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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 333-68167
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CARDIA, INC.
(Name of small business issuer in its charter)
MINNESOTA 41-1923885
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13770 Frontier Court, Burnsville, Minnesota 55337-4720
(Address of principal executive offices, including zip code)
(612) 997-2100
(Issuer's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. NOT APPLICABLE.
State issuer's revenues for its most recent fiscal year: $1,133,906.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates. NOT APPLICABLE (See Item 5).
DOCUMENTS INCORPORATED BY REFERENCE
None.
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TABLE OF CONTENTS
PAGE
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PART I
Item 1. Description of Business............................................1
Item 2. Properties.........................................................6
Item 3. Legal Proceedings..................................................7
Item 4. Submission of Matters to a Vote of Security Holders................7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................................7
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................7
Item 7. Financial Statements...............................................9
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.................22
Item 10. Executive Compensation............................................24
Item 11. Security Ownership of Certain Beneficial Owners and Management....26
Item 12. Certain Relationships and Related Transactions....................27
Item 13. Exhibits and Reports on Form 8-K..................................27
SIGNATURES....................................................................29
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-KSB,
including those made in the "Desription of Business" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections, and other written and oral statements made from time to time by the
Company do not relate strictly to historical or current facts but provide
current expectations or forecasts of future events. As such, they are considered
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934 and are subject to certain risks and uncertainties that
could cause actual results to differ materially from those presently anticipated
or projected. Such forward-looking statements can be identified by the use of
terminology such as "may," "will," "expect," "plan," "intend," "anticipate,"
"estimate," or "continue," or similar words or expressions. The Company's
forward-looking statements generally relate to its business strategies,
financial results, product development, regulatory approval matters and sales
efforts. Because actual results may differ, readers are cautioned not to place
undue reliance on these forward-looking statements.
It is not possible to foresee or identify all factors affecting the
Company's forward-looking statements and investors therefore should not consider
any list of factors to be an exhaustive statement of all risks, uncertainties or
potentially inaccurate assumptions. Factors that could cause actual results to
differ from the results discussed in the forward-looking statements include, but
are not limited to, the following factors: (i) the difficulties and obstacles
inherent in obtaining market acceptance for the cardiac closure devices of the
Company which are completely new products for treating cardiac defects and
designed to serve as an alternative to open heart surgery, the traditional
treatment for such defects; (ii) the potential liability risks inherent in the
use of implantable medical devices and the Company's inability to be assured
that the products liability insurance coverage it maintains will provide
adequate coverage against such potential liabilities; (iii) the challenges and
uncertainties associated with the lengthy and costly regulatory clearance
processes and ongoing compliance with the extensive requirements of the United
States Food and Drug Administration and foreign governments; (iv) the risks and
difficulties associated with developing international markets for the Company's
products; (v) the fact that the Company is an early stage company with limited
financial resources and an accumulated deficit of ($1,698,923), and no assurance
can be provided that additional capital will be available to the Company when
needed on acceptable terms, if at all; and (vi) the lack of a current public
market for the Company's common stock and an inability of the Company to provide
any assurance that an active trading market will ever develop or, if developed,
will be sustained.
PART I
Unless the context indicates otherwise, all references to the "Company"
and "Cardia" in this Annual Report on Form 10-KSB relate to Cardia, Inc.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Cardia, Inc. is a Minnesota corporation that was formed in October of
1998 as a subsidiary of Applied Biometrics, Inc. ("ABI") to develop, manufacture
and market transcatheter closure device products for the repair of certain
cardiac defects. These products are based, in part, on certain intellectual
property rights ABI acquired in November of 1997 from Bernhard Schneidt and Dr.
Rainer Schrader. Prior to October of 1998, a division of ABI engaged in the
development of transcatheter closure devices. As of October of 1998, Cardia
assumed all activity relating to the development and marketing of these
products.
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On February 11, 1999, ABI distributed 375,000 shares of Cardia's common
stock, valued at $1.00 per share, to ABI shareholders. Concurrent with the
distribution, Cardia sold 125,000 shares of Cardia common stock at a price of
$1.00 per share to an officer of the Company. Subsequent to the distribution,
Cardia completed a rights offering of approximately 500,000 shares of its common
stock to its shareholders at a subscription price of $1.00 per share.
On October 6, 1999, Video Learning Systems, Inc. ("VLS") was merged
into Cardia. VLS ceased operations in approximately 1989 and was not engaged in
any active operations at the time of the merger. Cardia was the surviving entity
in the merger and is continuing its business as it was being conducted prior to
the merger. The assets of VLS, which consisted principally of cash, cash
equivalents and a note receivable, became assets of Cardia upon completion of
the merger. The former shareholders of VLS received approximately 200,000 shares
of Cardia Common Stock in the merger.
PRODUCTS
Transcatheter closure devices are an entirely new family of small,
implantable devices which are delivered through a catheter inserted into a major
blood vessel to permanently repair certain cardiac defects in children and
adults. The procedure is performed in a cardiac catheterization lab and is
intended to reduce the need for open heart surgery, which is currently the
accepted method of repairing these defects. Cardia hopes to develop a product
family that will be capable of providing an effective, nonsurgical method of
correcting a variety of cardiac defects.
Since the purchase of its transcatheter closure technology, Cardia has
been marketing and selling two transcatheter closure devices in Europe. The
first device is for the closure of a cardiac defect known as patent ductus
arteriosus ("PDA"). The PDA defect is an abnormal passage between two major
vessels of the heart and is generally corrected in children. The Company's PDA
product has been implanted successfully in over 100 human cases. The second
device is designed to correct another cardiac defect known as patent foramen
ovale ("PFO"). The foramen ovale defect is an abnormal passage between the right
and left chambers of the heart and is generally corrected in adults. Cardia
believes that the market for PFO closure devices is significantly larger than
the market for PDA closure devices. Cardia has therefore focused the vast
majority of its development, regulatory approval and marketing efforts to date
on its PFO closure devices. Sales of Cardia's PFO device have accounted for
approximately 91% of the revenues generated by the Company during 1999. The
Company expects to continue devoting virtually all of its future resources
toward the development, production and marketing of its PFO closure devices. It
has, therefore, de-emphasized the marketing and sale of its PDA product.
Cardia's development, testing and marketing efforts have been focused
on the European market, where Cardia has recently received certain
certifications required to market its products, including the CE mark
certification. The certifications that Cardia has obtained are required for the
general sale of medical devices in Europe.
Cardia is not currently marketing or selling any of its products in the
United States because it has not applied for or received the necessary
regulatory approvals. Cardia has designed a detailed study proposal for
submission to the United States Food and Drug Administration with the intention
of pursuing FDA Class III implant device approval. Cardia expects to make its
submission to the FDA during the second half of 2000 and hopes to be cleared to
begin clinical trials by the end of 2000. The FDA approval process is, however,
a lengthy process that extends over a significantly protracted period of time.
