating loss carryforwards of approximately $98,033,000 and
$76,509,000, respectively, and state net operating loss
carryforwards of approximately $74,974,000 and $75,196,000,
respectively. The federal and state net operating loss
carryforwards expire in varying amounts between 2010 and 2029.
On November 6, 2009, President Obama signed The Worker,
Homeownership, and Business Assistance Act of 2009,
extending the federal net operating loss carryback period from
two to five years. In addition to the extended five year
carryback for regular tax net operating losses, the new
legislation also eliminates the 90 percent limitation on
utilization of the alternative minimum tax (AMT) net
operating loss. The Company is recognizing the benefit in 2009
associated with this new legislation as it plans to carryback
its 2009 AMT net operating loss to recover the alternative
minimum tax paid in the last three years resulting from the
90 percent limitation. The benefit expected to be claimed
is $579,000 which has been included in the total federal current
income tax benefit for the year ended December 31, 2009.
The Company has federal credit carryforwards of $4,900,000 and
state credit carryforwards of $2,998,000. The federal tax credit
carryforwards expire in varying amounts between 2018 and 2028,
while most of the state credits have no expiration.
The Research and Development credit expired on December 31,
2009. Congress is currently considering bills that will extend
the credit. If the Research and Development credit is not
legislatively enacted there will be neither a favorable nor an
unfavorable impact on the Companys 2010 effective income
tax rate as the deferred tax assets related to the credits are
already reduced to zero by a valuation allowance.
Sections 382 and 383 of the Internal Revenue Code of 1986,
as amended, provide for limitations on the utilization of net
operating loss and research and experimentation credit
carryforwards if the Company were to undergo an ownership
change, as defined in Section 382. The acquisitions by the
Company of Quinton Cardiology Systems, Inc., and Cardiac
Science, Inc., resulted in such an ownership change.
Accordingly, the estimated annual utilization of net operating
loss and credit carryforwards is limited to an amount between
$7,583,000 and $9,744,000 in years 2009 through 2010, and
$3,279,000 from 2011 through 2025.
The Company uses the
with-and-without
or incremental approach for ordering tax benefits
derived from the share-based payment awards. Using the
with-and-without
approach, actual income taxes payable for the period are
compared to the amount of tax payable that would have been
incurred absent the deduction for employee share-based payments
in excess of the amount of stock-based compensation cost
recognized for the period. As a result of this approach, net
operating loss carryforwards not generated from share-based
payments and which were in excess
77
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
of stock-based compensation cost recognized during the period
are utilized before the current periods share-based
deduction. For the years ended December 31, 2009, 2008 and
2007, no excess tax benefits have been included in
shareholders equity.
Deferred tax assets (liabilities) are comprised of the following
as of December 31 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
37,467
|
|
|
$
|
29,971
|
|
Stock-based compensation
|
|
|
2,461
|
|
|
|
2,122
|
|
Research and experimentation and alternative minimum tax credits
|
|
|
7,898
|
|
|
|
7,897
|
|
Inventory basis difference
|
|
|
1,005
|
|
|
|
995
|
|
Warranty liability
|
|
|
1,468
|
|
|
|
1,369
|
|
Corrective action liabilities
|
|
|
5,560
|
|
|
|
|
|
Deferred revenue
|
|
|
775
|
|
|
|
799
|
|
Accrued compensation, severance, relocation
|
|
|
684
|
|
|
|
660
|
|
Intangible assets, including tax deductible goodwill
|
|
|
13,010
|
|
|
|
14,448
|
|
Other assets
|
|
|
1,461
|
|
|
|
1,518
|
|
Other
|
|
|
429
|
|
|
|
1,230
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
72,218
|
|
|
|
61,009
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(69,720
|
)
|
|
|
(15,155
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
2,498
|
|
|
|
45,854
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Burdick intangible assets
|
|
|
(153
|
)
|
|
|
(246
|
)
|
Burdick trade name intangible asset
|
|
|
(1,240
|
)
|
|
|
(1,226
|
)
|
Cardiac Science intangible assets
|
|
|
(2,314
|
)
|
|
|
(3,423
|
)
|
Cardiac Science trade name
|
|
|
(4,149
|
)
|
|
|
(4,104
|
)
|
Marketable equity securities
|
|
|
|
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(7,856
|
)
|
|
|
(9,036
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
(5,358
|
)
|
|
$
|
36,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Current deferred tax assets
|
|
$
|
|
|
|
$
|
8,366
|
|
Deferred tax assets, noncurrent
|
|
|
31
|
|
|
|
28,452
|
|
Deferred tax liabilities, noncurrent
|
|
|
(5,389
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets / (liabilities)
|
|
$
|
(5,358
|
)
|
|
$
|
36,818
|
|
|
|
|
|
|
|
|
|
|
The Companys disclosures above for the 2008 comparative
period showing the components of deferred tax assets and
liabilities, as well as any valuation allowance necessary to
reduce deferred tax assets to an amount that is more likely than
not to be realized in the future, are amended from the
Companys 2008
Form 10-K
to reflect certain gross deferred tax assets and a valuation
allowance of $15,155,000 as of December 31, 2008. This did
not impact the Companys previously reported net deferred
tax assets of $36,818,000 as of December 31, 2008. The
increase to the valuation allowance was $54,565,000 and
$15,155,000, for the years ended December 31, 2009, and
2008, respectively. The valuation allowance was zero as of
December 31, 2007.
78
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has not provided for U.S. federal income and
foreign withholding taxes on any undistributed earnings from
foreign operations because such earnings are intended to be
reinvested indefinitely outside of the United States. If these
earnings were distributed, foreign tax credits may become
available under current law to reduce or eliminate the resulting
U.S. income tax liability. The amount of unrecognized
deferred tax liability related to these earnings or investments
is not significant.
The Company performs an analysis of uncertain income tax
positions related to recognition, measurement, presentation and
disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. Based on managements review
of the Companys tax positions the Company had no
significant unrecognized tax benefits as of December 31,
2009 and 2008.
The Companys continuing practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense
which were insignificant for all periods presented. At
December 31, 2009, the Company had no accrued interest
related to uncertain tax positions and no accrued penalties.
