Cardiac Science, Quinton Cardiology Complete Merger

More than six months after signing a definitive merger agreement, Cardiac Science Inc. (Irvine, CA) and Quinton Cardiology Systems Inc. (Bothell, WA) in early September completed the transaction to form Cardiac Science Corp. Cardiac Science manufactures automated external defibrillators (AEDs), and Quinton produces cardiovascular monitoring equipment.

Based on 2005 figures for both companies, the combined corporation anticipates annual revenues of about $160 million. Officials say they expect the company to achieve double-digit growth in 2006 and beyond.

“We believe the new company will have enhanced prospects for revenue growth based on our expanded product portfolio, stronger distribution capabilities in both the domestic and international markets, and the potential to leverage combined technological expertise and manufacturing strengths,” says former Quinton CEO John R. Hinson, who will continue as president and CEO of Cardiac Science Corp.

Matysik: Staying aboard.

Michael K. Matysik, Quinton’s senior vice president, CFO, and secretary, will also retain his titles with the new company.

Cohen: Bulking up.

As a result of the merger, Hinson says Cardiac Science Corp. will see cost savings of between $12 million and $14 million annually. The transaction also eliminated all Cardiac Science’s previous debt. “The merger creates a significantly larger, debt-free company with excellent people, technology, and products which speak well for our future prospects,” says Raymond W. Cohen, former Cardiac Science chairman and CEO. Cohen will remain with the new company as chairman of the board.

The corporation, now trading on the Nasdaq exchange under the new symbol CSCX, will maintain Quinton’s headquarters in Bothell, WA, and manufacturing facilities in Deerfield, WI. Defibrillator product development and certain other functions will be integrated into Cardiac Science’s facility in Lake Forest, CA. Cardiac Science’s headquarters in Irvine, CA, and manufacturing facilities in Minnetonka, MN, will be closed.

The combined company will employ about 550 people, representing consolidation among Quinton’s 359 employees and Cardiac Science’s 284 employees prior to the merger announcement.

Hinson: Retaining the reins.

According to Hinson, the new company will slowly refine its product focus within the cardiology market. “In the short term, we’re going to be completing the products that are in place for the existing stand-alone companies,” he says. “In the medium term, we’re going to look at our priorities and shift toward the areas of greatest growth.” These growth areas, says Hinson, include the AED and cardiology data management markets. Hinson says he also sees opportunities for growing the company’s international presence, which accounted for about 25% of revenue in 2004.

Hinson says this hope for the international market was validated by the Japanese Ministry of Health, Labor, and Welfare’s late August approval for Cardiac Science to market a biphasic version of its AED in Japan.

The merger, unanimously approved by the boards of both companies in February, brings together two companies of relatively similar size. During Cardiac Science’s second-quarter earnings report, prior to the merger’s completion, Cohen said that the added bulk of the combined company will help Cardiac Science counter its larger competitors, who, he said, “point to our size and financial position as a reason not to do business with Cardiac Science.”

“We believe that the merger with Quinton Cardiology will significantly mitigate this competitive issue and allow us to get point-of-sales conversations back on the merits of our AED technology, product features, and our program management service offering,” Cohen added.

During Cardiac Science Inc.’s 2005 second quarter, revenues from the sale of AEDs and related services and products were $15.2 million, compared to $15.9 million in the year-ago period. The company attributed the decline to a reduction in training programs and program management service revenues, while AED sales were essentially flat compared to 2004’s second quarter.

Cardiac Science reported a net loss for the second quarter of $7.1 million, compared to a loss of $5.3 million in the year-ago period. About $1.5 million in expenses in this year’s second quarter was attributed to the merger with Quinton and related shareholder litigation.

Following the initial merger announcement, Cardiac Science shareholders filed a class-action suit against the company. In late June, they agreed to drop the suit, which sought a preliminary injunction against the merger, after Cardiac Science agreed to make additional disclosures with the Securities and Exchange Commission in connection with the merger. Two months later, Cardiac Science Corp. reported that the final merger proposal was approved by 96% of the voting shares of Cardiac Science.

Under the agreement, each share of Cardiac Science is worth 0.10 of a share in the new company, and each Quinton share is valued at 0.77.

Cardiac Science Inc. had 2004 revenues of $68.5 million, up 10.4% from 2003. Quinton Cardiology Systems’ 2004 revenues were $89.6 million, up 6% over the previous year.

Canon Communications LLC

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