SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| x | Annual Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 |
For the fiscal Year Ended December 31, 2003
OR
| ¨ | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 0-19567
CARDIAC SCIENCE, INC.
(Exact Name of registrant as specified in its Charter)
| Delaware | 33-0465681 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
1900 Main Street, Suite 700, Irvine, CA 92614
(Address of Principal Executive Offices) (Zip Code)
Issuer’s telephone number (949) 797-3800
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K: x
Indicate by check mark if the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No ¨
The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the closing price of Common Stock on June 30, 2003, as reported by the Nasdaq National Market System, was approximately $160,381,000. Shares of voting stock held by each officer and director and by each person who owns 10% or more of the outstanding voting stock have been excluded in that such persons may be deemed to be affiliates. This assumption regarding affiliate status is not necessarily a conclusive determination for other purposes.
There were 80,576,128 shares of the registrant’s Common Stock outstanding as of March 11, 2004.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Security Ownership of Certain Beneficial Owners and Management |
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Exhibits, Financial Statement Schedules and Reports on Form 8-K |
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| ITEM 1. | DESCRIPTION OF BUSINESS. |
Overview
Cardiac Science is a leading developer, manufacturer and marketer of life-saving public access defibrillators, or automated external defibrillators (“AEDs”), and the largest corporate provider of comprehensive AED/CPR training services. We also manufacture and market a unique therapeutic in-hospital patient monitor-defibrillator that instantly and automatically treats cardiac patients with life-threatening heart rhythms and those that suffer sudden cardiac arrest (“SCA”). More than 450,000 people in the United States die each year from SCA. SCA is the leading cause of death in both the United States and Europe. Approximately two thirds of SCA deaths occur outside a hospital, and according to the American Heart Association (“AHA”) survival rates for victims of SCA average 5% outside the hospital. For victims of SCA, survival is directly linked to the amount of time between the onset of SCA and receiving a defibrillation shock, so that for every minute that goes by without a defibrillation shock, a victim’s chance of survival is reduced by approximately 10%. Additionally, the average survival rate for patients suffering an in-hospital SCA-event, is estimated to be less than 25%—a rate that has not improved since the 1960s.
Our proprietary RHYTHMx® software technology, and STAR® Biphasic energy delivery system, form the technology platform for our line of AED products, the Powerheart AED®, and our unique therapeutic monitor-defibrillator, the Powerheart® Cardiac Rhythm Module®, or Powerheart® CRM®. Our products and technology are designed to easily and effectively treat victims of SCA whether outside or inside a hospital in the shortest time frame possible, thereby significantly increasing a victim’s chance of survival. Once the electrodes of our Powerheart AED are placed on a patient, our device instantly and accurately detects the presence of any life-threatening arrhythmias and will advise the user to deliver a shock if required. In the case of our in-hospital Powerheart CRM, which continuously monitors a patient’s heart rhythms in the event of a life-threatening arrhythmia, can automatically deliver a potentially life-saving shock to the patient, with no human intervention.
We are active in new product development initiatives, including expanding and enhancing our existing Powerheart AED product line, as well as integrating our RHYTHMx and STAR Biphasic technology into new cardiac resuscitation product platforms for our strategic Original Equipment Manufacturer (“OEM”) partner General Electric Medical Systems (“GEMS”). We have a portfolio of 82 issued patents relating to our core technology and products.
In September 2001, we acquired Survivalink Corporation (“Survivalink”), a privately held Minneapolis, Minnesota-based manufacturer of AEDs. The acquisition of Survivalink enabled us to enter the rapidly growing AED marketplace, which we estimated to have worldwide sales of $200 million in 2003 and, according to Frost & Sullivan and our estimates, is expected to grow to approximately $650 million in sales in 2006.
In November 2001, we acquired approximately 95% of the outstanding shares of Artema Medical AB, (“Artema”) a Swedish based developer, manufacturer and marketer of standard hospital-based emergency defibrillators and patient monitoring equipment, which also had operations in Denmark. This acquisition provided us with a network of international distributors and the infrastructure required to establish our international headquarters in Copenhagen, Denmark.
In May 2002, we placed $50 million in 6.9% senior notes due May 2007 with Perseus, LLC, a merchant bank and private equity fund management company. We used the proceeds from this financing to retire $27 million in short term notes issued in connection with our acquisition of Survivalink and for working capital purposes. The interest on the notes accrues, but is not payable until May 2005. As part of the placement, the investors also received warrants to purchase 10 million shares of our common stock at $3.00 per share and warrants to purchase 3 million shares of our common stock at $4.00 per share.
In October 2003, we purchased substantially all the assets and certain liabilities of Complient Corporation (“Complient”), a Cleveland, Ohio based, privately held provider of comprehensive AED/CPR training and program management services designed to ensure successful AED deployments. The addition of these services means we are the only AED manufacturer offering a single source, turnkey AED deployment solution, which we believe provides us with a competitive advantage at point of sale, particularly with larger, multi-facility purchasers.
Our corporate headquarters is located in Irvine, California, and our research and development facility is located in Lake Forest, California. Our manufacturing facility is located in Minneapolis, Minnesota, and our international headquarters are located in Copenhagen, Denmark. We also have a facility related to the delivery of AED/CPR training and program management services located in Cleveland, Ohio. Our corporate headquarters is located at 1900 Main Street, Suite 700, Irvine, CA 92614 and the telephone number is (949) 797-3800.
