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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended: NOVEMBER 30, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-11868
CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3533362
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6155 CORNERSTONE COURT EAST, SUITE 125, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 535-0202
Securities registered pusuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) 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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not 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. [ ]
The issuer's revenues for the year ending November 30, 1996, were $146,655.
The aggregate market value of the voting stock held by nonaffiliates of the
registrant at March 7, 1997, was approximately $26,584,092, based on the average
bid and ask prices for the Common Stock in the over-the-counter market. At
March 7, 1997, 31,872,628 shares of registrant's Common Stock were outstanding.
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes X No
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Transitional Small Business Disclosure Format (check one): Yes No X .
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THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. SENTENCES IN THIS DOCUMENT
CONTAINING VERBS SUCH AS "PLAN," "INTEND," "ANTICIPATE," "TARGET," "ESTIMATE,"
"EXPECT," ETC., AND/OR FUTURE-TENSE OR CONDITIONAL CONSTRUCTIONS ("WILL," "MAY,"
"COULD," "SHOULD," ETC.) CONSTITUTE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ITEMS CONTEMPLATING, OR MAKING ASSUMPTIONS ABOUT,
ACTUAL OR POTENTIAL FUTURE SALES, MARKET SIZE, ACQUISITIONS, COLLABORATIONS,
TRENDS OR OPERATING RESULTS ALSO CONSTITUTE SUCH FORWARD-LOOKING STATEMENTS.
THESE STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY. CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED
THROUGHOUT THIS FORM 10-KSB AND ARE DISCUSSED IN THE SECTION ENTITLED "RISK " ON
PAGES 11 TO 17 OF THIS FORM 10-KSB. THE COMPANY DOES NOT UNDERTAKE TO UPDATE
THE DISCLOSURES CONTAINED IN THIS DOCUMENT.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CardioDynamics International Corporation ("CDIc" or the "Company") develops,
manufactures and markets noninvasive digital heart monitoring devices which
provide continuous data on a wide range of hemodynamic parameters. The
Company's primary product, the BioZ-TM- System, uses proprietary Thoracic
Electrical Bioimpedance ("TEB") technology to obtain data which is typically
available only through a time consuming, costly, potentially dangerous invasive
procedure.
The mission of CardioDynamics is to be a leading provider of innovative
Bio-medical products and services aimed at improving the quality of life. Our
dedicated, professional team is committed to excellence by consistently
exceeding our customers' requirements.
In November 1996, the Company received 510(k) clearance from the FDA to market
the BioZ-TM- System, a completely re-engineered, digital signal processing-based
version of an earlier, previously-approved analog TEB machine developed by the
Company. To complement the receipt of its marketing clearance, the Company is
currently designing and initiating broad-based, significant clinical trials to
compare the outputs received from the BioZ with those obtained through Right
Heart Catheterization ("RHC") or other measuring techniques for hemodynamic
status.
The BioZ System provides hemodynamic monitoring capability in such an
easy-to-use and available manner that it has the potential to expand the number
of clinical applications appropriate for its use well beyond cardiac units, into
applications for emergency, critically ill, surgical, hypertensive, high risk
obstetric, dialysis, pacemaker, and even sports medicine patients.
INDUSTRY OVERVIEW
Hemodynamic information measures the heart's ability to deliver oxygen-rich
blood throughout the body. The ability of the heart to move blood can be
assessed by looking at three main hemodynamic parameters: contractility, cardiac
output, and fluid level. Based on these parameters, treatment can be directed
towards correcting abnormalities. For example, if a patient's cardiac output is
low, but fluid level is normal, the underlying problem is probably cardiac-based
(cardiogenic), and the clinician should stimulate the heart's
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strength of contraction to increase cardiac output. Conversely, if a patient's
cardiac output and fluids are low, then the first therapeutic action should be
to administer fluids in an attempt to increase cardiac output.
INVASIVE METHODOLOGY. Although hemodynamic parameters are critical in assessing
cardiac function, they are difficult to obtain. The primary method currently
used is RHC, which is also referred to as thermodilution, pulmonary artery
catheterization, or Swan-Ganz-TM- (Baxter Healthcare Corporation's trade name)
catheterization. This method, which was introduced in the 1970's, is invasive,
in that it requires direct access to the arterial circulation. The procedure
involves an incision into a patient's neck region and insertion of a catheter
through the vascular system directly into the chambers of the heart.
This procedure has a morbidity (complication) rate of approximately 10% to 24%
(Moore et al., SURGICAL CLINICS OF NORTH AMERICA, August 1991). Complications
include pneumothorax, pulmonary artery rupture, arrhythmias and severe
infections. Additionally, a recent study performed at the University of
Virginia determined that the use of RHC to monitor cardiac output significantly
increased the risk of death in critically ill patients. The study, which was
reported in the September 1996 issue of the JOURNAL OF THE AMERICAN MEDICAL
ASSOCIATION (JAMA) by Connors et al., examined data from 5,735 intensive-care
patients treated at five U.S. medical centers. Patients who underwent RHC had a
21% higher risk of death within 30 days compared to those who did not undergo
the procedure.
Another significant consideration in the use of RHC is cost. The RHC procedure
requires a hospital to allocate valuable resources in terms of an intensive care
unit bed, cardiac catheterization laboratory or operating room, highly skilled
medical personnel and expensive equipment to obtain non-continuous hemodynamic
data. According to the above referenced JAMA article, the mean cost of the
hospital stay for critically ill patients having an RHC was $49,300, or $13,600
(38%) greater than the $35,700 cost for similar critically ill patients who did
not have an RHC. Overall, it is estimated by JAMA that there are one million
RHCs performed annually in the U.S., with an associated annual cost to the U.S.
healthcare system estimated variously at between $2 billion (reflecting only the
cost of catheters and their insertion) and $14 billion (reflecting also the cost
of complications arising from the procedure).
Many patients who might otherwise benefit from hemodynamic monitoring are
excluded presently because the increased risks and costs associated with RHC
often outweigh the potential benefits. TEB monitoring permits such patients to
receive treatment in a safe, efficient and cost-effective manner.