Accordingly, there can be no assurance that the FDA review of Cardia's
submission will not encounter prolonged delays. There also can be no assurance
that the data collected and submitted by Cardia to the FDA in its premarket
approval application will support approval. See "Government Regulation" for a
more detailed explanation of the regulatory environment in the United States.
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MARKETING, SALES AND DISTRIBUTION
Cardia believes its closure devices have a broad range of applications
for the closure of congenital and acquired cardiac defects. Cardia's PDA closure
device has the potential to reduce the need for open heart surgery as the method
of closure in many of the nearly 14,000 cases annually in the United States and
Europe. Cardia also believes that the PFO cardiac defect, which may be a cause
of paradoxical or otherwise inexplicable strokes, represents an even larger
market for the prevention of recurring embolic events. Cardia estimates that, as
a result of the recent development of an accurate test for detecting PFO cardiac
defects in victims of paradoxical strokes, there may be more than 250,000 PFO
closure cases annually in the United States and Europe. There is, however, no
current consensus on the size of the PFO closure market.
Cardia's marketing and sales efforts commenced in Europe immediately
following Cardia's receipt of all necessary certifications. Sales and
distribution efforts in European countries will be conducted through either a
direct sales force or specialized sales representatives and distributors,
depending on the country. Cardia expects to use a direct sales force in the
United States when sales are permitted. Currently, Cardia is recruiting sales
representative in several key European countries.
Cardia has marketed its PFO closure device by focusing its sales
efforts on neurologists and cardiologists. Neurologists are important to the
process because they are often the medical professionals who first see victims
of paradoxical strokes. If a neurologist determines, via testing, that a cardiac
defect is the cause of a paradoxical stroke and should be closed, the patient is
referred to a cardiologist. Cardia's PFO closure device is implanted by a
cardiologist in a catheterization lab, using standard catheterization
procedures. The implantation procedure is minimally invasive, and the patient
can usually be sent home within twenty-four hours. Cardia has been focusing its
efforts to demonstrate to neurologists and cardiologists that its closure device
products are a safe, effective, minimally invasive alternative to open heart
surgery.
RESEARCH AND DEVELOPMENT
Cardia's ongoing plans for research and development for its PFO closure
device include further improvements of the acquired technology and investigation
into modified devices for new applications. Cardia will perform animal pilot
trials on those devices which appear to be the most promising. Cardia expended
$199,404 on research and development costs in 1999 and expects to spend
approximately $200,000 on further research and development in 2000.
COMPETITION
Cardia's competitors in the cardiac defect closure field are believed
to be small to medium sized companies, the most prominent of which are Nitinol
Medical Technologies, Inc. located in Boston, Massachusetts, and AGA Medical
Corporation and Microvena, Corp., both located in Minneapolis, Minnesota. Cardia
believes that one or more of these companies is in clinical trials with closure
devices that would compete with Cardia's closure devices. Cardia's competitors
may have greater resources and be able to penetrate the transcatheter closure
device market in Europe and the United States sooner than Cardia. Although
Cardia believes its closure devices are based on sound and competitive
technology, there can be no assurance that Cardia's present products will be
able to compete successfully with existing or future competitive products or
that Cardia will be able to develop or acquire additional products or otherwise
effectively respond to new products or technological advances developed by
competitors. If Cardia fails to effectively penetrate markets sooner than its
competitors, or to successfully compete with existing or future products or
technologies, Cardia's anticipated revenues and earnings could be significantly
reduced or eliminated.
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GOVERNMENT REGULATION
Government regulation in the United States and other countries is a
significant factor in the development and marketing of Cardia's products and in
Cardia's ongoing manufacturing and research and development activities. Cardia
and its products are regulated by the FDA under a number of statutes, including
the Federal Food, Drug and Cosmetic Act.
Under the Federal Food, Drug and Cosmetic Act, medical devices are
categorized into one of three classes, Class I, II or III, on the basis of the
controls deemed necessary to reasonably ensure their safety and effectiveness.
Class I devices are subject to the least extensive controls, as the safety and
effectiveness reasonably can be assured through general controls such as
labeling, premarket notification and adherence to the FDA's good manufacturing
practices. For Class II devices, safety and effectiveness can be assured through
the use of special controls, such as performance standards, post-market
surveillance, patient registries and FDA guidelines. Class III devices, which
are life-sustaining or life-supporting implantable devices, or new devices which
have been found not to be substantially equivalent to legally marketed devices,
require the highest level of control, generally requiring premarket approval by
the FDA to ensure their safety and effectiveness. All companies subject to FDA
regulation must comply with a variety of rules, including the FDA's good
manufacturing practices regulations, and are subject to periodic inspections by
the FDA and other applicable agencies. If the FDA believes that its regulations
have not been fulfilled, it may implement extensive enforcement powers,
including powers granted under the Safe Medical Devices Act of 1990. The FDA's
powers include, but are not limited to, the ability to ban products from the
market, prohibit the operation of manufacturing facilities and effect recalls of
products from customer locations.
If a manufacturer or distributor of medical devices can establish that
a proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device or to a Class III medical device for which the FDA has
not required a premarket approval application, the manufacturer or distributor
may seek FDA marketing clearance for the device by filing a 510(k) notification.
Following submission of the 510(k) notification, the manufacturer or distributor
may not place the device into commercial distribution in the United States until
an order has been issued by the FDA. The FDA's target for issuing such orders is
within 90 days of submission, but the process can take significantly longer. The
order may declare the FDA's determination that the device is "substantially
equivalent" to another legally marketed device and allow the proposed device to
be marketed in the United States. The FDA may, however, determine that the
proposed device is not substantially equivalent or may require further
information, such as additional test data, before making a determination
regarding substantial equivalence. Cardia, however, does not believe that its
closure device products under development are substantially equivalent to
another legally marketed device.
If a manufacturer or distributor of medical devices cannot establish
that a proposed device is substantially equivalent to another device via the
510(k) process, the manufacturer or distributor must seek premarket approval of
the proposed device. A premarket approval application must be submitted,
supported by extensive data, including preclinical and clinical trial and
follow-up data, to prove the safety and efficacy of the device. Generally, a
company is required to obtain an investigative device exemption before it
commences clinical testing in the United States in support of a pre-market
approval application. The FDA monitors and oversees the use and distribution of
such "research use only" and "investigational use only" products. Cardia intends
to obtain Class III market clearance for its closure devices through the FDA's
investigative device exemption/premarket approval application process. Cardia
has designed a detailed study proposal for submission to the FDA in order to
obtain such clearance and intends to submit its proposal in the second half of
2000. Although by statute, the FDA has 180 days to review a premarket approval
application once it has been accepted for filing, during which time an advisory
committee may also evaluate the application and provide recommendations to the
FDA, premarket approval application reviews often extend over a significantly
protracted time period, often a number of years from filing. Accordingly, there
can be no assurance that the FDA review of any premarket approval application
submitted by Cardia will
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not encounter prolonged delays or that the data collected and submitted by
Cardia in its premarket approval application will support approval.