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Business Strategy
Our primary business objective is to become the market leader in the rapidly growing global AED marketplace, which according to Frost & Sullivan and our estimates should reach $650 million in 2006. Our secondary objective is to increase the rate of adoption of our in-hospital Powerheart CRM product, and to enter the traditional hospital “crash-cart” defibrillation market, estimated to total $300 million per year. We believe that achieving these objectives will result in consistent and significant revenue growth and profitability. We expect to achieve our objectives by focusing on the following core strategies:
| • | Continuing AED market share growth—We estimate that the market for AEDs in the U.S. is growing at approximately 30% per year, with some international markets growing even faster, and that the worldwide AED market totaled $200 million in 2003. In 2003, our AED related revenue increased 47% over 2002, and we estimate that we increased our market share to 28% at year end, compared to approximately 15% at the end of 2001. In order for us to continue to increase our market share and become the AED market leader we intend to focus on the following: |
| • | Increasing our AED distribution channels—We currently sell our AEDs through direct, indirect and original equipment manufacturer (“OEM”) channels in the U.S. and internationally. In 2002 our efforts were focused on expanding our direct sales force which increased from 17 to 55 during that year, and totaled 62 people at the end of 2003. In addition to maintaining our direct sales channel during 2003, our focus centered on expanding our indirect distributor and OEM channel relationships. During the year, we increased the number of U.S. distributors purchasing AEDs from 30 to 53. In addition to the OEM relationship we established with Nihon Khoden in 2002, we signed AED OEM agreements with Criticare Systems, Inc. for the dental market and Quinton Cardiology Systems, Inc. for the physician’s office market. In August, 2003 we entered into a multi-dimensional agreement with GEMS, the healthcare business of General Electric Company, which included providing a GE branded AED for sale by GEMS outside the U.S. Internationally, we continue to sell primarily through country specific distributors, however, in 2003 we established direct operations in the United Kingdom and Germany, the two largest AED markets outside of Japan. We believe that in order to gain AED market leadership we must continue to expand and broaden our direct and indirect distribution channels. In 2004 and beyond, in addition to continued expansion and optimization of our existing direct and indirect distribution channels, we expect to increase the size of our 9 person inside sales department which was established in late 2003 as a compliment to our direct selling efforts. |
| • | Enhancing our AED product line—We plan to continue to expand and enhance our core Powerheart AED product line as we did in 2003 with the second half launch of the Powerheart G3 and FirstSave G3 products. In the first half of 2004, we expect to introduce a fully automatic version of the Powerheart G3, and a more sophisticated Powerheart G3 Pro™, which will have among other new features, real time electrocardiogram (“EKG”) viewing and manual override capability. The G3 Pro is targeted at those medical and first responder customers in the U.S. and internationally who demand a certain feature set which we do not currently offer. We believe that by continuing to expand and enhance our core product offering to include niche-specific feature sets, we will broaden the base of potential customers. |
| • | Leveraging our AED services—Our October 2003 purchase of Complient’s assets allows us to provide a unique, single source, turnkey AED deployment solution to purchasers of AEDs. Through our nationwide network of 150 certified employee-educators, we can now provide the AED/CPR training required by most states to deploy AEDs. In addition, our AED program management services provide the medical direction and information management necessary for AED users to be in compliance with various state laws and regulations. We believe that the ability to offer a turnkey solution differentiates us from other AED manufacturers and provides us with a competitive advantage at point of sale, particularly with larger, multi-unit, multi-facility institutional customers such as schools, government and corporate purchasers. |
| • | Continuing to reduce our cost of goods—We were able to decrease the cost of goods on our Powerheart AED by 14% during 2002, and in 2003, primarily due to the introduction of our redesigned AED G3, we reduced our manufacturing costs an additional 31%. In 2004 and beyond, we plan to |
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| continue to focus on and expect to realize cost of goods reductions which will provide us with maximum flexibility with respect to competitive pricing pressures that may arise in the AED market. |
| • | Increasing the rate of adoption of our Powerheart CRM—Our therapeutic monitoring product, the Powerheart CRM, is the only hospital bedside monitor defibrillator cleared by the FDA for attachment and continuous monitoring of patients at risk of life-threatening arrhythmias that can deliver a potentially lifesaving shock without human intervention. It has the potential to become a new “standard of care” in the treatment of in-hospital SCA. However, despite clinical evidence which clearly demonstrates the positive impact the CRM can have on the survival rate of SCA victims, adoption of the technology has been slower than our expectations. We believe that the adoption of the product has been hindered by a lack of (a) peer reviewed clinical evidence demonstrating the cost/benefit of the technology; and (b) distribution capability. We intend to address these issues by: |
| • | Funding a multi-center and several single site clinical studies at recognized hospitals, for publication in peer-reviewed medical journals, to further support, improved patient outcomes and cost effectiveness of our Powerheart CRM. |
| • | Expanding our distribution network in the U.S. by signing additional regional distribution partners, and focus on marketing to Premier, Inc., a group buying organization consisting of more than 200 of the nation’s leading hospital and healthcare systems purchasing more than $17 billion annually in supplies and equipment, which included the Powerheart CRM on their purchasing list under the category of breakthrough technology. |
| • | Supporting GEMS in its efforts to market the Powerheart CRM internationally. This distribution relationship was a part of the GEMS agreement we signed in 2003. |
| • | Developing new product embodiments for our existing technology—In 2003, we entered into a strategic relationship with GEMS. In addition to OEM distribution of our Powerheart AED and CRM products, we agreed to develop and manufacture for GEMS a standard “crash cart” hospital defibrillator utilizing our core RHYTHMx and STAR Biphasic technology. We anticipate that this development project, which has minimum take or pay quantities associated with it, will be completed in the fourth quarter of 2004. This development arrangement allows us to enter the $300 million per year traditional hospital defibrillator market using the distribution strength of GEMS. We have identified other product development projects where GEMS technology and our RHYTHMx and STAR Biphasic core technology could be brought together to create a new line of hospital based patient monitor and defibrillation products. We are currently in discussions with GEMS with respect to the timing and funding of these projects. We believe that continued collaboration with GEMS will allow us to develop additional hospital based products which incorporate our core technology, ultimately allowing increased adoption of our technology through the marketing strength and hospital presence of GEMS. |
Sudden Cardiac Arrest
The Prevalence of SCA
Sudden Cardiac Arrest (“SCA”) is the leading cause of death of Americans. Each year, more than 450,000 people in the U.S. die from SCA. Death can occur in minutes if the SCA victim receives no treatment. External defibrillation is the only known treatment, but it must occur as soon as possible after the onset of SCA in order for it to be effective.
