UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended March 31, 2011 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33993
CardioNet, Inc.
(Exact Name of Registrant as Specified in its Charter)
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Delaware |
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33-0604557 |
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(State or Other Jurisdiction of Incorporation or Organization) |
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(I.R.S. Employer Identification Number) |
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227 Washington Street
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19428 |
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(Address of Principal Executive Offices) |
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(Zip Code) |
(610) 729-7000
(Registrant’s Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 25, 2011, 24,365,216 shares of the registrant’s common stock, $0.001 par value per share, were outstanding.
CARDIONET, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2011
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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FORWARD-LOOKING STATEMENTS
This document includes certain forward-looking statements within the meaning of the “Safe Harbor” provisions of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our growth prospects, the prospects for our products and our confidence in the Company’s future. These statements may be identified by words such as “expect,” “anticipate,” “estimate,” “intend,” “plan,” “believe,” “promises” and other words and terms of similar meaning. Such forward-looking statements are based on current expectations and involve inherent risks and uncertainties, including important factors that could delay, divert, or change any of them, and could cause actual outcomes and results to differ materially from current expectations. These factors include, among other things, the national rate set by the Centers for Medicare and Medicaid Services (“CMS”) for our mobile cardiovascular telemetry service, effectiveness of our cost savings initiatives, changes to insurance coverage and reimbursement levels for our products, the success of our sales and marketing initiatives, our ability to attract and retain talented executive management and sales personnel, our ability to identify acquisition candidates, acquire them on attractive terms and integrate their operations into our business, the commercialization of new products, market factors, internal research and development initiatives, partnered research and development initiatives, competitive product development, changes in governmental regulations and legislation, the continued consolidation of payors, acceptance of our new products and services and patent protection and litigation. For further details and a discussion of these and other risks and uncertainties, please see our public filings with the Securities and Exchange Commission, including our latest periodic reports on Form 10-K and 10-Q. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.
PART I — FINANCIAL INFORMATION
CARDIONET, INC.
CONSOLIDATED BALANCE SHEETS
( In thousands, except share and per share amounts )
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(Unaudited) |
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March 31, 2011 |
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December 31, 2010 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
18,458 |
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$ |
18,705 |
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Short-term available-for-sale-investments |
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24,553 |
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26,779 |
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Accounts receivable, net of allowance for doubtful accounts of $10,169 and $11,779, at March 31, 2011 and December 31, 2010, respectively |
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26,808 |
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24,978 |
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Other receivables |
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2,721 |
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3,041 |
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Inventory, net of reserves of $13 and $0, at March 31, 2011 and December 31, 2010, respectively |
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1,456 |
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1,461 |
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Prepaid expenses and other current assets |
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3,718 |
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3,086 |
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Total current assets |
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77,714 |
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78,050 |
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Property and equipment, net |
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19,288 |
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22,000 |
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Intangible assets, net |
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3,459 |
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3,764 |
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Goodwill |
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49,362 |
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49,362 |
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Other assets |
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4,089 |
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3,516 |
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Total assets |
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$ |
153,912 |
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$ |
156,692 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable |
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$ |
6,248 |
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$ |
7,127 |
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Accrued liabilities |
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8,044 |
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9,881 |
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Deferred revenue |
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559 |
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408 |
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Total current liabilities |
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14,851 |
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17,416 |
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Deferred tax liability |
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3,191 |
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3,191 |
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Deferred rent |
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1,062 |
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1,157 |
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Total liabilities |
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19,104 |
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21,764 |
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Stockholders’ equity: |
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Common stock, $.001 par value; 200,000,000 shares authorized; 24,333,158 and 24,251,170 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively |
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24 |
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24 |
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Paid-in capital |
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249,188 |
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247,747 |
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Accumulated other comprehensive (loss) income |
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(1 |
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8 |
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Accumulated deficit |
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(114,403 |
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(112,851 |
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Total stockholders’ equity |
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134,808 |
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134,928 |
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Total liabilities and stockholders’ equity |
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$ |
153,912 |
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$ |
156,692 |
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See accompanying notes.
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
( In thousands, except share and per share amounts )
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Three Months Ended
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2011 |
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2010 |
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Revenues: |
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Net patient service revenues |
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$ |
30,432 |
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$ |
31,816 |
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Other revenues |
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3,567 |
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— |
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Total revenues |
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33,999 |
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31,816 |
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Cost of revenues |
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13,652 |
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11,749 |
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Gross profit |
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20,347 |
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20,067 |
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Operating expenses: |
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General and administrative |
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9,675 |
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9,677 |
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Sales and marketing |
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8,065 |
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7,997 |
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Bad debt expense |
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2,390 |
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4,640 |
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Research and development |
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1,682 |
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1,243 |
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Integration, restructuring and other charges |
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124 |
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1,945 |
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Total expenses |
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21,936 |
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25,502 |
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Loss from operations |
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(1,589 |
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(5,435 |
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Other income, net |
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37 |
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4 |
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Loss before income taxes |
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(1,552 |
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(5,431 |
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Income tax benefit |
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— |
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— |
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Net loss |
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(1,552 |
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(5,431 |
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Net loss per common share: |
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Basic and diluted |
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$ |
(0.06 |
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$ |
(0.23 |
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Weighted average number of common shares outstanding: |
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Basic and diluted |
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24,298,875 |
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23,893,140 |
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See accompanying notes.
CARDIONET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
( In thousands )
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Three Months Ended
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2011 |
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2010 |
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Operating activities |
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Net loss |
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$ |
(1,552 |
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$ |
(5,431 |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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2,977 |
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2,898 |
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Amortization of intangibles |
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305 |
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181 |
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Amortization of investment premium |
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120 |
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— |
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Loss on disposal of property and equipment |
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131 |
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118 |
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(Decrease) increase in deferred rent |
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(95 |
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(60 |
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Provision for doubtful accounts |
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2,390 |
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4,640 |
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Provision for excess inventory |
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13 |
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— |
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Stock-based compensation |
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1,149 |
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918 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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(3,900 |
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(3,068 |
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Prepaid expenses and other current assets |
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(640 |
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(726 |
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Other assets |
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(573 |
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(194 |
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Accounts payable |
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(879 |
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(1,672 |
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Accrued and other liabilities |
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(1,686 |
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(556 |
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Net cash used in operating activities |
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(2,240 |
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(2,952 |
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Investing activities |
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Purchases of property and equipment |
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(396 |
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(1,478 |
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Purchases of short-term available-for-sale investments |
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(12,705 |
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— |
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Sale or maturity of short-term available-for-sale investments |
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14,802 |
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— |
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Net cash provided by (used in) investing activities |
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1,701 |
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(1,478 |
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Financing activities |
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Proceeds from the exercise of employee stock options and employee stock purchase plan contributions |
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292 |
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533 |
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Net cash provided by financing activities |
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292 |
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533 |
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Net decrease in cash and cash equivalents |
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(247 |
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(3,897 |
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Cash and cash equivalents — beginning of period |
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18,705 |
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49,152 |
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Cash and cash equivalents — end of period |
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$ |
18,458 |
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$ |
45,255 |
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Supplemental disclosure of cash flow information |
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Cash paid for taxes |
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$ |
118 |
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$ |
130 |
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See accompanying notes.
CARDIONET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
( In thousands, except share and per share amounts )
1. Summary of Significant Accounting Policies
Unaudited Interim Financial Data
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X. Accordingly, these consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations and cash flows. In the opinion of management, these consolidated financial statements reflect all adjustments which are of normal recurring nature and necessary for a fair presentation of CardioNet, Inc.’s (the “Company” or “CardioNet”) financial position as of March 31, 2011 and December 31, 2010, the results of operations for the three months ended March 31, 2011 and 2010, and cash flows for the three months ended March 31, 2011 and 2010. The financial data and other information disclosed in these notes to the financial statements related to the three months ended are unaudited. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for any future period.
Net Loss
The Company computes net loss per share in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 260, Earnings Per Share . The following summarizes the potential outstanding common stock of the Company at March 31, 2011 and 2010:
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March 31,
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March 31,
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Common stock options and restricted stock units outstanding |
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2,511,328 |
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1,436,313 |
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Common stock options and restricted stock units available for grant |
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2,413,969 |
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2,451,214 |
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Common stock held by certain employees and unvested |
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— |
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5,989 |
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Common stock |
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24,333,158 |
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24,067,005 |
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Total |
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29,258,455 |
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27,960,521 |
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Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by giving effect to all potential dilutive common shares, including stock options, warrants and convertible preferred stock, as applicable.
The following table presents the calculation of basic and diluted net loss per share:
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Three Months Ended
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2011 |
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2010 |
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Numerator: |
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Net loss |
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$ |
(1,552 |
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$ |
(5,431 |
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Denominator: |
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Weighted average shares used in computing diluted net income loss per share |
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24,298,875 |
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23,893,140 |
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Basic and diluted net loss per share |
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$ |
(0.06 |
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$ |
(0.23 |
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If the outstanding vested options or restricted stock units were exercised or converted into common stock, the result would be anti-dilutive for the three months ended March 31, 2011 and 2010. Accordingly, basic and diluted net loss per share are identical for the three months ended March 31, 2011 and 2010 and are presented in the consolidated statements of operations.
Comprehensive Loss
Comprehensive loss consists of net loss and all changes in stockholders’ equity from non-stockholder sources. The following summarizes the components of the Company’s comprehensive loss:
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Three Months Ended
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2011 |
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2010 |
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Net loss |
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$ |
(1,552 |
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$ |
(5,431 |
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Other comprehensive loss: |
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Unrealized loss on securities |
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(9 |
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— |
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Total comprehensive loss |
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$ |
(1,561 |
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$ |
(5,431 |
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Cash and Cash Equivalents
Cash and cash equivalents are held in U.S. financial institutions or in custodial accounts with U.S. financial institutions. Cash equivalents are defined as liquid investments and money market funds with maturity from date of purchase of 90 days or less that are readily convertible into cash and have minimal interest rate risk.