The Company is subject to U.S. federal income tax as well
as income tax in multiple state and foreign jurisdictions as
well as federal, state and foreign filings related to Quinton
and CSI. As a result of the net operating loss carryforwards,
substantially all tax years are open for U.S. federal and
state income tax matters. Foreign tax filings are open for years
2001 forward.
|
|
12.
|
Commitments
and Contingencies
|
Lease
Commitments
The Company leases its office facilities in the U.S. and
its international sales offices under operating leases. The
operating lease related to the Bothell, Washington corporate
headquarters is a non-cancelable facility lease agreement that
expires on December 31, 2013. The operating lease for the
office, production and warehouse facilities in Deerfield,
Wisconsin is a non-cancelable facility lease agreement that
expires on November 30, 2018 with two five-year renewal
options. The Company leases a facility in Laguna Hills,
California, which houses certain research and development
operations. This facility comprises approximately
13,000 square feet and the lease expires in 2014.
Additionally, the Company acquired international sales and
marketing offices under operating leases in Shanghai, China,
Copenhagen, Denmark and Manchester, United Kingdom. The Company
also leases equipment under non-cancelable operating leases.
Future minimum lease payments for all non-cancelable leases are
as follows (amounts in thousands):
|
|
|
|
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Year:
|
|
|
|
|
2010
|
|
$
|
2,133
|
|
2011
|
|
|
2,119
|
|
2012
|
|
|
2,091
|
|
2013
|
|
|
2,098
|
|
2014
|
|
|
1,160
|
|
Thereafter
|
|
|
3,185
|
|
|
|
|
|
|
Total
|
|
$
|
12,786
|
|
|
|
|
|
|
Net rental expense, including common area maintenance costs,
during 2009, 2008 and 2007 was approximately $1,975,000,
$1,991,000 and $1,709,000, respectively.
79
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Commitments
As of December 31, 2009, the Company had purchase
obligations of approximately $32,916,000 consisting of
outstanding purchase orders issued in the normal course of
business.
Guarantees
and Indemnities
During its normal course of business, the Company has made
certain guarantees, indemnities and commitments under which it
may be required to make payments in relation to certain
transactions. These indemnities include intellectual property
and other indemnities to the Companys customers and
suppliers in connection with the sales of its products, and
indemnities to directors and officers of the Company to the
maximum extent permitted under the laws of the State of
Delaware. Historically, the Company has not incurred any losses
or recorded any liabilities related to performance under these
types of indemnities.
Legal
Proceedings
We are subject to other various legal proceedings arising in the
normal course of business. In the opinion of management, the
ultimate resolution of these proceedings is not expected to have
a material effect on our consolidated financial position,
results of operations or cash flows.
Preferred
Stock
The Company is authorized to issue a total of
10,000,000 shares of preferred stock, no shares of which
were issued or outstanding as of December 31, 2009 and
2008. The Board of Directors is authorized to determine or alter
the rights, preferences, privileges and restrictions granted to
or imposed upon any wholly unissued series of preferred stock.
Common
Stock
The Company is authorized to issue a total of
65,000,000 shares of common stock.
During the year ended December 31, 2009, the Company issued
100,000 shares of common stock valued at approximately
$322,000 in exchange for certain patent rights.
|
|
14.
|
Stock-Based
Compensation Plans
|
The Company maintains an ESPP and several equity incentive plans
under which it may grant non-qualified stock options, incentive
stock options and non-vested stock awards to employees,
non-employee directors and consultants.
Total stock-based compensation expense recognized in the
consolidated statements of operations for the years ended
December 31, 2009, 2008 and 2007 was approximately
$2,645,000, $2,173,000 and $2,233,000, respectively. The Company
recognizes tax benefits related to exercises of non-qualified
stock options and vesting of non-vested stock awards. The
related tax benefit recognized in the consolidated statements of
operations for the years ended December 31, 2009, 2008,
2007 was approximately $0, $394,000 and $358,000, respectively.
Stock-based compensation of $25,000 and $21,000 was capitalized
and included in inventory in the consolidated balance sheets at
December 31, 2009 and 2008, respectively. The following
table summarizes total stock-
80
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
based compensation (including capitalized costs) consisting of
stock options, ESPP, non-vested stock awards and vested stock
awards expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock options
|
|
$
|
1,005,000
|
|
|
$
|
1,054,000
|
|
|
$
|
1,638,000
|
|
Non-vested stock awards
|
|
|
1,355,000
|
|
|
|
936,000
|
|
|
|
423,000
|
|
Vested stock awards
|
|
|
18,000
|
|
|
|
25,000
|
|
|
|
27,000
|
|
ESPP
|
|
|
292,000
|
|
|
|
179,000
|
|
|
|
169,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,670,000
|
|
|
$
|
2,194,000
|
|
|
$
|
2,257,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant and ESPP purchase is
estimated using the Black-Scholes option-pricing model with the
following weighted-average assumptions, and the fair value of
the non-vested stock awards is calculated based on the market
value of the shares awarded at date of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Stock options plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
51.1% - 55.0%
|
|
|
|
48.2% - 48.5%
|
|
|
|
48.6% - 50.9%
|
|
Expected term (years)
|
|
|
6.50
|
|
|
|
6.25
|
|
|
|
6.25
|
|
Risk-free interest rate
|
|
|
2.7%
|
|
|
|
3.4%
|
|
|
|
4.8%
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of options granted
|
|
$
|
2.06
|
|
|
$
|
4.63
|
|
|
$
|
5.31
|
|
Employee stock purchase plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
40.0%
|
|
|
|
27.0%
|
|
|
|
37.0%
|
|
Expected term (years)
|
|
|
0.5
|
|
|
|
0.5
|
|
|
|
0.5
|
|
Risk-free interest rate
|
|
|
2.1%
|
|
|
|
4.5%
|
|
|
|
4.5%
|
|
Expected dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of employee stock purchase rights
|
|
$
|
1.73
|
|
|
$
|
2.01
|
|
|
$
|
2.14
|
|
Non-vested stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of non-vested stock awards granted
|
|
$
|
3.60
|
|
|
$
|
9.04
|
|
|
$
|
9.35
|
|
Volatility is based exclusively on historical volatility of the
Companys common stock as the Company believes this is
representative of future volatility. The expected term is
determined based on the Companys best estimate of the
expected term considering historical exercise and forfeiture
history. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an
equivalent remaining term. The Company has not paid dividends in
the past and does not plan to pay any dividends in the near
future.
