As filed with the Securities and
Exchange Commission on June 23, 2008
Registration
No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CardioNet, Inc.
(Exact name of
Registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
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8090
(Primary Standard Industrial
Classification Code Number)
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33-0604557
(I.R.S. Employer
Identification Number)
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227
Washington Street #300
Conshohocken, PA 19428
(610) 729-7000
(Address,
Including Zip Code, and Telephone Number, Including
Area Code, of Registrants Principal Executive Offices)
Arie
Cohen
President and
Chief
Executive Officer
CardioNet, Inc.
227 Washington Street #300
Conshohocken, PA 19428
(610) 729-7000
(Name, Address,
Including Zip Code, and Telephone Number, Including
Area Code, of Agent for Service)
Copies to:
Marty
P. Galvan, CPA
Chief Financial Officer
CardioNet, Inc.
227 Washington Street#300
Conshohocken, PA 19428
(610) 729-7000
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Frederick
T. Muto, Esq.
Ethan E. Christensen, Esq.
Cooley Godward Kronish LLP
4401 Eastgate Mall
San Diego, CA 92121-9109
(858) 550-6000
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Approximate date of commencement of
proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the
securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933,
check the following box.
x
If this Form is
filed to register additional securities for an offering pursuant to Rule 462(b) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
If this Form is
a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
If this Form is
a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.
o
If delivery of the
prospectus is expected to be made pursuant to Rule 434 under Securities
Act, please check the following box.
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 definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
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Accelerated
filer
o
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Non-accelerated
filer
x
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Smaller
reporting company
o
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(Do not check if
a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
Title of each class of
securities to be registered
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Amount to
be registered
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Proposed maximum
offering price
per share(2)
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Proposed maximum
price aggregate
offering
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Amount of
registration fee
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Common Stock, par value
$0.001 per share(1)
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7,680,902
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$
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29.41
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$
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225,895,328
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$
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8,878
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(1)
Pursuant to Rule 416 under the
Securities Act of 1933, the shares being registered hereunder include such
indeterminate number of shares of common stock as may be issuable with respect
to the shares being registered hereunder as a result of stock splits, stock
dividends or similar transactions.
(2)
Estimated solely for the purpose of
calculating the registration fee pursuant to Rule 457(c) of the
Securities Act of 1933. The price per share and aggregate offering price are
based on the average of the high and low sale prices of the common stock on June 16,
2008, as reported on the Nasdaq Global Market.
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a) may
determine.
The information contained in this prospectus is not complete
and may be changed. These securities may not be sold until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not soliciting an
offer to buy these securities in any jurisdiction where the offer or sale is
not permitted.
Subject to Completion,
dated June 23, 2008
Prospectus
7,680,902
Shares
Common
Stock
We are
registering shares of our common stock, par value $0.001 per share, for resale
by the selling stockholders identified in this prospectus. We are not selling
any shares of our common stock under this prospectus and will not receive any
of the proceeds from the sale of shares by the selling stockholders.
For a
description of the plan of distribution of the resale shares, see Plan of
Distribution beginning on page 106 of this prospectus.
Our
common stock is listed on the Nasdaq Global Market under the symbol BEAT. On June 20,
2008, the last reported sale price for our common stock was $30.11 per share.
Investing in our common stock involves a high degree of risk.
See Risk Factors beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is accurate or complete. Any representation to
the contrary is a criminal offense.
The date of this
prospectus
is ,
2008
TABLE OF
CONTENTS
All
references in this prospectus to CardioNet, the Company, we, us or our
mean CardioNet, Inc., unless we state otherwise or the context otherwise
requires.
You
should rely only on the information contained in this prospectus, together with
any applicable prospectus supplement. We have not authorized anyone to provide
you with different information. We are not making an offer to sell these
securities in any jurisdiction where the offer is not permitted. The
information contained in this prospectus and any applicable prospectus
supplement are accurate only as of their respective dates, regardless of the
time of delivery of this prospectus or the time of any sale of our common
stock. Our business, financial condition, results of operations and prospects
may have changed since such date.
i
THE COMPANY
This summary highlights what we believe is the most
important information about us and this offering. Because it is only a summary,
it does not contain all of the information that you should consider before
investing in shares of our common stock. The information in this summary is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information appearing elsewhere in this prospectus. Before you decide
to invest in our common stock, you should read this entire prospectus
carefully, including the Risk Factors section and the consolidated financial
statements and related notes included in this prospectus.
Overview
We are
the leading provider of ambulatory, continuous, real-time outpatient management
solutions for monitoring relevant and timely clinical information regarding an
individuals health. We have raised over $250 million of capital and spent
seven years developing a proprietary integrated patient monitoring platform
that incorporates a wireless data transmission network, internally developed
software, FDA-cleared algorithms and medical devices, and a 24-hour digital
monitoring service center. Our initial efforts are focused on the diagnosis and
monitoring of cardiac arrhythmias, or heart rhythm disorders, with a solution
that we market as the CardioNet System.
We
believe that the CardioNet Systems continuous, heartbeat-by-heartbeat
monitoring is a fundamental advancement in arrhythmia monitoring, with the
potential to transform an industry that has historically relied on
memory-constrained, intermittent digital or tape recorders, such as event
monitors and Holter monitors. Existing technologies have one or more drawbacks
including the inability to detect asymptomatic events, which are defined as
clinically significant events that the patient cannot feel, algorithms with
limited detection capabilities, failure to provide real-time data, memory
constraints, frequent inaccurate diagnoses and an inability to monitor patient
compliance and interaction. We believe these drawbacks lead to suboptimal
diagnostic yields, adversely impacting clinical outcomes and health care costs.
In a randomized clinical trial, the CardioNet System detected clinically
significant arrhythmias nearly three times as often as traditional loop event
monitors in patients who had previously experienced negative or nondiagnostic
Holter monitoring.
The
CardioNet System incorporates a lightweight patient-worn sensor attached to
electrodes that capture two-lead electrocardiogram, or ECG, data measuring
electrical activity of the heart and communicates wirelessly with a compact,
handheld monitor. The monitor analyzes incoming heartbeat-by-heartbeat
information from the sensor on a real-time basis by applying proprietary
algorithms designed to detect arrhythmias. When the monitor detects an arrhythmic
event, it automatically transmits the ECG to the CardioNet Monitoring Center,
even in the absence of symptoms noticed by the patient and without patient
involvement. At the CardioNet Monitoring Center, which operates 24 hours a
day and 7 days per week, experienced certified cardiac monitoring
specialists analyze the sent data, respond to urgent events and report results
in the manner prescribed by the physician. The CardioNet System currently
stores at least 96 hours of ECG data, in contrast to 10 minutes for a
typical event monitor. We are in the process of upgrading our monitors to
provide expanded storage of 21 days of ECG data. The CardioNet System
employs two-way wireless communications, enabling continuous transmission of
patient data to the CardioNet Monitoring Center and permitting physicians to
remotely adjust monitoring parameters and request previous ECG data from the
memory stored in the monitor.
Since
our commercial introduction of the CardioNet System in January 2003,
physicians have enrolled over 131,000 patients. Through March 31, 2008, we
marketed our solution in 48 states. In addition, we have achieved reimbursement
levels that we believe reflects the clinical efficacy of the CardioNet System
relative to existing technologies. We have secured direct contracts with
172 commercial payors as of March 31, 2008. We estimate that,
combined with Medicare, this represents more than 176 million covered
lives.
Recent
Developments
·
Publication
of Randomized Clinical Trial.
We completed a 300-patient
randomized clinical trial finding that the CardioNet System provided a
significantly higher diagnostic yield compared to traditional loop event
monitoring, including loop event monitoring incorporating a feature designed to
automatically
1
detect certain
arrhythmias. We are using the clinical evidence from this trial to both drive
continued physician adoption of our solution and to attempt to secure contracts
with additional commercial payors. Of the 21 targeted commercial payors,
representing approximately 95 million covered lives, who had previously
required proof of product superiority evidenced by a published randomized clinical
trial, we have secured contracts with three such payors, representing over
26 million covered lives, since publication of our trial results in March 2007.
Several of the remaining payors have indicated that they do not believe that
the data from the clinical trial is sufficient. We continue to work with these
and other payors to secure reimbursement contracts.
·
Acquisition
of PDSHeart, Inc.
In March 2007, we
acquired PDSHeart, Inc., a leading cardiac monitoring company that
provides event, Holter and pacemaker monitoring services in 48 states. For the
year ended December 31, 2006, PDSHeart provided event monitoring services
to approximately 76,000 patients, representing approximately 80% of PDSHearts
$20.9 million in revenues for the year ending December 31, 2006. We
believe that the acquisition of PDSHeart can have numerous benefits for us,
including the opportunity to cross-sell into our respective customer bases and
the ability to become a one stop shop for arrhythmia monitoring services
given our full spectrum of solutions, ranging from our differentiated CardioNet
System to event and Holter monitoring. We believe that only approximately 5% of
our accounts overlapped with those of PDSHeart at the time of the acquisition,
due primarily to our complementary geographic coverage. In 2006, we derived
approximately 75% of our revenues from sales of our CardioNet System in the
Northeast states, while PDSHeart derived approximately 80% of its revenues in
states outside the Northeast. As a result, the acquisition has accelerated our
market expansion strategy by providing us with immediate access to a sales
force with existing physician relationships capable of marketing our CardioNet
System in areas of the country where it had previously not been sold. Our sales
force increased from 27 account executives at December 31, 2006 to 73
account executives as of March 31, 2008, largely as a result of the
PDSHeart acquisition. On a consolidated basis, for the three months ended March 31,
2008, our revenues were $25.5 million.
Industry
Overview
An
arrhythmia is categorized as a temporary or sustained abnormal heart rhythm that
is caused by a disturbance in the electrical signals in the chambers of the
heart. Proper transmission of electrical signals through the heart is necessary
to ensure effective heart function. There are two main categories of
arrhythmia: tachycardia, meaning too fast a heartbeat, and bradycardia, meaning
too slow a heartbeat.
Arrhythmias
affect more than 4 million people in the United States. According to the
American Heart Association, arrhythmias result in more than 780,000
hospitalizations and contribute to approximately 480,000 deaths per year.
The
ability to diagnose or rule out an arrhythmia as a symptom of a cardiac
condition is important both to treat those patients with serious cardiovascular
diseases as well as to identify those patients that may not require further
medical attention. Arrhythmias may be diagnosed either in a physicians office
or other health care facility or remotely by monitoring a patients heart
rhythm. Typically, physicians will initially administer a resting ECG that monitors
the electrical impulses in a patients heart. If a physician determines that a
patient needs to be monitored for a longer period of time to produce a
diagnosis, the physician will typically prescribe an ambulatory cardiac
monitoring device, such as a Holter monitor or an event monitor.
·
Holter Monitors.
A Holter monitor
is an ambulatory cardiac monitoring device, first used in 1961, that is
generally worn by a patient for a one or, in rare instances, two day period in
order to record continuous ECG data. After the one or two day period, the
magnetic or digital storage, or other medium containing the data recorded by
this device, is delivered by hand, mail or internet for processing and analysis
by the physician or a third party service provider. Despite the advent of newer
technologies, Holter monitoring continues to be used today for patients whose
suspected arrhythmia is believed to occur many times during the course of a
day, in which case a Holter is often effective or adequate. However, for a
patient that has an unpredictable or intermittent arrhythmia, a Holter may not
provide clinically useful information due to the insufficient duration of the
monitoring period. In addition, as a result of the typical one to three day
reporting delay and the lack of real-time physician notification, patients may
not receive timely diagnosis
2
of their condition. Any
artifact, or noise, in the data will not be discovered until the test is
analyzed. A 2005 Frost & Sullivan study reported that Holters have
been found to be effective in diagnosing cardiac arrhythmias only 10% of the
time.
·
Event Monitors.
An event monitor
records several minutes of ECG activity at a time and then begins overwriting
the memory, a process referred to as memory loop recording. When a patient
feels the symptoms of an event, he or she pushes a button to activate the
recording, which typically freezes 45 seconds of ECG data before symptom onset
and records 15 seconds live following the symptom. Event monitors have limited
memory, usually less than 10 minutes, and can generally store data concerning
between one and six cardiac events. The patient must transmit event data to the
monitoring center, typically by phone, and then erase the memory. To the extent
that the patient does not call in and transmit data concerning an event, the
device will become unable to store future event data once the devices event
storage is full.
Event monitors offer certain advantages over Holters
given that they are worn over a period of up to 30 days, instead of the
one or two day Holter period. However, event monitors have significant
shortcomings. Manual-trigger loop event monitors capture only cardiac events
associated with symptoms detectable by the patient and not asymptomatic cardiac
events. In our experience, only 15% to 20% of clinically significant cardiac
events are symptomatic, meaning that the patient can feel them as they occur.
Other drawbacks of manual-trigger loop event monitors include the limited data
storage, the lack of trend data, and poor patient compliance relating to the
requirement that the patient must both trigger and transmit events.
A newer version of event monitoring devices was
introduced in 1999 called auto-detect loop event monitors, which incorporate
basic algorithms that look at fast, slow or irregular heart rates and in some
cases, pauses, to automatically detect certain asymptomatic arrhythmias. The
primary drawback of auto-detect loop event monitors is that they require the
patient to call in to transmit data to physicians. The latest development in
event monitoring is referred to as auto-detect/auto-send loop event monitors,
which have the ability to send captured event data to a monitoring center via
cell phone. The drawbacks of auto-detect/auto-send loop event monitors are that
they suffer from limited data storage and, to our knowledge, utilize algorithms
that were not subject to the same level of FDA scrutiny prior to marketing as
the CardioNet System.
Despite
major advances in cardiology with new therapeutic drugs, such as beta blockers
and statins, and new therapeutic devices and procedures over the last several
decades, there have been few advances in ambulatory monitoring. We believe that
there is a significant opportunity for new arrhythmia monitoring solutions that
exploit the convergence of wireless, low power microelectronic and software
technologies to address the shortcomings of traditional Holter and event
monitors. We believe these shortcomings often lead to suboptimal diagnostic
yields, adversely impacting clinical outcomes and health care costs.
CardioNet
Solution
We
have developed an ambulatory, continuous and real-time arrhythmia monitoring
solution that we believe represents a significant advancement over event and
Holter monitoring. The CardioNet System incorporates a patient-worn sensor
attached to electrodes that capture two-lead ECG data and communicates
wirelessly with a compact monitor that analyzes incoming information by
applying proprietary algorithms designed to detect arrhythmias and eliminate
data noise. When the monitor detects an arrhythmic event, it automatically
transmits the ECG data to the CardioNet Monitoring Center, where experienced
certified cardiac monitoring specialists analyze the sent data, respond to
urgent events and report results in the manner prescribed by the physician. The
CardioNet System, on average, is worn by the patient for a period of
approximately 14 days.
The
CardioNet System results in a high diagnostic yield of clinically significant
arrhythmias, allowing for real-time detection and analysis as well as timely
intervention and treatment by the physician. In a randomized 300-patient
clinical study, the CardioNet System detected clinically significant
arrhythmias nearly three times as often as traditional loop event monitors in
patients who have previously experienced negative or nondiagnostic Holter
monitoring or 24 hours of telemetry.
3
We
believe that the CardioNet System offers the following advantages to
physicians, payors and patients:
·
Real-time,
continuous data.
The
CardioNet System initiates real-time analysis and automatic transmission as
events occur, which allows physicians to receive urgent notifications in a
timely manner. The CardioNet System currently stores at least 96 hours of
ECG data, considerably more than the typical 10 minutes of memory of event
monitors. We are in the process of upgrading our monitors to store 21 days of
ECG data. In addition, the CardioNet System works without patient interaction,
automatically detecting and transmitting asymptomatic events.
·
Reflects
real-life cardiac activity.
Patients using the CardioNet
System can continue normal activities, including activities that may trigger an
arrhythmia, with a minimum of data artifacts or noise. Patients experiencing
a symptom record details of their symptom and activity data on the touch-screen
of the CardioNet System monitor, which allows physicians to correlate the
information to the underlying ECG data.
·
Two-way
wireless capabilities for transmission, remote programming and data retrieval.
The CardioNet
System allows two-way wireless communications, compared to most event monitors
which only support one-way transmissions. With the CardioNet System, physicians
can adjust device parameters remotely, check in on the patient and request ECG
data from the previous 96 hours, or 21 days of ECG data from our upgraded
monitors as they become available. Our monitors currently in development will
also allow for voice capabilities in addition to the text messaging
capabilities of our current monitor.
·
Potential reduction in health care costs.
We have demonstrated
increased diagnostic yield as compared to event monitoring, which we believe
may reduce time to diagnosis and reduce health care costs resulting from
repeated emergency room and physician visits, additional diagnostic testing,
prolonged hospitalization for the sole purpose of arrhythmia monitoring and
unnecessary hospitalizations for drug initiation and titration, as well as
expenditures resulting from stroke and other serious cardiovascular
complications.
·
Tailored
and customized to physicians needs.
The prescribing physician
selects patient-specific monitoring thresholds and response parameters. The
physician selects the events to be monitored and the level and timing of
response by the CardioNet Monitoring Centerfrom routine daily reporting to
urgent stat reports. Physicians can review the data by fax or internet,
depending on their preferences.
Our
Business Strategy
Our
goal is to maintain our position as the leading provider of ambulatory, continuous
and real-time outpatient monitoring services by establishing our proprietary
integrated technology and service offering as the standard of care for multiple
health care markets. The key elements of the business strategy by which we
intend to achieve these goals include:
·
Continue
to Educate the Market on the Higher Diagnostic Yield of Our Differentiated
Arrhythmia Monitoring Solution.
We intend to continue to
educate cardiologists and electrophysiologists on the benefits of using the
CardioNet System to meet their arrhythmia monitoring needs, stressing the
increased diagnostic yield and their ability to use the clinically significant
data to make timely interventions and guide more effective treatments.
·
Capitalize
on Clinical Trial Results to Enhance Payor Relationships
. We have achieved
reimbursement for our advanced monitoring solution at levels that we believe
reflect its clinical efficacy relative to existing technologies. Our efforts
have resulted in contracts with 172 commercial payors as of March 31,
2008. We estimate that, combined with Medicare, this represents more than
176 million covered lives. We intend to continue to use the clinical
evidence from our 300-patient randomized clinical trial to secure contracts
with 18 targeted commercial payors, representing approximately 67 million
covered lives, which had previously required proof of product superiority
evidenced by a published randomized clinical trial.
4
·
Position
CardioNet as One Stop Shop for Arrhythmia Monitoring.
Through our
acquisition of PDSHeart, we are able to offer to physicians both the CardioNet
System and event and Holter monitoring services. We believe that certain
cardiologists and electrophysiologists prefer to use a single source of
arrhythmia monitoring solutions with a full spectrum of those solutions.
·
Leverage
Expanded Sales Footprint to Enhance Market Penetration.
With the
acquisition of PDSHeart, we now provide services to patients in 48 states. Our
sales force increased from 27 account executives at December 31, 2006 to
73 account executives as of March 31, 2008, largely as a result of the
PSDHeart acquisition, and we intend to continue to add sales capacity. The
acquisition accelerated our market expansion strategy by providing us with
immediate access to a sales force with existing physician relationships capable
of marketing our CardioNet System in areas of the country where it had
previously not been marketed or sold.
·
Leverage
Monitoring Platform to New Market Opportunities.
We believe that
the CardioNet System is a platform that can be leveraged for applications in
multiple markets. While our initial focus has been on arrhythmia diagnosis and
monitoring, we intend to expand into new market areas such as cardiac
monitoring for clinical trials, including QT prolongation and arrhythmia
trials, and comprehensive disease management for congestive heart failure,
diabetes and other diseases that require outpatient or ambulatory monitoring
and management. We believe that our technology could also be used to create instant
telemetry beds in hospitals, particularly in rural hospitals, step-down units
or skilled nursing facilities to help cope with acute nursing shortages by
reducing the number of nurses needed to oversee ECG monitoring and reduce
capital equipment costs.
Corporate
Information
We
were originally incorporated in the State of California in March 1994. We
reincorporated in the State of Delaware on February 22, 2008. Our
principal executive offices are located at 1010 Second Avenue, San Diego,
California 92101, and our telephone number is (619) 243-7500. Our website
address is
www.cardionet.com
. The
information contained in, or that can be accessed through, our website is not
part of this prospectus.
5
Summary
Consolidated Financial Information
The following summary consolidated
financial data should be read together with our consolidated financial
statements and related notes, Managements Discussion and Analysis of
Financial Condition and Results of Operations and other more detailed
financial information appearing elsewhere in this prospectus. The summary
consolidated financial data for the years ended December 31, 2005, 2006
and 2007 are derived from our audited financial statements, which are included
elsewhere in this prospectus. The summary consolidated financial data for the
three months ended March 31, 2007 and 2008 and at March 31, 2008 are derived from our unaudited consolidated
financial statements, which are included elsewhere in this prospectus.
The summary unaudited pro forma
consolidated statements of operations data for the year ended December 31,
2007 are based on the historical statements of operations of CardioNet, Inc.
and PDSHeart, Inc., giving effect to our acquisition of PDSHeart as if the
acquisition had occurred on January 1, 2007. The summary unaudited pro
forma consolidated statement of operations data is based on the estimates and
assumptions set forth in the notes to the unaudited pro forma consolidated
statements of operations, which are included elsewhere in this prospectus.
These estimates and assumptions are preliminary and subject to change, and have
been made solely for the purposes of developing such pro forma information. The
summary unaudited pro forma consolidated statement of operations data is
presented for illustrative purposes only and is not necessarily indicative of
the combined results of operations to be expected in any future period or the
results that actually would have been realized had the entities been a single
entity during these periods.
We have prepared the summary
unaudited consolidated financial data set forth below on the same basis as our
audited financial statements and have included all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for such periods.
The pro forma basic net loss per share data are unaudited and give effect to
the conversion into common stock of all outstanding shares of our preferred
stock for the periods indicated. The interim results set forth below are not
necessarily indicative of results for future periods.
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Actual
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Pro Forma
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Actual
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Three months ended
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Year ended December 31,
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March 31,
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(in thousands, except per share data)
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2005
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|
2006
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2007
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|
2007
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2007
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|
2008
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(unaudited)
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|
(unaudited)
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Statement of Operations Data:
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Revenues:
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Patient revenues
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$
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29,467
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$
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33,019
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$
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72,357
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$
|
76,412
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|
$
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10,957
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$
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25,248
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Other revenues
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|
1,471
|
|
904
|
|
635
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|
649
|
|
143
|
|
215
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Total revenues
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|
30,938
|
|
33,923
|
|
72,992
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|
77,061
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|
11,100
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|
25,463
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Cost of revenues
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16,963
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|
12,701
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|
25,526
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|
27,172
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|
3,790
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|
9,519
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|
|
|
|
|
|
|
|
|
|
|
|
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|
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Gross profit
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|
13,975
|
|
21,222
|
|
47,466
|
|
49,889
|
|
7,310
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|
15,944
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|
|
|
|
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|
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|
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Operating expenses:
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|
|
|
|
|
|
|
|
|
|
|
|
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Research and development
|
|
3,361
|
|
3,631
|
|
3,782
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|
3,782
|
|
990
|
|
1,141
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|
General and administrative
|
|
13,853
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|
15,631
|
|
27,474
|
|
28,700
|
|
5,201
|
|
9,066
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|
Sales and marketing
|
|
6,456
|
|
6,448
|
|
15,968
|
|
17,030
|
|
3,320
|
|
5,115
|
|
Integration, restructuring and other nonrecurring charges
|
|
|
|
|
|
|
|
|
|
|
|
1,306
|
|
Total expenses
|
|
23,670
|
|
25,710
|
|
47,224
|
|
49,512
|
|
9,511
|
|
16,628
|
|
Income (loss) from operations
|
|
(9,695
|
)
|
(4,488
|
)
|
242
|
|
377
|
|
(2,201
|
)
|
(684
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
97
|
|
114
|
|
1,622
|
|
1,627
|
|
223
|
|
178
|
|
Interest expense
|
|
(1,865
|
)
|
(3,271
|
)
|
(2,222
|
)
|
(2,264
|
)
|
(1,176
|
)
|
(66
|
)
|
Total other income (expense)
|
|
(1,768
|
)
|
(3,157
|
)
|
(600
|
)
|
(637
|
)
|
(953
|
)
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
(11,463
|
)
|
(7,645
|
)
|
(358
|
)
|
(260
|
)
|
(3,154
|
)
|
(572
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,463
|
)
|
$
|
(7,645
|
)
|
$
|
(358
|
)
|
$
|
(260
|
)
|
$
|
(3,154
|
)
|
$
|
(340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on and accretion of mandatorily convertible preferred stock
|
|
|
|
|
|
(8,346
|
)
|
(8,346
|
)
|
(482
|
)
|
(2,597
|
)
|
Net loss applicable to common shares
|
|
$
|
(11,463
|
)
|
$
|
(7,645
|
)
|
$
|
(8,704
|
)
|
$
|
(8,606
|
)
|
$
|
(3,636
|
)
|
$
|
(2,937
|
)
|
Basic and diluted net loss per share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
(4.04
|
)
|
(2.63
|
)
|
(2.89
|
)
|
(2.86
|
)
|
(1.22
|
)
|
(0.63
|
)
|
Pro Forma
|
|
|
|
|
|
|
|
(0.51
|
)
|
|
|
|
|
Shares used to compile basic and diluted net loss per share(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
2,837,772
|
|
2,908,360
|
|
3,011,699
|
|
3,011,699
|
|
2,993,061
|
|
4,694,561
|
|
Pro Forma
|
|
|
|
|
|
|
|
16,839,493
|
|
|
|
|
|
6
(1) Please
see Note 1 to our consolidated financial statements for an explanation of the
method used, the historical and pro forma net (loss) income per share and the
number of shares used in computation of the per share amounts.
|
|
As of March 31, 2008
|
|
|
|
Actual
|
|
|
|
(in thousands)
|
|
Consolidated Summary Balance Sheet Data
(unaudited):
|
|
|
|
Cash and cash equivalents
|
|
$
|
61,973
|
|
Working capital
|
|
71,958
|
|
Total assets
|
|
154,766
|
|
Total debt
|
|
2,872
|
|
Total shareholders equity
|
|
135,351
|
|
|
|
|
|
|
7
RISK
FACTORS
Before you decide to invest in our
common stock, you should consider carefully the risks described below, together
with the other information contained in this prospectus. We believe the risks
described below are the risks that are material to us as of the date of this
prospectus. If any of the following risks comes to fruition, our business,
financial condition, results of operations and future growth prospects would
likely be materially and adversely affected. In these circumstances, the market
price of our common stock could decline, and you may lose all or part of your
investment.
Risks related to our business and
industry
We have a history
of net losses and may never become profitable.
We have incurred net losses from our inception through
March 31, 2008, including net losses of $0.3 million for the quarter ended
March 31, 2008 and $0.4 million for the year ended December 31,
2007. As of March 31, 2008, we had total stockholders deficit of
approximately $82.1 million. We expect our operating expenses to increase as
we, among other things:
·
expand our sales and marketing activities;
·
invest in designing, manufacturing and building our
inventory of future generations of the CardioNet System;
·
hire additional personnel;
·
invest in infrastructure; and
·
incur the additional expenses associated with being a
public company.
With increasing expenses, we will need to continue to
substantially increase our revenues to become profitable. Because of the risks
and uncertainties associated with further developing and marketing the
CardioNet System, we are unable to predict the extent of any future losses or
when we will become profitable, if at all.
Our business is
dependent upon physicians prescribing our services; if we fail to obtain those
prescriptions, our revenues could fail to grow and could decrease.
The success of our business is dependent upon
physicians prescribing our services for patients and cross-selling the
respective CardioNet and PDSHeart customer bases. Our success in obtaining
prescriptions and cross-selling will be directly influenced by a number of
factors, including:
·
the ability of the physicians with whom we work to
obtain sufficient reimbursement and be paid in a timely manner for the
professional services they provide in connection with the use of our arrhythmia
monitoring solutions, particularly the CardioNet System;
·
our ability to educate physicians regarding, and
convince them of, the benefits of the CardioNet System over existing treatment
methods such as Holter monitors and event monitors; and
·
the perceived clinical efficacy of the CardioNet
System.
If we are unable to educate physicians regarding the
benefits of the CardioNet System, obtain sufficient prescriptions and
cross-sell our respective customer bases, revenues from the provision of our
arrhythmia monitoring solutions could fail to grow and could decrease.
8
We and the
physicians with whom we work are dependent upon reimbursement for the fees
associated with our services; the absence or inadequacy of reimbursement would
cause our revenues to fail to grow or decrease.
We receive reimbursement for our services from
commercial payors and from Medicare Part B carriers where the services are
performed on behalf of the Centers for Medicare and Medicaid Services, or CMS.
The Medicare Part B carriers in each state change from time to time, which
may result in changes to our reimbursement rates, increased administrative
burden and reimbursement delays.
In addition, our prescribing physicians receive
reimbursement for professional interpretation of the information provided by
our products and services from commercial payors or Medicare carriers within
the state where they practice. The efficacy, safety, performance and
cost-effectiveness of our products and services, on a stand-alone basis and
relative to competing services, will determine the availability and level of
reimbursement we and our prescribing physicians receive. Our ability to
successfully contract with payors is critical to our business because
physicians and their patients will select arrhythmia monitoring solutions other
than ours in the event that payors refuse to adequately reimburse our technical
fees and physicians professional fees.
Many commercial payors refuse to enter into contracts
to reimburse the fees associated with medical devices or services that such
payors determine to be experimental and investigational. Commercial payors
typically label medical devices or services as experimental and
investigational until such devices or services have demonstrated product
superiority evidenced by a randomized clinical trial. We completed a clinical
trial in which the CardioNet System provided higher diagnostic yield than
traditional loop event monitoring. Prior to our clinical trial, the CardioNet
System was labeled experimental and investigational by 21 targeted commercial
payors, representing approximately 95 million covered lives. Subsequent to
our trial, three commercial payors, representing over 26 million covered
lives, removed the designation of the CardioNet System as experimental and
investigational. Several of the remaining payors, however, have informed us
that they do not believe the data from this trial justifies the removal of this
designation. Other commercial payors may also find the data from our clinical
trial not compelling. Additional commercial payors may also label the CardioNet
System as experimental and investigational and, as a result, refuse to
reimburse the technical and professional fees associated with the CardioNet
System.
Administration of the claims process for the many
commercial payors is complex. As a result we sometimes bill payors for services
for which we have no reimbursement contract. These payors may require that we
return any funds that they pay in respect of these claims.
If commercial payors or Medicare decide not to
reimburse our services or the related services provided by physicians, or the
rates of such reimbursement change, or if we fail to properly administer
claims, our revenues could fail to grow and could decrease.
Reimbursement by Medicare
is highly regulated and subject to change; our failure to comply with
applicable regulations, could decrease our revenues and may subject us to
penalties or have an adverse impact on our business.
We receive approximately 33% of our revenues as reimbursement
from Medicare. The Medicare program is administered by Centers for Medicare & Medicaid
Services, or CMS, which imposes extensive and detailed requirements on medical
services providers, including, but not limited to, rules that govern how
we structure our relationships with physicians, how and when we submit
reimbursement claims, how we operate our monitoring facilities and how and
where we provide our arrhythmia monitoring solutions. Our failure to comply
with applicable Medicare rules could result in discontinuing our
reimbursement under the Medicare payment program, our being required to return
funds already paid to us, civil monetary penalties, criminal penalties and/or
exclusion from the Medicare program.
In addition, reimbursement from Medicare is subject to
statutory and regulatory changes, local and national coverage decisions, rate
adjustments and administrative rulings, all of which could materially affect
the range of services covered or the reimbursement rates paid by Medicare for use
of our arrhythmia monitoring solutions. For example, CMS adopted a new payment
policy in January 2007 that reduced the rate of reimbursement for a number
of services reimbursed by Medicare. Although this modification to Medicares
reimbursement rates did not affect the amount paid by Medicare for
reimbursement of the fees associated with the CardioNet System, it resulted in
the reduction of reimbursement rates for event services by 3% to 8%, depending
on the type of service, and Holter services by 8% as compared to the
corresponding rates in effect in 2006. Based on current proposed Medicare rates
9
for 2008 through 2010, we expect that reimbursement for event and
Holter services will continue to decline at an annual rate similar to 2007. In
addition, we cannot predict whether future modifications to Medicares
reimbursement policies could reduce or eliminate the amounts we receive from
Medicare for the solutions we provide. In addition, Medicares reimbursement
rates can affect the rate that commercial payors are willing to pay for our
products and services. Consequently, any future elimination, limitation or
reduction in the reimbursement rates provided by Medicare for our arrhythmia
monitoring solutions could result in a reduction in the rates we receive from
commercial payors.
Reimbursement for
the CardioNet System by Medicare and other commercial payors is complicated by
the lack of a specific Current Procedural Terminology, or CPT, code, which may
result in lower prescription rates or varying reimbursement rates.
When we bill Medicare and certain other commercial
payors for the service we provide in connection with the CardioNet System, we
submit the bill using the nonspecific billing, or CPT, code 93799. Unlike
dedicated CPT codes approved by the American Medical Association, or AMA, and
CMS, claims using non-specific codes may require semi-automated or manual
processing, as well as additional review by payors. The claims processing
requirements associated with a nonspecific code can make our services less
attractive to physicians because added time and effort is often required in
order to receive payment for their services. Furthermore, the Medicare
reimbursement rate for non-specific codes is determined by local Medicare
carriers. As a result, the reimbursement rates relating to our CardioNet System
are subject to change without notice.
A request to the AMA for a specific CPT code that
describes our CardioNet System has been made. The request was discussed and
voted upon by the CPT Editorial Panel at its public October 2007 meeting.
The results of the vote are confidential. We have been informally advised that
the CPT Editorial Panel voted in favor of the request. However, the results of
the vote are subject to change until such results are published in the fall of
2008. If the request is officially approved by the AMA CPT Editorial Panel, the
specific CPT code would be published in the fall of 2008 and would be available
for use in 2009. However, we cannot guarantee that we will receive a specific
CPT code for the CardioNet System in that timeframe, or ever. Moreover, if we
do receive a CPT code, the reimbursement rate associated with that code, which
would be subject to change on an annual basis through a public notice and
comment process, may be lower than our current reimbursement rates.
A reduction in
sales of our services or a loss of one or more of our key commercial payors
would adversely affect our business and operating results.
A small number of commercial payors represent a
significant percentage of our revenues. In the quarter ended March 31,
2008, our top 10 commercial payors by revenues accounted for approximately
27.8% of our total revenues. Our agreements with these commercial payors typically
allow either party to the contract to terminate the contract by providing
between 60 and 120 days prior written notice to the other party at any
time following the end of the initial term of the contract. Our commercial
payors may elect to terminate or not to renew their contracts with us for any
reason and, in some instances can unilaterally change the reimbursement rates
they pay. In the event any of our key commercial payors terminate their
agreements with us, elect not to renew their agreements with us or elect not to
enter into new agreements with us upon expiration of their agreements with us
on terms as favorable as our current agreements, our business, operating
results and prospects would be adversely affected.
Consolidation of
commercial payors could result in payors eliminating coverage of our CardioNet
System or reduced reimbursement rates for our CardioNet System.
The commercial payor industry is undergoing
significant consolidation. When payors combine their operations, the combined
company may elect to reimburse our CardioNet System at the lowest rate paid by
any of the participants in the consolidation. If one of the payors
participating in the consolidation does not reimburse for the CardioNet System
at all, the combined company may elect not to reimburse for the CardioNet
System. Our reimbursement rates tend to be lower for larger payors. As a
result, as payors consolidate, our average reimbursement rate may decline.
10
Our acquisition of
PDSHeart, as well as any other companies or technologies we may acquire in the
future, could prove difficult to integrate and may disrupt our business and
harm our operating results and prospects.
Our acquisition of PDSHeart involves numerous risks, including
the risk that we will not take advantage of the cross-selling opportunities
brought about by the acquisition. In addition, our acquisition of PDSHeart, as
well as acquisitions in which we may engage in the future, involve risks
associated with our assumption of the liabilities of an acquired company, which
may be liabilities that we were or are unaware of at the time of the
acquisition, potential write-offs of acquired assets and potential loss of the
acquired companys key employees or customers.
We may encounter difficulties in successfully
integrating our operations, technologies, services and personnel with that of
the acquired company, and our financial and management resources may be
diverted from our existing operations. For example, following our acquisition
of PDSHeart we have offices in Pennsylvania, California, Florida, Georgia and
Minnesota. Our offices in multiple states create a strain on our ability to
effectively manage our operations and key personnel. If we elect to consolidate
our facilities we may lose key personnel unwilling to relocate to the
consolidated facility, may have difficulty hiring appropriate personnel at the
consolidated facility and may have difficulty providing continuity of service
through the consolidation.
Physician and patient satisfaction or performance
problems with an acquired business, technology, service or device could also
have a material adverse effect on our reputation. Additionally, potential
disputes with the seller of an acquired business or its employees, suppliers or
customers and amortization expenses related to goodwill and other intangible
assets could adversely affect our business, operating results and financial
condition.
We may not be able to realize the anticipated benefits
of the PDSHeart acquisition or any other acquisition we may pursue or to
profitably deploy acquired assets. If we fail to properly evaluate and execute
acquisitions, our business may be disrupted and our operating results and
prospects may be harmed.
If we are unable to
manage our expected growth, our revenues and operating results may be adversely
affected.
Our business plans call for rapid expansion of our
sales and marketing operations and growth of our research and development,
product development and administrative operations. We had a sales force of 73
account executives at March 31, 2008. We intend to expand our sales force
to 89 individuals by December 31, 2008. We expect this expansion will
place a significant strain on our management and operational and financial
resources. Our current and planned personnel, systems, procedures and controls
may not be adequate to support our anticipated growth. To manage our growth we
will be required to improve existing and implement new operational and
financial systems, procedures and controls and expand, train and manage our
growing employee base. If we are unable to manage our growth effectively,
revenue growth may not be realized or may not be sustainable, may not result in
improved operating results or earnings, and our business, financial condition
and results of operations could be harmed.
Our business is
dependent upon having sufficient monitors and sensors. If we do not have enough
monitors or sensors or experience delays in manufacturing, we may be unable to
fill prescriptions in a timely manner, physicians may elect not to prescribe
the CardioNet System, and our revenues and growth prospects could be harmed.
When a physician prescribes the CardioNet System to a
patient, our customer service department begins the patient hook-up process,
which includes procuring a monitor and sensors from our distribution department
and sending them to the patient. While our goal is to provide each patient with
a monitor and sensors in a timely manner, we have experienced and may in the
future experience delays due to the availability of monitors, primarily when
converting to a new generation of monitor or, more recently, in connection with
the increase in prescriptions following our acquisition of PDSHeart.
We may also experience shortages of monitors or
sensors due to manufacturing difficulties. Multiple suppliers provide the
components used in the CardioNet System, but our facilities in San Diego,
California are registered and approved by the United States Food and Drug
Administration, or FDA, as the ultimate manufacturer of the CardioNet System.
Our manufacturing operations could be disrupted by fire, earthquake or other
natural disaster, a work stoppage or other labor-related disruption,
failure in supply or other logistical channels, electrical outages or other
reasons. If there was a disruption to our facilities in San Diego, we would be
unable to manufacture the CardioNet System until we have restored and
re-qualified our manufacturing capability or developed alternative manufacturing
facilities.
11
Our success in obtaining future prescriptions from
physicians is dependent upon our ability to promptly deliver monitors and
sensors to our patients, and a failure in this regard would have an adverse
effect on our revenues and growth prospects.
Interruptions or
delays in telecommunications systems or in the data services provided to us by
QUALCOMM or the loss of our wireless or data services could impair the delivery
of our CardioNet System services.
The success of the CardioNet System is dependent upon
our ability to store, retrieve, process and manage data and to maintain and
upgrade our data processing and communication capabilities. The monitors we use
in connection with the CardioNet System rely on a third party wireless carrier
to transmit data over its data network during times that the monitor is removed
from its base. All data sent by our monitors via this wireless data network or
via landline is routed directly to QUALCOMM data centers and subsequently
routed to our monitoring center. We are dependent upon these third parties to
provide data transmission and data hosting services to us. We do not have an
agreement directly with this third party wireless carrier. Although we do have
an agreement with QUALCOMM that has an initial termination date in September 2010,
QUALCOMM may terminate its agreement with us if certain conditions occur,
including if QUALCOMMs agreement with the third party wireless carrier
terminates or in the event we fail to maintain an agreed-upon number of active
cardiac monitoring devices on the QUALCOMM network. We have no control over the
status of the agreement between QUALCOMM and the wireless carrier. If we fail
to maintain our relationships with QUALCOMM or if we lose wireless carrier
services, we would be forced to seek alternative providers of data transmission
and data hosting services, which might not be available on commercially
reasonable terms or at all.
As we expand our commercial activities, an increased
burden will be placed upon our data processing systems and the equipment upon
which they rely. Interruptions of our data networks or the data networks of
QUALCOMM for any extended length of time, loss of stored data or other computer
problems could have a material adverse effect on our business, financial
condition and results of operations. Frequent or persistent interruptions in
our arrhythmia monitoring services could cause permanent harm to our reputation
and could cause current or potential users of the CardioNet System or
prescribing physicians to believe that our systems are unreliable, leading them
to switch to our competitors. Such interruptions could result in liability,
claims and litigation against us for damages or injuries resulting from the
disruption in service.
Our systems are vulnerable to damage or interruption
from earthquakes, floods, fires, power loss, telecommunication failures,
terrorist attacks, computer viruses, break-ins, sabotage, and acts of
vandalism. Despite any precautions that we may take, the occurrence of a
natural disaster or other unanticipated problems could result in lengthy
interruptions in these services. We do not carry business interruption
insurance to protect against losses that may result from interruptions in
service as a result of system failures. Moreover, the communications and
information technology industries are subject to rapid and significant changes,
and our ability to operate and compete is dependent in significant part on our
ability to update and enhance the communication technologies used in our
systems and services.
The market for
arrhythmia monitoring solutions is highly competitive. If our competitors are
able to develop or market monitoring solutions that are more effective, or gain
greater acceptance in the marketplace, than any solutions we develop, our
commercial opportunities will be reduced or eliminated.
The market for arrhythmia monitoring solutions is
evolving rapidly and becoming increasingly competitive. Our industry is highly
fragmented and characterized by a small number of large providers and a large
number of smaller regional service providers. These third parties compete with
us in marketing to payors and prescribing physicians, recruiting and retaining
qualified personnel, acquiring technology and developing solutions
complementary to our programs. In addition, as companies with substantially
greater resources than ours enter our market, we will face increased
competition. If our competitors are better able to develop and patent
arrhythmia monitoring solutions than us, or develop more effective and/or less
expensive arrhythmia monitoring solutions that render our solutions obsolete or
non-competitive or deploy larger or more effective marketing and sales
resources than ours, our business will be harmed and our commercial
opportunities will be reduced or eliminated.
12
If we need to raise
additional funding in the future, we may be unable to raise such capital when
needed, or at all, and the terms of such capital may be adverse to our
stockholders.
We believe that the net proceeds from our initial
public offering, together with our existing cash and cash equivalent balances,
will be sufficient to meet our anticipated cash requirements for the
foreseeable future. However, our future funding requirements will depend on
many factors, including:
·
the costs associated with manufacturing and building
our inventory of our next generation C3 monitor;
·
the costs of hiring additional personnel and investing
in infrastructure to support future growth;
·
the reimbursement rates associated with our products
and services;
·
actions taken by the FDA, CMS and other regulatory
authorities affecting the CardioNet System and competitive products;
·
our ability to secure contracts with additional
commercial payors providing for the reimbursement of our services;
·
the emergence of competing technologies and products
and other adverse market developments;
·
the costs of preparing, filing, prosecuting,
maintaining and enforcing patent claims and other intellectual property rights
or defending against claims of infringement by others; and
·
the costs of investing in additional lines of business
outside of arrhythmia monitoring solutions.
If we need to, or choose to, raise additional capital
in the future, such capital may not be available on reasonable terms, or at
all. If we raise additional funds by issuing equity securities, substantial
dilution to existing stockholders would likely result. If we raise additional
funds by incurring debt financing, the terms of the debt may involve
significant cash payment obligations as well as covenants and financial ratios
that may restrict our ability to operate our business.
Our manufacturing
facilities and the manufacturing facilities of our suppliers must comply with
applicable regulatory requirements. If we or our suppliers fail to achieve or
maintain regulatory approval of these manufacturing facilities, our growth
could be limited and our business could be harmed.
We currently manufacture the monitors and sensors for
the CardioNet System in San Diego, California. Monitors used in the provision
of services by PDSHeart are purchased from several third parties. In order to
maintain compliance with FDA and other regulatory requirements, our
manufacturing facilities must be periodically re-evaluated and qualified under
a quality system to ensure they meet production and quality standards.
Suppliers of components of and products used to manufacture the CardioNet
System and the manufacturers of the monitors used in the provision of services
by PDSHeart must also comply with FDA and foreign regulatory requirements,
which often require significant resources and subject us and our suppliers to
potential regulatory inspections and stoppages. We or our suppliers may not
satisfy these requirements. If we or our suppliers do not maintain regulatory
approval for our manufacturing operations, our business would be harmed.
Our dependence on a
limited number of suppliers may prevent us from delivering our devices on a
timely basis.
We currently rely on a limited number of suppliers of
components for the CardioNet System. If these suppliers became unable to
provide components in the volumes needed or at an acceptable price, we would
have to identify and qualify acceptable replacements from alternative sources
of supply. Qualifying suppliers is a lengthy process. Delays or interruptions
in the supply of our requirements could limit or stop our ability to provide
sufficient quantities of devices on a timely basis, meet demand for our
services, which could have a material adverse effect on our business, financial
condition and results of operations.
13
We could be subject
to medical liability or product liability claims which may not be covered by
insurance and which would adversely affect our business and results of
operations.
The design, manufacture and marketing of services of
the types we provide entail an inherent risk of product liability claims. Any
such claims against us may require us to incur significant defense costs,
irrespective of whether such claims have merit. In addition, we provide
information to health care providers and payors upon which determinations
affecting medical care are made, and claims may be made against us resulting
from adverse medical consequences to patients resulting from the information we
provide. In addition, we may become subject to liability in the event that the
monitors and sensors we use fail to correctly record or transfer patient
information or if we provide incorrect information to patients or health care
providers using our services. We have also agreed to indemnify QUALCOMM for any
claims resulting from the provision of our services. If we incur one or more
significant claims against us, if we are required to indemnify QUALCOMM as a
result of the provision of our services, or if we are required to undertake
remedial actions in response to any such claims, such claims or actions would
adversely affect our business and results of operations.
Our liability insurance is subject to deductibles and
coverage limitations. In addition, our current insurance may not continue to be
available to us on acceptable terms, if at all, and, if available, the
coverages may not be adequate to protect us against any future claims. If we
are unable to obtain insurance at an acceptable cost or on acceptable terms
with adequate coverage or otherwise protect against any claims against us, we
will be exposed to significant liabilities, which may harm our business.
If we do not obtain
and maintain adequate protection for our intellectual property, the value of
our technology and devices may be adversely affected.
Our business and competitive positions are dependent
in part upon our ability to protect our proprietary technology. To protect our
proprietary rights, we rely on a combination of trademark, copyright, patent,
trade secret and other intellectual property laws, employment, confidentiality
and invention assignment agreements with our employees and contractors, and
confidentiality agreements and protective contractual provisions with other
third parties. We attempt to protect our intellectual property position by
filing trademark applications and U.S., foreign and international patent
applications related to our proprietary technology, inventions and improvements
that are important to the development of our business.
As of March 31, 2008, we had 14 issued U.S.
patents, seven foreign patents and 42 pending U.S., foreign and international
patent applications relating to various aspects of the CardioNet System. As of March 31,
2008, we also had 14 trademark registrations and one pending trademark
application in the United States for a variety of word marks and slogans. We do
not believe that any single patent, trademark or other intellectual property
right of ours, or combination of our intellectual property rights, is likely to
prevent others from competing with us using a similar business model. There are
many issued patents and patent applications held by others in our industry and
the electronics field. Our competitors may independently develop technologies
that are substantially similar or superior to our technologies, or design
around our patents or other intellectual property to avoid infringement. In
addition, we may not apply for a patent relating to products or processes that
are patentable, we may fail to receive any patent for which we apply or have
applied, and any patent owned by us or issued to us could be circumvented,
challenged, invalidated, or held to be unenforceable, or rights granted
thereunder may not adequately protect our technology or provide a competitive
advantage to us. For example, with respect to one of our U.S. patents, we have
a corresponding foreign patent, the claims of which were amended substantially
more so than in the United States, to overcome art that was of record in the
U.S. patent. If a third-party challenges the validity of any patents or
proprietary rights of ours, we may become involved in intellectual property
disputes and litigation that would be costly and time-consuming.
Although third parties may infringe our patents and
other intellectual property rights, we may not be aware of any such
infringement, or we may be aware of potential infringement but elect not to
seek to prevent such infringement or pursue any claim of infringement, and the
third party may continue its potentially infringing activities. Any decision
whether or not to take further action in response to potential infringement of
our patent or other intellectual property rights may be based on any one or
more of a variety of factors, such as the potential costs and benefits of
taking such action, and business and legal issues and circumstances. Litigation
of claims of infringement of a patent or other intellectual property rights may
be costly and time-consuming and divert the attention of key company personnel,
and may not be successful or result in any significant recovery of compensation
for any infringement or enjoining of any infringing activity. Litigation or
licensing discussions may also involve or lead to counterclaims that could be
brought by a potential infringer to challenge the validity or enforceability of
our patents and other intellectual property.
14
To protect our trade secrets and other proprietary information,
we generally require our employees, consultants, contractors and outside
collaborators to enter into written nondisclosure agreements. These agreements,
however, may not provide adequate protection to prevent any unauthorized use,
misappropriation or disclosure of our trade secrets, know-how or other
proprietary information. These agreements may be breached, and we may not
become aware of, or have adequate remedies in the event of, any such breach.
Also, others may independently develop the same or substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets.
Our ability to
market our services may be impaired by the intellectual property rights of
third parties.
Our success is dependent in part upon our ability to
avoid infringing the patents or proprietary rights of others. Our industry and
the electronics field are characterized by a large number of patents, patent
filings and frequent litigation based on allegations of patent infringement.
Competitors may have filed applications for or have been issued patents and may
obtain additional patents and proprietary rights related to devices, services
or processes that we compete with or are similar to ours. We may not be aware
of all of the patents or patent applications potentially adverse to our
interests that may have been or may later be issued to or filed by others. U.S.
patent applications may be kept confidential while pending in the Patent and
Trademark Office. If other companies have or obtain patents relating to our
products or services, we may be required to obtain licenses to those patents or
to develop or obtain alternative technology. We may not be able to obtain any
such licenses on acceptable terms, or at all. Any failure to obtain such licenses
could impair or foreclose our ability to make, use, market or sell our products
and services.
Based on the litigious nature of our industry and the
electronics field and the fact that we may pose a competitive threat to some
companies who own or control various patents, it is always possible that one or
more third parties may assert a patent infringement claim seeking damages and
to enjoin the manufacture, use, sale and marketing of our products and
services. If a third-party asserts that we have infringed its patent or
proprietary rights, we may become involved in intellectual property disputes
and litigation that would be costly and time-consuming and could impair or
foreclose our ability to make, use, market or sell our products and services. For
example, a competitor initiated a patent infringement lawsuit against us in November 2004,
which we defended and ultimately settled in March 2006. Other lawsuits may
have already been filed against us without our knowledge. Additionally, we have
received and expect to continue to receive notices from other third parties
suggesting or asserting that we are infringing their patents and inviting us to
license such patents. We do not believe, however, that we are infringing any
third partys patents or that a license to any such patents is necessary.
Should litigation over such patents arise, which could occur if, for example, a
third party files a lawsuit alleging infringement of such patents or if we
file a lawsuit challenging such patents as being invalid or unenforceable, we
intend to vigorously defend against any allegation of infringement. If we are
found to infringe the patent or intellectual property rights of others, we may
be required to pay damages, stop the infringing activity or obtain licenses or
rights to the patents or other intellectual property in order to use,
manufacture, market or sell our products and services. Any required license may
not be available to us on acceptable terms or at all. If we succeed in obtaining
such licenses, payments under such licenses would reduce any earnings from our
products. In addition, licenses may be non-exclusive and, accordingly, our
competitors may have access to the same technology as that which may be
licensed to us. If we fail to obtain a required license or are unable to alter
the design of our product candidates to make a license unnecessary, we may be
unable to manufacture, use, market or sell our products and services, which
could significantly affect our ability to achieve, sustain or grow our
commercial business. Moreover, regardless of the outcome, patent litigation
against or by us could significantly disrupt our business, divert our
managements attention and consume our financial resources. We cannot predict
if or when any third party will file suit for patent or other intellectual
property infringement.
We are highly
dependent on our Executive Chairman, President and Chief Executive Officer,
Chief Financial Officer and other key employees, and if we are not able to
retain them or to recruit and retain additional qualified personnel, our
business may suffer.
We are highly dependent upon our Executive Chairman,
President and Chief Executive Officer, Chief Financial Officer and other key
employees. The loss of their services could have a material adverse effect on
our business, financial condition and results of operations. The employment of
our executive officers and key employees with us is at will, and each
employee can terminate his or her relationship with us at any time. We do not
carry key person life insurance on any of our employees other than James M.
Sweeney, our Executive Chairman.
15
We will need to hire
additional senior executives and qualified scientific, commercial, regulatory,
sales, quality assurance and control and administrative personnel as we
continue to expand our commercial activities. We may not be able to attract and
retain qualified personnel on acceptable terms given the competition for such
personnel among companies that provide arrhythmia monitoring solutions. We have
offices in Pennsylvania, California, Florida, Georgia and Minnesota.
Competition for personnel with arrhythmia monitoring experience in each of
those areas is intense. If we fail to identify, attract, retain and motivate
these highly skilled personnel, or if we lose current employees, we may be
unable to continue our business operations.
Our business operations could be significantly disrupted if we fail to
properly integrate our management team.
Our Chief Executive Officer
and Chief Financial Officer recently joined CardioNet and are being integrated
into our management team. Each of these officers will have significant
responsibility for our operations and success, but have only limited experience
with our business. If they do not smoothly and rapidly develop knowledge of our
business and integrate with our existing management, our business operations could
be significantly disrupted.
If we fail to obtain and maintain necessary FDA clearances, our
business would be harmed.
The monitors and sensors
that we manufacture and sell as part of the CardioNet System are classified as
medical devices and are subject to extensive regulation by the FDA. Further, we
maintain establishment registration with the FDA as a distributor of medical
devices. FDA regulations govern manufacturing, labeling, promotion,
distribution, importing, exporting, shipping and sale of these devices.
The CardioNet System,
including our C3 monitor, and our arrhythmia detection algorithms have 510(k) clearance
status from the FDA. Modifications to the CardioNet System or our algorithms
that could significantly affect safety or effectiveness, or that could
constitute a significant change in intended use, would require a new clearance
from the FDA. If in the future we make changes to the CardioNet System or our
algorithms, the FDA could determine that such modifications require new FDA clearance,
and we may not be able to obtain such FDA clearances in a timely fashion or at
all.
We are subject to continuing
regulation by the FDA, including quality regulations applicable to the
manufacture of the CardioNet System and various reporting regulations and
regulations that govern the promotion and advertising of medical devices. The
FDA could find that we have failed to comply with one of these requirements,
which could result in a wide variety of enforcement actions, ranging from a
warning letter to one or more severe sanctions, including the following:
·
fines, injunctions and civil penalties;
·
recall or seizure of the CardioNet System;
·
operating restrictions, partial suspension or
total shutdown of production;
·
refusal to grant 510(k) clearance of new
components or algorithms;
·
withdrawing 510(k) clearance already
granted to one or more of our existing components or algorithms; and
·
criminal prosecution.
Any of these enforcement
actions could be costly and significantly harm our business, financial
condition and results of operations.
16
Enforcement of federal and state laws regarding privacy and security of
patient information may adversely affect our business, financial condition or
operations.
The use and disclosure of
certain health care information by health care providers and their business
associates have come under increasing public scrutiny. Recent federal standards
under the Health Insurance Portability and Accountability Act of 1996, or
HIPAA, establish rules concerning how individually-identifiable health
information may be used, disclosed and protected. Historically, state law has
governed confidentiality issues, and HIPAA preserves these laws to the extent
they are more protective of a patients privacy or provide the patient with
more access to his or her health information. As a result of the implementation
of the HIPAA regulations, many states are considering revisions to their
existing laws and regulations that may or may not be more stringent or
burdensome than the federal HIPAA provisions. We must operate our business in a
manner that complies with all applicable laws, both federal and state, and that
does not jeopardize the ability of our customers to comply with all applicable
laws. We believe that our operations are consistent with these legal standards.
Nevertheless, these laws and regulations present risks for health care
providers and their business associates that provide services to patients in
multiple states. Because these laws and regulations are recent, and few have
been interpreted by government regulators or courts, our interpretations of
these laws and regulations may be incorrect. If a challenge to our activities
is successful, it could have an adverse effect on our operations, may require
us to forego relationships with customers in certain states and may restrict
the territory available to us to expand our business. In addition, even if our
interpretations of HIPAA and other federal and state laws and regulations are
correct, we could be held liable for unauthorized uses or disclosures of
patient information as a result of inadequate systems and controls to protect
this information or as a result of the theft of information by unauthorized
computer programmers who penetrate our network security. Enforcement of these
laws against us could have a material adverse effect on our business, financial
condition and results of operations.
We may be subject, directly or indirectly, to federal and state health
care fraud and abuse laws and regulations and, if we are unable to fully comply
with such laws, could face substantial penalties.
Our operations may be
directly or indirectly affected by various broad state and federal health care
fraud and abuse laws, including the Federal Healthcare Programs Anti-Kickback
Statute, which prohibits any person from knowingly and willfully offering,
paying, soliciting or receiving remuneration, directly or indirectly, to induce
or reward either the referral of an individual for an item or service, or the
ordering, furnishing or arranging for an item or service, for which payment may
be made under federal health care programs, such as the Medicare and Medicaid
programs. For some of our services, we directly bill physicians for our
services, who in turn bill payors. Although we believe such payments to be
proper and in compliance with laws and regulations, we may be subject to claims
that we are in violation of these laws and regulations. If our past or present
operations are found to be in violation of these laws, we or our officers may
be subject to civil or criminal penalties, including large monetary penalties,
damages, fines, imprisonment and exclusion from Medicare and Medicaid program
participation. If enforcement action were to occur, our business and results of
operations could be adversely affected.
The operation of our call centers and monitoring facilities is subject
to rules and regulations governing Independent Diagnostic Testing
Facilities; failure to comply with these rules could prevent us from
receiving reimbursement from Medicare and some commercial payors.