Available-for-Sale Investments
Marketable securities that do not meet the definition of cash and cash equivalents are classified as available-for-sale. Available-for-sale securities are carried at fair value, based on quoted market prices and observable inputs, with unrealized gains and losses, reported as a separate component of stockholders’ equity. We classify securities as current or non-current assets on the consolidated balance sheet based on maturity dates. The amortized cost of debt securities is adjusted for amortization of premiums and accretions of discounts to maturity. Amortization of debt premiums and accretion of debt discounts are recorded in other income and expense. Realized gains and losses, and declines in value, that are considered to be other-than-temporary, are recorded in other income and expense. The cost of securities sold is based on specific identification.
Accounts Receivable
Receivables are recorded at the time revenue is recognized, net of contractual allowances. The Company makes estimates each quarter regarding the collectability of its receivables as of the balance sheet date. The estimates take into consideration the most recent information available to the Company, as well as cash collection trends and the aging of receivables. Receivables are presented on the balance sheet net of allowances for doubtful accounts. Receivables are written off when the Company believes the likelihood for collection is remote, the receivables have been fully reserved, and when the Company believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. Prior to the third quarter of 2010, the Company performed an annual accounts receivable write-off in the fourth quarter. Beginning in the third quarter 2010, the Company has determined it will evaluate outstanding receivables and perform write-offs quarterly going forward. The Company wrote off $3,986 of receivables in the first quarter of 2011. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There was no impact on the net receivables reported on the balance sheet as of March 31, 2011, or bad debt expense reported on the statement of operations for the three months ended March 31, 2011, as a result of this write-off. Additionally, the Company recorded bad debt expense of $2,390 and $4,640 for the three months ended March 31, 2011 and 2010, respectively.
Goodwill
The Company considers its business to be one reporting unit for the purpose of performing its goodwill impairment analysis. In accordance with ASC 350-20-35, Intangibles — Goodwill and Other , goodwill is reviewed for impairment annually, or when events arise that could indicate that impairment exists. To determine whether impairment exists, the Company estimates the fair value of the reporting unit using an income approach, generally a discounted cash flow methodology that includes assumptions for, among other things, forecasted income, cash flow, growth rates, income tax rates, expected tax benefits and long-term discount rates, all of which require significant judgment. The Company also considers comparable market data to assist in determining the fair value of its reporting unit. There are inherent uncertainties related to these factors and the judgment applied in the analysis. The Company believes that the combination of an income and a market approach provides a reasonable basis to estimate the fair value of the reporting unit. If the estimated fair value of the reporting unit is less than its carrying value, impairment may exist and additional analysis will be undertaken to determine the amount of impairment.
Stock-Based Compensation
ASC 718, Compensation — Stock Compensation , 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 enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. ASC 718 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). ASC 718 requires that an entity measure the cost of liability-based service awards based on current fair value that is re-measured subsequently at each reporting date through the settlement date. The Company accounts for equity awards issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees .
The Company’s income before and after income taxes for the three months ended March 31, 2011 and 2010, was reduced by $1,149 and $918, respectively, as a result of stock-based compensation expense incurred. The impact of stock-based compensation expense was $(0.05) and $(0.04) on basic and diluted earnings per share for the three months ended March 31, 2011 and 2010, respectively.
We estimate the fair value of our share-based awards to employees and directors using the Black-Scholes option valuation model. The Black-Scholes option valuation model requires the use of certain subjective assumptions. The most significant of these assumptions are our estimates of the expected volatility of the market price of our stock and the expected term of the award. We base our estimates of expected volatility on a group of similar entities whose stock prices are publicly available. The expected term represents the period of time that stock-based awards granted are expected to be outstanding. Other assumptions used in the Black-Scholes option valuation model include the risk-free interest rate and expected dividend yield. The risk-free interest rate for periods pertaining to the contractual life of each option is based on the U.S. Treasury yield of a similar duration in effect at the time of grant. We have never paid, and do not expect to pay, dividends in the foreseeable future.
The Company utilized the Black-Scholes valuation model for estimating the fair value of stock options granted using the following weighted average assumptions:
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Three Months Ended
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2011 |
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2010 |
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Expected dividend yield |
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0 |
% |
0 |
% |
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Expected volatility |
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65 |
% |
65 |
% |
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Risk-free interest rate |
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2.51 |
% |
2.67 |
% |
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Expected life |
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6.25 years |
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6.25 years |
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Based on the Company’s 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 ASC 718, 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 three months ended March 31, 2011 and 2010 was $2.84 and $4.76, respectively.
The following table summarizes activity under all stock award plans from December 31, 2010 through March 31, 2011:
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Options Outstanding |
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Shares |
|
|
|
Weighted |
|
|
|
|
|
Available |
|
Number |
|
Average |
|
|
|
|
|
for Grant |
|
of Shares |
|
Exercise Price |
|
|
|
Balance — December 31, 2010 |
|
1,649,723 |
|
2,102,376 |
|
$ |
12.18 |
|
|
Additional options available for grant |
|
1,207,210 |
|
— |
|
— |
|
|
|
Granted |
|
(534,055 |
) |
534,055 |
|
4.76 |
|
|
|
Canceled |
|
91,091 |
|
(91,091 |
) |
22.44 |
|
|
|
Exercised |
|
— |
|
(34,012 |
) |
14.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — March 31, 2011 |
|
2,413,969 |
|
2,511,328 |
|
$ |
9.70 |
|
Per the plan documents, the 2008 Non-Employee Director Stock Option (NEDS) and Employee Stock Option (ESOP) Plans have an automatic increase in the shares available for grant every January the plans are active. The increase in the shares available for grant under the NEDS plan is equal to the lesser of the number of shares issuable upon the exercise of options granted during the preceding calendar year or such number of shares as determined by the Board of Directors. The increase in the shares available for grant under the ESOP plan is equal to 5% of the total shares outstanding at December 31, 2010.
Additional information regarding options outstanding is as follows:
|
|
|
March 31,
|
|
March 31,
|
|
|
Range of exercise prices (per option) |
|
$0.70 -$31.18 |
|
$0.70 - $31.18 |
|
|
Weighted average remaining contractual life (years) |
|
8.67 |
|
8.25 |
|
Employee Stock Purchase Plan
On March 17, 2011, 77,822 shares were purchased in accordance with the Employee Stock Purchase Plan (ESPP). Net proceeds to the Company from the issuance of shares of common stock under the ESPP for the three months ended March 31, 2011 were $286. In January 2011, the number of shares available for grant was increased by 241,442, per the ESPP plan documents. At March 31, 2011, approximately 544,764 shares remain available for purchase under the ESPP.
New Accounting Pronouncements
In January 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements . The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels and the reasons for the transfers. Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). Level 3 reconciliations should present separately information about purchases, sales, issuances and settlements. To date, the Company has not had any assets or liabilities that transferred in or out of fair value hierarchy levels. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliations, which is effective for fiscal years beginning after December 15, 2010. This guidance did not have an impact on the Company’s results of operations or financial position. The Company adopted these sets of guidance effective December 31, 2009 and December 31, 2010, respectively.
In December 2010, the FASB issued ASU No. 2010-29, Intangibles—Goodwill and Other (Topic 350) . The guidance requires entities that have recognized goodwill and have one or more reporting unit whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance defined in ASC 350-20-35-30, Intangibles—Goodwill and Other , which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments are effective for fiscal years beginning after December 15, 2010. This guidance did not have an impact on the Company’s results of operations or financial position. The Company adopted this guidance effective December 31, 2010.
In December 2010, the FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosing of Supplementary Pro Forma Information for Business Combinations . The guidance affects any public entity as defined by ASC 805, Business Combination , which enters into business combinations that are material on an individual or aggregate basis. The comparative financial statements should present and disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. This guidance did not have an impact on the Company’s results of operations or financial position. The Company adopted this guidance effective December 31, 2010.
2. Available-for-Sale Investments
We invest our excess funds in securities issued by the United States government, corporations, banks, municipalities, financial holding companies and in money market funds comprised of these same types of securities. Our cash and cash equivalents and available-for-sale investments are placed with high credit quality financial institutions. Additionally, we diversify our investment portfolio in order to maintain safety and liquidity. We do not hold mortgage-backed securities. As of March 31, 2011, all of our investments will mature within one year. These investments are recorded at fair value, based on quoted market prices, with unrealized gains and losses reported as a separate component of stockholders’ equity.
Investments have been classified as available-for-sale investments. At March 31, 2011, available-for-sale investments are detailed as follows:
|
|
|
Amortized |
|
Gross Unrealized |
|
Gross Unrealized |
|
Estimated |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
||||
|
Corporate debt securities |
|
$ |
16,108 |
|
$ |
1 |
|
$ |
(7 |
) |
$ |
16,102 |
|
|
U.S. Treasury and agency debt securities |
|
8,446 |
|
5 |
|
— |
|
8,451 |
|
||||
|
Total |
|
$ |
24,554 |
|
$ |
6 |
|
$ |
(7 |
) |
$ |
24,553 |
|
At December 31, 2010, available-for-sale investments are detailed as follows:
|
|
|
Amortized |
|
Gross Unrealized |
|
Gross Unrealized |
|
Estimated |
|
||||
|
|
|
Cost |
|
Gains |
|
Losses |
|
Fair Value |
|
||||
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
||||
|
Corporate debt securities |
|
$ |
13,132 |
|
$ |
2 |
|
$ |
(5 |
) |
$ |
13,129 |
|
|
U.S. Treasury and agency debt securities |
|
13,639 |
|
11 |
|
— |
|
13,650 |
|
||||
|
Total |
|
$ |
26,771 |
|
$ |
13 |
|
$ |
(5 |
) |
$ |
26,779 |
|
Net unrealized gains on available-for-sale investments are included as a component of stockholders’ equity and comprehensive loss until realized from a sale or other-than-temporary impairment. The Company recorded net unrealized losses for the three months ended March 31, 2011 and 2010 of $9 and $0, respectively. Realized gains and losses from the sale of securities are determined on a specific identification basis. Purchases and sales of investments are recorded on their trade dates. The Company recorded realized gains for the three months ended March 31, 2011 and 2010 of $1 and $0, respectively. Dividend and interest income are recognized when earned. Interest income for the three months ended March 31, 2011 was $151, which was partially offset by $120 related to amortization of investment premiums.