The FDA and the Federal Trade Commission also have the power to
scrutinize labeling and promotional activities. The FDA imposes postmarketing
controls, and registration, listing, medical device reporting, postmarket
surveillance, device tracking and other requirements on medical devices and
their manufacturers. If Cardia fails to meet these pervasive FDA requirements,
or receives adverse FDA determinations regarding Cardia's clinical and
preclinical trials, Cardia and its employees could be subject to injunction,
prosecution, civil fines, seizure or recall of products, prohibition of sales,
or suspension or withdrawal of any previously granted approvals.
The Federal Food, Drug and Cosmetic Act regulates Cardia's quality
control and manufacturing procedures by requiring Cardia and its contract
manufacturers to demonstrate compliance with current good manufacturing
practices as specified in published FDA regulations. The FDA monitors compliance
with good manufacturing practices by requiring manufacturers to register with
the FDA, which subjects them to periodic unannounced FDA inspections of
manufacturing facilities. The continued marketing of Cardia's products may be
adversely affected if violations of applicable regulations are noted during FDA
inspections of Cardia's manufacturing facilities manufacturers. Such regulations
are subject to change and depend heavily on administrative interpretations.
There can be no assurance that future changes in regulations or interpretations
made by the FDA or other regulatory bodies, with possible retroactive effect,
will not adversely affect Cardia.
Sales of medical devices outside of the United States are subject to
United States export requirements and foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.
For countries in the European Union, certification procedures are available for
medical devices, the successful completion of which allows the certified devices
both to be shipped from the United States and to be placed on the market in all
European countries. Medical devices may not be sold in a general manner in
Europe unless they display a mark indicating compliance with these procedures.
On October 15, 1999, Cardia obtained CE mark certification which has allowed the
Company to market its products in countries honoring this designation. There can
be no assurance, however, that Cardia will be able to obtain regulatory
approvals or clearances for its products in foreign countries that do not
recognize the CE mark.
No assurance can be given that the FDA or other regulatory authorities
will give, on a timely basis, if at all, the requisite approvals for medical
products currently under development by Cardia or that may be developed by
Cardia in the future. Even if approvals are received, the process of obtaining
clearance to market medical products is costly and time consuming and can delay
the marketing and sale of Cardia's products. Further, federal, state, foreign
and other regulations regarding the manufacture and sale of medical devices are
subject to change. Cardia cannot predict what impact such changes, if any, might
have on its business, financial condition or results of operations.
MANUFACTURING AND OPERATIONS
Cardia manufactures and assembles its closure devices at its facilities
in Burnsville, Minnesota. Certain of the components of Cardia's products are
manufactured by third-party vendors. Cardia has received ISO certification that
its manufacturing facilities comply with European standards for quality
assurance and manufacturing process control. Cardia maintains a quality
assurance program in order to ensure compliance with ISO standards.
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Cardia's business is not currently dependent on one or a few major
customers. It is also not currently dependent on a limited number of sources or
availability of raw materials to manufacture its products under development.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
There are several patents relating to Cardia's closure devices. A U.S.
patent, two German utility model registrations and a pending European patent
application exist for its PDA device. A German utility model application, three
U.S. patent applications European and Brazilian applications have been filed for
Cardia's PFO device.
There can be no assurance that patents will be issued on products under
development by Cardia or to be developed by Cardia in the future, that the
patents issued to Cardia in the past or in the future will be of material
benefit, or that Cardia will have sufficient resources to enforce its patent
rights. Nor can there be any assurance that Cardia's products do not infringe on
patents, copyrights or other proprietary information known or claimed by others,
or that others will not successfully utilize part of or all of Cardia's
technologies without compensation to Cardia. If Cardia is found to have
infringed on the rights of a third party, Cardia may be unable to market its
products without a license from such third party. There can be no assurance that
Cardia would be able to obtain such a license on satisfactory terms, or at all.
Cardia also relies for protection of trade secrets and proprietary know-how on
its internal security and secrecy measures and on employment and consulting
agreements requiring employees and consultants of Cardia to observe the
confidentiality of company information and to assign to Cardia inventions
developed in the course of work performed for Cardia.
EMPLOYEES
Cardia currently employs 10 full-time employees and 2 part-time
employees. The full-time employees are engaged in research and development,
manufacturing, and sales and marketing activities. Cardia believes that its
relations with its employees are good. The part-time employees are primarily
engaged in administrative functions. None of Cardia's employees is covered by a
collective bargaining agreement.
AVAILABLE INFORMATION
The Company files annual, quarterly and current reports, and other
information with the Securities and Exchange Commission (the "SEC"). You may
read and copy any reports, statements or other information we file at the SEC's
Public Reference Room, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and at the SEC's Regional Offices at 7 World Trade Center, Suite 1300, New
York, New York, 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You can request copies of these documents, upon payment
of a duplicating fee, by writing to the SEC. You may call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. The Company's filings are also available to the public on the SEC Web Site
at http:/www.sec.gov.
ITEM 2. PROPERTIES
The Company leases approximately 4,500 square feet of space in
Burnsville, Minnesota, a suburb of Minneapolis. The lease provides for monthly
rental payments which escalate over the term of the lease which expires in
September of 2004. The current monthly rental payments are approximately $6,343
and include payment for certain costs associated with the leased facilities,
such as real estate taxes, utilities and
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maintenance expenses. Cardia believes that its present facilities are in good
condition and adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any litigation and is not aware of any
threatened litigation that would have a material adverse effect on its financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
As of the date of this Report, there is no public trading market in the
United States or elsewhere for the common stock of the Company. The Company has
recently been working with market makers in order to develop a public market for
its common stock. There can be, and is, no assurance that market makers will
make or maintain a market in the common stock of the Company or that, even if a
market is made and maintained in the stock, that the common stock of the Company
will trade at prices deemed attractive or reasonable to the current shareholders
of the Company.
SHAREHOLDERS
As of March 28, 2000, there were approximately 112 holders of record of
common stock of the Company. The Company believes that these record holders
represent approximately 1,300 beneficial owners.
DIVIDENDS
The Company has never declared or paid dividends on its common stock
and has no plans to pay dividends in the foreseeable future. The Company
currently intends to retain any earnings for use in the operation and expansion
of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Cardia, Inc. is a Minnesota corporation that was formed in October of
1998 as a subsidiary of Applied Biometrics, Inc. ("ABI") to develop, manufacture
and market transcatheter closure device products for the repair of certain
cardiac defects. These products are based, in part, on certain intellectual
property rights ABI acquired in November of 1997 from Bernhard Schneidt and Dr.
Rainer Schrader. Prior to October of 1998, a division of ABI engaged in the
development of transcatheter closure devices. Cardia
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plans to continue research and development, as well as conduct clinical trials
for its closure devices. Research and development activities will include
further improvements of the acquired technology, continued testing and
improvement of the closure device technology Cardia has developed, and
investigation of modified devices for new applications. Cardia will perform
animal pilot trials on those devices which appear to be the most promising.