We have call centers and
monitoring facilities in Pennsylvania, Georgia, Florida, and Minnesota that
analyze the data obtained from arrhythmia monitors and report the results to
physicians. In order for us to receive reimbursement from Medicare and some
commercial payors, we must have a call center certified as an Independent
Diagnostic Testing Facility, or IDTF. Certification as an IDTF requires that we
follow strict regulations governing how the center operates, such as
requirements regarding the experience and certifications of the technicians who
review data transmitted from our monitors. These rules and regulations
vary from location to location and are subject to change. If they change, we
may have to change the operating procedures at our monitoring facilities and
call centers, which could increase our costs significantly. If we fail to
obtain and maintain IDTF certification, our services may no longer be
reimbursed by Medicare and some commercial payors, which could have a material
adverse impact on our business.
We may be subject to federal and state false claims laws which impose
substantial penalties.
Many of the physicians and
patients who use our services file claims for reimbursement with government
programs such as Medicare and Medicaid. As a result, we may be subject to the
federal False Claims Act if we knowingly cause the filing of false claims.
Violations may result in substantial civil penalties, including treble
17
damages. The federal False Claims Act also
contains whistleblower or qui tam provisions that allow private individuals
to bring actions on behalf of the government alleging that the defendant has
defrauded the government. In recent years, the number of suits brought in the
medical industry by private individuals has increased dramatically. Various
states have enacted laws modeled after the federal False Claims Act, including qui
tam provisions, and some of these laws apply to claims filed with commercial
insurers.
We are unable to predict
whether we could be subject to actions under the federal False Claims Act, or
the impact of such actions. However, the costs of defending claims under the
False Claims Act, as well as sanctions imposed under the False Claims Act,
could significantly affect our financial performance.
Changes in the regulatory environment may constrain or require us to
restructure our operations, which may harm our revenues and operating results.
Health care laws and
regulations change frequently and may change significantly in the future. We
may not be able to adapt our operations to address every new regulation, and
new regulations may adversely affect our business. We cannot provide assurance
that a review of our business by courts or regulatory authorities would not
result in a determination that adversely affects our revenues and operating
results, or that the health care regulatory environment will not change in a
way that restricts our operations. In addition, as a result of the focus on
health care reform in connection with the 2008 presidential election, there is
risk that Congress may implement changes in laws and regulations governing
health care service providers, including measures to control costs, or reductions
in reimbursement levels, which may adversely affect our business and results of
operations.
Changes in the health care industry or tort reform could reduce the
number of arrhythmia monitoring solutions ordered by physicians, which could
result in a decline in the demand for our solutions, pricing pressure and
decreased revenues.
Changes in the health care
industry directed at controlling health care costs or perceived
over-utilization of arrhythmia monitoring solutions could reduce the volume of solutions
ordered by physicians. If more health care cost controls are broadly instituted
throughout the health care industry, the volume of cardiac monitoring solutions
could decrease, resulting in pricing pressure and declining demand for our
services, which could harm our operating results. In addition, it has been
suggested that some physicians order arrhythmia monitoring solutions even when
the services may have limited clinical utility in large part to establish a
record for defense in the event of a claim of medical malpractice against the
physician. Legal changes making it more difficult to bring medical malpractice
cases, known as tort reform, could reduce the amount of our services prescribed
as physicians respond to reduced risks of litigation, which could harm our
operating results.
A write-off of the value of our goodwill or intangible assets could
adversely affect our results of operations.
As of March 31, 2008,
we had $46.0 million of goodwill and $2.6 million of intangible assets, most of
which resulted from acquisition of PDSHeart. Current accounting rules require
that goodwill and certain intangible assets be assessed for impairment using
fair value measurement techniques. If the carrying amount of a reporting unit
exceeds its fair value, then a goodwill impairment test is performed to measure
the amount of the impairment loss, if any. The goodwill impairment test
compares the implied fair value of the reporting units goodwill with the
carrying amount of that goodwill. Determining the fair value of the implied
goodwill is judgmental in nature and often involves the use of significant
estimates and assumptions. Any determination requiring the write-off of a
significant portion of goodwill or intangible assets could have a material
adverse effect on the market price of our common stock, and our business,
financial condition and results of operations.
Risks
related to the securities market and investment in our common stock
Our quarterly operating results and stock price may be volatile or may
decline regardless of our operating performance.
The market price for our
common stock has been and is likely to continue to be volatile and may
fluctuate significantly in response to a number of factors, most of which we
cannot control, including:
·
changes in reimbursement rates or policies by
payors;
18
·
adoption of the CardioNet System by
physicians;
·
changes in Medicare rules or
regulations;
·
the development of increased compensation for
arrhythmia monitoring solutions;
·
price and volume fluctuations in the overall
stock market;
·
changes in operating performance and stock
market valuations of other early stage companies generally;
·
the seasonal nature of our revenues, which
have typically been moderately lower during summer months, which we believe may
be due to physician and patient vacation schedules and patient reluctance to
initiate cardiac monitoring during months when patients are more likely to be
more active;
·
the financial projections we may provide to
the public, any changes in these projections or our failure to meet these
projections;
·
changes in financial estimates by any
securities analysts who follow our common stock, our failure to meet these
estimates or failure of those analysts to initiate or maintain coverage of our
common stock;
·
ratings downgrades by any securities analysts
who follow our common stock;
·
the publics response to press releases or
other public announcements by us or third parties, including our filings with
the Securities and Exchange Commission, or SEC, and announcements relating to
payor reimbursement decisions, product development, litigation and intellectual
property impacting us or our business;
·
market conditions or trends in our industry
or the economy as a whole;
·
the development and sustainability of an
active trading market for our common stock;
·
future sales of our common stock by our
officers, directors and significant stockholders;
·
other events or factors, including those resulting
from war, incidents of terrorism, natural disasters or responses to these
events; and
·
changes in accounting principles.
In addition, the stock
markets, and in particular the Nasdaq Global Market, have experienced extreme
price and volume fluctuations that have affected and continue to affect the
market prices of equity securities of many health care companies. Stock prices
of many health care companies have fluctuated in a manner unrelated or
disproportionate to the operating performance of those companies. In the past,
stockholders have instituted securities class action litigation following
periods of market volatility. If we were involved in securities litigation, we
could incur substantial costs, and our resources and the attention of management
could be diverted from our business.
Future sales of our common stock or securities convertible into our
common stock may depress our stock price.
Sales of a substantial
number of shares of our common stock or securities convertible into our common
stock in the public market could occur at any time. These sales, or the
perception in the market that the holders of a large number of shares intend to
sell shares, could reduce the market price of our common stock. As of March 31,
2008, we had 23,065,145 outstanding shares of common stock. Of these,
approximately 18,445,551 shares of common stock are subject to lock-up
agreements that are in force through and including September 14, 2008.
Substantially all of the shares of our common stock subject to lock-up
agreements may be sold upon expiration of such agreements. In addition, we have
outstanding warrants to purchase up to 6,250 shares of our common stock
that, if exercised, would result in these additional shares becoming available
for sale upon expiration of the lock-up agreements.
19
Effective February 15,
2008, the SEC adopted revisions to Rule 144. Under the newly adopted
revisions:
·
the holding period for restricted shares of
our common stock has been reduced to six months under specified circumstances;
·
the restrictions on the sale of restricted
shares of our common stock held by affiliates and non-affiliates of ours has
been reduced; and
·
certain other restrictions on resale of the
shares of our common stock under Rule 144 were modified to make it easier
for our stockholders under specified circumstances to sell their shares upon
the expiration of the lock-up agreements beginning 180 days after the date
of the final prospectus relating to our initial public offering.
Based on the number of
shares outstanding as of March 31, 2008, holders of up to approximately
14,016,792 shares of common stock (including shares of our common stock
issuable upon the exercise of a warrant to purchase up to 6,250 shares of our
common stock) have rights, subject to some conditions, to require us to file
registration statements covering their shares or to include their shares in
registration statements that we may file for ourselves or other stockholders.
These rights will terminate on March 25, 2011, or for any particular
holder with registration rights who holds less than one percent of our
outstanding capital stock, at any time when all securities held by that
stockholder that are subject to registration rights may be sold pursuant to Rule 144
under the Securities Act of 1933, as amended, or the Securities Act, within a
single 90 day period. We have also registered all shares of common stock
that we may issue under our equity compensation plans. These shares can be freely
sold in the public market upon issuance, subject to the lock-up agreements
described above.
We agreed, subject to
various terms and conditions, to register on or prior to June 23, 2008 the
7,680,902 shares of our common stock that were issued at the closing of
our initial public offering upon conversion of our mandatorily redeemable
convertible preferred stock, and use commercially reasonable best efforts to
cause the registration statement to become effective prior to September 21,
2008. The registration statement of which this prospectus forms a part, once
effective, will register the offer and sale of these shares. Once registered,
subject to any lock-up agreements or other restrictions, these shares will be
freely tradable. If we fail to register these shares when and as required, we
will be required to pay liquidated damages at a rate of 0.5% of the original
purchase price of the mandatorily redeemable convertible preferred stock, plus
accrued and unpaid dividends, for the initial failure and 1.0% of the original
purchase price of the mandatorily redeemable convertible preferred stock, plus
accrued and unpaid dividends, for each 30-day period thereafter that the
failure goes uncured. We intend to comply with our obligations relating to such
registration.
If a large number of our
shares of our common stock or securities convertible into our common stock are
sold in the public market after they become eligible for sale, the sales could
reduce the trading price of our common stock and impede our ability to raise
future capital.
Anti-takeover provisions in our charter documents and Delaware law
might deter acquisition bids for us that our stockholders might consider
favorable.
Our amended and restated
certificate of incorporation and bylaws contain provisions that may make the
acquisition of our company more difficult without the approval of our board of
directors. These provisions:
·
establish a classified board of directors so
that not all members of our board are elected at one time;
·
authorize the issuance of undesignated
preferred stock, the terms of which may be established and shares of which may
be issued without stockholder approval, and which may include rights superior
to the rights of the holders of common stock;
·
prohibit stockholder action by written
consent, which requires all stockholder actions to be taken at a meeting of our
stockholders;
·
provide that the board of directors is
expressly authorized to make, alter, or repeal our bylaws; and
20
·
establish advance notice requirements for
nominations for elections to our board or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
In addition, because we are
incorporated in Delaware, we are subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits
stockholders owning in excess of 15% of our outstanding voting stock from
merging or combining with us. These anti-takeover provisions and other
provisions under Delaware law could discourage, delay or prevent a transaction
involving a change of control of our company, even if doing so would benefit
our stockholders. These provisions could also discourage proxy contests and
make it more difficult for our stockholders to elect directors of their
choosing and cause us to take other corporate actions such stockholders desire.
Our existing principal stockholders, executive officers and directors
have substantial control over us, which may prevent our stockholders from
influencing significant corporate decisions and may harm the market price of
our common stock.
Including stock options that
are exercisable within 60 days of March 31, 2008, our existing
principal stockholders, executive officers and directors, together with their
affiliates, beneficially owned, in the aggregate, approximately 28.2% of our
outstanding common stock. These stockholders may have interests that conflict
with other stockholders and, if acting together, have the ability to determine
the outcome of matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation or sale of
all or substantially all of our assets. In addition, these stockholders, acting
together, may have the ability to control our management and affairs.
Accordingly, this concentration of ownership may harm the market price of our
common stock by:
·
delaying, deferring or preventing a change of
control;
·
impeding a merger, consolidation, takeover or
other business combination involving us; or
·
discouraging a potential acquirer from making
a tender offer or otherwise attempting to obtain control of us.
We do not expect to pay any cash dividends for the foreseeable future.
The continued expansion of
our business may require substantial funding. Accordingly, we do not anticipate
that we will pay any cash dividends on shares of our common stock for the
foreseeable future. Even if we were not prohibited from paying dividends, any
determination to do so in the future would be at the discretion of our board of
directors and will depend upon our results of operations, financial condition,
contractual restrictions, restrictions imposed by applicable law and other
factors our board of directors deems relevant. Accordingly, realization of a
gain on your investment will depend on the appreciation of the price of our
common stock, which may never occur. Investors seeking cash dividends in the
foreseeable future should not purchase our common stock.
FORWARD-LOOKING
STATEMENTS
This prospectus and the
documents incorporated herein by reference contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements relate to future events or to our future financial performance,
and involve known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance, or achievements to
be materially different from any future results, levels of activity,
performance or achievements expressed or implied by these forward-looking
statements. In some cases, you can identify forward-looking statements by the
use of words such as may, could, expect, intend, plan, seek, anticipate,
believe, estimate, predict, potential, continue, or the negative of
these terms or other comparable terminology. You should not place undue
reliance on forward-looking statements, since they involve known and unknown
risks, uncertainties and other factors which are, in some cases, beyond our
control and which could materially affect actual results, levels of activity,
performance or achievements. These risks, uncertainties and other factors
include, but are not limited to, those described under Risk Factors above and
in any applicable prospectus supplement and any documents incorporated by
reference herein or therein.
21
In addition, past financial
or operating performance is not necessarily a reliable indicator of future
performance and you should not use our historical performance to anticipate
results or future period trends. We can give no assurances that any of the
events anticipated by the forward-looking statements will occur or, if any of
them do, what impact they will have on our results of operations and financial
condition. Except as required by law, we undertake no obligation to publicly
revise our forward-looking statements to reflect events or circumstances that
arise after the date of this prospectus or any applicable prospectus supplement
or the date of documents incorporated herein or therein that include
forward-looking statements.
22
USE OF PROCEEDS
We will not receive any proceeds from the sale of
shares of our common stock by the selling stockholders in this offering.
PRICE RANGE
OF COMMON STOCK
Our
common stock has been traded on the Nasdaq Global Market under the symbol
BEAT since March 19, 2008. Prior to that time, there was no public market
for the common stock. The following table sets forth the range of high and low
sale prices for the common stock for each completed fiscal quarter since March 19,
2008.
2008
|
|
High
|
|
Low
|
|
First Quarter (from March 19)
|
|
$
|
18.68
|
|
$
|
17.22
|
|
Second Quarter (through June 20)
|
|
$
|
30.40
|
|
$
|
17.01
|
|
On
June 20, 2008, the last reported sale price of our common stock on the
Nasdaq Global Market was $30.11 per share. As of June 20, 2008, we had
approximately 272 holders of record, including multiple beneficial holders at
depositories, banks and brokers included as a single holder in the single
street name of each respective depository, bank or broker.
DIVIDEND
POLICY
We have never declared or paid any cash dividends on
our capital stock. We currently intend to retain all available funds and any
future earnings to support our operations and finance the growth and
development of our business. We do not intend to pay cash dividends on our
common stock for the foreseeable future. Any future determination related to dividend
policy will be made at the discretion of our board of directors.
23
CAPITALIZATION
The following table sets forth our capitalization as
of March 31, 2008.
You
should read the information in this table together with our consolidated
financial statements and accompanying notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere
in this prospectus.
|
|
As of March 31, 2008
|
|
|
|
Actual
|
|
|
|
(unaudited)
|
|
|
|
(in thousands, except
|
|
|
|
share
|
|
|
|
and per share data)
|
|
|
|
|
|
Debt
obligations:
|
|
|
|
Note payable to shareholder (net of
discount)
|
|
$
|
|
|
Long term debt, including current portion
|
|
2,872
|
|
|
|
|
|
Common stock: 200,000,000 shares
authorized, 22,985,279 shares issued and outstanding; $0.001 par value
|
|
23
|
|
Preferred stock: 10,000,000 shares
authorized, 0 shares issued and outstanding; $0.001 par value
|
|
0
|
|
Additional paid-in capital
|
|
217,388
|
|
Deferred compensation
|
|
|
|
Accumulated deficit
|
|
(82,060
|
)
|
|
|
|
|
Total
shareholders equity (deficit)
|
|
135,351
|
|
|
|
|
|
Total
capitalization
|
|
$
|
138,223
|
|
24
The number of shares of common stock outstanding as
of March 31, 2008 includes 79,866 unvested shares held by employees and
excludes:
·
1,704,804
shares of common stock issuable upon the exercise of outstanding options under
our 2003 Equity Incentive Plan as of March 31, 2008 having a weighted
average exercise price of $7.58 per share;
·
533,063 shares
of common stock reserved for future issuance under our 2008 Equity Incentive
Plan, 142,500 shares of common stock reserved for future issuance under
our 2008 Non-Employee Directors Stock Option Plan and 238,000 shares of
common stock reserved for future issuance under our 2008 Employee Stock
Purchase Plan; and
·
6,250 shares of
common stock issuable upon the exercise of an outstanding warrant having an
exercise price of $2.94 per share.
25
UNAUDITED
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The
following unaudited pro forma consolidated statements of operations for the
year ended December 31, 2007 are based on the historical statements of
operations of CardioNet, Inc. and PDSHeart, Inc. giving effect to our
acquisition of PDSHeart as if the acquisition had occurred on January 1,
2007.
The
unaudited pro forma consolidated statements of operations are based on
estimates and assumptions which are preliminary and subject to change, as set
forth in the related notes to such statements. The unaudited pro forma
consolidated financial statements are presented for illustrative purposes only
and are not necessarily indicative of the combined results of operations to be
expected in any future period or the results that actually would have been
realized had the entities been a single entity during these periods. This
information should be read in conjunction with the historical financial
statements and related notes of CardioNet and PDSHeart included in this
prospectus, and in conjunction with the accompanying notes to these unaudited
pro forma consolidated statements of operations.
26
CardioNet, Inc.
Unaudited Pro Forma Consolidated Statement of Operations
Year ended December 31, 2007
(in thousands, except share and per share data)
|
|
Twelve Months
Consolidated
CardioNet
|
|
January 1 to
March 7
PDSHeart
|
|
Notes
|
|
Pro Forma
Adjustments
|
|
Pro Forma
Consolidated
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenues
|
|
$
|
72,357
|
|
$
|
4,055
|
|
|
|
$
|
|
|
$
|
76,412
|
|
Other revenues
|
|
635
|
|
14
|
|
|
|
|
|
649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
72,992
|
|
4,069
|
|
|
|
|
|
77,061
|
|
Cost of revenues
|
|
25,526
|
|
(1,646
|
)
|
|
|
|
|
27,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
47,466
|
|
2,423
|
|
|
|
|
|
49,889
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
3,782
|
|
|
|
|
|
|
|
3,782
|
|
General and administrative
|
|
26,675
|
|
1,128
|
|
(a
|
)
|
(88
|
)
|
27,715
|
|
Sales and marketing
|
|
15,968
|
|
1,098
|
|
(b
|
)
|
(36
|
)
|
17,030
|
|
Amortization
|
|
799
|
|
32
|
|
(c
|
)
|
154
|
|
985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
47,224
|
|
2,258
|
|
|
|
30
|
|
49,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
242
|
|
165
|
|
|
|
(30
|
)
|
377
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
1,622
|
|
5
|
|
|
|
|
|
1,627
|
|
Interest expense
|
|
(2,222
|
)
|
(122
|
)
|
(d
|
)
|
80
|
|
(2,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
(600
|
)
|
(117
|
)
|
|
|
80
|
|
(637
|
)
|
Income tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
(358
|
)
|
48
|
|
|
|
50
|
|
(260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on and accretion of mandatorily
redeemable convertible preferred stock
|
|
(8,346
|
)
|
|
|
|
|
|
|
(8,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$
|
(8,704
|
)
|
$
|
48
|
|
|
|
$
|
50
|
|
$
|
(8,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss available to
common shareholders per share
|
|
$
|
(2.89
|
)
|
|
|
|
|
|
|
$
|
(2.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used to compute basic and diluted
net loss available to common shareholders per share
|
|
3,011,699
|
|
|
|
|
|
|
|
3,011,699
|
|
27
CardioNet, Inc.
Notes to Unaudited Pro Forma Consolidated Statements of Operations
Basis of Pro Forma Presentations
On
March 8, 2007, we acquired PDSHeart, Inc. for an aggregate purchase
price of $51.6 million. The $51.6 million purchase price was
comprised of $44.3 million in cash at closing, $5.2 million in
assumed debt, $1.4 million in transaction expenses and the assumption of a
$0.7 million liability related to payments due to certain key employees of
PDSHeart on March 8, 2008. Approximately $1.5 million of the assumed
debt was satisfied through the issuance of 1,456 shares of our mandatorily
redeemable convertible preferred stock at an original issue price per share of
$1,000. In addition to the $51.6 million, we agreed to pay PDSHeart
shareholders $5.0 million of contingent consideration in the event of a
qualifying liquidation event, including a public offering or acquisition. Our
initial public offering was consummated on March 25, 2008 and,
accordingly, the purchase price for the PDSHeart acquisition has been adjusted
to $56.6 million to reflect this payment.
The
unaudited pro forma consolidated statements of operations are based on the
historical financial statements of the Company and PDSHeart after giving effect
to our acquisition of PDSHeart, as if it occurred on January 1, 2007.
The
pro forma consolidated statements of operations do not give effect to any
restructuring or integration costs or any potential cost savings or other
operating efficiencies that could result from the acquisition.
The
effects of the acquisition have been presented using the purchase method of
accounting under Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations
. The total
purchase price of the acquisition has been allocated to assets and liabilities
based on their estimated fair values.
Under
the purchase method of accounting, the total purchase price is allocated to
tangible and identifiable intangible assets acquired and liabilities assumed
based on their fair values. The following is a summary of our purchase price
allocation (in thousands):
Aggregate purchase price consideration
|
|
$
|
55,180
|
|
Acquisition related costs
|
|
1,415
|
|
|
|
|
|
Total purchase price
|
|
$
|
56,595
|
|
|
|
|
|
Net tangible assets
|
|
$
|
7,334
|
|
Other accruals
|
|
(344
|
)
|
Identifiable intangible assets
|
|
|
|
Trade Name
|
|
1,810
|
|
Customer Relationships
|
|
1,551
|
|
Non Compete Agreements
|
|
245
|
|
Goodwill
|
|
45,999
|
|
|
|
|
|
Total allocated purchase price
|
|
$
|
56,595
|
|
28
Pro Forma Adjustments
The
following table summarizes the pro forma adjustments for the respective periods
presented (in thousands):
|
|
Year Ended
December 31, 2007
|
|
(a) Elimination of executive salary
|
|
$
|
88
|
|
(b) Elimination
of marketing salary
|
|
36
|
|
(c) Additional
amortization expense
|
|
(154
|
)
|
(d) Reduction
of interest expense
|
|
80
|
|
|
|
|
|
Net reduction in net loss
|
|
$
|
50
|
|
(a) Reflects
the elimination of salary paid to PDSHearts Chief Executive Officer whose
employment was terminated in connection with the acquisition.
(b) Reflects
the elimination of salary paid to PDSHearts Vice President of Marketing whose
employment was terminated in connection with the acquisition.
(c) Reflects
the adjustment required to increase amortization expense related to the
acquisition of PDSHeart. The following table summarizes the intangible assets
acquired and the estimated useful lives ($ in thousands):
|
|
Amount
|
|
Useful
Life
|
|
Annual
Amortization
|
|
Trade Name
|
|
$
|
1,810
|
|
3.0
|
|
$
|
603
|
|
Customer Relationships
|
|
1,551
|
|
6.0
|
|
259
|
|
Non Compete Agreements
|
|
245
|
|
2.0
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,606
|
|
|
|
$
|
985
|
|
(d) Adjustment
reflects the reduction of interest expense related to the repayment of
$5.0 million of debt assumed in the acquisition. The adjustment was
calculated using the average interest rate on the assumed debt of 8.9% for both
periods. For the period ended December 31, 2007, the adjustment represents
66 days of interest expense.
29
SELECTED
CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be
read together with our consolidated financial statements and notes and Managements
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this prospectus. The selected consolidated financial
data as of and for the years ended December 31, 2005, 2006 and 2007 are
derived from our consolidated financial statements, which are included
elsewhere in this prospectus. The selected consolidated financial data as of
and for the years ended December 31, 2003 and 2004 are derived from our
audited consolidated financial statements, which are not included in this
prospectus. The selected consolidated financial data for the three months ended
March 31, 2007 and 2008 and as of March 31, 2008 have been derived
from our unaudited consolidated financial statements, which are included
elsewhere in this prospectus. We have prepared the unaudited financial
information set forth below on the same basis as our audited consolidated
financial statements and have included all adjustments, consisting only of
normal recurring adjustments, that we consider necessary for a fair
presentation of our financial position and operating results for such periods.
The pro forma basic net income per share data are unaudited and give effect to
the conversion into common stock of all outstanding shares of our preferred
stock for the periods indicated. The interim results set forth below are not
necessarily indicative of results for future periods.
|
|
Year ended December 31,
|
|
Three months ended
March 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
(in thousands, except share and per share data)
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenues
|
|
$
|
7,640
|
|
$
|
20,956
|
|
$
|
29,467
|
|
$
|
33,019
|
|
$
|
72,357
|
|
$
|
10,957
|
|
$
|
25,248
|
|
Other revenues
|
|
283
|
|
1,275
|
|
1,471
|
|
904
|
|
635
|
|
143
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
7,923
|
|
22,231
|
|
30,938
|
|
33,923
|
|
72,992
|
|
11,100
|
|
25,463
|
|
Cost of revenues
|
|
5,664
|
|
16,971
|
|
16,963
|
|
12,701
|
|
25,526
|
|
3,790
|
|
9,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
2,259
|
|
5,260
|
|
13,975
|
|
21,222
|
|
47,466
|
|
7,310
|
|
15,944
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
4,438
|
|
2,412
|
|
3,361
|
|
3,631
|
|
3,782
|
|
990
|
|
1,141
|
|
General and administrative
|
|
7,020
|
|
15,252
|
|
13,853
|
|
15,631
|
|
27,474
|
|
5,201
|
|
9,066
|
|
Sales and marketing
|
|
3,527
|
|
7,695
|
|
6,456
|
|
6,448
|
|
15,968
|
|
3,320
|
|
5,115
|
|
Integration, restructuring and other
nonrecurring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
14,985
|
|
25,359
|
|
23,670
|
|
25,710
|
|
47,224
|
|
9,511
|
|
16,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(12,726
|
)
|
(20,099
|
)
|
(9,695
|
)
|
(4,488
|
)
|
242
|
|
(2,201
|
)
|
(684
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
120
|
|
141
|
|
97
|
|
114
|
|
1,622
|
|
223
|
|
178
|
|
Interest expense
|
|
(74
|
)
|
(989
|
)
|
(1,865
|
)
|
(3,271
|
)
|
(2,222
|
)
|
(1,176
|
)
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
46
|
|
(848
|
)
|
(1,768
|
)
|
(3,157
|
)
|
(600
|
)
|
(953
|
)
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from Income Taxes
|
|
$
|
(12,680
|
)
|
$
|
(20,947
|
)
|
$
|
(11,463
|
)
|
$
|
(7,645
|
)
|
$
|
(358
|
)
|
$
|
(3,154
|
)
|
$
|
(572
|
)
|
Income Tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(12,680
|
)
|
$
|
(20,947
|
)
|
$
|
(11,463
|
)
|
$
|
(7,645
|
)
|
$
|
(358
|
)
|
$
|
(3,154
|
)
|
$
|
(340
|
)
|
Dividends on and accretion of mandatorily
redeemable convertible preferred stock
|
|
|
|
|
|
|
|
|
|
(8,346
|
)
|
(482
|
)
|
(2,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common shares
|
|
$
|
(12,680
|
)
|
$
|
(20,947
|
)
|
$
|
(11,463
|
)
|
$
|
(7,645
|
)
|
$
|
(8,704
|
)
|
$
|
(3,636
|
)
|
$
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(5.23
|
)
|
$
|
(7.33
|
)
|
$
|
(4.04
|
)
|
$
|
(2.63
|
)
|
$
|
(2.89
|
)
|
$
|
(1.22
|
)
|
$
|
(0.63
|
)
|
Pro forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.52
|
)
|
|
|
|
|
|
Shares used to compute net loss per
share(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
2,423,072
|
|
2,856,072
|
|
2,837,772
|
|
2,908,360
|
|
3,011,699
|
|
2,993,061
|
|
4,694,561
|
|
Pro forma
|
|
|
|
|
|
|
|
|
|
16,839,493
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Please see Note 2 to our consolidated
financial statements for an explanation of the method used, the historical and
pro forma net (loss) income per share and the number of shares used in
computation of the per share amounts.
30
|
|
December 31,
|
|
March 31,
|
|
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,106
|
|
$
|
5,718
|
|
$
|
2,758
|
|
$
|
3,909
|
|
$
|
18,091
|
|
$
|
61,973
|
|
Working capital
|
|
11,862
|
|
8,666
|
|
3,648
|
|
(18,713
|
)
|
29,375
|
|
71,958
|
|
Total assets
|
|
22,151
|
|
22,802
|
|
16,451
|
|
17,170
|
|
103,040
|
|
154,766
|
|
Total debt
|
|
10,525
|
|
20,661
|
|
23,606
|
|
29,488
|
|
2,744
|
|
2,872
|
|
Total mandatorily redeemable convertible
preferred stock
|
|
|
|
|
|
|
|
|
|
115,302
|
|
|
|
Total shareholders equity (deficit)
|
|
8,000
|
|
(2,763
|
)
|
(13,660
|
)
|
(19,857
|
)
|
(26,865
|
)
|
135,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
You should
read the following discussion and analysis of our financial condition and
results of our operations in conjunction with our consolidated financial
statements and the related notes to those statements included elsewhere in this
prospectus. This discussion contains forward-looking statements reflecting our
current expectations that involve risks and uncertainties. Our actual results
and the timing of events may differ materially from those contained in these
forward-looking statements due to a number of factors, including those
discussed in the section entitled Risk Factors, and elsewhere in this
prospectus. We are on a calendar year end, and except where otherwise indicated
below, 2007 refers to the year ending December 31, 2007; 2006 refers
to the year ended December 31, 2006; and 2005 refers to the year ended December 31,
2005.
Overview
We are the leading provider of ambulatory,
continuous, real-time outpatient management solutions for monitoring relevant
and timely clinical information regarding an individuals health. We
incorporated in the state of California in March 1994, but did not
actively begin developing our product platform until April 2000. From 2000
through 2002, we devoted substantially all of our resources to developing an
integrated patient monitoring platform that incorporates a wireless data
transmission network, internally developed software, FDA-cleared algorithms and
medical devices, and a 24-hour monitoring service center.
In February 2002, we received FDA 510(k) clearance
for the first and second generation of our core CardioNet System (Mobile
Cardiac Outpatient Telemetry). We opened the CardioNet Monitoring Center in
Conshohocken, Pennsylvania in July 2002 and currently provide all of our
CardioNet System arrhythmia monitoring at that location. We established our
relationship with QUALCOMM Incorporated, which provides us its wireless
cellular data connectivity solution and data hosting and queuing services, in May 2003.
Pursuant to our agreement with QUALCOMM, we have no fixed or minimum financial
commitment. However, in the event that we fail to maintain an agreed-upon
number of active cardiac monitoring devices on the QUALCOMM network, QUALCOMM
has the right to terminate this agreement.
In November 2006, we received FDA 510(k) clearance
for our third generation product, or C3, which we have begun to incorporate as
part of our monitoring solution. We had previously received FDA 510(k) clearance
for the proprietary algorithm included in our C3 system in October 2005.
In September 2002, we were approved as an
Independent Diagnostic Testing Facility for Medicare. The local Medicare
carrier in Pennsylvania sets the terms for reimbursement of our CardioNet
System for approximately 40 million covered lives. We have also worked to
secure contracts with commercial payors. We increased the number of contracts
with commercial payors from six at year-end 2003 to 41 at year-end 2004 to 97
at year-end 2005 to 144 at year-end 2006 and to 170 at March 31, 2008.
Over this period of time, we estimate that the number of covered commercial
lives increased from six million at year-end 2003 to 32 million at
year-end 2004 to 70 million at year-end 2005 to 102 million at
year-end 2006 and to 136 million at March 31, 2008. The current
estimated total of 176 million Medicare and commercial lives for which we
had reimbursement contracts as of March 31, 2008 represents approximately
70% of the total covered lives in the United States. The majority of the
remaining covered lives are insured by a relatively small number of large
commercial insurance companies that, beginning in 2003, deemed the CardioNet
System to be experimental and investigational and do not currently reimburse
us for services provided to their beneficiaries. We believe a primary reason
for the experimental and investigational designation has been the lack of a
published peer reviewed prospective randomized clinical trial that demonstrates
the clinical efficacy of the CardioNet System. As a result, we significantly
slowed our geographic expansion in 2005 and 2006, as we awaited results of a
randomized clinical trial comparing the CardioNet System to traditional loop
event monitors.
On March 8, 2007, we acquired all of the
outstanding capital stock of PDSHeart for an aggregate purchase price of
$51.6 million. The $51.6 million purchase price was comprised of
$44.3 million in cash at closing, $5.2 million in assumed debt, $1.4 million
of transaction expenses and the assumption of a $0.7 million liability
related to payments due to certain key employees of PDSHeart on March 8,
2008. Approximately $1.5 million of the assumed debt was satisfied through
the issuance of 1,456 shares of our mandatorily redeemable convertible
preferred stock at an
32
original
issue price per share of $1,000. In addition to the $51.6 million of
consideration, the Company agreed to pay PDSHeart shareholders $5.0 million
of contingent consideration in the event of a qualifying liquidation event,
including a public offering or acquisition. The Companys initial public
offering was consummated on March 25, 2008 and, accordingly, the purchase
price for the PDSHeart acquisition has been adjusted to $56.6 million to
reflect this payment. The acquisition has been included in our consolidated
results of operations since March 8, 2007. PDSHeart, now a
wholly-owned subsidiary of CardioNet, provides event, Holter and pacemaker monitoring
services to patients in 48 states, with a concentration of sales in the
Southeast. The acquisition has broadened our geographic coverage and expanded
our service offerings to include the complete range of cardiac monitoring
services.
For our event, Holter and pacemaker monitoring
services, we have established Medicare reimbursement and we have 106 direct
contracts with commercial payors as of March 31, 2008 representing an
estimated 135 million covered lives.
In March 2007, we raised $110 million in
mandatorily redeemable convertible preferred stock to, in part, fund the
acquisition of PDSHeart.
We have undertaken an initiative to improve our
operational efficiency and future profitability in connection with our
acquisition of PDSHeart in March 2007, mainly through the integration of
operational and administrative functions. The plan, which was approved at the
time of the PDSHeart acquisition, includes the closure of a facility and the
elimination of 58 positions in the areas of sales, finance, service and
management. In connection with the plan, the Company established reserves of
$510,000 included in the purchase price allocation. Additionally, we
incurred expenses of $0.3 million of employee-related costs to integrate these
functions in the first quarter of 2008 and expect to incur an additional
$0.6 million of expenses to integrate these functions. These costs will be
expensed as incurred in accordance with the SFAS No. 146,
Accounting for Exit or Disposal Activities
.
On February 25, 2008, the Board of Directors of
the Company, subject to stockholder approval, approved a reverse stock split of
the Companys common stock at a ratio of one share for every two shares
previously held. On March 5, 2008, the stockholders of the Company
approved the reverse stock split and the reverse stock split became effective.
On March 25, 2008, the Company completed its
initial public offering generating net proceeds of approximately $46.9 million
after deducting underwriter commissions and estimated offering expenses.
Critical
Accounting Policies and Estimates
The discussion and analysis
of our financial condition and results of operations are based on our financial
statements, which we have prepared in accordance with generally accepted
accounting principles. The preparation of these financial statements requires
us to make estimates and assumptions that affect the reported amount of assets
and liabilities, revenues and expenses and related disclosures. We base our
estimates and judgments on historical experience and on various other factors
that we believe to be reasonable under the circumstances; however actual
results may differ from these estimates. We review our estimates and judgments
on an ongoing basis.
We believe that our
accounting policies and estimates are most critical to a full understanding and
evaluation of our reported financial results. Our significant accounting
policies are more fully described in Managements Discussion and Analysis of
Financial Condition and Results of Operations Critical Accounting Policies
and Estimates in our Final Prospectus filed with the United States Securities
and Exchange Commission pursuant to Rule 424(b) (File No. 333-145547)
on March 19, 2008.
Statements of Operations Overview
Revenues
Our principal source of revenues is patient revenue
from cardiac monitoring services. The amount of revenue generated is based on
the number of patients enrolled through physician prescriptions and the rates
reimbursed to us by commercial payors, physicians, patients and Medicare.
Reimbursement rates are set by the Centers for Medicare and Medicaid Services (CMS)
on a case rate basis for the Medicare program and through negotiations with
commercial payors who typically pay a daily monitoring rate. From 2002 through March 2008,
our average case rate for monitoring Medicare patients has remained relatively
stable. We expect pricing to decline over time in a manner consistent with the
introduction and penetration of a premium priced service due to competition,
introduction of new
33
technologies
and the potential addition of larger commercial payors. Since our CardioNet
System services are relatively new and the reimbursement status is evolving,
our revenues are subject to fluctuations due to increases or decreases in rates
and decisions by payors regarding reimbursement.
For the event, Holter and pacemaker monitoring
market we expect the price to be flat or declining as the new generation
technology gains wider acceptance in the market. In addition, the established
2007 Medicare rates compared to 2006 for our event monitoring services declined
by 3% to 8%, depending on the type of service, and our Holter monitoring
services declined 8%. Based on current proposed Medicare rates for 2008 through
2010, we expect this downward reimbursement trend to continue for these
services.
We believe the CardioNet System revenues will
increase as a percentage of revenues going forward as we emphasize this
service, continue our geographic expansion and achieve greater market
penetration in existing markets. We expect that the event, Holter and pacemaker
monitoring services revenues will be flat or declining in absolute terms as the
old technology is replaced and therefore, decrease as a percentage of revenues
going forward. Other revenue consists mainly of web hosting services provided
to an affiliate of a stockholder. We believe that other revenues will be flat
or declining in absolute terms and therefore, decrease as a percentage of
revenues going forward. Our revenues are seasonal, as the volume of
prescriptions tends to slow down in the summer months due to the more limited
use of our monitoring solutions as physicians and patients vacation.
Gross Profit
Gross profit consists of revenues less the cost of
revenues which includes:
·
salaries, benefits and stock-based compensation for personnel providing
various services and customer support to physicians and patients including
patient enrollment and education, monitoring services, distribution services
(scheduling, packaging and delivery of the monitors and sensors to the
patients), device repair and maintenance, and quality assurance;
·
cost of patient-related services provided by third-party subcontractors
including device transportation to and from the patient, cellular airtime charges
related to transmission of ECGs to the CardioNet Monitoring Center and cost for
in-home customer hook-ups when necessary;
·
consumable supplies sent to patients along with the durable components
of the CardioNet System;
·
depreciation on our monitors; and
·
service cost related to special project revenues.
Our gross profit margins have increased
significantly from 24% in 2004 to 45% in 2005 to 63% in 2006 to 65% in 2007.
The major reasons for the growth in our gross profit margins from 2004 to 2006
are as follows:
·
patient hook-up model shift from in-home to telephonic starting in the
first quarter of 2005 for commercial patients and completed in the first
quarter of 2006 with the conversion of Medicare patients;
·
lower device transportation costs following contract negotiations in
the first quarter of 2005 and the first quarter of 2006;
·
lower cellular airtime costs following contract negotiations in the
third quarter of 2005;
·
efficiencies at the CardioNet Monitoring Center;
·
economies of scale due to higher volume; and
·
lower depreciation.
34
For the quarter ended March 31, 2008, our gross
profit margin was 62.6%. In general, we expect gross profit margins on the
CardioNet System services to remain flat or increase, assuming no changes in
reimbursement rates. For our event and Holter monitoring services, we expect
gross profit margins to decrease as reimbursement rates decline as currently
proposed by CMS.
Sales and
Marketing
Sales and marketing expense consists primarily of
salaries, benefits and stock-based compensation related to account executives,
marketing personnel and contracting personnel, account executive commissions,
travel and other reimbursable expenses, and marketing programs such as trade
shows and marketing campaigns.
We did not expand geographically in 2005 or 2006
while awaiting the results of our randomized clinical trial. Our sales force
had 20 account executives at year-end 2005 and 27 account executives at December 31
2006. Following the completion of our randomized clinical trial and the
PDSHeart acquisition, we made a significant investment in sales and marketing
by increasing the number of account executives in new geographies. We had a
sales force of 73 account executives as of March 31, 2008 and expect to
have 89 account executives by December 31, 2008. We currently have account
executives covering 48 states. We also plan to increase our marketing
activities. As a result, we expect that sales and marketing expenses will
increase in absolute terms, but will remain flat as a percentage of revenues
going forward.
Research and
Development
Research and development expense consists primarily
of salaries, benefits and stock-based compensation of personnel and the cost of
subcontractors who work on the development of the hardware and software for our
next generation monitors, enhance the hardware and software of our existing
monitors and provide quality control and testing. The expenses related to the
randomized clinical trial are also included in research and development
expenses. We expect that research and development expenses will increase in
absolute terms but decrease as a percentage of revenues going forward.
General and
Administrative
General and administrative expense consists
primarily of salaries, benefits and stock based compensation related to general
and administrative personnel, professional fees primarily related to legal and
audit fees, facilities expenses and the related overhead, and bad debt expense.
We expect that general and administrative expenses will increase in absolute
terms due to the significant planned investment in infrastructure to support
our growth and the additional expenses related to becoming a publicly traded
company, including the increased cost of compliance and increased audit fees
resulting from the Sarbanes-Oxley Act. As a percentage of revenues, we expect
general and administrative expenses to decline as we grow.
Income Taxes
We have net deferred income tax assets totaling approximately
$31.2 million at the end of 2007, consisting primarily of federal and
state net operating loss and credit carryforwards. The federal and state net
operating loss carryforwards, if unused, will begin to expire in 2010. The
federal and state credit carryforwards, if unused, will expire in 2026. Due to
uncertainty regarding the ultimate realization of these net operating loss and
credit carryforwards and other deferred income tax assets, we have established
a valuation allowance for most of these assets and will recognize the benefits
only as reassessment indicates the benefits are realizable. The Company is
currently conducting an analysis to determine the timing and manner of the
utilization of the net operating loss carryforwards and will adjust our tax
rate accordingly in future quarters.
35
Non-recurring
Expenses
A competitor initiated a patent infringement lawsuit
against us in November 2004, which we defended and ultimately settled in March 2006.
Included in general and administrative expenses are legal expenses related to
this lawsuit of $0.1 million in 2004, $1.2 million in 2005 and
$0.6 million in 2006.
Results of Operations
Quarters Ended March 31,
2008 and 2007
Revenues.
Total revenues for
the quarter ended March 31, 2008 increased to $25.5 million from
$11.1 million for the quarter ended March 31, 2007, an increase of
$14.4 million, or 129.4%. This increase of $14.4 million included an
increase of $14.3 million in patient revenues, of which $3.5 million
was from the event and Holter monitoring business versus the prior year quarter
(full quarter effect in 2008, as the PDSHeart acquisition was consummated on March 8,
2007) and $10.7 million was from CardioNet System revenues. In addition,
special project revenue increased by $0.1 million due to increased pass-through
costs. Of the $10.7 million increase in CardioNet System revenues,
$3.6 million was attributed to increased patient revenues from physicians
within the geographies that we historically served and $7.1 was due to
geographic expansion.
Gross Profit.
Gross profit
increased to $15.9 million for the quarter ended March 31, 2008, or
62.6% of revenues, from $7.3 million for the quarter ended March 31,
2007, or 65.9% of revenues. The increase of $8.6 million is primarily due to
increased revenue from the CardioNet System and the full quarter effect of the
PDSHeart acquisition. As a percentage of revenues, gross profit decreased by
3.3% in the quarter ended March 31, 2008 versus the same quarter last
year, primarily due to the inclusion of an entire quarter of lower margin
PDSHeart event and Holter monitoring products and a fuel surcharge on device
shipments to and from patients.
Sales and Marketing Expense.
Sales and marketing
expenses were $5.1 million for the quarter ended March 31, 2008
compared to $3.3 million for the quarter ended March 31, 2007. The
increase of $1.8 million is due to the full quarter effect of the PDSHeart
acquisition. As a percent of total revenues, sales and marketing expenses
were 20.1% for the quarter ended March 31, 2008 compared to 29.9% for the
quarter ended March 31, 2007, a decline of 9.8% as the full quarter effect
of the PDSHeart acquisition was more than offset by higher revenue.
Research and Development Expense.
Research and
development expenses increased to $1.1 million for the quarter ended March 31,
2008 compared to $1.0 million for the quarter ended March 31, 2007.
As a percent of total revenues, research and development expenses declined to
4.5% for the quarter ended March 31, 2008 compared to 8.9% for the quarter
ended March 31, 2007, a decline of 4.4% primarily due to higher revenue.
General and Administrative
Expense.
General
and administrative expenses (including amortization) increased to
$9.1 million for the quarter ended March 31, 2008 from
$5.2 million for the quarter ended March 31, 2007. This increase of
$3.9 million, or 74.3%, was primarily due to an increase in the provision
for bad debt ($0.6 million), stock based compensation ($0.3 million),
increased legal fees ($0.7 million), increased infrastructure due to increased
growth and in preparation of becoming a public company ($1.5 million), and
amortization of intangible assets in connection with our acquisition of PDSHeart
($0.2 million). In addition, $0.7 million of this increase was
related to the PDSHeart general and administrative expenses, excluding bad debt
expense, due to the full quarter effect of the PDSHeart acquisition in 2008. As
a percent of total revenues, general and administrative expenses declined to
35.6% for the quarter ended March 31, 2008 compared to 46.9% for the
quarter ended March 31, 2007, a decrease of 11.3% as the increase in
expense was offset by the higher revenue.
Integration, Restructuring and
Other Nonrecurring Charges.
We have accrued for integration and
restructuring costs as well as $1.0 million related to the resolution of a
legal matter for the quarter ended March 31, 2008. Integration charges
relating to the PDSHeart acquisition were $0.3 million for the quarter ended March 31,
2008. Restructuring charges relating to consolidating our Finance and Human
Resources functions in Pennsylvania were $0.1 million for the quarter ended March 31,
2008. We incurred no integration, restructuring or other nonrecurring charges
in the quarter ended March 31, 2007.
In connection with the acquisition of PDSHeart, we
initiated exit plans for acquired activities that are redundant to our existing
operations. The plan includes the closure of a facility and the elimination of
58 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company established reserves of $510,000 included
in the purchase price allocation. As of March 31, 2008, no positions have
been eliminated and approximately $0.3 million of employee-related expenses
have been incurred.
36
In addition, in March 2008, we initiated
restructuring plans to consolidate our Finance and Human Resources functions in
Pennsylvania. This plan includes the elimination of seven positions in
California and is currently anticipated to be completed by September 2008.
As of March 31, 2008, no positions have been eliminated and approximately
$0.1 million of employee-related expenses have been incurred.
Total Interest Income/Expense,
Net.
Net
interest income was $0.1 million for the quarter ended March 31, 2008
compared to net interest expense of $1.0 million for the quarter ended March 31,
2007. This decrease in interest expense on a net basis is due to the payoff of
debt which occurred as a result of a preferred stock financing completed by us
in March 2007.
Income Taxes.
Our effective tax
rate was 41.4% for the quarter ended March 31, 2008. This compares
to no income tax benefit or expense for the quarter ended March 31, 2007.
The effective tax rate is based on our estimated fiscal 2008 pretax income and
does not take into account our net operating loss carryforwards and other
future income tax deductions because we are still in the process of determining
the timing and manner in which we can utilize such carryforwards and deductions
due to limitations in the Internal Revenue Code applicable to changes in
ownership of corporations. The Company has approximately $62 million in federal
net operating losses as of December 31, 2007 to offset future taxable
income expiring in various years through 2026. Following the completion
of our analysis of the availability of such carryforwards and future income tax
deductions we will adjust our tax rate accordingly in future quarters.
Net Loss.
Net loss was $0.3
million for the quarter ended March 31, 2008 compared to a net loss of
$3.2 million for the quarter ended March 31, 2007. As a percent of
total revenues, net loss was 1.0% for the quarter ended March 31, 2008
compared to a net loss of 28.4% for the quarter ended March 31, 2007.
Years Ended December 31,
2007 and 2006
Revenues.
Total revenues for
the year ended December 31, 2007 increased to $73.0 million from $33.9 million
for the year ended December 31, 2006, an increase of $39.1 million,
or 115%. This increase of $39.1 million included an increase of
$39.3 million in patient revenues, of which $17.7 million was from
the event and Holter monitoring business and $21.6 million was from
CardioNet System revenues. These increases in patient revenues were offset by a
decrease of $0.3 million in special project revenues. Of the
$21.6 million increase in CardioNet System revenues, $3.0 million was
attributed to increased patient revenues from physicians within the geographies
that we historically served, $5.4 million was due to geographic expansion
and $13.2 million was due to the acquisition of the PDSHeart sales force.
Special projects revenues decreased due to lower contractual rates.
Cost of Revenues.
Cost of revenues for
the year ended December 31, 2007 were $25.5 million compared to
$12.7 million for the year ended December 31, 2006. This increase of
$12.8 million, or 101%, is due to the acquisition of PDSHeart and higher
volume for the CardioNet system. Cost of sales was 35% of revenues in December 2007
versus 37% in December 2006. This decline is due mainly to the full period
effect of our telephonic hook-up process in 2007, which was still in transition
during 2006.
Gross Profit.
Gross profit
increased to $47.5 million for the year ended December 31, 2007, or
65% of revenues, from $21.2 million for the year ended December 31,
2006, or 63% of revenues.
Sales and Marketing Expense.
Sales and marketing
expenses were $16.0 million for the year ended December 31, 2007
compared to $6.4 million for the year ended December 31, 2006. The
increase of $9.6 million is due to increased costs from a larger sales
force which is mainly a result of the PDSHeart acquisition and the introduction
of a marketing campaign aimed at promoting our positive clinical trial results.
As a percent of total revenues, sales and marketing expenses were 22% for the
year ended December 31, 2007 compared to 19% for the year ended December 31,
2006.
37
Research and Development Expense.
Research and
development expenses increased to $3.8 million for the year ended December 31,
2007 compared to $3.6 million for the year ended December 31, 2006.
As a percent of total revenues, research and development expenses declined to
5% for the year ended December 31, 2007 compared to 11% for the year ended
December 31, 2006.
General and Administrative
Expense.
General
and administrative expenses (including amortization) increased to
$27.5 million for the year ended December 31, 2007 from
$15.6 million for the year ended December 31, 2006. This increase of
$11.9 million, or 76%, was primarily due to an increase in the provision
for bad debt ($3.9 million), stock based compensation ($0.8 million),
executive separation costs ($0.4 million), increased compensation cost for
bonuses paid to executive officers in connection with stock loans
($0.3 million), increased employee recruiting cost ($0.4 million),
and amortization of intangible assets in connection with our acquisition of
PDSHeart ($0.8 million). In addition $3.6 million of this increase
was related to the PDSHeart general and administrative expenses excluding bad
debt expense. Our provision for bad debt increased to $8.1 million from
$4.2 million, an increase of $3.9 million. Of this increase,
$1.1 million related to provisions for bad debt related to revenues from
our acquisition of PDSHeart. The remaining $2.8 million increase relates
to an increase in CardioNet System revenue and additional provisions for
uncollectible accounts. Our overall bad debt provision as a percent of patient
revenue was 11.1% and 12.4% for the year ended December 31, 2007 and 2006,
respectively. As a percent of total revenues, general and administrative
expenses declined to 38% for the year ended December 31, 2007 compared to
46% for the year ended December 31, 2006.
Total Interest Expense, Net.
Interest expense, net
decreased to $0.6 million for the year ended December 31, 2007 from
$3.2 million for the year ended December 31, 2006. This net decrease
is due to an increase in interest income received from the excess funds
generated from our private placement in March 2007, offset by an increase
in interest expense related to additional borrowings, including the value of
additional warrants and recognition of a beneficial conversion feature issued
to debtholders.
Additionally the term loan due to Guidant Investment
Corporation of $23.3 million was repaid in August 2007.
Income Taxes.
We had no income tax
benefit or expense for the year ended December 31, 2007 or for the year
ended December 31, 2006.
Net Loss.
Net loss decreased to
$0.4 million for the year ended December 31, 2007 from
$7.6 million for the year ended December 31, 2006. As a percent of
total revenues, net loss was 0% for the year ended December 31, 2007
compared to 23% for the year ended December 31, 2006.
Years Ended December 31,
2006 and 2005
Revenues.
Total revenues for
2006 increased to $33.9 million from $30.9 million in 2005, an
increase of $3.0 million, or 10%. This increase of $3.0 million
included an increase of $3.6 million in patient revenues offset by a
decrease of $0.6 million in special project revenues. Patient revenues
increased due to successful implementation of a new sales strategy and
increased penetration in existing markets, which translated to an increase in
the total patients serviced. Special project revenues decreased due to a change
in the negotiated contract rate.
Cost of Revenues.
Cost of revenues for
2006 were $12.7 million compared to $17.0 million in 2005. This
decrease of $4.3 million, or 25%, is attributable to a shift in our
patient hook-up model from in-home to telephonic, lower device transportation
costs and cellular airtime costs following contract renegotiation, and a
decrease in the number of employees providing services and customer support as
we transitioned from in-home to telephonic hookups. We decreased headcount in
our service operation responsible for monitoring patients, providing logistical
and customer support and supporting product distribution from 155 people at
year-end 2005 to 129 people at year-end 2006. As a percent of total revenues,
cost of revenues decreased to 37% in 2006 compared to 55% in 2005.
Gross Profit.
Gross profit
increased to $21.2 million in 2006, or 63% of revenues, from
$14.0 million in 2005, or 45% of revenues.
38
Sales and Marketing Expense.
Sales and marketing
expenses were $6.4 million in 2006 compared to $6.5 million in 2005.
Expenses remained relatively flat since we did not expand the sales force in
2006 as we awaited completion of the randomized clinical trial. As a percent of
total revenues, sales and marketing expenses decreased to 19% in 2006 compared
to 21% in 2005.
Research and Development Expense.
Research and
development expenses increased to $3.6 million in 2006 from
$3.4 million in 2005. This increase of $0.2 million, or 7%, was due
to continued development of the third generation device, C3. As a percent of
total revenues, research and development expenses remained consistent at 11% in
2006 and 2005.
General and Administrative
Expense.
General
and administrative expenses increased to $15.6 million in 2006 from
$13.9 million in 2005. This increase of $1.7 million, or 12%, was
primarily due to relocation expenses, consulting services related to
reimbursement and increased provision for bad debt. Headcount was held
relatively flat in 2006 versus 2005. As a percent of total revenues, general
and administrative expenses increased to 46% in 2006 compared to 45% in 2005.
Total Interest Expense, Net.
Interest expense, net
increased to $3.1 million in 2006 from $1.8 million in 2005. This
increase of $1.3 million was due to an increase in borrowings in order to
fund our operations of $0.8 million and increased accretion in debt
discount of $0.6 million.
Income Taxes.
We had no income tax
benefit or expense for the years ended December 31, 2006 or 2005. As of December 31,
2006 and 2005, we had net deferred income tax assets totaling approximately
$30.0 and $27.5 million, respectively, consisting primarily of federal and
state net operating loss carryforwards.
Net Loss.
Net loss decreased to
$7.6 million in 2006 from $11.5 million in 2005. As a percent of
total revenues, net loss was 23% in 2006 compared to 37% in 2005.
Years Ended December 31,
2005 and 2004
Revenues.
Total revenues for
2005 increased to $30.9 million from $22.2 million in 2004, an increase
of $8.7 million, or 39%. This increase of $8.7 million included an
increase of $8.5 million in patient revenues and a $0.2 million
increase in special project revenues. Patient revenues increased due to a 33%
increase in patient enrollment with no geographic expansion. Special project
revenues remained relatively flat due to negotiated contract pricing.
Cost of Revenues.
Cost of revenues for
both 2005 and 2004 were $17.0 million. Expenses remained flat as
increasing monitoring expenses were offset by decreases in patient service
delivery as we began to implement the switch from in-home to telephonic
hook-ups. We had 155 people in our service operation at December 31, 2005
monitoring patients, providing logistical and customer support and supporting
product distribution compared to 162 people at December 31, 2004. As a
percent of total revenues, cost of revenues decreased to 55% in 2005 compared
to 76% in 2004.
Gross Profit.
Gross profit
increased to $14.0 million in 2005, or 45% of revenues, from
$5.3 million in 2004, or 24% of revenues.
Sales
and Marketing Expense.
Sales and marketing expenses were
$6.5 million in 2005 compared to $7.7 million in 2004. This decrease
of $1.2 million, or 16%, was due to restructuring activities which reduced
sales and marketing personnel by 27%. This reduction of headcount was achieved
in markets which had limited reimbursement and were not providing a sufficient
level of business. As a percent of total revenues, sales and marketing expenses
decreased to 21% in 2005 compared to 35% in 2004.
Research and Development Expense.
Research and
development expenses increased to $3.4 million in 2005 from
$2.4 million in 2004. This increase of $1.0 million, or 40%, was due
to the development expenses related to our C3 device. As a percent of total
revenues, research and development expenses were 11% in both 2005 and 2004.
39
General and Administrative
Expense.
General
and administrative expenses decreased to $13.9 million in 2005 from
$15.3 million in 2004. This decrease of $1.4 million, or 9%, was
primarily due to restructuring activities which reduced support personnel by
19%. As a percent of total revenues, general and administrative expenses
decreased from 45% in 2005 compared to 69% in 2004.
Total Interest Expense, Net.
Interest expense, net
increased to $1.8 million in 2005 from $0.8 million in 2004. Of the
increase of $1.0 million, $0.6 million was due to an increase in our
borrowings to fund our operations and $0.3 million from increased
accretion in debt discount.
Income
Taxes.
We
had no income tax benefit or expense for the years ended December 31, 2006
or 2005. As of December 31, 2005 and 2004, we had net deferred income tax
assets totaling approximately $27.5 million and $22.2 million,
respectively consisting primarily of federal and state net operating loss
carryforwards.
Net loss.
Net loss decreased to
$11.5 million in 2005 as compared to $20.9 million in 2004. As a
percent of total revenues, net loss was 37% in 2005 compared to 94% in 2004.
Liquidity and Capital Resources
From our inception in 1999 through March 31,
2008, we did not generate sufficient cash flows to fund our operations and the
growth in our business. As a result, our operations have been financed
primarily through the private placement of equity securities, both long-term
and short-term debt financings, the issuance in March 2007 of our
mandatorily redeemable convertible preferred stock, in which we received net
proceeds of approximately $102 million, and our initial public offering in March 2008,
in which we received net proceeds, after underwriting discounts and offering
expenses of approximately $46.9 million. Through March 31, 2008, we
funded our business primarily through the following:
·
initial
public offering generating net proceeds of approximately $46.9 million, after
deducting underwriting commissions and estimated offering expenses;
·
issuance
of mandatorily redeemable convertible preferred stock that provided gross
proceeds of $110 million, of which $45.9 million was used to acquire
PDSHeart;
·
issuance
of preferred stock that provided gross proceeds of $53.7 million;
·
a
term loan of $23.3 million from Guidant Investment Corporation, which was
repaid on August 15, 2007; and
·
bank
debt from Silicon Valley Bank consisting of a term loan of $3.0 million,
which we repaid on April 1, 2008, and a working capital line secured by
accounts receivable of $1.9 million, which was repaid from the proceeds of
the mandatorily redeemable convertible preferred stock.