3. Fair Value Measurements
ASC 820 defines fair value as an exit price that would be received from the sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
· Level 1 — Valuations based on quoted prices for identical assets or liabilities in active markets at the measurement date. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment. Our Level 1 assets consist of cash and money market funds, as well as U.S. Treasury and agency debt securities.
· Level 2 — Valuations based on quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data, such as alternative pricing sources with reasonable levels of price transparency. Our Level 2 assets consist of fixed income securities such as corporate debt securities including commercial paper and corporate bonds.
· Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement. We have not measured the fair value of any of our assets using Level 3 inputs.
No transfers were made into or out of the different category levels, nor did the Company categorize any of its investments as Level 3 at March 31, 2011 and December 31, 2010. We will continue to review our fair value inputs on a quarterly basis.
The fair value of our financial assets subject to the disclosure requirements of ASC 820 was determined using the following levels of inputs at March 31, 2011:
Fair Value Measurements at March 31, 2011
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
||||
|
Cash |
|
$ |
7,110 |
|
$ |
— |
|
$ |
— |
|
$ |
7,110 |
|
|
Money market funds |
|
6,250 |
|
— |
|
— |
|
6,250 |
|
||||
|
Corporate debt securities |
|
— |
|
19,201 |
|
— |
|
19,201 |
|
||||
|
U.S. Treasury and agency debt securities |
|
10,450 |
|
— |
|
— |
|
10,450 |
|
||||
|
Total |
|
$ |
23,810 |
|
$ |
19,201 |
|
$ |
— |
|
$ |
43,011 |
|
The fair value of our financial assets subject to the disclosure requirements of ASC 820 was determined using the following levels of inputs at December 31, 2010:
Fair Value Measurements at December 31, 2010
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
|
Assets: |
|
|
|
|
|
|
|
|
|
||||
|
Cash |
|
$ |
12,681 |
|
$ |
— |
|
$ |
— |
|
$ |
12,681 |
|
|
Money market funds |
|
5,024 |
|
— |
|
— |
|
5,024 |
|
||||
|
Corporate debt securities |
|
— |
|
14,129 |
|
— |
|
14,129 |
|
||||
|
U.S. Treasury and agency debt securities |
|
13,650 |
|
— |
|
— |
|
13,650 |
|
||||
|
Total |
|
$ |
31,355 |
|
$ |
14,129 |
|
$ |
— |
|
$ |
45,484 |
|
4. Integration, Restructuring and Other Charges
2010 Restructuring
During the first quarter of 2010, the Company undertook an initiative to streamline its sales and service organizations and reduce support costs company-wide. It also initiated plans to close its event monitoring facility in Georgia and consolidate it with the Company’s monitoring facilities in Pennsylvania and Minnesota. The Company realized cost efficiencies by undertaking these initiatives.
The restructuring plan involved the elimination of approximately 100 positions. The restructuring activities were substantially complete as of December 31, 2010. The total cost of the restructuring plan was approximately $3,523, all of which resulted in cash charges. The Company incurred restructuring expenses of $1,662 for the three months ended March 31, 2010. As of March 31, 2011, approximately $316 remains accrued.
The Company accounts for expenses associated with exit or disposal activities in accordance with ASC 420, Exit or Disposal Cost Obligations, and records the expenses in Integration, restructuring and other charges in its statement of operations, and records the related accrual in the Accrued liabilities line of its balance sheet.
Other Charges
The Company incurred other charges of $283 for the three months ended March 31, 2010, including legal costs related to the Company’s defense of class-action and patent infringement lawsuits. Additional information regarding legal proceedings can be found in Note 7.
5. Income Taxes
The income tax provision for interim periods is determined using an estimated annual effective tax rate adjusted for discrete items, if any, which are taken into account in the quarterly period in which they occur. The Company reviews and updates its estimated annual effective tax rate each quarter. For the three months ended March 31, 2011, the Company’s estimated annual effective tax rate was zero. Accordingly, the Company recorded no tax expense or benefit for the three months ended March 31, 2011.
As of March 31, 2011, in accordance with ASC 740, the Company maintained a full valuation allowance against net deferred tax assets. The Company will continue to maintain a full valuation allowance until such time it can reasonably estimate the probability of realizing a benefit from the deferred tax assets. The Company implemented the provisions of ASC 740-10 on January 1, 2007 related to accounting for uncertainty in income taxes. There has been no material change to the amount of unrecognized tax expense or benefit reported as of March 31, 2011.
7. Legal Proceedings
On March 5, 2010, West Palm Beach Police Pension Fund filed a putative class action complaint in California Superior Court, San Diego County asserting claims for violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended, against CardioNet, nine current and former officers and directors of CardioNet and six underwriters of CardioNet’s initial public offering (IPO) and/or Secondary Offering (together with the IPO, the “Offerings”). The complaint filed also asserted claims for alleged violations of Sections 25401 and 25501 of the California Corporations Code against defendants James M. Sweeney and Fred Middleton. The plaintiff seeks to bring claims on behalf of all those who acquired the common stock of CardioNet pursuant and/or traceable to the Company’s Offerings. On March 10, 2010, plaintiff filed an Amended Complaint that deleted the claims for violations of the California Corporations Code. The claims are based on purported misrepresentations and omissions in the Registration Statements for the Offerings relating to alleged business decisions made by CardioNet that were supposedly not disclosed to investors and alleged misstatements concerning CardioNet’s business. On April 5, 2010, all defendants removed the case to the Southern District of California, where it is pending. On April 7, 2010, defendants filed a Motion to Transfer the case to the Eastern District of Pennsylvania. On April 23, 2010, the plaintiff moved to remand the case to state court. On March 24, 2011, the court granted the plaintiff’s Motion remanding the case to the Superior Court of the State of California. Consistent with the accounting for contingent liabilities, no accrual has been recorded in the financial statements. The Company believes that the claims are without merit and intends to defend the litigation vigorously.
On September 25, 2009, LifeWatch Services, Inc. (“LifeWatch”), and Card Guard Scientific Survival, Ltd. (“Card Guard”), the licensee and owner, respectively, of U.S. Patent Nos. 7,542,878 B2 (“the ‘878 Patent”) and 5,730,143 (“the ‘143 Patent”) commenced a patent infringement action against CardioNet’s wholly owned subsidiary, Braemar Inc. (“Braemar”), and one of Braemar’s customers, eCardio Diagnostics, LLC (“eCardio”), in the District Court for the Northern District of Illinois, File No. 09-CV-6001. The action alleges that Braemar and eCardio had infringed the ‘878 and ‘143 Patents. Braemar and eCardio have denied those allegations. The Supply Agreement between Braemar and eCardio provides that Braemar will hold eCardio harmless from any liability it incurs in connection with a claim that Braemar’s products violate the intellectual property rights or infringe upon any patent of a third party. Since the commencement of the action, LifeWatch and Card Guard have dismissed their claims relating to alleged infringement of the ‘878 Patent, Card Guard dropped out of the action, and LifeWatch has continued to pursue its claims relating to the alleged infringement of the ‘143 Patent. The ‘143 Patent has been in reexamination proceedings at the U.S. Patent Office since February 19, 2010. During the reexamination, LifeWatch amended all of the claims of the ‘143 Patent in response to the Patent Office’s rejection of all of the claims based on prior art. On February 1, 2011, the Patent Office indicated that the claims as amended during the reexamination will be issued, and on April 6, 2011 indicated that the Reexamination Certificate issued. The Company believes that LifeWatch’s claims under the original ‘143 Patent and under the amended claims of the Reexamination Certificate are without merit and intends to defend the litigation vigorously. The parties currently are in the middle of briefing on claim construction issues. A claim construction hearing date has not yet been set by the Court. Consistent with the accounting for contingent liabilities, no accrual has been recorded in the financial statements. The Company believes that the claims are without merit and intends to defend the litigation vigorously.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2010, and in conjunction with the accompanying quarterly unaudited condensed consolidated financial statements. This discussion contains certain forward-looking statements that involve risks and uncertainties. The Company’s actual results and the timing of certain events could differ materially from those discussed in these forward-looking statements as a result of certain factors, including, but not limited to, those set forth herein and elsewhere in this report and in the Company’s other filings with the Securities and Exchange Commission. See the “Forward-Looking Statements” section at the beginning of this report.
Company Background
CardioNet is a leading provider of ambulatory, continuous, real-time outpatient management solutions for monitoring relevant and timely clinical information regarding an individual’s health. The Company’s efforts have initially been focused on the diagnosis and monitoring of cardiac arrhythmias, or heart rhythm disorders, with a solution that it markets as Mobile Cardiac Outpatient Telemetry™ (MCOT™). The Company actively began developing its product platform in April 2000, and since that time, has devoted substantial resources in advancing its patient monitoring solutions. The platform successfully integrates a wireless data transmission network, internally developed software, FDA-cleared algorithms and medical devices, and a 24-hour monitoring service center. In addition to its MCOT service offerings, the Company offers event, Holter and pacemaker monitoring services.
The Company’s Conshohocken location has been an approved Independent Diagnostic Testing Facility (“IDTF”) by Medicare since it received 510(k) clearance for the first and second generation of its core MCOT devices in 2002. The CardioNet Monitoring Center commenced operations in Conshohocken, Pennsylvania in 2002, concurrent with its first FDA approval, and all of the Company’s MCOT arrhythmia monitoring activities are currently conducted at that location. The Company received FDA 510(k) clearance for the proprietary algorithm included in its third generation product, or C3, in October 2005. Subsequently in November 2006, the Company received FDA 510(k) clearance for its C3 system which it has incorporated as part of its monitoring solution. The Company received FDA 510(k) clearance for its next generation platform in April 2010 and expects the product launch to occur in 2011. The Company continues to pursue innovation of new and existing medical solutions through investments in research and development.
In December 2010, the Company completed its acquisition of Biotel Inc., and its wholly owned subsidiaries, Braemar, Inc. and Agility Centralized Research Services, Inc. (referred to herein as “Biotel,” “Braemar” or “Agility”). The acquisition gave the Company the ability to develop, manufacture, test and market medical devices and related software to medical companies. Additionally, the acquisition also gave the Company access to established customer relationships, entry into the clinical trial service business and the ability to diversify its product and service offerings.