NONINVASIVE METHODOLOGY. The Company's core technology, TEB is a noninvasive
technology which determines the mechanical activity of the heart (blood flow)
rather than its electrical activity (ECG). TEB has significant advantages over
RHC, including:
1) Elimination of RHC-caused morbidity and mortality;
2) Reduction in associated medical costs;
3) Reduction in set-up and procedure time;
4) Immediate availability of parameters;
5) Continuous, real time data; and
6) Expanded clinical applications.
In analyzing the fundamental theoretical basis of TEB, one must consider that
blood is the most electrically conductive substance in the body. In the thorax,
blood volume and velocity changes with each left ventricular ejection and
results in a change in the electrical conductivity of the thorax.
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In order to measure this conductivity change, the Company's BioZ System utilizes
four dual electrodes (two on the neck and two on the chest) to deliver a high
frequency, low magnitude alternating current through the thorax. Use of a high
frequency current eliminates the possibility of interference with bioelectrical
activity of the heart and brain. Additionally, as the skin-to-electrode
impedance is very low at high frequency, there are no thermal effects to tissue,
thus, no sensation to the patient.
With this current of constant magnitude, variations in blood volume and velocity
in the descending thoracic aorta cause a proportional voltage change. The
measured voltage change is processed by the BioZ System, using sophisticated
proprietary Digital Signal Processing ("DSP") technology. An impedance waveform
is generated and is electronically differentiated to produce a rate of impedance
change, dZ/dt.
Through impedance waveform generation, direct measurement of base impedance,
acceleration index, index of contractility, pre-ejection period, left
ventricular ejection time and heart rate is made. Additionally, the BioZ
System calculates stroke volume, cardiac output and many other parameters. TEB
measures the change in conductivity (or the inverse, which is impedance) over a
change in time. To draw a parallel: RHC measures the change in temperature
over a change in time. In this sense, the two technologies are similar. The
significant dissimilarities originate with the fact the TEB is noninvasive,
whereas RHC is invasive.
Because the Company's products provide hemodynamic parameters noninvasively,
broader clinical applications may exist for its products including use on
critically ill, surgical, emergency, hypertensive, high risk obstetric,
dialysis, sports medicine, and pacemaker patients.
MANAGED CARE ENVIRONMENT. In the early 1980s, national attention focused on
escalating healthcare costs. Congress introduced a new Medicare payment system
called Diagnostic Related Groups (DRGs), which limited reimbursement amounts for
each patient hospitalization. Additionally, third party payors such as
insurance companies, employers and health maintenance organizations (HMOs)
identified numerous factors driving healthcare costs, one of which was the
growing number of invasive procedures. To induce providers to seek more
cost-effective treatments, third party payors began to institute their own
capitated payment systems, thereby shifting the financial risk of offering
patient care from the payor to the provider. In this current environment,
payment incentives are shifting away from the more expensive invasive
technologies. Increasingly, providers are seeking technologies and products
that produce effective outcomes at lower cost.
COMPANY HISTORY
Even before managed care, noninvasive alternatives for hemodynamic monitoring
were being studied. In fact, TEB had been researched since the 1940's. In the
1960's and 1970's, TEB research was funded by NASA, whose goal was to monitor
noninvasively astronauts' hemodynamics under conditions of space flight. While
this was not practical under the technological limitations of that time, the
technology found its way into mainstream medical research.
In 1980, Bomed Medical Manufacturing, Ltd. ("Bomed") was founded to capitalize
on TEB technology. Throughout the 1980's, Bomed obtained patents on TEB and
ultimately produced a noninvasive cardiac analog-based output monitor. The
product had only limited commercial success due to reimbursement disincentives,
technological limitations and inaccurate physiological assumptions. Bomed
entered into Chapter 11 in March 1992, and emerged from bankruptcy in October
1993, under the name of CardioDynamics International Corporation.
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Recognizing the potential value of TEB and the advancement of microprocessors, a
group of investors which included Allen E. Paulson, James C. Gilstrap and
Nicholas V. Diaco, M.D., purchased control of the Company in February 1995. In
June 1995, experienced management was recruited for the revitalization of the
Company. The new management team identified a number of key areas that needed
to be addressed before the Company could successfully launch a medical product.
These areas included:
Advanced development of TEB and the Company's product;
Identification of a credible medical manufacturing partner;
Implementation of quality assurance and regulatory programs;
Establishment of a prominent medical advisory board;
Commencement of clinical trials (and ultimate medical journal publication);
Identification of primary medical markets;
Implementation of a sales and marketing plan; and
Arrangement of additional capital.
Since that time, the Company has made significant advances in each of the areas.
PRODUCTS
BIOZ SYSTEM. The BioZ System is a full-function noninvasive hemodynamic
monitor. It consists of a Pentium-based CPU, 15" high resolution color monitor,
keyboard and ergonomically designed roll cart. Included in the CPU is the
Company's proprietary DSP circuit board and patented software. With the
application of four dual electrodes to the patient's neck and chest, the
physician is able to assess twelve hemodynamic parameters within minutes. The
BioZ System is a system for hospital use which is designed to provide
noninvasive hemodynamic information, including cardiac output, stroke volume,
preload, afterload, contractility and thoracic fluid content.
During 1995-96, the Company re-engineered its analog TEB products (CDM 3000 and
CDM 4000) on a DSP-based platform. This re-engineering effort increased the
accuracy and consistency of TEB from approximately 65% to over 95%, as tested,
documented, and submitted to the FDA in the 510(k) notification. In addition,
the BioZ System offers improved consistency and processing speed over a broader
range of patients than earlier products, through:
Advanced digital processing of patient signals;
Digital waveform sampling rates up to 16 times faster than the previous
technology;
Improved detection and rejection of aberrant beats and noise artifact;
Improved QRS detection and analysis;
Virtually unlimited waveform and data storage; and
Software upgrades with a floppy disk.