As of March 31, 2008, our principal sources of
liquidity were cash totaling $62.0 million and net accounts receivable of $25.6
million.
Cash Flows from Operating Activities
Net cash provided by (used in) operating activities
during the years ended December 31, 2005, 2006, 2007 and the three month
period ended March 31, 2008 was $(5.5) million, $(2.9) million,
$(0.2) million and $0.8 million, respectively. For the year ended December 31,
2006, cash was used in operations primarily by:
·
$7.6 million of net loss; and
·
$1.3 million increase in accounts receivable net of reserve
primarily as a result of growth in the fourth quarter.
40
These cash uses were partially offset by:
·
$2.7 million of depreciation and amortization expense;
·
$1.4 million of interest payments deferred until the maturity of a
note payable to a shareholder;
·
$0.9 million of non cash accretion of debt discount;
·
$0.6 million increase in accrued expenses primarily as a result of
additional accrued interest due to the higher debt balance; and
·
$0.3 million increase in accounts payable.
For the year ended December 31, 2007, cash was
used in operations primarily by:
·
$0.4 million of net loss;
·
$6.9 million increase in accounts receivable net of reserves
primarily as a result of growth; and
·
$2.0 million of offering expenses.
The cash uses were partially offset by:
·
$4.6 million of depreciation and amortization expense;
·
$2.3 million increase in accounts payable and accrued liabilities;
·
$0.9 million of non cash stock option expense and common stock
issued for services;
·
$0.5 million increase in deferred rent; and
·
$0.7 million of non cash accretion of debt discount.
For the three month period ended March 31,
2008, cash was provided by operations by:
·
$1.9 million of depreciation and amortization expense; and
·
$2.1 million increase in accrued expenses and accounts payable primarily
relating to amounts due the former PDSHeart stockholders as a result of our
initial public offering.
The cash provided by operations was partially offset
by:
·
$2.9 million increase in accounts receivable net of reserves primarily as a
result of growth; and
·
$0.3 million increase in prepaid expenses and other assets.
Cash Flows from Investing
Activities
Net cash used in investing activities during the
years ended December 31, 2005, 2006, 2007 and the three month period ended
March 31, 2008 was $0.6 million, $0.9 million,
$59.0 million and $4.3 million, respectively. For the year ended December 31,
2006, cash was used in investing activities primarily by:
·
$0.5 million increase in asset purchases; and
41
·
$0.3 million increase in non-device purchasing, consisting mainly
of purchases of molds and other equipment to support the development of our
third generation monitoring device.
For the year ended December 31, 2007, cash was
used in investing activities primarily by:
·
$13.0 million increase in asset purchases; and
·
$46.0 million consideration for the PDSHeart acquisition.
For the three month period ended March 31,
2008, cash was used in investing activities primarily by:
·
$1.7 million of asset purchases; and
·
$2.6 million in payments to former PDSHeart stockholders as a result of our
initial public offering.
Cash Flows from Financing Activities
Net cash provided by financing activities during the
years ended December 31, 2005, 2006 and 2007 and the three month period
ended March 31, 2008 was $3.2 million, $5.0 million,
$73.4 million and $47.4 million, respectively. For the year ended December 31,
2006, cash was provided by financing activities primarily by:
·
$5.1 million increase in debt due to securing of a
$3.0 million term loan and a $1.9 million working capital line
secured by accounts receivable from Silicon Valley Bank and the deferral of
interest payment on a loan from a stockholder (rolled into principal of loan)
amounting to $1.4 million.
For the year ended December 31, 2007, cash was
provided by financing activities primarily by:
·
$102.1 million of net proceeds from the sale of mandatorily
redeemable convertible preferred convertible stock in March 2007,
$0.4 million of proceeds from issuance of debt and $0.5 million of
proceeds from shareholder notes partially offset by $29.6 million in debt
repayment, consisting of $3.5 million of PDSHeart debt retired and
$26.1 million of existing CardioNet debt.
For the three month period ended March 31, 2008
cash was provided by financing activities primarily by:
·
$47.3 in net proceeds from our initial public offering.
We believe that our existing cash and cash
equivalent balances and revenues from our operations, will be sufficient to
meet our anticipated cash requirements for the foreseeable future.
Our future funding requirements will depend on many
factors, including:
·
the costs associated with developing, manufacturing and building our
inventory of our future monitoring solutions;
·
the costs of hiring additional personnel and investing in
infrastructure;
·
the reimbursement rates associated with our products and services;
·
actions taken by the FDA and other regulatory authorities affecting the
CardioNet System and competitive products;
·
our ability to secure contracts with additional commercial payors
providing for the reimbursement of our services;
42
·
the emergence of competing technologies and products and other adverse
market developments;
·
the costs of preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights or defending against
claims of infringement by others; and
·
the costs of investing in additional lines of business outside of
arrhythmia monitoring solutions.
To the extent that we raise additional capital by
issuing equity securities, our stockholders ownership will be diluted. In
addition, if we determine that we need to raise additional capital, such
capital may not be available on reasonable terms, or at all. If we raise
additional funds by issuing equity securities, substantial dilution to existing
stockholders would likely result. If we raise additional funds by incurring
additional debt financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial ratios that may
restrict our ability to operate our business.
Contractual Obligations and Commitments
The following table describes our long-term
contractual obligations and commitments as of March 31, 2008:
Contractual
|
|
Payments due by period
|
|
obligations
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Beyond
|
|
|
|
(in thousands)
|
|
Interest and principal payable under loan
agreements
|
|
$
|
3,045
|
|
$
|
1,258
|
|
$
|
1,187
|
|
$
|
600
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Operating lease obligations
|
|
9,410
|
|
2,104
|
|
1,801
|
|
1,717
|
|
1,558
|
|
1,164
|
|
1,066
|
|
Capital lease obligations
|
|
154
|
|
52
|
|
52
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,609
|
|
$
|
3,414
|
|
$
|
3,040
|
|
$
|
2,367
|
|
$
|
1,558
|
|
$
|
1,164
|
|
$
|
1,066
|
|
In connection with our acquisition of PDSHeart, we
assumed the obligations under three facility leases which are included in the
table above.
From time to time we may enter into contracts or
purchase orders with third parties under which we may be required to make
payments. Our payment obligations under certain agreements will depend on,
among other things, the progress of our development programs. Therefore, we are
unable at this time to estimate with certainty the future costs we will incur
under these agreements or purchase orders.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and
expands disclosures about fair value measurements. SFAS 157 applies to
other accounting pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. We are currently evaluating the requirements of SFAS 157;
however, we do not believe that its adoption will have a material effect on our
consolidated financial statements.
43
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets
and Financial Liabilities-Including an Amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 permits entities to choose fair value
measurement for many financial instruments and certain other items as of
specified election dates. Business entities will thereafter report in earnings
the unrealized gains and losses on items for which the fair value option has
been chosen. The fair value option may be applied instrument by instrument but
may not be applied to portions of instruments and is irrevocable unless a new
elections date occurs. SFAS 159 is effective for the Company beginning January 1,
2008. The Company is currently evaluating the potential impact of adoption of
SFAS 159, but does not expect that it will have a material effect on the
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)) and SFAS No. 160,
Noncontrolling
Interests In Consolidated Financial Statements, an amendment of ARB No. 51
(SFAS 160). SFAS 141(R) establishes new principles and
requirements for accounting for business combinations, including recognition
and measurement of identifiable assets acquired, goodwill acquired, liabilities
assumed, and noncontrolling financial interests. SFAS 160 requires all entities
to report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. These new standards will significantly change
the accounting for and reporting of business combination transactions and
noncontrolling (minority) interests in consolidated financial statements.
SFAS 141(R) and SFAS 160 are required to be adopted
simultaneously and are effective for fiscal years beginning on or after December 15,
2008. Earlier adoption is prohibited. The Company is currently evaluating the
potential effect of adoption of SFAS 141(R) and SFAS 160.
Off-Balance Sheet Arrangements
As of December 31, 2007, 2006 and 2005,
we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special
purpose entities, which would have been established for the purpose of
facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Related Party Transactions
For a description of our related party transactions,
see the Related Party Transactions section of this prospectus.
Quantitative and Qualitative
Disclosures about Market Risk
Our cash and cash equivalents as of March 31,
2008 consisted primarily of cash and money market funds with maturities of less
than 90 days. The primary objective of our investment activities is to
preserve our capital for the purpose of funding operations while, at the same
time, maximizing the income we receive from our investments without
significantly increasing risk. To achieve this objective, our investment policy
allows us to maintain a portfolio of cash equivalents and short term
investments in a variety of securities including money market funds and
corporate debt securities. Due to the short term nature of our investments, we
believe we have no material exposure to interest rate risk.
44
BUSINESS
Overview
We are the leading provider of ambulatory,
continuous, real-time outpatient management solutions for monitoring relevant
and timely clinical information regarding an individuals health. We have
raised over $250 million of capital and spent seven years developing a
proprietary integrated patient monitoring platform that incorporates a wireless
data transmission network, internally developed software, FDA-cleared
algorithms and medical devices, and a 24-hour digital monitoring service
center. Our initial efforts are focused on the diagnosis and monitoring of
cardiac arrhythmias, or heart rhythm disorders, with a solution that we market
as the CardioNet System.
We believe that the CardioNet Systems continuous,
heartbeat-by-heartbeat monitoring is a fundamental advancement in arrhythmia
monitoring, with the potential to transform an industry that has historically
relied on memory-constrained, intermittent digital or tape recorders, such as
event monitors and Holter monitors. Existing technologies have one or more
drawbacks including failure to provide real-time data, memory constraints,
frequent inaccurate diagnoses and an inability to monitor patient compliance
and interaction. We believe these drawbacks lead to suboptimal diagnostic
yields, adversely impacting clinical outcomes and health care costs. In a
randomized clinical trial, the CardioNet System detected clinically significant
arrhythmias nearly three times as often as traditional loop event monitors in
patients who had previously experienced negative or inconclusive Holter
monitoring.
The CardioNet System incorporates a lightweight
patient-worn sensor attached to electrodes that capture two-lead
electrocardiogram, or ECG, data measuring electrical activity of the heart and
communicates wirelessly with a compact, handheld monitor. The monitor analyzes
incoming heartbeat-by-heartbeat information from the sensor on a real-time
basis by applying proprietary algorithms designed to detect arrhythmias. When
the monitor detects an arrhythmic event, it automatically transmits the ECG to
the CardioNet Monitoring Center, even in the absence of symptoms noticed by the
patient and without patient involvement. At the CardioNet Monitoring Center,
which operates 24 hours a day and 7 days per week, experienced certified
cardiac monitoring specialists analyze the sent data, respond to urgent events
and report results in the manner prescribed by the physician. The CardioNet
System currently stores at least 96 hours of ECG data, in contrast to 10
minutes for a typical event monitor. We are in the process of upgrading our
monitors to provide expanded storage of 21 days of ECG data. The CardioNet
System employs two-way wireless communications, enabling continuous
transmission of patient data to the CardioNet Monitoring Center and permitting
physicians to remotely adjust monitoring parameters and request previous ECG
data from the memory stored in the monitor.
Since our commercial introduction of the CardioNet
System in January 2003, physicians have enrolled over 131,000 patients in
the CardioNet System. Through the end of 2007, we marketed our solution in 48
states. In addition, we have achieved reimbursement at payment levels that we
believe reflects the clinical efficacy of the CardioNet System relative to
existing technologies. We have secured direct contracts with 172 commercial
payors as of March 31, 2008. We estimate that, combined with Medicare,
this represents more than 176 million covered lives.
·
Publication of Randomized Clinical Trial
. We
completed a 300-patient randomized clinical trial finding that the CardioNet
System provided a significantly higher diagnostic yield compared to traditional
loop event monitoring, including loop event monitoring incorporating a feature
designed to automatically detect certain arrhythmias. We are using the clinical
evidence from this trial to both drive continued physician adoption of our
solution and to attempt to secure contracts with additional commercial payors.
Of the 21 targeted commercial payors, representing approximately
95 million covered lives, who had previously required proof of product
superiority evidenced by a published randomized clinical trial, we have secured
contracts with three such payors, representing over 26 million covered
lives, since publication of our trial results in March 2007.
45
·
Acquisition of PDSHeart, Inc.
On March 8,
2007, we acquired PDSHeart, Inc. for an aggregate purchase price of
$51.6 million. The $51.6 million purchase price was comprised of
$44.3 million in cash at closing, $5.2 million in assumed debt,
$1.4 million in transaction expenses and the assumption of a
$0.7 million liability related to payments due to certain key employees of
PDSHeart on March 8, 2008. Approximately $1.5 million of the assumed
debt was satisfied through the issuance of 1,456 shares of our mandatorily
redeemable convertible preferred stock at an original issue price per share of
$1,000. In addition to the $51.6 million, we agreed to pay PDSHeart
shareholders $5.0 million of contingent consideration in the event of a
qualifying liquidation event, including a public offering or acquisition. Our initial
public offering was consummated on March 25, 2008 and, accordingly, the
purchase price for the PDSHeart acquisition has been adjusted to $56.6 million
to reflect the payment. PDSHeart provides event, Holter and pacemaker
monitoring services in 48 states. Event monitoring and Holter monitoring
represented approximately 80% and 16%, respectively, of PDSHearts
$20.9 million in revenues for the year ending December 31, 2006. For
the year ended December 31, 2006, PDSHeart provided event monitoring
services to approximately 76,000 patients. We believe that the acquisition of
PDSHeart can have numerous benefits for us, including the opportunity to cross
sell into our respective customer bases and the ability to become a one stop
shop for arrhythmia monitoring services given our full spectrum of solutions,
ranging from our differentiated CardioNet System to event and Holter
monitoring. We believe that only approximately 5% of our accounts overlapped
with those of PDSHeart at the time of the acquisition, due primarily to our
complementary geographic coverage. In 2006, we derived approximately 75% of our
revenues from sales of our CardioNet System in the Northeast states, while
PDSHeart derived approximately 80% of its revenues in states outside the
Northeast. As a result, the acquisition has accelerated our market expansion
strategy by providing us with immediate access to a sales force with existing
physician relationships capable of marketing our CardioNet System in areas of
the country where it had previously not been sold. Our sales force increased
from 27 account executives at December 31, 2006 to 73 account executives
as of March 31, 2008, largely as a result of the PDSHeart acquisition. On
a consolidated basis, for the three months ended March 31, 2008, revenues
were $25.5 million.
We believe that our integrated patient monitoring
platform can be utilized for future applications in multiple markets beyond
arrhythmia monitoring. We believe that we have growth opportunities in clinical
trial monitoring, where we have developed additional FDA-cleared algorithms for
specific cardiac data required in clinical trials, and in comprehensive disease
management for congestive heart failure, diabetes and other diseases. We
believe that our technology could also be used to create instant telemetry
beds in hospitals, particularly in rural hospitals, step-down units or skilled
nursing facilities to help cope with acute nursing shortages by reducing the
number of nurses needed to oversee ECG monitoring. In addition, the significant
capital equipment costs associated with in-facility based ECG telemetry could
be avoided through the use of the CardioNet System.
Industry Overview
Overview of Cardiac Arrhythmias
An arrhythmia is categorized as a temporary or
sustained abnormal heart rhythm that is caused by a disturbance in the
electrical signals in the chambers of the heart. Proper transmission of
electrical signals to the heart is necessary to ensure effective heart function.
There are two main categories of arrhythmia: tachycardia, meaning too fast a
heartbeat, and bradycardia, meaning too slow a heartbeat.
Arrhythmias affect more than four million people in
the United States. According to the American Heart Association, arrhythmias
result in more than 780,000 hospitalizations and contribute to approximately
480,000 deaths each year. A number of factors can contribute to arrhythmias
including cardiovascular disease, high blood pressure, diabetes, smoking,
excessive consumption of alcohol or caffeine, illicit drug abuse or stress. An
arrhythmia may be a symptom of serious cardiovascular disease and, if left
undiagnosed and untreated, can lead to stroke, other serious complications or
even death. Examples of arrhythmias and their consequences include:
·
Atrial fibrillation.
The most prevalent
arrhythmia is atrial fibrillation, an arrhythmia that affects approximately
2.2 million Americans and is characterized by a rapid, irregular quivering
of the upper chambers of the heart. According to the Framingham Study published
in 2004, one in four people over the age of 40 in the United States has a
lifetime risk of developing atrial fibrillation, and the incidence of atrial
fibrillation increases with age. According to the American Heart Association,
approximately 15% to 20% of the estimated 700,000 strokes that occur annually
in the United States are attributable to atrial fibrillation and people with
atrial fibrillation are approximately five times more likely to have a stroke.
46
·
Ventricular Tachycardia.
Ventricular
tachycardia is a potentially life-threatening arrhythmia initiated in the lower
chambers of the heart. It can interfere with the ability of the heart to pump
blood and may degenerate into ventricular fibrillation requiring CPR and
defibrillation. It can occur with or without apparent heart disease.
·
Syncope.
While not an arrhythmia, syncope, or fainting,
many times results from an arrhythmia
.
It is the temporary loss of consciousness because of a sudden decline in blood
flow to the brain that may be the result of tachycardia or bradycardia. Syncope
accounts for 1% to 3% of emergency department visits and up to 6% of hospital
admissions each year in the United States.
The ability to diagnose or rule out an
arrhythmia as a symptom of a cardiac condition is important both to treat those
patients with serious cardiovascular diseases as well as to identify those
patients that may not require further medical attention.
Evolution of Traditional Arrhythmia
Monitoring Technologies
Arrhythmias may be diagnosed either in a physicians
office or other health care facility or remotely by monitoring a patients
heart rhythm. Typically, physicians will initially administer a resting ECG
that monitors the electrical impulses in a patients heart. If a physician
determines that a patient needs to be monitored for a longer period of time to
produce a diagnosis, the physician will typically prescribe an ambulatory
cardiac monitoring device, such as a Holter monitor or an event monitor.
Some physicians own their own ambulatory cardiac
monitoring devices and provide ambulatory monitoring services directly to their
patients, while other physicians outsource the services to third party
providers. In the wake of increasing legal and compliance requirements
surrounding ambulatory cardiac monitoring, including a 2003 Medicare decision
requiring 24 hour per day monitoring stations, the increasing trend is for
physicians and hospitals to outsource their monitoring needs to independent
providers.
If either the Holter monitor or event monitor are
negative or inconclusive and the physician still suspects an arrhythmia as the
cause of the symptom, the physician may decide to prescribe additional, more
expensive testing or hospitalize the patient in a telemetry unit (continuously
attended ECG monitoring). In-hospital telemetry is expensive and therefore is
only utilized selectively and for short time periods, and the monitored data is
often not reflective of real-life cardiac activity.
Holter Monitors
A Holter monitor is an ambulatory cardiac monitoring
device, first used in 1961, that is generally worn by a patient for a one or,
in rare instances, two day period in order to record continuous ECG data. After
the one or two day period, the magnetic or digital storage, or other medium
containing the data recorded by this device, is delivered by hand, mail or
internet for processing and analysis by the physician or a third party service
provider. Despite the advent of newer technologies, Holter monitoring continues
to be used today for patients whose suspected arrhythmia is believed to occur
many times during the course of a day, in which case a Holter is often
effective or adequate. However, for a patient that has an unpredictable or
intermittent arrhythmia, a Holter may not provide clinically useful information
due to the insufficient duration of the monitoring period. In addition, as a
result of the typical one to three day reporting delay and the lack of
real-time physician notification, patients may not receive timely diagnosis of
their condition. Any artifact, or noise, in the data will not be discovered
until the test is analyzed. A 2005 Frost & Sullivan study reported
that Holters have been found to be effective in diagnosing arrhythmias only 10%
of the time.
Event Monitors
Beginning in the 1980s, a new category of ambulatory
cardiac monitoring devices called event monitors emerged, with the most common
type referred to as manual-trigger loop event monitors. An event monitor
records several minutes of ECG activity at a time and then begins overwriting
the memory, a process referred to as memory
47
loop recording. When a patient feels the
symptoms of an event, he or she pushes a button to activate the recording,
which typically freezes 45 seconds of ECG data before symptom onset and records
15 seconds live following the symptom. Event monitors have limited memory,
usually less than 10 minutes, and can generally store data concerning between
one and six cardiac events. The patient must transmit the event data to the
monitoring center, typically by phone, and then erase the memory. To the extent
that the patient does not call in and transmit data concerning an event, the device
will become unable to store future event data once the device event storage is
full.
Event monitors offer certain advantages over Holters
given that they are worn over a period of up to 30 days, instead of the
one to two day Holter period. However, event monitors have significant
shortcomings. Manual-trigger loop event monitors capture only cardiac events
associated with symptoms detectable by the patient and not asymptomatic cardiac
events. In our experience, only 15% to 20% of clinically significant cardiac
events are symptomatic, meaning that the patient can feel them as they occur.
Other drawbacks of manual-trigger loop event monitors include the limited data
storage, the lack of trend data, and poor patient compliance relating to the
requirement that the patient must both trigger and transmit events.
A newer version of event monitoring devices was
introduced in 1999 called the auto-detect loop event monitor. The auto-detect
loop event monitor also records using a very short memory loop and event storage
capability, capturing several minutes of heart activity at a time before
starting over, but incorporates basic algorithms that look at fast, slow or
irregular heart rates and, in some instances, pauses to automatically detect
certain asymptomatic arrhythmias. Similar to manual-trigger loop event
monitors, the auto-detect loop event monitor requires the patient to call in
and transmit the event by reaching the physician or a technician at a physicians
office or a monitoring center and holding the cardiac event monitor up to a
telephone to transmit the event data. The latest development in auto-detect
loop event monitoring, not yet widely adopted by physicians, is referred to as
auto-detect/auto-send. Auto-detect/auto-send loop event monitors have the ability
to send captured event data to a monitoring center via cell phone, instead of
requiring patients to manually transmit event data. Patients do not have the
ability to correlate symptoms to the event via the monitor and are required to
carry a diary and make contact with the monitoring center to report symptoms.
We believe the algorithms in these monitors were not subject to the same level
of FDA scrutiny prior to marketing as the CardioNet System algorithm and
therefore have not received the same FDA clearance. These monitors still
continue to suffer from limited data storage and limited algorithm
capabilities. To our knowledge, randomized prospective peer reviewed clinical
trials have not yet been conducted to demonstrate any improvement in diagnostic
yield between the standard loop monitors and the newer auto-trigger or
auto-trigger/auto-send monitors.
Shortcomings of Traditional
Arrhythmia Monitoring
Despite major advances in cardiology with new
therapeutic drugs, such as beta blockers and statins, and new therapeutic
devices and procedures over the last several decades, there have been few
advances in ambulatory monitoring. We believe that there is a significant
opportunity for new arrhythmia monitoring solutions that exploit the
convergence of wireless, low power microelectronic and software technologies to
address the shortcomings of traditional Holter and event monitors. Existing
technologies have one or more drawbacks including inability to detect
asymptomatic events, failure to provide real-time data, memory constraints,
frequent inaccurate diagnoses and an inability to monitor patient compliance
and interaction. These drawbacks often lead to suboptimal diagnostic yields,
adversely impacting clinical outcomes and health care costs.
Our Solution
We have developed an ambulatory, continuous and
real-time arrhythmia monitoring solution that we believe represents a
significant advancement over event and Holter monitoring. The CardioNet System
incorporates a patient-worn sensor attached to leads that captures ECG data and
communicates wirelessly with a compact monitor that analyzes incoming
information by applying proprietary algorithms designed to detect arrhythmias
and eliminate data noise. When the monitor detects an arrhythmic event, it
automatically transmits the ECG data to the CardioNet Monitoring Center, where
experienced certified cardiac monitoring specialists analyze the sent data,
respond to urgent events and report results in the manner prescribed by the
physician. The CardioNet System, on average, is worn by the patient for a
period of approximately 14 days.
48
The CardioNet System results in a high diagnostic
yield of clinically significant arrhythmias, allowing for real-time detection
and analysis as well as timely intervention and treatment. In a randomized
300-patient clinical study, the CardioNet System detected clinically
significant arrhythmias nearly three times as often as traditional loop event
monitors in patients who have previously experienced negative or nondiagnostic
Holter monitoring.
We believe that the CardioNet System offers the
following advantages to physicians, payors and patients:
·
Real-time, continuous data.
The CardioNet System
initiates real-time analysis and automatic transmission as events occur, which
allows physicians to receive urgent notifications in a timely manner. In
contrast, most event monitors require the patient to go to a phone and call in
to transmit the event data, which may not happen until hours or days after the
event, or at all if the patient is not compliant.
·
Expanded memory.
The CardioNet System
currently stores at least 96 hours of ECG data, considerably more than the
typical 10 minutes of memory of event monitors. We are in the process of
upgrading our monitors to store 21 days of ECG data. Event monitors have
capacity to store multiple events, but generally store only between one and six
cardiac events, a subset of which may be unusable depending on degree of data
artifacts. To the extent that the patient does not call in and transmit an
event, once the event monitor is full, it may become unable to capture future
events. The CardioNet System not only provides up to 21 days of memory to
prevent inadvertent loss of data, but also presents physicians with trend data
for heart rate and atrial fibrillation burden.
·
Increased compliance through
technology and reduced patient interaction.
The CardioNet System
works without patient interaction, automatically detecting and transmitting
asymptomatic events. Event monitors typically require the patient to call in
and transmit the event by reaching the physician or a technician at a physicians
office or a monitoring center and holding the event monitor up to a telephone
to transmit the event data. The CardioNet System increases patient compliance
by alerting the patient through the monitor of loss of communication between
the sensor and monitor or that a lead has become detached. Physicians are able
to confirm the patient wore the monitor through the daily reports provided to
physicians.
·
Reflects real-life cardiac activity.
Patients using the
CardioNet System can continue normal activities, including activities that may
trigger an arrhythmia.
·
Symptom correlation.
Patients experiencing
a symptom record details of their symptom and activity data on the touch-screen
of the CardioNet System monitor, which allows physicians to correlate the
information to the underlying ECG data.
·
Detection of asymptomatic events.
We have developed a
proprietary, FDA-cleared ECG detection algorithm that automatically identifies
arrhythmic events, even in the absence of symptoms noticed by the patient.
·
Minimization of data artifacts or noise.
We have designed our
algorithms to eliminate data artifacts to reduce inaccurate diagnoses and enable
more efficient data review by both physicians and the certified cardiac
monitoring specialists in the CardioNet Monitoring Center. In contrast, we
believe that certain of the algorithms in the auto-detect loop event monitors
rely on simplistic triggers relating to high, low and irregular heart rates
and, in some cases, pauses in heart rate, and consequently result in frequent
inaccurate diagnoses.
·
Two-way wireless capabilities for
transmission, remote programming and data retrieval.
The CardioNet System
allows two-way wireless communications, compared to most or all event monitors
which only support one-way transmissions. With the CardioNet System, physicians
can adjust device parameters remotely, check in on the patient and request
ECG data from the previous 96 hours, or 21 days for our next generation and
upgraded monitors. Our next generation monitor also allows for voice
capabilities in addition to text messaging capabilities.
·
Potential reduction in health care
costs.
We
have demonstrated increased diagnostic yield as compared to event monitoring,
which we believe may reduce time to diagnosis and reduce health care costs
resulting from repeated emergency room and physician visits, additional
diagnostic testing, prolonged hospitalizations for the sole purpose of
arryhythmia monitoring and unnecessary hospitalizations for drug initiation and
titration, as well as expenditures resulting from stroke and other serious
cardiovascular complications.
49
·
Tailored and customized to physicians
needs.
The
prescribing physician selects patient-specific monitoring thresholds and
response parameters. The physician selects the events to be monitored and the
level and timing of response by the CardioNet Monitoring Center from
routine daily reporting to urgent stat reports. Physicians can review the
data by fax or internet, depending on their preferences.
Following our acquisition of PDSHeart, we also offer
traditional event and Holter monitoring services, positioning us as a one stop
shop for arrhythmia monitoring solutions. We provide cardiologists and
electrophysiologists who prefer to use a single source of arrhythmia monitoring
solutions with a full spectrum of those solutions, ranging from our differentiated
CardioNet System to traditional event and Holter monitoring.
Our Business Strategy
Our goal is to maintain our position as the leading
provider of ambulatory, continuous and real-time outpatient monitoring services
by establishing our proprietary integrated technology and service offering as
the standard of care for multiple health care markets. The key elements of the
business strategy by which we intend to achieve these goals include:
·
Continue to Educate the Market on
the Higher Diagnostic Yield of Our Differentiated Arrhythmia Monitoring
Solution.
We
intend to continue to educate cardiologists and electrophysiologists on the
benefits of using the CardioNet System to meet their arrhythmia monitoring
needs, stressing the increased diagnostic yield and their ability to use the
clinically significant data to make timely interventions and guide more
effective treatments. Physicians have responded favorably to our comprehensive
and responsive service delivery model which allows predetermined notification
criteria tailored to the patient by the physician, while driving increased
patient compliance and resulting in positive patient experiences. In 2007, we
launched a new campaign for our CardioNet System entitled Without Peer aimed
at building brand awareness and customer preference over other monitoring
solutions. The Without Peer campaign reflects our belief that the CardioNet
System is superior to other arrhythmia monitoring solutions.
·
Capitalize on Clinical Trial Results
to Enhance Payor Relationships
. We have pioneered reimbursement for our
advanced monitoring solution at levels that we believe reflects its clinical
efficacy relative to existing technologies. At year-end 2004, we had contracts
with 41 commercial payors representing 32 million covered lives. Our
efforts since year-end 2004 have resulted in contracts with 172 commercial
payors and Medicare as of March 31, 2008. We estimate that this represents
more than 176 million covered lives. We completed a 300-patient randomized
clinical trial that found that the CardioNet System provided a significantly
higher diagnostic yield compared to traditional loop event monitoring,
including technology incorporating a feature designed to automatically detect
certain arrhythmias. We are using the clinical evidence from this trial to both
drive continued physician adoption of our solution and to attempt to secure
contracts with additional commercial payors. Of the 21 targeted commercial payors,
representing approximately 95 million covered lives, who had previously
required proof of product superiority evidenced by a published randomized
clinical trial, we have secured contracts with three such payors, representing
over 26 million covered lives, since publication of our trial results in March 2007.
Several of the remaining payors have indicated that they do not believe that
the data from the clinical trial is sufficient. We continue to work with these
and other payors to secure reimbursement contracts.
·
Position CardioNet as One Stop Shop
for Arrhythmia Monitoring.
Through
our acquisition of PDSHeart, we are able to offer to physicians both the
CardioNet System and event and Holter monitors. We believe that certain
cardiologists and electrophysiologists prefer to use a single source of
arrhythmia monitoring solutions with a full spectrum of those solutions.
·
Leverage Expanded Sales Footprint to
Enhance Market Penetration.
With
the acquisition of PDSHeart, we now provide services to patients in 48 states.
Our sales force increased from 27 account executives at December 31, 2006
to 73 account executives as of March 31, 2008, largely as a result of the
PDSHeart acquisition, and we intend to continue to add sales capacity. The
acquisition accelerated our market expansion strategy by providing us with
immediate access to a sales force with existing physician relationships capable
of marketing our CardioNet System in areas of the country where it had
previously not been marketed or sold.
·
Leverage Monitoring Platform to New
Market Opportunities.
We believe that the
CardioNet System is a platform that can be leveraged for applications in
multiple markets. We have made a significant investment in infrastructure and
technology. Our investment includes designing and implementing an integrated
technology and service network, establishing a sophisticated data services
architecture in
50
conjunction with our data partner QUALCOMM,
creating a dedicated central monitoring service center, and internally
developing advanced algorithms which sense, analyze and process data. While our
initial focus has been on arrhythmia diagnosis and monitoring, we intend to
expand into new market areas such as cardiac monitoring for clinical trials,
including QT prolongation and arrhythmia trials, and comprehensive disease
management for congestive heart failure, diabetes and other diseases that
require outpatient or ambulatory monitoring and management. We believe that our
technology could also be used to create instant telemetry beds in hospitals,
particularly in rural hospitals, step-down units or skilled nursing facilities
to help cope with acute nursing shortages by reducing the number of nurses
needed to oversee ECG monitoring and reduce capital equipment costs.
Monitoring with the CardioNet
System
Initiation of Service
A physician prescribing the CardioNet System for his
patient completes an enrollment form that describes the length of time during
which the patient should be monitored, together with patient-specific
monitoring thresholds and response parameters. Once the patient has been
enrolled, a CardioNet representative contacts the patient to coordinate
delivery and schedule a telephonic patient-education session on the use of
the CardioNet System. Prior to January 2006, our standard practice was to
provide in-home patient education and service initiation. By transitioning to
telephonic patient education, which now accounts for approximately 91% of new patient
starts, we were able to substantially lower our cost of sales, contributing to
an improvement in gross profit margins from 55% for the three months ended December 2005
to 69% in the comparable period in 2006.
Monitoring
A lightweight sensor (worn as a pendant or on a belt
clip) attached to leads records two channels of ECG. The sensor constantly
communicates wirelessly with the monitor, a compact handheld unit which can be
tucked into a pocket or purse. The monitor analyzes incoming information from
the sensor on a real-time basis by applying proprietary algorithms designed to
detect arrhythmias.
When the monitor detects an arrhythmic event
(defined by the values prescribed by the patients physician), it transmits the
ECG to the CardioNet Monitoring Center, even in the absence of symptoms noticed
by the patient and without patient interaction. When patients experience a
symptom, they select their symptom and the contemporaneous activity level
through the monitors touch-screen. Once completed, the monitor automatically
transmits the event to the CardioNet monitoring center for review. When at
home, the patient can place the monitor in a base station, which allows
recharging and enables automated data transmission through the standard
telephone line in the patients home. Historically, our monitors stored
96 hours of ECG data. We are upgrading our monitor inventory to enable
21 days of ECG data storage.
The monitor allows two-way wireless communications,
enabling the CardioNet Monitoring Center to adjust device parameters, check in
on the patient and pull previous ECG data, over standard telephone lines and
through cellular coverage. The monitors allow for text messaging and our C3
monitor also has voice capabilities. Most other ambulatory devices on the
market, such as most event monitors, only support one-way transmissions.
Central Monitoring Station/Data
Transmission Network
At the CardioNet Monitoring Center, an Independent
Diagnostic Testing Facility certified by Medicare, experienced certified
cardiac monitoring specialists analyze the sent data, respond to urgent events
and report results in the manner prescribed by the physician and monitor
patient compliance. The CardioNet Monitoring Center operates 24 hours a
day, 7 days per week. The data transmission is accomplished through (i) a
wireless cell phone modem in the monitor or (ii) through the telephone
line modem in the base station.
51
Physician Notification
When
prescribing the CardioNet System, the physician selects the events to be
monitored and the level and timing of response by the CardioNet Monitoring
Center from routine daily reporting to urgent stat reports. Physicians
can review the data in the media they prefer fax or internet. Reports
have been designed to allow rapid review of results, graphing related data and
trends. The following is a summary of the types of reports we provide:
·
Daily
Report,
which
includes
:
·
Heart rate trending chart;
·
Charts describing the frequency and
duration of atrial fibrillation;
·
Summary of ECG activity from the prior
24 hours;
·
Description of symptoms and associated
activity level if reported by patient; and
·
Description of urgent ECG data
transmitted during the prior 24 hours.
·
Urgent
Report
·
When a patients ECG and/or symptom meets
pre-prescribed physician notification criteria, the physician is notified
immediately and provided with the relevant ECG data, along with the symptoms
and activity reported by the patient. Physicians are also allowed to revise
notification criteria if applicable to prevent future false alarms.
·
Fetch
Report
·
Provides customized information from the
monitor at the request of the physician for any period during the previous
96 hours, or 21 days for our next generation and upgraded monitors. We are
in the process of upgrading our existing monitors and building new monitor
inventory with storage for 21 days of ECG data.
·
End of
Service Summary Report
·
At the completion of the patients
monitoring, a report is prepared describing the length of the monitoring
service and all reports that were prepared for the patient during the
monitoring service.
Other
Arrhythmia Monitoring Services
In
addition to the CardioNet System, we also offer Holter and event monitoring
services that are marketed and serviced by PDSHeart.
Holter Monitoring Services
The
Holter monitor is a small portable ECG recorder designed to record a continuous
ECG signal for one to, in rare instances, two days. The Holter monitor has five
to seven leads that are attached to electrodes, which are typically placed on
the patient in the physicians office. Patients are instructed to wear the
monitor continuously while they go about normal daily routine, including
sleeping. During the monitoring period, the Holter monitor stores an image of
the electrical impulses of every heartbeat or irregularity in either digital
format on an internal compact flashcard or in analog format on a standard
cassette tape located inside the monitor. Approximately 13% of our Holters are
analog tape and the remaining 87% use digital flashcard technology. At the
conclusion of the monitoring period, the patient returns to the physician office
to have the monitor disconnect. After the patient returns home, the stored data
is mailed or sent electronically through a secure web transfer to our Holter
lab where our trained cardiac technicians analyze the data, generate a report
of the findings and return the results back to the physician in less than
24 hours. The physician then interprets the results and determines the
next step for the patient. Our Holter lab is distinct from the CardioNet
Monitoring Center which is used for the CardioNet System. PDSHeart provided
Holter monitoring services to approximately 48,000 patients in 2007.
52
Event Monitoring Services
The
event monitor is a small portable ECG recorder about the size of a pager designed
to record and store up to 540 seconds of ECG signal. Event monitors are placed
on the patient in the physicians office and worn typically for 30 days.
Our event monitoring services provides physicians with the flexibility to
prescribe both memory loop event monitors and non-loop event monitors. In 2007,
approximately 87% of our event monitors prescribed by physicians were memory
loop event monitors and the remaining 13% prescribed were non-loop event
monitors. The memory loop event monitor has two to four leads that are attached
to electrodes, which are placed on the patients chest. The memory loop event
monitor continuously records and stores the previous 60 seconds of ECG signal
in internal loop memory. When a patient becomes symptomatic, he or she
activates the monitor by pressing the record button which stores the 60 seconds
of existing loop memory and an additional 30 seconds of ECG signal following
patient activation. The stored data is considered one cardiac event and
provides physicians a snapshot of the ECG signal recorded immediately before
and during a patients symptoms. Some of our memory loop event monitors have an
internal algorithm that can automatically activate the monitor based on rate
thresholds and irregular rhythms. Our non-loop event monitors are kept with the
patient at all times. When a patient experiences symptoms, our non-loop event
monitors will typically record and store 30 seconds of ECG signal immediately
following activation and placement in direct contact with the patients chest.
Our event monitors have a capacity to store one to six cardiac events before
the patient must transmit the data telephonically to one of three event
monitoring centers where our trained cardiac technicians analyze the data,
generate a report of the findings and return the results back to the physician
in less than 24 hours. The physician then interprets the results and
determines the next step for the patient. Once transmitted, the internal memory
in the monitor is erased and the patient can resume activating the monitor to
record further cardiac events. Our three event monitoring centers are distinct
from the CardioNet Monitoring Center which is used for the CardioNet System.
PDSHeart provided event monitoring services to approximately 77,000 patients in
2007.
Pacemaker Monitoring Services
Following
the implantation of a pacemaker, certain physicians refer patients to us for
periodic monitoring and evaluation of the device based on a pre-determined
frequency set by the referring physician. The patient is provided a transmitter
device that we use to telephonically transmit data that we use to monitor the
life and function of the pacemakers. For the three months ended March 31,
2008, PDSHeart preformed approximately 6,000 pacemaker tests.
CardioNet
Patient Monitoring Platform
The
CardioNet System is a patient monitoring platform that we believe can be
leveraged for applications in multiple markets. We designed the CardioNet
System to connect sensors and analysis devices on the patients body (which
could include ECG, weight, blood pressure, glucose and others) to a monitoring
center through the use of a wireless data transmission network. Our advanced
technology allows the patient system to be housed in a small, portable,
non-invasive package that requires limited patient involvement and compliance.
The extended monitoring period and portability of the CardioNet System enables
the capture and analysis of real-life patient activity through sophisticated
patient information management systems and the transmission of such data.
We
have made a significant investment in infrastructure and technology over a six
year period. We have raised over $250 million in capital and spent seven
years developing and deploying a proprietary integrated patient monitoring
platform that incorporates a wireless data transmission network, internally
developed software, FDA-cleared algorithms and medical devices, and a 24-hour
digital monitoring service center. Our investment includes designing and
implementing an integrated technology and service network, establishing a
sophisticated data services architecture in conjunction with our data partner
QUALCOMM, creating a dedicated central monitoring service center, and
internally developing advanced algorithms which sense, analyze and process
data.
53
Next Generation CardioNet System Technology Pipeline
We
have been marketing our second generation CardioNet System, referred to as C2,
since 2004. We have developed a third generation system called C3 which
features several technology enhancements including:
·
new monitor, which will be roughly half
the size and weight of the existing monitor;
·
new sensor;
·
voice capability;
·
new 510(k) cleared, proprietary
algorithm; and
·
expanded memory storage of 21 days.
The
cost of manufacturing C3 will be approximately 34% less than the cost of
manufacturing the older generation device. We received FDA 510(k) clearance
for the C3 system, including the new algorithm, and began commercial delivery
of the C3 system in October 2007. Eventually, we expect that our inventory
of C3 systems will replace our existing inventory of our C2 systems. In
addition, we are in the process of upgrading our inventory of C2 systems in
order to increase their memory storage from 96 hours of ECG data to
21 days of ECG data.
Wireless Data Transmission Network
The
CardioNet System makes use of multiple communication networks to transmit ECG
data to the technicians in the CardioNet Monitoring Center in real time. When
an event meeting pre-prescribed physician notification criteria is detected by
our monitor, the monitor transmits data to the CardioNet Monitoring Center over
a telephone line if the monitor is in its base, or wirelessly over a cellular
data network if the monitor is being used outside the base. Pursuant to our
agreement, all data is sent from the monitor directly to QUALCOMM. QUALCOMM has
both a primary and backup data center for high availability. QUALCOMM
immediately forwards the transmission to our CardioNet Monitoring Center. The
CardioNet Monitoring Center is equipped with primary and backup data centers
that are fully integrated with QUALCOMMs primary and backup datacenters so
that data can be easily routed through a number of paths in the event of an
emergency. When data is received by the CardioNet Monitoring Center, it is
processed by our technicians in order of severity and time received. Our
agreement with QUALCOMM expires in September 2010 and automatically renews
for successive periods for one year each, unless terminated by either party
with at least 90 days advance notice to the other party. Pursuant to the
agreement, we are required to indemnify QUALCOMM for all claims resulting from
the provision of our services.
Proprietary Software and Algorithms
We
have developed a proprietary software platform which is at the core of the
CardioNet System. In the last six years, we have had more than 25 major
software releases. Key software includes:
·
ECG Detection
Algorithm.
The
CardioNet System monitor analyzes incoming information from the sensor on a
real-time basis by applying proprietary algorithms which are designed to detect
arrhythmias. Our original CardioNet System layered CardioNet-developed
algorithms on top of a commercially available algorithm. In October 2005,
we received FDA 510(k) clearance for a next generation ECG detection
algorithm we use in the C3, to which one or more patents or patent applications
relate.
·
Patient Enrollment and
Management System.
The
CardioNet System features separate HIPAA compliant websites for each physician
practice that allow physicians to review, edit and print patient reports. We
also maintain demographic information for each physician practice enrolled with
us which enables members of the CardioNet monitoring center to immediately
contact a physician whose patient experiences a clinically significant event
described in predefined monitoring thresholds provided to us by the physician.
·
Monitoring Services
Application.
The
monitoring services application is a software application included within the
CardioNet Monitoring Center that analyzes incoming data from a patient-worn
sensor on a real time basis. When the monitor detects an arrhythmic event
(defined by the values prescribed by the patients physician), it transmits the
ECG data to the CardioNet Monitoring System for our review. The ECG data is
reviewed by one of our monitoring specialists and a determination is made as to
the stat nature of the data and if the physician should be notified. Our
monitoring services application provides the basis for the daily,
54
urgent and fetch reports
that we send to physicians and stores at least 96 hours of ECG data. In
addition, we are in the process of upgrading our existing monitors to provide
expanded storage of 21 days of ECG data.
·
Work Order System.
The CardioNet
System tracks each patient from the time their use of the CardioNet System is
prescribed by their physician through the time that the patient completes use
of the CardioNet System, returns the CardioNet System to us and is released for
billing. We are able to schedule and track relevant events such as the date we
provide in-home patient education and service initiation to our patients and
the dates that we ship and receive our CardioNet System to and from each
patient.
Sales
and Marketing
We
market our arrhythmia monitoring solutions, including the CardioNet System,
primarily to cardiologists and electrophysiologists, who are the physician
specialists who most commonly diagnose and manage patients with arrhythmias. We
have grown our sales force from 27 account executives at December 31, 2006
to 73 account executives as of March 31, 2008, principally as a result of
our acquisition of PDSHeart. In 2006, we derived approximately 75% of our
revenues from sales of our CardioNet System in the Northeast states, while
PDSHeart derived approximately 80% of its revenues in states outside the
Northeast. Today, we market our arrhythmia monitoring solutions in 48 states.
We
attend trade shows and medical conferences such as the Heart Rhythm Society,
American College of Cardiology, American Heart Association, Syncope Symposium,
and the annual Atrial Fibrillation Conference in Boston to promote the
CardioNet System and to meet medical professionals with an interest in
performing research and reporting their results in peer-reviewed medical
journals and at major medical conferences. We also sponsor peer-to-peer
educational opportunities and participate in targeted public relations
opportunities. In 2007, we launched a new campaign for our CardioNet System
entitled Without Peer aimed at building brand awareness and customer
preference over other monitoring solutions. The Without Peer campaign
reflects our belief that the CardioNet System is superior to other arrhythmia
monitoring solutions.
Reimbursement
CardioNet System
Arrhythmia
monitoring with the CardioNet System involves two different types of
reimbursement - technical services and professional services.
·
Technical Services.
CardioNet receives
reimbursement for the technical component related to the monitoring services
provided by the CardioNet Monitoring Center, located in Conshohocken,
Pennsylvania. The reimbursement is either provided by the Medicare Part B
carrier for Pennsylvania on behalf of the Centers for Medicare and Medicaid
Services or commercial payors. The technical component of our service is billed
under the non-specific billing, or CPT, Code 93799. Unlike dedicated CPT
codes approved by the AMA and CMS, claims using non-specific codes may require
semi-automated or manual processing, as well as additional review by payors.
The claims processing requirements associated with a nonspecific code can make
our services less attractive to physicians. Furthermore, the Medicare
reimbursement rate for non-specific codes is determined by local contractors.
As a result, the reimbursement rates associated with that code is subject to
change without notice. A request has been made to the CPT Editorial Panel to
obtain a CPT code for our CardioNet System, with the goal of receiving a
Category 1 CPT code from the AMA Coding Committee in 2009. The request was
discussed and voted upon by the CPT Editorial Panel at its public October 2007
meeting. The results of the vote are confidential. We have been informally
advised that the CPT Editorial Panel voted in favor of the request. However,
the results of the vote are subject to change until such results are published
in the fall of 2008. If the request is officially approved by the CPT Editorial
Panel, the specific CPT code would be published in the fall of 2008 and would
be available for use in 2009.
55
As of March 31,
2008, our coverage with Medicare represented approximately 40 million covered
lives, and we had secured contracts with 172 commercial payors as of March 31,
2008. We estimate that, combined with Medicare, this represents more than
176 million covered lives. We enter into contracts with commercial payors
pursuant to which we receive reimbursement for our technical services. Such
contracts typically provide for an initial term of between one and three years
and provide for automatic renewal. Either party can typically terminate these
contracts by providing between 60 to 120 days prior notice to the other
party at any time following the end of the initial term of the agreement. The
contracts provide for an agreed upon reimbursement rate, which in some
instances is tied to the rate of reimbursement we receive from Medicare.
Pursuant to these contracts, we generally agree to indemnify our commercial
payors for damages arising in connection with the performance of our
obligations thereunder.
·
Professional Services.
Our physician customers
receive reimbursement for professional interpretation by most commercial payors
or Medicare carriers within the state where they practice. The reimbursement
reflects payment for daily interpretation of enrollment patients or on a case
rate or per day basis. We have an internal team of reimbursement professionals
who call on Medicare and private payors to help facilitate physician
reimbursement.
We
completed a 300-patient randomized clinical trial that found that the CardioNet
System provided a significantly higher diagnostic yield compared to traditional
loop event monitoring, including technology incorporating a feature designed to
automatically detect certain arrhythmias. We are using the clinical evidence
from this trial to both drive continued physician adoption of our solution and
to attempt to secure contracts with additional commercial payors. Of the 21
targeted commercial payors, representing approximately 95 million covered
lives, who had previously required proof of product superiority evidenced by a
published randomized clinical trial, we have secured contracts with three such
payors, representing over 26 million covered lives, since publication of
our trial results in March 2007. Several of the remaining payors have
indicated that they do not believe that the data from the clinical trial is
sufficient. We continue to work with these and other payors to secure
reimbursement contracts.
The
following charts demonstrates the growth in payors who covered the CardioNet
System and our estimates of the number of covered lives that such payors
represented on a quarterly basis during the time period beginning in the third
quarter of 2003 through the fourth quarter of 2006:
Covered
Lives Commercial
|
|
Direct
Contracts Commercial
|
|
|
|
56
Other Arrhythmia Monitoring Solutions
Our
other arrhythmia monitoring services, including event, Holter and pacemaker
monitoring services, are reimbursed by commercial payors and government
programs including Medicare. We also have direct arrangements with physicians
who purchase our services and then submit claims for them directly to
commercial and government payors. In some cases, patients may pay out-of-pocket
on a fee for service basis. Generally our other arrhythmia monitoring services
are billed using specific codes describing those services. Those codes are part
of the CPT coding system which was established by the American Medical
Association to describe services provided by physicians and other suppliers
such as PDSHeart. The rate at which we are reimbursed by commercial payors and
physicians (in those cases where physicians purchase our services) for our
event, Holter and pacemaker monitoring services are negotiated between PDSHeart
and the individual commercial payor or physician. Medicare pays for our
services through the Physician Fee Schedule. These reimbursement rates are
determined annually by CMS and are made available to the public through
publication in the Federal Register and the CMS website. Reimbursement made by
physicians for purchased services is made at fair market value. The
determination of fair market value is subject to interpretation under federal
and state anti-kickback laws. At this time, we are not aware of any government
challenge or investigations involving the arrangements between PDSHeart and its
physician customers.
Clinical
Development
We
intend to continue to develop proof of superiority of our technology through
clinical data. The three primary sources of clinical data that we have used to
date to illustrate the clinical value of the CardioNet System include: (1) a
randomized 300-patient clinical study; (2) our cumulative actual
monitoring experience from our databases; and (3) other published studies.
Randomized Clinical Study
We
completed a 17 center, 300-patient randomized clinical trial that CardioNet
sponsored. We believe this study represents the largest randomized study
comparing two noninvasive arrhythmia monitoring methods.
The
study was designed to evaluate patients who were suspected to have an
arrhythmic cause underlying their symptoms, but who were a diagnostic challenge
given that they had already had a nondiagnostic 24-hour Holter monitoring
session or four hours of telemetry within 45 days prior to enrollment.
Patients were randomized to either the CardioNet System or to a loop event
monitor for up to 30 days. Of the 300 patients who were randomized, 266
patients who completed a minimum of 25 days of monitoring were analyzed
(134 patients using CardioNet System and 132 patients using loop event
monitors).
Inclusion
criteria included a high clinical suspicion of a malignant arrhythmia and
symptoms of syncope, presyncope or severe palpitations occurring less
frequently than once per 24 hours. Exclusion criteria included severe
heart failure (as denoted by New York Heart Association Class IV),
myocardial infarction (heart attack) within the prior three months, candidacy
for or recent heart valve surgery, and a history of certain sustained
tachycardias called ventricular tachycardia or ventricular fibrillation.
The
primary endpoint was the confirmation or exclusion of a probable arrhythmic
cause of the patients symptoms, defined as diagnosis. Study investigators
classified any arrhythmias during the monitoring period as being either clinically
significant or clinically insignificant. Confirmation was based on
investigators assessment of the likelihood that a clinically significant
arrhythmia caused the patients presenting symptoms. Exclusion of a probable
arrhythmic cause was determined if any reported symptoms were not associated
with an arrhythmia. Monitoring was considered nondiagnostic, or
nonconclusive, if patients remained asymptomatic during the monitoring period
with either no arrhythmia or only a clinically insignificant arrhythmia
document. The study concluded that the primary endpoint was met.
Eric
Prystowsky, a member of our board of directors and medical advisory board, is
the chief editor of the journal in which the study was published. Dr. Prystowsky
recused himself from the journals review of the study and a guest editor was
chosen who selected the reviewers and oversaw the entire review process, which
was blinded to Dr. Prystowsky.
57
The
following chart depicts data from the trial, indicating that the CardioNet
System is nearly three times more successful in detecting clinically
significant arrhythmias in patients than loop event monitors:
In a
subgroup of patients experiencing syncope and/or presyncope, the CardioNet
System was more than three times more effective than loop event monitors in
diagnosing clinically significant arrhythmias, as demonstrated in the following
chart:
The
study specifically compared the success of the CardioNet System against loop
event monitors in detecting patients afflicted with atrial fibrillation because
of the prevalence of asymptomatic episodes that occur in cases of atrial
fibrillation and the difficulty of diagnosis. Diagnosis and treatment of atrial
fibrillation is important because it can lead to many other medical problems,
including stroke. The following chart depicts data from the trial indicating
that the CardioNet System demonstrated greater success in detecting atrial
fibrillation than loop event monitors, especially in patients who were
experiencing asymptomatic atrial fibrillation.
58
The
following chart depicts data from the trial indicating the success of the
CardioNet System compared to loop event monitors in diagnosing atrial
fibrillation in patients experiencing syncope and/or presyncope and who also
experience asymptomatic episodes of atrial fibrillation:
CardioNets Monitoring Experience
In January 2005,
we completed a study of the first 100 patients who used the CardioNet System.
51% of such patients were diagnosed with clinically significant arrhythmias.
53% of patients who had previously been tested without successful diagnosis
using Holter or event monitors were diagnosed with clinically significant
arrhythmias by the CardioNet System. 34% of patients experienced a change of
management by their physician as a result of their diagnosis using the CardioNet
System. Of those, 15% were implanted with pacemakers, 6% were implanted with
cardioverter-defibrillators and 12% were prescribed ablations.
59
Other Studies
Several
other studies produced data indicating the usefulness and efficiency of the
CardioNet System including:
·
A 19-patient study conducted at Johns
Hopkins Hospital in Baltimore utilized the CardioNet System to monitor patients
both pre- and post- ablation for atrial fibrillation. The patients were
monitored for recurrence of atrial fibrillation and the reliability of patient
symptoms in determining when atrial fibrillation was or was not occurring.
Results demonstrated the unreliability of using symptoms to determine when
atrial fibrillation was occurring.
·
A 42-patient study conducted at the
Cleveland Clinic utilized the CardioNet System to determine the incidence of
recurrence of atrial fibrillation post ablation. The study evaluated patients
for asymptomatic atrial fibrillation in making decisions for anticoagulation
after ablation procedures. The study showed that in this population the
CardioNet System helped facilitate the decision to stop anticoagulation
treatment.
·
A 39-patient study conducted at the
Cleveland Clinic utilized the CardioNet System to monitor children presenting
with palpitations, syncope and presyncope. The study results indicated that the
CardioNet System is safe and useful for evaluation of children and adolescents
with suspected arrhythmia, providing a diagnosis in 64% of subjects within four
weeks. The study further reported that in this initial series, the diagnostic
yield of the CardioNet System was higher than the expected yield from traditional
trans-telephonic ECG event monitors in pediatric patients.
·
A 122-patient study conducted at the Care
Group in Indianapolis utilized the CardioNet System to monitor patients for
palpitations, syncope, presyncope and antiarrhythmic therapy consisting of drug
titration and ablation. The study showed the ability of the CardioNet System to
identify asymptomatic clinically significant arrhythmias such as atrial
fibrillation even in patients without a history of arrhythmia, and to identify
the cause of presyncope/syncope, including patients with a previous negative workup.
Further, the CardioNet System allowed patients to undergo daily medication dose
titration in the outpatient setting, thus avoiding hospitalizations.
Competition
Although
we believe that we have a leading market share in the mobile cardiac arrhythmia
monitoring industry, the market in which we operate is fragmented and
characterized by a large number of smaller regional service providers.
According to Frost & Sullivan, the combined market share of CardioNet
and PDSHeart in the mobile cardiac arrhythmia monitoring industry in 2006,
exclusive of Holter monitoring, was approximately 24%, and the market shares of
LifeWatch Corp. and Raytel Medical Corporation, the next largest participants
in that market, were approximately 20% and 12%, respectively. To our knowledge,
none of our competitors, including LifeWatch and Raytel, provide a monitoring
solution directly competitive to our CardioNet System. A number of companies,
however, provide Holter and event monitors that indirectly compete with the
CardioNet System, including LifeWatch Corp. and Raytel Medical Corporation.
We
believe that the principal competitive factors that impact the success of our
cardiac monitoring solutions include some or all of the following:
·
quality of the algorithm used to detect
symptoms;
·
successful completion of a randomized
clinical trial and publication of the results in a peer-reviewed journal;
·
quality of clinical data;
·
ease of use and reliability of cardiac
monitoring solutions for patients and physicians;
·
technology performance, innovation,
flexibility and range of application;
·
timeliness and clinical relevance of new
product introductions;
·
quality and availability of customer
support services;
·
size, experience, knowledge and training
of sales and marketing staff;
·
brand recognition and reputation;
60
·
relationships with referring physicians,
hospitals, managed care organizations and other third party payors;
·
the reimbursement rates associated with
our services; and
·
value.
We
believe that we compete favorably based on the factors described above.
However, our industry is evolving rapidly and is becoming increasingly
competitive and the bases on which we compete may change over time. In
addition, as companies with substantially greater resources than ours enter our
market, we will face increased competition. For example, Royal Philips
Electronics recently announced an agreement to acquire Raytel.
Intellectual
Property
To
protect our proprietary rights, we rely on a combination of trademark,
copyright, patent, trade secret and other intellectual property laws,
employment, confidentiality and invention assignment agreements with our
employees and contractors, and confidentiality agreements and protective
contractual provisions with our partners and other third parties.
Patents.
As of March 31, 2008, we
had 14 issued U.S. patents and seven issued foreign patents relating to
functionality of individual components of the CardioNet System, operation of
the total monitoring system, communication methodologies, control of data in
the system, algorithms for ECG detection and analysis, and monitoring methods.
We are in the process of applying for additional patents relating to various
aspects of our technology, including our proprietary ECG detection algorithm.
As of March 31, 2008, we had 42 U.S., foreign and international patent
applications on file relating to various aspects of our technology.
Trademarks and Copyrights.
As of March 31, 2008, we
had 14 trademark registrations and one pending trademark application in the
United States for a variety of word marks and slogans. Our trademarks are an
integral part of our business and include, among others, CardioNet® and PDS
Heart®. We also have a significant amount of copyright-protected materials,
including among other things, software textual material.