RESULTS OF OPERATIONS
REVENUES. Revenues for 1999 were $1,133,906 as compared to revenues of
$167,240 in 1998. Cardia's revenues have been generated by marketing its PDA and
PFO closure devices in Europe. In October 1999, Cardia received the CE mark for
its products, which allows the Company to market its products throughout Europe.
Cardia has turned its primary focus to the marketing of its PFO device and
expects the majority of future revenue to be generated from the sale of this
product. Although Cardia may release additional product variations during 2000,
it is not expected that these variations would contribute significantly to the
Company's revenues during the year. In general, the Company believes that PFO
closure is in the very early stage of market acceptance and that revenue for
this procedure is likely to increase over the next several years.
GROSS PROFIT. Gross profit for 1999 was $901,011, up from $133,588 in
1998. The increase in gross profit in 1999 from the previous year can be
attributed to the significant increase in 1999 in revenues generated by Cardia
in connection with sales of its transcatheter closure devices, which were
limited during 1998. Gross profit as a percentage of net sales was 79.4% for
1999 compared to 79.9% for 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Cardia expended
$1,222,782 in 1999 on selling, general and administrative expenses, up from
$564,826 in 1998. The majority of these expenses are attributable to an increase
in Cardia's sales and marketing activities that occurred after Cardia obtained
CE mark approval in Europe. Cardia expects to add between four and six full-time
employees during 2000. Those additional personnel will not be added, however,
unless business growth justifies additional employees.
RESEARCH AND DEVELOPMENT. Research and development expenses were
$199,404 during 1999, down from $405,148 expended in 1998. This reflects the
Company's shift in focus from primarily research and development in 1998 to
sales and marketing in 1999. The Company's plans for research and development
for its closure devices include continued further improvements and investigation
into modified devices for new applications. Cardia expects to spend
approximately $200,000 on research and development during 2000 in order to
enhance existing products and develop new product extensions that are
complimentary to the Company's existing products.
NET LOSS. Cardia recognized a net loss of $404,671 in 1999, as compared
to a net loss of $836,386 in 1998. Net loss decreased in 1999 as a result of
significantly increased revenues. In 1999, the net loss per share was ($0.45),
compared to a net loss per share of ($2.23) in 1998.
LIQUIDITY AND CAPITAL RESOURCES. Cardia's liquidity as of December 31,
1999 consisted of approximately $753,768 in cash, a demand note receivable in
the amount of $156,602 and $157,466 in accounts receivable. In conjunction with
the merger of Video Learning Systems, Inc. with and into Cardia on October 6,
1999, Cardia acquired approximately $549,960 in cash and a demand note
receivable. Cardia believes that its liquidity will be sufficient to fund
operations through 2000.
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ITEM 7. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants - Grant Thornton LLP
Report of Independent Accountants - PricewaterhouseCoopers LLP
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the Years Ended December 31, 1999 and 1998
Statements of Shareholders' Equity for the Years Ended December 31, 1999 and
1998
Statements of Cash Flows for the Years Ended December 31, 1999 and 1998
Notes to Financial Statements for the Years Ended December 31, 1999 and 1998
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Cardia, Inc.
We have audited the accompanying balance sheet of Cardia, Inc. as of
December 31, 1999, and the related statements of operations, shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cardia, Inc. as of
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States.
/s/ Grant Thornton LLP
Minneapolis, Minnesota
January 21, 2000
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Cardia, Inc.
In our opinion, the balance sheet as of December 31, 1998 and the related
statements of operations, shareholders' equity and of cash flows for the year
ended December 31, 1998 present fairly, in all material respects, the financial
position, results of operations and cash flows of Cardia, Inc. at December 31,
1998 and for the year then ended, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards generally accepted in
the United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above. We have not
audited the financial statements of Cardia, Inc. for any period subsequent to
December 31, 1998.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 18, 1999
11
<PAGE>
CARDIA, INC.
BALANCE SHEETS
DECEMBER 31,
<TABLE>
<CAPTION>
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 753,768 $ 500
Accounts receivable 157,466 92,917
Note receivable 156,602 --
Inventories 53,512 50,888
Prepaid expenses 7,430 11,285
------------ ------------
Total current assets 1,128,778 155,590
PROPERTY AND EQUIPMENT - NET 63,028 27,371
INTANGIBLE ASSETS - NET 66,666 83,332
------------ ------------
$ 1,258,472 $ 266,293
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 38,981 $ 63,651
Accrued expenses 23,787 --
------------ ------------
Total current liabilities 62,768 63,651
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $.01 par value; 10,000,000 shares
authorized; 1,200,053 and 0 shares issued and
outstanding at December 31, 1999 and 1998 12,001 --
Advances by Applied Biometrics, Inc. -- 1,496,894
Additional paid-in capital 2,882,626 --
Accumulated deficit (1,698,923) (1,294,252)
------------ ------------
1,195,704 202,642
------------ ------------
$ 1,258,472 $ 266,293
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
12
<PAGE>
CARDIA, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
1999 1998
----------- -----------
Net sales $ 1,133,906 $ 167,240
Cost of sales 232,895 33,652
----------- -----------
Gross profit 901,011 133,588
Operating expenses
Selling, general and administrative 1,122,782 564,826
Research and development 199,404 405,148
----------- -----------
1,322,186 969,974
----------- -----------
Operating loss (421,175) (836,386)
Interest income 16,504 --
----------- -----------
NET LOSS $ (404,671) $ (836,386)
=========== ===========
Net loss per common share - basic and diluted $ (0.45) $ (2.23)
=========== ===========
Weighted average common and common equivalent
shares outstanding - basic and diluted 892,641 375,000
=========== ===========
The accompanying notes are an integral part of these statements.
13
<PAGE>
CARDIA, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
ADVANCES
COMMON STOCK ADDITIONAL FROM APPLIED
------------ PAID-IN BIOMETRICS, ACCUMULATED
SHARES AMOUNT CAPITAL INC. DEFICIT TOTAL
--------- ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1998 -- $ -- $ -- $ 557,866 $ (457,866) $ 100,000
Advances by Applied
Biometrics, Inc. -- -- -- 939,028 -- 939,028
Net loss -- -- -- -- (836,386) (836,386)
--------- ------- ---------- ----------- ----------- -----------
Balances at December 31, -- -- -- 1,496,894 (1,294,252) 202,642
1998
Advances by Applied
Biometrics, Inc. -- -- -- 222,773 -- 222,773
Distribution to Applied
Biometrics, Inc.
shareholders 375,000 3,750 1,715,917 (1,719,667) -- --
Sale of common stock 625,081 6,251 618,749 -- -- 625,000
Shares issued in
acquisition of Video
Learning Systems, 199,972 2,000 547,960 -- -- 549,960
Inc.