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The features and benefits of the BioZ System, as compared to RHC, are as
follows:
FEATURE BENEFIT
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Noninvasive Painless
No morbidity or mortality
Reduced costs and liabilities
May be used on wider range of patient
populations
Potential for improved patient outcomes
Portable May be easily transported and used in any
setting, including all hospital departments,
physician offices and clinics
Two Minute Setup Simple procedure performed by nurses or
technicians
Rapid assessment with potential for improved
patient outcomes
Quick clinical decision capabilities
Continuous Data Reports immediate change
Potential for improved patient outcomes
Disposable Electrodes Reduced cost per evaluation
Simple procedure performed by nurses or
technicians
BIOZ TRANSDUCER ELECTRODES. The Company will market disposable electrodes
designed specifically for use with the BioZ System. With each monitoring event,
four dual electrodes are utilized. These electrodes are placed on the patient's
neck and chest and are generally replaced after each use or every twenty-four
hours.
WARRANTY AND SERVICE
The Company's products are sold with a limited twelve month parts and labor
warranty commencing at the date of sale. When warranty repairs are necessary,
they are performed by the Company at its headquarters or, in some cases, by its
distributors in authorized service centers. The Company provides field
application specialists, as well as 24-hour on-call field engineers.
The Company offers service agreements for hardware and software maintenance
beyond the warranty period. Otherwise, equipment may be serviced by the Company
on a time and materials basis.
MARKETING
Until recently, comprehensive hemodynamic information has been available only in
acute care settings, such as an ICU. The BioZ System makes assessment of this
type of hemodynamic information simple, rapid, cost-effective, safe, continuous
and painless. For these reasons, the Company expects utilization of hemodynamic
information to spread from the ICU to other areas of the hospital and outside
the hospital setting.
The Company intends to increase clinician knowledge of TEB, identify the BioZ
System as the TEB method of choice, and build sales to establish the Company as
the market leader in TEB. The Company has invested considerable resources on
market research, development of product literature, and attendance at trade
shows that target the Company's primary markets.
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The Company participated in a number of trade shows during 1996, including the
North American Society of Pacing and Electrophysiology, the American Association
of Critical Care Nurses, the American Society of Anesthesiology and the American
Heart Association. The Company has developed an aggressive schedule for 1997
including the same shows as in 1996 and will enhance this schedule with several
new shows, including the Society of Critical Care Medicine, the American College
of Cardiology, the American College of Obstetrics and Gynecology, the Canadian
Cardiovascular Society, the American College of Emergency Physicians and the
American Society of Nephrology.
SALES AND DISTRIBUTION
DISTRIBUTION CHANNELS
The Company has identified a select network of regional specialty distributors
that it believes can accomp-lish the Company's goals. The Company has
contracted with 12 regional distributors and intends to contract with several
others, who together would provide nationwide coverage.
Specialty distributors usually work on a regional basis and carry a limited
number of product lines. They have sales representatives that visit various
departments within a hospital and work directly with the appropriate decision
makers in each area. Because specialty distributors generally have exclusive
product lines, they can offer a higher degree of personal service and training.
The Company requires a substantial financial commitment from its specialty
distributors. To become distributors, they must commit to an extensive training
program and order a minimum number of BioZ Systems for demonstration purposes
and for stocking inventory. The Company received initial orders for over $1.0
million from its regional distributors in the first quarter of 1997.
For distribution in Europe and Asia, the Company has entered into an agreement
with Landice International, Inc. ("Landice"). Landice has agreements relating
to the BioZ System with sub-distributors in eight countries, including England,
Italy, Spain, Belgium, Ireland, Japan, South Korea and Taiwan, and is currently
negotiating similar arrangements in other countries of Europe and Asia.
REGIONAL SALES MANAGERS
The Company will be utilizing Regional Sales Managers ("RSMs"), in each of the
four regional territories to manage the distribution network. In order to
create an effective selling team for introduction of the BioZ System, the RSMs
will work very closely with the Company's distributors.
The RSMs are responsible for identifying, evaluating and selecting the
distributors in their given territory. Once distribution agreements are signed,
the RSMs are responsible for assisting the distributors in selling product.
This will be accomplished by educating, training and motivating the distributor
personnel through: (i) joint sales calls with the distributor representatives,
(ii) assistance in sales presentations, evaluations and closing of sales; and
(iii) ongoing correspondence.
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RESEARCH AND DEVELOPMENT
The Company's research and development team presently includes 32 individuals
engaged through independent contractors or as employees. Individuals in the
research and development team have extensive experience in the areas of
impedance tomography, TEB, biological signal processing, hardware/software
development, and regulatory compliance. The team is responsible for on-going
product engineering, new product development, and basic research into additional
TEB and noninvasive monitoring applications. Additionally, the R&D team
participates in monitoring and analysis of Company-sponsored clinical trials.
The key members of the CDIc research and development team include:
MARKUS J. OSYPKA, PH.D. Dr. Osypka has been the Company's Vice President of
Engineering since March 1996. He has seven years experience in the medical
device industry and has held positions as Director of Product Management and
Director of International Sales at Dr. Ing P. Osypka GmbH, Germany. He earned a
Ph.D. in electrical engineering at the University of Karlsruhe in Germany, where
he did extensive research in Electrical Impedance Tomography (EIT).
ERIC E. SCHAFER. Mr. Schafer has been the Company's Director of Engineering
since March 1996 and has six years of research and development experience in
electronic hardware and software. He is involved with the evolution of
software-based signal processing algorithms for the bioelectrical and
bioimpedance waveforms. Mr. Schafer authored two university level research
papers on Electrophysiology and Implantable Cardioverters/Defibrillators. Mr.
Schafer holds Bachelor of Science degrees in both Electrical Engineering and
Biomedical Engineering.
DONALD P. BERNSTEIN, M.D. Dr. Bernstein, the Company's Director of Medical
Science and Services, is an anesthesiologist with over 20 years of clinical
experience at Palomar Medical Center, Escondido, California, Escondido Surgery
Center, Escondido, California, and Sharp Health Care, Murietta, California. Dr.
Bernstein is a leading authority on TEB and has published numerous related
articles. Dr. Bernstein is involved in the development of new physiological
models to further enhance the accuracy and applications of TEB. Dr. Bernstein
received his undergraduate education at Franklin and Marshall College and his
M.D. from George Washington University School of Medicine.
In addition, the Company utilizes Rivertek Medical Systems, Inc. ("Rivertek"),
located in Minneapolis, Minnesota. Rivertek serves as engineering consultant to
medical device manufacturers, including Guidant Corporation and Medtronic, Inc.,
as well as emerging medical technology companies. Founded in 1988 by Dennis
Hepp, Rivertek employs 25 medical hardware and software engineers.