The Heart
The heart has four chambers, the two upper, smaller chambers are called the left and right atria and the two lower, larger and stronger chambers are referred to as the left and right ventricles. Blood is pumped throughout the circulatory system by a series of highly coordinated contractions of the heart’s four chambers. If these contractions do not occur in a synchronized manner, then the transportation of blood throughout the body is diminished. Under normal conditions, an electrical impulse is initiated in a bundle of highly specialized cells located in the right atrium. This bundle of cells, referred to as the sinus node, is also appropriately known as the heart’s natural pacemaker. From the sinus node, this electrical current moves across a specific
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path in the atria, and to the ventricles, causing the chambers to contract and pump blood. If the heart is to beat properly, then the electrical current, beginning in the atria, must follow a precise path so that the heart’s chambers beat in a synchronized and coordinated fashion.
Arrhythmias
If the heart deviates from this normal series of electrical impulses, then abnormal heart rhythms result, and the ability of the heart to effectively pump blood throughout the circulatory system is diminished. Although some arrhythmias are short in duration and have little effect on the heart’s normal rhythm, arrhythmias that last for some time may cause the heart to beat too fast—tachycardia—or too slow—bradycardia. If tachycardia originates in the ventricles, it is referred to as ventricular tachycardia (“VT”), otherwise it is known as supraventricular tachycardia (“SVT”). Tachycardia in the ventricles requires prompt treatment. VT may result from serious heart disease and can be treated with medicines and by treating the cause.
While atrial fibrillation and bradycardia, as described below, are serious conditions affecting heart rhythm and effectiveness, it is the first type of arrhythmia described below, ventricular fibrillation, that is immediately life threatening and must be corrected by defibrillation to prevent sudden cardiac death. Our products are capable of diagnosing all of these cardiac conditions and applying therapy to reestablish regular heart rhythm. Our technology and devices are designed to detect and treat the three types of arrhythmia.
Ventricular Fibrillation and SCA
Ventricular fibrillation (“VF”) is a lethal form of arrhythmia in which disordered electrical activity in the heart causes the ventricles to contract in a rapid, unsynchronized, uncoordinated fashion. With the onset of VF, little or no blood is pumped from the heart to the brain and vital organs, resulting in collapse and sudden death unless medical help is provided immediately. This loss of heart function is known as sudden cardiac arrest and to prevent death, the only treatment remains defibrillation—the application of an electric shock to resynchronize the heart’s disordered electrical activity to a normal rhythm.
Atrial Fibrillation
Atrial fibrillation occurs when the atria emit uncoordinated electrical signals, causing the atrial chambers to contract too fast, pumping blood unevenly. Although the heart beat will be irregular, these electrical signals will not always be transmitted to the ventricles, still allowing the ventricles to continue to pump blood throughout the circulatory system. Although AF is not life threatening, it can eventually lead to SCA and to other problems, including chronic fatigue, congestive heart failure and stroke. According to the AHA, patients with AF are five times more likely to suffer a stroke and 15% of all strokes occur in people with AF. More than two million Americans currently suffer from AF.
Cardioversion and drug therapy are the common treatment modalities for AF. Cardioversion therapy is applied by a defibrillator which delivers an electric shock that is synchronized with a patient’s heartbeat, returning the atria to its normal rhythm. Our Powerheart CRM and Powerheart AEDs both have cardioversion capability.
Bradycardia
Bradycardia occurs when the heart beats too slowly, generally less than 60 beats per minute, depending on age. Bradycardia can cause fatigue, dizziness, lightheadedness and fainting. It is treated on an emergency basis through the administration of drugs or invasive temporary pacing, in which a wire is inserted into the heart to deliver a current, or noninvasive temporary pacing, where external electrodes are attached to a patient deliver an electrical stimulus. Our Powerheart CRM is noninvasive pacing capable.
Where Does SCA Strike?
Factors contributing to the onset of SCA include coronary heart disease, drug abuse, respiratory arrest, electrocution, drowning, choking and trauma. Death from SCA is sudden and unexpected, occurring without warning or immediately after the onset of symptoms. The AHA estimates that 50% of SCA victims have no prior indication of heart disease—their first symptom is SCA. And for those with a known history of heart attacks, the chance of sudden cardiac death is four to six times greater than the that of the general population.
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According to the AHA, almost 60% of SCA incidents are witnessed. It is estimated that 95% of SCA victims die before reaching the hospital. Survival is directly linked to the amount of time between the onset of SCA and defibrillation: a victim’s chances of survival are reduced by approximately 10% with every minute of delay.
Average response time for emergency personnel to arrive on scene in the U.S. is approximately 8-12 minutes after calling 911. The average time from collapse to providing defibrillation varies widely across the country. Communities with public access defibrillation (“PAD”) programs in place, where AEDs are placed in public buildings, at sporting events and in emergency vehicles, response times are significantly reduced. In some venues, when the first shock is delivered within 3-5 minutes, the reported survival rates from SCA are as high as 48% to 74%. Other studies show that police equipped with AEDs can cut response times to SCA victims by about three minutes when compared to historical response times, significantly improving a victim’s chance of survival.
Our Core Technology
All of our 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 have integrated our core technology, along with other proprietary technology that we have developed into our Powerheart AED and CRM product lines. We also sell accessories and disposable products, including our proprietary disposable defibrillator electrodes, and are actively licensing certain components of our core technology to third-parties for integration into other products.