Net loss -- -- -- -- (404,671) (404,671)
--------- ------- ---------- ----------- ----------- -----------
Balance at December 31,
1999 1,200,053 $12,001 $2,882,626 $ -- $(1,698,923) $ 1,195,704
========= ======= ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
14
<PAGE>
CARDIA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (404,671) $ (836,386)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 27,577 19,709
Changes in operating assets and liabilities:
Accounts receivable (64,549) (92,917)
Inventories (2,624) (50,888)
Prepaid expenses 3,855 (11,285)
Accounts payable (24,670) 63,651
Accrued liabilities 23,787 --
----------- -----------
Net cash used in operating activities (441,295) (908,116)
Cash flows from investing activities:
Purchase of property and equipment (46,568) (30,412)
----------- -----------
Net cash used in investing
activities (46,568) (30,412)
Cash flows from financing activities:
Payments received on note receivable 8,102 --
Proceeds from issuance of common stock 625,000 --
Cash received from acquisition 385,256 --
Advances made by Applied Biometrics, Inc. 222,773 939,028
----------- -----------
Net cash provided by financing activities 1,241,131 939,028
----------- -----------
NET INCREASE IN CASH
AND EQUIVALENTS 753,268 500
Cash and equivalents at beginning of year 500 --
----------- -----------
Cash and equivalents at end of year $ 753,768 $ 500
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
15
<PAGE>
CARDIA, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cardia (Cardia or the Company) was formed to develop, manufacture, and market
Transcatheter Closure Devices (TCDs) and since October 1998 has operated as a
subsidiary of Applied Biometrics, Inc. (ABI). In December 1998, the Board of
Directors of ABI approved a plan to distribute ABI's interest in the Company
as a dividend to the shareholders of ABI. The distribution occurred on
February 11, 1999.
Cardia manufactures TCDs in its Minnesota manufacturing facility and sells
its products to hospitals, universities and doctors in Europe, principally
Germany. TCDs are a new generation of implantable device technologies which
are delivered through a catheter to permanently repair certain cardiac
defects in children and adults.
Basis of Presentation
The accompanying financial statements as of December 31, 1998 and for the
year then ended include the specifically identifiable net assets of the
transcatheter closure operations of ABI and the results of operations of that
business. Costs related to functions performed by ABI on behalf of the
Company for the year ended December 31, 1998 and for the period January 1,
1999 to February 11, 1999 have been charged to the Company. Such costs
allocated by ABI include certain general and administrative costs such as
personnel costs, legal costs and costs of the finance function. These
allocations of costs were determined in a manner which management considers
to reflect the incremental costs of providing these services. The terms of
these transactions and allocations of costs were determined between related
parties and may therefore differ from terms which would have occurred between
wholly unrelated parties or had the Company operated as a completely
autonomous entity since inception.
The financial information included herein may not necessarily be indicative
of the financial position, results of operations, or cash flows of the
Company in the future or what the financial position, results of operations,
or cash flows would have been if the Company had been a separate, independent
company during the periods presented.
Acquisition of Technology
ABI acquired the rights to the TCD technology in an acquisition consummated
in November 1997. The purchase price for the acquired technology was
approximately $542,000 and was comprised of 85,000 shares of ABI stock and
$32,000 of related acquisition costs. The acquired technologies consisted of
a pediatric product which has been subsequently marketed internationally on a
limited basis and rights to another product with therapeutic applications to
adults which required substantial additional development. The purchase price
allocation included approximately $100,000 to capitalizable intangible assets
related to the developed product. The technology purchase agreement also
requires the payment of royalties equal to 3% of the net sales price of
Vessel/Septal Occluder devices sold, payable on a quarterly basis for a
period of six years.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
16
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Cash and Equivalents
Cash equivalents are highly liquid marketable securities with original
maturities of three months or less. At December 31, 1999, 15% of cash and
equivalents were held in one financial institution in Germany.
Concentrations of Credit Risk
The Company grants credit to customers in the normal course of business, but
generally does not require collateral or other security to support amounts
due. Management performs on-going credit evaluations of its customers.
During 1999, nearly all of the Company's revenue was derived from customers
located in Germany. Three customers accounted for 13%, 11% and 10% of total
revenues for the year ended December 31, 1999. At December 31, 1999, all
accounts receivable are denominated in a foreign currency and are from
customers located in Germany.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Inventories consist primarily of raw materials.
Property and Equipment
Property and equipment are stated at cost with depreciation computed using
accelerated methods over the estimated useful lives of the assets, generally
five years. Expenditures for additions and improvements are capitalized while
repair and maintenance costs are expensed as incurred.
Intangible Assets
The cost of acquired intangible assets is capitalized and amortized on a
straight-line basis over an estimated useful life of six years. The
recoverability of unamortized intangible assets is assessed on an ongoing
basis by comparing discounted future cash flows from the related product to
book value.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
Foreign Currency
Net realized and unrealized losses of $29,800 from transactions denominated
in a foreign currency are included in the net loss for the year ended
December 31, 1999. Accounts receivable of the Company are translated at rates
of exchange at the end of the period. The Company does not enter into foreign
currency hedging transactions.
Stock Options
The Company utilizes the intrinsic value method of accounting for its stock
option plan. Pro-forma information related to the fair value based method of
accounting is contained in note E.
17
<PAGE>
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Net Loss Per Common Share
Basic net loss per common share is computed by dividing net loss by the
weighted-average number of outstanding common shares. Diluted net loss per
common share is computed by dividing net loss by the weighted average number
of outstanding common shares and common share equivalents, when dilutive.
Options to purchase 148,100 shares of common stock with weighted average
prices of $1.03 were outstanding during 1999, but were excluded from the
computation of common share equivalents because they were anti-dilutive.
For periods prior to the spin-off of Cardia from ABI, weighted-average shares
outstanding have been determined as if the distribution of shares in the
spin-off had occurred as of the inception of the Company.
Use of Estimates
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE B - NOTE RECEIVABLE
In conjunction with the Video Learning Systems, Inc. merger in October 1999
(note D), a promissory note was transferred to the Company in the amount of
$164,704. The note bears interest at 7% and is due October 2002 or on demand.
NOTE C - FINANCIAL STATEMENT COMPONENTS
Property and equipment consisted of the following at December 31:
1999 1998
---- ----
Furniture and fixtures $ 5,288 $ 7,496
Machinery and equipment 68,651 22,916
-------- --------
73,939 30,412
Less accumulated depreciation (10,911) (3,041)
-------- --------
$ 63,028 $ 27,371
======== ========
Intangible assets consisted of the following at December 31:
1999 1998
---- ----
Intangible assets $100,000 $100,000
Less accumulated depreciation (33,334) (16,668)
-------- --------
$ 66,666 $ 83,332
======== ========
18
<PAGE>
NOTE D - SHAREHOLDERS' EQUITY
Initial Capitalization and Financing
In December 1998, the Board of Directors of ABI approved a plan to distribute
ABI's interest in the Company as a dividend to the shareholders of ABI (the
Distribution). Under the plan, ABI shareholders received one share of Cardia
for every 11.563 shares of ABI common stock. The Distribution to shareholders
occurred on February 11, 1999, with a total distribution of 375,000 of Cardia
shares. Concurrent with the Distribution, the Company sold 125,000 shares of
Cardia common stock at a price of $1 per share to an officer of the Company.