The Company also employs Clinical Application Specialists ("CAS"). Presently,
the Company has four CASs, three at the corporate office and one on the East
coast. These individuals have strong clinical backgrounds and are responsible
for monitoring clinical studies and assisting in the training of distributor
personnel and customers.
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MEDICAL ADVISORY BOARD
The Company has established a distinguished Medical Advisory Board ("MAB")
comprised of 13 doctors, many of whom are affiliated with prestigious
universities and well-known medical institutions. Members of the MAB have
expertise in cardiology, anesthesiology, hypertension, internal medicine and
emergency medicine, and provide guidance to the Company on structuring clinical
trials as well as identifying technological improvements and potential uses for
the Company's products.
Members of the MAB receive reimbursement for their expenses in attending Company
sponsored meetings and receive consulting fees based on the amount of time spent
working on behalf of the Company. During the fiscal year ended November 30,
1996, the members of the MAB received an average of approximately $1,000 per
member in consulting fees.
MANUFACTURING
The Company is licensed as a health care device manufacturer by the Food and
Drug Branch of the California Department of Health Services (equivalent to a
State FDA). The Company has also been audited by the FDA and is in compliance
with GMP standards. Final assembly and testing is completed by the Company.
Initial assembly work is performed under contract by Arrow Schweber Electronics
("Arrow"). As the largest distributor of Intel Corporation products in North
America, and as an experienced medical device manufacturer, Arrow is well
positioned to assist the Company in the manufacture of its products.
ISO 9000 QUALITY CERTIFICATION. As a result of management's commitment to
quality, the Company has commenced quality procedures and documentation required
for successful International Organization for Standardization ("ISO") 9001
certification. Since the ISO 9000 series standards for quality management and
quality assurance are becoming an internationally recognized common standard,
the Company believes ISO 9001 certification, if received, will streamline the
Company's international sales processes. The Company has initiated the process
of modifying internal procedures to conform with ISO 9001 standards. The
Company aims to receive ISO 9001 certification during 1997, although there can
be no assurance the Company will succeed in obtaining such certification or that
it will derive the benefits it expects such certification to bring.
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COMPETITION
NON-TEB COMPETITION
RIGHT HEART CATHETERIZATION. RHC is also known as thermodilution, pulmonary
artery catheterization and Swan-Ganz-TM- catheterization. The RHC procedure was
introduced in the early 1970's and has limitations. Some of the limitations
include:
<TABLE>
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LIMITATION EXPLANATION REFERENCE (IF APPLICABLE)
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<S> <C> <C>
Morbidity (complications) Rates of 10% to 24%, including per Moore, OP. CIT.
infection, cardiac arrhythmias, air
embolus, pulmonary infarction,
pulmonary artery rupture and
pneumothorax
Mortality (death) Increased 30 day death rates in patients per Connors, OP. CIT.
undergoing RHC as compared to those
patients not receiving RHC
Costs Average increased hospitalization costs per Connors, OP. CIT.
of $13,600 per patient
Insertion requirements Hospitalization in an intensive care
bed, operating room or cardiac
catheterization laboratory; sterile
environment; physician, nurses and
trained personnel required for insertion;
X-ray confirmation of placement
Availability of data Intermittent; requires personnel
Variability of data +/-20% error/inconsistency per Moore, OP. CIT.
Conditions that may limit Obesity; anatomical, vascular and
placement or accuracy cardiac structure anomalies; tricuspid,
pulmonary and mitral valve
abnormalities
</TABLE>
Despite the limitations listed in the table above, RHC is the most commonly used
invasive technology for monitoring a patient's hemodynamic status. It is
estimated that RHC procedures are used more than one million times per year in
the United States and more than two million times per year worldwide. The
estimated cost to the U.S. healthcare system is estimated variously as between
$2 billion and $14 billion per year. Baxter Healthcare Corporation, Abbott
Laboratories and B. Braun Medical, Inc. produce the majority of right heart
catheters used in the U.S.
ECHOCARDIOGRAPHY (DOPPLER AND TRANS-ESOPHAGEAL). Echocardiography ("Echo") is a
medical diagnostic tool utilizing ultrasound frequency waves to anatomical
abnormalities of the heart, valvular structures, and great vessels. Echo
technology originally developed during the 1970's, and has advanced through the
years with the addition of sophisticated electronics and digitalization for
acquisition of better images.
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A continuous wave suprasternal doppler echo measures cardiac output
noninvasively by placing a doppler transducer on the chest, aiming it toward the
ascending aorta, and measuring aortic blood flow velocity. Specifically, it
measures the moving red cells to determine the velocity and direction of blood
flow, and measures the aortic diameter to calculate stroke volume, and hence
calculate cardiac output.
Hundreds of thousands of Echoes are performed annually within the U.S. at costs
varying between $300 to $1,200 per exam. Hewlett-Packard Company, Acuson
Corporation, and ATL Ultrasound produce the majority of Echo equipment used
today.
Limitations in measuring cardiac output via Echo include: (i) inconsistency in
images and in the data generated, due to differences in technician ability and
experience, patient size and diagnosis; (ii) difficulty in procuring images in
patients with evidence of pulmonary disease, tracheotomies, chest wounds, and
obesity; and (iii) time consuming procedure that may require 30-45 minutes,
causing patients to complain due to the necessity of patients lying in one
position. In some patients, reliable, accurate Echo images simply cannot be
obtained by doppler echo for unknown reasons.
Due to many of the above limitations, Trans-esophageal Echo ("TEE") has been
developed in recent years to obtain closer images of the heart. It is useful in
patients in whom examination from the usual position is impossible technically
and in patients undergoing cardiac surgery. TEE is performed with the
ultrasound transducer placed invasively through the mouth and down the
esophagus. Although this procedure enables more direct, accurate images of the
heart, several disadvantages accompany this technique because of its invasive
nature. Some disadvantages include increased patient discomfort, patient
sedation to promote procedure tolerance, and necessity of available emergency
equipment, such as oxygen, intubation equipment, and ECG monitoring, in case of
patient airway complications. Consequently, the procedure customarily is
performed in an outpatient clinic or hospital setting with several attendants,
usually an Echo technician, a nurse and a physician. TEE is used much less
frequently than Echo.