Our RHYTHMx Technology
Our proprietary RHYTHMx technology allows for the detection and identification of life-threatening arrhythmias and, in the case of our CRM, automatic delivery of the appropriate measured therapy, or in the case of our Powerheart AED, instructions to deliver the appropriate shock. Our patented RHYTHMx software algorithm offers the unique ability of filtering noise and artifact from a patient’s EKG signal without compromising its ability to correctly identify heart rhythms that are life-threatening—shockable, or non-life-threatening—non-shockable.
RHYTHMx begins by filtering the patient’s EKG signal to reduce noise artifact and then detects the heart’s QRS complexes in conjunction with the patient’s heart rate. The heart’s ECG signals contain wave shapes that are referred to as P-QRS-T waves. While a normal heartbeat contains each of these wave shapes, in the case of the chaotic and disorganized rhythm of ventricular fibrillation, these wave shapes—or QRS complexes—are absent or indistinguishable. If the heart rhythm is considered shockable by RHYTHMx, and it persists, then a shock is indicated. Further analysis by RHYTHMx, which occurs in a fraction of a second, classifies the shockable rhythm as requiring a synchronous shock—in the case of a life-threatening VT—or an asynchronous shock—in the case of life-threatening VF.
Clinical results with our RHYTHMx technology demonstrated 100% sensitivity (correct identification of shockable rhythms) and 99.4% specificity (correct identification of non-shockable rhythms). The average time to first shock was 21 seconds and normal rhythm was restored by the device’s first shock in 96.2% of the cases. These results were based on data from a multi-center clinical trial conducted between February 1993 and May 1997 using early versions of our original Powerheart device. The trial was divided into two phases, with 155 patients enrolled and 104 patients tested, at Arizona Heart Institute, University of California Irvine Medical Center and University of Southern California Medical Center. We received FDA clearance to market RHYTHMx technology as a stand-alone device in August 1998.
Another study, the European Powerheart Trial, was presented during the “late breaking” clinical trial session of the North American Society of Pacing and Electrophysiology at San Diego in May 2002, and was subsequently published in the Journal of the American College of Cardiology. In the study, 117 patients in 10 European medical centers in Germany, Spain, Italy and Finland were monitored. The patients included 51 at risk of cardiac arrest located in special monitoring wards (intensive or coronary care units or in the emergency room), and 66 who were undergoing electrophysiological testing or implantation of cardioverter-defibrillators because of suspected or documented ventricular tachyarrhythmias. During a total of 1,240 hours of testing, there were no adverse events, with 1,988 heart rhythm events documented and 115 of those requiring treatment through defibrillation. The mean response time of our Powerheart device was 14.4 seconds. The trial’s investigators concluded that our Powerheart device is safe and effective in detecting, monitoring and treating spontaneous arrhythmias and that the use of the device will shorten response times and significantly improve the outcome of patients with in-hospital cardiac arrest.
Our platform RHYTHMx technology is integral to our Powerheart AED and CRM products. We also license our RHYTHMx technology for use in certain other wearable defibrillators.
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Our STAR Biphasic Technology
Our Self-Tracking Active Response (“STAR”) Biphasic waveform technology allows our Powerheart AED and CRM defibrillator devices to deliver the most effective therapy possible by delivering an optimized amount of energy in response to SCA. STAR Biphasic quickly assesses the unique characteristics of a patient and customizes the defibrillation energy he or she receives.
The STAR Biphasic waveform treats cardiac patients individually, based on three important characteristics: impedance, defibrillation threshold and cellular response.
Impedance is the number one difficulty in delivering current to the heart in external defibrillation. Tissue such as skin, fat, muscle and bone, surround the heart and impede the flow of energy delivered by a defibrillator. Impedance varies from person to person and in order to optimize energy delivery, adjustments must be made for a patient’s impedance. Our STAR Biphasic waveform technology provides optimized energy delivery by measuring a patient’s impedance and customizing a waveform to deliver the most effective defibrillation energy. This customization occurs for even the most difficult high-impedance patients. STAR Biphasic technology delivers optimal therapy for every patient.
Defibrillation threshold (“DFT”) is defined as the minimum current required to defibrillate the heart and establish normal rhythm. DFT varies from person to person, based primarily on a person’s anatomy, disease condition and metabolic state of the heart. Failure to exceed a patient’s DFT means failure to defibrillate a patient’s heart. STAR Biphasic technology automatically escalates defibrillation energy to ensure that a patient’s DFT is exceeded as rapidly as possible.
During the delivery of any defibrillation shock, the cell membranes of the heart are charged, until the cells depolarize. This allows normal electrical pathways to reestablish control and produce a coordinated rhythm. If any residual charge remains on the cells, i.e., they do not fully depolarize, then refibrillation may occur. The STAR Biphasic waveform has been uniquely designed to neutralize any residual charge through a process of charge balancing. STAR Biphasic precisely controls the energy delivered in the first phase of defibrillation and balances any residual cellular charge during the second phase of defibrillation. By neutralizing the residual charge, STAR Biphasic minimizes the likelihood of refibrillation and provides the optimal environment to defibrillate the heart.
The STAR Biphasic waveform was validated in a clinical trial led by researchers at the Cleveland Clinic and Cedars-Sinai Medical Center. This multi-center study, designed according to FDA guidelines, determined that the STAR Biphasic waveform was safe and effective. The study’s high success rates resulted in statistically significant results with a smaller sample size than initially expected.
In addition to the use of STAR Biphasic waveform technology in our defibrillator devices, we also license this technology to selected partners internationally.
Our Products
The Powerheart AED
Our Powerheart AED product line is powered by our RHYTHMx and STAR Biphasic technology, and is the only AED that can provide continuous monitoring capabilities before, during and after SCA, protecting the victim against delays in therapy and the reoccurrence of another life-threatening arrhythmia following resuscitation.