In
addition, we also seek to maintain certain intellectual property and
proprietary know-how as trade secrets, and generally require our partners to
execute non-disclosure agreements prior to any substantive discussions or
disclosures of our technology or business plans.
Our
business and competitive positions are dependent in part upon our ability to
protect our proprietary technology and our ability to avoid infringing the
patents or proprietary rights of others.
Government
Regulation
The
health care industry is highly regulated, and there can be no guarantee that
the regulatory environment in which we operate will not change significantly
and adversely to us in the future. We believe that health care legislation,
rules, regulations and interpretations will change, and we expect to modify our
agreements and operations from time to time in response to changes in the
health care regulatory environment.
U.S. Food and Drug Administration.
The monitors and
sensors that comprise part of the CardioNet System are regulated by the FDA as
a medical device under the Federal Food, Drug, and Cosmetic Act. The basic
regulatory requirements that manufacturers of medical devices distributed in
the U.S. must comply with are:
·
Premarket Notification 510(k), unless
exempt, or Premarket Approval, or PMA;
·
establishment registration;
61
·
medical device listing;
·
quality system regulation;
·
labeling requirements; and
·
medical device reporting.
Medical
devices are classified into Class I, II, and III. Regulatory control
increases from Class I to Class III. The device classification
regulation defines the regulatory requirements for a general device type. Most Class I
devices are exempt from 510(k) requirements. Most Class II devices,
including the monitors and sensors that comprise part of the CardioNet System,
require 510(k) clearance from the FDA to be marketed in the U.S. A 510(k) submission
must demonstrate that the device is substantially equivalent to a device
legally in commercial distribution in the United States: (1) before May 28,
1976; or (2) to a device that has been determined by FDA to be
substantially equivalent. In some instances, data from human clinical trials
must also be submitted in support of a 510(k) submission. If so, these
data must be collected in a manner that conforms with specific requirements in
accordance with federal regulations. Changes to existing devices covered by a
510(k) which do not significantly affect safety or effectiveness can
generally be made without additional 510(k) submissions. Most Class III
devices are high risk devices that pose a significant risk of illness or injury
or devices found not substantially equivalent to Class I and II predicate
devices through the 510(k) process and require PMA. The PMA process is
more involved and includes the submission of clinical data to support claims
made for the device. The PMA is an actual approval of the device by the FDA.
The
CardioNet System and our algorithms maintain FDA 510(k) clearance as a Class II
device. On October 28, 2003, the FDA issued a draft guidance document
entitled: Class II Special Controls Guidance Document: Arrhythmia
Detector and Alarm. In addition to conforming to the general requirements of
the Federal Food, Drug, and Cosmetic Act, including the premarket notification
requirements described above, all of our 510(k) submissions address the
specific issues covered in this special controls guidance document.
Failure
to comply with applicable regulatory requirements can result in enforcement
action by the FDA, which may include any of the following sanctions:
·
fines, injunctions and civil penalties;
·
recall or seizure of the CardioNet
System;
·
operating restrictions, partial
suspension or total shutdown of production;
·
withdrawing 510(k) clearance of new
components or algorithms;
·
withdrawing 510(k) clearance already
granted to one or more of our existing components or algorithms; and
·
criminal prosecution.
Health Care Fraud and Abuse.
In the United States, there
are state and federal anti-kickback laws that generally prohibit the payment or
receipt of kickbacks, bribes or other remuneration in exchange for the referral
of patients or other health care-related business. For example, the Federal
Healthcare Programs Anti-Kickback Law prohibits any person from knowingly and
willfully offering, paying, soliciting or receiving remuneration, directly or
indirectly, to induce or reward either the referral of an individual for an
item or service, or the ordering, furnishing or arranging for an item or
service, for which payment may be made under federal health care programs, such
as the Medicare and Medicaid programs. Some states have anti-kickback laws
which establish similar prohibitions, although these state laws may apply
regardless of whether federal health care program payment is involved.
Anti-kickback laws constrain our sales, marketing and promotional activities by
limiting the kinds of financial arrangements we may have with physicians,
medical centers, and others in a position to purchase, recommend or refer
patients for our cardiac monitoring services or other products or services we
may develop and commercialize.
62
Due to the breadth of
some of these laws, it is possible that some of our current or future practices
might be challenged under one or more of these laws. Furthermore, federal and
state false claims laws prohibit anyone from presenting, or causing to be
presented, claims for payment to third party payers that are false or
fraudulent. For example, we may be subject to the federal False Claims Act if
we knowingly cause the filing of false claims for payment by a federal health
care program (including Medicaid and Medicare). Violations may result in
substantial civil penalties, including treble damages, and criminal penalties,
including imprisonment, fines and exclusion from participation in federal
health care programs. The federal False Claims Act also contains whistleblower
or qui tam provisions that allow private individuals to bring actions on
behalf of the government alleging that the defendant has defrauded the
government. Various states have enacted laws modeled after the federal False
Claims Act, including qui tam provisions, and some of these laws apply to
claims filed with commercial insurers. Any violations of anti-kickback and
false claims laws could have a material adverse effect on our business,
financial condition and results of operations.
Health Insurance Portability and Accountability Act of 1996
(HIPAA).
The
Health Insurance Portability and Accountability Act was enacted by the United
States Congress in 1996. Numerous state and federal laws govern the collection,
dissemination, use and confidentiality of patient and other health information,
including the administrative simplification provisions of HIPAA. Historically,
state law has governed confidentiality issues and HIPAA preserves these laws to
the extent they are more protective of a patients privacy or provide the
patient with more access to his or her health information. As a result of the
implementation of the HIPAA regulations, many states are considering revisions
to their existing laws and regulations that may or may not be more stringent or
burdensome than the federal HIPAA provisions. HIPAA applies directly to covered
entities, which include health plans, health care clearinghouses and many
health care providers. The rules promulgated pursuant to HIPAA include the
Standards for Privacy of Individually Identifiable Health Information, for
which compliance by most entities was required by April 16, 2003, Security
Standards, for which compliance by most entities was required by April 21,
2005, and the Standards for Electronic Transactions, for which compliance by
most entities was required by October 16, 2003. The privacy rule, security
rule, and electronic transactions and code sets rule each establish
certain standards regarding health information. These rules standards concern,
respectively, the privacy of information when it is used and/or disclosed; the
confidentiality, integrity and availability of electronic health information;
and the content and format of certain identified electronic health care transactions.
The laws governing health care information impose civil and criminal penalties
for their violation and can require substantial expenditures of financial and
other resources for information technology system modifications and for
implementation of operational compliance.
Medicare and Medicaid.
Medicare is a federal program
administered by CMS through fiscal intermediaries and carriers. Available to
individuals age 65 or over, and certain other individuals, the Medicare program
provides, among other things, health care benefits that cover, within
prescribed limits, the major costs of most medically necessary care for such
individuals, subject to certain deductibles and co-payments. The Medicare
program has established guidelines for local and national coverage
determinations and reimbursement of certain equipment, supplies and services.
In general, in order to be reimbursed by Medicare, a health care item or
service furnished to a Medicare beneficiary must be reasonable and necessary
for the diagnosis or treatment of an illness or injury, or to improve the
functioning of a malformed body part. The methodology for determining coverage
status and the amount of Medicare reimbursement varies based upon, among other
factors, the setting in which a Medicare beneficiary received health care items
and services. Any changes in federal legislation, regulations and policy
affecting Medicare coverage and reimbursement relative to our cardiac
monitoring services could have an adverse effect on our performance.
The Medicaid
program is a cooperative federal/state program that provides medical assistance
benefits to qualifying low income and medically needy persons. State
participation in Medicaid is optional, and each state is given discretion in
developing and administering its own Medicaid program, subject to certain
federal requirements pertaining to payment levels, eligibility criteria and
minimum categories of services. The coverage, method and level of reimbursement
varies from state to state and is subject to each states budget restraints.
Changes to the coverage, method or level of reimbursement for our services may
affect future revenues negatively if reimbursement amounts are decreased or
discontinued.
63
Both
the Medicare and Medicaid programs are subject to statutory and regulatory
changes, retroactive and prospective rate adjustments, administrative rulings,
interpretations of policy, intermediary determinations, and government funding
restrictions, all of which may materially increase or decrease the rate of
program payments to health care facilities and other health care suppliers and
practitioners, including those paid for our cardiac monitoring services.
Our
facilities in Pennsylvania, Georgia and Florida are enrolled as IDTFs, which is
defined by CMS as an entity independent of a hospital or physicians office in
which diagnostic tests are performed by licensed or certified nonphysician
personnel under appropriate physician supervision. Medicare has set certain
performance standards that every IDTF must meet in order to obtain or maintain
their billing privileges. Specifically, an IDTF is required to: (i) operate
its business in compliance with all applicable federal and state licensure and
regulatory requirements for the health and safety of patients; (ii) provide
complete and accurate information on its enrollment application, and report
certain changes, within 30 calendar days, to the designated fee-for-service
contractor on the Medicare enrollment application; (iii) maintain a
physical facility on an appropriate site, that is not an office box or a
commercial mail box that contains space for equipment appropriate for the
services designated on the enrollment application, and both business and current
medical records storage within the office setting of the IDTF; (iv) have
all applicable diagnostic testing equipment, with the physical site maintaining
a catalog of portable diagnostic testing equipment, including the equipments
serial numbers; (v) maintain a primary business phone under the name of
the designated business, which is located at the designated site of the
business, or within the home office of the mobile IDTF units; (vi) have a
comprehensive liability insurance policy of at least $0.3 million per
location, covering both the place of business and all customers and employees
of the IDTF, and carried by a non-relative owned company; (vii) agree not
to directly solicit patients and to accept only those patients referred for
diagnostic testing by an attending physician, who is furnishing a consultation
or treating a beneficiary for a specific medical problem and who uses the
results in the management of the beneficiarys specific medical problem; (viii) answer
beneficiaries questions and respond to their complaints; (ix) openly post
the Medicare standards for review by patients and the public; (x) disclose
to the government any person having ownership, financial, or control interest
or any other legal interest in the supplier at the time of enrollment or within
30 days of a change; (xi) have its testing equipment calibrated and
maintained per equipment instructions and in compliance with applicable
manufacturers suggested maintenance and calibration standards; (xii) have
technical staff on duty with the appropriate credentials to perform tests and
produce the applicable federal or state licenses or certifications of the
individuals performing these services; (xiii) have proper medical record
storage and be able to retrieve medical records upon request from CMS or its
fee-for-service contractor within two business days; and (xiv) permit CMS,
including its agents, or its designated fee-for-service contractors, to conduct
unannounced, on-site inspections to confirm the IDTFs compliance with these standards.
We
believe that all our IDTFs are currently in compliance with these regulations
and any additional standards currently imposed by local Medicare contractors
and other payers and are not aware of any investigations or allegations that
such is not the case. Medicare has proposed to make changes in the regulations
governing IDTF enrollment that, if finalized, would take effect on January 1,
2009. If necessary, we will take appropriate steps required to comply with
those changes.
Environmental Regulation.
We use substances regulated
under environmental laws, primarily in manufacturing and sterilization
processes. While it is difficult to quantify, we believe the ongoing impact of
compliance with environmental protection laws and regulations will not have a
material impact on our business, financial position or results of operations.
Product
Liability and Insurance
The
design, manufacture and marketing of medical devices and services of the types
we produce entail an inherent risk of product liability claims. In addition, we
provide information to health care providers and payors upon which
determinations affecting medical care are made, and claims may be made against
us resulting from adverse medical consequences to patients resulting from the
information we provide. To protect ourselves from product liability claims, we
maintain professional liability and general liability insurance on a claims
made basis. Insurance coverage under such policies is contingent upon a policy
being in effect when a claim is made, regardless of when the events which
caused the claim occurred. While a product liability claim has never been made
against us and we believe our insurance policies are adequate in amount and
coverage for our current operations, there can be no assurance that the
coverage maintained by us is sufficient to cover all future claims. In
addition, there can be no assurance that we will be able to obtain such
insurance on commercially reasonable terms in the future.
64
Manufacturing
Our
San Diego facility provides space for our production and field service
operations, packaging, storage and shipping. We believe that our manufacturing
facilities will be sufficient to meet our manufacturing needs for the
foreseeable future.
Manufacturers
(both domestic and foreign) and initial distributors of medical devices must
register their facilities with the FDA. We believe our manufacturing operations
are in compliance with regulations mandated by the FDA. We have been
FDA-registered since December 2001 and a California-licensed medical
device manufacturer since March 2002. We are subject to unannounced
inspections by the FDA and we successfully completed a routine audit by the FDA
in April 2006 with no findings noted or warnings issued.
Manufacturing
of components of our monitors and sensors is provided by an electronics
manufacturing service provider, Jabil Circuit, Inc., in its facilities in
Tempe, Arizona. We may need to expand our manufacturing capacity for our
CardioNet System monitors and sensors in the future to meet market demand, and
may do so by hiring and training additional skilled employees for our
production group or by working with Jabil Circuit, Inc. on available
capacity opportunities such as increases to the personnel assigned to its
CardioNet manufacturing team, adding additional manufacturing lines or
expanding to a second and third shift, as necessary. Our production group
provides system test and product release activities.
There
are a number of critical components and sub-assemblies in the monitors and
sensors that compose part of the CardioNet System. The vendors for these
materials are qualified through stringent evaluation and testing of their
performance. We implement a strict no change policy with our contract
manufacturer to ensure that no components are changed without our approval.
Employees
As of March 31,
2008, we employed 604 full-time employees, of which 92 were in sales and
marketing. We consider our relationship with our employees to be good.
Facilities
We
lease approximately 20,000 square feet of space for our headquarters in San
Diego, California under an agreement that expires in August 2011, of which
approximately 4,000 square feet is dedicated to manufacturing and the balance
is dedicated to office space. We also lease approximately 35,000 square feet of
space for our service center in Philadelphia, Pennsylvania under an agreement
that expires in December 2013. We recently leased approximately 6,000
square feet of space for our distribution operation in Chester, PA, which is
being relocated from Philadelphia, under an agreement that expires in November 2012.
We believe that our existing facilities are adequate to meet our current needs,
and that suitable additional alternative spaces will be available in the future
on commercially reasonable terms.
Our
wholly-owned subsidiary PDSHeart leases approximately 6,000 square feet of
space in West Palm Beach, Florida under a pair of agreements that expire in September 2009,
approximately 10,300 square feet of space in Conyers, Georgia under an
agreement that expires in April 2008 and approximately 2,030 square feet
of space in Edina, Minnesota under an agreement that expires in April 2012.
We believe that their existing facilities will be adequate to meet our current
needs, and that suitable additional alternative spaces will be available in the
future on commercially reasonable terms.
Legal
Proceedings
On November 26,
2007, we filed a lawsuit against LifeWatch Corp. and certain of its
employees in the United States District Court for the Northern District of
Illinois, Eastern Division. In the action, we alleged several causes of action
including trade secret misappropriation, breach of contract, fraud, and unfair
competition arising from actions of LifeWatch and its employees to unlawfully
obtain, use, inspect and test two of our CardioNet System kits.
65
On January 4, 2008,
LifeWatch responded by filing counterclaims in the action against us. In its
counterclaims, LifeWatch alleged that we misappropriated trade secrets of
LifeWatch through inspection of a LifeWatch device, and that we have made
misleading advertising and marketing statements relating to LifeWatch. In May 2008,
the parties entered into a settlement agreement pursuant to which the parties
amicably agreed to resolve the lawsuit with dismissal by both sides of all
claims pending in the lawsuit.
Medical
Advisory Board
We
seek advice from a number of leading physicians and scientists on scientific,
technical and medical matters. These advisors are leading physicians and
scientists in the areas of electrophysiology and cardiology. Our medical
advisors are consulted regularly to assess, among other things:
·
our research and development programs;
·
our publication strategies;
·
new technologies relevant to our research
and development programs; and
·
specific scientific and technical issues
relevant to our business.
Our
medical advisors and their primary affiliations are listed below:
Name
|
|
Primary
Affiliation
|
David G. Benditt, M.D.
|
|
University of Minnesota
Medical School Cardiovascular Division
|
|
|
|
David S. Cannom, M.D.
|
|
L.A. Cardiology
Associates
|
|
|
|
Anthony N. DeMaria,
M.D.
|
|
UCSD Medical
Center Division of Cardiology
|
|
|
|
Peter R. Kowey, M.D.
|
|
Main Line Health Heart
Center
|
|
|
|
Craig M. Pratt, M.D.
|
|
The Methodist Hospital
|
|
|
|
Eric N. Prystowsky,
M.D.
|
|
The Care Group, LLC
|
66
MANAGEMENT
Executive
Officers, Directors and Key Employees
The
following table sets forth information regarding our executive officers,
directors and key employees as of March 31, 2008:
Name
|
|
Age
|
|
Position
|
Executive
Officers and Directors:
|
|
|
|
|
Arie Cohen
|
|
60
|
|
President, Chief
Executive Officer and Director
|
James M. Sweeney
|
|
65
|
|
Executive Chairman and
Director
|
Martin P. Galvan, CPA
|
|
56
|
|
Chief Financial
Officer; Chief Operating Officer, PDSHeart
|
Manny S. Gerolamo
|
|
55
|
|
Senior Vice President,
Sales and Marketing
|
Fred Middleton(1)
|
|
58
|
|
Director
|
Woodrow A. Myers Jr.,
M.D.(1)
|
|
54
|
|
Director
|
Eric N. Prystowsky,
M.D.(2)
|
|
60
|
|
Director
|
Harry T. Rein(1)(2)
|
|
63
|
|
Director
|
Robert J. Rubin, M.D.(2)
|
|
62
|
|
Director
|
|
|
|
|
|
Key
Employees:
|
|
|
|
|
JR Finkelmeier
|
|
34
|
|
Vice President,
Marketing
|
Michael Forese
|
|
50
|
|
Vice President, Finance
and Administration
|
Charles M. Gropper
|
|
50
|
|
Vice President,
Research and Development
|
John F. Imperato
|
|
51
|
|
Senior Vice President,
Business Operations
|
Philip Leone
|
|
43
|
|
Vice President, Managed
Care and Reimbursement Services
|
Anna McNamara, RN
|
|
60
|
|
Senior Vice President,
Clinical Operations
|
Chris Strasinski
|
|
40
|
|
Vice President, Sales
|
(1) Member of the
audit committee.
(2) Member of the
compensation, nominating and corporate governance committee.
Executive Officers and Directors
Arie Cohen.
Mr. Cohen
has served as our President and Chief Executive Officer since November 2007
and as a member of our board since December 2007. From November 2003
to November 2007, Mr. Cohen held several positions with Viasys
Healthcare Inc., a healthcare technology company that was acquired by
Cardinal Health, Inc. in June 2007, most recently as Group President
Respiratory Care. From August 2001 to November 2003, Mr. Cohen
served as President of ARC Healthcare Consulting, a healthcare consulting
company that he founded. Mr. Cohen received an undergraduate degree in
electrical engineering from California State Polytechnic University Pamona and
a masters degree in Electrical Engineering from UCLA.
James M. Sweeney.
Mr. Sweeney
has served as our Executive Chairman since November 2007 and as a member
of our board of directors since April 2000. From April 2000 to November 2007,
Mr. Sweeney served as our Chief Executive Officer and Chairman of the
Board. From 1997 to 1999, Mr. Sweeney served as the founder, Chairman and
CEO for Cerner Bridge Medical, a company specializing in medication error
prevention. From 1994 to 1996, Mr. Sweeney served as the founder, Chairman
and CEO of Coram, Inc. a home intravenous, or IV, therapy
67
company. From 1990 to
1993, Mr. Sweeney served as Chairman and CEO of McGaw, Inc. (acquired
by IVAX Corp. in 1994) an IV solution manufacturer. From 1989 to 1990, Mr. Sweeney
served as the founder, Chairman and CEO of Central Admixture Pharmacy Services
(CAPS), a subsidiary of B. Braun Medical Inc., an IV solution
manufacturer. From 1989 to 1990, he served as the founder, Chairman and CEO of
CareGivers, a high tech home care partnership. From 1988 to 1989, he served as
the founder, Chairman and CEO of CarePartners, a 24/7/365 nursing call center
and from 1979 to 1987 he served as the founder, Chairman and CEO of Caremark, Inc.,
a health infusion services and prescription management company. Mr. Sweeney
received an undergraduate degree in Business Administration from San Diego
State University.
Martin P. Galvan, CPA.
Mr. Galvan
has served as our Chief Financial Officer since September 2007 and as our
Chief Operating Officer, PDSHeart since October 2007. From June 2001
to July 2007, Mr. Galvan held several positions with Viasys
Healthcare Inc., a healthcare technology company that was acquired by Cardinal
Health, Inc. in June 2007, most recently as Executive Vice President,
Chief Financial Officer and Director Investor Relations. From 1999 to 2001, Mr. Galvan
served as Chief Financial Officer of Rodel, Inc., a precision surface
technologies company. From 1979 to 1998, Mr. Galvan held several positions
with Rhone-Poulenc Rorer Pharmaceuticals, Inc., a pharmaceuticals company,
including Vice President, Finance Worldwide; President & General
Manager, RPR Mexico & Central America; Vice President, Finance,
Europe/Asia Pacific; and Chief Financial Officer, United Kingdom &
Ireland. Mr. Galvan received an undergraduate degree in Economics from
Rutgers University.
Manny S. Gerolamo.
Mr. Gerolamo
has served as our Senior Vice President, Sales and Marketing since January 2008.
From September 2006 to January 2008, Mr. Gerolamo served as
Executive Director, Cardiovascular Specialty Sales of Reliant Pharmaceuticals,
a pharmaceutical company. From February 2006 to August 2006, Mr. Gerolamo
served as Vice President, Sales and Marketing of Inspirion Pharmaceuticals, a
pharmaceutical company. From May 2004 to January 2006, Mr. Gerolamo
served as Vice President, Sales and Marketing of Fournier Pharma, a
pharmaceutical company. From May 2000 to May 2004, Mr. Gerolamo
served as Executive Director, Sales and Marketing Operations of Reliant
Pharmaceuticals. Mr. Gerolamo received an undergraduate degree in Speech
Pathology and Audiology from Lehman College and an M.B.A. from New York
University.
Fred Middleton.
Mr. Middleton
has been a member of our board of directors since April 2000. Since 1987,
he has been a General Partner/Managing Director of Sanderling Ventures, a firm
specializing in biomedical venture capital. From 1984 through 1986, he was the
Managing General Partner of Morgan Stanley Ventures, an affiliate of Morgan
Stanley & Co. Earlier in his career, Mr. Middleton was part of
the original management team at Genentech, Inc., a biotechnology company,
serving there from 1978 through 1984 as Vice President of Finance and Corporate
Development, and Chief Financial Officer. He has played active management roles
in many biomedical companies, including as Chairman, CEO or director of a
number of Sanderling portfolio companies, currently including Stereotaxis, Inc.,
a medical device company where he serves as Chairman, and Favrille, Inc.,
a biotechnology company where he serves as director, as well as serving as
board member of several private held biomedical companies. Mr. Middleton
received an undergraduate degree in Chemistry from the Massachusetts Institute
of Technology and an M.B.A. with distinction from Harvard Business School.
Woodrow A. Myers Jr., M.D.
Dr. Myers
has been a member of our board of directors since August 2007. Since December 2005,
he has served as the Managing Director of Myers Ventures LLC, an investment
firm with interests in health care consulting and international health. From October 2000
to January 2005, Dr. Myers served as Executive Vice President and
Chief Medical Officer of WellPoint, Inc., a health benefits company. From
1996 to 2000, Dr. Myers served as Director of Health Care Management for
Ford Motor Company, an automobile company. From 1991 to 1995, Dr. Myers
served as the Corporate Medical Director for Anthem Blue Cross Blue Shield
(then known as the Associated Group), a health care company. Dr. Myers
currently serves on the board of directors of Thermogenesis Corp., a health
care products company, Genomic Health, Inc., a life science company,
Express Scripts, Inc., a pharmacy benefit management company, and the
Stanford University Hospitals and Clinics. He is a Visiting Professor of
Medicine at the UCLA School of Medicine. Dr. Myers received an
undergraduate degree in Biological Sciences and an M.B.A. from Stanford
University and an M.D. from Harvard Medical School.
Eric N. Prystowsky, M.D.
Dr. Prystowsky
has been a member of our board of directors since March 2001. Since 1988, Dr. Prystowsky
has served as the Director, Clinical Elecrophysiology Laboratory at St. Vincent
Hospital, Indianapolis Indiana. Since 1988, Dr. Prystowsky has served as
Consulting Professor of Medicine at Duke University. Since 2004, he has served
as the associate editor of Hurst Textbook of Cardiology and, since January
68
2004, he has served as
editor-in-chief of the Journal of Cardiovascular Electrophysiology. From 1992
to 1994, he served as the Chairman of the American Heart Associations
Committee on Electrocardiography and Electrophysiology and, from May 2001
to May 2002, as President of the Heart Rhythm Society. Dr. Prystowsky
currently serves as the Chairman of the ABIM test writing committee for the
Electrophysiology Boards. Dr. Prystowsky currently serves on the board of
directors of Stereotaxis, Inc., a biotechnology company. Dr. Prystowsky
received an undergraduate degree from the Pennsylvania State University and an
M.D. from the Mount Sinai School of Medicine.
Harry T. Rein.
Mr. Rein has
been a member of our board of directors since January 2006. He has served
as a General Partner with Foundation Medical Partners, a venture capital firm,
since March 2003. From 1987 to 2002, Mr. Rein served as the founder
and Managing General Partner of Canaan Partners, a venture capital fund focused
on health care companies. In addition to his role as the Managing General
Partner at Canaan Partners, Mr. Rein was responsible for Canaans Life
Sciences Investment Practice. From 1983 to 1987, he was President and CEO of GE
Venture Capital Corporation, a venture capital firm. Mr. Rein joined the
General Electric Company, or GE, in 1979 and directed several of GEs lighting
businesses as general manager before joining the venture capital subsidiary. Mr. Rein
currently serves on the board of directors of Anadigics, Inc., a
semiconductor solutions provider, and one or more privately held companies. Mr. Rein
received an undergraduate degree in Political Science from Oglethorpe College
and an M.B.A. from the Darden School at the University of Virginia.
Robert J.
Rubin, M.D.
Dr. Rubin has been a member of our
board of directors since July 2007. He has been a clinical professor of
medicine at Georgetown University since 1995. From 1987 to 2001, he was
president of the Lewin Group (purchased by Quintiles Transnational Corp. in
1996), a national health policy and management consulting firm. From 1994 to
1996, Dr. Rubin served as Medical Director of ValueRx, a pharmaceutical
benefits company. From 1992 to 1996, Dr. Rubin served as President of
Lewin-VHI, a health care consulting company. From 1987 to 1992, he served as
President of Lewin-ICF, a health care consulting company. From 1984 to 1987, Dr. Rubin
served as a principal for ICF, Inc., a health care consulting company.
From 1981 to 1984, Dr. Rubin served as the Assistant Secretary for
Planning and Evaluation at the Department of Health and Human Services and as
an Assistant Surgeon General in the United States Public Health Service. Dr. Rubin
is a board certified nephrologist and internist. Dr. Rubin received an
undergraduate degree in Political Science from Williams College and an M.D.
from Cornell University.
Key
Employees
JR Finkelmeier.
Mr. Finkelmeier
has served as our Vice President of Marketing since May 2007. Mr. Finkelmeier
joined us following our acquisition of PDSHeart, where he served as Regional
Sales Director from December 2005 to May 2007 and as Regional
Accounts Manager from March 2003 to November 2005. From 2000 to February 2003,
Mr. Finkelmeier served as General Manager of Veritas Partners, a
Midwest-based venture capital and management company. Mr. Finkelmeier
received an undergraduate degree in Pre-Professional Studies from the
University of Notre Dame.
Michael Forese.
Mr. Forese
has served as our Vice President, Finance and Administration since April 2004.
From February 2003 to March 2004, he was employed by CRT
Pharmaceuticals, a pharmaceutical company, where he served as Chief Operating
and Chief Financial Officer. From 1998 to 2002, Mr. Forese served as CFO
of Research Pharmaceutical Services, Inc., a start-up contract research
organization. From 1997 to 1998, he served in senior financial and operating
roles in companies such as IBAH Pharmaceutical Services, Inc. (acquired by
Omnicare in 1998), a pharmaceutical care company, and PARAXEL International
Corporation, a biopharmaceutical service provider. From 1981 to 1992, Mr. Forese
served in several positions with Imperial Chemical Industries PLC (Zeneca) in
Brussels, Belgium, a chemical producing company, including as controller for
international operations and most recently as Manager of Internal Audit for
North America. Mr. Forese received an undergraduate degree in Accounting
from Villanova University and an M.B.A. from Drexel University.
Charles M. Gropper.
Mr. Gropper
has served as our Vice President, Research and Development since January 2008.
From June 2005 to January 2008, Mr. Gropper served as Vice
President, Engineering of HepaHope, Inc., a healthcare company. From January 2001
to September 2004, Mr. Gropper served as Director, Product Assurance
Engineering of Cameron Health, Inc., a medical device company. From 1999
to 2001,
69
Mr. Gropper served
as Director, Quality and Product Assurance Engineering of Cardiac Science, Inc.,
a healthcare company. From 1995 to 1999, Mr. Gropper served as Project
Manager, Development and Product Assurance Engineering of Datascope
Corporation, a healthcare company. From 1982 to 1995, Mr. Gropper held
several positions with Viasys Healthcare Inc., a healthcare technology
company that was acquired by Cardinal Health, Inc. in June 2007, most
recently as Principal Biomedical and Project Engineer. From 1980 to 1982, Mr. Gropper
served as Biomedical and Design Engineer of SIMS Portex, Inc., a
healthcare company. Mr. Gropper received an undergraduate degree in
Biomedical Engineering from Rensselaer Polytechnic Institute and an M.B.A. from
California State University at Fullerton.
John F. Imperato.
Mr. Imperato
has served as our Senior Vice President, Business Operations since June 2008.
From June 2007 to June 2008, Mr. Imperato served as Senior Vice
President, Integration and Business Operations with Cardinal Health, Inc, a
global manufacturer and distributor of medical and surgical supplies and
technologies. From January 2006 to June 2007, Mr. Imperato
served as Senior Vice President, Business Operations with Viasys
Healthcare Inc., a healthcare technology company that was acquired by
Cardinal Health, Inc. in June 2007. From October 2001 to January 2006,
Mr. Imperato served as Corporate Vice President, Finance with Viasys
Healthcare Inc. From 2000 to 2001, Mr. Imperato served as Chief Financial
Officer of Auxilium A2, Inc., a pharmaceutical company engaged in
development and marketing of ethical pharmaceutical products. From 1999 to
2000, Mr. Imperato served as Chief Financial Officer of Omnicare Clinical
Services, Inc., a contract research organization. From 1984 to 1998, Mr. Imperato
held several positions with Rhone-Poulenc Rorer Pharmaceuticals, Inc.,
including Vice President, Finance, Worldwide Industrial Operations. Mr. Imperato
received an undergraduate degree in Accounting from Manhattan College and an
M.B.A. from Pace University.
Philip Leone.
Mr. Leone
has served as our Vice President, Managed Care and Reimbursement Services since
December 2002. From 1990 to April 2002, Mr. Leone successfully
served in numerous sales and executive sales management positions within Legend
Healthcare, a health care company, where he most recently served as Executive
Vice President/Chief Operating Officer. Mr. Leone received an
undergraduate degree in Business Administration from Western New England
College.
Anna McNamara.
Ms. McNamara
has served as our Senior Vice President, Clinical Operations since September 2002.
From February 2001 to September 2002, Ms. McNamara served as
Executive Vice President of Clinical Operations for LifeWatch Corp., a health
care services company. From July 1998 to February 2001, Ms. McNamara
served as Vice President of Clinical Operations for Quality Diagnostic Services
at Matria Healthcare, Inc., a health care company. From January 1997
to July 1998, Ms. McNamara served as Vice President of Clinical
Operations for WebMD Health Corp., a web-based health information provider. Ms. McNamara
received an undergraduate degree from Marymount College and an RN at Mercy
Hospital in Scranton, PA.
Chris Strasinski.
Mr. Strasinski
has served as our Vice President, Sales in addition to several other positions
since December 2002. From 2000 to December 2002, Mr. Strasinski
served as a Regional Sales Director for Digirad Imagining Solutions, a leader
in mobile nuclear imaging services. Mr. Strasinski received an
undergraduate degree in Business Administration from Lynn University.
Board
Composition
Our
board of directors currently consists of eight authorized members, with one
vacancy, and is divided into three classes, as follows:
·
Class I, which consists of Messrs. Middleton
and Sweeney, and whose term will expire at our annual meeting of stockholders
to be held in 2008;
·
Class II, which consists of Mr. Rein
and Dr. Myers, with one vacancy, and whose term will expire at our annual
meeting of stockholders to be held in 2009; and
·
Class III, which consists of Mr. Cohen
and Drs. Prystowsky and Rubin, and whose term will expire at our annual
meeting of stockholders to be held in 2010.
70
Our
board of directors has determined that five of our seven current directors, Messrs. Middleton
and Rein and Drs. Myers, Prystowsky and Rubin, are independent directors,
as defined by Rule 4200(a)(15) of the Nasdaq Marketplace Rules.
At
each annual meeting of stockholders to be held after the initial
classification, the successors to directors whose terms then expire will serve
until the third annual meeting following their election and until their
successors are duly elected and qualified. The authorized number of directors
may be changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed between the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of the
board of directors may have the effect of delaying or preventing changes in our
control or management. Our directors may be removed for cause by the
affirmative vote of the holders of at least 66
2
/
3
% of our voting stock.
Board
Committees
Our
board of directors has an audit committee and a compensation, nominating and
corporate governance committee.
Audit Committee
Our
audit committee consists of Mr. Middleton, Mr. Rein and Mr. Myers,
each of whom is a non-employee director of our board of directors. Mr. Middleton
is the chairman of our audit committee. Our board of directors has determined
that Mr. Middleton is a financial expert. Our board of directors has also
determined that each of the directors serving on our audit committee is
independent within the meaning of the rules of the SEC and the Nasdaq
Marketplace Rules. The functions of this committee include, among other things:
·
evaluating the performance of our
independent auditors and determining whether to retain their services for the
ensuing year;
·
reviewing and pre-approving the
engagement of our independent auditors to perform audit services;
·
reviewing and proposing to the full board
of directors for approval any permissible non-audit services;
·
reviewing our annual financial statements
and reports and discussing the statements and reports with our independent
auditors and management;
·
reviewing with our independent auditors
and management significant issues that arise regarding accounting principles
and financial statement presentation, and matters concerning the effectiveness
of internal auditing and financial reporting controls; and
·
establishing procedures for the receipt,
retention and treatment of complaints received by us regarding accounting,
internal accounting controls or auditing matters.
Both
our independent registered public accounting firm and management periodically
meet privately with our audit committee.
Compensation, Nominating and Corporate Governance Committee
Our
compensation, nominating and corporate governance committee consists of Mr. Rein
and Drs. Rubin and Prystowsky, each of whom is a non-employee director of
our board of directors. Mr. Rein is the chairman of the compensation,
nominating and corporate governance committee. Our board of directors has
determined that each of the directors serving on our compensation, nominating
and corporate governance committee is independent within the meaning of the rules of
the SEC and the Nasdaq Marketplace Rules. The functions of this committee
include, among other things:
71
·
reviewing and recommending to the Board
the compensation and other terms of employment of our executive officers;
·
reviewing and recommending to the Board
performance goals and objectives relevant to the compensation of our executive
officers and assessing their performance against these goals and objectives;
·
evaluating and recommending to the Board
the equity incentive plans, compensation plans and similar programs advisable
for us, as well as modification or termination of existing plans and programs;
·
reviewing and periodically accessing the
adequacy of compensation to be paid or awarded to board members;
·
establishing policies with respect to
equity compensation arrangements;
·
reviewing the competitiveness of our
executive compensation programs and evaluating the effectiveness of our
compensation policy and strategy in achieving expected benefits to us;
·
reviewing and recommending to the Board
the terms of any employment agreements, severance arrangements, change in
control protections and any other compensatory arrangements for our executive
officers;
·
reviewing with management our disclosures
under the caption Compensation Discussion and Analysis and recommending to
the full board its inclusion in our periodic reports to be filed with the SEC;
and
·
preparing the report that the SEC
requires in our annual proxy statement;
·
identifying, reviewing and evaluating
candidates to serve on our board of directors consistent with criteria approved
by our board of directors;
·
determining the minimum qualifications
for service on our board of directors;
·
evaluating director performance on the
board and applicable committees of the board and determining whether continued
service on our board is appropriate;
·
reviewing, evaluating and recommending
individuals to the board of directors for membership on our board of directors;
·
evaluating nominations by stockholders of
candidates for election to our board;
·
considering and assessing the
independence of members of our board of directors;
·
developing, as appropriate, a set of
corporate governance policies and principles, including a code of business
conduct and ethics and reviewing and recommending to our board of directors any
changes to such policies and principles;
·
periodically reviewing with our CEO the
succession plans for the office of CEO and for other key executive officers,
and making recommendations to our board of directors of appropriate individuals
to succeed to these positions;
·
considering questions of possible
conflicts of interest of directors as such questions arise;
·
reviewing the adequacy of our
compensation, nominating and corporate governance committee charter on a
periodic basis; and
·
reviewing and evaluating, at least
annually, the performance of the compensation, nominating and corporate
governance committee.
72
Compensation
Committee Interlocks and Insider Participation
No
member of our compensation, nominating and corporate governance committee has
ever been an executive officer or employee of ours. None of our officers
currently serves, or has served during the last completed year, on the
compensation, nominating and corporate governance committee or board of
directors of any other entity that has one or more officers serving as a member
of our board of directors or compensation, nominating and corporate governance
committee. Prior to establishing the compensation, nominating and corporate
governance committee, our full board of directors made decisions relating to
compensation of our officers.
73
EXECUTIVE
COMPENSATION
Compensation
Discussion and Analysis
Overview
We
have formed a compensation, nominating and corporate governance committee of
our board of directors, which is composed entirely of independent directors,
administers our executive compensation program. One of the roles of the
compensation, nominating and corporate governance committee is to oversee our
compensation and benefit plans and policies, to administer our equity incentive
plans and to review and recommend to the board of directors all compensation
decisions relating to all executive officers.
Compensation Philosophy
Our
executive compensation programs are designed to:
·
attract, motivate and retain executives
of outstanding ability and potential; and
·
ensure that executive compensation is
meaningfully related to the creation of stockholder value.
Our
compensation, nominating and corporate governance committee believes that our
executive compensation programs should include both short- and long-term
components, including cash and equity-based compensation, and should reward
consistent performance that meets or exceeds expectations. Historically, we
have not tied compensation to the achievement of specific corporate or
individual goals. Instead, determinations about corporate or individual
performance have been based on the judgments made in the discretion of our
chief executive officer, our compensation committee or board.
Setting Executive Compensation
Currently,
the compensation, nominating and corporate governance committee is chartered to
review and make recommendations to our board regarding the compensation to be
paid to our chief executive officer and other executive officers. Historically,
our compensation committee negotiated compensation with our chief executive
officer, and our chief executive officer consulted with our board of directors
regarding the compensation of our other executive officers. As a private
company, our directors and chief executive officer based compensation decisions
primarily on their extensive background and experience with compensation
practices and policies in the medical device and services industries. This
background and experience provides the context in which they have made
subjective judgments regarding our executives compensation. We have not
benchmarked compensation against any company or specific group of peer
companies or based compensation decisions on the practices of other companies,
although we plan to do so. Generally, salaries and initial stock grants for our
executive officers have been negotiated at the time of hire. Thereafter,
salaries have generally been subject to annual review, and the adequacy of
option grants has been reviewed from time to time.
Our
compensation, nominating and corporate governance committee may in the future
retain the services of third party executive compensation specialists and
consultants from time to time, as it sees fit, in connection with the
establishment of cash and equity compensation and related policies.
Role of Chief Executive Officer in Compensation Decisions
For
our executive officers other than himself, our chief executive officer has
historically determined salary amounts independently in consultation with our
board of directors and recommended option award amounts to our compensation
committee and board for approval. These recommendations, after consultation
with the board, have generally been approved by our board as presented.
74
Mr. Sweeney
was our chief executive officer through November 26, 2007. His
compensation for 2006 was determined as part of the renegotiation of his
employment agreement in 2005. His employment agreement, including his salary
during 2006, was negotiated by our compensation committee. His compensation for
2007, which is described in detail below under the heading Elements of
Executive Compensation, was determined by our compensation committee. Mr. Cohen
became our president and chief executive officer on November 26, 2007. His
compensation, which is also described in detail below, was determined as a part
of the negotiation of his employment agreement. Members of our compensation
committee negotiated on our behalf and our board approved the terms of Mr. Cohens
employment agreement, including his compensation.
In the
future, we expect that our chief executive officer will evaluate the
performance of other executive officers on an annual basis and make
recommendations to the compensation, nominating and corporate governance
committee with respect to annual salary adjustments, bonuses and annual stock
option grants. The compensation, nominating and corporate governance committee
will exercise its own discretion in determining salary adjustments and
discretionary cash and equity-based awards to recommend to the board of
directors for all executive officers.
Elements of Executive Compensation
The
compensation program for our executive officers consists principally of base
salary, long-term compensation in the form of stock options,
severance/termination protection and, in limited instances, bonuses. As a
private company, our compensation program has been weighted toward long-term
compensation as opposed to cash-based compensation. If we are successful, we
expect the equity awards held by our executives to be the major component of
overall compensation. The amount of each element of compensation paid to our
executives is not typically considered when determining the levels of each
other element.
Base Salary
Base
salaries for our executives are established based on the scope of their
responsibilities and individual experience, taking into account our informal
understanding of competitive market compensation paid by other companies for
similar positions within our industry. Base salaries are typically reviewed
annually taking into account individual responsibilities, performance and
achievement. We have not set specific performance related objectives or goals,
but instead we have based salary determinations on our overall evaluation of
performance. We have not applied specific formulas to determine increases.
Mr. Cohens
base salary for 2007 was $450,000. This salary was determined as part of the
negotiation of Mr. Cohens employment agreement in November 2007,
which was conducted on our behalf by members of our compensation committee and
approved by our board. In approving the salary, the board considered Mr. Cohens
requested salary and the salaries of other members of our management, including
Mr. Sweeney, Mr. Galvan and Gregory A. Marsh, our former Chief
Financial Officer and former Chief Operating Officer, PDSHeart. Mr. Cohens
salary was most similar to that of Mr. Sweeney, reflective of the fact
that Mr. Cohen succeeded Mr. Sweeney as our President and Chief
Executive Officer. Mr. Cohens salary was significantly higher than those
of Mr. Galvan and Mr. Marsh, reflective of the more significant
responsibilities attached to his position and title. We did not compare his
salary to those of executives at other companies.
For
2006, Mr. Sweeneys base salary was $460,000. This salary was determined
as part of a re-negotiation of his employment agreement in November 2005,
was negotiated on our behalf by our compensation committee and reflected an
increase over his prior salary of $400,000. For 2007, Mr. Sweeneys base
salary was $500,000, which represented an increase over his 2006 salary of
$460,000. In determining the amount of Mr. Sweeneys salary for 2006 and
2007, the committee made subjective judgments about Mr. Sweeneys overall
performance, his contributions to our success and changes in the cost of
living. We did not formally compare his salary to those of executives at other
companies. We did not use specific performance criteria to evaluate Mr. Sweeneys
performance, nor did we identify or evaluate any specific element of
performance or specific contributions in determining the amount of Mr. Sweeneys
salary. Instead, we based the determination solely on an overall subjective
assessment of Mr. Sweeneys performance and contributions.
75
Mr. Foreses
base salary in 2006 was $200,000 and was increased to $210,000 in 2007. Mr. Foreses
2006 salary was determined by Mr. Sweeney and his 2007 salary was
determined by Mr. Wood and were based on Mr. Sweeneys and Mr. Woods
subjective judgment about Mr. Foreses overall performance. We did not use
specific performance criteria to evaluate Mr. Foreses performance, nor
did we identify or evaluate any specific element of performance in determining
the amount of Mr. Foreses salary. Instead, we based the determination
solely on an overall subjective assessment of Mr. Foreses performance. We
did not compare the base salary amount for Mr. Forese to those of
executives at other companies.
Mr. Galvans
base salary for 2007 was $300,000. This salary was determined as part of the
negotiation of Mr. Galvans employment agreement in September 2007,
which was conducted on our behalf by our chief executive officer and approved
by our board. In determining the salary, we considered Mr. Galvans
requested salary and the salaries of other members of our management, including
Mr. Sweeney, Mr. Marsh and Mr. Forese. Mr. Galvans salary
was most similar to that of Mr. Marsh, reflective of the fact that Mr. Galvan
succeeded Mr. Marsh as our Chief Financial Officer. We did not compare his
salary to those of executives at other companies.
Mr. Marshs
base salary for 2007 was $273,000. This salary reflected a continuation of Mr. Marshs
compensation at PDSHeart prior to our acquisition of PDSHeart. We did not
compare his salary to those of executives at other companies.
Mr. Woods
base salary in 2006 was $350,000. His base salary in 2007 was $365,600, which
represented a cost of living increase over his 2006 salary. Mr. Woods
salary was determined in negotiations between Mr. Sweeney, members of our
compensation committee and Mr. Wood in connection with the commencement of
his employment in April 2006. We did not compare the base salary amount
for Mr. Wood to those of executives at other companies.
We
believe, based on our recruiting efforts and general experience in our
industry, that the base salary levels of our executives are commensurate with
the general salary levels for similar positions in medical device and services
companies of similar size and stage of development and operations. However, we
have not conducted a review of salary levels at any specific company or group
of companies to verify the size of base salaries relative to the market.
Long-term Incentive Program
We
believe that by providing our executives the opportunity to increase their
ownership of our stock, the best interests of stockholders and executives will
be more aligned and we will encourage long-term performance. Stock awards
enable our executive officers to participate in any increase in stockholder
value and personally participate in the risks of business setbacks. We have not
adopted stock ownership guidelines and, with the exception of the shares
acquired by our chief executive officer early in our corporate history, our
equity benefit plans have provided our executive officers the only means to
acquire equity or equity-linked interests in CardioNet.
Mr. Cohen
was awarded an option to purchase 450,000 shares of our common stock in
connection with the commencement of his employment in November 2007. The
number of shares was determined as part of the negotiation of his overall
employment package and was approved by our board of directors. In determining
the number of shares, the board considered the number of shares requested by Mr. Cohen
and the equity ownership of other members of our management, including Mr. Galvan,
Mr. Marsh and Mr. Forese. The number of shares awarded to Mr. Cohen
was significantly higher than those awarded to Mr. Galvan, Mr. Marsh
and Mr. Forese, reflective of the more significant responsibilities
attached to his position and title. We did not compare this stock amount to
equity amounts held by executives at other companies.
Mr. Sweeney
was not granted any equity awards in 2006. Mr. Sweeney was awarded an
option to purchase 50,000 shares of our common stock in April 2007. The
purpose of this option grant was to provide Mr. Sweeney with an incentive
to continue to provide services to us, including assisting us with the hiring
of a new chief executive officer and the pursuit of strategic alternatives. The
shares underlying this option vest in full upon the achievement of either one
of two performance milestones aligned to these incentive purposes as follows:
·
upon the approval by our board of a
management succession plan deemed satisfactory to our board in its sole
discretion; or
76
·
immediately prior to the closing of a
change in control if so determined by our board, in its sole discretion, prior
to the closing of such change in control.
In December 2007
our board determined that the first of the foregoing milestones had been met
and the shares underlying this option vested in full. The number of shares
subject to the option was determined by negotiation with Mr. Sweeney and
approved by our board. In determining the number of shares, the board
considered the number of shares then held by Mr. Sweeney and sized the
award to an amount that they felt would provide an adequate incentive in light
of his equity ownership. We did not compare this stock amount to equity amounts
held by executives at other companies.
Mr. Forese
was not granted any equity awards in 2006 or 2007.
Mr. Galvan
was awarded an option to purchase 150,000 shares of our common stock in
connection with the commencement of his employment in September 2007. The
number of shares was determined as part of the negotiation of his overall
employment package and was approved by our board of directors. In determining
the number of shares, the board considered the number of shares requested by Mr. Galvan
and the equity ownership of other members of our management, including Mr. Marsh
and Mr. Forese. The number of shares awarded to Mr. Galvan was most
similar to those awarded to Mr. Marsh, reflective of the fact that Mr. Galvan
succeeded Mr. Marsh as our Chief Financial Officer. We did not compare
this stock amount to equity amounts held by executives at other companies.
Mr. Marsh
was awarded an option to purchase 100,000 shares of our common stock in
connection with the commencement of his employment in March 2007. The
number of shares was determined as part of the negotiation of his overall
employment package and was approved by our board of directors. In determining
the number of shares, the board considered the equity ownership of other
members of our management. We did not compare this stock amount to equity
amounts held by executives at other companies. In September 2007, Mr. Marsh
agreed to forfeit this option and the option was cancelled.
Mr. Wood
was granted a stock option to purchase 200,000 shares of our common stock in
connection with the commencement of his employment in April 2006. The
number of shares was determined as part of the negotiation of his overall
employment package and was approved by our board of directors. In determining
the number of shares, the board considered the number of shares requested by Mr. Wood
and the equity ownership of other members of our management, including Mr. Sweeney
and Mr. Forese. The number of shares awarded to Mr. Wood was
significantly lower than those awarded to Mr. Sweeney, reflective of his
role as our President and Chief Operating Officer and the less significant
responsibilities attached to such role relative to those of our President and Chief
Executive Officer, as well as the fact that Mr. Sweeney was a founder of
CardioNet. The number of shares awarded to Mr. Wood was most similar to
those awarded to Mr. Forese, reflective of our determination that Mr. Wood
and Mr. Forese held positions of similar responsibility. We did not
compare this stock amount to equity amounts held by executives at other
companies.
Prior
to our initial public offering, we granted equity awards primarily through our
2003 plan, which was adopted by our board of directors and stockholders to
permit the grant of stock options, stock bonuses and restricted stock to our
officers, directors, employees and consultants. The material terms of our 2003
plan are further described under Equity Benefit Plans.
In the
absence of a public trading market for our common stock prior to the closing of
our initial public offering, our board of directors and compensation committee
determined the fair market value of our common stock in good faith based upon
consideration of a number of relevant factors including the status of our
development efforts, financial status and market conditions.
All
equity awards to our employees and directors were granted at no less than the
fair market value of our common stock on the date of each award. All option
grants typically vest over four years, with one quarter of the shares subject
to the stock option vesting on the one year anniversary of the vesting
commencement date and the remaining shares vesting in equal months installments
thereafter over three years. All options have a ten year term.
77
Additional information
regarding accelerated vesting upon or following a change in control is
discussed below under post employment compensation. We do not have any
program, plan or obligation that requires us to grant equity compensation to
executive officers on specified dates and, because we have not been a public
company, we have not made equity grants in connection with the release or
withholding of material non-public information. Authority to make equity grants
to executive officers rests with our board of directors, based on
recommendations from our compensation, nominating and corporate governance
committee, although we do consider the recommendations of our chief executive
officer for officers other than himself.
In
connection with our initial public offering, our board of directors adopted new
equity benefit plans described under Equity Benefit Plans. The 2008
plan replaced our previously existing 2003 plan immediately following our
initial public offering and, as described below, affords our compensation,
nominating and corporate governance committee much greater flexibility in
making a wide variety of equity awards. Participation in our 2008 purchase plan
that became effective on March 18, 2008 is also available to all executive
officers on the same basis as our other employees.
Our
2008 plan authorizes us to grant stock appreciation rights, or SARs, and grant
restricted stock or restricted stock awards which are more fully described
below under Equity Benefit Plans.
To
date, no SARs, restricted stock or restricted stock awards have been awarded to
any of our executive officers. However, we may in the future elect to make such
awards to our executive officers if we deem it advisable.
Severance and Change in Control Benefits
Our
chief executive officer and our executive chairman are each entitled to certain
severance and change in control benefits, the terms of which are described below
under Post Employment Compensation. We believe these severance and
change in control benefits are an essential element of our overall executive
compensation package.
Bonuses
In
2006 and 2007, the only cash bonuses that we paid to our executive officers
were as follows:
·
In May 2006, we paid a signing bonus
of $50,000 to Mr. Wood.
·
In February 2007, PDSHeart paid a
discretionary bonus of $27,500 to Mr. Marsh.
·
In March 2007, PDSHeart paid to Mr. Marsh
a discretionary bonus of $27,500 and a transaction bonus of $160,000.
·
In July 2007 we paid a special
retention bonus of $50,000 to Mr. Forese.
·
In August 2007 we paid a special
bonus of $352,679 to Mr. Sweeney, approximately $210,000 of which he
applied to repaying all principal and accrued interest on a loan we made to him
in 2004.
·
In August 2007 we paid a special
bonus of $165,696 to Mr. Forese, approximately $115,000 of which he
applied to repaying all principal and accrued interest on a loan we made to him
in 2007.
We
paid the May 2006 signing bonus to Mr. Wood in connection with the
hiring of Mr. Wood by us. The amount of the bonus was negotiated between Mr. Sweeney,
members of our compensation committee and Mr. Wood in connection with the
commencement of Mr. Woods employment. In determining the amount of the
bonus, we considered Mr. Woods overall compensation, including his salary
and equity ownership.
78
The
special bonuses of $27,500 in February 2007 and March 2007 were paid
to Mr. Marsh by PDSHeart prior to our acquisition of PDSHeart. The amounts
of the bonuses were determined by the board of directors and compensation
committee of PDSHeart.
The
transaction bonus of $160,000 was paid to Mr. Marsh by PDSHeart prior to
our acquisition of PDSHeart in consideration for Mr. Marshs continuation
of employment with PDSHeart through the closing of the acquisition. The amount
of the bonus was determined by the board of directors of PDSHeart.
We
paid the July 2007 bonus to Mr. Forese in order to encourage Mr. Forese
to continue his employment with us during our search for a new chief financial
officer to replace Mr. Marsh, who was then serving in such capacity. The
amount of the bonus was negotiated with Mr. Forese by Mr. Wood, our
former president and chief operating officer. In approving the payment of the
retention bonus, we considered Mr. Foreses overall compensation,
including his salary and equity ownership.
We
paid the August 2007 bonuses in order to enable Mr. Sweeney and Mr. Forese
to, after tax withholdings, repay their loans prior to the initial filing of
our registration statement for our initial public offering, as required by the
provisions of the Sarbanes-Oxley Act of 2002, which they did. We do not intend
to continue the practice of extending such loans or paying bonuses for the
repayment of such loans in the future.
Other Compensation
In
addition, consistent with our compensation philosophy, we intend to continue to
maintain the current benefits for our executive officers, which are also
available to all of our other employees; however, our compensation, nominating
and corporate governance committee, in its discretion, may in the future
revise, amend or add to the benefits of any executive officer if it deems it
advisable.
Deductibility of Compensation under Section 162(m)
Section 162(m) of
the Internal Revenue Code of 1986 limits our deduction for federal income tax
purposes to not more than $1 million of compensation paid to certain
executive officers in a calendar year. Compensation above $1 million may
be deducted if it is performance-based compensation. The compensation,
nominating and corporate governance committee has not yet established a policy
for determining which forms of incentive compensation awarded to our executive
officers will be designed to qualify as performance-based compensation. To
maintain flexibility in compensating our executive officers in a manner
designed to promote our objectives, the compensation, nominating and corporate
governance committee has not adopted a policy that requires all compensation to
be deductible. However, the compensation, nominating and corporate governance
committee intends to evaluate the effects of the compensation limits of Section 162(m) on
any compensation it proposes to grant, and the compensation, nominating and
corporate governance committee intends to provide future compensation in a
manner consistent with our best interests and those of our stockholders.
79
Summary
Compensation Table
The
following table provides information regarding the compensation earned during
the years ended December 31, 2006 and 2007 by each person serving in 2006
and/or 2007 as a principal executive officer, principal financial and accounting
officer or other executive officer, who we collectively refer to as our named
executive officers in this prospectus.
Name and principal
position
|
|
Year
|
|
Salary($)
|
|
Bonus($)
|
|
Stock
Awards(1)($)
|
|
Option
awards(2)($)
|
|
All other
compensation($)
|
|
Total($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arie Cohen
President and
Chief Executive Officer(3)
|
|
2007
|
|
34,616
|
|
|
|
|
|
|
|
|
|
34,616
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James M. Sweeney
Executive
Chairman and former Chairman and Chief Executive Officer(4)
|
|
2007
|
|
495,384
|
|
352,679
|
|
25,000
|
|
166,000
|
|
11,321
|
|
1,050,384
|
|
|
|
2006
|
|
474,222
|
|
|
|
25,000
|
|
|
|
253,188
|
|
752,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael Forese
Vice President,
Finance and Administration(5)
|
|
2007
|
|
208,846
|
|
215,696
|
|
13,786
|
|
1,501
|
|
|
|
439,829
|
|
|
|
2006
|
|
200,000
|
|
|
|
15,288
|
|
|
|
|
|
215,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin P. Galvan,
CPA Chief
Financial Officer; Chief Operating Officer, PDSHeart(6)
|
|
2007
|
|
70,386
|
|
|
|
|
|
|
|
|
|
70,386
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gregory A. Marsh
Former
Chief Financial
Officer; Former Chief Operating Officer, PDSHeart(7)
|
|
2007
|
|
251,428
|
|
215,000
|
|
|
|
|
|
416,546
|
|
882,974
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Wood
Former President
and Chief Operating Officer(8)
|
|
2007
|
|
237,235
|
|
|
|
|
|
22,611
|
|
182,800
|
|
442,646
|
|
|
|
2006
|
|
231,538
|
|
50,000
|
|
|
|
10,290
|
|
58,336
|
|
350,164
|
|
(1) Calculated in
accordance with SFAS No. 123R using the modified prospective transition
method without consideration of forfeitures. The amount reflects the dollar
amount realized by us for financial statement reporting purposes in each of
2006 and 2007 in connection with the vesting of shares of common stock that
were issued upon exercise of stock options prior to the vesting date of such
options.
(2) Calculated in
accordance with SFAS No. 123R using the modified prospective transition
method without consideration of forfeitures. The amount reflects the dollar
amount realized by us for financial statement reporting purposes in each of
2006 and 2007 in connection with the vesting of outstanding options to purchase
shares of our common stock.
(3) Mr. Cohen
became our President and Chief Executive Officer in November 2007.
(4) Mr. Sweeney
served as our Chairman and Chief Executive Officer during 2006 and until November 2007,
at which time he became our Executive Chairman. All other compensation for 2007
includes $11,321 paid towards air travel expenses for Mr. Sweeneys
spouse. In August 2007, we paid a special bonus of $352,679 to Mr. Sweeney,
approximately $210,000 of which he applied to repaying all principal and
accrued interest on a loan we made to him in 2004. The bonus was paid in order
to enable Mr. Sweeney to repay the loan prior to the initial filing of our
registration statement for our initial public offering, as required by the
provisions of the Sarbanes-Oxley Act of 2002. All other compensation for 2006
includes $236,673 paid as reimbursement in connection with Mr. Sweeneys
relocation from Pennsylvania to California and $16,515 paid towards air travel
expenses for Mr. Sweeneys spouse.