DIRECT COMPETITION
Management is aware of only two additional manufacturers of TEB hemodynamic
monitors. Since both companies are privately held, exact sales figures for
these potential competitors are not available.
INTELLECTUAL PROPERTY
The Company's success will to some extent depend on its ability to maintain
patent protection for its products and processes, to preserve its trade secrets
and proprietary technology and to operate without infringing upon the patents or
proprietary rights of third parties. At March 7, 1997, the Company had seven
issued U.S. patents and multiple international patents and patent applications
based on five of those.
All of the Company's existing patents were issued prior to the re-engineering of
the products to a DSP-based system. As such, several of the patents are not
integral to the design of BioZ. The Company also possesses proprietary software
which it has strategically elected not to disclose through patents.
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THIRD PARTY REIMBURSEMENT
Most medical procedures are reimbursed by a variety of third party payors,
including Medicare and private insurers. Health Care Finance Association, the
governmental body which approves medical diagnosis and treatment for financial
reimbursement for Medicare coverage, determines whether to reimburse for a given
type of procedure and what dollar amount should be allowed. Currently, TEB does
not have a unique CPT code. The Company's goal is to obtain a specific code for
TEB which may allow higher reimbursement amounts. Although a specific TEB code
allowing for higher reimbursement would most likely contribute to increased
outpatient and physician office utilization, the Company believes current
reimbursement sufficiently justifies the equipment cost for outpatient and
physician office utilization and would not be a significant factor in hospital
purchasing decisions.
While management of the Company expects to pursue obtaining a separate
reimbursement code for TEB procedures, it is quite possible that cost
containment pressures on the hospitals and doctors will lead to substantially
increased usage of TEB even without a change in reimbursement policies. The
financial and health care cost containment pressures at all U.S. hospitals,
resulting from per-capita compensation techniques required by HMOs, are driving
medical departments to decrease costs. In a managed care system involving
capitation, the health care provider is strongly induced to utilize the most
cost-efficient methods available in order to maintain per-patient costs within
the monthly fees. The BioZ System has the potential to reduce hospital costs.
Therefore, an incentive exists, completely independent of third party procedure
reimbursement circumstances, for hospitals to purchase and use the Company's
products.
EMPLOYEES
At March 7, 1997, the Company has 25 employees. The Company believes that the
success of its business will depend, in part, on its ability to identify,
attract and retain qualified personnel. In the future, the Company will need to
add additional skilled personnel or retain consultants in such areas as research
and development, manufacturing and marketing and sales. The Company considers
its relationship with its employees to be good.
RISK FACTORS
DEPENDENCE ON PRIMARY PRODUCT; UNCERTAINTY OF MARKET ACCEPTANCE. The Company's
future is substantially dependent upon the success of the BioZ System and
follow-on products. The market for TEB products is in a relatively early stage
of development, and there can be no assurance that this market will develop.
The long-term commercial success of the BioZ System and any follow-on TEB
products requires widespread acceptance, by a significant portion of the medical
community, of the Company's TEB products as safe, efficacious and cost-effective
alternatives to invasive procedures. Widespread acceptance would represent a
significant change in practice patterns. Historically, some medical
professionals have indicated hesitancy in using TEB products such as
analog-based TEB monitors previously manufactured by the Company. Invasive
procedures, such as right heart catheterization, are generally accepted in the
medical community and have a long history of use.
11
<PAGE>
The Company currently has limited clinical data with which to demonstrate the
clinical benefits of its products but plans to conduct clinical trials which it
hopes will demonstrate consistent clinical benefits resulting from the use of
its products (including reduced procedure time, reduced patient trauma and lower
costs). There can be no assurance as to when such clinical trials will be
completed, that such clinical trials will have a positive outcome or that a
positive outcome in such trial would be sufficient to enable acceptance of the
BioZ System by the medical community. The Company is unable to predict how
quickly, if at all, its products may be accepted by members of the medical
community. Technological limitations of TEB make it subject to inaccuracies
where a patient has certain identified clinical circumstances such as:
Severe septic shock,
Significant pulmonary hypertension,
Aortic valve regurgitation,
Severe hypertension (MAP greater than 130mmHg),
Tachycardia rates greater than 180BPM,
Patients heights measuring less than 47"(120cm),*
Patients weight measuring less than 66 lbs(30kg) or greater than 342 lbs.
(155kg),*
Extreme patient movement*
_______________________
*Until algorithm development for pediatric and exercise applications is
completed.
Failure of the BioZ System or other of the Company's TEB products to gain
widespread acceptance in the medical community, and to maintain such acceptance,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company competes with other entities
developing and marketing non-invasive hemodynamic monitors. The Company also is
subject to severe competition from invasive-technology companies, including
Baxter Healthcare Corporation, which have more established and larger marketing
and sales organizations, significantly greater financial and technical resources
and a larger installed base of customers than the Company. Such competitors may
be able to devote greater resources to the development, promotion and sales of
their products than the Company. The current widespread acceptance of RHC, and
lack of widespread acceptance of TEB, is an important competitive disadvantage
which the Company must overcome. In addition, current and potential small
competitors of the Company may establish cooperative relationships with large
medical equipment companies to gain access to greater research and development
or marketing resources. Competition may result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to compete
successfully.
In addition, the introduction by others of products embodying new technologies
and the emergence of new hemodynamic monitoring equipment industry standards
could render the Company's products obsolete and unmarketable. Other companies
may develop and introduce products and processes competitive with or superior to
those of the Company. In addition, other technologies or products may be
developed that have an entirely different approach or means of accomplishing the
intended purposes of the Company's products. Accordingly, the life cycles of
the Company's products are difficult to estimate. To compete successfully, the
Company must develop and introduce new products that keep pace with
technological developments, respond to evolving consumer requirements and
achieve market acceptance.
12
<PAGE>
There can be no assurance that the Company can satisfactorily and timely develop
and introduce additional products. Even if the Company succeeds in developing
and marketing products that achieve market acceptance, there can be no assurance
that competitors will not in the future develop and market products that will
replace those of the Company.