Reflecting the merger of Survivalink and Cardiac Science in September 2001, our Powerheart AED combines industry-leading AED expertise with advanced arrhythmia detection technology. In 2003, our Powerheart AED and related services and accessories represented 91% of our company-wide revenue and our devices have been deployed by such companies as Harrah’s Entertainment, Coca Cola, General Electric, Procter & Gamble, Exxon, Pepsi, Anheuser Busch and Merrill Lynch. Our Powerheart AED has also been chosen by many local governments and municipalities for use in respective community Public Access Defibrillation (“PAD”) programs, the United States Navy, Army and Air Force, as well as by numerous schools and educational facilities throughout the U.S.
We believe that our Powerheart AED offers the following competitive advantages:
| • | Our patented RescueReady® technology tests not only the battery and system components, but also verifies that the pre-connected disposable electrodes are properly functioning. |
| • | Clear, concise voice prompts guide the user through the rescue process and our exclusive one-button operation eliminates confusion and uncertainty. |
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| • | Our innovative RHYTHMx technology provides continuous monitoring capability and our STAR Biphasic waveform technology allows for customized defibrillation and escalating variable energy delivery. |
| • | Pre-connected electrodes save time and ensure the AED is ready at time of rescue. |
Our proprietary self-testing AED defibrillator electrodes are interchangeable for body placement and are supplied pre-gelled with a self-adhesive. We have also developed and are marketing our proprietary FDA-cleared pediatric defibrillation electrode system, designed for use with our AED, to deliver reduced defibrillation energy to infants and children up to 8-years old, or up to 55 lbs. These innovative pediatric electrodes are suitably sized for a child’s smaller torso, and are less than half the size of our adult AED electrodes.
The Powerheart CRM
The chances of survival for a patient suffering SCA in a hospital remains at less than 25%. Because of the time it takes to defibrillate patients, even under monitored conditions, this survival rate has not changed in the last 40 years. And those that do survive are typically faced with a longer and more expensive hospital stay.
The Powerheart CRM, attached to patients via our disposable defibrillator electrodes, continuously monitors a patient’s cardiac rhythm, and if a life-threatening arrhythmia is detected, automatically delivers a life-saving defibrillation shock within seconds and with no human intervention.
Therapeutic monitoring with the Powerheart CRM offers cardiac patients the best chance of survival from SCA and represents a potential new standard of care for medical facilities worldwide. In December 2001, we received clearance from the FDA to market the Powerheart CRM to medically supervised environments such as hospitals, medical and dental surgery centers, physician offices, clinics and nursing homes in the United States. We have also received the necessary approvals to market the Powerheart CRM in Europe, Canada, Australia and other regions around the world. Our Powerheart CRM is in numerous hospitals worldwide.
Our Powerheart CRM is a unique therapeutic monitor incorporating state-of-the-art technology that offers medical facilities the following features and benefits:
| • | Powerheart CRM provides reliable, continuous monitoring, detection and treatment of life-threatening arrhythmias; |
| • | Biphasic waveform technology customizes defibrillation energy to deliver optimal therapy for each patient; |
| • | Non invasive external pacing; |
| • | The Powerheart CRM’s compact design and battery operation allows for use in transporting patients and also provides for multiple mounting options at the bedside and uninterrupted operation in any hospital setting. The Powerheart CRM’s footprint measures 11 inches x 4 inches x 8.25 inches and weighs only 11.5 pounds; and |
| • | User friendly programmable interface software and control buttons permit simple operation and a color LCD provides exceptional viewing and resolution. The Powerheart CRM can operate in manual, advisory or fully automatic modes. |
We also market our proprietary disposable defibrillator electrodes for use with the Powerheart CRM. These disposable defibrillator electrodes provide reliable ECG monitoring, defibrillation and external pacing performance and offer reduced motion artifact caused by patient movement. The compact design and radiotransluscence of the Powerheart CRM disposable defibrillator electrodes also allows clearer views of the chest under x-ray and fluoroscopy and a new hydrogel adhesive reduces the potential for skin irritation.
Miscellaneous Products
As part of the Artema acquisition, we marketed a low-end line of patient monitors. The Diascope G2 is a compact, transportable vital signs monitor designed for use in hospitals and day surgery units and has been marketed in certain international markets. In 2003 we sold approximately $2.5 million of this product, compared to $3.9 million in 2002.
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In connection with the Complient acquisition, we marketed a line of CPR related resuscitation products and accessories, including training mannequins and an audible CPR prompt device. These products, which accounted for $730,000 in revenue in the quarter ended December 31, 2003 are sold primarily through distributors in the U.S.
In February 2004, we made a strategic decision to discontinue the Diascope patient monitor product line and sell the CPR training related product line, both of which had below average gross margins and used disproportionate manufacturing, sales and administrative resources. We believe that exiting these product lines will allow us to focus our resources on our core AED products and services and our in-hospital CRM technology.
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Our Markets
We segment the market for our devices and technology into two principal categories: AEDs and related accessories and AED/CPR services, and in-hospital therapeutic monitoring-defibrillation (Powerheart CRM).
AED Market Segments
We estimate the worldwide AED market in 2003 was approximately $200 million, with the U.S. AED market, comprising 85% of the worldwide market, growing at approximately 30% with faster growth recorded in certain international markets. We expect the worldwide market for AEDs in 2004 to be between $260 million to $270 million, and believe international markets will become a larger proportion of the overall market for AEDs.