(5) Mr. Forese
served as our principal financial and accounting officer during 2006 and until March 2007,
during which time we operated without a Chief Financial Officer. In July 2007,
we paid a retention bonus of $50,000 to encourage Mr. Forese to continue
his employment with us during our search for a new chief financial officer to
replace Mr. Marsh, who was then serving in such capacity. In August 2007,
we paid a special bonus of $165,696 to
80
Mr. Forese,
approximately $115,000 of which he applied to repaying all principal and
accrued interest on a loan we made to him in 2007. The August 2007 bonus
was paid in order to enable Mr. Forese to repay the loan prior to the
initial filing of our registration statement for our initial public offering,
as required by the provisions of the Sarbanes-Oxley Act of 2002.
(6) Mr. Galvan
became our Chief Financial Officer in September 2007 and our Chief
Operating Officer, PDSHeart in October 2007.
(7) Mr. Marsh
served as our Chief Financial Officer and Chief Operating Officer, PDSHeart
from March 2007 until October 2007. In February and March 2007,
prior to our acquisition of PDSHeart, PDSHeart paid discretionary bonuses in an
aggregate amount of $55,000 to Mr. Marsh. In March 2007, prior to our
acquisition of PDSHeart, PDSHeart paid a bonus of $160,000 to Mr. Marsh in
consideration for his continuation of employment with PDSHeart through the
closing of the acquisition. All other compensation for 2007 includes $411,700
in severance payments paid by us in connection with the termination of Mr. Marshs
employment with us in October 2007 and $4,846 paid to Mr. Marsh as a
car allowance. The $411,700 of severance payments paid by us to Mr. Marsh
in 2007 are subject to reimbursement to us from the escrow account established
in connection with our acquisition of PDSHeart.
(8) Mr. Wood
served as our President and Chief Operating Officer during 2007 until June 2007.
All other compensation includes $182,800 in severance payments paid in
connection with the termination of Mr. Woods employment with us in June 2007.
In August 2004,
we entered into an employment agreement with Mr. Sweeney, our former Chief
Executive Officer and Chairman of the Board and our current Executive Chairman,
which was amended in November 2005 and February 2008. Mr. Sweeney
receives a current base salary of $500,000 per year and is eligible to receive
an annual performance bonus beginning with the fiscal year ending on December 31,
2006, with the amount of such bonus determined by our board of directors in its
sole and absolute discretion. The employment agreement also entitles Mr. Sweeney
to receive all customary and usual fringe benefits available to our employees.
The
employment agreement provides that Mr. Sweeneys employment is voluntary
and at will. If, during Mr. Sweeneys employment with us, there is a
change of control or an initial public offering and Mr. Sweeney
voluntarily resigns within 180 days thereafter, he is entitled to payment
of accrued base compensation, certain relocation benefits and tax
reimbursements, to the extent not previously paid. In the event Mr. Sweeney
voluntarily resigns more than 180 days after a change of control or an
initial public offering, he is entitled to (i) payments at a rate equal to
his base salary then in effect for a period of up to 12 months following
his voluntary termination and (ii) payment of certain relocation benefits
and tax reimbursements, to the extent not previously paid. In addition, if Mr. Sweeney
is terminated without cause or becomes disabled, he is also entitled to (i) payments
at a rate equal to his base salary then in effect for a period of
12 months following his involuntary termination or disability and (ii) payment
of certain relocation benefits and tax reimbursements, to the extent not
previously paid. All amounts payable to Mr. Sweeney in connection with his
resignation or termination, as set forth above, are payable in accordance with
our general payroll practices and not as a lump sum.
In January 2007,
our wholly-owned subsidiary, PDSHeart, entered into an employment agreement
with Mr. Marsh, our former Chief Financial Officer and Chief Operating
Officer, PDSHeart, which was amended in February 2007 in connection with
our acquisition of PDSHeart. The employment agreement provides that Mr. Marsh
is entitled to a base salary of $273,000 per year and is eligible to
participate in any executive bonus plan that we may put into effect. The
employment agreement entitles Mr. Marsh to a stock option grant to
purchase 100,000 shares of our common stock. In September 2007, Mr. Marsh
agreed to forfeit this option and the option was cancelled. The employment
agreement also entitles Mr. Marsh to receive all customary and usual
fringe benefits available to our employees.
The
employment agreement provides that Mr. Marshs employment is voluntary and
at will. If, during Mr. Marshs employment with us, there is a change of
control and Mr. Marsh is terminated without cause or resigns with good
reason within 12 months thereafter, he is entitled to (i) a lump sum
payment equal to 18 months of his base salary, (ii) reimbursement of
healthcare premiums for up to 18 months and (iii) a pro-rated portion
of his annual bonus to the extent he is otherwise entitled thereto.
81
Mr. Marsh
was terminated without cause in October 2007. The terms of his separation
are described below under the heading Post Employment Compensation.
In November 2007,
we entered into an employment agreement with Mr. Cohen, our President and
Chief Executive Officer. Mr. Cohen receives a current base salary of
$450,000 per year and is eligible to receive an annual performance bonus beginning
with the fiscal year ending on December 31, 2008, with the amount of such
bonus determined by our board of directors in its sole and absolute discretion.
The employment agreement entitles Mr. Cohen to a stock option grant to
purchase 450,000 shares of our common stock and to reimbursement of reasonable
relocation expenses in connection with his relocation to Conshohocken,
Pennsylvania. The employment agreement also entitles Mr. Cohen to receive
all customary and usual fringe benefits available to our employees.
If,
during Mr. Cohens employment with us, Mr. Cohen voluntarily resigns
with good reason or is terminated without cause or upon his complete
disability, he is entitled to receive payments at a rate equal to his base
salary then in effect for a period of 15 months, or until such earlier
time as he begins full-time employment with another entity, and continued
payment by us of his healthcare premiums for 15 months, or until such
earlier time as he begins full-time employment with another entity.
Furthermore, if Mr. Cohen voluntarily resigns with good reason or is
terminated without cause in anticipation of, in connection with, or within one
year following a change in control, he is entitled to full acceleration of all
unvested stock options then held by him. All amounts payable to Mr. Cohen
in connection with his resignation or termination, as set forth above, are
payable in accordance with our general payroll practices and not as a lump sum.
Post-Employment
Compensation
The
amount of compensation payable to each named executive officer upon voluntary
termination, involuntary termination without cause, termination following a
change in control or termination in the event of disability or death of the
executive is shown below.
Payments Made Upon Termination
Regardless
of the manner in which a named executive officers employment terminates, the
named executive officer is entitled to receive amounts earned during his term
of employment, including salary and unused vacation pay.
Potential Payment Under Employment Arrangements
In August 2004,
we entered into an employment agreement with Mr. Sweeney as described in
greater detail under the heading Summary Compensation Table. Assuming that,
effective December 31, 2007, Mr. Sweeney voluntarily resigned more
than 180 days after a change in control or an initial public offering or
was terminated without cause or due to disability, he would be entitled to
receive $500,000, reflecting 12 months of his then base salary.
In November 2007, we entered into an employment
agreement with Mr. Cohen as described in greater detail under the heading Summary
Compensation Table. Assuming that, effective December 31, 2007, Mr. Cohen
voluntarily resigned with good reason or was terminated without cause or upon
his complete disability, and assuming he did not begin full-time employment
with another entity during the following 15 months, he would be entitled
to receive $562,500, reflecting 15 months of his then base salary, and
continued payment by us of his healthcare premiums for 15 months at a rate
equal to approximately $1,200 per month. Furthermore, assuming that, effective December 31,
2007, Mr. Cohen voluntarily resigned with good reason or was terminated
without cause in anticipation of, in
connection with, or within one year following a change
in control, he would be entitled to full acceleration of all unvested stock
options then held by him.
In June 2007,
in connection with the termination of the employment of Mr. Wood, our
former President and Chief Operating Officer, we entered into a separation and
release agreement entitling Mr. Wood to severance benefits. The separation
and release agreement provides that, in exchange for Mr. Woods full
release of claims
82
against us, Mr. Wood
was entitled to (i) severance payments at a rate equal to his base salary
then in effect for a period of six months following his termination, (ii) in
exchange for Mr. Woods agreement to forfeit 12,513 of his vested stock
option shares at the time of his termination, continued exercisability of his
remaining 41,653 vested stock option shares for a period of one-year following
his termination date and (iii) forgiveness of both principal and accrued
interest pursuant to a loan by us to Mr. Wood made in September 2006.
In connection with his termination in June 2007, Mr. Wood received (i) a
lump sum payment of $182,800, reflecting six months of Mr. Woods
then base salary, (ii) continued exercisability of 41,653 vested stock
option shares for a period of one-year from his termination date and (iii) a
lump sum of $227,117, reflecting the our forgiveness of both principal and
accrued interest under the September 2006 loan.
In September 2007,
Mr. Marsh agreed to immediately forfeit all of his options to purchase
shares of our common stock. In October 2007, in connection with the
termination of the employment of Mr. Marsh, our former Chief Financial
Officer and the former Chief Operating Officer of PDSHeart, Mr. Marsh was
entitled to severance benefits under the terms of his employment agreement. In
exchange for Mr. Marshs full release of claims against us, Mr. Marsh
was entitled to (i) a lump sum severance payment equal to 18 months
of his base salary and (ii) continued payment by us of Mr. Marshs
healthcare premiums until the earlier of 18 months following Mr. Marshs
termination of employment with us or his enrollment in a health insurance plan
by another employer. Accordingly, Mr. Marsh received (i) a lump sum
payment of $409,500 and (ii) continued payment by us of Mr. Marshs
healthcare premiums through November 2007 which resulted in aggregate
payments to Mr. Marsh of approximately $2,200. The $411,700 of severance
payments paid by us to Mr. Marsh are subject to reimbursement to us from
the escrow account established in connection with our acquisition of PDSHeart.
Grants
of Plan-Based Awards
All
stock options granted to our named executive officers are incentive stock
options, to the extent permissible under the Code. The exercise price per share
of each stock option granted to our named executive officers was equal to the
fair market value of our common stock as determined in good faith by our board
of directors on the date of the grant. All stock options were granted under our
2003 plan.
We
omitted columns related to non-equity and equity incentive plan awards as none
of our named executive officers earned any such awards during 2007. The
following table sets forth certain information regarding grants of plan-based
awards to our named executive officers for 2007. Mr. Forese and Mr. Wood
were not granted any plan-based awards during 2007 and therefore are not
included in the following table.
Name
|
|
Grant date
|
|
All option awards:
number of securities
underlying options (#)
|
|
Exercise or base
price of option
awards
($/share)(1)
|
|
Grant date fair
value of option
awards
($)(2)
|
|
Arie Cohen(3)
|
|
11/30/07
|
|
450,000
|
|
9.50
|
|
2,250,000
|
|
James M. Sweeney(4)
|
|
4/19/07
|
|
50,000
|
|
6.10
|
|
166,000
|
|
Martin P. Galvan, CPA(3)
|
|
9/28/07
|
|
150,000
|
|
7.20
|
|
585,000
|
|
Gregory A. Marsh(5)
|
|
4/19/07
|
|
100,000
|
|
6.10
|
|
332,000
|
|
(1) Represents the
per share fair market value of our common stock, as determined in good faith by
our board of directors on the grant date.
(2) Calculated in
accordance with SFAS No. 123R using the modified prospective transition
method without consideration of forfeitures.
(3) 25% of the total
number of shares subject to this named executive officers options vest on the
one-year anniversary of the applicable grant date with the remainder vesting
over the following 36 months.
(4) 100% of the
total number of shares subject to this named executive officers options vest
upon the occurrence of either of the following milestone events: (i) the
approval by our board of a management succession plan deemed satisfactory to
our board in its sole discretion; or (ii) immediately prior to the closing
of a change in control if so determined by our board, in its sole discretion,
prior to the closing of such change in control. In December 2007 our board
determined that the first of the foregoing milestones had been met and the
shares underlying this option vested in full.
83
(5) 25% of the total
number of shares subject to this option would vest on the one-year anniversary
of the grant date of the option with the remainder vesting over the following
36 months. In September 2007, Mr. Marsh agreed to forfeit this
option and the option was cancelled.
Outstanding
Equity Awards at December 31, 2007
The
following table sets forth certain information regarding outstanding equity
awards granted to our named executive officers for 2007 that remain outstanding
as of December 31, 2007. All of the options in this table are exercisable
at any time but, if exercised, are subject to a lapsing right of repurchase
until the options are fully vested.
|
|
Option awards
|
|
Stock Awards(1)
|
|
Name
|
|
Number of
securities
underlying
unexercised
options
(#)
exercisable
|
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
|
|
Option
exercise
price
($)
|
|
Option
expiration
date
|
|
Number of
Shares
of stock
that have
not vested
(#)
|
|
Market Value
of Shares
of stock
that have
not vested
($)(2)
|
|
Arie Cohen(3)
|
|
450,000
|
|
|
|
9.50
|
|
11/30/17
|
|
|
|
|
|
James M. Sweeney(4)
|
|
50,000
|
|
|
|
6.10
|
|
4/18/17
|
|
18,229
|
|
328,122
|
|
Michael Forese
|
|
|
|
|
|
|
|
|
|
27,135
|
|
488,430
|
|
Martin P. Galvan, CPA(3)
|
|
150,000
|
|
|
|
7.20
|
|
9/27/17
|
|
|
|
|
|
David S. Wood(5)
|
|
41,653
|
|
|
|
1.62
|
|
6/5/18
|
|
|
|
|
|
(1) Represents
shares of common stock subject to repurchase by us as of December 31, 2007
that were issued upon exercise of stock options prior to the vesting date of
such options.
(2) The market value
is determined based on the initial public offering price of $18.00 per share.
(3) 25% of the total
number of shares subject to this named executive officers options vest on the
first anniversary of the applicable grant date with the remainder vesting over
the following 36 months.
(4) 100% of the
total number of shares subject to this named executive officers options vest
upon the occurrence of either of the following milestone events: (i) the
approval by our board of directors of a management succession plan deemed
satisfactory to the board of directors in its sole discretion; or (ii) immediately
prior to the closing of a change in control if so determined by our board, in
its sole discretion, prior to the closing of such change in control. In December 2007
our board determined that the first of the foregoing milestones had been met
and the shares underlying this option vested in full.
(5) All of the
shares subject to this named executive officers options were vested as of December 31,
2007.
84
Option
Exercises and Stock Vested
The
following table provides information regarding the number of shares of common
stock acquired and the value received pursuant to the exercise of stock options
and the vesting of stock during the year ended December 31, 2007 by our
named executive officers for 2007.
|
|
Option Awards(1)
|
|
Stock Awards(2)
|
|
Name
|
|
Number of shares
acquired on
exercise
|
|
Value Realized
on exercise(3)
|
|
Number of shares
acquired on
vesting
|
|
Value Realized
on vesting(4)
|
|
James M. Sweeney
|
|
|
|
|
|
31,250
|
|
$
|
562,500
|
|
Michael Forese
|
|
31,875
|
|
$
|
573,750
|
|
15,989
|
|
$
|
287,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Represents the
number of shares of common stock acquired during 2007 upon exercise of vested
stock options.
(2) Represents the
number of shares of common stock that vested during 2007 which were originally
acquired upon the exercise of stock options prior to the vesting date of such
options.
(3) The value
realized on exercise is determined based on the initial public offering price
of $18.00 per share, multiplied by the number of shares that were exercised,
without taking into account any taxes that may be payable in connection with
the transaction.
(4) The value
realized on vesting is determined based on the initial public offering price of
$18.00 per share, multiplied by the number of shares that vested, without
taking into account any taxes that may be payable in connection with the
transaction.
Option
Repricings
We did
not engage in any repricings or other modifications to any of our named
executive officers outstanding equity awards during the year ended December 31,
2007.
Pension
Benefits
None
of our named executive officers participate in or have account balances in
qualified or non-qualified defined benefit plans sponsored by us. Our
compensation, nominating and corporate governance committee may elect to adopt
qualified or non-qualified benefit plans in the future if it determines that
doing so is in our best interests.
Nonqualified
Deferred Compensation
None
of our named executive officers participate in or have account balances in
nonqualified defined contribution plans or other nonqualified deferred
compensation plans maintained by us. Our compensation, nominating and corporate
governance committee may elect to provide our officers and other employees with
non-qualified defined contribution or other nonqualified deferred compensation
benefits in the future if it determines that doing so is in our best interests.
Employee
Benefit Plans
2003 Equity Incentive Plan
We
adopted our 2003 equity incentive plan (the 2003 plan) in July 2003. The
2003 plan terminated on March 18, 2008.
However, outstanding options previously granted under the 2003 plan
remain subject thereto. The 2003 plan
provides for the grant of the following:
·
ISOs, which may be granted solely to our employees,
including officers; and
·
NSOs, stock bonus awards, and restricted stock awards,
which may be granted to our directors, consultants or employees, including
officers.
Share Reserve.
As of March 31, 2008,
options to purchase 1,704,804 shares of our common stock issued under the 2003
plan were outstanding and no shares of common stock were available for future
grant under the 2003 plan. We have
issued 1,918,004 shares pursuant to the exercise of options subject to the 2003
Plan, of which 79,866 were subject to lapsing rights of repurchase in favor of
us as of March 31, 2008.
85
Effective
as of March 18, 2008, any shares reserved under the 2003 plan that were
not subject to outstanding options at such time were no longer reserved under
the 2003 plan and became reserved under the 2008 equity incentive plan.
Furthermore, any shares that are issuable pursuant to options under the 2003
plan that are forfeited or expire after March 18, 2008 become reserved
under the 2008 equity incentive plan. Since the completion of our initial
public offering, we have not made further grants of stock options under the
2003 plan.
Administration.
The 2003 plan is administered
by our board of directors, which may in turn delegate authority to administer
the plan to a committee. Subject to the terms of the 2003 plan, our board of
directors or its authorized committee determines recipients, the numbers and
types of stock awards to be granted and the terms and conditions of the stock
awards, including the period of their exercisability and vesting. Subject to
the limitations set forth below, our board of directors or its authorized
committee also determines the exercise price of options granted under the 2003
plan.
Stock Options.
Stock options are granted
pursuant to stock option agreements. Generally, the exercise price for an ISO
cannot be less than 100% of the fair market value of the common stock subject
to the option on the date of grant, and the exercise price for an NSO cannot be
less than 85% of the fair market value of the common stock subject to the
option on the date of grant. Options granted under the 2003 plan vest at the
rate specified in the option agreement. A stock option agreement may provide
for early exercise, prior to vesting. Unvested shares of our common stock
issued in connection with an early exercise may be repurchased by us.
In
general, the term of stock options granted under the 2003 plan may not exceed
ten years. Unless the terms of an optionholders stock option agreement provide
for earlier or later termination, if an optionholders service relationship
with us, or any affiliate of ours, ceases due to disability or death, the
optionholder, or his or her beneficiary, may exercise any vested options up for
to 12 months, or 18 months in the event of death, after the date the
service relationship ends, unless the terms of the stock option agreement
provide for earlier termination. If an optionholders service relationship with
us, or any affiliate of ours, ceases without cause for any reason other than
disability or death, the optionholder may exercise any vested options for up to
three months after the date the service relationship ends, unless the terms of
the stock option agreement provide for a longer or shorter period to exercise
the option. If an optionholders relationship with us, or any affiliate of
ours, ceases with cause, the option will terminate at the time the optionholders
relationship with us ceases. In no event may an option be exercised after its
expiration date.
Acceptable
forms of consideration for the purchase of our common stock under the 2003 plan
include (i) cash and (ii) at the discretion of our board of directors
at the time of grant, common stock previously owned by the optionholder,
deferred payment arrangements, or other legal consideration approved by our
board of directors.
Generally,
an optionholder may not transfer a stock option other than by will or the laws
of descent and distribution or a domestic relations order. However, an
optionholder may designate a beneficiary who may exercise the option following
the optionholders death.
Limitations.
The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to ISOs that are exercisable for the first time by an optionholder
during any calendar year under all of our stock plans may not exceed $100,000.
The options or portions of options that exceed this limit are treated as NSOs.
No ISO may be granted to any person who, at the time of the grant, owns or is
deemed to own stock possessing more than 10% of our total combined voting power
or that of any affiliate unless the following conditions are satisfied:
·
the option exercise price must be at least 110% of the
fair market value of the stock subject to the option on the date of grant; and
·
the term of any ISO award must not exceed five years
from the date of grant.
Restricted Stock Awards.
Restricted stock awards are
granted pursuant to restricted stock purchase agreements. The purchase price of
restricted stock awards shall not be less than 85% of the common stocks fair
market value on the date the award is made or at the time the purchase is consummated.
The purchase price for a
86
restricted stock award
may be payable in (i) cash, (ii) at the discretion of our board of
directors, according to a deferred payment or other similar arrangement, or (iii) any
other form of legal consideration approved by our board of directors. Shares of
our common stock acquired under a restricted stock award may, but need not, be
subject to a share repurchase option in our favor in accordance with a vesting
schedule to be determined by our board of directors. Rights to acquire shares
of our common stock under a restricted stock award are not transferable other
than by will or the laws of descent and distribution.
Stock Bonus Awards.
Stock bonus awards are granted
pursuant to stock bonus award agreements. A stock bonus award may be granted in
consideration for the recipients past services performed for us or an
affiliate of ours. Shares of our common stock acquired under a stock bonus
award may, but need not, be subject to forfeiture to us in accordance with a
vesting schedule to be determined by our board of directors. Rights to acquire
shares of our common stock under a stock bonus award are not transferable other
than by will or the laws of descent and distribution.
Changes to Capital Structure.
In the event that there is a
specified type of change in our capital structure not involving the receipt of
consideration by us, such as a stock split or stock dividend, the number of
shares and exercise price or strike price, if applicable, of all outstanding
stock awards will be appropriately adjusted.
Corporate Transactions.
Unless otherwise provided in
the stock award agreement, in the event of certain corporate transactions, any
or all outstanding stock awards under the 2003 plan may be assumed, continued
or substituted for by any surviving entity. If the surviving entity elects not
to assume, continue or substitute for such awards, the vesting provisions of
such stock awards generally will be accelerated in full and such stock awards
will be terminated if and to the extent not exercised at or prior to the
effective time of the corporate transaction and our repurchase rights will
generally lapse.
Plan Amendments.
Our board of directors has the
authority to amend or terminate the 2003 plan. However, no amendment or
termination of the plan will adversely affect any rights under awards already
granted to a participant unless agreed to by the affected participant. We will
obtain stockholder approval of any amendment to the 2003 plan as required by
applicable law.
2008 Equity Incentive Plan
Our
board of directors adopted the 2008 equity incentive plan (the 2008 plan) in February 2008,
and our stockholders approved the 2008 plan in March 2008. The 2008 plan
became effective on March 18, 2008. The 2008 plan will terminate in March 2018,
unless sooner terminated by our board of directors.
Stock Awards.
The 2008 plan
provides for the grant of incentive stock options, nonstatutory stock options,
restricted stock awards, restricted stock unit awards, stock appreciation
rights, performance-based stock awards, and other forms of equity compensation,
or collectively, stock awards. In addition, the 2008 plan provides for the
grant of performance cash awards. Incentive stock options may be granted only
to employees. All other awards may be granted to employees, including officers,
non-employee directors and consultants.
Share Reserve.
As of March 31,
2008, 533,063 shares of our common stock may be issued pursuant to stock awards
under the 2008 plan. In addition, the number of shares of our common stock
reserved for issuance automatically increases (i) on January 1 of
each calendar year, from January 1, 2009 through January 1, 2018, by
the least of (a) four percent of the total number of shares of our common
stock outstanding on December 31st of the preceding calendar year, (b) 1,500,000
shares, or (c) a number determined by our board of directors that is less
than (a) or (b). The reserve also includes any shares that are issuable
pursuant to options under the 2003 plan that are forfeited or expire from time
to time. The maximum number of shares that may be issued pursuant to the
exercise of incentive stock options under the 2008 plan is equal to 5,000,000
shares, as increased from time to time pursuant to annual increases.
No
person may be granted stock awards covering more than 5,000,000 shares of our
common stock under the 2008 plan during any calendar year pursuant to stock
options or stock appreciation rights. In addition, no person may be granted a
performance stock award covering more than 5,000,000 shares or a performance
cash award
87
covering $5,000,000 in
any calendar year. Such limitations are designed to help assure that any
deductions to which we would otherwise be entitled with respect to such stock
awards will not be subject to the $1,000,000 limitation on the income tax
deductibility of compensation paid per covered executive officer imposed by Section 162(m) of
the Code.
If a
stock award granted under the 2008 plan expires or otherwise terminates without
being exercised in full, or is settled in cash, the shares of our common stock
not acquired pursuant to the stock award again become available for subsequent
issuance under the 2008 plan. In addition, the following types of shares under
the 2008 plan may become available for the grant of new stock awards under the
2008 plan: (a) shares that are forfeited to or repurchased by us prior to
becoming fully vested; (b) shares withheld to satisfy income or employment
withholding taxes; (c) shares used to pay the exercise price of an option
in a net exercise arrangement; and (d) shares tendered to us to pay the
exercise price of an option. Shares issued under the 2008 plan may be
previously unissued shares or reacquired shares bought on the open market. As
of the date hereof, 10,450 shares of our common stock have been issued under
the 2008 plan.
Administration.
Our board of
directors has delegated its authority to administer the 2008 plan to our
compensation, nominating and corporate governance committee. Subject to the
terms of the 2008 plan, our board of directors or an authorized committee,
referred to as the plan administrator, determines recipients, dates of grant,
the numbers and types of stock awards to be granted and the terms and
conditions of the stock awards, including the period of their exercisability
and vesting. Subject to the limitations set forth below, the plan administrator
also determines the exercise price of options granted, the consideration to be
paid for restricted stock awards and the strike price of stock appreciation
rights.
The
plan administrator has the authority to reprice any outstanding stock award
under the 2008 plan without the approval of our stockholders.
Stock Options.
Incentive and
nonstatutory stock options are granted pursuant to incentive and nonstatutory
stock option agreements adopted by the plan administrator. The plan
administrator determines the exercise price for a stock option, within the
terms and conditions of the 2008 plan, provided that the exercise price of a
stock option cannot be less than 100% of the fair market value of our common
stock on the date of grant. Options granted under the 2008 plan vest at the
rate specified by the plan administrator.
The
plan administrator determines the term of stock options granted under the 2008
plan, up to a maximum of ten years, except in the case of certain incentive
stock options, as described below. Unless the terms of an optionholders stock
option agreement provide otherwise, if an optionholders relationship with us,
or any of our affiliates, ceases for any reason other than for cause,
disability or death, the optionholder may exercise any vested options for a period
of three months following the cessation of service. If an optionholders
service relationship with us is terminated for cause, then the option
terminates immediately. If an optionholders service relationship with us, or
any of our affiliates, ceases due to disability or death, or an optionholder
dies within a certain period following cessation of service, the optionholder
or a beneficiary may exercise any vested options for a period of 12 months
in the event of disability and 18 months in the event of death. The option
term may be extended in the event that exercise of the option following
termination of service is prohibited by applicable securities laws. In no
event, however, may an option be exercised beyond the expiration of its term.
Acceptable
consideration for the purchase of common stock issued upon the exercise of a
stock option is determined by the plan administrator and may include (a) cash,
check, bank draft or money order, (b) a broker-assisted cashless exercise,
(c) the tender of common stock previously owned by the optionholder, (d) a
net exercise of the option and (e) other legal consideration approved by
the plan administrator.
Unless
the plan administrator provides otherwise, options generally are not
transferable except by will, the laws of descent and distribution, or pursuant
to a domestic relations order. An optionholder may designate a beneficiary,
however, who may exercise the option following the optionholders death.
88
Tax Limitations
on Incentive Stock Options.
Incentive
stock options may be granted only to our employees. The aggregate fair market
value, determined at the time of grant, of shares of our common stock with
respect to incentive stock options that are exercisable for the first time by
an optionholder during any calendar year under all of our stock plans may not
exceed $100,000. No incentive stock
option may be granted to any person who, at the time
of the grant, owns or is deemed to own stock possessing more than 10% of our
total combined voting power or that of any of our affiliates unless (a) the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant, and (b) the term of the
incentive stock option does not exceed five years from the date of grant.
Restricted Stock Awards.
Restricted stock
awards are granted pursuant to restricted stock award agreements adopted by the
plan administrator. Restricted stock awards may be granted in consideration for
(a) cash, check, bank draft or money order, (b) past or future
services rendered to us or our affiliates, or (c) any other form of legal
consideration. Shares of common stock acquired under a restricted stock award
may, but need not, be subject to a share repurchase option in our favor in
accordance with a vesting schedule to be determined by the plan administrator.
Rights to acquire shares under a restricted stock award may be transferred only
upon such terms and conditions as set by the plan administrator.
Restricted Stock Unit Awards.
Restricted stock
unit awards are granted pursuant to restricted stock unit award agreements
adopted by the plan administrator. Restricted stock unit awards may be granted
in consideration for any form of legal consideration. A restricted stock unit
award may be settled by cash, delivery of stock, a combination of cash and
stock as deemed appropriate by the plan administrator, or in any other form of
consideration set forth in the restricted stock unit award agreement. Additionally,
dividend equivalents may be credited in respect of shares covered by a
restricted stock unit award. Except as otherwise provided in the applicable
award agreement, restricted stock units that have not vested will be forfeited
upon the participants cessation of continuous service for any reason.
Stock Appreciation Rights.
Stock
appreciation rights are granted pursuant to stock appreciation rights
agreements adopted by the plan administrator. The plan administrator determines
the strike price for a stock appreciation right which cannot be less than 100%
of the fair market value of our common stock on the date of grant. Upon the
exercise of a stock appreciation right, we will pay the participant an amount
equal to the product of (a) the excess of the per share fair market value
of our common stock on the date of exercise over the strike price, multiplied
by (b) the number of shares of common stock with respect to which the
stock appreciation right is exercised. A stock appreciation right granted under
the 2008 plan vests at the rate specified in the stock appreciation right
agreement as determined by the plan administrator.
The
plan administrator determines the term of stock appreciation rights granted
under the 2008 plan, up to a maximum of ten years. If a participants service
relationship with us, or any of our affiliates, ceases, then the participant,
or the participants beneficiary, may exercise any vested stock appreciation
right for three months (or such longer or shorter period specified in the stock
appreciation right agreement) after the date such service relationship ends. In
no event, however, may a stock appreciation right be exercised beyond the
expiration of its term.
Performance Awards.
The 2008 plan
permits the grant of performance stock awards and performance cash awards that
may qualify as performance-based compensation that is not subject to the
$1,000,000 limitation on the income tax deductibility of compensation paid per
covered executive officer imposed by Section 162(m) of the Code. To
assure that the compensation attributable to performance-based awards will so
qualify, our compensation, nominating and corporate governance committee can
structure such awards so that stock will be issued or paid pursuant to such
award only upon the achievement of certain pre-established performance goals
during a designated performance period. The maximum benefit number of shares
that may be granted to a participant in any calendar year attributable to
performance stock awards may not exceed 5,000,000 shares of common stock and
the maximum value that may be granted to a participant in any calendar year
attributable to performance cash awards may not exceed $5,000,000.
Other Stock Awards.
The plan
administrator may grant other awards based in whole or in part by reference to
our common stock. The plan administrator will set the number of shares under
the award and all other terms and conditions of such awards.
89
Changes to Capital Structure.
In the event that
there is a specified type of change in our capital structure, such as a stock
split, appropriate adjustments will be made to (a) the number of shares
reserved under the 2008 plan, (b) the maximum number of shares by which
the share reserve may increase automatically each year, (c) the maximum
number of options, stock appreciation rights and performance stock awards and
performance cash awards that can be granted in a calendar year, (d) the
number of shares for which options are subsequently to be made as initial and
annual grants to new and continuing non-employee directors and (e) the
number of shares and exercise price or strike price, if applicable, of all
outstanding stock awards.
Corporate
Transactions.
In
the event of certain significant corporate transactions, awards under the 2008
plan may be assumed, continued or substituted for by any surviving or acquiring
entity or its parent company. If the surviving or acquiring entity or its
parent company elects not to assume, continue or substitute for such stock
awards, then (a) with respect to any such stock awards that are held by
individuals whose service with us or our affiliates has not terminated prior to
the effective date of the corporate transaction, the vesting and exercisability
provisions of such stock awards will be accelerated in full and such awards
will be terminated if not exercised prior to the effective date of the
corporate transaction, and (b) all other outstanding stock awards will
terminate if not exercised prior to the effective date of the corporate
transaction. Our board of directors has the discretion to:
·
arrange for the assumption, continuation, or
substitution of a stock award by a surviving or acquiring entity or parent
company;
·
accelerate the vesting of a stock award and provide
for its termination prior to the effective time of the corporate transaction;
or
·
provide for the surrender of a stock award in exchange
for a payment equal to the excess of (a) the value of the property that
the optionholder would have received upon the exercise of the stock award over (b) the
exercise price otherwise payable in connection with the stock award.
Changes in Control.
Our board of
directors has the discretion to provide that a stock award under the 2008 plan
will immediately vest as to all or any portion of the shares subject to the
stock award (a) immediately upon the occurrence of certain specified
change in control transactions, whether or not such stock award is assumed,
continued or substituted by a surviving or acquiring entity in the transaction
or (b) in the event a participants service with us or a successor entity
is terminated actually or constructively within a designated period following
the occurrence of certain specified change in control transactions. Stock
awards held by participants under the 2008 plan will not vest automatically on
such an accelerated basis unless specifically provided by the participants
applicable award agreement.
2008
Non-Employee Directors Stock Option Plan
Our
board of directors adopted the 2008 non-employee directors stock option plan
(the directors plan) in February 2008 and we expect our stockholders
approved our directors plan in March 2008. The directors plan became
effective on March 18, 2008. The directors plan will terminate at the
discretion of our board of directors. The directors plan provides for the
automatic grant of nonstatutory stock options to purchase shares of our common
stock to our non-employee directors.
Share Reserve.
An aggregate of
142,500 shares of our common stock are reserved for issuance under the
directors plan. This amount will be increased annually on January 1 of
each calendar year, from January 1, 2009 through January 1, 2018, by
the aggregate number of shares of our common stock subject to options granted
under the directors plan during the immediately preceding year. However, our
board of directors has the authority to designate a lesser number of shares by
which the authorized number of shares of our common stock will be increased.
Shares
of our common stock subject to stock options that have expired or otherwise
terminated under the directors plan without having been exercised in full
shall again become available for grant under the directors plan. Shares of our
common stock issued under the directors plan may be previously unissued shares
or reacquired shares bought on the market or otherwise. If the exercise of any
stock option granted under the directors plan is satisfied by tendering shares
of our common stock held by the participant, then the number of shares tendered
shall again become available for the grant of awards under the directors plan.
90
Administration.
Our board of
directors has delegated its authority to administer the directors plan to our
compensation, nominating and corporate governance committee.
Stock Options.
Stock options are
granted pursuant to stock option agreements. The exercise price of the options
granted under the directors plan is equal to 100% of the fair market value of
our common stock on the date of grant. Initial grants vest in equal monthly
installments over three years after the date of grant and annual grants vest in
equal monthly installments over 12 months after the date of grant.
In
general, the term of stock options granted under the directors plan may not
exceed ten years. If an optionholders service relationship with us, or any
affiliate of ours, ceases, then the optionholder or his or her beneficiary may
exercise any vested options for such period as provided under the terms of the
stock option agreement.
Acceptable
consideration for the purchase of our common stock issued under the directors
plan may include cash, a net exercise, common stock previously owned by the
optionholder or a program developed under Regulation T as promulgated by
the Federal Reserve Board.
Generally,
an optionholder may not transfer a stock option other than by will or the laws
of descent and distribution. However, an optionholder may transfer an option
under certain circumstances with our written consent if a Form S-8
registration statement is available for the exercise of the option and the
subsequent resale of the shares. In addition, an optionholder may designate a
beneficiary who may exercise the option following the optionholders death.
Automatic Grants
·
Initial Grant
. Any person who
becomes a non-employee director will automatically receive an initial grant of
an option to purchase 15,000 shares of our common stock upon his or her
election, subject to adjustment by our board of directors from time to time.
These options will vest on the first anniversary of the date of grant with
respect to thirty-three and one-third percent of the shares subject to the initial
grant and the remainder will vest in equal monthly installments over the
two-year period thereafter.
·
Committee Chair Grant
. Any person who
becomes a chairperson of our audit committee or our compensation, nominating
and corporate governance committee will automatically receive a grant of an
option to purchase 7,500 shares of our common stock upon his or her election,
subject to adjustment by our board of directors from time to time. These
options will vest on the first anniversary of the date of grant with respect to
thirty-three and one-third percent of the shares subject to the grant and the
remainder will vest in equal monthly installments over the two-year period
thereafter.
·
Annual Grant
. In addition, any
person who is a non-employee director on the date of each annual meeting of our
stockholders automatically will be granted, on the annual meeting date,
beginning with our 2008 annual meeting, an option to purchase 5,000 shares of
our common stock, or the annual grant, subject to adjustment by our board of
directors from time to time. However, the size of an annual grant made to a
non-employee director who is elected after the completion of our initial public
offering and who has served for less than 12 months at the time of the
annual meeting will be reduced ratably for each full month during such prior
12-month period during which such person did not serve as a non-employee
director. These options will vest in equal monthly installments over
12 months following the date of grant.
Changes to Capital Structure.
In the event
there is a specified type of change in our capital structure not involving the
receipt of consideration by us, such as a stock split or stock dividend, the
number of shares reserved under the directors plan and the number of shares
and exercise price of all outstanding stock options will be appropriately
adjusted.
91
Corporate Transactions.
In the event of
certain corporate transactions, including change in control transactions, the
vesting of options held by non-employee directors whose service has not been
terminated prior to the effective time of the corporate transaction generally
will be accelerated in full and all options outstanding under the directors
plan will be terminated if not exercised prior to the effective date of the
corporate transaction.
Plan Amendments.
Our board of
directors has the authority to amend or terminate the directors plan. However,
no amendment or termination of the directors plan will adversely affect any
rights under awards already granted to a participant unless agreed to by the
affected participant. We will obtain stockholder approval of any amendment to
the directors plan as required by applicable law.
2008
Employee Stock Purchase Plan
Our
board of directors adopted our 2008 employee stock purchase plan (the 2008
purchase plan) in February 2008, and our stockholders approved the 2008
purchase plan in March 2008. The 2008 purchase plan became effective on March 18,
2008.
Share Reserve.
The 2008 purchase
plan authorizes the issuance of 238,000 shares of our common stock pursuant to
purchase rights granted to our employees or to employees of any of our
designated affiliates. The number of shares of our common stock reserved for
issuance will automatically increase on January 1 of each calendar year,
from January 1, 2009 through January 1, 2018, by the least of (a) one
percent of the total number of shares of our common stock outstanding on December 31st
of the preceding calendar year, (b) 300,000 shares, or (c) a number
determined by our board of directors that is less than (a) or (b). The
2008 purchase plan is intended to qualify as an employee stock purchase plan
within the meaning of Section 423 of the Code. As of the date hereof, no
shares of our common stock have been purchased under the 2008 purchase plan.
Administration.
Our board of
directors has delegated its authority to administer the 2008 purchase plan to
our compensation, nominating and corporate governance committee. The 2008
purchase plan is implemented through a series of offerings of purchase rights
to eligible employees. Under the 2008 purchase plan, we may specify offerings
with a duration of not more than 27 months, and may specify shorter purchase
periods within each offering. Each offering will have one or more purchase
dates on which shares of our common stock will be purchased for employees
participating in the offering. An offering may be terminated under certain
circumstances.
Payroll Deductions.
Generally, all
regular employees, including executive officers, employed by us or by any of
our designated affiliates, may participate in the 2008 purchase plan and may
contribute, normally through payroll deductions, up to 15% of their earnings
for the purchase of our common stock under the 2008 purchase plan. Unless
otherwise determined by our board of directors, common stock will be purchased
for accounts of employees participating in the 2008 purchase plan at a price
per share equal to the lower of (a) 85% of the fair market value of a
share of our common stock on the first date of an offering or (b) 85% of
the fair market value of a share of our common stock on the date of purchase.
Limitations.
Employees may
have to satisfy one or more of the following service requirements before
participating in the 2008 purchase plan, as determined by our board of
directors: (a) customarily employed for more than 20 hours per week, (b) customarily
employed for more than five months per calendar year or (c) continuous
employment with us or one of our affiliates for a period of time not to exceed
two years. No employee may purchase shares under the 2008 purchase plan at a
rate in excess of $25,000 worth of our common stock based on the fair market
value per share of our common stock at the beginning of an offering for each
year such a purchase right is outstanding. Finally, no employee will be
eligible for the grant of any purchase rights under the 2008 purchase plan if
immediately after such rights are granted, such employee has voting power over
5% or more of our outstanding capital stock measured by vote or value.
Changes to Capital Structure.
In the event that
there is a specified type of change in our capital structure, such as a stock
split, appropriate adjustments will be made to (a) the number of shares
reserved under the 2008 purchase plan, (b) the maximum number of shares by
which the share reserve may increase automatically each year and (c) the
number of shares and purchase price of all outstanding purchase rights.
92
Corporate Transactions.
In the event of
certain significant corporate transactions, any then-outstanding rights to
purchase our stock under the 2008 purchase plan will be assumed, continued or
substituted for by any surviving or acquiring entity (or its parent company).
If the surviving or acquiring entity (or its parent company) elects not to
assume, continue or substitute for such purchase rights, then the participants
accumulated payroll contributions will be used to purchase shares of our common
stock within ten business days prior to such corporate transaction, and such
purchase rights will terminate immediately.
401(k) Plan
We
maintain a defined contribution employee retirement plan for our employees. The
plan is intended to qualify as a tax-qualified plan under Section 401(k) of
the Internal Revenue Code so that contributions to the 401(k) plan, and
income earned on such contributions, are not taxable to participants until
withdrawn or distributed from the 401(k) plan. The 401(k) plan
provides that each participant may contribute up to 100% of his or her pre-tax
compensation, up to a statutory limit, which is $15,500 for 2007. Participants
who are at least 50 years old can also make catch-up contributions,
which in 2007 may be up to an additional $5,000 above the statutory limit.
Under the 401(k) plan, each employee is fully vested in his or her
deferred salary contributions. Employee contributions are held and invested by
the plans trustee. The 401(k) plan also permits us to make discretionary
contributions and matching contributions, subject to established limits and a
vesting schedule. To date, we have not made any discretionary or matching
contributions to the plan on behalf of participating employees.
Non-Employee
Director Compensation
The
following table sets forth in summary form information concerning the
compensation that we paid or awarded during the year ended December 31,
2007 to each of our non-employee directors.
Name
|
|
Fees Earned or
Paid in Cash ($)
|
|
Stock
Awards
($)(1)
|
|
Option
Awards
($)(2)
|
|
All Other
Compensation ($)
|
|
Total ($)
|
|
Bruce H. KenKnight, Ph.D.(3)
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence S. Lewin(4)
|
|
|
|
24,900
|
|
|
|
|
|
24,900
|
|
Fred A. Middleton
|
|
|
|
|
|
7,800
|
|
|
|
7,800
|
|
Timothy Mills, Ph.D.(5)
|
|
|
|
|
|
|
|
|
|
|
|
Woodrow A. Myers Jr., M.D.(6)
|
|
|
|
|
|
5,200
|
|
|
|
5,200
|
|
Eric N. Prystowsky, M.D.
|
|
8,000
|
(7)
|
|
|
45,083
|
|
36,000
|
(8)
|
89,083
|
|
Harry T. Rein
|
|
|
|
|
|
7,800
|
|
|
|
7,800
|
|
Robert J. Rubin, M.D.(9)
|
|
|
|
16,600
|
|
5,200
|
|
60,000
|
(10)
|
81,800
|
|
Daniel C. Wood(11)
|
|
|
|
|
|
|
|
|
|
|
|
(1) Calculated in
accordance with SFAS No. 123R using the modified prospective transition
method without consideration of forfeitures. The amount reflects the dollar
amount realized by us for financial statement reporting purposes in 2007 in
connection with the issuance by us of fully vested stock awards.
(2) Calculated in
accordance with SFAS No. 123R using the modified prospective transition
method without consideration of forfeitures. The amount reflects the dollar
amount realized by us for financial statement reporting purposes in 2007 in
connection with the vesting of outstanding options to purchase shares of our
common stock.
(3) Dr. KenKnight
resigned from our board in August 2007.
(4) Mr. Lewin
resigned from our board in July 2007.
(5) Dr. Mills
resigned from our board in July 2007.
(6) Dr. Myers
was elected to our board in August 2007.
(7) Represents board
meeting fees in the amount of $8,000 in connection with four meetings attended.
93
(8) Represents fees
paid to a consulting firm affiliated with Dr. Prystowsky for services
provided by Dr. Prystowsky.
(9) Dr. Rubin
was elected to our board in August 2007.
(10) Represents fees
paid to Dr. Rubin for consulting services provided by him.
(11)
Mr. Wood resigned from our board in September 2007.
We
have reimbursed and will continue to reimburse our non-employee directors for
their travel, lodging and other reasonable expenses incurred in attending
meetings of our board of directors and committees of the board of directors.
In July 2007,
our board of directors adopted a compensation program for our non-employee
directors, or the Non-Employee Director Compensation Policy. The Non-Employee
Director Compensation Policy became effective in March 2008. Pursuant to
the Non-Employee Director Compensation Policy, each member of our board of
directors who is not our employee receives the following cash compensation for
board services, as applicable:
·
$25,000 per year for service as a board member;
·
$2,500 per year for service as a member of the audit
committee and the compensation, nominating and corporate governance committee;
·
$2,000 for each in-person board meeting and $1,000 for
each telephonic board meeting; and
·
$500 for each in-person or telephonic audit committee
meeting.
In
addition, our non-employee directors receives initial and annual, automatic,
non-discretionary grants of nonqualified stock options under the terms and
provisions of our directors plan, which became effective in March 2008.
In
addition to the foregoing, each non-employee director serving on our board as
of July 27, 2007 was granted a non-statutory stock option to purchase 15,000
shares of common stock under our 2003 plan with an exercise price equal to the
then fair market value of our common stock on the date of grant and each
non-employee director serving as a chairperson of the compensation or audit
committee on July 27, 2007 was granted an additional non-statutory option
to purchase 7,500 shares of common stock under our 2003 plan with an exercise
price equal to the then fair market of our common stock on the date of grant.
Each of these grants vest over a three year period, 33
1
/
3
% of which will vest upon the first
anniversary of the date of grant and the remainder will vest in a series of 24
successive equal monthly installments thereafter. All stock options granted
will have a maximum term of ten years and will vest in full upon the closing of
a change in control transaction.
In
addition to the foregoing, each non-employee director that joined our board
prior to the closing of our initial public offering was automatically granted a
non-statutory stock option to purchase 15,000 shares of common stock under our
2003 plan with an exercise price equal to the then fair market value of our
common stock and each non-employee director assuming the role of a chairperson
of the compensation, nominating and corporate governance or audit committees
during such period was automatically granted an additional non-statutory option
to purchase 7,500 shares of common stock under our 2003 plan with an exercise
price equal to the then fair market of our common stock on the date of grant.
Each of these grants vest over a three year period, 33
1
/
3
% of which will vest upon the first
anniversary of the date of grant and the remainder will vest in a series of 24
successive equal monthly installments thereafter. All stock options granted
will have a maximum term of ten years and will vest in full upon the closing of
a change in control transaction.
For a
more detailed description of our directors plan and 2003 plan, see Equity
Benefit Plans above.
94
Limitation
of Liability and Indemnification
Our amended and
restated certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for liability for any:
·
breach of their duty of loyalty to the corporation or
its stockholders;
·
act or omission not in good faith or that
involves intentional misconduct or a knowing violation of law;
·
unlawful payment of dividends or
redemption of shares; or
·
transaction from which the directors
derived an improper personal benefit.
These limitations
of liability do not apply to liabilities arising under federal securities laws
and do not affect the availability of equitable remedies such as injunctive
relief or rescission.
Our amended and
restated bylaws provide that we will indemnify our directors and executive
officers, and may indemnify other officers, employees and other agents, to the
fullest extent permitted by law. Our amended and restated bylaws also permit us
to secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in connection with their
services to us, regardless of whether our amended and restated bylaws permit
such indemnification. We have obtained a policy of directors and officers
liability insurance.
We have entered,
and intend to continue to enter, into separate indemnification agreements with
our directors and executive officers, in addition to the indemnification
provided for in our amended and restated bylaws. These agreements, among other
things, require us to indemnify our directors and executive officers for
certain expenses, including attorneys fees, judgments, fines and settlement
amounts incurred by a director or executive officer in any action or proceeding
arising out of their services as one of our directors or executive officers, or
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request.
At present, there
is no pending litigation or proceeding involving any of our directors or executive
officers as to which indemnification is required or permitted, and we are not
aware of any threatened litigation or proceeding that may result in a claim for
indemnification.
Insofar as
indemnification for liabilities arising under the Securities Act may be
permitted to directors, executive officers or persons controlling us, we have
been informed that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
95
RELATED PARTY TRANSACTIONS
The following is a
description of transactions since January 1, 2005 to which we have been a
party, in which the amount involved in the transaction exceeds $120,000, and in
which any of our directors, executive officers or to our knowledge, beneficial
owners of more than 5% of our capital stock had or will have a direct or
indirect material interest, other than compensation, termination and
change-in-control arrangements, which are described under Executive
Compensation. We believe the terms obtained or consideration that we paid or
received, as applicable, in connection with the transactions described below
were comparable to terms available or the amounts that would be paid or received,
as applicable, in arms-length transactions.
Policies
and Procedures for Transactions with Related Persons
We have adopted a
written Related-Person Transactions Policy that sets forth our policies and
procedures regarding the identification, review, consideration and oversight of
related-persons transactions. For purposes of our policy only, a related-person
transaction is a transaction, arrangement or relationship (or any series of
similar transactions, arrangements or relationships) in which we and any related
person are participants involving an amount that exceeds $120,000.
Transactions involving compensation for services provided to us as an employee,
director, consultant or similar capacity by a related person are not covered by
this policy. A related person is any executive officer, director or a holder of
more than five percent of our common stock, including any of their immediate
family members and any entity owned or controlled by such persons.
Under the policy,
where a transaction has been identified as a related-person transaction,
management must present information regarding the proposed related-person
transaction to our audit committee (or, where review by our audit committee
would be inappropriate, to another independent body of our board of directors)
for review. The presentation must include a description of, among other things,
the material facts, the direct and indirect interests of the related persons,
the benefits of the transaction to us and whether any alternative transactions
are available. To identify related-person transactions in advance, we rely on
information supplied by our executive officers, directors and certain
significant stockholders. In considering related-person transactions, our audit
committee takes into account the relevant available facts and circumstances
including, but not limited to:
·
the risks, costs and benefits to us;
·
the impact on a directors independence in the event
the related person is a director, immediate family member of a director or an
entity with which a director is affiliated;
·
the terms of the transaction;
·
the availability of other sources for comparable
services or products; and
·
the terms available to or from, as the case may be,
unrelated third parties or to or from our employees generally.
In the event a
director has an interest in the proposed transaction, the director must recuse
himself or herself from the deliberations and approval. Our policy requires
that, in reviewing a related-person transaction, our audit committee must
consider, in light of known circumstances, whether the transaction is in, or is
not inconsistent with, the best interests of us and our stockholders, as our
audit committee determines in the good faith exercise of its discretion. We did
not previously have a formal policy concerning transactions with related
persons.
Preferred
Stock Financings
In March 2007,
we issued and sold to investors an aggregate of 114,839 shares of mandatorily
redeemable convertible preferred stock at a purchase price of $1,000 per share,
for aggregate consideration of $114.8 million Upon the closing of our
initial public offering, these shares converted into 7,680,902 shares of
common stock.
96
The participants
in these preferred stock financings included the following directors, officers
and holders of more than 5% of our capital stock or entities affiliated with
them. The following table presents the number of shares issued to these related
parties in the mandatorily redeemable convertible preferred stock financing:
Participants(1)
|
|
Mandatorily
Redeemable
Convertible Preferred
Stock
|
|
Sanderling Venture Partners VI and its affiliates(2)
|
|
7,256
|
|
H&Q Funds(3)
|
|
1,563
|
|
Foundation Medical Partners(4)
|
|
1,064
|
|
(1) Additional
detail regarding these stockholders and their equity holdings is provided in Principal
Stockholders and Selling Stockholder.
(2) Fred A.
Middleton, one of our directors, is a General Partner/Managing Director of
Sanderling Ventures, and as such he shares voting and investment control of the
shares held by the Sanderling entities. Upon completion of our initial public
offering, these shares converted into 485,309 shares of our common stock.
(3) Upon completion
of our initial public offering, these shares converted into 104,539 shares of
our common stock.
(4) Harry T. Rein,
one of our directors, has served as a General Partner with Foundation Medical
Partners since March 2003. Upon completion of our initial public offering,
these shares converted into 71,164 shares of our common stock.
In connection with
the mandatorily redeemable convertible preferred stock financing, we entered
into a registration rights agreement with the holders of our mandatorily
redeemable convertible preferred stock which provided certain registration
rights to such holders.
Convertible
Note and Warrant Issuances
Bridge Financings
2005
Bridge Financing.
In
August 2005, we issued secured subordinated convertible promissory notes
in an aggregate amount of $2.0 million to affiliates of Sanderling
Ventures, $500,000 to the H&Q Funds and $500,000 to Foundation Medical
Partners, each with a maturity date of the first to occur of February 15,
2006 or certain events as set forth in the promissory notes. In connection
therewith, we also issued warrants to purchase 171,427 shares of our preferred
stock to affiliates of Sanderling Ventures, warrants to purchase 42,856 shares
of our preferred stock to the H&Q Funds and warrants to purchase 42,857
shares of our preferred stock to Foundation Medical Partners.
May 2006
Bridge Financings.
In
May 2006 we issued secured subordinated convertible promissory notes in an
aggregate amount of $2,113,534 to affiliates of Sanderling Ventures, $528,274
to the H&Q Funds and $528,383 to Foundation Medical Partners, each with a
maturity date of the first to occur of August 15, 2006 or certain events
as set forth in the promissory notes. These notes superseded and restated in
their entirety the notes issued in August 2005. In connection therewith,
we also issued additional warrants to purchase 181,159 shares of our Series D-1
preferred stock to affiliates of Sanderling Ventures, warrants to purchase
45,280 shares of our Series D-1 preferred stock to the H&Q Funds and
warrants to purchase 45,290 shares of our Series D-1 preferred stock to
Foundation Medical Partners.
August 2006
Bridge Financing.
In
August 2006 we issued secured subordinated convertible promissory notes in
an aggregate amount of $49,103 to affiliates of Sanderling Ventures, $12,273 to
the H&Q Funds and $12,276 to Foundation Medical Partners, each with a
maturity date of the first to occur of February 15, 2007 or certain events
as set forth in the promissory notes. In connection therewith, we also issued
warrants to purchase 13,939 shares of our Series D-1 preferred stock to
affiliates of Sanderling Ventures, warrants to purchase 3,475 shares of our Series D-1
preferred stock to the H&Q Funds and warrants to purchase 3,485 shares of
our Series D-1 preferred stock to Foundation Medical Partners.
97
The notes issued
in the May 2006 and August 2006 bridge financings were converted into
$3.4 million of our mandatorily redeemable convertible preferred stock in March 2007.
The exercise price of the warrants issued in the May 2006 and August 2006
bridge financings on a per share basis is $3.50. These warrants were
automatically net exercised immediately prior to the completion of our initial
public offering in accordance with the terms thereof.
Guidant Financings
In May 2006,
we issued a subordinated promissory note with a principal amount of $21,400,958
to Guidant Investment Corporation, with a maturity date of November 12,
2007, which amended, restated and superseded in full those certain promissory
notes dated November 12, 2003 and March 18, 2004, each with a
principal amount of $10.0 million. This note was repaid in full in August 2007.
In May 2006,
we issued a warrant to purchase 200,136 shares of our Series D-1 preferred
stock to Guidant Investment Corporation. In August 2007 we issued a
warrant to purchase 214,285 shares of our Series D-1 preferred stock to
Guidant Investment Corporation. The exercise price of the warrants issued to
Guidant Investment Corporation on a per share basis is $3.50. These warrants
were automatically net exercised immediately prior to the completion of our
initial public offering in accordance with the terms thereof.
Loan
Program
From July 2003
to February 2006, we maintained a program whereby, from time to time, we
allowed certain of our employees, including James M. Sweeney and Michael
Forese, to exercise options to purchase shares of our common stock by issuing
to us a full recourse promissory note. The promissory notes generally have a
four year term and accrue interest at a rate of approximately the treasury
rate. Principal and interest payments are due annually and the notes are
secured by the Companys common stock issued under the arrangement.
Under this
program, in 2004, we made a loan of $187,500 to James M. Sweeney, bearing
interest at an annual rate of 4.00% pursuant to a full recourse promissory
note. The loan was payable in monthly payments of principal and interest
through 2008. In August 2007, we paid a special bonus of $352,679 to Mr. Sweeney
and, subsequently, the remaining outstanding principal and interest balance of
the loan of approximately $210,000, which was the largest outstanding amount
under the loan at any given time, was repaid in its entirety. Mr. Sweeney
made no payments with respect to principal or interest under the loan other
than the repayment in connection with his special bonus in August 2007.
In 2007, we made a
loan of $112,500 to Michael Forese, bearing interest at an annual rate of 4.58%
pursuant to a full recourse promissory note. In August 2007, we paid a
special bonus of $165,696 to Mr. Forese and, subsequently, the remaining
outstanding principal and interest balance of the loan of approximately
$115,000, which was the largest outstanding amount under the loan at any given time,
was repaid in its entirety. Mr. Forese made no payments with respect to
principal or interest under the loan other than the repayment in connection
with his special bonus in August 2007.
Loan To
David Wood
In September 2006,
we made a loan of $230,000 to David S. Wood, bearing interest at an annual rate
of 5.13% pursuant to a loan agreement. Pursuant to the terms of a separation
and release agreement we entered into with Mr. Wood in connection with the
termination of his employment in June 2007, we forgave all principal and
accrued interest under the loan.
98
Information
Technology Services Agreement
In July 2004,
we entered into a two year information technology services agreement with
Cardiac Pacemakers, Inc., an affiliate of Guidant Investment Corporation,
a shareholder. Under the agreement, we provide information technology services
to Cardiac Pacemakers and they pay us for such services. In June 2006, the
agreement was extended for an additional two year period. In connection with
this agreement we earned revenue of $1.5 million, $0.9 million and
$0.6 million for the years ended December 31, 2005, 2006 and 2007,
respectively.
Stock
Options Granted to Executive Officers and Directors
From January 1,
2005 to December 31, 2007, we granted options to purchase an aggregate of
752,500 shares of common stock to our current directors and executive officers,
with exercise prices ranging from $6.10 to $9.50.