The Company's business plan contemplates an income stream from sales of
electrodes toward an installed base of Company monitors. The Company may be
subject, however, to price competition from other electrode manufacturers.
NEW MANAGEMENT AND PRODUCTS. Although not in fact a new company, the Company
now has entirely new management and personnel, and its products and operations
have been redeveloped. Therefore, currently the Company faces many of the
challenges characteristic of new companies in or just emerging from the
development phase.
The BioZ System has required, and any future products will require, substantial
development efforts and compliance with all governmental clearance/approval
requirements. The Company may encounter unforeseen technological or scientific
problems, which may force abandonment or substantial change in the development
of a specific product or process, or technological change or product
developments by others, any of which may have a material adverse effect on the
Company. Further, even after successful technical development and receipt of
governmental approval, a product may not achieve commercial success.
HISTORY OF LOSSES. Since its emergence from bankruptcy proceedings in 1993, the
Company has incurred substantial losses in the course of researching, developing
and enhancing its technology and products and establishing an administrative
organization. The Company anticipates that its operating expenses will increase
substantially in the foreseeable future as it increases its sales and marketing
activities, expands its operations and management and continues the development
of its technology. Accordingly, the Company expects to incur additional losses
for fiscal 1997, and there can be no assurance that the Company will achieve or
sustain revenue growth or profitability.
ABILITY TO MANAGE GROWTH. The Company, if successful, will experience a period
of growth that would place a significant strain upon its managerial, financial
and operational resources. There can be no assurance that the Company's
systems, procedures or controls will be adequate to support the Company's
operations or that the Company's management will be able to achieve the rapid
execution necessary to fully exploit any future market opportunity for the
Company's products. The Company's future operating results will also depend on
its ability to complete its geographic network of distributors, expand its sales
and marketing organizations, and fill out its staff support organization. If
the Company is unable to manage expansion effectively, the Company's business,
results of operations and financial condition will be materially and adversely
affected. There can be no assurance, however, that such expansion or growth
will occur.
GOVERNMENT REGULATION. The Company's products and activities are subject to
extensive regulation by the FDA and other governmental authorities. Delays in
receipt of, or failure to obtain, regulatory clearances and approvals, or any
failure to comply with regulatory requirements could have a material adverse
effect on the Company's business, financial condition and results of operations.
13
<PAGE>
The Company's TEB products are subject to extensive and rigorous regulation by
the FDA and, to varying degrees, by state and foreign regulatory agencies.
Under the federal Food, Drug, and Cosmetic Act (the "FDC Act"), the FDA
regulates the clinical testing, manufacture, labeling, packaging, marketing,
distribution and record keeping for medical devices, in order to ensure that
medical devices distributed in the United States are safe and effective for
their intended use.
Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA clearance of a 510(k) or approval of a premarket
approval ("PMA") application. Following submission of a 510(k) or PMA
application, the manufacturer may not market the new device until an order is
issued by the FDA granting clearance or approval, which can entail an expensive,
lengthy and uncertain process.
The Company is also subject to routine inspection by the FDA and state agencies,
such as the California Department of Health Services, for compliance with Good
Manufacturing Practice requirements, Medical Device Reporting requirements and
other applicable regulations. Noncompliance with applicable requirements can
result in warning letters, import detentions, fines, civil penalties,
injunctions, suspensions or losses of regulatory approvals, recall or seizure of
products, operating restrictions, refusal of the government to approve product
export applications or allow the Company to enter into supply contracts and
criminal prosecution. Delays in receipt of, or failure to obtain, regulatory
clearances and approvals, if obtained, or any failure to comply with regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has received a
marketing clearance for its BioZ System.
The FDC Act requires that medical devices be manufactured in accordance with the
current GMPs. GMPs require, among other things that (I) the manufacturing
process be regulated and controlled by the use of written procedures, (ii) the
ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process and
(iii) any deficiencies in the manufacturing process or in the products produced
be investigated and detailed records kept. Manufacturing facilities are subject
to FDA inspection on a periodic basis to monitor compliance with current GMPs.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.
For any medical device cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness of the
device or that constitute a major change to the intended use of the device
require a new 510(k) submission. If the FDA requires the Company to submit a
new 510(k) notice for any product modification, the Company may be prohibited
from marketing the modified product until the 510(k) notice is cleared by the
FDA.
The FDA regulates computer software that performs the function of a regulated
device or that is intimately associated with a given device, such as control
software for diagnostic devices. The FDA is in the process of reevaluating its
regulation of such software, and if the FDA undertakes increased or more
rigorous regulation of such software, the BioZ System and related products may
become subject to further regulatory processes and clearance requirements.
Laws and regulations regarding the manufacture, sale and use of medical devices
are subject to change and depend heavily on administrative interpretations.
There can be no assurance that future changes in the regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
14
<PAGE>
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary from country to country. The Company
currently relies on its international distributors and sub-distributors for the
receipt of premarket approvals and compliance with clinical trial requirements
in those countries that require them, and it expects to continue to rely on
distributors in those countries where the Company continues to use distributors.
In the event that the Company's international distributors fail to obtain or
maintain required premarket approvals or fail to comply with foreign
regulations, foreign regulatory authorities may require the Company to cause the
applicable distributor to file revised governmental notifications, cease
commercial sales of its products in the applicable countries or otherwise act so
as to stop any ongoing noncompliance in such countries. Such enforcement action
by regulatory authorities could have a material adverse effect on the Company's
business, financial condition and results of operations.