We estimate that we now hold approximately 28% of the worldwide market share in AEDs, up from 15% at the end of 2001. We believe that we are the leader in two of our market segments, the U.S. government agency workplace segment and the U.S. corporate workplace market. The following are our market segment highlights:
| • | In the U.S. corporate workplace market segment, we estimate that only 5% of U.S. corporations have AEDs. In 2003, 47% of our U.S. AED sales were from this segment and we estimate our market share to be in excess of 35% in the corporate AED market segment. |
| • | Only 1%-3% of schools in the United States have AEDs and to date only New York has mandated deployment of AEDs in public schools. In 2003, we generated 9% of our U.S. AED sales from schools and colleges. |
| • | In the fire, police and EMS market segment, only 15% of the estimated 210,000 police, Sheriff and Highway Patrol vehicles carry AEDs and approximately 25% of an estimated 75,000 fire vehicles are equipped with AEDs. Sales in this segment represented 12% of our U.S. 2003 AED sales. |
| • | The PAD market segment includes the U.S. government, municipalities, and community PAD programs. Despite legislation mandating deployment in all 17,000 Federal government buildings, it is estimated less than 3% have installed AEDs. Moreover, we estimate only 5% of U.S. cities have implemented PAD programs. This segment accounted for 19% of our 2003 U.S. AED sales. |
| • | The medical segment includes physician and dental offices and hospitals. We estimate less than 5% of an estimated 200,000 physician and dental offices have AEDs and only a small percentage of the 6,600 hospitals have AEDs available. About 13% of our U.S. AED sales in 2003 were to the medical market segment. |
| • | We believe we are the market leader in the Japanese AED market due to our strategic partnership with Nihon Kohden. We also have more than 50 distributors in all major world markets, and we continue to focus our sales and marketing efforts on growing our market share in the three largest and fastest growing global markets, Japan, Germany and the U.K. We estimate the international market for AEDs accounts for 15% of worldwide AED sales. International sales represented 19% of our total 2003 AED sales. |
In-Hospital Therapeutic Monitoring-Defibrillation (Powerheart CRM)
Traditionally, hospitals have deployed manual or semi-automatic defibrillators to treat SCA victims. Standard defibrillators require supervision by highly skilled medical personnel to analyze and interpret the patient’s electrocardiogram and to manually deliver a shock using handheld paddles. Standard defibrillators are typically positioned in the hospital at locations such as critical care and cardiac care units, emergency and operating rooms and electrophysiology labs. We estimate that there are 6,600 hospitals in the United States.
Despite the availability of standard defibrillators to treat SCA in hospitals, numerous hospital studies have documented delays of five minutes or more between the onset of cardiac arrest to the arrival of the first medical team member. Clinical studies show that the average survival rate of patients who have an in-hospital SCA is estimated at less than 25%, a rate of survival that has not improved since the 1960s. We believe that our Powerheart CRM is well positioned to provide hospitals with a therapeutic monitoring alternative which will result in an increase in survival rates and a reduction in patient care costs.
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Technology Licensing
We are seeking strategic relationships with third parties to license our RHYTHMx and STAR Biphasic proprietary technologies for use in patient monitoring type devices.
During 2002, we entered into three separate licensing agreements with Zoll Medical, Inc., Lifecor, Inc., and Innomed Medical Co. We licensed our STAR Biphasic technology for use into standard emergency defibrillators for sales internationally and licensed certain patents relating to wearable defibrillators and other proprietary features of our AEDs, as well as licensing of our platform RHYTHMx technology. In consideration for these licenses we received cash and ongoing royalty payments.
AED Market Drivers
SCA kills approximately 450,000 people in the United States each year. A few minutes after the onset of SCA, brain damage can start to occur and death will result unless the victim’s heart is shocked back into rhythm by a defibrillator. According to the AHA almost 60% of all SCAs are witnessed by a bystander. Moreover, the AHA currently estimates that 95% of SCA victims die before reaching the hospital. Communities that strategically place AEDs in public buildings, arenas, airports and emergency vehicles can significantly reduce response times. In venues where bystanders or first responders can defibrillate a victim within three to five minutes, the reported survival rates from SCA are as high as 48% to 74%.
There is now widespread acknowledgement and increasing awareness that AEDs save lives and can be safely used by lay people. The AHA has publicly encouraged widespread deployment of AEDs through community AED programs.
Legislation is a key market driver, and numerous AED-related bills have been introduced at the Federal level and in State governments in the past two years, which we believe will facilitate the growth of new and existing markets for AEDs:
| • | In 2000, the 106th Congress of the United States passed the Cardiac Arrest Survival Act, which directs placement of AEDs in all Federal buildings in order to improve survival rates of SCA victims in those buildings and establishes protections from civil liability arising from the emergency use of AEDs. |
| • | The Rural Access to Emergency Devices Act, signed into law in 2000, authorized the spending of $25 million in federal funds over three years to help rural communities purchase AEDs and to provide training on how to use them. |
| • | In 2001, the Office of Management and Budget directed the Occupational Safety and Health Administration (“OSHA”) to consider whether promotion of AEDs should be elevated to a priority. In response, OSHA issued a technical bulletin encouraging all employers to consider making AEDs available in the workplace. According to OSHA, 13% of all workplace fatalities are attributable to SCA |
| • | The Community Access Emergency Defibrillation Act of 2001 was added to the Public Health Security and Bioterrorism Preparedness and Response Act of 2002, and was signed into law in June 2002. The Act provided federal funding for implementation of PAD programs. |
| • | In 2002, the New York State Legislature passed laws requiring public school facilities, regardless of size, to retain at least one AED on school premises. Currently, seven other states are considering legislative alternatives to either recommend or mandate the use of AEDs in schools and certain other facilities and public places. |
| • | State of Illinois House Bill 43, was passed on March 5, 2003 creating the Physical Fitness Facility Medical Emergency Preparedness Act which requires various physical fitness facilities, including (i) facilities owned or operated by a unit of local government or by a school, college, or university, (ii) golf courses, and (iii) health or fitness clubs, to have on its premises at least one AED and a trained AED user. |
Sales and Marketing
In 2003, we expanded our indirect and OEM AED distribution channels. Our marketing efforts were focused on the U.S. corporate workplace and the U.S. government agency workplace market segments. As a result of this effort, we believe that we are the market leaders in those segments. We currently have 61 direct AED sales people in the United States and also have over 50 distributors focusing on certain domestic market segments.