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options, which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions, particularly for the expected term and expected
stock price volatility. The Companys employee stock
options have characteristics significantly different from those
of traded options, and changes in the subjective input
assumptions can materially affect the fair value estimate. While
estimates of fair value and the associated charge to earnings
materially affect the Companys results of operations, it
has no impact on the Companys cash position. Because
Company stock options do not trade on a secondary exchange,
employees do not derive a benefit from holding stock options
unless there is an increase, above the exercise price, in the
market price of the Companys stock. Such an increase in
stock price would benefit all shareholders commensurately.
81
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following shares of common stock have been reserved for
issuance under the Companys stock-based compensation plans
as of December 31, 2009:
|
|
|
|
|
Outstanding shares 2002 Plan
|
|
|
2,319,861
|
|
Outstanding shares 1997 Plan
|
|
|
810,062
|
|
Stock options available for grant
|
|
|
123,418
|
|
Outstanding restricted stock grants
|
|
|
1,045,460
|
|
Employee stock purchase plan shares available for issuance
|
|
|
755,343
|
|
|
|
|
|
|
Total common shares reserved for future issuance
|
|
|
5,054,144
|
|
|
|
|
|
|
Following its adoption of guidance issued by the FASB related to
share-based payments, the Company determined that a hypothetical
additional paid in capital pool (APIC pool) related
to previously granted non-qualified stock options and non-vested
stock awards did not exist. The impact of incentive stock
options is considered when evaluating a companys APIC pool
when the benefit associated with a disqualifying disposition
reduces income taxes payable versus resulting in, or increasing,
a net operating loss carryforward. The Company has been unable
to reduce taxes payable with any disqualifying dispositions and
as such remains with a zero APIC pool as of December 31,
2009.
Deferred tax assets are recorded to the extent the Company
recognizes book expense for non-qualified stock options and
non-vested stock awards. These deferred tax assets are reduced
at the time stock options are exercised and non-vested stock
awards vest. Upon exercise of an option or vesting of a stock
award, the Company will compare the recorded deferred tax asset
related to these instruments to the tax benefit that will be
received, if any. If the recorded deferred tax asset incurred
exceeds the tax benefit to be received (a tax deficiency), the
Company will record income tax expense in the period it occurs
for the difference. Alternatively, if the tax benefit related to
non-qualified stock options or non-vested stock awards exceeds
the recorded deferred tax asset (excess tax benefit), the
Company will first apply this excess tax benefit against any
previously recorded tax deficiencies incurred during the current
year, and the remaining amount will be included in the
Companys APIC pool (if one existed) and used to offset
future tax deficiencies in the current year, if any. Any excess
tax benefits remaining at the end of the current year would be
available to offset tax deficiencies in future years, at which
time the settlement of the award reduces income taxes payable
and does not result in a net operating loss carryforward or
increase a net operating loss carryforward. The Company
recognized expense of $155,000 in 2009 due to its net tax
deficiency position, prior to recording a full valuation
allowance against the remaining deferred tax asset for
stock-based compensation during the third quarter of 2009. The
Company had no similar expense in 2008 and 2007 due to its net
excess tax benefit positions in each year.
2002 Plan In February 2002,
Quintons board of directors adopted and Quintons
shareholders approved the 2002 Stock Incentive Plan (the
2002 Plan), which became effective upon completion
of Quintons initial public offering in May 2002 and was
assumed by the Company in connection with the merger
transaction. The 2002 Plan replaced Quintons 1998 Equity
Incentive Plan (the 1998 Plan) for purposes of all
future incentive stock awards. The 2002 Plan allows the Company
to issue awards of incentive or nonqualified stock options,
shares of common stock or units denominated in common stock, all
of which may be subject to restrictions. The 2002 Plan
authorizes annual increases in shares for issuance equal to the
lesser of (i) 526,261 shares, (ii) 3% of the
number of shares of common stock outstanding on a fully diluted
basis as of the end of the Companys immediately preceding
fiscal year, and (iii) a lesser amount established by the
Companys board of directors. Any shares from increases in
previous years that are not issued will continue to be included
in the aggregate number of shares available for future issuance.
Options held by employees generally vest 25% after one year from
the date of the grant and then monthly thereafter over a four
year period. The term of the options is for a period of ten
years or less. Options generally expire 90 days after
termination of employment. The Company has also adopted a stock
option grant program for
82
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
non-employee directors, administered under the terms and
conditions of the 2002 Plan. Options granted to non-employee
directors generally vest over four years.
The fair value of each stock option granted is estimated on the
date of grant using the Black-Scholes option valuation model.
The assumptions used to calculate the fair value of options
granted are evaluated and revised, as necessary, to reflect
market conditions and the Companys experience.
Compensation expense is recognized only for those options
expected to vest, with forfeitures estimated at the date of
grant based on the Companys historical experience and
future expectations.
The aggregate intrinsic values indicated in the tables below are
before applicable income taxes, based on the Companys
closing stock price of $2.23 as of the last business day of the
year ended December 31, 2009, which would have been
received by the optionees had all options been exercised on that
date.
As of December 31, 2009, total unrecognized stock-based
compensation expense related to nonvested stock options was
approximately $2,250,000, which is expected to be recognized
over a weighted average period of approximately 3.4 years
and is primarily related to options granted under the 2002 plan.
The total intrinsic value of stock options exercised during the
years ended December 31, 2009, 2008 and 2007 was $127,000,
$364,000 and $327,000, respectively. The total fair value of
shares vested during the years ended December 31, 2009,
2008 and 2007 was $1,005,000, $1,053,000 and $1,585,000,
respectively. The Company issues new shares of common stock upon
the exercise of options.
The following table summarizes information about the 2002 Plan
option activity during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Aggregate
|
|
|
|
Subject to
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Contractual Life
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Outstanding, December 31, 2008
|
|
|
2,063,065
|
|
|
$
|
8.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
970,000
|
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(193,098
|
)
|
|
|
2.81
|
|
|
|
|
|
|
|
|
|
Forfeited and cancelled
|
|
|
(520,106
|
)
|
|
|
8.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
2,319,861
|
|
|
$
|
6.43
|
|
|
|
8.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
1,191,553
|
|
|
$
|
8.03
|
|
|
|
6.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested Stock Awards In the fourth
quarter of 2005, the Company began granting employees and
directors non-vested stock awards in addition to stock options.