Indemnification
Agreements
We have entered
into indemnification agreements with each of our directors and executive
officers. These agreements, among other things, require us to indemnify our
directors and executive officers for certain expenses, including attorneys
fees, judgments, fines and settlement amounts incurred by a director or
executive officer in any action or proceeding arising out of their services as
one of our directors or executive officers, or any of our subsidiaries or any
other company or enterprise to which the person provides services at our
request.
We have agreed to
indemnify the selling stockholder in this offering against certain liabilities
that it may incur in connection with the sale of its shares in this offering.
99
PRINCIPAL AND SELLING STOCKHOLDERS
The shares of
common stock being registered for resale hereby consist of 7,680,902 shares of
our common stock that we issued to the selling stockholders in the private
placement that was completed on March 8, 2007.
In connection with
the registration rights we granted to the selling stockholders, we filed with
the SEC a registration statement on Form S-1, of which this prospectus is
a part, with respect to the resale or other disposition of the shares of our
common stock offered by this prospectus from time to time on the Nasdaq Global
Market, in privately negotiated transactions or otherwise. We have also agreed
to prepare and file amendments and supplements to the registration statement to
the extent necessary to keep the registration statement effective for the
period of time required under our agreement with the selling stockholders.
Beneficial
ownership is determined in accordance with the rules of the SEC, and is
based upon information provided by each respective stockholder identified
below, Forms 4, Schedules 13D and 13G and other public documents filed with the
SEC. The number representing the number of shares of common stock beneficially
owned prior to the offering for each such stockholder includes (i) all
shares held by the stockholder prior to the private placement, if any, plus (ii) all
shares purchased by the stockholder in the private placement, if any, and being
offered pursuant to this prospectus. The percentages of shares owned after the
offering are based on 23,112,265 shares of our common stock outstanding as of May 15,
2008, which includes the outstanding shares of common stock offered by this
prospectus.
Unless otherwise
indicated below, to our knowledge, all persons named in the table below have
sole voting and investment power with respect to their shares of common stock,
except to the extent authority is shared by spouses under applicable law. The
inclusion of any shares in the table below does not constitute an admission of
beneficial ownership for the person named below.
Except as noted in
the footnotes below, none of the selling stockholders has held any position or
office with us or our affiliates within the last three years or has had a
material relationship with us or any of our predecessors or affiliates within
the past three years, other than as a result of the ownership of our shares or
other securities.
The selling
stockholders may sell some, all or none of their shares of common stock offered
by this prospectus. We do not know how long the selling stockholders will hold
their shares of common stock before selling them. We currently have no
agreements, arrangements or understandings with the selling stockholders
regarding the sale of any of the shares of common stock being offered hereunder
other than the subscription agreement pursuant to which the selling
stockholders purchased their shares of common stock from us and the
registration rights agreement entered into in connection therewith. The shares
offered by this prospectus may be offered from time to time by the selling
stockholders. Accordingly, for purposes of the table below, we have assumed
that, after completion of the offering, the only shares that will continue to
be held by the selling stockholders are those not including the shares being
registered for resale hereby, if any. Each of the selling stockholders has
agreed with the underwriters for our initial public offering not to sell the
shares being registered hereby through and including September 14, 2008
without the prior written consent of Citigroup Global Markets Inc.
The selling
stockholders identified below may have sold or transferred, in transactions
exempt from the registration requirements of the Securities Act of 1933, as
amended, or the Securities Act, or otherwise, some or all of their shares of
common stock since the date on which the information in the table below is
presented. Information about such stockholders may change over time.
The following
table sets forth information regarding beneficial ownership of our capital
stock outstanding as of May 15, 2008 by:
·
each person, or group of affiliated
persons, known by us to beneficially own more than 5% of our common stock;
·
each of our directors;
·
each of our named executive officers;
100
·
all of our directors and executive
officers as a group; and
·
each selling stockholder.
|
|
Number of Shares of
Common Stock
Beneficially Owned
Prior to the Offering
|
|
Number of Shares of
Common Stock
Registered for Sale
Hereby
|
|
Common Stock Owned
Upon Completion of this
Offering
|
|
% of Common Stock Owned
Upon Completion of this
Offering
|
|
Directors and Named Executive Officers:
|
|
|
|
|
|
|
|
|
|
Arie Cohen(1)
|
|
450,000
|
|
|
|
450,000
|
|
2.8
|
%
|
James M. Sweeney(2)
|
|
1,299,845
|
|
|
|
1,299,845
|
|
8.4
|
%
|
Fred Middleton(3)
|
|
2,598,694
|
|
485,309
|
|
2,113,385
|
|
13.7
|
%
|
Woodrow A. Myers Jr.,
M.D. (4)
|
|
15,000
|
|
|
|
15,000
|
|
|
*
|
Eric N. Prystowsky, M.D.(5)
|
|
96,309
|
|
|
|
96,309
|
|
|
*
|
Harry T. Rein(6)
|
|
650,097
|
|
71,164
|
|
578,933
|
|
3.7
|
%
|
Robert J. Rubin, M.D.(7)
|
|
37,037
|
|
|
|
37,037
|
|
|
*
|
Michael Forese(8)
|
|
75,000
|
|
|
|
75,000
|
|
|
*
|
Martin P. Galvan, CPA(9)
|
|
150,000
|
|
|
|
150,000
|
|
|
*
|
Manny S. Gerolamo(10)
|
|
125,000
|
|
|
|
125,000
|
|
|
*
|
Gregory a. Marsh
|
|
|
|
|
|
|
|
|
*
|
David Wood
|
|
41,653
|
|
|
|
41,653
|
|
|
*
|
All directors and executive officers as a group (10 persons)(11)
|
|
5,496,982
|
|
556,473
|
|
4,940,509
|
|
30.3
|
%
|
5% and Selling Stockholders:
|
|
|
|
|
|
|
|
|
|
Basso Fund Ltd.(12)
|
|
20,065
|
|
20,065
|
|
|
|
|
*
|
Basso Holdings Ltd.(13)
|
|
244,127
|
|
244,127
|
|
|
|
|
*
|
Basso Multi-Strategy Holding Fund Ltd.(14)
|
|
70,228
|
|
70,228
|
|
|
|
|
*
|
Citigroup Global Markets Inc.(15)
|
|
372,486
|
|
367,863
|
|
4,623
|
|
|
*
|
Credit Suisse Securities
(USA) LLC(16)
|
|
468,189
|
|
468,189
|
|
|
|
|
*
|
DRW Securities LLC(17)
|
|
234,094
|
|
234,094
|
|
|
|
|
*
|
Deutsche Bank AG(18)
|
|
1,003,263
|
|
1,003,263
|
|
|
|
|
*
|
KBC Convertibles MAC 28 Ltd.(19)
|
|
133,768
|
|
133,768
|
|
|
|
|
*
|
KBC Diversified Fund, A Segregated Portfolio of KBC AIM Master Fund
SPC(19)
|
|
294,290
|
|
294,290
|
|
|
|
|
*
|
Linden Capital L.P.(20)
|
|
167,210
|
|
167,210
|
|
|
|
|
*
|
Old Lane Cayman Master Fund, LP(21)
|
|
199,315
|
|
199,315
|
|
|
|
|
*
|
Old Lane HMA Master Fund, LP(21)
|
|
56,517
|
|
56,517
|
|
|
|
|
*
|
Old Lane US Master Fund, LP(21)
|
|
78,588
|
|
78,588
|
|
|
|
|
*
|
Ore Hill Hub Fund Ltd.
|
|
668,842
|
|
668,842
|
|
|
|
|
*
|
Peter J. Callahan Revocable Trust dated 2/28/02
|
|
97,383
|
|
97,383
|
|
|
|
|
*
|
101
Rhythm Fund,
Ltd.(19)
|
|
107,014
|
|
107,014
|
|
|
|
|
*
|
Silver Oak Capital,
L.L.C.(22)
|
|
267,536
|
|
267,536
|
|
|
|
|
*
|
SOLA LTD(23)
|
|
1,005,000
|
|
1,003,263
|
|
1,737
|
|
|
*
|
Suttonbrook Capital
Portfolio, L.P.(24)
|
|
267,536
|
|
267,536
|
|
|
|
|
*
|
Tempo Master Fund LP(25)
|
|
668,842
|
|
668,842
|
|
|
|
|
*
|
UBS AG London Branch(26)
|
|
334,421
|
|
334,421
|
|
|
|
|
*
|
Whitebox Convertible Arbitrage Partners, LP(27)
|
|
267,536
|
|
267,536
|
|
|
|
|
*
|
Foundation Medical Partners L.P.(28)
|
|
627,597
|
|
71,164
|
|
556,433
|
|
3.6
|
%
|
H&Q Healthcare
Investors(29)
|
|
867,434
|
|
62,068
|
|
805,366
|
|
5.2
|
%
|
H&Q Life Science
Investors(29)
|
|
579,380
|
|
42,471
|
|
536,909
|
|
3.5
|
%
|
Sanderling V
Beteilingungs(30)
|
|
52,377
|
|
11,370
|
|
41,007
|
|
|
*
|
Sanderling V Biomedical(30)
|
|
218,158
|
|
47,287
|
|
170,871
|
|
1.1
|
%
|
Sanderling V Limited Partnership(30)
|
|
58,860
|
|
12,774
|
|
46,086
|
|
|
*
|
Sanderling Venture Partners V(30)
|
|
359,763
|
|
77,920
|
|
281,843
|
|
1.8
|
%
|
Sanderling Venture Partners VI(30)
|
|
843,006
|
|
317,633
|
|
525,373
|
|
3.4
|
%
|
Sanderling Ventures Management V(30)
|
|
5,859
|
|
1,538
|
|
4,321
|
|
|
*
|
Sanderling Ventures Management VI(30)
|
|
65,526
|
|
3,344
|
|
62,182
|
|
|
*
|
Sanderling VI
Beteilingungs(30)
|
|
6,153
|
|
6,153
|
|
|
|
|
*
|
Sanderling VI Limited Partnership(30)
|
|
7,290
|
|
7,290
|
|
|
|
|
*
|
*
Less than 1%.
(1)
Includes an option to purchase 450,000
shares of capital stock, all of which will be unvested but exercisable as of July 14,
2008.
(2)
Includes 1,104,795 shares of capital
stock held by the James M. Sweeney Trust established May 24, 1999, of
which James M. Sweeney is trustee, 5,000 shares of capital stock held by
Lauren A. Sweeney, Mr. Sweeneys daughter, 10,000 shares of
capital stock held by Timothy M. Sweeney, Mr. Sweeneys son,
5,000 shares of which Timothy M. Sweeney holds as Custodian for Dylan
Marie Sweeney under the California Uniform Transfers to Minors Act, and
5,000 shares of capital stock held by Timothy M. Sweeney and Gretchen
Sweeney, Timothy M. Sweeneys wife, as Co-Trustees of the Sweeney Childrens
Trust FBO Jacob Michael Sweeney. Includes a fully vested option to purchase
50,000 shares of capital stock. Of these 1,249,845 shares, 2,604 will be
subject to repurchase as of July 14, 2008.
(3)
Includes the shares of capital stock held
by Sanderling entities referred to in footnote (30) below and entities
affiliated therewith. Fred Middleton disclaims any beneficial ownership of the
shares owned by these entities except to the extent of
102
his pecuniary interest in
these entities. Includes an option to purchase 22,500 shares of capital stock,
all of which will be unvested but exercisable as of July 14, 2008.
(4)
Includes an option to purchase 15,000
shares of capital stock, all of which will be unvested but exercisable as of July 14,
2008.
(5)
Includes 10,204 shares of capital stock
held by Raymond James and Associates, Inc. for the benefit of Eric N.
Prystowsky and 4,500 shares of capital stock held by each of David and Daniel
Prystowsky, Mr. Prystowskys sons. Includes options to purchase 27,500
shares of capital stock, 15,000 of which will be unvested but exercisable as of
July 14, 2008.
(6)
Includes the shares of capital stock held
by Foundation Medical Partners L.P. referred to in footnote (28) below.
Includes options to purchase 22,500 shares of capital stock, all of which will
be unvested but exercisable as of July 14, 2008.
(7)
Includes an option to purchase 15,000
shares of capital stock, all of which will be unvested but exercisable as of July 14,
2008.
(8)
Of these 75,000 shares of capital stock,
16,979 will be subject to repurchase as of July 14, 2008.
(9)
Includes an option to purchase 150,000
shares of capital stock, all of which will be unvested but exercisable as of July 14,
2008.
(10)
Includes an option to purchase 125,000
shares of capital stock, all of which will be unvested but exercisable as of July 14,
2008.
(11)
Includes the shares of capital stock
referred to in footnotes (1) through (10) above. Includes 4,619,482
shares of common stock, of which 19,583 will be subject to a right of
repurchase by us as of July 14, 2008, and options to purchase 877,500
shares of common stock, of which 815,000 will be unvested but exercisable as of
July 14, 2008.
(12)
Basso Capital Management, L.P. is the
Investment Manager to Basso Fund Ltd.
Howard Fischer is a Managing Member of Basso GP LLC, the General Partner
of Basso Capital Management, L.P. Mr. Fischer
has voting and investment power with respect to the shares held by Basso Fund
Ltd. Mr. Fischer disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(13)
Basso Capital Management, L.P. is the
Investment Manager to Basso Holdings Ltd.
Howard Fischer is a Managing Member of Basso GP LLC, the General Partner
of Basso Capital Management, L.P. Mr. Fischer
has voting and investment power with respect to the shares held by Basso
Holdings Ltd. Mr. Fischer disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(14)
Basso Capital Management, L.P. is the
Investment Manager to Basso Multi-Strategy Holding Fund Ltd. Howard Fischer is a Managing Member of Basso
GP LLC, the General Partner of Basso Capital Management, L.P. Mr. Fischer has voting and investment
power with respect to the shares held by Basso Multi-Strategy Holding Fund
Ltd. Mr. Fischer disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(15)
Ken Stiller, a Managing Director with
Citigroup Global Markets Inc., has voting and investment power with respect to
the shares held by Citigroup Global Markets Inc. Mr. Stiller disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest therein. Citigroup Global Markets Inc. has indicated
that it is a FINRA member. However,
Citigroup Global Markets Inc. has indicated that it purchased the shares
offered hereby in the ordinary course of business and has no arrangements or
understandings, directly or indirectly, with any person to distribute such
shares. Citigroup Global Markets Inc.
has provided investment banking services to us both in our initial public
offering and prior financing transactions.
(16)
Doug Teresko, a Director of Credit Suisse
Securities (USA) LLC, has voting and
investment power with respect to the shares held by Credit Suisse Securities
(USA) LLC. Mr. Teresko disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein. Credit Suisse
Securities (USA) LLC has indicated that it is a FINRA member. However, Credit
Suisse Securities (USA) LLC has indicated that it purchased the shares offered
hereby in the ordinary course of business and has no arrangements or understandings,
directly or indirectly, with any person to distribute such shares.
103
(17)
Donald Wilson, Jr., a Manager of DRW
Securities LLC, and Ilan Huberman, an employee of DRW Securities LLC, have voting and investment power with respect
to the shares held by DRW Securities LLC.
Each of Messrs. Wilson and Huberman disclaims beneficial ownership
of these shares except to the extent of his pecuniary interest therein.
(18)
Pierre Weinstein, a Portfolio Manager of
Deutsche Bank AG has voting and
investment power with respect to the shares held by Deutsche Bank AG. Mr. Weinstein disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein. Deutsche Bank AG has indicated
that it is affiliated with one or more Financial Industry Regulatory Authority,
or FINRA, members. However, such FINRA members will receive no compensation
whatsoever in connection with the sales by Deutsche Bank AG of the shares
offered hereby.
(19)
Carlo Georg, a Managing Director of KBC
Alternative Investment Management, the Investment Manager of KBC Convertibles MAC 28 Ltd., KBC Diversified
Fund, A Segregated Portfolio of KBC AIM Master Fund SPC and Rhythm Fund, Ltd.,
has voting and investment power with respect to the shares held by KBC
Convertibles MAC 28 Ltd., KBC Diversified Fund, A Segregated Portfolio of KBC
AIM Master Fund SPC and Rhythm Fund, Ltd.
Mr. Georg disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
KBC Convertibles MAC 28 Ltd., KBC Diversified Fund, A Segregated
Portfolio of KBC AIM Master Fund SPC and Rhythm Fund, Ltd. have indicated that
they are affiliated with one or more FINRA members. However, such FINRA members
will receive no compensation whatsoever in connection with the sales by KBC
Convertibles MAC 28 Ltd., KBC Diversified Fund, A Segregated Portfolio of KBC
AIM Master Fund SPC or Rhythm Fund, Ltd. of the shares offered hereby.
(20)
Siu Min Wong, the Managing Member of
Linden GP LLC, the General Partner of Linden Capital L.P., has voting and investment power with respect
to the shares held by Linden Capital L.P.
Mr. Siu Min Wong disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(21)
Each of Old Lane Cayman Master Fund, LP,
Old Lane HMA Master Fund, LP and Old Lane US Master Fund, LP has indicated that
it is affiliated with one or more FINRA members. However, such FINRA members
will receive no compensation whatsoever in connection with the sales by Old
Lane Cayman Master Fund, LP, Old Lane HMA Master Fund, LP or Old Lane US Master
Fund, LP of the shares offered hereby.
(22)
John M. Angelo and Michael L. Gordon,
controlling members of Silver Oak Capital, L.L.C., have voting and investment
power with respect to the shares held by Silver Oak Capital, L.L.C. Each of Messrs. Angelo and Gordon
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein. Silver Oak
Capital, L.L.C. has indicated that it is affiliated with one or more FINRA
members. However, such FINRA members will receive no compensation whatsoever in
connection with the sales by Silver Oak Capital, L.L.C. of the shares offered
hereby.
(23)
Solus Alternative Asset Management LP is
the Investment Advisor to SOLA LTD. and has voting and investment power with
respect to the shares held by SOLA LTD.
(24)
John London and Steven M. Weinstein, each
a Principal of Suttonbrook Capital Management LP, the Investment Manager of
Suttonbrook Capital Portfolio, L.P., have voting and investment power with
respect to the shares held by Suttonbrook Capital Portfolio, L.P. Each of Messrs. London and Weinstein
disclaims beneficial ownership of these shares except to the extent of his
pecuniary interest therein.
(25)
J. David Rogers, the General Partner of
Tempo Master Fund LP, has voting and
investment power with respect to the shares held by Tempo Master Fund LP. Mr. Rogers disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(26)
Chris Coward, the Executive Director of
UBS AG London Branch, has voting and
investment power with respect to the shares held by UBS AG London Branch. Mr. Coward disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein. UBS AG London Branch has
indicated
104
that it is affiliated
with one or more FINRA members. However, such FINRA members will receive no
compensation whatsoever in connection with the sales by UBS AG London Branch of
the shares offered hereby.
(27)
Andrew J. Redleaf, the Managing Member of
Whitebox Advisors, LLC, the General Partner of Whitebox Convertible Arbitrage
Partners, LP, has voting and investment
power with respect to the shares held by Whitebox Convertible Arbitrage
Partners, LP. Mr. Redleaf disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(28)
Harry Rein, the General Partner of
Foundation Medical Partners L.P. is one of our directors.
(29)
Hambrecht & Quist Capital
Management, LLC is the investment adviser to H&Q Life Sciences Investors
and H&Q Healthcare Investors, each a Massachusetts business trust
(together, the H&Q Funds). Daniel R. Omstead, Ph.D. is President of
Hambrecht & Quist Capital Management, LLC and a member of the
portfolio management team and, as such, has voting and investment power with
respect to the shares held by the H&Q Funds. Dr. Omstead disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(30)
Fred A. Middleton, one of our directors,
and Robert G. McNeil, Timothy C. Mills and Timothy J. Wollaeger share voting
and investment power with respect to the shares held by the Sanderling V
entities. Robert G. McNeil, Fred A. Middleton, Timothy C. Mills, Timothy J.
Wollaeger and Paul A. Grayson share voting and investment power with respect to
the shares held by the Sanderling VI entities. Each of Messrs. Middleton,
McNeil, Mills and Wollaeger disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
105
PLAN OF
DISTRIBUTION
We
are registering the shares of our common stock issued to the selling
stockholders to permit the resale of these shares from time to time after the
date of this prospectus. We will not receive any of the proceeds from the sale
by the selling stockholders of the shares of common stock. We will bear all
fees and expenses incident to our obligation to register these shares of our
common stock.
The
selling stockholders may sell all or a portion of the shares of our common
stock beneficially owned by them and offered hereby from time to time directly
or through one or more underwriters, broker-dealers or agents. If the shares of
our common stock are sold through underwriters or broker-dealers, the selling
stockholders will be responsible for underwriting discounts or commissions or
agents commissions. The shares of our common stock may be sold on any national
securities exchange or quotation service on which our common stock may be
listed or quoted at the time of sale, in the over-the-counter market or in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market and in one or more transactions at fixed prices, at
prevailing market prices at the time of the sale, at varying prices determined
at the time of sale, or at negotiated prices. These sales may be effected in
transactions, which may involve crosses or block transactions. The selling
stockholders may use any one or more of the following methods when selling
shares:
·
ordinary brokerage transactions and
transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases by a broker-dealer as principal and
resale by the broker-dealer for its account;
·
an exchange distribution in accordance with
the rules of the applicable exchange;
·
privately negotiated transactions;
·
settlement of short sales entered into after the effective date of the
registration statement of which this prospectus is a part;
·
broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
·
through the writing or settlement of options or other hedging
transactions, whether such options are listed on an options exchange or
otherwise;
·
one or more underwritten offerings on a firm
commitment or best efforts basis;
·
a combination of any such methods of sale;
and
·
any other method permitted pursuant to
applicable law.
The
selling stockholders also may resell all or a portion of the shares in open
market transactions in reliance upon Rule 144 under the Securities Act, as
permitted by that rule, or Section 4(1) under the Securities Act, if
available, rather than under this prospectus, provided that they meet the
criteria and conform to the requirements of those provisions.
Broker-dealers
engaged by the selling stockholders may arrange for other broker-dealers to
participate in sales. If the selling stockholders effect such transactions by
selling shares of our common stock to or through underwriters, broker-dealers
or agents, such underwriters, broker-dealers or agents may receive commissions
in the form of discounts, concessions or commissions from the selling
stockholders or commissions from purchasers of the shares of our common stock
for whom they may act as agent or to whom they may sell as principal. Such
commissions will be in amounts to be negotiated, but, except as set forth in a
supplement to this prospectus, in the case of an agency transaction will not be
in excess of a customary brokerage commission in compliance with NASD Rule 2440;
and in the case of a principal transaction a markup or markdown in compliance
with NASD IM-2440.
106
In
connection with sales of the shares of our common stock or otherwise, the
selling stockholders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
shares of our common stock in the course of hedging in positions they assume.
The selling stockholders may also sell shares of our common stock short and if
such short sales take place after the date that the registration statement of
which this prospectus is a part is declared effective by the SEC, the selling
stockholders may deliver shares of our common stock covered by this prospectus
to close out short positions and to return borrowed shares in connection with
such short sales. The selling stockholders may also loan or pledge shares of
our common stock to broker-dealers that in turn may sell such shares, to the
extent permitted by applicable law. The selling stockholders may also enter
into option or other transactions with broker-dealers or other financial
institutions or the creation of one or more derivative securities which require
the delivery to such broker-dealer or other financial institution of shares
offered by this prospectus, which shares such broker-dealer or other financial
institution may resell pursuant to this prospectus (as supplemented or amended
to reflect such transaction). Notwithstanding the foregoing, the selling
stockholders have been advised that they may not use shares registered on the
registration statement of which this prospectus is a part to cover short sales
of our common stock made prior to the date such registration statement has been
declared effective by the SEC.
The
selling stockholders may, from time to time, pledge or grant a security
interest in some or all of the shares of our common stock owned by them and, if
they default in the performance of their secured obligations, the pledgees or
secured parties may offer and sell the shares of our common stock from time to
time pursuant to this prospectus or any amendment to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act, amending, if necessary, the
list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus. The
selling stockholders also may transfer and donate the shares of our common
stock in other circumstances in which case the transferees, donees, pledgees or
other successors in interest will be the selling beneficial owners for purposes
of this prospectus.
The
selling stockholders and any broker-dealer or agents participating in the
distribution of the shares of our common stock may be deemed to be underwriters
within the meaning of Section 2(11) of the Securities Act in connection
with such sales. In such event, any commissions paid, or any discounts or
concessions allowed to, any such broker-dealer or agent and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. Selling stockholders who are
underwriters within the meaning of Section 2(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities Act
and may be subject to certain statutory liabilities of, including but not
limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
Each
selling stockholder has informed us that it does not have any written or oral
agreement or understanding, directly or indirectly, with any person to
distribute the common stock. If a selling stockholder notifies us in writing
that any material arrangement has been entered into with a broker-dealer for
the sale of our common stock through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule 424(b) under
the Securities Act, disclosing (i) the name of each such selling
stockholder and the participating broker-dealer(s), (ii) the number of
shares involved, (iii) the price at which such the shares of common stock
were sold, (iv) the commissions paid or discounts or concessions allowed
to such broker-dealer(s), where applicable, (v) that such broker-dealer(s) did
not conduct any investigation to verify the information set out in this
prospectus, and (vi) other facts material to the transaction. In no event
shall any broker-dealer receive fees, commissions and markups, which, in the
aggregate, would exceed eight percent (8%).
Under
the securities laws of some states, the shares of our common stock may be sold
in such states only through registered or licensed brokers or dealers. In
addition, in some states the shares of our common stock may not be sold unless
such shares have been registered or qualified for sale in such state or an exemption
from registration or qualification is available and is complied with.
There
can be no assurance that any selling stockholder will sell any or all of the
shares of our common stock registered pursuant to the registration statement of
which this prospectus is a part.
107
Each
selling stockholder and any other person participating in such distribution
will be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including, without limitation, Regulation M of the
Exchange Act, which may limit the timing of purchases and sales of any of the
shares of our common stock by the selling stockholder and any other
participating person. Regulation M may also restrict the ability of any
person engaged in the distribution of the shares of our common stock to engage
in market-making activities with respect to such shares. All of the foregoing
may affect the marketability of the shares of our common stock and the ability
of any person or entity to engage in market-making activities with respect to
such shares.
We
will pay all expenses of the registration of the shares of our common stock
pursuant to a registration rights agreement, including, without limitation, SEC
filing fees and expenses of compliance with state securities or blue sky
laws;
provided
,
however
, that each selling stockholder
will pay all underwriting discounts and selling commissions, if any and any
related legal expenses incurred by it other than one special counsel for all of
the selling stockholders. We will indemnify the selling stockholders against
certain liabilities, including some liabilities under the Securities Act, in
accordance with a registration rights agreements, or the selling stockholders
will be entitled to contribution. We may be indemnified by the selling
stockholders against civil liabilities, including liabilities under the
Securities Act, that may arise from any written information furnished to us by
the selling stockholders specifically for use in this prospectus, in accordance
with the registration rights agreement, or we may be entitled to contribution.
108
DESCRIPTION
OF CAPITAL STOCK
Our
authorized capital stock consists of 200,000,000 shares of common stock, par
value $0.001 per share, and 10,000,000 shares of preferred stock, par value
$0.001 per share.
The
following is a summary of the rights of our common stock and preferred stock.
This summary is not complete. For more detailed information, please see our
amended and restated certificate of incorporation and bylaws, which are filed
as exhibits to the registration statement of which this prospectus is a part.
Common Stock
Outstanding
Shares.
As
of March 31, 2008, there were 23,065,145 shares of common stock
outstanding, including 79,866 unvested shares held by employees, and there were
1,704,804 shares of common stock subject to outstanding options under our 2003
Equity Incentive Plan.
As
of March 31, 2008, we had approximately 258 record holders of our common
stock.
Voting
Rights.
Each
holder of common stock is entitled to one vote for each share of common stock
on all matters submitted to a vote of the stockholders, including the election
of directors. Our amended and restated certificate of incorporation and amended
and restated bylaws do not provide for cumulative voting rights. Because of
this, the holders of a majority of the shares of common stock entitled to vote
in any election of directors can elect all of the directors standing for
election, if they should so choose.
Dividends.
Subject to
preferences that may be applicable to any then outstanding preferred stock, the
holders of common stock are entitled to receive ratably those dividends, if
any, as may be declared from time to time by our board of directors out of
legally available funds.
Liquidation.
In the event of our
liquidation, dissolution or winding up, holders of common stock will be
entitled to share ratably in the net assets legally available for distribution
to stockholders after the payment of all of our debts and other liabilities and
the satisfaction of the liquidation preferences granted to the holders of any
outstanding shares of preferred stock.
Rights and
Preferences.
Holders
of common stock have no preemptive, conversion or subscription rights, and
there are no redemption or sinking fund provisions applicable to the common
stock. The rights, preferences and privileges of the holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.
Fully Paid
and Nonassessable.
All
of our outstanding shares of common stock are fully paid and nonassessable.
Preferred Stock
As
of March 31, 2008, there were no shares of preferred stock issued and
outstanding. Our board of directors has the authority, without further action
by the stockholders, to issue up to 10,000,000 shares of preferred stock in one
or more series, to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and privileges of
the shares of each wholly unissued series and any qualifications, limitations
or restrictions thereon and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then
outstanding).
Our
board of directors may authorize the issuance of preferred stock with voting or
conversion rights that could adversely affect the voting power or other rights
of the holders of the common stock. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect of delaying,
deferring or preventing a change of control and may adversely affect the market
price of the common stock and the voting and other rights of the holders of common
stock. We have no current plans to issue any shares of preferred stock.
109
Warrants
As
of March 31, 2008, Silicon Valley Bank held a warrant to purchase an
aggregate of 6,250 shares of our common stock, having a weighted average
exercise price of $2.94 per share. This warrant contains a net exercise
provision under which Silicon Valley Bank may, in lieu of payment of the
exercise price in cash, surrender the warrant and receive a net amount of
shares based on the fair market value of our common stock at the time of
exercise of the warrant after deduction of the aggregate exercise price. The
warrant also provides for the same registration rights that certain of our
stockholders are entitled to receive pursuant to our amended and restated
investor rights agreement, as amended, as described in greater detail under the
heading Registration Rights. The warrant also contains provisions for the
adjustment of the exercise price and the aggregate number of shares issuable
upon the exercise of the warrant in the event of stock dividends, stock splits,
reorganizations, reclassifications and consolidations. The warrant will
terminate in August 2010.
Registration Rights
Amended and Restated
Investor Rights Agreement
As
of March 31, 2008, under our amended and restated investor rights
agreement, as amended, holders of up to approximately 7,635,903 shares of
common stock (including shares of our common stock issuable upon the exercise
of a warrant to purchase up to 6,250 shares of our common stock) have certain rights to require us to register
their shares (without taking into account shares issuable upon exercise of
warrants) with the Securities and Exchange Commission so that those shares may
be publicly resold.
Demand
Registration Rights.
At
any time beginning on the earlier of (a) March 18, 2008 and (b) six
months after the completion of our initial public offering, the holders of at
least 30% of the shares having demand registration rights have the right to
make up to two demands that we file a registration statement so long as
the aggregate number of securities requested to be sold under such registration
statement is at least $5,000,000, subject to specified exceptions. We are not required
to effect a registration pursuant to these demand registration rights during
the period from the date of filing of, and ending 180 days following the
effective date of a registration statement relating to a public offering.
Form S-3
Registration Rights.
If
we are eligible to file a registration statement on Form S-3, one or
more holders of registration rights have the right to demand that we
file a registration statement on Form S-3 so long as the aggregate
amount of securities to be sold under the registration statement on Form S-3
is at least $1,000,000, subject to specified exceptions.
Piggyback
Registration Rights.
If
we register any securities for public sale, holders of registration rights will
have the right to include their shares in the registration statement. The
underwriters of any underwritten offering will have the right to limit the
number of shares having registration rights to be included in the registration
statement, but not below 20% of the total number of shares included in the
registration statement, unless such offering is our initial public offering and
such registration does not include shares of any other selling stockholders, in
which case any and all shares held by selling stockholders may be excluded from
the offering.
Expenses of
Registration.
Generally,
we are required to bear all registration and selling expenses incurred in
connection with the demand, piggyback and Form S-3 registrations described
above, other than underwriting discounts and commissions.
Expiration
of Registration Rights.
The
demand, piggyback and Form S-3 registration rights discussed above will
terminate on March 25, 2011. In addition, the registration rights
discussed above will terminate with respect to any stockholder or warrant
holder entitled to these registration rights on the date when such stockholder
or warrant holder is able to sell all of their registrable common stock in a
single 90-day period under Rule 144 of the Securities Act.
110
Registration Rights Agreement
In
March 2007, we entered into a registration rights agreement with the
holders of our previously outstanding mandatorily redeemable convertible
preferred stock. At the closing of our initial public offering, these shares of
preferred stock were converted into 7,680,902 shares of our common stock. Pursuant
to the registration rights agreement we agreed to, at our expense, for the
benefit of the holders of such shares of our common stock, file with the SEC
the registration statement of which this prospectus is a part covering the
resale of such shares of common stock on or before June 23, 2008. We also
agreed to use commercially reasonable best efforts to cause the registration statement
to become effective prior to September 21, 2008, and to keep the
registration statement effective until the earlier of (i) the sale of all
the shares of common stock pursuant to Rule 144 under the Securities Act
or a shelf registration statement and (ii) the date on which all shares of
common stock not theretofore sold pursuant to Rule 144 or such shelf
registration statement can be sold without restrictions pursuant to Rule 144
other than any shares of common stock held by our affiliates. We are permitted
to suspend the use of this prospectus under certain circumstances relating to
corporate developments, public filings with the SEC and similar events for a
period not to exceed 30 days in any three-month period and not to exceed
an aggregate of 90 days in any 12-month period. We have agreed to pay
liquidated damages to holders of the shares of common stock if the shelf
registration statement of which this prospectus is a part is not timely filed
or made effective or if this prospectus is unavailable for periods in excess of
those permitted above. Such liquidated damages shall be paid upon the
designated schedule until such failure to file or become effective or
unavailability is cured, at a rate of 0.5% of the original issue price of the
mandatorily redeemable convertible preferred stock (plus any accrued or
declared and unpaid dividends thereon) for the initial occurrence of such event
and 1.0% of the original issue price of the mandatorily redeemable convertible
preferred stock (plus any accrued or declared and unpaid dividends thereon) for
each 30-day period thereafter that the occurrence shall go uncured. We will pay
such liquidated damages in cash on the earlier of (i) the last day of the
calendar month during which such registration default occurred and (ii) the
third business day after the event or failure giving rise to the registration
default is cured. When such registration default is cured, the time periods for
calculation of such liquidated damages shall cease to accrue as of the date of
such cure.
In
addition to the rights discussed in the above paragraph, the registration
rights agreement also provides that if we file with the SEC a registration
statement contemplating the underwritten public offering of common stock, the
holders of the shares of common stock into which the shares of mandatorily
redeemable convertible preferred stock converted upon the completion of our
initial public offering will have the right to participate in such underwritten
public offering with respect to such shares of common stock, subject to
customary requirements and conditions.
We
have agreed in the registration rights agreement to give notice to all parties
thereto of the filing and effectiveness of a shelf registration statement by
release made to Bloomberg Financial Markets or other reasonable means of
distribution.
Transferees
of the shares of common stock into which the shares of mandatorily redeemable
convertible preferred stock converted upon the completion of our initial public
offering will, under certain circumstances, be entitled to the benefits of the
registration rights agreement.
Delaware Anti-Takeover Law and Provisions of Our Amended and
Restated Certificate of Incorporation and Bylaws
Delaware
Anti-Takeover Law.
We
are subject to Section 203 of the Delaware General Corporation Law. Section 203
generally prohibits a public Delaware corporation from engaging in a business
combination with an interested stockholder for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
·
prior to the
date of the transaction, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
111
·
the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced, excluding for purposes of determining
the number of shares outstanding (a) shares owned by persons who are
directors and also officers and (b) shares owned by employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or
·
on or
subsequent to the date of the transaction, the business combination is approved
by the board and authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of at least 66
2
/3%
of the outstanding voting stock which is not owned by the interested
stockholder.
Section 203
defines a business combination to include:
·
any merger or
consolidation involving the corporation and the interested stockholder;
·
any sale,
transfer, pledge or other disposition involving the interested stockholder of
10% or more of the assets of the corporation;
·
subject to
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder;
·
subject to
exceptions, any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; and
·
the receipt by
the interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
In
general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
Amended and
Restated Certificate of Incorporation and Bylaws.
Provisions of our
amended and restated certificate of incorporation and bylaws may delay or
discourage transactions involving an actual or potential change of control or
change in our management, including transactions in which stockholders might
otherwise receive a premium for their shares, or transactions that our
stockholders might otherwise deem to be in their best interests. Therefore,
these provisions could adversely affect the price of our common stock. Among
other things, our amended and restated certificate of incorporation and bylaws:
·
permit our
board of directors to issue up to 10,000,000 shares of preferred stock, with
any rights, preferences and privileges as they may designate (including the
right to approve an acquisition or other change of control);
·
provide that
the authorized number of directors may be changed only by resolution of the
board of directors;
·
provide that
all vacancies, including newly created directorships, may, except as otherwise
required by law, be filled by the affirmative vote of a majority of directors
then in office, even if less than a quorum;
·
divide our
board of directors into three classes;
·
require that
any action to be taken by our stockholders must be effected at a duly called
annual or special meeting of stockholders and not be taken by written consent;
·
provide that
stockholders seeking to present proposals before a meeting of stockholders or
to nominate candidates for election as directors at a meeting of stockholders
must provide advance notice in writing, and also specify requirements as to the
form and content of a stockholders notice;
112
·
do not provide
for cumulative voting rights (therefore allowing the holders of a majority of
the shares of common stock entitled to vote in any election of directors to
elect all of the directors standing for election); and
·
provide that
special meetings of our stockholders may be called only by the chairman of the
board, our CEO or by the board of directors pursuant to a resolution adopted by
a majority of the total number of authorized directors.
The
amendment of any of these provisions would require approval by the holders of
at least 66
2
/
3% of our then outstanding common stock.
Listing on the Nasdaq Global Market
Our
common stock is listed on the Nasdaq Global Market under the symbol BEAT.
Transfer Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock Transfer &
Trust Company. The transfer agent and registrars address is 59 Maiden Lane,
Plaza level, New York, New York 10038.
113
SHARES
ELIGIBLE FOR FUTURE SALE
Future
sales of substantial amounts of common stock in the public market could adversely
affect prevailing market prices. Furthermore, since only a limited number of
shares will be available for sale shortly after this offering because of
contractual and legal restrictions on resale described below, sales of
substantial amounts of common stock in the public market after the restrictions
lapse could adversely affect the prevailing market price for our common stock
as well as our ability to raise equity capital in the future.
As
of March 31, 2008, 23,065,145 shares of our common stock were outstanding,
including the 7,680,902 shares to which this prospectus relates. The selling
stockholders are subject to restrictions as set forth in lock-up agreements
entered into in connection with our initial public offering. All of the shares sold in this offering will
be freely tradable unless held by an affiliate of ours. Except as set forth
below, substantially all of the remaining 15,384,243 shares of common stock are
restricted as a result of securities laws or lock-up agreements. However, substantially
all of such restricted shares will be become available for sale in the public
market under Rule 144 or Rule 701 upon expiration of lock-up
agreements on September 14, 2008.
Rule 144
In
general, under Rule 144 under the Securities Act of 1933, as in effect on
the date of this prospectus, a person who is not one of our affiliates at any
time during the three months preceding a sale, and who has beneficially owned
shares of our common stock for at least six months, would be entitled to sell
an unlimited number of shares of our common stock provided current public
information about us is available and, after owning such shares for at least one
year, would be entitled to sell an unlimited number of shares of our common
stock without restriction. Our affiliates who have beneficially owned shares of
our common stock for at least six months are entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
·
1% of the
number of shares of our common stock then outstanding, which was equal to
approximately 230,650 shares as of March 31, 2008; or
·
the average
weekly trading volume of our common stock on the Nasdaq Global Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to the sale.
Sales
under Rule 144 by our affiliates are also subject to manner of sale
provisions and notice requirements and to the availability of current public
information about us.
Rule 701
Rule 701
under the Securities Act, as in effect on the date of this prospectus, permits
resales of shares in reliance upon Rule 144 but without compliance with
certain restrictions of Rule 144, including the holding period
requirement. Most of our employees, executive officers, directors or
consultants who purchased shares under a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701, but all holders
of Rule 701 shares are required to wait until 90 days after the date
of the prospectus for our initial public offering before selling their shares.
However, substantially all Rule 701 shares are subject to lock-up
agreements as described and under Underwriting and will become eligible for
sale at the expiration of those agreements.
Lock-up Agreements
Our
officers and directors, the selling stockholders and certain of our other
stockholders have agreed that, for a period of 180 days from the date of
the prospectus for our initial public offering (the Lock-Up Period), they
will not, without the prior written consent of Citigroup Global
Markets Inc., dispose of or hedge any shares of our common stock or any
securities convertible into or exchangeable for our common stock. The lock-up
agreements signed by our security holders generally permit them to transfer
shares of our common stock (i) acquired in open market transactions after
the completion of our initial public offering, (ii) to a family member or
trust, (iii) by bona fide gift, will or intestacy, and (iv) if the
security holder is a partnership, limited liability company or corporation, to
114
its
partners, members, stockholders or affiliates of the undersigned;
provided that
, in each case, no filing by
any party (donor, donee, transferor or transferee) under the Exchange Act shall
be required or shall be voluntarily made in connection with such transfer
(other than a filing made after the expiration of the Lock-Up Period) and
provided further
that in connection with
the transactions listed in (ii)-(iv) above, the transferee agrees to be
bound in writing by the terms of this agreement prior to such transfer. In
addition, security holders may establish a written plan for trading securities
in accordance with Rule 10b5-1(c) under the Securities Exchange Act
of 1934, as amended,
provided that
such plan does not provide for the disposition, during the Lock-Up Period, of
any shares of our common stock or any securities convertible into, or
exercisable or exchangeable for our common stock. Furthermore, security holders
may exercise or exchange any option or warrant to acquire shares of our common
stock, or securities exchangeable or exercisable for or convertible into our
common stock,
provided that
the
security holders do not transfer the Common Stock acquired on such exercise or
exchange during the Lock-Up Period.
The
Lock-Up Period will be extended if:
·
we issue an
earnings release or material news, or a material event relating to us occurs,
during the last 17 days of the Lock-Up Period; or
·
prior to the
expiration of the Lock-Up Period, we announce that we will release earnings
results during the 16-day period beginning on the last day of the Lock-Up
Period,
in
which case the restrictions described in the preceding paragraph shall continue
to apply until the expiration of the 18-day period beginning on the issuance of
the earnings release or the occurrence of the material news or material event,
unless Citigroup Global Markets Inc. waives, in writing, such extension.
Citigroup
Global Markets Inc. in its sole discretion may release any of the
securities subject to these lock-up agreements at any time without notice.
Registration Rights
As
of March 31, 2008, the holders of 15,310,555 shares of our common stock
and warrants to purchase up to 6,250 shares of our common stock were entitled
to rights with respect to the registration of their shares under the Securities
Act, subject to the lock-up arrangements described above. Registration of these
shares under the Securities Act would result in the shares becoming freely
tradable without restriction under the Securities Act, except for shares
purchased by affiliates. Any sales of securities by these stockholders could
have a material adverse effect on the trading price of our common stock. See Description
of Capital Stock Registration Rights.
Equity Incentive Plans
In
March 2008, we filed with the SEC a registration statement under the
Securities Act covering the shares of common stock reserved for issuance under
our 2003 Equity Incentive Plan, and our 2008 Equity Incentive Plan, 2008
Non-Employee Directors Stock Option Plan and 2008 Employee Stock Purchase
Plan. Accordingly, shares registered under the registration statement are
available for sale in the open market, subject to Rule 144 volume
limitations and the lock-up arrangements described above, if applicable.
115
LEGAL
MATTERS
The
validity of the shares of common stock being offered by this prospectus will be
passed upon for us by Cooley Godward Kronish LLP, San Diego, California.
EXPERTS
Ernst &
Young LLP, independent registered public accounting firm, has audited our
financial statements at December 31, 2006 and 2007 and for each of the
three years in the period ended December 31, 2007, as set forth in their
report. We have included our financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young
LLPs report, given on their authority as experts in accounting and auditing.
Ernst &
Young LLP, independent certified public accountants, has audited PDSHeart, Inc.s
financial statements at December 31, 2005 and 2006, and for each of the
three years in the period ended December 31, 2006, as set forth in their
report. The Company has included these financial statements in the prospectus
and elsewhere in the registration statement in reliance on Ernst &
Youngs report, given on their authority as experts in accounting and auditing.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
This
prospectus is part of a registration statement on Form S-1 that we filed
with the SEC. Certain information in the registration statement has been
omitted from this prospectus in accordance with the rules of the SEC. We
are a public company and file proxy statements, annual, quarterly and special
reports and other information with the SEC. The registration statement, such
reports and other information can be inspected and copied at the Public
Reference Room of the SEC located at 100 F Street, N.E., Washington D.C.
20549. Copies of such materials, including copies of all or any portion of the
registration statement, can be obtained from the Public Reference Room of
the SEC at prescribed rates. You can call the SEC at 1-800-SEC-0330 to obtain
information on the operation of the Public Reference Room. Such materials may
also be accessed electronically by means of the SECs home page on the
Internet
(www.sec.gov).
116
CARDIONET, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CardioNet, Inc.
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
Consolidated
Balance Sheets as of December 31, 2006 and 2007 and March 31, 2008
(unaudited)
|
|
F-3
|
Consolidated
Statements of Operations for the years ended December 31, 2005, 2006,
and 2007 and for the three months ended March 31, 2007 and 2008
(unaudited)
|
|
F-4
|
Consolidated
Statements of Redeemable Convertible Preferred Stock and Shareholders Equity
(Deficit) for the years ended December 31, 2005, 2006 and 2007 and the
three months ended March 31, 2008 (unaudited)
|
|
F-5
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005, 2006 and
2007 and for the three months ended March 31, 2007 and 2008 (unaudited)
|
|
F-6
|
Notes to Consolidated Financial Statements
|
|
F-7
|
|
|
|
PDSHeart, Inc.
|
|
|
|
|
|
Report of Independent Certified Public Accountants
|
|
F-26
|
Consolidated Balance Sheets as of December 31,
2005 and 2006
|
|
F-27
|
Consolidated Statements of Operations for the years
ended December 31, 2004, 2005 and 2006
|
|
F-28
|
Consolidated Statements of Stockholders Equity
(Deficit) for the years ended December 31, 2004, 2005 and 2006
|
|
F-29
|
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2005 and 2006
|
|
F-30
|
Notes to Consolidated Financial Statements
|
|
F-31
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Shareholders
CardioNet, Inc.
We
have audited the accompanying balance sheets of CardioNet, Inc. (the Company)
as of December 31, 2006 and 2007, and the related statements of
operations, redeemable convertible preferred stock and shareholders deficit,
and cash flows for the three years in the period ended December 31, 2007.
These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits in accordance with 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. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of CardioNet, Inc. at December 31,
2006 and 2007, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2007, in conformity with
accounting principles generally accepted in the United States.
As
discussed in Note 2 to the financial statements, the Company changed its
method of accounting for stock-based compensation effective January 1,
2006.
Philadelphia,
Pennsylvania
February 18, 2008, except for the second paragraph of Note 2 as to
which the date is March 5, 2008.
F-2
CARDIONET, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
March 31,
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash and
cash equivalents
|
|
$
|
3,909,150
|
|
$
|
18,090,636
|
|
$
|
61,973,117
|
|
Accounts
receivable, net of allowance for doubtful accounts of $6,263,000, $7,909,147,
and $10,227,226 at December 31, 2006 and 2007, and March 31, 2008,
respectively
|
|
10,496,607
|
|
22,853,958
|
|
25,636,175
|
|
Due from
related parties
|
|
90,628
|
|
142,965
|
|
130,206
|
|
Prepaid
expenses and other current assets
|
|
294,913
|
|
287,284
|
|
1,342,018
|
|
|
|
|
|
|
|
|
|
Total current
assets
|
|
14,791,298
|
|
41,374,843
|
|
89,081,516
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
1,779,043
|
|
15,094,205
|
|
15,138,648
|
|
Due from
related parties
|
|
207,278
|
|
|
|
|
|
Intangible
assets, net
|
|
|
|
2,806,950
|
|
2,560,854
|
|
Goodwill
|
|
|
|
41,162,835
|
|
45,999,403
|
|
Other assets
|
|
392,450
|
|
2,600,695
|
|
1,985,894
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
17,170,069
|
|
$
|
103,039,528
|
|
$
|
154,766,315
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareholders deficit
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,642,132
|
|
$
|
3,971,781
|
|
$
|
2,929,864
|
|
Accrued
liabilities
|
|
5,285,412
|
|
6,424,886
|
|
12,005,951
|
|
Bridge loan
payable to certain shareholders
|
|
3,229,247
|
|
|
|
|
|
Note payable
to shareholder
|
|
21,001,719
|
|
|
|
|
|
Current
portion of debt
|
|
2,346,186
|
|
1,088,528
|
|
1,489,950
|
|
Current
portion of capital leases
|
|
|
|
48,688
|
|
48,688
|
|
Deferred
revenue
|
|
|
|
465,578
|
|
648,850
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
33,504,696
|
|
11,999,461
|
|
17,123,303
|
|
|
|
|
|
|
|
|
|
Note payable
to shareholder
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion
|
|
2,911,115
|
|
1,655,449
|
|
1,381,976
|
|
Deferred
rent
|
|
428,534
|
|
878,886
|
|
849,502
|
|
Other
noncurrent liabilities
|
|
182,490
|
|
68,961
|
|
60,867
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
37,026,835
|
|
14,602,757
|
|
19,415,648
|
|
|
|
|
|
|
|
|
|
Redeemable
convertible preferred stock
|
|
|
|
|
|
|
|
Convertible
preferred stock no par value:
|
|
|
|
|
|
|
|
Mandatorily
redeemable convertible preferred stock 114,883 and 0 shares authorized,
114,839 and 0 shares issued and outstanding at December 31, 2007 and
March 31, 2008 respectively
|
|
|
|
115,301,850
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders
deficit
|
|
|
|
|
|
|
|
Series A
1,563,248 shares authorized, issued, and outstanding as of
December 31, 2006 and 2007, 0 shares authorized, issued and outstanding
as of March 31, 2008
|
|
390,812
|
|
390,812
|
|
|
|
Series B
4,720,347 shares authorized; 4,707,847 shares issued and outstanding as of
December 31, 2006 and 2007, 0 shares authorized issued and outstanding
as of March 31, 2008
|
|
6,903,969
|
|
6,903,969
|
|
|
|
Series C
10,399,011 shares authorized, issued, and outstanding as of
December 31, 2006 and 2007, 0 shares authorized, issued and outstanding
as of March 31, 2008
|
|
36,195,991
|
|
36,195,991
|
|
|
|
Series D
1,000,000 shares authorized, issued, and outstanding as of December 31,
2006 and 2007, 0 shares authorized, issued and outstanding as of
March 31, 2008
|
|
9,964,933
|
|
9,964,933
|
|
|
|
Series D1
964,075 shares authorized, none issued and outstanding as of
December 31, 2006 and 2007, 0 shares authorized, issued and outstanding
as of March 31, 2008
|
|
|
|
|
|
|
|
Common stock
no par value as of December 31, 2006 and 2007 and $.001 par value as
of March 31, 2008; 50,000,000 shares authorized as of December 31,
2006 and 2007 and 200,000,000 shares authorized as of March 31, 2008;
2,971,054, 3,130,054, and 22,985,279 shares issued, outstanding and vested at
December 31, 2006, 2007, and March 31, 2008, respectively
|
|
1,186,463
|
|
1,399,402
|
|
23,067
|
|
Paid-in
capital
|
|
1,686,369
|
|
|
|
217,387,993
|
|
Notes
receivable from shareholders
|
|
(224,250
|
)
|
|
|
|
|
Accumulated
deficit
|
|
(75,961,053
|
)
|
(81,720,186
|
)
|
(82,060,393
|
)
|
|
|
|
|
|
|
|
|
Total
shareholders deficit
|
|
(19,856,766
|
)
|
(26,865,079
|
)
|
(135,350,667
|
)
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders deficit
|
|
$
|
17,170,069
|
|
$
|
103,039,528
|
|
$
|
154,766,315
|
|
See accompanying notes.
F-3
CARDIONET, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Year Ended December 31,
|
|
Three Months
Ended March 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Net patient service revenues
|
|
$
|
29,466,653
|
|
$
|
33,019,175
|
|
$
|
72,357,437
|
|
$
|
10,957,150
|
|
$
|
25,247,977
|
|
Other revenues
|
|
1,471,075
|
|
903,626
|
|
634,749
|
|
143,361
|
|
215,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
30,937,728
|
|
33,922,801
|
|
72,992,186
|
|
11,100,511
|
|
25,463,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
16,963,107
|
|
12,700,998
|
|
25,526,418
|
|
3,790,238
|
|
9,518,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
13,974,621
|
|
21,221,803
|
|
47,465,768
|
|
7,310,273
|
|
15,944,288
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
3,360,753
|
|
3,630,819
|
|
3,781,991
|
|
990,467
|
|
1,141,530
|
|
General and administrative
|
|
13,853,089
|
|
15,630,610
|
|
27,473,895
|
|
5,200,815
|
|
9,066,407
|
|
Sales and marketing
|
|
6,455,686
|
|
6,448,290
|
|
15,968,271
|
|
3,319,838
|
|
5,114,727
|
|
Integration, restructuring and other
nonrecurring charges
|
|
|
|
|
|
|
|
|
|
1,305,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
23,669,528
|
|
25,709,719
|
|
47,224,157
|
|
9,511,120
|
|
16,628,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
(9,694,907
|
)
|
(4,487,916
|
)
|
241,611
|
|
(2,200,847
|
)
|
(683,931
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
96,463
|
|
114,295
|
|
1,621,738
|
|
223,270
|
|
178,040
|
|
Interest expense
|
|
(1,864,813
|
)
|
(3,271,111
|
)
|
(2,221,420
|
)
|
(1,176,532
|
)
|
(65,826
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense)
|
|
(1,768,350
|
)
|
(3,156,816
|
)
|
(599,682
|
)
|
(953,262
|
)
|
112,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before benefit from income taxes
|
|
(11,463,257
|
)
|
(7,644,732
|
)
|
(358,071
|
)
|
(3,154,109
|
)
|
(571,717
|
)
|
Benefit from income taxes
|
|
|
|
|
|
|
|
|
|
231,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(11,463,257
|
)
|
(7,644,732
|
)
|
(358,071
|
)
|
(3,154,109
|
)
|
(340,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends on and accretion of mandatorily
redeemable convertible preferred stock
|
|
|
|
|
|
(8,346,089
|
)
|
(482,448
|
)
|
(2,596,942
|
)
|
Net loss available to common shareholders
|
|
$
|
(11,463,257
|
)
|
$
|
(7,644,732
|
)
|
$
|
(8,704,160
|
)
|
$
|
(3,636,557
|
)
|
$
|
(2,937,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(4.04
|
)
|
$
|
(2.63
|
)
|
$
|
(2.89
|
)
|
$
|
(1.22
|
)
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (unaudited)
|
|
|
|
|
|
$
|
(0.52
|
)
|
|
|
$
|
(0.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
2,837,772
|
|
2,908,360
|
|
3,011,699
|
|
2,993,061
|
|
4,694,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma (unaudited)
|
|
|
|
|
|
16,839,493
|
|
|
|
4,694,561
|
|
See accompanying notes.
F-4
CARDIONET, INC.
CONSOLIDATED
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS EQUITY (DEFICIT)
|
|
Redeemable Convertible
Preferred Stock
|
|
Shareholders Equity (Deficit)
|
|
|
|
Mandatorily Redeemable
Convertible Preferred Stock
|
|
Convertible Preferred Stock
|
|
Common Stock
|
|
|
|
Notes
Receivable
|
|
|
|
Total
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
From
Shareholders
|
|
Accumulated
Deficit
|
|
Shareholders
Equity (Deficit)
|
|
Balance,
December 31, 2004
|
|
|
|
|
|
17,670,106
|
|
53,455,705
|
|
2,820,529
|
|
982,158
|
|
|
|
(347,406
|
)
|
(56,853,064
|
)
|
(2,762,607
|
)
|
Series D1
preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,567
|
|
|
|
|
|
434,567
|
|
Issuance of
common stock and stock options
|
|
|
|
|
|
|
|
|
|
82,750
|
|
63,648
|
|
|
|
|
|
|
|
63,648
|
|
Exercise of stock
options under note receivable arrangements
|
|
|
|
|
|
|
|
|
|
130,000
|
|
178,750
|
|
|
|
(178,750
|
)
|
|
|
|
|
Stock repurchased
|
|
|
|
|
|
|
|
|
|
(178,263
|
)
|
(192,747
|
)
|
|
|
188,307
|
|
|
|
(4,440
|
)
|
Repayment of
shareholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71,598
|
|
|
|
71,598
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,463,257
|
)
|
(11,463,257
|
)
|
Balance,
December 31, 2005
|
|
|
|
|
|
17,670,106
|
|
53,455,705
|
|
2,855,016
|
|
1,031,809
|
|
434,567
|
|
(266,251
|
)
|
(68,316,321
|
)
|
(13,660,491
|
)
|
Series D1
preferred stock warrants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230,056
|
|
|
|
|
|
1,230,056
|
|
Issuance of common
stock and stock options
|
|
|
|
|
|
|
|
|
|
135,026
|
|
167,960
|
|
|
|
|
|
|
|
167,960
|
|
Stock repurchased
|
|
|
|
|
|
|
|
|
|
(18,988
|
)
|
(13,306
|
)
|
|
|
13,126
|
|
|
|
(180
|
)
|
Repayment of
shareholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,875
|
|
|
|
28,875
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,746
|
|
|
|
|
|
21,746
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,644,732
|
)
|
(7,644,732
|
)
|
Balance,
December 31, 2006
|
|
|
|
|
|
17,670,106
|
|
53,455,705
|
|
2,971,054
|
|
1,186,463
|
|
1,686,369
|
|
(224,250
|
)
|
(75,961,053
|
)
|
(19,856,766
|
)
|
Issuance of
common stock and stock options
|
|
|
|
|
|
|
|
|
|
7,176
|
|
|
|
153,150
|
|
|
|
|
|
153,150
|
|
Exercise of stock
options
|
|
|
|
|
|
|
|
|
|
151,824
|
|
212,939
|
|
|
|
|
|
|
|
212,939
|
|
Issuance/Repayment
of shareholder notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
224,250
|
|
|
|
224,250
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
778,508
|
|
|
|
|
|
778,508
|
|
Issuance of
mandatorily redeemable convertible preferred stock and recognition of
contingent beneficial conversion
|
|
114,839
|
|
106,955,761
|
|
|
|
|
|
|
|
|
|
327,000
|
|
|
|
|
|
327,000
|
|
Dividend on and
accretion of mandatorily redeemable convertible preferred stock
|
|
|
|
8,346,089
|
|
|
|
|
|
|
|
|
|
(2,945,027
|
)
|
|
|
(5,401,062
|
)
|
(8,346,089
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(358,071
|
)
|
(358,071
|
)
|
Balance,
December 31, 2007
|
|
114,839
|
|
115,301,850
|
|
17,670,106
|
|
53,455,705
|
|
3,130,054
|
|
1,399,402
|
|
|
|
|
|
(81,720,186
|
)
|
(26,865,079
|
)
|
Issuance/vesting
of common stock
|
|
|
|
|
|
|
|
|
|
23,399
|
|
|
|
1,681
|
|
|
|
|
|
1,681
|
|
Exercise of stock
options
|
|
|
|
|
|
|
|
|
|
21,283
|
|
21
|
|
26,719
|
|
|
|
|
|
26,740
|
|
Stock based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359,881
|
|
|
|
|
|
359,881
|
|
Dividend on and
accretion of MRCPS
|
|
|
|
2,596,942
|
|
|
|
|
|
|
|
|
|
(2,596,942
|
)
|
|
|
|
|
(2,596,942
|
)
|
Conversion of
MRCPS to common stock
|
|
(114,839
|
)
|
(117,898,792
|
)
|
|
|
|
|
7,680,902
|
|
7,681
|
|
117,891,111
|
|
|
|
|
|
117,898,792
|
|
Conversion of
Convertible Preferred Stock
|
|
|
|
|
|
(17,670,106
|
)
|
(53,455,705
|
)
|
8,835,042
|
|
(1,387,332
|
)
|
54,843,037
|
|
|
|
|
|
|
|
Gross proceeds
from IPO (net of underwriter commissions)
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
3,000
|
|
50,217,000
|
|
|
|
|
|
50,220,000
|
|
Transaction
expenses related to IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,354,199
|
)
|
|
|
|
|
(3,354,199
|
)
|
Cashless exercise
of warrants
|
|
|
|
|
|
|
|
|
|
294,599
|
|
295
|
|
(295
|
)
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(340,207
|
)
|
(340,207
|
)
|
Balance
March 31, 2008
|
|
|
|
$
|
|
|
|
|
$
|
|
|
22,985,279
|
|
$
|
23,067
|
|
$
|
217,387,993
|
|
$
|
|
$
|
(82,060,393
|
)
|
$
|
135,350,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompany notes.