Braemar is engaged in the manufacture and sale of event and Holter medical devices, as well as the repair of such devices. Braemar’s customers include distributors and other resellers, physicians, clinics and hospitals. Agility is involved primarily in contract research monitoring services. Its customers include universities, hospitals, physicians, and private companies that are involved in the research and testing of pharmaceuticals, products and medical procedures.
Reimbursement
Effective January 1, 2009, the American Medical Association (“AMA”) established the Category I CPT codes (93228 and 93229) that cover MCOT services. Highmark Medicare Services (“HMS”), a contract service provider for the Centers for Medicare and Medicaid Services (“CMS”), was responsible for setting the reimbursement rate on behalf of CMS for code 93229, which is the code for the technical component of our services. The new billing codes allow for automated claims adjudication, substantially simplifying the reimbursement process for physicians and payors compared to the previous process. Reimbursement prior to the use of the new CPT codes was obtained through non-specific billing codes which require various narratives that, in most cases, involve semi-automated or manual processing, as well as additional review by payors.
After receiving the CPT code in the first quarter of 2009, the Company received pressure from several commercial payors to renegotiate reimbursement rate contracts. This pressure led to a substantial decline in our average commercial reimbursement rates in the first half of 2009. During the second half of 2009 and throughout the first half of 2010 we saw commercial reimbursement rates stabilize. The Company experienced a decline in commercial reimbursement rates during the second half of 2010. However, the Company experienced an increase in the first quarter of 2011 as a result of fewer non-contracted commercial patients. The Company expects to experience some fluctuation in its average commercial reimbursement rates due to variations in payor mix. Overall, we expect the average commercial reimbursement rates to remain stable or decline over time.
On July 10, 2009, HMS announced a reduction in the reimbursement rate for our MCOT services to $754 per service, a reduction of approximately 33%. This new rate went into effect on September 1, 2009. The decline in reimbursement rate has had a negative impact on the Company’s revenue and operating results. The Company estimates that the rate reduction caused a reduction in revenue for the year ended December 31, 2010, of approximately $25.4 million. Several strategic initiatives have been implemented, including cost reduction initiatives, process improvement and facility consolidation in an effort to improve the Company’s operating performance given the reduced reimbursement rate.
On November 2, 2010, CMS published The Medicare Program Final Rule establishing a national rate for the MCOT technology (CPT Code 93229). CMS valued the CPT code at 20.14 relative value units, which was multiplied by an annually determined conversion factor to establish the amounts paid under the physician fee schedule. Using the formula and values currently in place, the Company’s national rate is approximately $739 per service, which became effective January 1, 2011. This is a decrease of approximately 2% from the Company’s local carrier rate of $754 per service that was previously established by HMS. The 2% rate decline did not have a material impact on revenue for the three months ended March 31, 2011.
We have successfully secured contracts with most national and regional commercial payors. As of March 31, 2011, we have 313 MCOT contracts with commercial payors, compared to 304 at December 31, 2010. The current estimated total of over 210 million covered lives for Medicare and commercial lives for which we had reimbursement contracts as of March 31, 2011 represents approximately 79% of the total covered lives in the United States. The MCOT contracts also cover event, Holter and pacemaker service pricing. In addition, as of March 31, 2011 there were approximately 167 contracts with commercial payors that pertained only to event, Holter and pacemaker service pricing, and did not cover MCOT. The majority of the remaining covered lives are insured by a small number of large commercial insurance companies that deemed MCOT to be experimental in nature and do not currently reimburse us for services provided to their beneficiaries.
Patient and Other Revenue
Patient revenue includes revenue from MCOT, event, Holter and pacemaker monitoring services. Other revenue includes revenue from product sales, product repairs, contract research services and all other revenue that is not patient related.
Accounts Receivable
Receivables are recorded at the time revenue is recognized, net of contractual allowances and are presented on the balance sheet net of allowance for doubtful accounts. The Company performs analyses to evaluate the net realizable value of accounts receivable as of the balance sheet date. Specifically, the Company considers historical realization data, accounts receivable aging trends, other operating trends and relevant business conditions. Because of continuing changes in the health care industry and third party reimbursement, it is possible that our estimates could change, which could have a material impact on our operations and cash flows.
The ultimate collection of accounts receivable may not be known for several months after services have been provided and billed. The Company records bad debt expense based on the aging of the receivable using historical Company-specific data. The percentages and amounts used to record bad debt expense and the allowance for doubtful accounts are supported by various methods and analyses, including current and historical cash collections, and bad debt write-offs. The Company will write-off receivables when the likelihood for collection is remote, the receivables have been fully reserved, and when the Company believes collection efforts have been fully exhausted and it does not intend to devote additional resources in attempting to collect. Prior to the third quarter of 2010, the Company performed an annual accounts receivable write-off in the fourth quarter. Beginning in the third quarter 2010, the Company has determined it will evaluate outstanding receivables and perform write-offs quarterly going forward. The Company wrote off $4.0 million of receivables in the first quarter of 2011. The impact was a reduction of gross receivables and a reduction in the allowance for doubtful accounts. There was no impact on the net receivables reported on the balance sheet as of March 31, 2011, or bad debt expense reported on the statement of operations for the three ended March 31, 2011, as a result of this write-off.
Restructuring Activities
During the first quarter of 2010, the Company undertook an initiative to streamline its sales and service organizations and reduce support costs Company-wide. It also initiated plans to close its event monitoring facility in Georgia and consolidate it with the Company’s monitoring facilities in Pennsylvania and Minnesota. The Company realized cost efficiencies by undertaking these initiatives. The total cost of the restructuring plan was approximately $3.5 million. The Company incurred restructuring expenses of $1.7 million for the three months ended March 31, 2010. The restructuring activities were substantially complete as of December 31, 2010.
nPhase Supplier Agreement
The Company established a relationship with nPhase, formerly Qualcomm Inc., in May 2003. nPhase is the sole provider of wireless cellular data connectivity solutions and data hosting and queuing services for the Company’s monitoring network. The Company has no fixed or minimum financial commitment as it relates to network usage or volume activity. However, if the Company fails to maintain an agreed-upon number of active cardiac monitoring devices on the nPhase network or it utilizes the monitoring and communications services of a provider other than nPhase, nPhase has the right to terminate its relationship with the Company and/or the Company may be subject to penalties.
Results of Operations
Three Months Ended March 31, 2011 and 2010
Revenues. Total revenues for the three months ended March 31, 2011 increased to $34.0 million from $31.8 million for the three months ended March 31, 2010, an increase of $2.2 million, or 6.9%. The increase in revenue was primarily driven by the additional $3.6 million in revenue generated from product sales, product repairs and contract research services, as well as an increase in event and Holter revenue of $0.3 million. MCOT™ revenue declined $1.7 million substantially due to a decrease in MCOT™ reimbursement rates.
Gross Profit. Gross profit increased to $20.3 million for the three months ended March 31, 2011 from $20.1 million for the three months ended March 31, 2010. The increase of $0.2 million was largely due to $1.6 million of gross profit generated from product sales, partially offset by lower MCOT reimbursement rates totaling $1.2 million and lower event and Holter volume due to the lower reimbursement rates as well as the inclusion of the lower margin product sales. Gross profit as a percentage of revenue declined to 59.8% for the three months ended March 31, 2011 compared to 63.1% for the three months ended March 31, 2010.
General and Administrative Expense. General and administrative expense remained constant at $9.7 million for the three months ended March 31, 2011 and 2010. As a percent of total revenues, general and administrative expense was 28.5% for the three months ended March 31, 2011 compared to 30.4% for the three months ended March 31, 2010.
Sales and Marketing Expense. Sales and marketing expense was $8.1 million for the three months ended March 31, 2011 compared to $8.0 million for the three months ended March 31, 2010. The increase of $0.1 million, or 0.9%, was due to higher payroll and other employee related expenses assumed in connection with the Biotel acquisition. As a percent of total revenues, sales and marketing expense was 23.7% for the three months ended March 31, 2011 compared to 25.1% for the three months ended March 31, 2010.
Bad Debt Expense. Bad debt expense was $2.4 million for the three months ended March 31, 2011 compared to $4.6 million for the three months ended March 31, 2010. The decrease of $2.2 million, or 48.5%, was due to lower gross receivable balances moving into older aging brackets with higher reserve percentages, which was a result of improved cash collections. The bad debt expense recorded was based upon an evaluation of historical collection experience of accounts receivable, by age, for various payor classes. As a percentage of net patient service revenues, bad debt expense was 7.9% for the three months ended March 31, 2011 compared to 14.6% for the three months ended March 31, 2010.
Research and Development Expense. Research and development expense was $1.7 million for the three months ended March 31, 2011 compared to $1.2 million for the three months ended March 31, 2010. The increase of $0.5 million, or 35.3%, was due primarily to work associated with the launch of our next generation MCOT platform. Additionally, we experienced higher payroll and other employee related expenses of $0.3 million assumed in connection with the Biotel acquisition. As a percent of total revenues, research and development expense was 4.9% for the three months ended March 31, 2011 compared to 3.9% for the three months ended March 31, 2010.
Integration, Restructuring and Other Charges. The Company incurred other charges related to legal costs and other miscellaneous items of $0.1 million for the three months ended March 31, 2011. Integration, restructuring and other charges were 0.4% of total revenues for the three months ended March 31, 2011.
The Company incurred restructuring costs of $1.7 million and other charges of $0.3 million for the three months ended March 31, 2010. The restructuring costs included $1.4 million of severance and employee related costs and $0.3 million of other charges related to the 2010 restructuring plan. The 2010 restructuring plan included the consolidation of the Company’s sales and service organizations, the closure of the Company’s event monitoring facility in Georgia and consolidation of its monitoring facilities in Pennsylvania and Minnesota, and an overall reduction of administrative costs Company-wide. The other charges related to legal costs and other miscellaneous items. Integration, restructuring and other charges were 6.1% of total revenues for the three months ended March 31, 2010.