Outside the U.S., we distribute the Powerheart AED through 50 international distributors and have a presence in all major foreign markets. In 2003, we established direct sales operations in the United Kingdom and Germany. Our international
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distribution channel is managed from our Copenhagen office by a group of 9 sales managers who each have sales responsibility for certain regions of the world.
We currently have 3 specialists supporting our CRM sales and marketing effort, and also utilize distributors in certain regions in the United States and internationally. In addition, in 2003 we signed an OEM agreement with GEMS whereby it distributes the CRM through its distribution channels. We are also focused on the collection of clinical data supporting the cost-effectiveness and improved patient outcomes of our Powerheart CRM.
Competition
Our principal competitors in the AED market are Philips Medical’s Heartstream division, Medtronic Physio-Control and ZOLL Medical Corporation. We believe that Philips Medical is currently the market leader with an estimated 33% market share.
Our experience indicates that the key criteria that buyers of AEDs exhibit in their purchasing decision is:
| • | ease of use, |
| • | reliability and self testing, |
| • | overall value—a combination of features and price, and |
| • | capability to assist in deployment and training. |
We believe that our Powerheart AED compares favorably with our competitors’ products in the AED market based on these factors as well as on other competitive determinants. We also believe that our ability to provide a complete turnkey AED deployment solution provides us with a competitive advantage over other manufacturers, particularly in the government and corporate workplace segments.
The Powerheart CRM is the only FDA-cleared external defibrillator that provides fully automatic detection and treatment for patients suffering from life-threatening arrhythmias. We compete against numerous companies in the hospital marketplace where we sell our Powerheart CRM.
Manufacturing
We manufacture our Powerheart AEDs and Powerheart CRMs at our 25,000 square foot manufacturing facility in Minnetonka, Minnesota. Our current in-place assembly and manufacturing capacity will allow us to build approximately 80,000 AEDs annually. In 2003, we manufactured approximately 30,000 AEDs, compared with 18,000 in 2002. We outsource the manufacture of major subassembly components such as printed circuit boards primarily for the benefit of reduced cost, and perform final assembly and testing in our facility.
Our FDA-registered Minnetonka facility is ISO certified for the design and manufacture of medical products. Our certifications allow us to design and manufacture medical products with the CE mark for shipment to Europe and to ship FDA-cleared products in the United States.
The manufacturing processes used to produce our products are required to comply with FDA enforced Good Manufacturing Practices (”GMP”) regulations which cover the design, testing, production, control and documentation of our products. In those foreign jurisdictions where we market our products, we are also required to comply with and obtain regulatory approvals and clearances. These regulatory requirements also apply to our third party contract manufacturers, as well as to some of our suppliers. The FDA and foreign counterparts conduct periodic inspections of manufacturing facilities to ensure compliance with “Quality System Regulation,” GMP, and other regulations, such as those promulgated by the International Standards Association. Any concern raised by such inspections could result in regulatory action, delays or termination of production.
Intellectual Property
We believe that our intellectual assets, including trademarks, patents, trade secrets and proprietary technology, are extremely valuable and constitute a cornerstone of our business. We own 82 U.S. and foreign patents relating to our automatic defibrillation technology platform and its various applications. We intend to file additional patent applications relating to each of our products and our underlying proprietary technology, as well as around new technological inventions that we are developing. We believe that our patents and proprietary technology provide us with a competitive advantage over our competitors. We will
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aggressively defend our inventions and also look for opportunities to generate royalty fees from licensing our intellectual property.
We have a wide range of patents covering the technology found in our AEDs, including our RescueReady technology, which features one button operation, pre-connected disposable electrode pads and self-test capabilities. Other patents we have been issued cover our proprietary RHYTHMx arrhythmia detection software technology, our STAR Biphasic defibrillation waveform technology and our disposable therapy electrodes.
During 2003, we were granted six additional U.S. patents and one European patent relating to our core technology and key aspects of our RHYTHMx analysis algorithm software.
Clinical Studies
We are actively engaged in, and are pursuing the sponsorship of, clinical studies at hospital medical centers both in the U.S. and Europe, relating to our Powerheart CRM product. These studies are primarily focused on demonstrating clinical efficacy, along with improved survival rates and the economic benefits associated with deployment of our Powerheart technology for hospitalized at-risk cardiac patients. We anticipate that the results of these studies will be presented in abstract form at conferences, and if accepted, as manuscripts published in peer reviewed medical journals. Various studies are either ongoing, planned or proposed, at luminary medical centers in the U.S. and Europe.
A 117-patient, 10-center study, published February, 2003 in the Journal of the American College of Cardiology, demonstrates that our Powerheart CRM is not only safe and effective, but significantly shortens hospital response time to SCA. Because time to defibrillation is critical to patient survival, the study investigators concluded that our Powerheart CRM has the potential to significantly improve the outcome of patients with SCA.
Government Regulation
In the United States, clinical testing, manufacturing, packaging, labeling, promotion, marketing, distribution, registration, record keeping and reporting, clearance or approval of medical devices generally are subject to regulation by the FDA. Medical devices intended for human use are classified into three categories, subject to varying degrees of regulatory control. Class III devices, which we believe cover certain of our products, are subject to the most stringent controls.
In October 1997, we received 510(k) clearance from the FDA to market the clinical version of the original Powerheart in the United States. In August 1998, we received 510(k) clearance from the FDA to market RHYTHMx and to integrate it into other stand-alone defibrillator monitors. In January 2000, we received clearance from the FDA to market the commercial version of the original Powerheart in the United States. In February 2001, we received notification from the FDA that allows our original Powerheart to be used in outpatient surgery centers, nursing homes and at home when prescribed by a physician. In December 2001, the FDA granted us 510(k) clearance to market our Powerheart CRM in medically supervised environments such as hospitals, medical and dental surgery centers, physician offices, clinics and nursing homes. In October 2001, the FDA granted us 510(k) clearance to market a new advanced version of our monitoring-defibrillation-pacing electrodes.