The stock award program offers employees the opportunity to earn
shares of our stock over time, rather than options that give
employees the right to purchase stock at a set price. Non-vested
stock awards require no payment from the employee, with the
exception of employee-related taxes upon vesting of the stock
award. Employees can elect to have stock awards withheld to
cover minimum tax withholdings upon vesting.
Non-vested stock awards are grants that entitle the holder to
shares of common stock as the award vests. Our stock awards
generally vest ratably over a four-year period in annual
increments. Compensation cost is recorded based on the market
price on the grant date and is recorded equally over the vesting
period of four years. Compensation expense related to non-vested
stock awards approximated $1,355,0000, $936,000 and $423,000
during the years ended December 31, 2009, 2008 and 2007,
respectively.
As of December 31, 2009, total unrecognized stock-based
compensation expense related to non-vested stock awards was
approximately $2,876,000 which is expected to be recognized over
a weighted average period of approximately 3.1 years.
83
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about the non-vested
stock awards activity during the year ended December 31,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Shares
|
|
|
Grant-Date Fair Value
|
|
|
Non-vested balance, December 31, 2008
|
|
|
388,002
|
|
|
$
|
9.02
|
|
Granted
|
|
|
871,197
|
|
|
|
3.60
|
|
Vested
|
|
|
(148,240
|
)
|
|
|
8.93
|
|
Forfeited
|
|
|
(65,499
|
)
|
|
|
8.34
|
|
|
|
|
|
|
|
|
|
|
Non-vested balance, December 31, 2009
|
|
|
1,045,460
|
|
|
$
|
4.57
|
|
|
|
|
|
|
|
|
|
|
1997 Plan The Companys 1997
Stock Option/Stock Issuance Plan (the 1997 Plan) was
established by CSI in 1997 and was assumed by the Company in
connection with the 2005 merger transaction between Quinton and
CSI. The 1997 Plan provided for the granting of incentive or
nonqualified stock options to employees of the Company,
including officers, and nonqualified stock options to employees,
including officers and directors of the Company, as well as to
certain consultants and advisors. Shares authorized under the
1997 Plan are 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 expired in 2007. Accordingly, no
future grants are allowed under the 1997 Plan. Previous awards
under the 1997 Plan will continue to be outstanding until they
are exercised, expire or are forfeited.
The following table summarizes information about the 1997 Plan
option activity during the year ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
|
|
|
|
Subject to
|
|
|
Exercise Price
|
|
|
Remaining
|
|
|
Aggregate Intrinsic
|
|
|
|
Options
|
|
|
Per Share
|
|
|
Contractual Life
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Outstanding, December 31, 2008
|
|
|
836,312
|
|
|
$
|
24.11
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(26,250
|
)
|
|
|
19.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2009
|
|
|
810,062
|
|
|
$
|
24.23
|
|
|
|
3.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2009
|
|
|
796,937
|
|
|
$
|
24.49
|
|
|
|
3.0
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan The
Companys ESPP was established by Quinton in 2002 and
assumed by the Company in connection with the 2005 merger
transaction between Quinton and CSI. The ESPP permits eligible
employees to purchase common stock through payroll deductions.
Shares of our common stock may presently be purchased by
employees at three month intervals at 85% of the lower of fair
market value on first day of the offering period or the last day
of each three month purchase period. Employees may purchase
shares having a value not exceeding 15% of their gross
compensation during an offering period, not to exceed
525 shares during an offering period. The Company initially
reserved 175,420 shares for issuance under the ESPP. In
addition, the ESPP authorizes annual increases in shares for
issuance equal to the lesser of (i) 175,420 shares,
(ii) 2% of the number of shares of common stock outstanding
on a fully diluted basis as of the end of the Companys
immediately preceding fiscal year, and (iii) a lesser
amount established by the Companys board of directors. Any
shares from increases in previous years that are not actually
issued will continue to be included in the aggregate number of
shares available for future issuance.
84
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During the years ended December 31, 2009, 2008, and 2007,
the Company recorded stock-based compensation expense for the
ESPP of approximately $292,000, $179,000 and $169,000,
respectively. The following table summarized shares issued under
the Companys ESPP and total proceeds received.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Total shares issued under ESPP
|
|
|
169,063
|
|
|
|
89,670
|
|
|
|
80,078
|
|
Proceeds received for shares issued under ESPP
|
|
$
|
464,000
|
|
|
$
|
603,000
|
|
|
$
|
553,000
|
|
|
|
15.
|
Fair
Value Measurement
|
Fair value measurements are determined under a three-level
hierarchy that prioritizes the inputs to valuation techniques
used to measure fair value, distinguishing between market
participant assumptions developed based on market data obtained
from sources independent of the reporting entity
(observable inputs) and the reporting entities own
assumptions about market participant assumptions developed based
on the best information available in the circumstances
(unobservable inputs). Level 1 inputs consist
of quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for
similar assets and liabilities in active markets or inputs that
are observable for the asset or liability, either directly or
indirectly through market corroboration, for substantially the
full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the Companys own assumptions
used to measure assets and liabilities at fair value.
Classification of a financial asset or liability within the
hierarchy is determined based on the lowest level input that is
significant to the fair value measurement. There were no changes
to the valuation techniques during the year ended
December 31, 2009.
The Companys assets and liabilities are carried at fair
value and are recorded on the balance sheet in cash equivalents
and investments in unconsolidated entities. The Companys
cash equivalents are comprised primarily of investments in money
market funds and the Companys investments in
unconsolidated entities are comprised primarily of investments
in equity securities of unrelated entities that are traded in
active markets.