Net Loss. The Company incurred a net loss of $1.6 million for the three months ended March 31, 2011 compared to a net loss of $5.4 million for the three months ended March 31, 2010.
Liquidity and Capital Resources
The Company’s Annual Report on Form 10-K for the year ended December 31, 2010 includes a detailed discussion of our liquidity, contractual obligations and commitments. The information presented below updates and should be read in conjunction with the information disclosed in that Form 10-K.
As of March 31, 2011, our principal source of liquidity was cash and cash equivalents of $18.5 million, available-for-sale investments of $24.5 million and net accounts receivable of $29.5 million. The Company has no short or long-term debt and does not anticipate needing to secure financing from external sources for cash to operate the business. The Company had working capital of $62.9 million as of March 31, 2011, up from $60.6 million at December 31, 2010, driven mostly by higher net accounts receivable. We believe that our existing cash and cash equivalent balances will be sufficient to meet our anticipated cash requirements for the foreseeable future.
The Company used $2.2 million of cash from operations for the three months ended March 31, 2011. Cash was used primarily to fund the Company’s ongoing operations during the three month period that resulted in a $1.6 million net loss, and to fund its net working capital requirements. The Company’s working capital requirements were driven primarily by a decrease in accounts payable and an increase in accounts receivable. The net loss and net working capital requirements were partially offset by $4.6 million of non-cash items related to depreciation, amortization and stock compensation expense.
The Company used $0.4 million for the investment in medical devices for use in its ongoing operations for the three months ended March 31, 2011. In addition, the Company received $14.8 million of receipts from the maturity of certain of its short term investments, and used $12.7 million of the receipts from maturity for the purchase of available-for-sale securities for the three months ended March 31, 2011. The Company believes that the available-for-sale investments can be converted to cash in a short period of time, if needed.
If the Company determines that it needs to raise additional capital, such capital may not be available on reasonable terms, or at all. If the Company raises additional funds by issuing equity securities, its existing stockholders’ ownership will be diluted. If the Company raises additional funds by incurring debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict the ability to operate its business.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Our cash and cash equivalents as of March 31, 2011 were $18.5 million and consisted primarily of cash and money market funds with maturities of less than 90 days. The Company also has $24.5 million of available-for-sale securities with maturities of less than one year. The Company believes that these securities can be converted to cash in a short period of time, if needed. 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.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Exchange Act as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2011 to ensure that information required to be disclosed in Company reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms and (ii) accumulated and communicated to management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three months ending March 31, 2011, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
On March 5, 2010, West Palm Beach Police Pension Fund filed a putative class action complaint in California Superior Court, San Diego County asserting claims for violations of Sections 11, 12 and 15 of the Securities Act of 1933, as amended, against CardioNet, nine current and former officers and directors of CardioNet and six underwriters of CardioNet’s initial public offering (IPO) and/or Secondary Offering (together with the IPO, the “Offerings”). The complaint filed also asserted claims for alleged violations of Sections 25401 and 25501 of the California Corporations Code against defendants James M. Sweeney and Fred Middleton. The plaintiff seeks to bring claims on behalf of all those who acquired the common stock of CardioNet pursuant and/or traceable to the Company’s Offerings. On March 10, 2010, plaintiff filed an Amended Complaint that deleted the claims for violations of the California Corporations Code. The claims are based on purported misrepresentations and omissions in the Registration Statements for the Offerings relating to alleged business decisions made by CardioNet that were supposedly not disclosed to investors and alleged misstatements concerning CardioNet’s business. On April 5, 2010, all defendants removed the case to the Southern District of California, where it is pending. On April 7, 2010, defendants filed a Motion to Transfer the case to the Eastern District of Pennsylvania. On April 23, 2010, the plaintiff moved to remand the case to state court. On March 24, 2011, the court granted the plaintiff’s Motion remanding the case to the Superior Court of the State of California. Consistent with the accounting for contingent liabilities, no accrual has been recorded in the financial statements. The Company believes that the claims are without merit and intends to defend the litigation vigorously.
On September 25, 2009, LifeWatch Services, Inc. (“LifeWatch”), and Card Guard Scientific Survival, Ltd. (“Card Guard”), the licensee and owner, respectively, of U.S. Patent Nos. 7,542,878 B2 (“the ‘878 Patent”) and 5,730,143 (“the ‘143 Patent”) commenced a patent infringement action against CardioNet’s wholly owned subsidiary, Braemar Inc. (“Braemar”), and one of Braemar’s customers, eCardio Diagnostics, LLC (“eCardio”), in the District Court for the Northern District of Illinois, File No. 09-CV-6001. The action alleges that Braemar and eCardio had infringed the ‘878 and ‘143 Patents. Braemar and eCardio have denied those allegations. The Supply Agreement between Braemar and eCardio provides that Braemar will hold eCardio harmless from any liability it incurs in connection with a claim that Braemar’s products violate the intellectual property rights or infringe upon any patent of a third party. Since the commencement of the action, LifeWatch and Card Guard have dismissed their claims relating to alleged infringement of the ‘878 Patent, Card Guard dropped out of the action, and LifeWatch has continued to pursue its claims relating to the alleged infringement of the ‘143 Patent. The ‘143 Patent has been in reexamination proceedings at the U.S. Patent Office since February 19, 2010. During the reexamination, LifeWatch amended all of the claims of the ‘143 Patent in response to the Patent Office’s rejection of all of the claims based on prior art. On February 1, 2011, the Patent Office indicated that the claims as amended during the reexamination will be issued, and on April 6, 2011 indicated that the Reexamination Certificate issued. The Company believes that LifeWatch’s claims under the original ‘143 Patent and under the amended claims of the Reexamination Certificate are without merit and intends to defend the litigation vigorously. The parties currently are in the middle of briefing on claim construction issues. A claim construction hearing date has not yet been set by the Court. Consistent with the accounting for contingent liabilities, no accrual has been recorded in the financial statements. The Company believes that the claims are without merit and intends to defend the litigation vigorously.
In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, as well as the information contained in this Quarterly Report and our other reports and registration statements filed with the SEC. There have been no material changes from the risk factors previously disclosed under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Not applicable.
EXHIBIT INDEX
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Exhibit
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10.1 |
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Employment Agreement, dated February 7, 2011, between the Registrant and Peter Ferola.* |
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31.1 |
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Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended. |
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31.2 |
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Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended. |
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32.1 |
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Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* Filed herewith.
CardioNet, Inc.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CARDIONET, INC. |
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Date: May 6, 2011 |
By: |
/s/ Heather C. Getz |
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Heather C. Getz, CPA |
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Chief Financial Officer |
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(Principal Financial Officer and authorized officer of the Registrant) |
Exhibit 10.1
CARDIONET, INC.
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this “Agreement” ) is made and entered into effective as of February 7, 2011 (the “Effective Date” ) by and among CARDIONET, INC. ( the “Company” ) and PETER F. FEROLA (the “Executive” ) . The Company and Executive are hereinafter collectively referred to as the “Parties” , and individually referred to as a “Party”. This Agreement supersedes all prior and contemporaneous oral or written employment agreements or arrangements between Executive and the Company.
RECITALS
A. The Company desires assurance of the association and services of Executive in order to retain Executive’s experience, skills, abilities, background and knowledge, and is willing to continue to engage Executive’s services on the terms and conditions set forth in this Agreement.
B . Executive desires to continue to be in the employ of the Company, and is willing to accept such continued employment on the terms and conditions set forth in this Agreement.
AGREEMENT
In consideration of the foregoing Recitals and the mutual promises and covenants herein contained, and for other good and valuable consideration, the Parties, intending to be legally bound, agree as follows:
1. EMPLOYMENT.
1.1 Title. Effective as of the Effective Date, Executive’s position shall be the Company’s General Counsel/Senior Vice President, Corporate Development subject to the terms and conditions set forth in this Agreement.
1.2 Term. The term of this Agreement shall begin on the Effective Date and shall continue until it is terminated pursuant to Section 4 herein (the “Term” ) .
1.3 Duties. Executive shall do and perform all services, acts or things necessary or advisable to manage and conduct the business of the Company and that are normally associated with the position of General Counsel/Senior Vice President, Corporate Development, Executive shall report to the Chief Executive Officer of the Company.
1.4 Policies and Practices. The employment relationship between the Parties shall be governed by this Agreement and by the policies and practices established by the Company and the Company’s Board of Directors, or any committee thereof to which the Company’s Board of Directors has delegated responsibility for compensation matters, (the “Board” ) . In the event that the terms of this Agreement differ from or are in conflict with the Company’s policies or practices or the Company’s Employee Handbook, this Agreement shall control.
1.5 Location. Unless the Parties otherwise agree in writing, during the Term Executive shall perform the services Executive is required to perform pursuant to this Agreement at the Company’s offices in Conshohocken, Pennsylvania; provided, however, that the Company may from time to time require Executive to travel temporarily to other locations in connection with the Company’s business.
2. LOYAL AND CONSCIENTIOUS PERFORMANCE; NONCOMPETITION.
2.1 Loyalty. During Executive’s employment by the Company, Executive shall devote Executive’s full business energies, interest, abilities and productive time to the proper and efficient performance of Executive’s duties under this Agreement.
2.2 Covenant not to Compete. During the Term, and during any period thereafter in which Executive is receiving severance benefits from the Company, Executive shall not engage in competition with the Company and/or any of its Affiliates (as defined below), either directly or indirectly, in any manner or capacity, as adviser, principal, agent, affiliate, promoter, partner, officer, director, employee, stockholder, owner, co-owner, consultant, or member of any association or otherwise, in any phase of the business of developing, manufacturing and marketing of products or services that are in the same field of use or which otherwise compete with the products or services of the Company, except with the prior written consent of the Board. For purposes of this Agreement, “Affiliate,” means, with respect to any specific entity, any other entity that, directly or indirectly, through one or more intermediaries, controls, is controlled by or is under common control with such specified entity.