F-5
CARDIONET, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
Three Months
Ended March 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,463,257
|
)
|
$
|
(7,644,732
|
)
|
$
|
(358,071
|
)
|
$
|
(3,154,109
|
)
|
$
|
(340,207
|
)
|
Adjustments to reconcile net loss to net
cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
5,869,120
|
|
2,656,291
|
|
3,749,875
|
|
416,248
|
|
1,647,326
|
|
Loss on disposal of property and equipment
|
|
695,330
|
|
14,471
|
|
49,727
|
|
10,829
|
|
46,313
|
|
(Decrease) increase in deferred rent
|
|
109,156
|
|
(191,833
|
)
|
450,352
|
|
105,010
|
|
(29,384
|
)
|
Provision for doubtful accounts
|
|
2,536,556
|
|
4,194,785
|
|
8,077,387
|
|
1,717,249
|
|
2,343,544
|
|
Common stock and stock options issued for
services
|
|
30,000
|
|
|
|
153,150
|
|
16,200
|
|
|
|
Accretion of debt discount, including
recognition of contingent beneficial conversion
|
|
325,925
|
|
930,420
|
|
677,239
|
|
487,292
|
|
|
|
Stock-based compensation
|
|
|
|
21,746
|
|
778,508
|
|
69,363
|
|
359,881
|
|
Amortization of intangibles
|
|
|
|
|
|
799,150
|
|
60,862
|
|
246,096
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(5,130,338
|
)
|
(5,554,522
|
)
|
(15,123,571
|
)
|
(1,730,729
|
)
|
(5,268,726
|
)
|
Due from related parties
|
|
(50,105
|
)
|
(196,357
|
)
|
154,941
|
|
(17,026
|
)
|
12,759
|
|
Prepaid expenses and other current assets
|
|
119,112
|
|
194,398
|
|
222,922
|
|
(132,508
|
)
|
(911,769
|
)
|
Other assets
|
|
(3,781
|
)
|
37,267
|
|
(1,988,232
|
)
|
9,514
|
|
614,801
|
|
Accounts payable
|
|
592,096
|
|
303,513
|
|
1,372,628
|
|
545,030
|
|
(1,041,918
|
)
|
Accrued liabilities
|
|
1,012,286
|
|
2,427,991
|
|
928,845
|
|
2,946,912
|
|
3,134,542
|
|
Other noncurrent liabilities
|
|
(111,144
|
)
|
(106,167
|
)
|
(182,489
|
)
|
(44,862
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating
activities
|
|
(5,469,044
|
)
|
(2,912,729
|
)
|
(237,639
|
)
|
1,305,275
|
|
813,258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(644,550
|
)
|
(913,666
|
)
|
(13,050,946
|
)
|
(974,952
|
)
|
(1,738,083
|
)
|
Investment in subsidiary, net of cash
acquired
|
|
|
|
|
|
(45,906,548
|
)
|
(45,906,548
|
)
|
(2,608,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(644,550
|
)
|
(913,666
|
)
|
(58,957,494
|
)
|
(46,881,500
|
)
|
(4,346,363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of mandatorily
redeemable convertible preferred stock
|
|
|
|
|
|
102,116,762
|
|
102,195,953
|
|
|
|
Proceeds from issuance of common stock
|
|
33,648
|
|
167,960
|
|
67,670
|
|
2,236
|
|
47,294,052
|
|
Proceeds from issuance of debt
|
|
3,342,275
|
|
5,130,525
|
|
372,997
|
|
372,997
|
|
500,062
|
|
Repayment of debt
|
|
(289,460
|
)
|
(349,191
|
)
|
(29,550,329
|
)
|
(5,829,840
|
)
|
(380,209
|
)
|
Repurchase of stock/subject to repurchase
|
|
(4,440
|
)
|
(180
|
)
|
|
|
|
|
1,681
|
|
Payments received on shareholder notes
|
|
71,598
|
|
28,875
|
|
369,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
3,153,621
|
|
4,977,989
|
|
73,376,619
|
|
96,741,346
|
|
47,415,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash
equivalents
|
|
(2,959,973
|
)
|
1,151,594
|
|
14,181,486
|
|
51,165,121
|
|
43,882,481
|
|
Cash and cash equivalents beginning of
period
|
|
5,717,529
|
|
2,757,556
|
|
3,909,150
|
|
3,909,150
|
|
18,090,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents end of period
|
|
$
|
2,757,556
|
|
$
|
3,909,150
|
|
$
|
18,090,636
|
|
$
|
55,074,271
|
|
$
|
61,973,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow
information
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
981,970
|
|
$
|
1,782,100
|
|
$
|
3,526,271
|
|
$
|
2,170,132
|
|
$
|
64,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash
financing activities
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options under note
receivable arrangements
|
|
$
|
178,750
|
|
$
|
|
|
$
|
276,900
|
|
$
|
276,900
|
|
$
|
|
|
Mandatorily redeemable convertible
preferred stock issued in connection with bridge loan
|
|
|
|
|
|
3,303,000
|
|
3,303,000
|
|
$
|
|
|
Mandatorily redeemable convertible
preferred stock issued as consideration for PDSHeart, Inc. acquisition
|
|
|
|
|
|
1,456,000
|
|
1,456,000
|
|
$
|
|
|
Deferral of interest payment on long term
debt
|
|
|
|
$
|
1,400,959
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
F-6
CARDIONET, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2005, 2006, 2007 and March 31,
2008
1. Organization
CardioNet, Inc.
(the Company or CardioNet) provides ambulatory, continuous, real-time
outpatient management solutions for monitoring relevant and timely clinical
information regarding an individuals health. The Company, which integrates
wireless communications, Internet and cardiac monitoring technologies, has been
in active development since 1994 through predecessor research and development
entities. CardioNet incorporated in the state of California in March 1994,
but did not actively begin developing its product platform until April 2000.
In September 1999, the Company was capitalized as CardioNet, a company
focused on helping physicians more rapidly diagnose and more effectively manage
therapy for patients with cardiovascular disease. In February 2002, the
Company received FDA 510(k) clearance for the first and second generation
of its core CardioNet System which automatically detects cardiac rhythm
problems and transmits ECG data to a 24/7/365 monitoring center which was
opened in Conshohocken, Pennsylvania in July 2002. The CardioNet
Monitoring Center provides analysis and response for all incoming ECG data.
Currently the Company provides all arrhythmia monitoring services for the
CardioNet system at this location. The Company receives reimbursement for
services provided to patients from Medicare and other third-party payors.
On
March 8, 2007, the Company acquired PDSHeart, Inc., a leading cardiac
monitoring company, for an aggregate of $51.6 million plus the assumption
of $5.2 million in debt. In
addition to the $51.6 million consideration, the Company agreed to pay
PDSHeart shareholders $5.0 million of contingent consideration in the
event of a qualifying liquidation event, including a public offering or
acquisition. The initial public offering was consummated on March 25, 2008
and accordingly the purchase price has been adjusted to $56.6 million to
reflect this payment. PDSHeart, now a wholly-owned subsidiary of CardioNet,
provides Event monitoring, Holter monitoring and Pacing services in 48 states,
primarily in the southeast. The acquisition has broadened the Companys
geographic coverage and expanded the service offering to include the complete
range of cardiac monitoring services.
On
February 25, 2008, the board of directors of the Company, subject to
stockholder approval, approved a reverse stock split of the Companys common
stock at a ratio of one share for every two shares previously held. On March 5,
2008, the stockholders of the Company approved the reverse stock split and the
reverse stock split became effective. All common stock share and per-share data
included in these consolidated financial statements reflect the proposed
reverse stock split.
On
March 25, 2008, The Company completed its initial public offering
generating net proceeds of approximately $46.9 million after deducting
underwriter commissions and estimated offering expenses.
2. Summary of Significant
Accounting Policies
Principals of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
Unaudited Interim Financial
Statement Data
The
accompanying balance sheet as of March 31, 2008, the consolidated
statements of operations and cash flows for the three month periods ended March 31,
2007 and 2008 and the consolidated statements of redeemable convertible
preferred stock and shareholders deficit for the three months ended March 31,
2008 are unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and,
F-7
in
the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to state fairly the Companys results of its
operations and cash flows for the three month period ended March 31, 2007.
The financial data and other information disclosed in these notes to the
financial statements related to the three month period ended March 31,
2007 are unaudited. The results for the three months ended March 31, 2008
are not necessarily indicative of the results to be expected for the year
ending December 31, 2008, nor for any other interim period or for any
future year.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates.
Cash Equivalents
Cash
and cash equivalents include various deposits with financial institutions in
checking and short-term money market accounts. The Company considers all highly
liquid investments with initial maturity dates of three months or less to be
cash or cash equivalents.
Accounts Receivable Concentration of
Credit Risk and Allowance for Bad Debt
Accounts
receivable consist of amounts due to the Company from third-party payors and
patients as a result of the Companys normal business activities. Accounts
receivable are reported in the balance sheets at their estimated net realizable
value, which approximates outstanding amounts, less an allowance for bad debt.
The Company provides an allowance for bad debt for estimated losses resulting
from unwillingness of third-party payors, physicians or patients to make
payment for services. The allowance is determined based upon historical
collections experience, write-offs and a percentage of the Companys accounts
receivable by aging category. Uncollectible account balances are written off
against the allowance after all means of collections have been exhausted and
the potential for recovery is considered remote. Expenses for doubtful accounts
are included in general and administrative expense in the accompanying
consolidated statements of operations.
Financial
instruments that potentially subject the Company to credit risk consist
principally of cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with high quality financial
institutions to mitigate this risk. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. The
Company records an allowance for doubtful accounts when it becomes probable and
estimable that a receivable will not be collected. Past-due amounts are written
off against the allowance for doubtful accounts when collections are deemed
unlikely and all collection efforts have ceased.
At December 31, 2005 no one customer accounted for greater then 10% of our
accounts receivable balance. At December 31, 2006, one customer accounted
for 13% of our accounts receivable. One customer accounted for 12% of our
accounts receivable at December 31, 2007. One customer accounted for 12%
of our accounts receivable at March 31, 2008. For the three months ended March 31,
2008 Medicare accounted for approximately 33% of the Companys revenue.
F-8
The
estimated mix of accounts receivable from government programs, physicians,
private pay patients and third-party payers at December 31, 2005, 2006,
2007 and March 31, 2008 are as follows:
|
|
2005
|
|
2006
|
|
2007
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Government
programs
|
|
7
|
%
|
6
|
%
|
12
|
%
|
12
|
%
|
Physicians
|
|
8
|
%
|
6
|
%
|
3
|
%
|
3
|
%
|
Private pay patients
|
|
8
|
%
|
6
|
%
|
9
|
%
|
7
|
%
|
Third-party payers
|
|
77
|
%
|
83
|
%
|
76
|
%
|
78
|
%
|
The
following table summarizes the changes in the Companys allowance for doubtful
accounts for the period indicated.
|
|
|
|
Three months
|
|
|
|
Year ended December 31,
|
|
ended
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
|
$
|
520,000
|
|
$
|
2,973,464
|
|
$
|
6,263,488
|
|
$
|
7,909,147
|
|
Allowances acquired from PDSHeart
acquisition
|
|
|
|
|
|
2,499,540
|
|
|
|
Amounts to expense
|
|
2,536,556
|
|
4,194,785
|
|
8,077,387
|
|
2,362,513
|
|
Accounts written off
|
|
(83,092
|
)
|
(904,761
|
)
|
(8,931,268
|
)
|
(44,434
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
2,973,464
|
|
$
|
6,263,488
|
|
$
|
7,909,147
|
|
$
|
10,227,226
|
|
Property and Equipment
Property
and equipment is recorded at cost. Depreciation is provided over the estimated
useful life of each class of depreciable assets (generally 2-5 years), and
is computed using the straight-line method. Leasehold improvements are
amortized over the shorter of the estimated asset life or term of the lease.
Repairs and maintenance costs are charged to expense as incurred.
Impairment of Long-Lived Assets
The
Company periodically evaluates the recoverability of the carrying value of its
long-lived assets based on the criteria established in Statement of Financial
Accounting Standard (SFAS) No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets
. The Company
considers historical performance and anticipated future results in its
evaluation of potential impairment. Accordingly, when indicators of impairment
are present, the Company evaluates the carrying value of these assets in
relation to the operating performance of the business and the undiscounted cash
flows expected to result from the use of these assets. Impairment losses are
recognized when the sum of the expected future cash flows is less than the
assets carrying value. No such impairment losses have been recognized to date.
Goodwill and Acquired Intangible
Assets
In
March 2007, the Company recorded goodwill and acquired intangible assets
under the purchase method of accounting in connection with the acquisition of
the assets of PDSHeart (Note 3). Acquired intangible assets consist of
trade name, customer relationships and non-compete agreements. The Company
amortizes acquired intangible assets over their estimated useful lives on a
straight-line basis.
Goodwill
represents the excess of the purchase price over the fair value of identifiable
net assets of the acquired business. The Company accounts for goodwill in
accordance with SFAS No. 142,
Goodwill
and Other Intangible Assets.
Under SFAS No. 142, goodwill and
intangible assets which have indefinite lives are not amortized but instead are
tested for impairment annually or more frequently if changes in circumstances
or occurrence of events indicate possible impairment.
F-9
Pursuant
to SFAS No. 142, the Company will perform an annual impairment test for
goodwill. If the carrying value of the Companys goodwill exceeds its fair
value, any excess of the carrying value over the implied fair value will be
recorded as an impairment loss.
Revenue Recognition
The
Company recognizes patient service revenue from four different services, which
are the CardioNet System services and, event, Holter and pacemaker monitoring
services. Our largest source of revenue is CardioNet System services for which
we recognize revenue as the monitoring service is provided. For event
monitoring services, revenue is recognized over the monitoring period,
typically 30 days, on a straight-line basis. For monitoring services
related to Holters and pacemakers, revenue is recognized as the service is
provided.
The
CardioNet monitor and event monitors are shipped to the patient from the
service center after the patient agrees to be monitored. Included in this
shipment is a prepaid return shipment mailer so when the patient monitoring is
complete, the monitor can be returned to CardioNet and ultimately sent to
another patient. Holter monitors are provided by the physicians office and
returned by the patient to the physicians office. There is no fee or charge
associated with providing the monitors. The provision of monitors is included
in the fee we charge for our services.
Revenue
is reported at the estimated net realizable amounts from commercial payors,
physicians, patients and Medicare for services rendered. Payment arrangements
for the Cardionet System include per diem (per day) and case rate payments,
which is a fixed payment amount for the patient monitoring period. Payment
arrangements for event, Holter and pacemaker services are generally reimbursed
on a per test basis. Revenue from commercial payors is recognized based on the
negotiated contractual rate or upon historical or estimated payment patterns.
We estimate from history and or experience the amount of revenue to be received
for each claim filed. We base our estimates, which require our management to
exercise judgment, on historical results, which are limited, according to the
type of service and specifics of each arrangement. Payments from the Medicare
and Medicaid program are based on reimbursement rates set by governmental
authorities, which may fluctuate. Laws and regulations governing the Medicare
and Medicaid programs are complex and subject to interpretation. Management
believes that it is in compliance with all applicable laws and regulations and
is not aware of any pending or threatened investigations involving allegations
of potential wrongdoing.
Other
revenue, consisting mainly of information technology services provided to an
affiliate of a stockholder, is recognized as the services are provided.
Research and Development Costs
Research
and development costs are charged to expense as incurred.
Net loss attributable to common
shares
The
Company computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share
(SFAS No. 128).
Under SFAS No. 128, basic net loss per share is computed by dividing net
loss per share available to common stockholders by the weighted average number
of common shares outstanding for the period and excludes the effects of any
potentially dilutive securities. Diluted earnings per share, if presented,
would include the dilution that would occur upon the exercise or conversion of
all potentially dilutive securities into common stock using the treasury stock
and/or if converted methods as applicable.
F-10
The
following summarizes the potential outstanding common stock of the Company as
of the end of each period:
|
|
December 31, 2005
|
|
December 31, 2006
|
|
December 31, 2007
|
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock (A,B,C,D)
|
|
8,835,042
|
|
8,835,042
|
|
8,835,042
|
|
|
|
Mandatorily redeemable convertible
preferred stock
|
|
|
|
|
|
4,784,958
|
|
|
|
Series B warrants
|
|
6,250
|
|
6,250
|
|
6,250
|
|
6,250
|
|
Series D1 warrants
|
|
|
|
|
|
482,090
|
|
|
|
Common stock options outstanding
|
|
677,768
|
|
764,828
|
|
1,641,614
|
|
1,704,804
|
|
Common stock options available for grant
|
|
206,777
|
|
3,679
|
|
617,518
|
|
533,063
|
|
Common stock held by certain employees and
unvested
|
|
|
|
|
|
103,292
|
|
79,866
|
|
Common stock
|
|
2,855,016
|
|
2,971,054
|
|
3,130,054
|
|
22,985,279
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
12,580,853
|
|
12,580,853
|
|
19,600,818
|
|
25,309,262
|
|
If
the outstanding options, warrants, and preferred stock were exercised or
converted into common stock, the result would be anti-dilutive. Accordingly,
basic and diluted net loss attributable to common stockholders per share are
identical for all periods presented in the accompanying consolidated statements
of operations
The
unaudited pro forma net loss per share is calculated by dividing the unaudited
pro forma net loss available to common shareholders by the pro forma weighted
average number of common shares outstanding during the period. The pro forma
weighted average number of common shares assumes the conversion of the
outstanding preferred stock and the exercise of all outstanding warrants and
options. The Company believes unaudited pro forma net loss per share provides
material information to investors, as the conversion of the Companys preferred
stock to common stock is expected to occur upon the closing of an initial
public offering, and the disclosure of pro forma net loss per share thus
provides an indication of net loss per share on a basis that is comparable to
what will be reported by the Company as a reporting entity. The following
details the computation of the unaudited pro forma net loss per share as for
the year ended December 31, 2007:
|
|
Year ended
December 31, 2007
|
|
|
|
(unaudited)
|
|
|
|
|
|
Net loss
|
|
$
|
(358,071
|
)
|
Pro forma accretion of preferred stock
dividend (unaudited)
|
|
(8,346,089
|
)
|
|
|
|
|
Pro forma net loss applicable to common
shares
|
|
(8,704,160
|
)
|
Weighted average number of common shares
outstanding:
|
|
|
|
Basic and diluted
|
|
3,011,699
|
|
Conversion of preferred stock and exercise
of options and warrants
|
|
13,827,794
|
|
|
|
|
|
Pro forma basic and diluted weighted
average shares outstanding (unaudited)
|
|
16,839,493
|
|
|
|
|
|
Pro forma basic and diluted loss per common
share (unaudited)
|
|
$
|
(0.52
|
)
|
F-11
Stock-Based Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R),
Share-Based Payment
, a revision
of SFAS No. 123,
Accounting for
Stock-Based Compensation
, that addresses the accounting for
share-based payment transactions in which an enterprise receives employee
services in exchange for (a) equity instruments of the enterprise or (b) liabilities
that are based on the fair value of the enterprises equity instruments or that
may be settled by the issuance of such equity instruments. SFAS No. 123(R) requires
that an entity measure the cost of equity-based service awards based on the
grant-date fair value of the award and recognize the cost of such awards over
the period during which the employee is required to provide service in exchange
for the award (the vesting period). SFAS No. 123(R) requires that an
entity measure the cost of liability-based service awards based on current fair
value that is remeasured subsequently at each reporting date through the
settlement date. The Company adopted this new standard effective January 1,
2006, under the prospective method, which requires the Company to recognize
share-based compensation expense in the statements of operations for any new
grants and modifications made after the date of adoption. The Company accounts
for equity awards issued to non-employees in accordance with EITF 96-18,
Accounting for Equity Investments that are Issued to
Other Than Employees for Acquiring, or in Conjunction with, Selling Goods or
Services
(EITF 96-18).
The
Company estimated and has taken responsibility for the assumptions used in
valuing its common stock during 2006 and 2007. The valuation methodology
utilized relied primarily on the income approach to estimate enterprise
value. The income approach involves projecting future cash flows and
discounting them to present value using a discount rate based on a risk
adjusted weighted average cost of capital of comparable companies. The
projection of future cash flows and the determination of an appropriate
discount rate involve a significant level of judgment. In order to allocate the
enterprise value to the various securities that comprise the Companys capital
structure, the option-pricing method was used.
Prior
to 2006, the Company accounted for grants made under its stock option plan in
accordance with APB Opinion No. 25,
Accounting
for Stock Options Issued to Employees
, as permitted under SFAS No. 123.
Under APB Opinion No. 25, the Company was only required to recognize
compensation expenses for options granted to employees for the difference
between the fair value of the underlying common stock and the exercise price of
the option at the date of grant. The fair value of these options was determined
using the minimum value option pricing model.
Since
the exercise price of the Companys stock option grants issued prior to 2006
was equal to the estimated fair value of the underlying stock on the grant
date, no compensation expense related to options granted to employees was
recognized in prior years.
Income Taxes
The
Company utilizes the liability method of accounting for income taxes as
prescribed by SFAS No. 109
Accounting
for Income Taxes.
Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequences attributable
to differences between financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. 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 are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date. The Company has provided a full valuation allowance against its
net deferred tax assets as of December 31, 2005, 2006, 2007 and March 31,
2008.
In June 2006, the FASB issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN
48), which prescribes detailed guidance for the financial statement
recognition, measurement, and disclosure of uncertain tax positions recognized
in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Tax positions must meet a more-likely-than-not
recognition threshold at the effective date to be recognized upon the adoption
of FIN 48 and in subsequent periods. The company adopted FIN 48 on January 1,
2007. The adoption of FIN 48 did not have a material effect on the Companys
financial statements.
F-12
Certain Significant Risks and
Uncertainties
Financial
instruments which potentially subject the Company to concentrations of credit
risk consist primarily of cash, cash equivalents and accounts receivable
balances. Cash and cash equivalents consist primarily of cash in bank accounts.
Accounts receivable consist of amounts due to the Company from its normal
business activities. The Company performs ongoing credit evaluations of its
customers financial condition and maintains an allowance for potential credit
losses.
The
Company participates in a dynamic high-technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Companys future financial position, results of operations, or cash flows;
ability to obtain future financing; advances and trends in new technologies;
competitive pressures; changes in overall demand for the products offered by
the Company; acceptance of the Companys products; ability to obtain
satisfactory agreements with payors for reimbursement for services; litigation
or claims against the Company based on intellectual property, patent,
regulatory, and other factors; and the Companys ability to attract and retain
employees necessary to support its growth.
Segment information
SFAS
No. 131,
Disclosures about Segments of
an Enterprise and Related Information
, establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information about those segments to be
presented in interim financial reports issued to stockholders. Operating
segments are identified as components of an enterprise about which separate
financial information is available for evaluation by the chief operating
decisions maker, or decision making group, in making decisions on how to
allocate resources and assess performance. The Company views its operations and
manages it business as one operating segment.
New Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
, which defines
fair value, establishes a framework for measuring fair value under generally
accepted accounting principles, and expands disclosures about fair value
measurements. SFAS No. 157 applies to other accounting pronouncements that
require or permit fair value measurements. The new guidance is effective for
financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The Company adopted
SFAS No. 157 on January 1, 2008 and it did not have a material effect
on the consolidated financial statements.
In
February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities-Including an Amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 permits entities to choose fair value
measurement for many financial instruments and certain other items as of
specified election dates. Business entities will thereafter report in earnings
the unrealized gains and losses on items for which the fair value option has
been chosen. The fair value option may be applied instrument by instrument but
may not be applied to portions of instruments and is irrevocable unless a new
elections date occurs. SFAS 159 is effective for the Company beginning January 1,
2008. The Company did not elect the fair value option of SFAS 159 and
thus, the adoption of SFAS No. 159 had no impact on the company.
In
December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R))
and SFAS No. 160,
Noncontrolling
Interests in Consolidated Financial Statements, an Amendment of ARB No. 151
(SFAS 160). SFAS 141(R) establishes new principles and requirements
for accounting for business combinations, including recognition and measurement
of identifiable assets acquired, goodwill acquired, liabilities assumed, and
noncontrolling financial interests. SFAS 160 requires all entities to
report noncontrolling (minority) interests in subsidiaries as equity in the
consolidated financial statements. These new standards will significantly
change the accounting for and reporting of business combination transactions
and noncontrolling (minority) interests in consolidated financial statements.
SFAS 141(R) and SFAS 160 are required to be adopted
simultaneously and are effective for fiscal years beginning on or after December 15,
2008. Earlier adoption is prohibited. The Company is currently evaluating the
potential effect of adoption of SFAS 141(R) and SFAS 160.
F-13
3. Acquisition-PDSHeart, Inc.
On
March 8, 2007, the Company acquired all of the outstanding capital stock
of PDSHeart for an aggregate purchase price of $51.6 million. The
$51.6 million purchase price was comprised of $44.3 million cash at
closing, $5.2 million in assumed debt, $1.4 million of transaction
expenses and the assumption of a $0.7 million liability related to
payments due to certain key employees of PDSHeart upon the one year anniversary
of the closing. Approximately $1.5 million of the assumed debt was
satisfied through the issuance of 1,456 shares of MRCPS at a par value of
$1,000. In addition to the $51.6 million consideration, the Company agreed
to pay PDSHeart shareholders $5.0 million of contingent consideration in
the event of a qualifying liquidation event, including a public offering or
acquisition. The Companys initial public offering was consummated on March 25,
2008 and, accordingly, the purchase price for the PDSHeart acquisition has been
adjusted to $56.6 million to reflect this payment.
The
acquisition has been included within the consolidated results of operations
from March 8, 2007. The Company believes that the acquisition will
accelerate its market expansion strategy by providing immediate access to a
sales force with existing physician relationships capable of marketing the
CardioNet system in areas of the country where it had previously not been sold.
A significant portion of the purchase price has been allocated to goodwill. The
most significant reason is that 75% of PDSHeart revenues are received as
patient reimbursement from medical insurers and Medicare; however the patients
are the customers as they determine the economic relationship. There is no
long-term intangible asset associated with these patients so no value has been
assigned to this revenue stream.
Under
the purchase method of accounting, the total purchase price is allocated to tangible
and identifiable intangible assets acquired and liabilities assumed based on
their estimated fair values. The following is a summary of the purchase price
allocation:
Cash and cash equivalents
|
|
$
|
509,000
|
|
Accounts receivable, net
|
|
5,168,000
|
|
Property, plant and equipment
|
|
4,136,000
|
|
Other assets
|
|
505,000
|
|
Goodwill
|
|
45,999,000
|
|
Intangible assets:
|
|
|
|
Trade name
|
|
1,810,000
|
|
Customer relationships
|
|
1,551,000
|
|
Non compete agreements
|
|
245,000
|
|
Other Accruals
|
|
(344,000
|
)
|
Other liabilities assumed
|
|
(2,984,000
|
)
|
|
|
|
|
Net assets acquired
|
|
$
|
56,595,000
|
|
The
intangible assets with definite lives are being amortized on a straightline
basis over lives ranging from two to six years.
The following
supplemental information presents the non-cash impact on the balance sheet of
assets acquired and liabilities assumed in connection with the acquisition of
PDSHeart.
Assets acquired
|
|
$
|
54,577
|
|
Liabilities assumed
|
|
(2,984
|
)
|
Debt assumed
|
|
(5,178
|
)
|
|
|
|
|
Cash paid
|
|
46,415
|
|
Less cash acquired
|
|
(509
|
)
|
|
|
|
|
Cash paid, net of cash acquired
|
|
$
|
45,906
|
|
F-14
The
following unaudited pro forma consolidated statements of operations data for
the year ended December 31, 2007 is based on the historical statements of
operations of the Company and PDSHeart giving effect to the acquisition of
PDSHeart as if the acquisition had occurred on January 1, 2007.
|
|
Year ended
December 31, 2007
|
|
|
|
|
|
Revenues
|
|
$
|
77,061,000
|
|
Net loss
|
|
$
|
(260,000
|
)
|
Net loss available to common shareholders
|
|
$
|
(8,606,000
|
)
|
Basic and diluted net loss available to
common shareholders per share
|
|
$
|
(2.86
|
)
|
The
unaudited pro forma consolidated statements of operations data is based on
estimates and assumptions which are preliminary and subject to change. The
unaudited pro forma consolidated financial statements data is presented for
illustrative purposes only and are not necessarily indicative of the combined
results of operations to be expected in any future period or the results that
actually would have been realized had the entities been a single entity during
these periods.
In
connection with the acquisition of PDSHeart, the Company initiated exit plans
for acquired activities that are redundant to the Companys existing
operations. The plan includes the closure of a facility and the elimination of
58 positions in the areas of sales, finance, service and management. In
connection with the plan, the Company has established reserves of $510,000 included
in the purchase price allocation. As of March 31, 2008, none of the
positions had been eliminated and the facility has not been closed. The reserve
is included in accrued liabilities in the accompanying consolidated balance
sheet.
A
summary of the reserve activity related to the PDSHeart acquisition- related
integration plan as of March 31, 2008 is as follows (in thousands):
|
|
Initial Reserves
Recorded in
Purchase Accounting
|
|
Payments/Adjustments
through
March 31, 2008
|
|
Balance as of
March 31, 2008
|
|
|
|
|
|
|
|
|
|
Severance and employee related costs
|
|
366
|
|
166
|
|
$
|
200
|
|
Rent Abandonment
|
|
144
|
|
|
|
$
|
144
|
|
Total
|
|
510
|
|
166
|
|
$
|
344
|
|
Additionally,
we incurred expenses of $0.3 million in the first quarter of 2008 and expect to
incur an additional $0.6 million of expenses to integrate these functions,
which should be substantially completed by June 30, 2008. These costs will
be expensed as incurred in accordance with the SFAS No. 146,
Accounting for Exit or Disposal Activities
.
4. Goodwill and Intangible
Assets
The
carrying amount of goodwill as of March 31, 2008 is $45,999,000.
The
gross carrying amounts and accumulated amortization of the Companys intangible
assets as of March 31, 2008 is as follows:
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net Book
Value
|
|
Useful
Life
Years
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
$
|
1,810,000
|
|
$
|
641,000
|
|
$
|
1,169,000
|
|
3
|
|
Customer Relationships
|
|
1,551,000
|
|
274,000
|
|
1,277,000
|
|
6
|
|
Non Compete Agreements
|
|
245,000
|
|
130,000
|
|
115,000
|
|
2
|
|
|
|
$
|
3,606,000
|
|
$
|
1,045,000
|
|
$
|
2,561,000
|
|
|
|
The
future annual amortization expense is $985,000.
F-15
5. Property
and Equipment
Property
and equipment consists of the following:
|
|
Estimated
Useful Life
|
|
December 31,
|
|
March 31,
|
|
|
|
(Years)
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cardiac monitoring devices
|
|
2-5
|
|
$
|
9,828,966
|
|
$
|
31,040,675
|
|
$
|
31,386,488
|
|
Computers and purchased software
|
|
3-5
|
|
3,180,425
|
|
5,927,657
|
|
6,719,872
|
|
Equipment, tools and molds
|
|
3
|
|
1,341,417
|
|
1,301,101
|
|
1,301,101
|
|
Furniture and fixtures
|
|
3
|
|
506,206
|
|
1,001,763
|
|
1,001,763
|
|
Cardiac monitoring device parts and components
|
|
2-5
|
|
512,695
|
|
2,961,995
|
|
3,163,337
|
|
Leasehold improvements
|
|
Life
of lease
|
|
508,862
|
|
780,314
|
|
780,314
|
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, at cost
|
|
|
|
15,878,571
|
|
43,013,505
|
|
44,352,875
|
|
Less accumulated depreciation and amortization
|
|
|
|
(14,099,528
|
)
|
(27,919,300
|
)
|
(29,214,227
|
)
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
|
|
$
|
1,779,043
|
|
$
|
15,094,205
|
|
$
|
15,138,648
|
|
Depreciation
expense associated with property and equipment was $2,656,291, $3,713,675 and
$1,647,326 for the years ended December 31, 2006, 2007 and for the
three-month period ended March 31, 2008, respectively.
6. Accrued
Expenses
Accrued
expenses consist of the following:
|
|
December 31,
|
|
March 31,
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued purchases
|
|
$
|
724,560
|
|
$
|
1,840,071
|
|
$
|
1,764,794
|
|
Accrued compensation
|
|
1,731,325
|
|
3,070,382
|
|
3,459,537
|
|
Accrued professional fees
|
|
150,809
|
|
654,900
|
|
617,395
|
|
Accrued interest payable
|
|
2,076,179
|
|
20,460
|
|
218,631
|
|
|
|
|
|
|
|
|
|
Current portion of exit costs liability
|
|
174,494
|
|
189,189
|
|
142,680
|
|
|
|
|
|
|
|
|
|
PDSHeart purchase accounting liability
|
|
|
|
510,313
|
|
344,430
|
|
Contingent payment to former PDSHeart stockholders
|
|
|
|
|
|
2,394,202
|
|
Accrued income taxes
|
|
|
|
|
|
1,556,819
|
|
Accrued equity issuance costs
|
|
|
|
|
|
426,477
|
|
Other
|
|
428,045
|
|
139,571
|
|
1,080,986
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,285,412
|
|
$
|
6,424,886
|
|
$
|
12,005,951
|
|
F-16
7. Long-Term
Debt
Long-term
debt consists of the following as of December 31, 2006 and 2007 and March 31,
2008:
|
|
December 31,
|
|
March 31,
|
|
|
|
2006
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable to shareholder, secured by substantially all assets of
the Company, interest payable in annual installments at the Prime Rate plus 1%
(September 30, 2007), principal due in November 2007
|
|
$
|
21,400,958
|
|
$
|
|
|
$
|
|
|
Note payable to a redevelopment authority, secured by certain assets
of the Company. Interest accrues monthly at a rate of 6.5%, with monthly
principal and interest payments of $3,909 due January 2007 through
December 2008, remaining principal and accrued interest due
December 2008
|
|
365,061
|
|
|
|
|
|
Bridge financing with certain shareholders, secured by certain assets
of the Company. Interest accrues monthly at a rate of 8%, with principal and
accrued interest payable upon the occurrence of certain events as defined in
the bridge financing agreements
|
|
3,238,286
|
|
|
|
|
|
Term loan with a bank. Interest-only payments through July 2007.
Thirty-six monthly installments of principal and interest beginning
August 2007
|
|
3,000,000
|
|
2,583,333
|
|
2,333,333
|
|
Revolving bank line of credit
|
|
1,892,240
|
|
|
|
|
|
Note payable to third party payor
|
|
|
|
160,644
|
|
139,290
|
|
Note payable to finance company for insurance premiums
|
|
|
|
|
|
399,303
|
|
|
|
|
|
|
|
|
|
Total
|
|
29,896,545
|
|
2,743,977
|
|
2,871,926
|
|
Less current portion
|
|
(26,577,152
|
)
|
(1,088,528
|
)
|
(1,489,950
|
)
|
Less debt discount
|
|
(408,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
2,911,115
|
|
$
|
1,655,449
|
|
$
|
1,381,976
|
|
F-17
Note Payable to Shareholder
On
November 12, 2003, the Company entered into a Credit Agreement with a
shareholder that provided a $20,000,000 credit facility. The Company drew down
the first $10,000,000 pursuant to the credit facility on November 12,
2003, and made an additional drawdown of $10,000,000 pursuant to the credit
facility on March 18, 2004. Each drawdown was evidenced by a promissory
note. On May 30, 2006, the Company entered into an Amended and Restated
Subordinated Promissory Note with the shareholder in the amount of $21,400,958
that restated and superseded in full the prior promissory notes, and represented
the entire principal and interest accrued under the credit facility as of December 31,
2005. In January, 2007, the Company entered into an Amended and Restated
Subordinated Promissory Note with the shareholder in the amount of $23,301,099
that restated and superseded in full the prior promissory notes, and
represented the entire principal and interest accrued under the credit facility
as of December 31, 2006. The credit facility matures on November 13,
2007, and all principal and accrued interest outstanding is payable on that
date. The interest rate on the credit facility is equal to the prime rate as
published in
The Wall Street Journal
plus 1%.
The
Credit Agreement is secured by substantially all of the Companys assets and
requires the Company to comply with various financial covenants. In August,
2007 the Company repaid the entire note payable to shareholder including
accrued interest.
Bridge Financing
On
May 1, 2006 and August 29, 2006, the Company entered into bridge financing
transactions and issued $3,170,192 and $73,653, respectively, of Subordinated
Convertible Promissory Notes (the 2006 Notes) and concurrently issued
detachable warrants for the purchase of the Companys Series D-1 Preferred
Stock to certain existing investors. The 2006 Notes matured on the first
occurrence of certain events as defined in the agreements. The Company was
required to repay all principal and interest outstanding pursuant to the 2006
Notes on the maturity date. The relative fair value of the warrants was
recorded as a discount to the 2006 Notes. As a result of recording the fair
value of the warrants as a debt discount, a beneficial conversion feature was
created as the effective conversion rate at the time the notes were issued,
which was less than the fair market value of the MRCPS into which the stock was
converted. When the Company completed its February 2007 equity financing
before the maturity date, holders of the 2006 Notes elected to convert the 2006
Notes into shares of the Companys preferred stock subject to terms described
in the agreements. Concurrent with the closing of the Companys private
placement of Mandatorily Redeemable Convertible Preferred Stock (see
Note 8) on March 7, 2007, the holders of the 2006 Notes converted the
2006 Notes into shares of mandatorily redeemable convertible preferred stock.
For the year ended December 31, 2007, the Company recorded $327,000 of
interest expense related to the beneficial conversion feature, which was
considered contingent at the time the notes were issued.
The
2006 Notes were secured by substantially all of the assets of the Company and
required the Company to comply with various financial covenants.
Revolving Bank Line of Credit and Term Loan
On
July 3, 2006, the Company entered into a loan and security agreement with
a bank that provides for a revolving line of credit and a term loan. The
revolving line of credit is available in an amount up to $2,000,000 less the
amount of any letters of credit issued by the bank on the Companys behalf. The
Company may receive advances under the revolving line of credit through the
maturity date of July 1, 2008. At the maturity date, all principal and
interest accrued under the revolving line of credit becomes due and payable.
The interest rate on amounts outstanding on the revolving line of credit is
equal to the banks prime rate plus 0.5%. As of September 30, 2007, there
was no amount outstanding on the revolving line of credit as it was paid
concurrent with the closing of the Companys private placement of Mandatorily
Redeemable Convertible Preferred Stock.
On
July 3, 2006, the Company borrowed $3,000,000 under a term loan with the
same bank. Interest-only payments are required through July 2007.
Beginning August 2007, the term loan is repayable in thirty-six equal
installments of principal, plus monthly payments of accrued interest. The
interest rate on the term loan is fixed at 8.63%.
F-18
The
revolving line of credit and the term loan are secured by substantially all of
the Companys assets and require the Company to comply with various financial
covenants. At March 31, 2008, the Company is in compliance with such
covenants.
In
April, 2008 the Company repaid the entire term loan including accrued interest.
8. Mandatorily
Redeemable Convertible Preferred Stock and Shareholders Equity (Deficit)
Mandatorily Redeemable Convertible Preferred Stock
In
March 2007, the Company sold 110,000 shares of its mandatorily redeemable
convertible preferred stock, or MRCPS, which generated net proceeds to the
Company of $102,119,142 ($110,000,000 less offering costs of $7,880,858). The
Company also issued 3,383 shares of MRCPS upon conversion of an outstanding
bridge loan and 1,456 shares as consideration to a major shareholder of
PDSHeart as consideration in the PDSHeart acquisition. Accrued dividends were
$6.1 million at March 25, 2008. The MRCPS original purchase price plus
accrued dividends were converted to common shares on March 25, 2008 in
connection with the Companys initial public offering.
Series A, B, C and D Convertible Preferred Stock
From
1999 to 2004, the Company issued convertible preferred stock which generated
net proceeds to the company of $53.5 million. All Series A, B, C and D
preferred stock converted to common stock on March 25, 2008 in connection
with the Companys initial public offering.
Preferred Stock Warrants
In
connection with a borrowing arrangement provided by a bank, the Company issued
a warrant in August of 2000 to purchase 12,500 shares of Series B
preferred stock at a price of $1.47 per share. The warrant may be exercised at
any time on or before August 9, 2010.
In
2005 and 2006, the Company issued 964,189 warrants to purchase shares of its
preferred stock at a price of $3.50 per share to the participants in certain
bridge financing transactions and to a stockholder in connection with entering
into the Amended and Restated Subordinated Promissory Note with a stockholder.
As a result of the MRCPS financing the warrants became exercisable for shares
of the Companys Series D-1 preferred stock. The warrants were
automatically net exercised for common stock on March 25, 2008 in
connection with the Companys initial public offering.
Common Stock Issued for Services
During
the year ended December 31, 2005, the Company issued common stock to
non-employees for services. The estimated fair value of the shares issued of
$30,000 was recognized as expense in the accompanying statements of operations
for the year ended December 31, 2005. No common stock was issued to
non-employees for services during the year ended December 31, 2006. During
the year ended December 31, 2007, the Company issued common stock to non
employees for services. The estimated fair value of the shares issued of
$153,150 was recognized as an expense in the accompanying statements of
operation for the year ended December 31, 2007. No common stock was issued
for non-employees for services during the three-month period ended March 31,
2008.
The
Company has estimated the fair value of its common stock during 2007 by using
the probability weighted expected returns method (the PWER Method) described
in the AICPA Technical Practice Aid,
Valuation
of Privately-Held-Company Securities Issued as Compensation
(Practice
Aid). Under the PWER method, the value of the Companys common stock was
estimated based upon an analysis of future values for the Company assuming
various future outcomes. In the Companys situation, the future outcomes
included three alternatives: (1) the Company becomes a public company (public
company alternative), (2) the Company is acquired (M&A alternative)
and (3) the Company remains a private company (remains private
alternative).
F-19
Valuation
models require the input of highly subjective assumptions. Prior to the Companys
initial public offering, its common stock had characteristics significantly
different from that of publicly traded common stock. Because changes in the
subjective input assumptions could have materially affected the fair value
estimate, in managements opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of our common stock.
As
of December 31, 2006, 2007, and March 31, 2008, the Company has
reserved shares of common stock for issuance as follows:
|
|
December 31,
|
|
March 31,
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
Conversion of outstanding preferred stock
|
|
8,835,042
|
|
8,835,042
|
|
|
|
Exercise of options available and grants of awards under equity plans
|
|
1,800,000
|
|
3,550,000
|
|
2,618,367
|
|
Conversion of preferred stock issuable under outstanding preferred
stock warrant
|
|
6,250
|
|
488,340
|
|
6,250
|
|
|
|
|
|
|
|
|
|
Conversion of mandatorily redeemable convertible preferred stock
|
|
|
|
4,784,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,641,292
|
|
17,658,340
|
|
2,624,617
|
|
Stock Based Compensation
Under
the Companys 2003 Equity Incentive Plan (the Option Plan), as of March 31,
2008 the Company was no longer entitled to grant options to purchase shares of
common stock to employees, executives, directors and consultants. Options granted under the Option Plan have
exercise prices not less than the fair market value at date of grant for
incentive stock options and not less than 85% of the fair market value at the
date of grant for nonstatutory options. These options generally expire ten
years from the date of grant and generally vest 25% twelve months from the date
of grant, and ratably over the next 36 months thereafter.
The
Option Plan allows for employees to early exercise options on the first
anniversary date of employment, regardless of the vested status of granted
options. If an employee terminates prior to fully vesting in options that have
been early exercised, the Company repurchases the common stock associated with
unvested options at the original exercise price.
The
Companys income before income taxes for the year ended December 31, 2007
and the period ended March 31, 2008 was $778,508 and $360,000 lower,
respectively, and the Companys after-tax net income for year ended December 31,
2007 and the period ended March 31, 2008 was $778,508 and $211,000 lower,
respectively, as a result of stock-based compensation expense incurred, which
included charges resulting from the adoption of SFAS 123R on January 1,
2006. The impact of stock-based compensation expense was $(0.26) and $(0.04) on
the basic or diluted earnings per share for the year ended December 31,
2007 and the period ended March 31, 2008, respectively.
F-20
The
Company utilized the Black-Scholes valuation model for estimating the fair
value of the stock options granted after the adoption of SFAS 123R with
the following weighted average assumptions.
|
|
Year ended
December 31, 2007
|
|
Three months
ended
March 31, 2008
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
|
Expected volatility
|
|
50
|
%
|
50
|
%
|
Risk-free interest rates
|
|
5
|
%
|
2.71
|
%
|
Expected life
|
|
6.25
years
|
|
6.25
years
|
|
The
dividend yield of zero is based on the fact that the Company has never paid
cash dividends and has no present intention to pay cash dividends. Since the Companys
stock was not publicly traded prior to the closing of its initial public
offering, the expected volatility was calculated for each date of grant based
on an alternative method. The Company identified similar public entities for
which share price information is available and have considered the historical
volatility of these entities share price in estimated expected volatility. The
risk-free interest rate is derived from the U.S. Federal Reserve rate in effect
at the time of grant. The expected life calculation is based on the observed
and expected time to the exercise of options by our employees based on
historical exercise patterns for similar options. Based on the Companys
historical experience of options that cancel before becoming fully vested, the
Company has assumed an annualized forfeiture rate of 15% for all options. Under
the true-up provision of SFAS 123R, the Company will record additional
expense if the actual forfeiture rate is lower than estimated, and will record
a recovery of prior expense if the actual forfeiture rate is higher than
estimated.
Based
on the above assumptions, the per share weighted average fair value of the
options granted under the stock option plan for the year ended December 31,
2007 and the period ended March 31, 2008 was $4.00 and $8.59,
respectively.
During
the years ended December 31, 2005, and December 31, 2006 the per
share weighted-average fair value of the options granted under the stock option
plan were $0.52 and $0.88, respectively. The Company utilized the minimum value
valuation model for estimating these fair values with the following
weighted-average assumptions:
|
|
Year ended
December 31, 2005
|
|
Year ended
December 31, 2006
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
Expected volatility
|
|
0
|
%
|
0
|
%
|
Risk-free interest rates
|
|
4.43
|
%
|
4.57-4.92
|
%
|
Expected life
|
|
10
years
|
|
10
years
|
|
Total
compensation cost of options granted but not yet vested, as of December 31,
2007 and March 31, 2008, was approximately $3,614,000 and $4,632,152,
respectively, which is expected to be recognized over the weighted average
period of 3.75 years and 3.50 years, respectively. At December 31,
2006, December 31, 2007 and March 31, 2008, approximately 3,679,
617,518 and 533,063 shares, respectively, remained available for future grant
under the Plan.
F-21
Option
activity under the Option Plan is summarized as follows for the years ended December 31,
2005, 2006, 2007 and for the three-month period ended March 31, 2008:
|
|
|
|
Options Outstanding
|
|
|
|
Shares
Available
for Grant
|
|
Number
of Shares
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
280,889
|
|
628,143
|
|
$
|
1.14
|
|
Granted
|
|
(354,800
|
)
|
354,800
|
|
$
|
1.50
|
|
Canceled
|
|
102,425
|
|
(102,425
|
)
|
$
|
1.08
|
|
Repurchased
|
|
178,263
|
|
|
|
$
|
1.14
|
|
Exercised
|
|
|
|
(202,750
|
)
|
$
|
1.14
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
206,777
|
|
677,768
|
|
$
|
1.34
|
|
Additional shares authorized for grant
|
|
|
|
|
|
|
|
Granted
|
|
(451,325
|
)
|
451,325
|
|
$
|
1.62
|
|
Canceled
|
|
229,239
|
|
(229,239
|
)
|
$
|
1.46
|
|
Repurchased
|
|
18,988
|
|
|
|
$
|
0.70
|
|
Exercised
|
|
|
|
(135,026
|
)
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
3,679
|
|
764,828
|
|
$
|
1.48
|
|
Additional shares authorized for grant
|
|
1,750,000
|
|
|
|
|
|
Granted
|
|
(1,756,914
|
)
|
1,756,914
|
|
$
|
6.58
|
|
Canceled
|
|
620,753
|
|
(620,753
|
)
|
$
|
2.48
|
|
Exercised/Rounding
|
|
|
|
(259,375
|
)
|
$
|
1.84
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2007
|
|
617,518
|
|
1,641,614
|
|
$
|
6.38
|
|
Granted
|
|
(307,875
|
)
|
307,875
|
|
12.19
|
|
Canceled
|
|
223,404
|
|
(223,404
|
)
|
$
|
5.74
|
|
Exercised/Rounding
|
|
16
|
|
(21,281
|
)
|
1.26
|
|
Balance March 31, 2008
|
|
533,063
|
|
1,704,804
|
|
$
|
7.58
|
|
Additional
information regarding options outstanding is as follows:
|
|
December 31,
|
|
March 31,
|
|
|
|
2006
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Range of exercise price (per option)
|
|
$0.30-$1.96
|
|
$0.70-$9.50
|
|
$0.70-$18.30
|
|
Weighted average remaining contractual life (years)
|
|
8.94
|
|
9.28
|
|
9.22
|
|
Common Stock Reacquisition Rights
As
of March 31, 2008, the Company has the right to repurchase 79,866 shares
of its outstanding common stock. The number of shares subject to repurchase is
subject to reduction over a four-year vesting period ending during 2009. The
Company has the right to repurchase these unvested shares at the original
issuance price when certain conditions are met.
F-22
Notes Receivable from Shareholders
During
2003, certain officers of the Company exercised outstanding options to purchase
1,600,000 shares of the Companys common stock. The $560,000 purchase price of
the stock was financed by the Company under note receivable arrangements which
bear interest at a rate of 3.65%. Principal and interest payments on the notes
are due annually through February 28, 2007. The notes are secured by the
Companys common stock issued under the arrangements. During 2004 and 2005,
additional individuals exercised outstanding options under the notes receivable
arrangement. Upon termination of individuals with outstanding notes receivable
balances under this arrangement, the Company repurchased unvested options, and
those individuals repaid outstanding balances. As of December 31, 2006,
the principal balance on the notes was $224,250 which represents exercised
options for 390,000 shares of the Companys common stock.
In
February 2007 certain officers of the Company exercised outstanding
options to purchase 360,000 shares of the Companys common stock.
The
notes were paid off in August 2007 in their entirety prior to the initial
filing of the registration statement for an initial public offering, as
required by the provisions of the Sarbanes-Oxley Act of 2002.
9. Income
Taxes
The
Companys effective tax rate of 41.4% for 2008 is based on our estimated fiscal
2008 pretax income and does not take into account the utilization of the
Companys net operating loss, credit carryforwards or other deferred income tax
assets because the Company is still in the process of determining the timing
and manner in which it can utilize such carryforwards and deductions due to
limitations in the Internal Revenue Code applicable to changes in ownership of
corporations.. The Company is currently conducting an analysis to determine the
timing and manner of the utilization of the net operating loss carryforwards.
Following the completion of our analysis of the availability of such
carryforwards and future income tax deductions we will adjust our tax rate
accordingly in future quarters.
The
Company has net deferred income tax assets totaling approximately
$31.2 million at the end of 2007, consisting primarily of federal and
state net operating loss and credit carryforwards. The federal and state net
operating loss carryforwards, if unused, will begin to expire in 2010. The
federal and state credit carryforwards, if unused, will expire in 2026. Due to
uncertainty regarding the ultimate realization of these net operating loss and
credit carryforwards and other deferred income tax assets, we have established
a valuation allowance for most of these assets and will recognize the benefits
only as reassessment indicates the benefits are realizable.
Deferred
taxes result from temporary differences between the carrying amounts of assets
and liabilities used for financial reporting purposes and the amounts used for
income tax purposes. The significant components of the Companys deferred tax
assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2006
|
|
2007
|
|
Deferred tax assets
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
23,723,805
|
|
$
|
24,381,504
|
|
Research and development credit carryforwards
|
|
1,798,617
|
|
1,990,245
|
|
Inventory reserve
|
|
175,134
|
|
147,270
|
|
Allowance for doubtful accounts
|
|
2,457,497
|
|
3,099,312
|
|
Property, plant and equipment
|
|
1,275,143
|
|
602,334
|
|
Other, net
|
|
530,122
|
|
998,410
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
29,960,318
|
|
31,219,075
|
|
Less valuation allowance
|
|
(29,960,318
|
)
|
(31,164,919
|
)
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
$
|
54,156
|
|
Deferred tax liabilities
|
|
|
|
|
|
Goodwill and acquired intangibles
|
|
|
|
(49,768
|
)
|
Prepaid insurance
|
|
|
|
(4,388
|
)
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
|
$
|
(54,156
|
)
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
|
|
|
|
F-23
The
Company has reported net losses since inception. This loss has not resulted in
a reported tax benefit because of an increase in the valuation allowance for
deferred tax assets that results from the inability to determine the
realizability of those assets.
Reconciliations
between expected income taxes computed at the federal rate of 34% for the years
ended December 31, 2005, 2006 and 2007, respectively, and the provision
for income taxes are as follows:
|
|
Years ended December 31,
|
|
|
|
2005
|
|
2006
|
|
2007
|
|
Income tax benefit at statutory rate
|
|
$
|
(3,786,693
|
)
|
$
|
(2,282,866
|
)
|
$
|
(120,826
|
)
|
State income tax, net of federal benefit
|
|
(442,317
|
)
|
(124,893
|
)
|
(7,898
|
)
|
Nondeductible expenses
|
|
66,003
|
|
74,471
|
|
167,684
|
|
Research tax credit
|
|
(590,752
|
)
|
(169,094
|
)
|
(191,628
|
)
|
Other
|
|
(634,452
|
)
|
63,151
|
|
15,103
|
|
Increase in valuation allowance
|
|
5,388,211
|
|
2,439,231
|
|
137,565
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
|
|
$
|
|
|
$
|
|
|
At
December 31, 2005, 2006 and 2007, the Company had federal net operating
loss carryforwards of approximately $57,000,000 and $60,000,000 and
$62,000,000, respectively, to offset future federal taxable income expiring in
various years through 2026.
At
December 31, 2005, 2006 and 2007, the Company had state net operating
losses of $50,000,000, $53,000,000 and $52,500,000, respectively, which expire
in various years starting in 2010.
The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
are deductible. The timing and manner in which the Company can utilize its net
operating loss carryforward and future income tax deductions in any year may be
limited by provisions of the Internal Revenue Code regarding the change in
ownership of corporations. Such limitation may have an impact on the ultimate
realization of the Companys carry forwards and future tax deductions.
The
Company adopted the provisions of FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, on January 1, 2007. Prior to the adoption
of FIN 48, the Company did not have a tax reserve recorded for tax
contingencies. As a result of adopting FIN 48, the Company has not
identified any uncertain tax positions and no tax reserve was recorded as of January 1,
2007. Further, no tax reserve for uncertain tax positions was recognized for
the year ended December 31, 2007. At December 31, 2007, the Company
has not identified any uncertain tax positions and therefore, it has no tax reserve
recorded as of December 31, 2007.
At
December 31, 2007, the Companys federal and state income tax returns for
the tax years ended December 31, 2004, 2005 and 2006 remain subject to
examination by the taxing authorities.
F-24
10. Commitments
and Contingencies
Operating Leases
The
Company leases its principal administrative and service facilities as well as
office equipment under noncancelable operating leases expiring at various dates
through 2013. Payments made under operating leases are charged to operations on
a straight-line basis over the period of the lease. Rent expense was
$1,038,298, $1,918,984, and $499,023 for the years ended December 31,
2006, 2007 and for the three-month period ended March 31, 2008,
respectively.
Future
minimum lease payments under noncancelable operating leases are summarized as
follows at December 31, 2007:
2008
|
|
$
|
2,065,966
|
|
2009
|
|
1,753,606
|
|
2010
|
|
1,668,549
|
|
2011
|
|
1,507,095
|
|
2012
|
|
1,121,042
|
|
Thereafter
|
|
1,065,537
|
|
|
|
|
|
|
|
$
|
9,181,795
|
|
In
2004, the Company changed its geographic strategy, and exited leased office
space in the Midwest. The Company applied the principles of SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities
, in accounting for costs that will continue to be
incurred under an operating lease for this office space, expiring on December 31,
2008. At December 31, 2007, $189,189 is included in accrued expenses and
$0 is included in other noncurrent liabilities, which represents the recorded
liability for the present value of remaining lease payments, reduced by
estimated sublease rentals.
For
the years ended December 31, 2006 and 2007, approximately $89,000 and
$13,000, respectively, is included in general and administrative expenses in
the accompanying statements of operations related to exit costs associated with
this lease.