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31,
|
|
|
|
|
2009 Using:
|
|
|
Total Carrying
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
|
Value at December 31,
|
|
Active Markets
|
|
Observable Events
|
|
Unobservable Inputs
|
|
|
2009
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
(In thousands of dollars)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
18,617
|
|
|
$
|
18,617
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated entities
|
|
$
|
306
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
The following table provides the assets and liabilities carried
at fair value measured on a recurring basis as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31,
|
|
|
|
|
2008 Using:
|
|
|
Total Carrying
|
|
Quoted Prices in
|
|
Significant Other
|
|
Significant
|
|
|
Value at December 31,
|
|
Active Markets
|
|
Observable Events
|
|
Unobservable Inputs
|
|
|
2008
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
|
|
(In thousands of dollars)
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
26,593
|
|
|
$
|
26,593
|
|
|
|
|
|
|
|
|
|
Investments in unconsolidated entities
|
|
$
|
450
|
|
|
$
|
450
|
|
|
|
|
|
|
|
|
|
85
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Periodically the Company enters into foreign currency forward
exchange contracts that are not designated as hedging
instruments for accounting purposes, to mitigate the foreign
exchange risk of certain balance sheet items. These forward
exchange contracts resulted in net realized gains (losses) of
($133,000) and $1,379,000 in the year ended December 31,
2009 and 2008, respectively. The net realized gains (losses)
were partially offset by foreign currency losses on intercompany
payables denominated in U.S. dollars owed by foreign
subsidiaries. The assets for these contracts are recorded in
prepaid expenses and other current assets or accrued liabilities
and the net realized and unrealized gains or losses are recorded
in other income, net. There were no foreign currency forward
exchange contracts outstanding as of December 31, 2009 or
December 31, 2008. The Company did not enter into these
contracts in 2007.
On April 23, 2008, the Company completed an acquisition of
a former distributor in Germany, under the purchase method of
accounting. The total estimated purchase price was allocated to
the tangible and identifiable intangible assets acquired and
liabilities assumed in connection with the acquisition, based on
their fair values as of the closing date. The purchase
consideration of $148,000 was allocated to the Cardiac Science
Deutschland trade name valued at $202,000, other assets of
$12,000, and accounts payable of $66,000. Management has
concluded that no legal, regulatory, contractual, competitive,
economic, or other factors limit the useful life of the trade
name and accordingly has considered the useful life of the trade
name to be indefinite.
|
|
18.
|
Employee
Benefit Plans
|
The Company is the sponsor of the Cardiac Science Corporation
401(k) Plan (401(k) Plan). The 401(k) Plan covers
all regular employees of the Company who satisfy certain age and
service requirements as specified in the 401(k) Plan. The 401(k)
Plan includes provision for an employee deferral of up to 50% of
pre-tax compensation to the maximum deferral allowed under IRC
guidelines, and up to 50% of compensation for after-tax
deferral. On behalf of eligible participants, the Company may
make a matching contribution equal to a discretionary percentage
of the elective deferral up to the Plans established
limits and is subject to the Plans vesting schedule. The
Company made matching contributions of approximately $874,000
$941,000 and $910,000 for the years ended December 31,
2009, 2008 and 2007, respectively. As of December 31, 2009
and 2008, the Company had accrued $6,000 and $56,000,
respectively, for matching plan contributions.
Subsequent events have been evaluated through the date of
issuance of these consolidated financial statements.
86
CARDIAC
SCIENCE CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
20.
|
Quarterly
Results of Operations (Unaudited)
|
The following table sets forth selected unaudited quarterly
operating data for the last eight quarters. This information has
been prepared on the same basis as our audited consolidated
financial statements and includes, in the opinion of management,
all normal and recurring adjustments that management considers
necessary for a fair statement of the quarterly results for the
periods. The operating results and data for any quarter are not
necessarily indicative of the results for future periods.
The table below presents quarterly data for the years ended
December 31, 2009 and 2008 (in thousands, except per share
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
48,959
|
|
|
$
|
52,132
|
|
|
$
|
54,006
|
|
|
$
|
51,056
|
|
|
$
|
39,664
|
|
|
$
|
36,114
|
|
|
$
|
38,884
|
|
|
$
|
42,186
|
|
Cost of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product and Service
|
|
|
24,761
|
|
|
|
26,169
|
|
|
|
27,887
|
|
|
|
25,053
|
|
|
|
19,785
|
|
|
|
18,563
|
|
|
|
20,289
|
|
|
|
22,028
|
|
Corrective action costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,500
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
24,198
|
|
|
|
25,963
|
|
|
|
26,119
|
|
|
|
26,003
|
|
|
|
19,879
|
|
|
|
17,551
|
|
|
|
95
|
|
|
|
17,658
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
3,863
|
|
|
|
3,796
|
|
|
|
4,103
|
|
|
|
4,664
|
|
|
|
3,471
|
|
|
|
3,617
|
|
|
|
4,270
|
|
|
|
3,592
|
|
Sales and marketing
|
|
|
12,189
|
|
|
|
13,047
|
|
|
|
12,934
|
|
|
|
12,563
|
|
|
|
11,198
|
|
|
|
11,271
|
|
|
|
11,923
|
|
|
|
13,655
|
|
General and administrative
|
|
|
5,125
|
|
|
|
5,347
|
|
|
|
5,096
|
|
|
|
6,849
|
|
|
|
5,616
|
|
|
|
6,349
|
|
|
|
6,571
|
|
|
|
7,598
|
|
Impairment of goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,671
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,177
|
|
|
|
22,190
|
|
|
|
22,133
|
|
|
|
131,747
|
|
|
|
20,285
|
|
|
|
21,237
|
|
|
|
22,764
|
|
|
|
24,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,021
|
|
|
|
3,773
|
|
|
|
3,986
|
|
|
|
(105,744
|
)
|
|
|
(406
|
)
|
|
|
(3,686
|
)
|
|
|
(22,669
|
)
|
|
|
(7,187
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income (expense), net
|
|
|
115
|
|
|
|
163
|
|
|
|
156
|
|
|
|
55
|
|
|
|
13
|
|
|
|
19
|
|
|
|
23
|
|
|
|
11
|
|
Other income (expense), net
|
|
|
211
|
|
|
|
(125
|
)
|
|
|
20
|
|
|
|
529
|
|
|
|
(148
|
)
|
|
|
545
|
|
|
|
158
|
|
|
|
(453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
|
326
|
|
|
|
38
|
|
|
|
176
|
|
|
|
584
|
|
|
|
(135
|
)
|
|
|
564
|
|
|
|
181
|
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax benefit (expense)
|
|
|
3,347
|
|
|
|
3,811
|
|
|
|
4,162
|
|
|
|
(105,160
|
)
|
|
|
(541
|
)
|
|
|
(3,122
|
)
|
|
|
(22,488
|
)
|
|
|
(7,629
|
)
|
Income tax benefit (expense)
|
|
|
(1,240
|
)
|
|
|
(1,407
|
)
|
|
|
(1,598
|
)
|
|
|
152
|
|
|
|
166
|
|
|
|
1,194
|
|
|
|
(43,923
|
)