2.3 Agreement not to Participate in Company’s Competitors. During the Term, Executive agrees not to acquire, assume or participate in, directly or indirectly, any position, investment or interest known by Executive to be adverse or antagonistic to the Company, its business, or prospects, financial or otherwise, or in any company, person, or entity that is, directly or indirectly, in competition with the business of the Company or any of its Affiliates. Ownership by Executive, in professionally managed funds over which Executive does not have control or discretion in investment decisions, or as a passive investment, of less than two percent (2%) of the outstanding shares of capital stock of any corporation with one or more classes of its capital stock listed on a national securities exchange or publicly traded on a national securities exchange or in the over-the-counter market shall not constitute a breach of this Section 2.3.
3. COMPENSATION OF EXECUTIVE.
3.1 Base Salary. The Company shall pay Executive a base salary at the annualized rate of Two Hundred Eighty Thousand Dollars ($280,000) (the “Base Salary” ) , less payroll deductions and all required withholdings, payable in regular periodic payments in accordance with the Company’s normal payroll practices. The Base Salary shall be prorated for any partial year of employment on the basis of a three hundred sixty-five (365) day fiscal year.
3.2 Bonus Payments.
3.2.1 In consideration for the Executive’s entry into this Agreement, the Company shall pay to the Executive Twenty-Five Thousand Dollars ($25,000) in a lump sum within thirty (30) days of the date of this Agreement. If the Executive resigns without Good Reason or is terminated by the Company for Cause within one hundred eighty (180) days of the Effective Date, the Executive shall repay to the Company a pro-rata portion of the bonus payment described in this Section 3.2.1. The amount to be repaid shall be calculated by multiplying Twenty-five Thousand Dollars ($25,000) by a fraction, the numerator of which is the difference between the number of days that have elapsed since the Effective Date and one hundred eighty (180) and the denominator of which is one hundred eighty (180).
3.2.2 In addition to the Executive’s Base Salary, Executive shall be eligible to receive an annual discretionary bonus under the Company’s Management Incentive Program beginning with the 2011 fiscal year. The bonus amount Executive may receive, if any, shall be discretionary and based upon the target bonus amount determined by the Board and the other criteria set forth in the Management Incentive Program as determined by and evaluated by the Board in its sole and absolute discretion. Beginning with the 2011 fiscal year, the Board has determined that the Executive’s target bonus amount is fifty percent (50%) of Base Salary. For 2011, any bonus earned by the Executive shall be prorated for the Executive’s partial year of employment on the basis of a three hundred sixty-five (365) day fiscal year. Any bonus earned by the Executive shall be paid in accordance with the Company’s Management Incentive Program.
3.3 Long Term Incentive Plan. In addition to the Executive’s Base Salary and annual discretionary bonus opportunity described in Sections 3.1 and 3.2.2 above, the Executive shall be eligible to participate in the Company’s Long Term Incentive Plan (the “LTIP”) beginning with the 2012 fiscal year. Under the LTIP, the Executive shall be eligible to receive annual stock option and restricted stock awards for each fiscal year based upon the Adjusted Dollar Value (as defined in the LTIP) as determined by and evaluated by the Board in its sole and absolute discretion. For the 2012 fiscal year, for purposes of determining the Executive’s Adjusted Dollar Value, the Board has determined that the Executive’s target dollar value is fifty percent (50%) of Base Salary. For 2012, any award under the LTIP shall be prorated for the Executive’s partial year of employment on the basis of a three hundred sixty-five (365) day fiscal year. The Executive’s receipt of any awards under the LTIP shall be subject in all respects to the terms and conditions of the LTIP, as in effect from time to time.
3.4 Initial Equity Grant. Contemporaneously with this Agreement, pursuant to the Company’s 2008 Equity Incentive Plan (the “Equity Plan”), the Company shall grant to the Executive a stock option (which shall be treated as an incentive stock option to the maximum extent permissible and as a nonqualified stock option as to any remainder) to purchase Seventy-Five Thousand (75,000) shares of common stock of the Company, subject to the restrictions and conditions set forth in the Equity Plan and applicable Incentive Stock Option Agreement. The foregoing option shall have an exercise price equal to the closing price of a share of common stock of the Company on the Effective Date and shall vest and become exercisable as follows: twenty-five percent (25%) of the shares subject to the option shall vest on the first anniversary of the date of grant and an additional twenty-five percent (25%) of the shares subject to the option shall vest and become exercisable on each of the second, third and fourth anniversaries thereafter; provided that the Executive remains in the Continuous Service (as defined in the Equity Plan) of the Company as of each applicable vesting date.
3.5 Expense Reimbursements. The Company shall reimburse Executive for all reasonable business expenses Executive incurs in conducting his duties hereunder, pursuant to the Company’s usual expense reimbursement policies, but in no event later than thirty (30) days after the end of the calendar month following the month in which such expenses were incurred by Executive; provided that Executive supplies the appropriate substantiation for such expenses no later than the end of the calendar month following the month in which such expenses were incurred by Executive.
3.6 Relocation. The Company shall pay to the Executive within thirty (30) days of this Agreement a lump sum amount calculated such that, after taking into account all applicable federal, state and local employment taxes, and income taxes, (all computed at the highest applicable marginal rate), results in receipt by Executive, on an after tax basis, of an amount equal to $60,000 to cover all expenses associated with the Executive’s relocation to the Philadelphia metropolitan area. If the Executive resigns without Good Reason or is terminated by the Company for Cause prior to the first anniversary of the Effective Date, the Executive shall repay to the Company a pro rata portion of the payment described in this Section 3.6. The amount to be repaid shall be calculated by multiplying Sixty Thousand Dollars ($60,000) by a fraction, the numerator of which is the difference between the number of days that have elapsed since the Effective Date and three hundred sixty-five (365) and the denominator of which is three hundred sixty-five (365).
3.7 Changes to Compensation. Executive’s compensation shall be reviewed periodically and may be changed from time to time in the Company’s sole discretion.
3.8 Employment Taxes. All of Executive’s compensation shall be subject to customary withholding taxes and any other employment taxes as are commonly required to be collected or withheld by the Company.
3.9 Benefits. Executive shall, in accordance with Company policy and the terms of the applicable plan documents, be eligible to participate in benefits under any benefit plan or arrangement that may be in effect from time to time and made available to the Company’s senior management employees. Executive shall also be eligible for paid vacation and paid Company holidays in accordance with Company policy.
3.10 Indemnification. The Company shall, to the maximum extent permitted by law, indemnify and hold Executive harmless against any costs and expenses, including reasonable attorneys’ fees, judgments, fines, settlements and other amounts incurred in connection with any proceeding or investigation arising out of, by reason of or relating to Executive’s employment by the Company. The Company shall also advance to Executive any costs and expenses incurred in defending any such proceeding to the maximum extent permitted by law. The Company shall also provide Executive with coverage as a named insured under a directors and officers liability insurance policy maintained for the Company’s directors and officers. The Company shall continue to maintain directors and officers liability insurance for the benefit of Executive during the Term and for at least three (3) years following the termination
of Executive’s employment with the Company. This obligation to provide insurance and indemnify Executive shall survive expiration or termination of this Agreement with respect to proceedings or threatened proceedings based on acts or omissions of Executive occurring during Executive’s employment with the Company or with any of its Affiliates. Such obligations shall be binding upon the Company’s successors and assigns and shall inure to the benefit of Executive’s heirs and personal representatives.
4. TERMINATION.
4.1 Termination by the Company. Executive’s employment with the Company is at will and may be terminated by the Company at any time and for any reason, or for no reason, including, but not limited to, under the following conditions. Upon any termination by the Company, Executive agrees to resign all positions, including as an officer and, if applicable, as a director or member of the Board, related to the Company and its parents, subsidiaries and Affiliates.
4.1.1 Termination by the Company for Caus e . The Company may terminate Executive’s employment under this Agreement for “Cause” (as defined below) by delivery of written notice to Executive. Any notice of termination given pursuant to this Section 4.1.1 shall effect termination as of the date of the notice, or as of such other date as specified in the notice.
4.1.2 Termination by the Company without Cause. The Company may terminate Executive’s employment under this Agreement without Cause at any time and for any reason, or for no reason. Such termination shall be effective on the date Executive is so informed, or as otherwise specified by the Company.
4.2 Termination by Executive. Executive’s employment with the Company is at will and may be terminated by Executive at any time and for any reason, or for no reason, including, but not limited to, under the following conditions. Upon any termination by Executive, Executive agrees to resign all positions, including as an officer and, if applicable, as a director or member of the Board, related to the Company and its parents, subsidiaries and Affiliates.
4.2.1 Termination by Executive for Good Reason. Executive may terminate his employment under this Agreement for “Good Reason” (as defined below) in accordance with the procedures specified in Section 4.6.2 below.
4.2.2 Without Good Reason. Executive may terminate Executive’s employment hereunder for other than Good Reason upon thirty (30) days’ written notice to the Company.
4.3 Termination for Death or Complete Disability. Executive’s employment with the Company shall automatically terminate effective upon the date of Executive’s death. In addition, subject to the requirements of applicable law, the Company may terminate Executive’s employment due to Executive’s Complete Disability (as defined below).
4.4 Termination by Mutual Agreement of the Parties . Executive’s employment with the Company may be terminated at any time upon a mutual agreement in writing of the Parties. Any such termination of employment shall have the consequences specified in such agreement.
4.5 Compensation Upon Termination.
4.5.1 Death or Complete Disability. If, during the Term, Executive’s employment shall be terminated by the Company on account of Executive’s Complete Disability as provided in Section 4.3 or due to Executive’s death, the Company shall pay to Executive, or to Executive’s heirs, as applicable, Executive’s Base Salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of termination, less standard deductions and withholdings. The Company shall thereafter have no further obligations to Executive and/or to Executive’s heirs under this Agreement, except as otherwise provided by law.
4.5.2 With Cause or Without Good Reason. If, during the Term, Executive’s employment is terminated by the Company for Cause, or Executive terminates Executive’s employment hereunder without Good Reason, the Company shall pay Executive’s Base Salary and accrued and unused vacation benefits earned through the date of termination at the rate in effect at the time of termination, less standard deductions and withholdings. The Company shall thereafter have no further obligations to Executive under this Agreement, except as otherwise provided by law.