In February, 2002, the FDA granted us 510(k) clearance to market our Powerheart AED for the emergency treatment of victims of sudden cardiac arrest and in January 2003, the FDA granted us 510(k) clearance to market our Powerheart AED for use on children under eight-years of age.
We have also received the necessary approvals to market the Powerheart CRM, Powerheart AED and related product accessories within Europe, Canada, Australia and other regions of the world.
Our products are subject to FDA review of labeling, advertising and promotional materials, as well as record keeping and reporting requirements. Failure to comply with any of the FDA’s requirements, or the discovery of a problem with any of the products, could result in FDA regulatory or enforcement action. Further, any changes to the products or their labeling may require additional FDA submissions, review, clearance or approval.
Research and Development
We are committed to improving and expanding our product line through the application of our existing patented and proprietary technology, and through the research and development of new technology. Our core RHYTHMx and STAR Biphasic
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technologies have multiple patient monitoring and therapeutic applications, and we continue to seek out new device embodiments integrating our proprietary technology, enhancing or expanding our own product line, or by licensing to a third-party.
Research and development expenses for the years ended December 31, 2003, 2002 and 2001 were $5.5 million, $6.1 million, and $8.6 million, respectively. We intend to continue to devote resources and capital to research and development so we can improve and refine our existing products and technology, develop and commercialize our products currently under development, and develop new applications for our technology.
Backlog
As of December 31, 2003, we had a backlog of $700,000 in training related orders, as compared to a backlog of $877,900 as of December 31, 2002. The backlog of orders in 2003 was related to AED/CPR training services which were ordered but yet not delivered. Revenue on AED/CPR training services is recognized when the services are delivered.
Employees
As of December 31, 2003, we had 284 full-time employees, of which 97 employees were involved in worldwide sales and marketing functions, 29 were involved in supporting our research and development activities, 104 were in manufacturing and 54 were general and administrative personnel. None of our employees are represented by a collective bargaining arrangement and we believe our relationship with our employees is satisfactory. We may add additional personnel as we grow.
General Information
We maintain an Internet website at www.cardiacscience.com where our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports are available without charge, as reasonably practicable following the date they are filed with or furnished to the SEC.
A Warning About Forward-Looking Information and the Safe Harbor Under the Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K and the other reports, releases, and statements (both written and oral) issued by us and our officers from time to time may contain statements concerning our future results, future performance, intentions, objectives, plans, and expectations that are deemed to be “forward-looking statements.” These statements, including statements regarding:
| • | products under development; |
| • | technological and competitive advantages; |
| • | timetable for commercial introduction of our products; |
| • | our ability to improve patient care, increase survival rates, decrease recovery time, lessen patient debilitation, and reduce patient care costs; |
| • | markets, demand for our services, purchase orders and commitments; |
| • | strategic alliances; |
| • | the competitive and regulatory environment; |
| • | planned integration of technologies with products; and |
| • | business strategies. |
Such statements are made in reliance upon safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Our actual results, performance, and achievements may differ significantly from those discussed or implied in the forward-looking statements as a result of a number of known and unknown risks and uncertainties including, without limitation, those
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discussed below and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, we cannot assure you that the results discussed or implied in such forward-looking statements will prove to be accurate. In light of the significant uncertainties inherent in such forward-looking statements, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Words such as “believes,” “anticipates,” “expects,” “intends,” “may,” “plans,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. We undertake no obligation to revise any of these forward-looking statements.
Sometimes we communicate with securities analysts. It is against our policy to disclose to analysts any material non-public information or other confidential commercial information. You should not assume that we agree with any statement or report issued by any analyst regardless of the content of the statement or report. We have a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others. If reports issued by securities analysts contain projections, forecasts or opinions, those reports are not our responsibility.
Availability of SEC Filings
We file annual, quarterly and special reports, proxy statements and other information with the Securities and Exchange Commission. You can read our SEC filings over the Internet at the SEC’s website at http://www.sec.gov. We also make our SEC filings available free of charge through our Internet website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Our website address is www.cardiacscience.com. The reference to our website address does not constitute incorporation by reference into this report of the information contained at that site.
Risk Factors
The risks set forth below are not intended to be exhaustive. These are the factors that we believe could cause actual results to be different from expected and historical results. Our industry is very competitive and changes rapidly. Sometimes new risks emerge and we may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.
If the worldwide AED market does not grow as projected, our sales and results may suffer.
According to Frost & Sullivan and our estimates, the worldwide AED market is expected to grow from $155 million in annual sales in 2002 to $650 million in 2006. Our current level of operations is based on assumptions concerning the future expected growth of AED markets, and if such assumptions are significantly different from actual AED market growth rates, then we may not be able to successfully grow our revenue and, as a result, our level of revenue may not be able to support our current or future level of operations.
If we fail to successfully compete against new or existing competitors, our operating results may suffer.
Our principal competitors relating to our AED product line are Medtronic Physio-Control and Philips Heartstream. Due to their dominant market position and well established customer relationships, it may be difficult for us to increase our market share and penetrate new markets. In addition, these competitors are part of much larger organizations, and thus have significantly greater resources than we do. Accordingly, Medtronic Physio-Control and Philips Heartstream may increase the resources they devote to the development and marketing of AEDs, which could materially impact our results.
We also compete against other companies that manufacture and sell external defibrillator devices to hospitals, where we sell our Powerheart CRM. These companies include Medtronic Physio-Control, Philips Heartstream and ZOLL Medical Corporation. Many of the manufacturers of these competing external devices are well established in the medical device field, have substantially greater experience than us in research and development, obtaining regulatory clearances, manufacturing, and sales and marketing, and have significant