Subsequent to the Distribution, the Company completed a rights offering of
its common stock to sell an aggregate of 500,000 shares of common stock at a
subscription price of $1 per share, on the basis of one right for each share
of Cardia common stock held by a shareholder immediately after the
Distribution.
Acquisition
The Company entered into an Agreement and Plan of Merger with Video Learning
Systems, Inc. ("VLS") pursuant to which VLS merged into the Company on
October 6, 1999. The Company is the surviving entity.
VLS has not conducted an active trade of business in 199 or 1998. Therefore,
the transaction was accounted for as a financing transaction. The Company
issued 199,972 shares of common stock in exchange for the net assets of VLS
which consisted of $385,256 in cash and $164,704 note receivable.
NOTE E - STOCK OPTIONS
On January 27, 1999, the Board of Directors and sole shareholder of the
Company adopted the Cardia, Inc. 1999 Omnibus Stock Incentive Plan to provide
for the granting of stock-based incentives to officers, key employees and
directors of the Company. The Company has reserved 200,000 shares of its
common stock for issue in connection with awards granted pursuant to the
plan. Options under the Company's agreements are generally granted to be
exercised at management's best estimate of the current fair market price of
the stock and expire 10 years from the grant date.
Option transactions for the year ended December 31, 1999 are summarized as
follows:
Weighted
Average
Exercise
Shares Price
------ --------
Outstanding at January 1, 1999 -- $ --
Granted 148,100 1.03
-------
Outstanding at December 31, 1999 148,100 1.03
======= ======
19
<PAGE>
NOTE E - STOCK OPTIONS -- Continued
The following table summarizes information about stock options at December
31, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------- -------------------
Weighted-
Number average Weighted- Number Weighted-
Range of outstanding remaining average exercisable average
exercise at contractual exercise at exercise
prices year end life price year end price
------ -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
$1.00 - $1.10 148,100 9.6 years $1.03 144,433 $1.03
</TABLE>
The weighted average fair value of the options granted during 1999 are $0.67.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for all grants in 1999: no dividend yield; risk-free rate of
return of 6.5%; volatility of 50%; and an average term of 5 years. The
proforma net loss for 1999 is $503,671 or $0.56 per share, had the fair value
method been used, although this may not be representative of the future
effects of applying this method.
NOTE F - INCOME TAXES
The Company was part of the consolidated tax return of ABI until spun-off as
a separate company in February 1999. No tax benefits from losses prior to
that date are available for carryforward to future periods.
There is no current or deferred tax expense for the period ending December
31, 1999, due to a valuation allowance recorded to offset the deferred tax
assets created by the current period loss and the difference in the useful
life of the intangible asset for book and tax purposes. For tax purposes, all
acquired technology of the Company is capitalized and amortized over a life
of 15 years. Realization of the future tax benefits related to deferred tax
assets is dependent on many factors, including the Company's ability to
generate taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to the
valuation allowance for financial reporting purposes.
Deferred tax assets consist of the following at December 31, 1999:
Intangible asset amortization $ 160,000
Net operating loss carryforward 170,000
---------
Total deferred tax assets 330,000
Valuation allowance (330,000)
---------
Net deferred tax asset $ --
=========
The Company's net operating loss carryforward of approximately $421,000 will
expire in 2019.
Differences between income tax benefit and amounts derived by applying the
statutory federal income tax rate of 34% to loss before income taxes for the
years ending December 31, 1999 and 1998 are due to the recognition of the
valuation allowance.
20
<PAGE>
NOTE G - LEASE COMMITMENT
The Company conducts its operations in a leased facility under an operating
lease that expires September 2004. The lease provides that real estate taxes,
insurance, and maintenance expenses are obligations of the Company. Minimum
rental payments for the years ending December 31 are as follows:
2000 $77,240
2001 81,158
2002 83,397
2003 85,076
2004 63,807
Rent expense, including real estate taxes and maintenance expenses, was
approximately $21,174 for the year ended December 31, 1999.
21
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Effective November 15, 1999, PricewaterhouseCoopers LLP resigned as the
principal accountant to audit Cardia, Inc.'s financial statements, beginning
with its financial statements for the year ending December 31, 1999.
The report of PricewaterhouseCoopers LLP on the financial statements of the
Company for the past two fiscal years did not contain an adverse opinion or
disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit
scope or accounting principles. There were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure during the
Company's most recent two fiscal years ending December 31, 1998, and each
subsequent interim period preceding November 15, 1999 which, if not resolved to
PricewaterhouseCoopers LLP's satisfaction, would have caused
PricewaterhouseCoopers LLP to make reference to the subject matter of the
disagreements in connection with their reports.
The Company requested that PricewaterhouseCoopers LLP furnish a letter
addressed to the Securities and Exchange Commission stating whether it agrees
with the statements made by the Company, and, if not, stating the respects in
which it does not agree. A letter from PricewaterhouseCoopers LLP was included
as Exhibit 16 to the Company's Current Report on Form 8-K (the "Current
Report"), stating their agreement with the statements made by the Company in the
Current Report.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table provides information about the Company's directors and
executive officers:
<TABLE>
<CAPTION>
Name Age Position Since
---- --- -------- -----
<S> <C> <C>
Joseph A. Marino .......... 47 Chairman of the Board of Directors, Chief Executive
Officer, President, Treasurer and Director 1998
Peter Buonomo ............. 38 Vice President 1998
Thomas E. Brust ........... 40 Director 1998
Christopher J. Turnbull ... 43 Director 1999
Peter R. Peterson ......... 65 Director 1999
</TABLE>
- -----------
JOSEPH A. MARINO. Chairman, President, Chief Executive Officer, Treasurer and
Director of Cardia since November 1998; Chairman of Applied Biometrics, Inc.
from 1994 to June 1999 and Chief Financial Officer from 1993 to 1996.
PETER BUONOMO. Vice President of Cardia since November 1998; Vice President of
Sales and Marketing of Applied Biometrics, Inc. from 1996 to March 1999, Vice
President of Marketing since 1995 and Director of Marketing from 1994 to
1995.
THOMAS E. BRUST. Director of Cardia since November 1998; Chairman and Chief
Executive Officer of Micronet Medical, Inc., a medical device manufacturer,
since 1992.
CHRISTOPHER J. TURNBULL. Director of Cardia since January 1, 1999; Director and
Chief Executive Officer of St. Paul Medical Inc., a disposable medical device
manufacturer, since 1993; President of Critical Care Anesthetist, P.A.,
22
<PAGE>
a provider of contract nurse anesthetist anesthesia services to hospitals and
ambulatory healthcare facilities, since 1987; served as the interim President
of Oxboro Medical International, a medical device manufacturer, from 1998
until 1999.
PETER R. PETERSON. Director of Cardia since October 7, 1999; Director of PPT
Vision, Inc., a manufacturer, marketer and integrator of machine vision
systems; Secretary and Director of Electro-Sensors, Inc., a manufacturer and
distributor of industrial production monitoring and process control systems.