4.5.3 Without Cause or For Good Reason. If, during the Term, the Company terminates Executive’s employment without Cause or Executive resigns Executive’s employment for Good Reason, the Company shall pay Executive’s Base Salary and accrued and unused vacation earned through the date of termination, at the rate in effect at the time of termination, less standard deductions and withholdings. In addition, subject to Executive (a) furnishing to the Company an executed waiver and release of claims in the form attached hereto as Exhibit A (or in such other form as may be specified by the Company in order to comply with then-existing legal requirements to effect a valid release of claims) (the “Release” ) ; and (b) allowing the Release to become effective in accordance with its terms, then Executive shall be entitled to the following:
(i) payment of (a) an amount equal to one times (1.0x) Executive’s annual Base Salary in effect at the time of termination (but determined prior to any reduction in Base Salary that would give rise to Executive’s right to voluntarily resign for “Good Reason” pursuant to Section 4.6.2), less required deductions and withholdings, and (b) an amount equal to one times (1.0x) Executive’s on-target annual performance incentive bonus in effect at the time of termination, less required deductions and withholdings, such amounts described in (a) and (b) hereof to be paid in installments over twelve (12) months following the date of Executive’s termination in accordance with the Company’s payroll practices commencing within sixty (60) days of the date of Executive’s termination;
(ii) if the date of Executive’s termination is within the thirty (30) days immediately preceding or the twelve (12) months immediately following a Corporate Transaction (as defined below), the vesting of all equity awards granted to Executive prior to the date of termination shall accelerate such that all such awards shall be deemed fully vested and immediately exercisable; and
(iii) continued participation in the medical, dental and vision plans in which Executive (and where applicable, Executive’s spouse and dependents) was enrolled as of the date of Executive’s termination until the earlier of: (a) the date that is twelve (12) months after the date of Executive’s termination, or (b) the date upon which Executive becomes eligible to enroll in any similar plan offered or provided by an employer other than the Company, at the same premium rates and cost sharing as may be charged from time to time for employees generally, as if Executive had continued in employment during such period. Executive agrees to immediately notify the Company in writing in the event Executive becomes eligible to so enroll.
4.6 Definitions. For purposes of this Agreement, the following terms shall have the following meanings:
4.6.1 Complete Disability. “Complete Disability” shall mean the inability of Executive to perform Executive’s duties under this Agreement, even with reasonable accommodation, because Executive has become permanently disabled within the meaning of any policy of disability income insurance covering employees of the Company then in force. In the event the Company has no policy of disability income insurance covering employees of the Company in force when Executive becomes disabled, the term “Complete Disability” shall mean the inability of Executive to perform Executive’s duties under this Agreement, whether with or without reasonable accommodation, by reason of any incapacity, physical or mental, which the Company, based upon medical advice or an opinion provided by a licensed physician acceptable to the Company, determines to have incapacitated Executive from satisfactorily performing all of Executive’s usual services for the Company, with or without reasonable accommodation, for a period of at least one hundred twenty (120) days during any twelve (12) month period (whether or not consecutive). Based upon such medical advice or opinion, the determination of the Company shall be final and binding and the date such determination is made shall be the date of such Complete Disability for purposes of this Agreement.
4.6.2 Good Reason. “Good Reason” for Executive to terminate Executive’s employment hereunder shall mean the occurrence of any of the following events without Executive’s consent:
(i) a change in Executive’s title that is accompanied by a material reduction in Executive’s duties, authority, or responsibilities relative to Executive’s duties, authority, or responsibilities in effect immediately prior to such reduction;
(ii) the relocation of Executive’s principal business location to a point that requires a one-way increase of Executive’s commuting distance of more than fifty (50) miles; or
(iii) a material reduction by the Company of Executive’s Base Salary as initially set forth herein or as the same may be increased from time to time;
(iv) failure of the Company to obtain the agreement from any successor to assume and agree to perform the Company’s obligations under this Agreement;
provided, however , that such termination by Executive shall only be deemed for Good Reason pursuant to the foregoing definition if: (A) Executive gives the Company written notice of the intent to terminate for Good Reason within thirty (30) days following the first occurrence of the condition(s) that Executive believes constitutes Good Reason, which notice shall describe such condition(s); (B) the Company fails to remedy such condition(s) within thirty (30) days following receipt of the written notice (the “Cure Period” ) ; and (C) Executive terminates his employment within thirty (30) days following the end of the Cure Period.
4.6.3 Cau s e. “Cause” for the Company to terminate Executive’s employment hereunder shall mean the occurrence of any of the following events, as determined by the Company, in its sole discretion:
(i) Executive’s willful and repeated failure to satisfactorily perform Executive’s job duties;
(ii) Executive’s willful commission of an act that materially injures the business of the Company;
(iii) Executive’s willful refusal or failure to follow lawful and reasonable directions of the Board or the appropriate individual to whom Executive reports;
(iv) Executive’s conviction of, or plea of nolo contendere to, any felony involving moral turpitude;
(v) Executive’s engaging or in any manner participating in any activity which is directly competitive with or injurious to the Company or any of its Affiliates or which violates any material provisions of Sections 2 and/or 5 hereof or the PITA (as defined in Section 5);
(vi) Executive’s commission of any fraud against the Company, its Affiliates, employees, agents or customers or use or intentional appropriation for Executive’s personal use or benefit of any funds or properties of the Company not authorized by the Board to be so used or appropriated; or
(vii) Executive’s material breach of or willful failure to comply with Company policies, including but not limited to equal employment opportunity or harassment policies, insider trading policies, code of ethics or conflict of interest policies, non-disclosure and confidentiality policies, travel and expense policies, workplace violence policies, Sarbanes-Oxley compliance policies, policies governing preparation and approval of financial statements, and/or policies governing the making of financial commitments on behalf of the Company.
4.6.4 Corporate Transaction. A “Corporate Transaction” is an Acquisition or Asset Transfer of the Company. An “Acquisition” shall mean (A) any consolidation or merger of the Company with or into any other corporation or other entity or person, or any other corporate reorganization, in which the capital stock of the Company
immediately prior to such consolidation, merger or reorganization, represents less than 50% of the voting power of the surviving entity (or, if the surviving entity is a wholly owned subsidiary, its parent) immediately after such consolidation, merger or reorganization; or (B) any transaction or series of related transactions to which the Company is a party in which in excess of fifty (50%) of the Company’s voting power is transferred; provided that an Acquisition shall not include (x) any consolidation or merger effected exclusively to change the domicile of the Company, or (y) any transaction or series of transactions principally for bona fide equity financing purposes in which cash is received by the Company or any successor or indebtedness of the Company is cancelled or converted or a combination thereof. “Asset Transfer” shall mean a sale, lease, license or other disposition or all or substantially all of the assets of the Company.
4.7 Survival of Certain Sections. Sections 2.2, 3.9, 4, 5, 6, 7, 8, 9, 12, 13, 16 and 18 of this Agreement shall survive the termination of this Agreement.
4.8 Parachute Payment. If any payment or benefit the Executive would receive pursuant to this Agreement ( “Payment” ) would (i) constitute a “Parachute Payment” within the meaning of Section 280G of the Internal Revenue Code (the “Code” ) , and (ii) but for this sentence, be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax” ) , then such Payment shall be reduced to the Reduced Amount. The “Reduced Amount” shall be either (x) the largest portion of the Payment that would result in no portion of the Payment being subject to the Excise Tax or (y) the largest portion of the Payment, which such amount, after taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all computed at the highest applicable marginal rate), results in the Executive’s receipt, on an after-tax basis, of the greatest amount of the Payment notwithstanding that all or some portion of the Payment may be subject to the Excise Tax. If a reduction in payments or benefits constituting “Parachute Payments” is necessary so that the Payment equals the Base Amount, the Payments shall be reduced on a nondiscretionary basis in such a way as to minimize the reduction in the economic value deliverable to Executive. Where more than one payment has the same value for this purpose and they are payable at different times they shall be reduced on a pro rata basis.
4.9 Application of Section 409A of the Internal Revenue Code. Notwithstanding anything to the contrary set forth herein, any payments and benefits provided under this Agreement (the “Severance Benefits” ) that constitute “deferred compensation” within the meaning of Section 409A of the Code and the regulations and other guidance thereunder and any state law of similar effect (collectively “Section 409A” ) shall not commence in connection with Executive’s termination of employment unless and until Executive has also incurred a “separation from service” (as such term is defined in Treasury Regulation Section 1.409A-1(h) ( “Separation From Service” ) , unless the Company reasonably determines that such amounts may be provided to Executive without causing Executive to incur the additional twenty percent (20%) tax under Section 409A.
It is intended that each payment under this Agreement shall constitute a separate “payment” and each installment of the Severance Benefits payments provided for in this Agreement shall be treated as a separate “payment” for purposes of Treasury Regulation Section 1.409A-2(b)(2)(i). For the avoidance of doubt, it is intended that payments of the Severance Benefits set forth in
this Agreement satisfy, to the greatest extent possible, the exemptions from the application of Section 409A provided under Treasury Regulation Sections 1.409A-1(b)(4), 1.409A-1(b)(5) and 1.409A-1(b)(9). However, if the Company (or, if applicable, the successor entity thereto) determines that the Severance Benefits constitute “deferred compensation” under Section 409A and Executive is, on the termination of service, a “specified employee” of the Company or any successor entity thereto, as such term is defined in Section 409A(a)(2)(B)(i) of the Code, then, solely to the extent necessary to avoid the incurrence of the adverse personal tax consequences under Section 409A, the timing of the Severance Benefit payments shall be delayed until the earlier to occur of: (i) the date that is six months and one day after Executive’s Separation From Service, or (ii) the date of Executive’s death (such applicable date, the “Specified Employee Initial Payment Date” ) , the Company (or the successor entity thereto, as applicable) shall (A) pay to Executive a lump sum amount equal to the sum of the Severance Benefit payments that Executive would otherwise have received through the Specified Employee Initial Payment Date if the commencement of the payment of the Severance Benefits had not been so delayed pursuant to this Section and (B) commence paying the balance of the Severance Benefits in accordance with the applicable payment schedules set forth in this Agreement.