|
|
|
101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
2,107
|
|
|
|
2,404
|
|
|
|
2,564
|
|
|
|
(105,008
|
)
|
|
|
(375
|
)
|
|
|
(1,928
|
)
|
|
|
(66,411
|
)
|
|
|
(7,528
|
)
|
Less: Net income attributable to noncontrolling interests
|
|
|
(53
|
)
|
|
|
(118
|
)
|
|
|
(86
|
)
|
|
|
(194
|
)
|
|
|
(163
|
)
|
|
|
(178
|
)
|
|
|
(135
|
)
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Cardiac Science
Corporation
|
|
$
|
2,054
|
|
|
$
|
2,286
|
|
|
$
|
2,478
|
|
|
$
|
(105,202
|
)
|
|
$
|
(538
|
)
|
|
$
|
(2,106
|
)
|
|
$
|
(66,546
|
)
|
|
$
|
(7,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to Cardiac Science
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
(4.58
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.85
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
(4.58
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(2.85
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted as of December 31, 2009, an
evaluation of our disclosure controls and procedures, as such
term is defined under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation
as of December 31, 2009, our Chief Executive Officer and
our Chief Financial Officer concluded that our disclosure
controls and procedures were effective for ensuring that the
information required to be disclosed by us in the reports we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms. In
addition, our Chief Executive Officer and Chief Financial
Officer concluded as of December 31, 2009, that our
disclosure controls and procedures are also effective to ensure
that information required to be disclosed in reports that we
file or submit under the Exchange Act is accumulated and
communicated to our management, including to our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
Managements
Report on Internal Control Over Financial Reporting
Managements report on internal control over financial
reporting is set forth in Item 8 in our consolidated
financial statements included elsewhere in this report.
KPMG LLP, an independent registered public accounting firm, has
issued an attestation report on our internal control over
financial reporting as of December 31, 2009, which is
included in Item 8.
Changes
in Internal Controls
There were no changes in our internal control over financial
reporting that occurred during our fiscal quarter ended
December 31, 2009 that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
Item 9B.
|
Other
Information
|
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information called for by Part III, Item 10, is
incorporated by reference to the sections entitled
Election of Directors, Executive
Officers, Section 16(a) Beneficial Ownership
Reporting Compliance, Code of Ethics and
Other Information as to Directors Board
Committees and Meetings Audit Committee
included in our definitive Proxy Statement relating to our 2010
annual meeting of stockholders. We will file the information
called for by this item by an amendment to this report no later
than the end of the 120 day period following the fiscal
year end to which this report relates if our Proxy Statement is
not filed by such date.
|
|
Item 11.
|
Executive
Compensation
|
Information called for by Part III, Item 11, is
incorporated by reference to the sections entitled Other
Information as to Directors Directors
Compensation, Executive Compensation and
Compensation Committee Report included in our
definitive Proxy Statement relating to our 2010 annual meeting
of stockholders. We will file the information called for by this
item by an amendment to this report no later than the end of the
120 day period following the fiscal year end to which this
report relates if our Proxy Statement is not filed by such date.
89
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information called for by Part III, Item 12, is
incorporated by reference to the sections entitled
Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan
Information included in our definitive Proxy Statement
relating to our 2010 annual meeting of stockholders. We will
file the information called for by this item by an amendment to
this report no later than the end of the 120 day period
following the fiscal year end to which this report relates if
our Proxy Statement is not filed by such date.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
Information called for by Part III, Item 13, is
incorporated by reference to the sections entitled Certain
Relationships and Related Person Transaction and
Other Information as to Directors Director
Independence included in our definitive Proxy Statement
relating to our 2010 annual meeting of stockholders. We will
file the information called for by this item by an amendment to
this report no later than the end of the 120 day period
following the fiscal year end to which this report relates if
our Proxy Statement is not filed by such date.
|
|
Item 14.
|
Principal
Accountant Fees and Services.
|
Information called for by Part III, Item 14, is
incorporated by reference to the section entitled Audit
and Related Fees included in our definitive Proxy
Statement relating to our 2010 annual meeting of stockholders.
We will file the information called for by this item by an
amendment to this report no later than the end of the
120 day period following the fiscal year end to which this
report relates if our Proxy Statement is not filed by such date.
PART IV
|
|
ITEM 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following financial statements, financial statement
schedule and exhibits are filed as part of this report:
(1) Consolidated Financial Statements: See Index to
Financial Statements at Item 8.
(2) Financial Statement Schedule: See
Schedule II Valuation and Qualifying Accounts.
(3) Exhibits are incorporated herein by reference or are
filed with this report: See Index to Exhibits following the
signature page of this report.
All other schedules have been omitted because they are not
applicable, not required, or because the information required to
be set forth therein is included in the consolidated financial
statements or in notes thereto.
(b) Exhibits.
The Exhibit Index is included on pages
92-95 of
this report.
90
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Cardiac Science
Corporation
|
|
|
|
By:
|
/s/ Michael
K. Matysik
Michael
K. Matysik
Chief Financial Officer
|
Date: March 15, 2010
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated and
on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ DAVID
L. MARVER
David
L. Marver
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ MICHAEL
K. MATYSIK
Michael
K. Matysik
|
|
Senior Vice President, Chief Financial Officer (Principal
Financial Officer and Principal Accounting Officer)
|
|
March 15, 2010
|
|
|
|
|
|
/s/ RUEDIGER
NAUMANN-ETIENNE
Ruediger
Naumann-Etienne
|
|
Chairman of the Board
|
|
March 15, 2010
|
|
|
|
|
|
/s/ RONALD
A. ANDREWS, JR.
Ronald
A. Andrews, Jr.
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ W.
ROBERT BERG
W.