Mr. Peterson served as Secretary of Electro-Sensors since 1973 and served as
Chairman of the Board from 1969 to 1989. He is also President of P. R.
Peterson, Inc., a venture capital firm where he has served for over five
years; Chairman and Chief Executive Officer of Video Learning Systems, Inc.
from 1982 to 1999.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee is currently comprised of Messrs.
Turnbull (Chair) and Brust. The Audit Committee meets with the Company's
independent auditors and representatives of management to review the internal
and external financial reporting of the Company, reviews the scope of the
internal auditors' examination, considers comments by the auditors regarding
internal controls and accounting procedures and management's response to these
comments and approves any material non-audit services to be provided by the
Company's internal auditors. The Audit Committee met one time during 1999.
The Compensation Committee is currently composed of Messrs. Turnbull
and Brust (Chair). The Compensation Committee reviews and makes recommendations
to the Board of Directors regarding salaries, compensation, stock options and
benefits of officers and employees. The Compensation Committee met one time
during 1999.
The Company does not have a Nominating Committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not applicable.
23
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The following table shows, for the fiscal years ending December 31,
1999, 1998 and 1997, the cash compensation paid by the Company, as well as
certain other compensation paid or accrued for those years, to Joseph A. Marino,
the Company's Chief Executive Officer, and each of the other executive officers
of the Company as determined in accordance with the Securities and Exchange
Commission rules (together with Mr. Marino, the "Named Executives").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES ALL OTHER
SALARY BONUS UNDERLYING OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR(1) ($) ($) (#) ($)
- --------------------------- ------- ------- ----- ------------------ ------------
<S> <C> <C> <C> <C> <C>
Joseph A. Marino(2) .......... 1999 $155,833 -0- 50,000 -0-
Chief Executive Officer 1998 -0- -0- -0- -0-
1997 -0- -0- -0- -0-
Peter Buonomo(3) ............. 1999 82,500 -0- 25,000 -0-
Vice President 1998 -0- -0- -0- -0-
1997 -0- -0- -0- -0-
</TABLE>
- --------------
(1) Cardia was formed in October 1998.
(2) Mr. Marino became Chief Executive Officer of the Company in
November 1998 and received a salary for the remainder of the year
through February 9, 1999, from Applied Biometrics, Inc.
(3) Mr. Buonomo became Vice President of the Company in November 1998 and
received a salary for the remainder of the year through February 9,
1999 from Applied Biometrics, Inc.
24
<PAGE>
The following table provides information about each stock option grant
made during the fiscal year ended December 31, 1999 to the Named Executives:
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
NUMBER OF SECURITIES PERCENT OF TOTAL OPTIONS EXERCISE OR BASE
UNDERLYING OPTIONS GRANTED TO EMPLOYEES PRICE EXPIRATION
NAME GRANTED(#)(1) IN FISCAL YEAR(%) ($/SHARE) DATE
- ---- ------------- ----------------- --------- ----
<S> <C> <C> <C> <C>
Joseph A. Marino 50,000 47.3% $1.10 1/27/09
Peter Buonomo 25,000 23.7% $1.00 3/04/09
</TABLE>
- --------------
(1) The options granted to each of Messrs. Marino and Buonomo were granted
pursuant to the Company's 1999 Omnibus Stock Incentive Plan and contain an
automatic reload feature. The reload feature provides for the automatic issuance
of additional stock options upon the exercise by either Mr. Marino or Mr.
Buonomo of currently outstanding options. The additional options are equal in
number to the number of options exercised but have an exercise price equal to
the fair market value of the Common Stock of the Company on the date the
replacement options are granted.
The following table summarizes stock option exercises during the fiscal
year ended December 31, 1999 and the total number of options held at the end of
fiscal year 1999 by the Named Executives:
AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1999
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE DECEMBER 31, 1999(#) DECEMBER 31, 1999($)
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Joseph A. Marino -0- -0- 50,000 -0- (1) -0-
Peter Buonomo -0- -0- 25,000 -0- (1) -0-
</TABLE>
- ----------------
(1) There is and has been no established trading market or market price for the
Common Stock of the Company. See Item 5. The Company has estimated that the fair
market value of its Common Stock to be $1.00 per share. Accordingly, the options
that have been granted by the Company to Messrs. Marino and Buonomo, exercisable
at a per share price of $1.10 and $1.00, respectively, are not in-the-money.
EMPLOYMENT AGREEMENTS
The Company does not currently have any employment agreements with
either Messrs. Marino or Buonomo.
NON-EMPLOYEE DIRECTOR COMPENSATION
Members of the Board of Directors receive no cash compensation in
connection with their service. All Directors are reimbursed for their travel
expenses incurred in attending board meetings. Upon their election to the Board
of Directors, each of Messrs. Brust, Turnbull and Peterson received a ten-year,
non-qualified stock option to purchase 10,000 shares of common stock of the
Company at an exercise price of $1.00 per share, the Company's estimate of the
fair market value of its common stock on the date of grant.
25
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table presents, as of March 28, 2000, the number and
percent regarding beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to beneficially own more than 5% of the outstanding
shares of Common Stock; (ii) each director and executive officer of the Company;
and (iii) all directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF
BENEFICIAL OWNERS SHARES OWNED
----------------- ---------------------------------------
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY OWNED OF CLASS
------------------ --------
<S> <C> <C>
Cede & Co. .......................................... 635,375 52.9%
c/o Depository Trust Co.
P.O. Box 20
Bowling Green Station
New York, New York 10004
Joseph A. Marino .................................... 330,433(1)(2)(3) 26.4%
13770 Frontier Court
Burnsville, Minnesota 55337
David B. Johnson .................................... 86,588(4) 7.2%
Miller Johnson & Kuehn, Inc.
5500 Wayzata Blvd., Suite 800
Minneapolis, Minnesota 55416
Aaron Boxer Revocable Trust ......................... 76,072(5) 6.3%
c/o Miller Johnson & Kuehn, Inc.
5500 Wayzata Blvd., Suite 800
Minneapolis, Minnesota 55416
Peter R. Peterson ................................... 49,474(1)(6) 4.1%
Peter Buonomo ....................................... 25,000(3)(7) 2.0%
Thomas E. Brust ..................................... 10,000(1)(8) *
Christopher J. Turnbull ............................. 10,000(1)(9) *
All executive officers and directors as a group
(5 persons) ......................................... 424,907(2)(6)(7)(8)(9) 32.6%
</TABLE>
- -----------------------
* Less than 1%.
(1) Current director of Cardia, Inc.
(2) Includes 50,000 shares which could be purchased by Mr. Marino under stock
options exercisable within sixty (60) days. Also includes 2,773 shares held
by Mr. Marino's daughter, Anna M. Marino, and 30,000 shares held by Mr.
Marino or his wife in trusts for their children, the beneficial ownership
of all of such shares is disclaimed.