Notwithstanding anything to the contrary set forth herein, Executive shall receive the Severance Benefits described above, if and only if Executive duly executes and returns to the Company within the applicable time period set forth therein, a separation agreement containing the Company’s standard form of release of claims in favor of the Company (attached to this Agreement as Exhibit A ) and other standard provisions, including without limitation, those relating to non-disparagement and confidentiality (the “Separation Agreement” ) , and permits the release of claims contained therein to become effective in accordance with its terms. Notwithstanding any other payment schedule set forth in this Agreement, none of the Severance Benefits shall be paid or otherwise delivered prior to the effective date of the Separation Agreement. Except to the extent that payments may be delayed until the Specified Employee Initial Payment Date pursuant to the preceding paragraph, on the first regular payroll pay day following the effective date of the Separation Agreement, the Company shall pay Executive the Severance Benefits Executive would otherwise have received under the Agreement on or prior to such date but for the delay in payment related to the effectiveness of the Separation Agreement, with the balance of the Severance Benefits being paid as originally scheduled. All amounts payable under the Agreement shall be subject to standard payroll taxes and deductions.
All reimbursements provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A, including, where applicable, the requirement that (a) any reimbursement shall be for expenses incurred during Executive’s lifetime (or during a shorter period of time specified in this Agreement), (b) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement in any other calendar year, (c) the reimbursement of an eligible expense shall be made on or before the last day of the calendar year following the year in which the expense is incurred and (d) the right to reimbursement is not subject to liquidation or exchange for another benefit.
5. CONFIDENTIAL AND PROPRIETARY INFORMATION.
5.1 As a condition of employment Executive agrees to execute and abide by the Company’s Proprietary Information and Inventions Agreement ( “PIIA” ) .
5.2 Executive recognizes that Executive’s employment with the Company will involve contact with information of substantial value to the Company, which is not generally known in the trade, and which gives the Company an advantage over its competitors who do not know or use it, including but not limited to, techniques, designs, drawings, processes, inventions know how, strategies, marketing, and/or advertising plans or arrangements, developments, equipment, prototypes, sales, supplier, service provider, vendor, distributor and customer information, and business and financial information relating to the business, products, services, practices and techniques of the Company, (hereinafter referred to as “Confidential and Proprietary Information” ) . Executive shall at all times regard and preserve as confidential such Confidential and Proprietary Information obtained by Executive from whatever source and shall not, either during Executive’s employment with the Company or thereafter, publish or disclose any part of such Confidential and Proprietary Information in any manner at any time, or use the same except on behalf of the Company, without the prior written consent of the Company.
6. ASSIGNMENT AND BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit of Executive and Executive’s heirs, executors, personal representatives, assigns, administrators and legal representatives. Because of the unique and personal nature of Executive’s duties under this Agreement, neither this Agreement nor any rights or obligations under this Agreement shall be assignable by Executive. This Agreement shall be binding upon and inure to the benefit of the Company and its successors, assigns and legal representatives. Any such successor of the Company shall be deemed substituted for the Company under the terms of this Agreement for all purposes. For this purpose, “successor” means any person, firm, corporation or other business entity which at any tie, whether by purchase, merger or otherwise, directly or indirectly acquires all or substantially all of the assets or business of the Company.
7. NOTICES.
All notices or demands of any kind required or permitted to be given by the Company or Executive under this Agreement shall be given in writing and shall be personally delivered (and receipted for) or faxed during normal business hours or mailed by certified mail, return receipt requested, postage prepaid, addressed as follows:
If to the Company:
CardioNet, Inc.
227 Washington St. #210
Conshohocken, PA 19428
Fax (610) 828-8048
Attention: Chief Executive Officer
If to Executive:
Peter F. Ferola
Any such written notice shall be deemed given on the earlier of the date on which such notice is personally delivered or three (3) days after its deposit in the United States mail as specified above. Either Party may change its address for notices by giving notice to the other Party in the manner specified in this section.
8. CHOICE OF LAW.
This Agreement is made in the Commonwealth of Pennsylvania. This Agreement shall be construed and interpreted in accordance with the internal laws of the Commonwealth of Pennsylvania. Any disputes or proceedings regarding this Agreement shall be conducted in Conshohocken, Pennsylvania, or, by written agreement of the Parties, at a mutually convenient location in the greater Philadelphia, Pennsylvania area.
9. INTEGRATION.
This Agreement, including Exhibit A and the PIIA, contains the complete, final and exclusive agreement of the Parties relating to the terms and conditions of Executive’s employment and the termination of Executive’s employment, and supersedes all prior and contemporaneous oral and written employment agreements or arrangements between the Parties.
10. AMENDMENT.
This Agreement cannot be amended or modified except by a written agreement signed by Executive and the Company.
11. WAIVER.
No term, covenant or condition of this Agreement or any breach thereof shall be deemed waived, except with the written consent of the Party against whom the wavier is claimed, and any waiver or any such term, covenant, condition or breach shall not be deemed to be a waiver of any preceding or succeeding breach of the same or any other term, covenant, condition or breach.
12. SEVERABILITY.
The finding by a court of competent jurisdiction of the unenforceability, invalidity or illegality of any provision of this Agreement shall not render any other provision of this Agreement unenforceable, invalid or illegal. Such court shall have the authority to modify or replace the invalid or unenforceable term or provision with a valid and enforceable term or provision, which most accurately represents the Parties’ intention with respect to the invalid or unenforceable term, or provision.
13. INTERPRETATION; CONSTRUCTION.
The headings set forth in this Agreement are for convenience of reference only and shall not be used in interpreting this Agreement. This Agreement has been drafted by legal counsel representing the Company, but Executive has been encouraged to consult with, and has
consulted with, Executive’s own independent counsel and tax advisors with respect to the terms of this Agreement. The Parties acknowledge that each Party and its counsel has reviewed and revised, or had an opportunity to review and revise, this Agreement, and any rule of construction to the effect that any ambiguities are to be resolved against the drafting Party shall not be employed in the interpretation of this Agreement.
14. REPRESENTATIONS AND WARRANTIES.
Executive represents and warrants that Executive is not restricted or prohibited, contractually or otherwise, from entering into and performing each of the terms and covenants contained in this Agreement, and that Executive’s execution and performance of this Agreement shall not violate or breach any other agreements between Executive and any other person or entity.
15. COUNTERPARTS.
This Agreement may be executed in two counterparts, each of which shall be deemed an original, all of which together shall contribute one and the same instrument.
16. ARBITRATION.
To ensure the rapid and economical resolution of disputes that may arise in connection with Executive’s employment with the Company, Executive and the Company agree that any and all disputes, claims, or causes of action, in law or equity, arising from or relating to Executive’s employment, or the termination of that employment, will be resolved, to the fullest extent permitted by law, by final, binding and confidential arbitration pursuant to the Federal Arbitration Act in Conshohocken, Pennsylvania conducted by the Judicial Arbitration and Mediation Services/Endispute, Inc. ( “JAMS” ) , or its successors, under the then current rules of JAMS for employment disputes; provided that the arbitrator shall: (a) have the authority to compel adequate discovery for the resolution of the dispute and to award such relief as would otherwise be permitted by law; and (b) issue a written arbitration decision including the arbitrator’s essential findings and conclusions and a statement of the award. Accordingly, Executive and the Company hereby waive any right to a jury trial. Both Executive and the Company shall be entitled to all rights and remedies that either Executive or the Company would be entitled to pursue in a court of law. The Company shall pay any JAMS filing fee and shall pay the arbitrator’s fee. The arbitrator shall have the discretion to award attorneys fees to the party the arbitrator determines is the prevailing party in the arbitration. Nothing in this Agreement is intended to prevent either Executive or the Company from obtaining injunctive relief in court to prevent irreparable harm pending the conclusion of any such arbitration. Notwithstanding the foregoing, Executive and the Company each have the right to resolve any issue or dispute involving confidential, proprietary or trade secret information, or intellectual property rights, by Court action instead of arbitration.
17. TRADE SECRETS OF OTHERS.
It is the understanding of both the Company and Executive that Executive shall not divulge to the Company and/or its subsidiaries any confidential information or trade secrets belonging to others, including Executive’s former employers, nor shall the Company and/or its Affiliates seek to elicit from Executive any such information. Consistent with the foregoing, Executive shall not provide to the Company and/or its Affiliates, and the Company and/or its Affiliates shall not request, any documents or copies of documents containing such information.
18. ADVERTISING WAIVER.
Executive agrees to permit the Company, and persons or other organizations authorized by the Company, to use, publish and distribute advertising or sales promotional literature concerning the products and/or services of the Company, or the machinery and equipment used in the provision thereof, in which Executive’s name and/or pictures of Executive taken in the course of Executive’s provision of services to the Company appear. Executive hereby waives and releases any claim or right Executive may otherwise have arising out of such use, publication or distribution.
Exhibit 31.1
CERTIFICATION
I, Joseph H. Capper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CardioNet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: May 6, 2011 |
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/s/ Joseph H. Capper |
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Joseph H. Capper |
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President and Chief Executive Officer |
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(Principal Executive Officer) |
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Exhibit 31.2
CERTIFICATION
I, Heather C. Getz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CardioNet, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
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Date: May 6, 2011 |
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/s/ Heather C. Getz |
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Heather C. Getz, CPA |
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Chief Financial Officer |
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(Principal Financial and Accounting Officer) |
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Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350, as adopted), Joseph H. Capper, the President and Chief Executive Officer of CardioNet, Inc. (the “Company”), and Heather C. Getz, the Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:
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The Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, to which this Certification is attached as Exhibit 32.1 (the “Periodic Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended; and |
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The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
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Date: May 6, 2011 |
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/s/ Joseph H. Capper |
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/s/ Heather C. Getz |
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Joseph H. Capper |
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Heather C. Getz, CPA |
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President and Chief Executive Officer |
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Chief Financial Officer |
This certification accompanies the Quarterly Report on Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or Securities Exchange Act of 1934, as amended (whether made before or after the date of the Quarterly Report on Form 10-Q), irrespective of any general incorporation language contained in such filing.