Robert Berg
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ CHRISTOPHER
J. DAVIS
Christopher
J. Davis
|
|
Director
|
|
March 15, 2010
|
|
|
|
|
|
/s/ TIMOTHY
C. MICKELSON
Timothy
C. Mickelson
|
|
Director
|
|
March 15, 2010
|
91
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger dated as of February 28, 2005,
as amended on June 23, 2005, among Quinton Cardiology
Systems, Inc., Cardiac Science, Inc., CSQ Holding Company,
Rhythm Acquisition Corporation, and Heart Acquisition
Corporation(1)
|
|
2
|
.2
|
|
Stock Purchase Agreement dated December 23, 2002 by and
among Spacelabs Medical, Inc., Spacelabs Burdick, Inc., Quinton
Cardiology Systems, Inc. and Datex-Ohmeda, Inc.(3)
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation(2)
|
|
3
|
.2
|
|
Amended and Restated Bylaws(12)
|
|
4
|
.1
|
|
Specimen Stock Certificate(2)
|
|
4
|
.2
|
|
Second Amended and Restated Registration Rights Agreement, dated
as of February 28, 2005, by and among Cardiac Science,
Inc., and the investors listed on the signature pages thereto(16)
|
|
10
|
.1*
|
|
Amended and Restated Employment Agreement dated as of
September 20, 2006 between Cardiac Science Corporation and
John R. Hinson(15)
|
|
10
|
.2*
|
|
Consulting Agreement dated as of March 26, 2009 between
Cardiac Science Corporation and John R. Hinson(22)
|
|
10
|
.3*
|
|
Quinton Cardiology Systems, Inc. 1998 Amended and Restated
Equity Incentive Plan(4)
|
|
10
|
.4*
|
|
Cardiac Science Corporation, Inc. 2002 Stock Incentive Plan
|
|
10
|
.5*
|
|
Cardiac Science Corporation, Inc. 2002 Employee Stock Purchase
Plan
|
|
10
|
.6*
|
|
Cardiac Science Corporation Stock Option Grant Program for
Nonemployee Directors(17)
|
|
10
|
.7*
|
|
Cardiac Science, Inc. 1997 Stock Option/Stock Issuance Plan, as
amended(9)
|
|
10
|
.8*
|
|
Quinton Cardiology Systems, Inc. Stock Option Grant Notice and
Stock Option Agreement between Quinton Cardiology Systems, Inc.
and Feroze Motafram dated as of July 23, 2003(8)
|
|
10
|
.9*
|
|
Amended and Restated Employment Agreement dated as of
September 20, 2006 between Cardiac Science Corporation and
Kurt Lemvigh(15)
|
|
10
|
.10*
|
|
Amended and Restated Employment Agreement dated as of
September 20, 2006 between Cardiac Science Corporation and
Feroze Motafram(21)
|
|
10
|
.11*
|
|
Separation and Release Agreement dated as of September 17,
2009 between Cardiac Science Corporation and Feroze Motafram(23)
|
|
10
|
.12*
|
|
Form of Quinton Cardiology Systems, Inc. Stock Option Grant
Notice and Stock Option Agreement (This exhibit represents other
substantially identical documents that have been omitted because
they are substantially identical to this document in all
material respects and an Appendix attached to this exhibit sets
forth material details by which the omitted documents differ
from this exhibit.)(7)
|
|
10
|
.13*
|
|
Form of Employment Agreement between Cardiac Science Corporation
and its executive officers
|
|
10
|
.14*
|
|
Form of Stock Option Grant Notice and Stock Option Agreement for
grants made pursuant to the Cardiac Science Corporation 2002
Stock Incentive Plan(14)
|
|
10
|
.15*
|
|
Form of Indemnification Agreement(12)
|
|
10
|
.16*
|
|
Equity Grant Program for Nonemployee Directors under the Cardiac
Science Corporation 2002 Stock Incentive Plan(21)
|
|
10
|
.17*
|
|
Cardiac Science Corporation Management Incentive Plan
(MIP) 2010
|
|
10
|
.18*
|
|
Form of 1997 Stock Option/Stock Issuance Plan Grant Notice and
Option Agreement(13)
|
|
10
|
.19*
|
|
Form of Cardiac Science Corporation Stock Option Grant Notice
under 2002 Stock Incentive Plan for Non-Employee Directors(17)
|
|
10
|
.20*
|
|
Form of 2010 Compensation Incentive Plan for Kurt Lemvigh
|
|
10
|
.21*
|
|
Form of Restricted Stock Unit Agreement under the Cardiac
Science Corporation 2002 Stock Incentive Plan(21)
|
|
10
|
.22*
|
|
Form of Restricted Stock Unit Grant Notice for grants made
pursuant to the Cardiac Science Corporation, Inc. 2002 Stock
Incentive Plan
|
|
10
|
.23
|
|
Lease Agreement between Carl Ruedebusch LLC and Burdick, Inc.
regarding premises at Deerfield Industrial Park in Deerfield,
Wisconsin dated as of November 26, 2008(21)
|
92
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.24
|
|
Lease Agreement between Quinton Cardiology Systems, Inc. and
Hibbs/ Woodinville Associates, L.L.C. regarding premises at
Bothell, Washington, dated August 29, 2003(6)
|
|
10
|
.25++
|
|
OEM Purchase and Supply Agreement between Cardiac Science, Inc.