(3) Current executive officer of Cardia, Inc.
(4) Based upon the Schedule 13G/A filed with the Securities and Exchange
Commission on February 22, 2000. Includes 56,091 and 46 shares owned
respectively by Betty Johnson and Todd Johnson, wife and son of David B.
Johnson. Mr.
26
<PAGE>
Johnson has sole voting and dispositive power with respect to 30,451 shares
and shared voting and dispositive power with respect to 56,137 shares.
(5) Based upon the Schedule 13G filed with the Securities and Exchange
Commission on February 22, 2000. The Aaron Boxer Revocable Trust has sole
voting and dispositive power with respect 68,289 shares and shared voting
and dispositive power with respect to 7,783 shares.
(6) Includes 10,000 shares which could be purchased by Mr. Peterson under stock
options exercisable within sixty (60) days of the date hereof. Calculation
also includes 8,812 shares owned by a subsidiary of Electro-Sensors, Inc.,
of which Mr. Peterson is a director and controlling shareholder.
(7) Includes 25,000 shares which could be purchased by Mr. Buonomo under stock
options exercisable within sixty (60) days of the date hereof.
(8) Includes 10,000 shares which could be purchased by Mr. Brust under stock
options exercisable within sixty (60) days of the date hereof.
(9) Includes 10,000 shares which could be purchased by Mr. Turnbull under stock
options exercisable within sixty (60) days of the date hereof.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included with this Annual Report on Form 10-KSB
(or incorporated by reference) as required by Item 601 of Regulation S-B.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger between Cardia, Inc. and Video Learning
Systems, Inc. dated July 1, 1999 (incorporated herein by reference to
Appendix A to the Company's Registration Statement on Form S-4,
Commission File No. 333-68167).
2.2 Distribution Agreement dated November 1, 1998 between Applied Biometrics,
Inc. and Cardia, Inc. (incorporated herein by reference to Exhibit 2.1
to the Company's Registration Statement on Form SB-2, as amended,
Commission File No. 333-68187 (hereinafter, the "SB-2 Registration
Statement")).
3.1 Articles of Incorporation of Cardia, Inc. (incorporated herein by
reference to Exhibit 3.1 to the SB-2 Registration Statement).
3.2* Articles of Amendment to Articles of Incorporation of Cardia, Inc.
3.3 Bylaws of Cardia, Inc. (incorporated herein by reference to Exhibit 3.2 to
the SB-2 Registration Statement).
4.1 Articles of Incorporation, Articles of Amendment to Articles of
Incorporation and Bylaws of Cardia, Inc. (incorporated by reference to
Exhibit Nos. 3.1, 3.2 and 3.3 above).
27
<PAGE>
4.2 Specimen of Common Stock Certificate for Common Stock of Cardia, Inc.,
$.01 par value per share (incorporated herein by reference to Exhibit
4.2 of the SB-2 Registration Statement).
10.1 Cardia, Inc. 1999 Omnibus Stock Incentive Plan (incorporated by reference
to Exhibit 10.1 to the SB-2 Registration Statement).
16.1 Letter dated November 18, 1999 from PricewaterhouseCoopers, LLP
(incorporated by reference to Exhibit 16 to the Company's Current
Report on Form 8-K, Commission File No. 333-68167).
24.1* Power of Attorney (included on the signature page hereof).
27.1* Financial Data Schedule.
- -----------
* Documents filed herewith.
(b) REPORTS ON FORM 8-K
A Report on Form 8-K was filed on November 18, 1999 to report that
PricewaterhouseCoopers, LLP, Cardiac's certifying accountant, resigned on
November 15 1999. See Item 8.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDIA, INC.
("Registrant")
Dated: March 28, 2000 By /s/ Joseph A. Marino
--------------------------------------
Joseph A. Marino
Chief Executive Officer, President, Treasurer
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on March 28, 2000 on behalf of
the Registrant in the capacities indicated.
(POWER OF ATTORNEY)
Each person whose signature appears below constitutes and appoints JOSEPH
A. MARINO and PATRICK DELANEY as his or her true and lawful attorneys-in-fact
and agents, each acting alone, with the full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any or all amendments to this Annual Report on Form
10-KSB and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, each acting alone, full power and authority
to do and perform each and every act and thing requisite and necessary to be
done in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue thereof.
/s/ Joseph A. Marino
- ----------------------------------
Joseph A. Marino
Chief Executive Officer, President, Treasurer
and Chairman of the Board of Directors
(Principal Executive Officer and Principal Financial Officer)
/s/ Thomas E. Brust
- ----------------------------------
Thomas E. Brust
Director
/s/ Christopher J. Turnbull
- ----------------------------------
Christopher J. Turnbull
Director
/s/ Peter R. Peterson
- ----------------------------------
Peter R. Peterson
Director
29
Exhibit 3.2
ARTICLES OF AMENDMENT TO
ARTICLES OF INCORPORATION
OF
CARDIA, INC.
The undersigned, the incorporator of Cardia, Inc., a Minnesota
Corporation, in order to amend the Articles of Incorporation of Cardia, Inc.
hereby states as follows:
The following Amendment to the Articles of Incorporation of Cardia,
Inc. is hereby adopted in accordance with Minnesota Statutes, Chapter 302A.171:
"ARTICLE III
The authorized capital stock of this corporation
shall be Eleven Million (11,000,000) shares which shall be
Ten Million (10,000,000) shares of Common Stock, $.01 par
value per share, and One Million (1,000,000) shares of
Preferred Stock, par value $ .01 per share. The Preferred
Stock may be issued from time to time as shares of one or
more series. Subject to the provisions hereof and the
limitations prescribed by law, the Board of Directors is
authorized, by adopting resolutions providing for the
issuance of Preferred Stock of any particular series, to
establish the number of shares of Preferred Stock to be
included in each such series, and to fix the designations,
relative powers, preferences, rights, qualifications,
limitations and restrictions thereof, including without
limitation the right to create voting, dividend and
liquidation preferences greater than those of Common Stock."
In Witness Whereof, I have hereunto set my hand this 30th day of
December, 1998.
/s/ Joseph A. Marino
-----------------------------------
Joseph A. Marino, Incorporator
30
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 753,768
<SECURITIES> 0
<RECEIVABLES> 314,068
<ALLOWANCES> 0
<INVENTORY> 53,512
<CURRENT-ASSETS> 1,128,778
<PP&E> 73,939
<DEPRECIATION> (10,911)
<TOTAL-ASSETS> 1,258,472
<CURRENT-LIABILITIES> 63,768
<BONDS> 0
0
0
<COMMON> 12,001
<OTHER-SE> 1,183,703
<TOTAL-LIABILITY-AND-EQUITY> 1,258,472
<SALES> 1,133,906
<TOTAL-REVENUES> 1,133,906
<CGS> (232,895)
<TOTAL-COSTS> (1,555,081)
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (404,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> (404,671)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (404,671)
<EPS-BASIC> (0.45)
<EPS-DILUTED> (0.45)
</TABLE>