The
Company has an agreement with QUALCOMM Incorporated (QUALCOMM) whereby the
Company has no fixed or minimum financial commitment, however, in the event the
Company fails to maintain an agreed upon number of active cardiac monitoring
devices on the QUALCOMM network, QUALCOMM has the right to terminate this
agreement.
In
the normal course of business, the Company is subject to various legal claims
and complaints. The Company does not believe any of these proceedings will have
a material adverse effect on its financial position or results of operations.
11. Employee
Benefit Plan
The
Company sponsors a 401(k) Retirement Savings Plan (the Plan) for all
eligible employees who meet certain requirements. Participants may contribute,
on a pretax basis, up to the maximum allowable amount pursuant to Section 401(k) of
the Internal Revenue Code. The Company is not required to contribute, nor has
it contributed, to the Plan for the years ended December 31, 2005, 2006
and 2007 and the three-month period ended March 31, 2008.
F-25
REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The
Board of Directors and Stockholders
PDSHeart, Inc.
We
have audited the accompanying consolidated balance sheets of PDSHeart, Inc.
(the Company) as of December 31, 2005 and 2006, and the related consolidated
statements of operations, stockholders equity (deficit), and cash flows for
each of the three years in the period ended December 31, 2006. These
financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of PDSHeart, Inc. at December 31,
2005 and 2006, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2006 in conformity with
accounting principles generally accepted in the United States.
West
Palm Beach, Florida
March 2, 2007
F-26
PDSHEART, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
|
2005
|
|
2006
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,154,656
|
|
$
|
898,499
|
|
Accounts receivable, net
|
|
3,152,896
|
|
4,376,502
|
|
Other current assets
|
|
236,363
|
|
213,648
|
|
|
|
|
|
|
|
Total current assets
|
|
4,543,915
|
|
5,488,649
|
|
Property and equipment, net
|
|
4,514,522
|
|
4,045,998
|
|
Other assets:
|
|
|
|
|
|
Goodwill, net
|
|
2,861,797
|
|
2,867,216
|
|
Identifiable intangibles, net
|
|
1,033,820
|
|
858,618
|
|
Other
|
|
375,537
|
|
462,560
|
|
|
|
|
|
|
|
Total other assets
|
|
4,271,154
|
|
4,188,394
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,329,591
|
|
$
|
13,723,041
|
|
|
|
|
|
|
|
Liabilities and stockholders deficit
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
3,162,045
|
|
$
|
3,028,409
|
|
Due to third party payor, current
|
|
93,350
|
|
80,535
|
|
Current portion of long-term debt
|
|
222,765
|
|
500,000
|
|
|
|
|
|
|
|
Total current liabilities
|
|
3,478,160
|
|
3,608,944
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
Due to third party payor
|
|
844,096
|
|
160,643
|
|
Long-term debt, less current portion
|
|
8,748,043
|
|
9,027,953
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
9,592,139
|
|
9,188,596
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable, convertible preferred stock
5,000,000 shares authorized, series A, $0.01 par value, 2,160,642 shares
issued and outstanding at December 31, 2005 and 2006
|
|
4,793,443
|
|
4,836,439
|
|
|
|
|
|
|
|
Stockholders deficit
|
|
|
|
|
|
Common stock, $0.01 par value, 30,000,000
shares authorized, 10,308,400 shares issued at December 31, 2005 and
2006, respectively
|
|
105,650
|
|
105,650
|
|
Less treasury stock, 256,600 shares at
December 31, 2005, and 2006, respectively
|
|
(290,250
|
)
|
(290,250
|
)
|
Additional paid-in capital
|
|
187,350
|
|
187,350
|
|
Accumulated deficit
|
|
(4,536,901
|
)
|
(3,913,688
|
)
|
|
|
|
|
|
|
Total stockholders deficit
|
|
(4,534,151
|
)
|
(3,910,938
|
)
|
|
|
|
|
|
|
Total liabilities and stockholders deficit
|
|
$
|
13,329,591
|
|
$
|
13,723,041
|
|
See accompanying notes.
F-27
PDSHEART, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
Years Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Net revenue:
|
|
|
|
|
|
|
|
Net service revenue
|
|
$
|
15,081,157
|
|
$
|
18,495,692
|
|
$
|
20,681,228
|
|
Other revenue
|
|
68,650
|
|
236,428
|
|
170,581
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
15,149,807
|
|
18,732,120
|
|
20,851,809
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
Cost of services
|
|
6,132,283
|
|
6,727,090
|
|
7,492,831
|
|
General and administrative
|
|
5,118,895
|
|
5,732,200
|
|
6,003,964
|
|
Sales and marketing
|
|
2,949,425
|
|
3,797,573
|
|
4,968,931
|
|
Provision for doubtful accounts
|
|
1,082,576
|
|
1,168,690
|
|
755,871
|
|
Amortization of intangibles
|
|
154,215
|
|
185,152
|
|
183,022
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
15,437,394
|
|
17,610,705
|
|
19,404,619
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
(287,587
|
)
|
1,121,415
|
|
1,447,190
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
Interest expense
|
|
(614,332
|
)
|
(546,226
|
)
|
(817,290
|
)
|
Other, net
|
|
58,939
|
|
36,488
|
|
39,654
|
|
|
|
|
|
|
|
|
|
Total other expense, net
|
|
(555,393
|
)
|
(509,738
|
)
|
(777,636
|
)
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
(842,980
|
)
|
611,677
|
|
669,554
|
|
Income taxes
|
|
|
|
|
|
3,345
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
(842,980
|
)
|
611,677
|
|
666,209
|
|
Accretion of redeemable preferred stock
|
|
|
|
(42,738
|
)
|
(42,996
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) available to common
stockholders
|
|
$
|
(842,980
|
)
|
$
|
568,939
|
|
$
|
623,213
|
|
See accompanying notes.
F-28
PDSHEART, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS EQUITY (DEFICIT)
|
|
Common Stock
|
|
Additional
Paid-in
|
|
Treasury
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Stock
|
|
Deficit
|
|
Total
|
|
Balance, December 31, 2003, restated
|
|
10,565,000
|
|
$
|
105,650
|
|
$
|
187,350
|
|
$
|
|
|
$
|
(4,262,860
|
)
|
$
|
(3,969,860
|
)
|
Purchase of 204,400 common shares for
treasury
|
|
|
|
|
|
|
|
(225,000
|
)
|
|
|
(225,000
|
)
|
Net loss, restated
|
|
|
|
|
|
|
|
|
|
(842,980
|
)
|
(842,980
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004, restated
|
|
10,565,000
|
|
105,650
|
|
187,350
|
|
(225,000
|
)
|
(5,105,840
|
)
|
(5,037,840
|
)
|
Purchase of 52,200 common shares for
treasury
|
|
|
|
|
|
|
|
(65,250
|
)
|
|
|
(65,250
|
)
|
Preferred stock accretion
|
|
|
|
|
|
|
|
|
|
(42,738
|
)
|
(42,738
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
611,677
|
|
611,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
10,565,000
|
|
105,650
|
|
187,350
|
|
(290,250
|
)
|
(4,536,901
|
)
|
(4,534,151
|
)
|
Preferred stock accretion
|
|
|
|
|
|
|
|
|
|
(42,996
|
)
|
(42,996
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
666,209
|
|
666,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
10,565,000
|
|
$
|
105,650
|
|
$
|
187,350
|
|
$
|
(290,250
|
)
|
$
|
(3,913,688
|
)
|
$
|
(3,910,938
|
)
|
See
accompanying notes.
F-29
PDSHEART, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
Operating activities
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(842,980
|
)
|
$
|
611,677
|
|
$
|
666,209
|
|
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
2,151,542
|
|
2,240,787
|
|
2,080,783
|
|
Provision for doubtful accounts
|
|
1,082,576
|
|
1,168,690
|
|
755,871
|
|
Provision for settlement with third party
payor
|
|
337,200
|
|
|
|
|
|
Changes in assets and liabilities (net of
effects of acquisitions):
|
|
|
|
|
|
|
|
Increase in accounts receivable
|
|
(1,077,059
|
)
|
(3,670,406
|
)
|
(1,979,477
|
)
|
(Increase) decrease in other current assets
|
|
(501,277
|
)
|
329,725
|
|
22,717
|
|
(Increase) decrease in other assets
|
|
30,307
|
|
|
|
(61,438
|
)
|
Increase in accounts payable and accrued
expenses
|
|
375,636
|
|
297,717
|
|
581,149
|
|
Decrease in amount due to third party payor
|
|
|
|
|
|
(611,000
|
)
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
1,555,945
|
|
978,190
|
|
1,454,814
|
|
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(1,436,952
|
)
|
(1,391,969
|
)
|
(2,210,642
|
)
|
Cash paid for acquisitions and acquisition
costs, net of cash acquired
|
|
(401,500
|
)
|
(480,000
|
)
|
(5,420
|
)
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
(1,838,452
|
)
|
(1,871,969
|
)
|
(2,216,062
|
)
|
|
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
|
|
Proceeds from new borrowings
|
|
|
|
133,750
|
|
863,768
|
|
Principal payments on long-term debt and
capital leases
|
|
(1,186,896
|
)
|
(942,045
|
)
|
(358,677
|
)
|
Purchase of treasury stock
|
|
(225,000
|
)
|
(65,250
|
)
|
|
|
Advances on officer loan
|
|
(384,480
|
)
|
|
|
|
|
Proceeds from sale of stock
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
(1,596,376
|
)
|
(873,545
|
)
|
505,091
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
(1,878,883
|
)
|
(1,767,324
|
)
|
(256,157
|
)
|
Cash and cash equivalents, beginning of
period
|
|
4,800,863
|
|
2,921,980
|
|
1,154,656
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
2,921,980
|
|
$
|
1,154,656
|
|
$
|
898,499
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosure of cash flow
information
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
630,934
|
|
$
|
540,874
|
|
$
|
788,344
|
|
See accompanying notes.
F-30
PDSHEART, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
1. Business and Organization
PDSHeart, Inc.
(the Company) was incorporated October 1, 2003 in the state of Delaware.
Prior to September 30, 2003, the Company was Physician Diagnostic
Services, LLC (the LLC), a partnership formed in February 2000. On September 30,
2003, the members of the LLC entered into a contribution agreement, which
provided for all of their interests in the LLC to be contributed to the Company
in exchange for proportionate shares of the Company. These financial statements
include the balance sheet, results of operations, cash flows and changes in
stockholders equity (deficit) for the years ended December 31, 2004, 2005
and 2006 of both the LLC and the Company. All significant intercompany
transactions and accounts have been eliminated in consolidation.
The
Company provides three primary services throughout the United States. The
majority of the Companys revenue is from cardiac event-monitoring services,
which generally is prescribed for patients who are experiencing some type of
heart related symptoms which a referring physician believes should be monitored
over time. The monitoring is typically provided over a 30-day period. The
Company also provides 24 hour monitoring using a Holter device and
pacemaker testing for patients with implanted pacemakers.
2. Summary of Significant
Accounting Policies
Third Party Settlement
During
2006, the Company settled a billing dispute with a third party payor and the
Department of Justice. The settlement totaling $2,927,000 related to the
Companys billing practices for cardiac event monitoring services during 2001
through 2004. This settlement was comprised of a $300,000 note payable to the
third party payor (to be paid out over a thirty six month period), a $611,000
cash payment to the Department of Justice (DOJ) and the write-off of claims
held (unadjudicated by the payor) by the Company (approximately $1,662,000) and
the write-off of accounts billed prior to October 29, 2004 (approximately
$354,000). For the year ended December 31, 2004, the Company recorded a
provision for a settlement with a third party payor of $337,200 as a reduction
in net service revenue. In addition, during 2005 the Company accrued $26,446 of
interest expense related to the DOJ settlement and in June 2006, paid
$637,446 to settle the DOJ liability.
Cash and Cash Equivalents
Cash
equivalents consist of highly liquid instruments with maturities at the time of
purchase of three months or less.
Property and Equipment, net
Property
and equipment are stated at cost. Routine maintenance and repairs are charged
to expense as incurred, while costs of betterments and renewals are
capitalized. The majority of the Companys property and equipment is medical
equipment, primarily heart monitoring devices, the use of which is prescribed
by a referring physician for their patients. These monitoring devices are being
depreciated over a five-year life.
Depreciation
and amortization are calculated on a straight-line basis, over the estimated
useful lives of the respective assets which lives range from three to
five years. Leasehold improvements are amortized over the shorter of the
term of the related lease, including renewal options, or the useful life of the
asset.
F-31
Intangible Assets
Identifiable
intangible assets with finite lives primarily relate to non-compete agreements
entered into in connection with acquisitions, and acquired customer lists. Such
assets are recorded at fair value as determined by management on the date of
acquisition and are being amortized over the estimated period to be benefited
of 5-10 years.
Goodwill
relates to the excess of cost over the fair value of net assets of the
businesses acquired. Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142) requires that goodwill and intangible assets with indefinite
lives are no longer amortized, but reviewed annually for impairment. These
impairment tests required by SFAS 142 are impacted by determination of the
appropriate levels of cash flows and future cash flow assumptions of the
related assets. The Company will continue to review its goodwill annually for
impairment, or more frequently if indicators of impairment are present.
Revenue Recognition
The
Company recognizes net revenue from its event monitoring services over the
30-day testing period, normally based on contractually determined reimbursement
rates or historical reimbursement rates. All other net revenue is recognized at
the time services are performed. At December 31, 2005 and 2006, there was
approximately $513,000 and $547,000, respectively, of deferred revenue recorded
related to billings for monitoring services for which the 30 day testing
period had not been completed. Unbilled receivables are recorded for services
rendered during, but billed subsequent to, the reporting period. Unbilled
receivables, net of allowances, as of December 31, 2005 and 2006 amounted
to approximately $853,000 and $1.4 million, respectively. Net revenue is
reported at the estimated realizable amounts due from patients, third-party
payors and others for services rendered. Revenue under certain third-party
payor agreements is subject to audit and retroactive adjustments. Provision for
estimated third party payor adjustments are estimated in the period the related
services are rendered and adjusted in future periods to the extent that actual
results differ from original estimates. The provision for contractual
allowances and bad debt and the related allowances are adjusted periodically,
based upon an evaluation of historical collection experience with specific
payors for particular services, anticipated collection levels with specific
payors for new services, industry reimbursement trends, and other relevant
factors. Changes in these factors in future periods could result in increases
or decreases in net services revenue, provision for doubtful accounts and the
results of operations and financial position.
Stock Based Compensation
During
2003, the Company adopted a stock option plan (the Option Plan) that provides
for the granting of options to purchase shares of common stock to key
employees, directors and others. The plan provides that the option price shall
not be less than the fair market value of the shares on the date of the grant.
Prior
to January 1, 2006, the Company elected to follow Accounting Principles
Board Opinion No. 25 (APB 25),
Accounting
for Stock Issued to Employees
, and related Interpretations in
accounting for employee stock options and adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation
(SFAS 123) as amended by Statements of Financial Accounting Standards No. 148,
Accounting for Stock-Based
Compensation Transitional Disclosure
, an Amendment to SFAS No. 123,
(SFAS 148) for option grants to employees.
Under
APB 25, because the exercise prices of the Companys employee stock options
were at or above the fair value of the underlying stock on the grant date, no
compensation expense is recognized.
Effective
January 1, 2006, the Company adopted, the Financial Accounting Standards
Boards SFAS No. 123(R),
Share-Based
Payment, a revision of SFAS No. 123, Accounting for Stock-Based
Compensation
, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123(R) requires that an
entity measure the cost of equity-based service awards based on the grant-date
fair value of the award and recognize the cost of such awards over the period
during which the employee is required to provide service in exchange for the
award (the vesting period). SFAS No. 123(R) requires that an entity
measure the cost of
F-32
liability-based
service awards based on current fair value that is remeasured subsequently at
each reporting date through the settlement date. The Company adopted this new
standard effective January 1, 2006, under the prospective transition
method which requires the Company to recognize share-based compensation expense
in the statement of operations for grants and modifications made after the date
of adoption. No stock option grants or modifications were made for the year
ended December 31, 2006.
Income Taxes
The
Companys provision for income taxes includes federal and state income taxes
currently payable, the deferred tax impact of converting to a C corporation
effective September 30, 2003, and changes in deferred tax assets and
liabilities for the Company. Deferred income taxes are accounted for in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes
(SFAS 109) and represent the estimated future tax effects resulting from
temporary differences between financial statement carrying values and tax
reporting bases of assets and liabilities. In accordance with SFAS 109,
the initial recording of deferred income taxes of $56,276 was recorded in the
Companys results of operations upon its conversion to a C Corporation on September 30,
2003.
Comprehensive Income
The
Company has adopted SFAS No. 130,
Reporting
Comprehensive Income
(SFAS 130), which requires the Company to
report and display certain information related to comprehensive income. For the
years ended December 31, 2004, 2005 and 2006, net income equaled
comprehensive income.
Fair Value of Financial Instruments
The
Companys financial instruments consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and outstanding debt. The carrying
amounts of the Companys cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the short-term nature of these
instruments.
As
of December 31, 2005 and 2006, approximately $6.8 million and
$8.4 million, respectively, of the Companys outstanding debt bears
interest at a variable market rate and thus has a carrying amount that
approximates fair value. The remaining $1.3 million of outstanding debt as
of December 31, 2006 (approximate fair value of $1.0 million), bears
interest at fixed rates ranging from 5.5% to 9.5%. As of December 31,
2005, the carry amount of the remaining $2.1 million of outstanding debt,
approximates its fair value, and bears interest at fixed rates ranging from 5.5%
to 6.375%.
Accounting Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States (generally accepted accounting
principles) requires management to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenue and expenses. Because of
the inherent uncertainties in this process, actual results could differ from
those estimates. Such estimates include the recoverability of intangible assets
and the collectibility of accounts receivable.
Recent Accounting Pronouncements
In
June 2006, the FASB issued Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
, (FIN 48),
which prescribes detailed guidance for the financial statement recognition, measurement
and disclosure of uncertain tax positions recognized in an enterprises
financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes.
Tax positions
must meet a more-likely-than-not recognition threshold at the effective date to
be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48
will be effective for fiscal years beginning after December 15, 2006, or January 1,
2007 for the Company, and the provisions of FIN 48 will be applied to all tax
positions accounted for under Statement No. 109 upon initial adoption. The
cumulative effect of applying the provisions of this interpretation will be
reported as an adjustment to the opening balance of retained earnings for that
fiscal year. The Company does not expect FIN 48 to have a material impact on
its financial statements.
F-33
In
September 2006, FASB issued SFAS No. 157,
Fair Value Measurements
, which provides enhanced guidance
for using fair value to measure assets and liabilities. SFAS No. 157
establishes a common definition of fair value, provides a framework for
measuring fair value under U.S. generally accepted accounting principles and
expands disclosure requirements about fair value measurements. SFAS No. 157
is effective for financial statements issued in fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is currently
evaluating the impact, if any, the adoption of SFAS No. 157 will have on
the Companys financial reporting and disclosures.
Reclassifications
Certain
reclassifications have been made to the 2005 and 2004 financial statements to
conform to current year classifications.
3. Accounts Receivable
Accounts
receivable are recorded at net realizable value. The allowance for
uncollectible accounts is $1,822,326 and $2,249,831 at December 31, 2005
and 2006, respectively, and is based on historical collection experience, aging
of accounts and payor class (i.e. third party payor, Medicare, private payor).
Accordingly, the actual amounts of uncollectible accounts experienced could
vary significantly from the estimated allowance for uncollectible accounts.
The
Company grants credit without collateral to individual patients and/or referring
physicians. The majority of patients are insured under third-party payor
agreements. The estimated mix of receivables from government programs,
patients, third-party payors and others at December 31, are as follows:
|
|
2004
|
|
2005
|
|
2006
|
|
Government programs
|
|
10
|
%
|
9
|
%
|
10
|
%
|
Third-party payors
|
|
73
|
|
70
|
|
74
|
|
Private pay patients
|
|
10
|
|
8
|
|
7
|
|
Physicians
|
|
7
|
|
13
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
A
significant portion of the Companys net revenue is generated from government
sources and certain third party payors. Any significant changes in
reimbursement by the government or a major payor could have a material impact
on the Companys future results of operations and financial condition.
4. Property and Equipment
Property
and equipment at December 31, consists of the following:
Estimated
|
|
Estimated
Useful Life
(Years)
|
|
2005
|
|
2006
|
|
Medical equipment
|
|
5
|
|
$
|
11,368,603
|
|
$
|
12,581,632
|
|
Computer equipment
|
|
3-5
|
|
1,122,906
|
|
1,278,599
|
|
Leasehold improvements
|
|
5
|
|
156,958
|
|
173,339
|
|
Furniture and fixtures
|
|
3
|
|
173,685
|
|
217,819
|
|
Less accumulated depreciation
|
|
|
|
(8,307,630
|
)
|
(10,205,391
|
)
|
|
|
|
|
|
|
|
|
Net property, plant, and equipment
|
|
|
|
$
|
4,514,522
|
|
$
|
4,045,998
|
|
F-34
Depreciation
expense, which includes depreciation of assets under capital lease, was
$1,997,327, $2,057,435 and $1,915,874 for the years ended December 31,
2004, 2005 and 2006, respectively. The classification of depreciation expense
for the years ended December 31, are set forth below:
|
|
2004
|
|
2005
|
|
2006
|
|
Cost of services
|
|
$
|
1,179,718
|
|
$
|
1,765,834
|
|
$
|
1,626,945
|
|
General and administrative
|
|
277,609
|
|
291,601
|
|
288,929
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,457,327
|
|
$
|
2,057,435
|
|
$
|
1,915,874
|
|
5. Intangible Assets
Intangible
assets and the related accumulated amortization at December 31, are set
forth below:
|
|
2005
|
|
2006
|
|
Non-compete agreements
|
|
$
|
775,719
|
|
$
|
775,719
|
|
Customer lists
|
|
880,000
|
|
880,000
|
|
Accumulated amortization
|
|
(621,899
|
)
|
(797,101
|
)
|
|
|
|
|
|
|
Identifiable intangibles, net
|
|
$
|
1,033,820
|
|
$
|
858,618
|
|
Non-compete
agreements and customer lists are amortized over their estimated useful lives
of 8 to 10 years. The aggregate amount of amortization expense during each
of the next five years and thereafter on all intangible assets subject to
amortization as of December 31, 2006, is as follows: 2007 $168,473; 2008
$114,000; 2009 $114,000; 2010 $114,000; 2011 $114,000; thereafter
$234,145.
6. Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses at December 31 consists of the following:
|
|
2005
|
|
2006
|
|
Accounts payable
|
|
$
|
1,322,705
|
|
$
|
850,936
|
|
Accrued compensation
|
|
815,274
|
|
1,239,309
|
|
Deferred revenue
|
|
541,438
|
|
547,464
|
|
Other accrued expenses
|
|
482,628
|
|
390,700
|
|
|
|
|
|
|
|
|
|
$
|
3,162,045
|
|
$
|
3,028,409
|
|
F-35
7. Long-term Debt
As
of December 31 2006, the Company had notes payable of $9,769,130. The
notes payable consisted of approximately $8.4 million due to a principal
shareholder and Chairman of the Company (Shareholder Note), $1.1 million
related to various term notes payable to a bank and a note payable of
approximately $260,000 relating to a settlement of a billing dispute with a
third party payor. As of December 31, 2006, the Company also had a
$500,000 working capital line of credit with no outstanding borrowings.
Long-term
debt at December 31, consists of the following:
|
|
2005
|
|
2006
|
|
Notes payable
|
|
$
|
8,823,756
|
|
$
|
9,527,953
|
|
Due to Third Party Payer
|
|
937,446
|
|
241,178
|
|
Capital leases
|
|
147,052
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
9,908,254
|
|
9,769,131
|
|
|
|
|
|
|
|
Less: current portion
|
|
(316,115
|
)
|
(580,535
|
)
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
9,592,139
|
|
$
|
9,188,596
|
|
In
January 2007, the Company refinanced all of its term notes payable to the
bank with a $6.0 million revolving line of credit with a bank (the Bank
Facility) and terminated its $500,000 working capital line of credit. The Bank
Facility has a five year term, with interest only payable monthly at a rate
equal to the London Interbank Offering Rate (LIBOR) plus 2.5%. The Bank
Facility is secured by virtually all of the Companys assets. The proceeds of
the Bank Facility were also used to make a $500,000 payment on the Shareholder
Note and to pay expenses related to the origination of the Bank Facility.
In
January 2007, the Company converted $5.0 million of the remaining
Shareholder Note into 50,000 shares of Series B preferred stock with a
$100 liquidation preference per share plus dividends at an annual rate of 5%.
Following the $500,000 payment noted above and the $5.0 million
conversion, the remaining Shareholder Note is approximately $2.9 million.
The remaining $2.9 million Shareholder Note is fully subordinated to the
Bank Facility, bears interest at a fixed rate of 9%, and has a maturity date of
April 2012, at which time the entire principal balance becomes due and
payable.
At
December 31, 2006, maturities of long-term debt, after giving effect to
the Bank Facility and conversion of $5.0 million of the Shareholder Note
to Series B Preferred Stock, are as follows:
|
|
Notes
Payable
|
|
2007
|
|
$
|
580,535
|
|
2008
|
|
88,528
|
|
2009
|
|
72,115
|
|
2010
|
|
|
|
2011 and thereafter
|
|
4,027,953
|
|
|
|
|
|
Total
|
|
$
|
4,769,131
|
|
As
of December 31, 2006, the capital lease assets consist of $3,848,375 for
medical devices placed in service and $246,663 of computers, less accumulated
depreciation and amortization of $3,939,160 for a net book value of $155,878.
F-36
8. Lease Commitments
2007
|
|
$
|
232,520
|
|
2008
|
|
187,856
|
|
2009
|
|
142,642
|
|
2010
|
|
36,353
|
|
2011
|
|
36,353
|
|
Thereafter
|
|
9,088
|
|
|
|
|
|
Total
|
|
$
|
644,812
|
|
Rent
expense relating to non-cancelable operating leases was $271,141, $287,277 and
$345,624 for 2004, 2005 and 2006, respectively.
9. Option Plan
During
2006, the Company increased the total shares available under the Option Plan
from 776,655 to 1,376,655. All options granted under the Option Plan have a
10-year term and vest over 3 to 5 years, an option price of $1.60 and
become exercisable ratably over the vesting period following the date of grant.
At December 31, 2006, there were approximately 322,506 exercisable options
outstanding. The following table summarizes the information regarding this
option plan.
Options outstanding, December 31, 2003
|
|
354,999
|
|
Granted
|
|
73,000
|
|
Canceled
|
|
(20,000
|
)
|
|
|
|
|
Options outstanding, December 31, 2004
|
|
407,999
|
|
Granted
|
|
265,500
|
|
Canceled
|
|
(6,800
|
)
|
|
|
|
|
Options outstanding, December 31, 2005
|
|
666,699
|
|
Canceled
|
|
(12,700
|
)
|
|
|
|
|
Options outstanding, December 31, 2006
|
|
653,999
|
|
Effective
January 1, 2006, the Company adopted, the Financial Accounting Standards
Boards SFAS No. 123(R),
Share-Based
Payment, a revision of SFAS No. 123, Accounting for Stock-Based
Compensation
, that addresses the accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the
fair value of the enterprises equity instruments or that may be settled by the
issuance of such equity instruments. SFAS No. 123(R) requires that an
entity measure the cost of equity-based service awards based on the grant-date
fair value of the award and recognize the cost of such awards over the period
during which the employee is required to provide service in exchange for the
award (the vesting period). SFAS No. 123(R) requires that an entity
measure the cost of liability-based service awards based on current fair value
that is remeasured subsequently at each reporting date through the settlement
date. The Company adopted this new standard effective January 1, 2006,
under the prospective transition method, which requires the Company to
recognize share-based compensation expense in the statement of operations for
all grants and modifications made after the date of adoption.
F-37
10. Redeemable, Convertible Preferred Stock
Prior
to 2006, the Company continued to account for its stock option plan in
accordance with APB Opinion No. 25, Accounting for Stock Options Issued to
Employees, as permitted under SFAS No. 123. Under APB Opinion No. 25,
the Company was only required to recognize compensation expenses for options granted
to employees for the difference between the fair value of the underlying common
stock and the exercise price of the option at the date of grant. As all option
grants prior to 2006 were at the grant date fair value, no compensation expense
related to options granted to employees was recognized for the years ended December 31,
2004 and 2005.
On
September 30, 2003, the Company authorized 5.0 million shares of Series A
redeemable preferred stock, par value $0.01 per share (the Preferred Stock). In
addition, on October 1, 2003, the Company sold an initial 2.0 million
shares of the Preferred Stock resulting in proceeds, net of transaction
expenses, of $4,750,705. Subsequent to December 31, 2003, based on
finalized 2003 operating results, the Company and the holders of the Preferred
Stock agreed to the issuance of an additional 160,642 shares of the Preferred
Stock to the holders related to this offering. The Preferred Stock ranks senior
to the Companys common stock. The Preferred Stock is not entitled to dividends
and it contains a liquidation preference and a participating liquidation
return. The Preferred Stock becomes redeemable beginning in 2008. The majority
holders of the Preferred Stock may require the Company to redeem up to
one-third of the shares of such stock held after September 30, 2008,
one-half of the shares held after September 30, 2009 and all remaining
shares after September 30, 2010. Each share of the Preferred Stock was
initially convertible into shares of common stock at the option of the holder
at any time, by dividing $2.50 by the conversion price in effect on the
conversion date. Subsequently, the conversion price was adjusted to $2.31
therefore each such share of the Preferred Stock is convertible into one share
of common stock. The Preferred Stock contains a mandatory conversion in the
event the Company completes an initial public offering meeting certain
specified criteria. As these shares become redeemable at the higher of fair
value or cost, periodic accretion is recorded such that upon redemption, the
carrying value will approximate the redemption value. The redemption price of
the Preferred Stock will be the higher of the fair market value of the redeemed
shares on the redemption date or the actual amount paid upon initial issuance
of the redeemed shares ($5 million). Periodic accretion of the difference
between the carrying and redemption value (amount paid) is recorded as a direct
charge to accumulated deficit.
11. Employee Benefit Plans
The
Company has a qualified 401(k) retirement plan (the 401(k) Plan)
covering substantially all eligible employees as defined in the 401(k) plan
document. The 401 (k) Plan has discretionary employer matching of the
employees contributions. For the years ended December 31, 2004 and 2005,
there were no Company matching contributions. For the year ended December 31,
2006, the Companys matching contributions was $34,051.
12. Commitments and Contingencies
During
the ordinary course of business, the Company has become and may in the future
become subject to pending and threatened legal actions and proceedings. These
claims are generally covered by insurance. Based upon current information, the
Company believes the outcome of such pending legal actions and proceedings,
individually or in the aggregate, will not have a material adverse effect on
the Companys financial condition, results of operations or liquidity.
The
Companys operations are insured for medical, professional and general
liabilities on a claims-made basis. The Company evaluates the liability related
to asserted and unasserted claims for reported and unreported incidents based
on facts and circumstances surrounding such claims and the applicable policy
deductible amounts and records the necessary reserve as deemed appropriate in accordance
with generally accepted accounting standards.
The
healthcare industry in general, and the services that the Company provides, are
subject to extensive federal and state laws and regulations. Additionally, a
significant portion of the Companys net revenue is from payments by
government-sponsored health care programs, principally Medicare, and is subject
to audit and adjustment by applicable regulatory agencies. Failure to comply
with any of these laws or regulations, the results of increased regulatory
audits and adjustments, or changes in the interpretation of the coding of
services or the amounts payable for the Companys services under these programs
could have a material adverse effect on the Companys financial position and
results of operations. The Companys operations are continuously subject to
review and inspection by regulatory authorities.
F-38
The
Company has entered into employment agreements with certain of its management
employees, which include, among other terms, noncompetition provisions and
salary continuation benefits.
13. Related Party Transactions
As
described in Note 7, the Company had a Shareholder Note payable to the
Companys Chairman of approximately $8.4 million as of December 31,
2006.
Included
in other long term assets are $326,664 of loans receivable plus accrued
interest from an officer and shareholder and a former officer and shareholder.
The loans accrue interest at an adjustable rate (8.77% at December 31,
2006) and are payable in full on or before April 13, 2009. These loans are
secured by such individuals shares of the Companys stock. Repayment of these
notes will be made from future bonus payments or a liquidation event which
results in the sale or substantial change in ownership of the Company.
14. Income Taxes
The
statutory federal income tax is reconciled to the effective tax on income
(loss) before income taxes for the years ended December 31 as follows:
|
|
2004
|
|
2005
|
|
2006
|
|
Statutory federal tax
|
|
$
|
(286,613
|
)
|
$
|
207,970
|
|
$
|
227,648
|
|
State income taxes, net of federal income
tax benefit
|
|
(33,382
|
)
|
24,222
|
|
26,514
|
|
Effect of permanent income tax differences
|
|
5,620
|
|
26,518
|
|
50,350
|
|
Insurance Settlement
|
|
|
|
(414,106
|
)
|
|
|
Valuation allowance
|
|
314,375
|
|
155,396
|
|
(301,167
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
$
|
|
|
$
|
3,345
|
|
There
was no provision for income taxes for the year ended December 31, 2005.
The
following is a summary of the deferred income tax assets and deferred tax
liabilities as of December 31:
|
|
2005
|
|
2006
|
|
Deferred tax assets:
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
691,755
|
|
$
|
854,036
|
|
Reserve for insurance claim
|
|
355,853
|
|
|
|
Accrued liabilities
|
|
89,260
|
|
111,050
|
|
Net operating loss
|
|
662,620
|
|
547,488
|
|
|
|
|
|
|
|
Deferred tax assets current
|
|
1,799,488
|
|
1,512,574
|
|
Deferred tax liabilities:
|
|
|
|
|
|
Goodwill and identifiable intangible assets
|
|
(197,895
|
)
|
(246,192
|
)
|
Fixed assets
|
|
(226,083
|
)
|
(192,039
|
)
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
(423,978
|
)
|
(438,231
|
)
|
|
|
|
|
|
|
Less: valuation allowance
|
|
(1,375,510
|
)
|
(1,074,343
|
)
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
$
|
|
|
F-39
Prior
to October 1, 2003, the Company was a limited liability company (LLC) that
was treated as a partnership for federal income tax purposes. As an LLC, the
Company was not responsible for the payment of federal and state income taxes.
The taxable income or loss of the Company was reported on each members
personal tax return. The members were responsible for any tax liability or
benefit received due to the Companys operations.
As
a result of the conversion to a C corporation, the Company recorded a deferred
tax asset and a reduction in the provision for income taxes of $454,000. This
represents the tax effect of temporary differences of approximately
$1.0 million related to the allowance for doubtful accounts, bonus
accrual, goodwill and other identifiable intangible assets.
In
addition, future tax benefits, such as from net operating losses (NOLs), are
required to be recognized to the extent that realization of such benefits is
more likely than not. A valuation allowance is established for those benefits
that do not meet the more likely than not criteria.
A
valuation allowance has been established for $1,375,510 and $1,074,343 of net
deferred tax assets at December 31, 2005 and 2006, respectively due to the
uncertainty regarding the Companys ability to utilize the NOLs and other
deferred tax assets due to lack of historical taxable income.
At
December 31, 2006, the Company has available net operating loss
carryforwards of approximately $1.4 million, which begin to expire in
2023.
15. Supplemental Cash Flow Information
The
following supplemental information presents the non-cash impact on the balance
sheet of assets acquired and liabilities assumed in connection with
acquisitions consummated during the year ended December 31:
|
|
2004
|
|
Assets acquired
|
|
$
|
1,075,000
|
|
Liabilities assumed
|
|
(675,000
|
)
|
Costs related to completed and pending
acquisitions
|
|
1,500
|
|
|
|
|
|
Cash paid for acquisitions and acquisition
costs, net of cash acquired
|
|
$
|
401,500
|
|
During
2004, the Company acquired certain assets, primarily customer lists related to
a heart monitoring business. The total maximum purchase price was
$1.3 million, of which $900,000 was placed in escrow pending the
resolution of specific contingencies. During 2004, the Company paid $400,000 in
connection with the acquisition. In addition, as of December 31, 2004, the
Company recorded a liability of $675,000 representing the estimated payment to
be made in future years related to the resolution of the contingencies. In May 2005,
the Company settled the contingent obligation for $480,000, resulting in a
final aggregate purchase price of $880,000. The resolution of this contingency
in 2005 resulted in a reduction in the value of intangible assets acquired of
$195,000.
16. Subsequent Events
On
February 5, 2007, the Company signed a definitive agreement to be acquired
for an aggregate purchase price of $50 million plus the assumption of up
to $5 million of the Companys debt. The proposed transaction is subject
to, among other conditions, the acquirers ability to obtain financing. The
proposed transaction is expected to close on or before March 31, 2007.
F-40
CardioNet, Inc.
PROSPECTUS
,
2008
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE
AND DISTRIBUTION.
The
following table sets forth all costs and expenses, other than underwriting
discounts and commissions, payable by us in connection with the sale of the
common stock being registered. All amounts shown are estimates except for the
SEC registration fee.
|
|
Amount
to be Paid
|
|
SEC registration fee
|
|
$
|
8,878
|
|
Legal fees and expenses
|
|
50,000
|
|
Accounting fees and expenses
|
|
25,000
|
|
Printing and engraving and miscellaneous
expenses
|
|
5,000
|
|
Total
|
|
$
|
88,878
|
|
ITEM 14. INDEMNIFICATION OF DIRECTORS
AND OFFICERS.
We
are incorporated under the laws of the State of Delaware. Section 145 of
the Delaware General Corporation Law provides that a Delaware corporation may
indemnify any persons who are, or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such person as an officer, director, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided that such person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the corporations
best interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his or her conduct was illegal. A Delaware
corporation may indemnify any persons who are, or are threatened to be made, a
party to any threatened, pending or completed action or suit by or in the right
of the corporation by reason of the fact that such person was a director,
officer, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit provided such
person acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the corporations best interests except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him or her against the
expenses which such officer or director has actually and reasonably incurred.
Our amended and restated certificate of incorporation and amended and restated
bylaws provide for the indemnification of our directors and officers to the
fullest extent permitted under the Delaware General Corporation Law.
Section 102(b)(7) of
the Delaware General Corporation Law permits a corporation to provide in its
certificate of incorporation that a director of the corporation shall not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duties as a director, except for liability for any:
·
transaction from which the director
derives an improper personal benefit;
·
act or omission
not in good faith or that involves intentional misconduct or a knowing
violation of law;
II-1
·
unlawful
payment of dividends or redemption of shares; or
·
breach of a
directors duty of loyalty to the corporation or its stockholders.
Our
amended and restated certificate of incorporation and amended and restated
bylaws include such a provision. Expenses incurred by any officer or director
in defending any such action, suit or proceeding in advance of its final
disposition shall be paid by us upon delivery to us of an undertaking, by or on
behalf of such director or officer, to repay all amounts so advanced if it
shall ultimately be determined that such director or officer is not entitled to
be indemnified by us.
Section 174
of the Delaware General Corporation Law provides, among other things, that a
director who willfully or negligently approves of an unlawful payment of
dividends or an unlawful stock purchase or redemption may be held liable for
such actions. A director who was either absent when the unlawful actions were
approved, or dissented at the time, may avoid liability by causing his or her dissent
to such actions to be entered in the books containing minutes of the meetings
of the board of directors at the time such action occurred or immediately after
such absent director receives notice of the unlawful acts.
As
permitted by the Delaware General Corporation Law, we have entered into
indemnity agreements with each of our directors and executive officers, that
require us to indemnify such persons against any and all expenses (including
attorneys fees), witness fees, damages, judgments, fines, settlements and
other amounts incurred (including expenses of a derivative action) in
connection with any action, suit or proceeding, whether actual or threatened,
to which any such person may be made a party by reason of the fact that such
person is or was a director, an officer or an employee of CardioNet or any of
its affiliated enterprises, provided that such person acted in good faith and
in a manner such person reasonably believed to be in or not opposed to our best
interests and, with respect to any criminal proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The indemnification agreements also
set forth certain procedures that will apply in the event of a claim for
indemnification thereunder.
At
present, there is no pending litigation or proceeding involving any of our
directors or executive officers as to which indemnification is required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification.
We
have an insurance policy covering our officers and directors with respect to
certain liabilities, including liabilities arising under the Securities Act or
otherwise.
In
connection with our initial public offering, we entered into an underwriting
agreement which provides that the underwriters are obligated, under some
circumstances, to indemnify our directors, officers and controlling persons
against specified liabilities, including liabilities under the Securities Act.
Reference
is made to the following documents filed as exhibits to this registration
statement regarding relevant indemnification provisions described above and
elsewhere herein:
Exhibit Document
|
|
Number
|
Amended
and Restated Certificate of Incorporation.
|
|
3.1
|
Amended
and Restated Bylaws.
|
|
3.2
|
Form of
Indemnity Agreement.
|
|
10.1
|
Second Amended and Restated Investors Rights
Agreement dated March 18, 2004 among the Registrant and certain of its
stockholders, as amended.
|
|
10.10
|
Registration Rights Agreement dated March 8,
2007 among the Registrant and certain of its stockholders.
|
|
10.11
|
II-2
ITEM 15. RECENT SALES OF UNREGISTERED
SECURITIES.
The following list sets forth information regarding all securities sold by us
since January 2005. All share
amounts have been retroactively adjusted to give effect to a 1-for-2 reverse
stock split of our common stock which occurred in March 2008.
(1) In
August 2005, we issued subordinated convertible promissory notes in an
aggregate amount of $3.0 million to a group of investors, each with a
maturity date of the first to occur of February 15, 2006 or certain events
as set forth in the promissory notes. In connection therewith, we also issued
warrants to purchase an aggregate of 257,140 shares of our Series D-1
preferred stock to a group of investors, each with an exercise price of $3.50
per share. These promissory notes and warrants were amended and restated in
connection with a subsequent bridge financing in May 2006. These warrants
were deemed automatically net exercised pursuant to the terms thereof
immediately prior to the closing of our initial public offering.
(2) In
May 2006, we issued amended and restated subordinated convertible
promissory notes in an aggregate amount of approximately $3.2 million to
the same group of investors that participated in our August 2005 bridge
financing. The principal amount of these promissory notes includes the
$3.0 million raised in the August 2005 bridge financing. Each of the
promissory notes, as amended and restated, had a maturity date of the first to
occur of August 15, 2006 or certain events as set forth in the promissory
notes. These promissory notes were amended in connection with a subsequent
bridge financing in August 2006 to extend the maturity date to the first
to occur of February 15, 2007 or certain events as set forth in the
promissory notes. These promissory notes were converted into shares of
mandatorily redeemable convertible preferred stock in connection with our
mandatorily redeemable convertible preferred stock financing in March 2007.
In connection therewith, we also issued warrants to purchase an aggregate of
271,729 additional shares of our Series D-1 preferred stock to the group
of investors, each with an exercise price of $3.50 per share. These warrants
were deemed automatically net exercised pursuant to the terms thereof
immediately prior to the closing of our initial public offering.
(3) In
May 2006, we issued a warrant to purchase an aggregate of 200,136 shares
of our Series D-1 preferred stock, with an exercise price of $3.50 per
share, to a lender. This warrant was deemed automatically net exercised
pursuant to the terms thereof immediately prior to the closing of our initial
public offering.
(4) In
August 2006, we issued subordinated convertible promissory notes in an
aggregate amount of $73,653 to a group of investors, each with a maturity date
of the first to occur of February 15, 2007 or certain events as set forth
in the promissory notes. These promissory notes were converted into shares of
mandatorily redeemable convertible preferred stock in connection with our
mandatorily redeemable convertible preferred stock financing in March 2007.
In connection therewith, we also issued warrants to purchase an aggregate of
20,899 shares of our Series D-1 preferred stock to the group of investors,
each with an exercise price of $3.50 per share. These warrants were deemed
automatically net exercised pursuant to the terms thereof immediately prior to
the closing of our initial public offering.
(5) In
March 2007, we issued and sold an aggregate of 114,839 shares of our
mandatorily redeemable convertible preferred stock to a group of investors at a
price of $1,000 per share for aggregate gross proceeds of approximately
$114.8 million. Upon completion of our initial public offering, these
shares converted into 7,680,902 shares of our common stock.
(6) In
August 2007, we issued a warrant to purchase an aggregate of 214,285
shares of our Series D-1 preferred stock, with an exercise price of $3.50
per share, to a lender. This warrant was deemed automatically net exercised
pursuant to the terms thereof immediately prior to the closing of our initial
public offering.
(7) In
October 2007, we issued 2,917 shares of our common stock at an aggregate
value of $21,002 to a consultant for services rendered.
(8) From
January 1, 2005 to March 31, 2008, we granted stock options under our
2003 equity incentive plan to purchase 1,906,809 shares of our common stock
(net of expirations and cancellations) to our employees, directors and
consultants, having exercise prices ranging from $1.50 to $18.30 per share. Of
II-3
these,
options to purchase 265,201 shares of common stock have been exercised through March 31,
2008 for aggregate consideration of $508,306, at exercise prices ranging from
$1.50 to $7.20 per share.
The
offers, sales and issuances of the securities described in paragraphs (1),
(2), (3), (4), (6) and (7) were deemed to be exempt from registration
under the Securities Act in reliance on Section 4(2) of the
Securities Act in that the issuance of securities to the recipients did not
involve a public offering. The recipients of securities in each of these transactions
acquired the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were
affixed to the securities issued in these transactions. Each of the recipients
of securities in these transactions was an accredited or sophisticated person
and had adequate access, through employment, business or other relationships,
to information about us.
The
offer, sale and issuance of the securities described in paragraph (5) was
deemed to be exempt from registration under the Securities Act in reliance on Rule 506
of Regulation D in that the issuance of securities to the accredited
investors did not involve a public offering. The recipients of securities in
this transaction acquired the securities for investment only and not with a
view to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the securities issued in this transaction. Each of the
recipients of securities in this transaction was an accredited investor under Rule 501
of Regulation D.
The
offers, sales and issuances of the securities described in paragraph (8) were
deemed to be exempt from registration under the Securities Act in reliance on Rule 701
in that the transactions were under compensatory benefit plans and contracts
relating to compensation as provided under Rule 701. The recipients of
such securities were our employees, directors or bona fide consultants and
received the securities under our 2003 equity incentive plan. Appropriate
legends were affixed to the securities issued in these transactions. Each of
the recipients of securities in these transactions had adequate access, through
employment, business or other relationships, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES.
(a) Exhibits.
Exhibit Number
|
|
Description of Document
|
|
|
|
3.1
|
(1)
|
Amended and
Restated Certificate of Incorporation.
|
|
|
|
3.2
|
(1)
|
Amended and
Restated Bylaws.
|
|
|
|
4.1
|
(1)
|
Form of
Common Stock Certificate.
|
|
|
|
4.2
|
(1)
|
Warrant issued
by Registrant on August 9, 2000 to Silicon Valley Bank.
|
|
|
|
5.1
|
|
Opinion of
Cooley Godward Kronish LLP.
|
|
|
|
10.1
|
+(1)
|
Form of
Indemnity Agreement.
|
|
|
|
10.2
|
+(1)
|
2003 Equity
Incentive Plan and Form of Stock Option Agreement thereunder.
|
|
|
|
10.3
|
+(1)
|
2008 Equity
Incentive Plan and Form of Stock Option Agreement thereunder.
|
|
|
|
10.4
|
+(1)
|
2008
Non-Employee Directors Stock Option Plan and Form of Stock Option
Agreement thereunder.
|
|
|
|
10.5
|
+(1)
|
2008 Employee
Stock Purchase Plan and Form of Offering Document thereunder.
|
|
|
|
10.6
|
+(1)
|
Amended and
Restated Employment Agreement dated November 1, 2005 between the
Registrant and James M. Sweeney, as amended.
|
II-4
10.7
|
+(1)
|
Employment and
Non-Competition Agreement dated January 1, 2007 between the Registrants
wholly-owned subsidiary, PDSHeart, Inc., and Gregory A. Marsh, as
amended.
|
|
|
|
10.8
|
+(1)
|
Separation and
Release Agreement dated June 10, 2007 between the Registrant and
David S. Wood.
|
|
|
|
10.9
|
+(1)
|
Forms of
Employee Innovations and Proprietary Rights Assignment Agreement.
|
|
|
|
10.10
|
(1)
|
Second Amended
and Restated Investors Rights Agreement dated March 18, 2004 among the
Registrant and certain of its stockholders, as amended on March 8, 2007.
|
|
|
|
10.11
|
(1)
|
Registration
Rights Agreement dated March 8, 2007 among the Registrant and certain of
its stockholders.
|
|
|
|
10.12
|
(1)
|
Office Lease
dated February 6, 2004 between the Registrant and Executive One
Associates, as amended.
|
|
|
|
10.13
|
(1)
|
Office Space
Lease dated May 30, 2003 between the Registrant and Washington Street
Associates II, L.P., as amended.
|
|
|
|
10.14
|
(1)
|
Lease Agreement
dated September 21, 2006 between the Registrants wholly-owned
subsidiary, PDSHeart, Inc. and HI/OCC, Inc.
|
|
|
|
10.15
|
(1)
|
Lease Agreement
dated November 14, 2001 between the Registrants indirect wholly-owned
subsidiary, Physician Diagnostic Services, LLC, and Navarro Lowrey, L.P.
Centrepark Plaza I Partners Series, as amended.
|
|
|
|
10.16
|
(1)
|
Lease Agreement
dated November 18, 2002 between the Registrants indirect wholly-owned
subsidiary, Physician Diagnostic Services, LLC, and Navarro Lowrey, L.P.
Centrepark Plaza I Partners Series, as amended.
|
|
|
|
10.17
|
(1)
|
Standard
Commercial Lease Agreement dated April 13, 2002 among the Registrants
wholly-owned subsidiary, PDSHeart, Inc., Travis Collins, David Wiedman
and La Vista Associates, Inc., as amended.
|
|
|
|
10.18
|
*(1)
|
Communications
Voice and Data Services Provider Agreement dated May 12, 2003 between the
Registrant and QUALCOMM, Incorporated, as amended.
|
|
|
|
10.19
|
*(1)
|
Purchase
Agreement dated September 14, 2001 between the Registrant and
Varian, Inc. (a wholly-owned subsidiary of Jabil Circuit, Inc.).
|
|
|
|
10.20
|
*(1)
|
Consignment
Inventory Agreement dated September 13, 2004 between the Registrant and
Varian, Inc. (a wholly-owned subsidiary of Jabil Circuit, Inc.).
|
|
|
|
10.21
|
+(1)
|
Loan Agreement
dated September 25, 2006 between the Registrant and David S. Wood.
|
|
|
|
10.22
|
(1)
|
Building Lease
Agreement dated November 2, 2007 between the Registrant and Columbus
Park Properties, LP.
|
|
|
|
10.23
|
+(1)
|
Separation
Agreement dated September 28, 2007 between the Registrant and
Gregory A. Marsh.
|
|
|
|
10.24
|
+(1)
|
Employment
Agreement dated November 24, 2007 between the Registrant and Arie Cohen.
|
|
|
|
10.25
|
(1)
|
Form of
Letter Agreement between the Registrant and the selling stockholder in the
Registrants initial public offering.
|
II-5
21.1
|
(1)
|
Subsidiaries of
the Registrant.
|
|
|
|
23.1
|
|
Consent of
Ernst & Young LLP, independent registered public accounting firm.
|
|
|
|
23.2
|
|
Consent of
Ernst & Young LLP, independent certified public accountants.
|
|
|
|
23.3
|
(1)
|
Consent of
Cooley Godward Kronish LLP. Reference is made to Exhibit 5.1.
|
|
|
|
24.1
|
(1)
|
Power of
Attorney.
|
+
Indicates management contract or
compensatory plan.
*
Confidential treatment has been granted
with respect to certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission.
(1)
Incorporated by reference to the registrants
registration statement on Form S-1 and amendments thereto (File No. 33-145547).
ITEM 17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
(1)
|
|
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
(i)
|
|
To
include any prospectus required by section 10(a)(3) of the
Securities Act;
|
|
|
|
(ii)
|
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the Calculation
of Registration Fee table in the effective registration statement; and
|
|
|
|
(iii)
|
|
To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement.
|
(2)
|
|
That,
for the purpose of determining any liability under the Securities Act, each
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide offering
thereof.
|
|
|
|
(3)
|
|
To
remove from registration by means of a post-effective amendment any of the
securities being registered that remain unsold at the termination of this
offering.
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(4)
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That,
for the purpose of determining liability under the Securities Act to any
purchaser, if the registrant is subject to Rule 430C, each prospectus
filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule 430B
or other than prospectuses filed in reliance on Rule 430A, shall be
deemed to be part of and included in the registration statement as of the
date it is first used after effectiveness.
Provided,
however
, that
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II-6
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no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of
the registration statement will, as to a purchaser with a time of contract of
sale prior to such first use, supersede or modify any statement that was made
in the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such date of
first use.
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Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC this form of indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against these
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by a director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
II-7
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on the 23rd day of June, 2008.
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CARDIONET, INC.
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By:
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/s/ ARIE
COHEN
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Arie Cohen
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President,
CEO and Director
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Pursuant
to the requirements of the Securities Act of 1933, this Registration Statement
has been signed by the following persons in the capacities and on the dates
indicated.
Signature
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Title
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Date
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/s/ ARIE
COHEN
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President,
CEO and Director
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June 23,
2008
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Arie
Cohen
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(Principal Executive Officer)
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/s/ MARTIN
P. GALVAN
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CFO
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June 23,
2008
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Martin P.
Galvan, CPA
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(Principal Financial and Accounting Officer)
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/s/ JAMES
M. SWEENEY
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Executive
Chairman and Director
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June 23,
2008
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James M.
Sweeney
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/s/ FRED
MIDDLETON
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Director
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June 23,
2008
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Fred
Middleton
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/s/ WOODROW
MYERS JR.
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Director
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June 23,
2008
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Woodrow
Myers Jr., M.D.
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/s/ ERIC
N. PRYSTOWSKY
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Director
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June 23,
2008
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Eric N.
Prystowsky, M.D.
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/s/ HARRY
T. REIN
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Director
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June 23,
2008
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Harry T.
Rein
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/s/ ROBERT
J. RUBIN
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Director
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June 23,
2008
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Robert J. Rubin, M.D.
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II-8
EXHIBIT INDEX
Exhibit Number
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Description of Document
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3.1
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(1)
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Amended and
Restated Certificate of Incorporation.
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3.2
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(1)
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Amended and
Restated Bylaws.
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4.1
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(1)
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Form of
Common Stock Certificate.
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4.2
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(1)
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Warrant issued
by Registrant on August 9, 2000 to Silicon Valley Bank.
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5.1
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Opinion of
Cooley Godward Kronish LLP.
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10.1
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+(1)
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Form of
Indemnity Agreement.
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10.2
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+(1)
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2003 Equity
Incentive Plan and Form of Stock Option Agreement thereunder.
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10.3
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+(1)
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2008 Equity
Incentive Plan and Form of Stock Option Agreement thereunder.
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10.4
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+(1)
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2008
Non-Employee Directors Stock Option Plan and Form of Stock Option Agreement
thereunder.
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10.5
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+(1)
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2008 Employee
Stock Purchase Plan and Form of Offering Document thereunder.
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10.6
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+(1)
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Amended and
Restated Employment Agreement dated November 1, 2005 between the
Registrant and James M. Sweeney, as amended.
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10.7
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+(1)
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Employment and
Non-Competition Agreement dated January 1, 2007 between the Registrants
wholly-owned subsidiary, PDSHeart, Inc., and Gregory A. Marsh, as
amended.
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10.8
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+(1)
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Separation and
Release Agreement dated June 10, 2007 between the Registrant and
David S. Wood.
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10.9
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+(1)
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Forms of
Employee Innovations and Proprietary Rights Assignment Agreement.
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10.10
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(1)
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Second Amended
and Restated Investors Rights Agreement dated March 18, 2004 among the
Registrant and certain of its stockholders, as amended on March 8, 2007.
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|
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10.11
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(1)
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Registration
Rights Agreement dated March 8, 2007 among the Registrant and certain of
its stockholders.
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|
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10.12
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(1)
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Office Lease
dated February 6, 2004 between the Registrant and Executive One
Associates, as amended.
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10.13
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(1)
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Office Space
Lease dated May 30, 2003 between the Registrant and Washington Street
Associates II, L.P., as amended.
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|
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10.14
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(1)
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Lease Agreement
dated September 21, 2006 between the Registrants wholly-owned
subsidiary, PDSHeart, Inc. and HI/OCC, Inc.
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10.15
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(1)
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Lease Agreement
dated November 14, 2001 between the Registrants indirect wholly-owned
subsidiary, Physician Diagnostic Services, LLC, and Navarro Lowrey, L.P.
Centrepark Plaza I Partners Series, as amended.
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10.16
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(1)
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Lease Agreement
dated November 18, 2002 between the Registrants indirect wholly-owned
|
|
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subsidiary,
Physician Diagnostic Services, LLC, and Navarro Lowrey, L.P. Centrepark
Plaza I Partners Series, as amended.
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10.17
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(1)
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Standard Commercial
Lease Agreement dated April 13, 2002 among the Registrants wholly-owned
subsidiary, PDSHeart, Inc., Travis Collins, David Wiedman and La Vista
Associates, Inc., as amended.
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10.18
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*(1)
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Communications
Voice and Data Services Provider Agreement dated May 12, 2003 between
the Registrant and QUALCOMM, Incorporated, as amended.
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10.19
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*(1)
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Purchase
Agreement dated September 14, 2001 between the Registrant and
Varian, Inc. (a wholly-owned subsidiary of Jabil Circuit, Inc.).
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10.20
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*(1)
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Consignment
Inventory Agreement dated September 13, 2004 between the Registrant and
Varian, Inc. (a wholly-owned subsidiary of Jabil Circuit, Inc.).
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10.21
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+(1)
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Loan Agreement
dated September 25, 2006 between the Registrant and David S. Wood.
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|
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10.22
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(1)
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Building Lease
Agreement dated November 2, 2007 between the Registrant and Columbus
Park Properties, LP.
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|
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10.23
|
+(1)
|
Separation
Agreement dated September 28, 2007 between the Registrant and
Gregory A. Marsh.
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|
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10.24
|
+(1)
|
Employment
Agreement dated November 24, 2007 between the Registrant and Arie Cohen.
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|
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10.25
|
(1)
|
Form of
Letter Agreement between the Registrant and the selling stockholder in the
Registrants initial public offering.
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|
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21.1
|
(1)
|
Subsidiaries of
the Registrant.
|
|
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|
23.1
|
|
Consent of
Ernst & Young LLP, independent registered public accounting firm.
|
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23.2
|
|
Consent of
Ernst & Young LLP, independent certified public accountants.
|
|
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23.3
|
(1)
|
Consent of
Cooley Godward Kronish LLP. Reference is made to Exhibit 5.1.
|
|
|
|
24.1
|
(1)
|
Power of
Attorney.
|
+
Indicates management contract or
compensatory plan.
*
Confidential treatment has been granted
with respect to certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission.
(1)
Incorporated by reference to the registrants
registration statement on Form S-1 and amendments thereto (File No. 33-145547).
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