and GE Medical Systems Information Technologies, Inc. dated
July 29, 2003(17)
|
|
10
|
.26++
|
|
Addendum 1 dated as of March 24, 2004 to OEM Purchase and
Supply Agreement between Cardiac Science, Inc. and GE Medical
Systems Information Technologies, Inc. dated July 29,
2003(17)
|
|
10
|
.27
|
|
Amendment One dated August 10, 2004 to OEM Purchase and
Supply Agreement between Cardiac Science, Inc. and GE Medical
Systems Information Technologies, Inc. dated July 29,
2003(17)
|
|
10
|
.28
|
|
Second Amendment dated February 14, 2005 to OEM Purchase
and Supply Agreement between Cardiac Science, Inc. and GE
Medical Systems Information Technologies, Inc. dated
July 29, 2003(17)
|
|
10
|
.29+
|
|
Third Amendment, dated June 10, 2005, to the OEM Purchase
and Supply Agreement dated July 29, 2003, as amended,
between Cardiac Science, Inc. and GE Medical Systems Information
Technologies, Inc.(11)
|
|
10
|
.30+
|
|
OEM Purchase Agreement between Cardiac Science, Inc. and GE
Medical Systems Information Technologies, Inc. dated
July 29, 2003(17)
|
|
10
|
.31
|
|
Amendment One dated August 10, 2004 to OEM Purchase
Agreement between Cardiac Science, Inc. and GE Medical Systems
Information Technologies, Inc. dated July 29, 2003(17)
|
|
10
|
.32
|
|
Second Amendment dated February 14, 2005 to OEM Purchase
Agreement between Cardiac Science, Inc. and GE Medical Systems
Information Technologies, Inc. dated July 29, 2003(17)
|
|
10
|
.33
|
|
Third Amendment, dated June 10, 2005, to the OEM Purchase
Agreement dated July 29, 2003, as amended, between Cardiac
Science, Inc. and GE Medical Systems Information Technologies,
Inc.(11)
|
|
10
|
.34++
|
|
Fourth Amendment dated October 25, 2006 to OEM Purchase
Agreement between Cardiac Science Corporation and GE Medical
Systems Information Technologies, Inc. dated July 29,
2003(17)
|
|
10
|
.35++
|
|
Fifth Amendment dated September 7, 2007 to OEM Purchase
Agreement between Cardiac Science Corporation and GE Medical
Systems Information Technologies, Inc. dated July 29,
2003(19)
|
|
10
|
.36+
|
|
Exclusive Distribution Agreement for United States and Canadian
Hospitals dated June 13, 2005, between Cardiac Science,
Inc. and GE Medical Systems Information Technologies, Inc.(11)
|
|
10
|
.37
|
|
First Amendment dated as of September 5, 2007 to
Exclusivity Agreement by and between Cardiac Science Corporation
and GE Medical Systems Information Technologies, Inc. dated
June 10, 2005(19)
|
|
10
|
.38
|
|
Settlement Agreement by and between Cardiac Science Corporation,
Koninklijke Philips Electronics N.V. and Philips Electronics
North America Corporation, dated April 24, 2007(18)
|
|
10
|
.39++
|
|
Cross-License Agreement by and between Cardiac Science
Corporation, Koninklijke Philips Electronics N.V. and Philips
Electronics North America Corporation, dated April 24,
2007(18)
|
|
10
|
.40++
|
|
Form of OEM Supply and Purchase Agreement between Cardiac
Science Corporation and Nihon Kohden Corporation entered into
July 29, 2008, effective January 1, 2008(20)
|
|
10
|
.41++
|
|
OEM Supply and Purchase Agreement between Cardiac Science
Corporation and Nihon Kohden Corporation entered into
March 31, 2005(21)
|
|
10
|
.42
|
|
Master Agreement for Professional Services dated as of
May 29, 2008 between Cardiac Science Corporation and
Syncroness, Inc.(22)
|
|
21
|
.1
|
|
Subsidiaries
|
|
23
|
.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
31
|
.1
|
|
Certification of Chief Executive Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
|
|
31
|
.2
|
|
Certification of Chief Financial Officer pursuant to
Section 302(a) of the Sarbanes-Oxley Act of 2002
|
|
32
|
.1
|
|
Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
Certification of Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Indicates management contract or compensatory plan or
arrangement. |
93
|
|
|
+ |
|
Portions of this exhibit are omitted and were filed separately
with the Securities and Exchange Commission pursuant to Cardiac
Science Inc.s application requesting confidential
treatment under
Rule 24b-2
of the Securities Exchange Act of 1934, as amended. |
|
++ |
|
Portions of this exhibit are omitted and were filed separately
with the Securities and Exchange Commission pursuant to Cardiac
Science Corporations application requesting confidential
treatment under Rule 24b-2 of the Securities Exchange Act of
1934, as amended. |
|
(1) |
|
Incorporated by reference to the Registrants Amendment
No. 3 to the Registration Statement on
Form S-4/A
(File
No. 333-124514)
filed on July 28, 2005. |
|
(2) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
(File
No. 000-51512)
filed on September 1, 2005. |
|
(3) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Current Report on
Form 8-K
(File
No. 000-49755)
filed on January 17, 2003. |
|
(4) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Registration Statement on
Form S-1
(File
No. 333-83272)
filed on February 22, 2002. |
|
(5) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Amendment No. 3 to the Registration Statement
on
Form S-1/A
(File
No. 333-83272)
filed on April 3, 2002. |
|
(6) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2003 (File
No. 000-49755). |
|
(7) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2003 (File
No. 000-49755). |
|
(8) |
|
Incorporated by reference to Quinton Cardiology Systems,
Inc.s Annual Report on
Form 10-K
for the year ended December 31, 2004 (File
No. 000-49755). |
|
(9) |
|
Incorporated by reference to Cardiac Science, Inc.s
Definitive Proxy Statement for the Annual Meeting of
Stockholders (File
No. 000-19567)
held on September 9, 2002. |
|
(10) |
|
Incorporated by reference to Cardiac Science, Inc.s
Current Report on
Form 8-K
(File No.
000-19567)
filed on July 22, 2004. |
|
(11) |
|
Incorporated by reference to Cardiac Science, Inc.s
Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005 (File
No. 000-19567). |
|
(12) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
(File
No. 000-51512)
filed November 15, 2005. |
|
(13) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2006 (File
No. 000-51512). |
|
(14) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2006 (File
No. 000-51512). |
|
(15) |
|
Incorporated by reference to the Registrants Current
Report on
Form 8-K
(File
No. 000-51512)
filed September 22, 2006. |
|
(16) |
|
Incorporated by reference to Registrants Registration
Statement on
Form S-4
(File No.
333-124514)
filed on May 2, 2005. |
|
(17) |
|
Incorporated by reference to Registrants Annual Report on
Form 10-K
for the year ended December 31, 2006 (File
No. 000-51512). |
|
(18) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended June 30, 2007 (File
No. 000-51512). |
|
(19) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2007 (File
No. 000-51512). |
|
(20) |
|
Incorporated by reference to the Registrants Amendment
No. 1 to its Quarterly Report for the quarter ended
September 30, 2008 (File
No. 000-51512)
filed on December 31, 2008. |
94
|
|
|
(21) |
|
Incorporated by reference to the Registrants Annual Report
on
Form 10-K
for the year ended December 31, 2008 (File
No. 000-51512). |
|
(22) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended March 31, 2009 (File
No. 000-51512). |
|
(23) |
|
Incorporated by reference to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009 (File
No. 000-51512). |
95