In order to sell its products within the European Economic Area following
June 14, 1998, the Company will be required to achieve compliance with the
requirements of the EEA's Medical Devices Directive and to affix CE marking on
its products to attest such compliance. Failure by the Company to comply with
CE marking requirements by June 1998 would mean that the Company would be unable
to sell its products in the European Economic Area unless and until compliance
was achieved, which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE. Commercialization by the Company of the BioZ System and the
development and commercialization of any additional products will require
substantial expenditures. The Company's capital requirements will depend on
numerous factors, including the rate of sales growth; the progress of the
Company's marketing-related clinical evaluations and product development
programs; the receipt of, and the time required to obtain, regulatory clearances
and approvals; the resources the Company devotes to the development, manufacture
and marketing of its products; the resources required to hire and develop
medical sales representatives and independent distributors and to develop
internal manufacturing capacity; facilities requirements; market acceptance and
demand for its products; the ability of the Company and its distributors to
avoid increased working capital requirements arising from hospitals' lengthy
capital equipment purchase processes by offering leasing programs; and other
factors. The timing and amount of such capital requirements cannot be
accurately predicted. The Company may be required to raise additional funds
through public or private financings, bank loans, collaborative relationships or
other arrangements earlier than expected. There can be no assurance that such
additional funding will be available on terms attractive to the Company, or at
all.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS. Allen E. Paulson and
James C. Gilstrap, the co-chairmen of the Company, beneficially own, directly or
through CardioDynamics Holdings,LLC, which they control, approximately 81% of
the outstanding shares of the Company's Common Stock (including shares owned by
others which CardioDynamics Holdings, LLC has the right to vote). Accordingly,
these persons, individually and as a group, are able to control the Company and
direct its affairs and business, including any future issuances of Common Stock
or other securities by the Company, merger and acquisition decisions,
declaration of dividends and the election of directors. CardioDynamics
Holdings, LLC also has a contractual right to purchase at $0.25 per share the
same number of shares of Common Stock as the Company may from time to time issue
to any other person.
15
<PAGE>
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is dependent upon
a limited number of key management and technical personnel. The loss of the
services of one or more of such key employees could have a material adverse
effect on the Company's business, financial condition, and results of
operations. In addition, the Company's success depends upon its ability to
attract and retain additional highly qualified sales, management, manufacturing
and research and development personnel. The Company faces intense competition
in its recruiting activities and there can be no assurance that the Company will
be able to attract and/or retain qualified personnel.
DEPENDENCE ON DISTRIBUTOR NETWORK. There can be no assurance that the Company
will succeed in entering into contracts with its desired specialty distributors
or in sufficient numbers on a timely basis or on terms that are satisfactory to
the Company, or in maintaining satisfactory relationships with its distributors.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's patents and
proprietary technology may not be able to prevent effective competition by
others. Although the Company believes that it has effective patent protection,
no assurance can be given that the Company's products will not be found to
infringe the rights of others. Intellectual property litigation, whether
defensive or offensive, would have no certain outcome other than to drain the
Company's resources.
The validity and breadth of claims in medical technology patents involve complex
legal and factual questions. No assurance can be given that any future patent
applications will be issued, that the scope of any patent protection will
exclude competitors or provide competitive advantages to the Company, that any
of the Company's patents will be held valid if subsequently challenged or that
others will not claim rights in or ownership of the patents and other
proprietary rights held or licensed by the Company or that the Company's
existing patents will cover the Company's future products. Moreover, when the
Company's key patents expire, the inventions will be in the public domain.
Since patent applications in the United States are maintained in secrecy until
patents issue, the Company cannot be certain that it will not infringe any
patents that may be issued to others. In the event the Company's products are
found to infringe patents held by competitors, there can be no assurance that
the Company will be able to modify successfully its product to avoid
infringement, or that any modified products will be commercially successful.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of substantial numbers of shares of
Common Stock in the public market following the EVEREN private placement could
adversely affect the market price for the Common Stock. Among other things, the
reduction, effective April 29, 1997, of the Rule 144 holding period to one year
will accelerate the time when substantial numbers of shares become first
eligible for public sale.
POTENTIAL VOLATILITY OF STOCK PRICE. The market price of the Company's Common
Stock is likely to be highly volatile and could be subject to wide fluctuations
in response to various factors beyond the control of the Company, including (i)
quarterly variations in operating results, (ii) announcements of technological
innovations, new products or pricing by the Company's competitors, (iii) changes
in, or failure of the Company to meet, financial estimates of securities
analysts, (iv) the rate of adoption by physicians of TEB technology in markets
targeted by the Company, (v) timing of patent and regulatory approvals, (vi)
timing and extent of technological advancements, (vii) results of clinical
studies and (viii) general market conditions. In addition, the stock market has
experienced significant price and volume fluctuations that have affected the
market prices of equity securities of many medical device companies and that
often have been unrelated to the operating performance of such companies. These
broad market fluctuations may adversely affect the market price of the Company's
Common Stock.
16
<PAGE>
LIMITED FLOAT OF COMMON STOCK. The Company has a relatively small market float,
which may adversely affect market liquidity and increase stock price volatility
(see above). The Company intends to apply to have its Common Stock listed for
quotation in the Nasdaq Small Cap Market and believes (after the EVEREN private
placement) that it meets all of Nasdaq's requirements. However, there can be no
assurance that the Company will succeed in having the Common Stock listed for
quotation in the Nasdaq Small Cap Market or that a more liquid or active public
market for the Common Stock will develop or be sustained.
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES. The Company believes it is
possible that international sales will represent a meaningful portion of revenue
in the future. This would require significant management attention and
financial resources and subject the Company further to the risks of selling
internationally. These risks include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions, and an adverse effect
from reduced protection for intellectual property rights and the burdens of
complying with a variety of foreign laws. In addition, fluctuations in the
rates of exchange could increase the price in local currencies of the Company's
products in foreign markets and make the Company's products relatively more
expensive than competitors' products that are denominated in local currencies.
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE. The
nature of the Company's business exposes it to risks of product liability or
product recalls that are inherent in the design, development, manufacture and
marketing of medical devices, in the event that use of the Company's products is
alleged to have caused adverse effects on a patient or such products are
believed to be defective. Medical devices as complex as those offered by the
Company frequently contain errors or failures, especially when first introduced
or when new versions are released. The Company's products are designed to be
used in certain procedures where there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or may in the future receive, regulatory clearance for commercial
sale.
The Company did not carry product liability insurance during certain periods
prior to May 15, 1995. Therefore, it has no coverage for analog TEB monitors
manufactured and sold during certain times. Since then, the Company has
maintained product liability insurance at levels which it believes to be
sufficient and consistent with industry standards for companies with its current
sales levels. The Company intends to increase its product liability insurance
policy limit as sales grow. There can be no assurance that the Company's
product liability insurance is adequate or that such insurance coverage will
continue to be available on commercially reasonable terms or at all. In
addition, product liability claims or recalls could result in loss of revenue or
delay in market acceptance, diversion of development resources, damage to the
Company's reputation or increased service and warranty costs.
UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTH CARE REFORM. The health
care industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the United States, comprehensive programs
have been proposed that seek to (i) increase access to health care for the
uninsured, (ii) control the escalation of health care expenditures within the
economy, and (iii) use health care reimbursement policies to help control the
federal deficit. The Company anticipates that Congress and state legislatures
will continue to review and assess such proposals, and public debate of these
issues will likely continue. The Company cannot predict which, if any, of such
reform proposals will be adopted and when they might be adopted. Other
countries also are considering health care reform. Significant changes in
health care systems are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition and results of
operations, and ability to market its products as currently contemplated.
17
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company is located in an approximately 6,000 square foot subleased facility
in San Diego, California. This facility houses all of the Company's research,
development, manufacturing, marketing, sales and administrative activities
except for field and contract personnel. The Company is currently investigating
larger facilities.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company trades in the over-the-counter market (OTC
Bulletin Board) under the symbol CRDY. The following table sets forth for the
periods indicated the high and low bid prices of the Common Stock as furnished
by the National Quotation Bureau, Inc. Such quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
HIGH LOW
---- ---
YEAR ENDING NOVEMBER 30, 1996
Fourth Quarter. . . . . . . . . . . . . . . . $4.88 $2.25
Third Quarter . . . . . . . . . . . . . . . . 4.38 2.00
Second Quarter. . . . . . . . . . . . . . . . 4.07 0.85
First Quarter . . . . . . . . . . . . . . . . 1.01 0.86
YEAR ENDING NOVEMBER 30, 1995
Fourth Quarter. . . . . . . . . . . . . . . . $1.19 $0.50
Third Quarter . . . . . . . . . . . . . . . . 1.06 0.56
Second Quarter. . . . . . . . . . . . . . . . 1.75 0.75
First Quarter . . . . . . . . . . . . . . . . 2.00 0.38
As of January 29, 1997 there were approximately 448 holders of record of the
Common Stock.
The Company has never paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future.
18
<PAGE>
The Company sold, in the fourth quarter of fiscal 1996, 236,219 shares of common
stock for $625,000 cash to three accredited investors (141,731 shares were sold
on November 20, 1996 and 94,488 shares were sold on December 10, 1996). No
placement agent or underwriter was used, and there were no commissions or
discounts paid. The transactions were exempt from Securities Act registration
requirements, pursuant to Section 4(2) of the Securities Act. The purchasers
received a contractual right, which they later exercised in fiscal 1997, to
rescind their purchases and re-invest in a larger offering of Company
securities (i.e., the private placement through EVEREN Securities, Inc.)
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
RESULTS OF OPERATIONS
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net sales during the fiscal years ended November 30, 1996 and 1995, (and 1994 as
well) relate to the Company's CDM 3000 and CDM 4000 monitors and electrodes
which have now been rendered obsolete by the BioZ System. Since CardioDynamics
Holdings, LLC purchased control of the Company in February 1995 and new
management was brought in shortly thereafter, the focus of the Company has been
on re-engineering the product, further development of the technology,
identification of a manufacturing partner, implementation of quality and
regulatory programs, establishment of a medical advisory board, commencement of
clinical trials and development of a sales and marketing plan. During these
fiscal years, the Company did not emphasize efforts to sell its earlier
generation, analog-based product line. On November 26, 1996, the Company
received Food and Drug Administration clearance to market the BioZ System.
The net losses recorded by the Company in fiscal 1996 and 1995 were not
materially different. Included in Cost of Sales are inventory write-down and
obsolescence charges of $146,054 and $254,699 in fiscal 1996 and 1995,
respectively, related to the earlier generation equipment Fiscal 1996 Research
and Development expenses include approximately $354,000 of consulting fees
related to the product redesign and regulatory programs instrumental in
achieving FDA 510(k) clearance for the BioZ System.
FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994
CDIc's fiscal 1995 net loss from operations was $2,402,473, compared to a net
loss from operations of $563,897 in fiscal 1994. The overall net loss for
fiscal 1994 included $270,030 of non-recurring bankruptcy-related income and the
write-off of $2,069,590 of "reorganization value" which had been recorded in
fiscal 1993 under fresh-start accounting.
Net product sales for fiscal 1995 were $275,743, a decrease of $331,998 or 55%
less than revenues in fiscal 1994. The decrease was due to reduced sales efforts
on older products during a period of product development for the new CDM-3000
and CDM-4000 product lines and difficulties with quality control and component
supply issues. Cost of goods sold increased to 137% of sales in fiscal 1995
compared to 1994. Selling, general and administrative expenses increased 141% or
$1,125,007 in fiscal 1995 compared to fiscal 1994 due to heavy investment in
sales and marketing staff (which was subsequently reduced) and to attendance at
trade shows.
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<PAGE>
Research and development expenses increased $22,745 or 18% in fiscal 1995
compared to fiscal 1994 due to the addition of an electrical engineer to assist
in the design and implementation of next generation products.
The Company's $59,377 in "other income" in fiscal 1995 was the result of
recognizing a gain on the forgiveness of debt from two creditors.
The Company's number of shares outstanding increased significantly in fiscal
1995 and 1996 due primarily to the sales of shares to CardioDynamics Holdings,
LLC, which now controls the Company, and to its individual members.
LIQUIDITY AND CAPITAL RESOURCES
The Company concluded that its "cash burn" rate in fiscal 1995 was excessive and
implemented strategies to preserve cash pending the growth of sales. To fund
its operating losses, the Company has relied primarily on periodic purchases of
unregistered securities by members of the Board of Directors and an affiliated
holding company. There are no binding obligations for such purchases to
continue.
Working capital at November 30, 1996 was $1,076,380. This is an uncomfortably
low level, given present sales levels. In their audit report of the Company's
fiscal 1995 financial statements, the Company's auditors expressed substantial
doubt about the Company's ability to continue as an ongoing concern. The
Company was in bankruptcy proceedings from March 6, 1992 to October 21, 1993.
Two important events in November, 1996 have brightened the liquidity picture.
First, the Company signed an engagement letter with EVEREN Securities, Inc. for
a best-efforts private placement of Common Stock. In February and March 1997,
the Company sold $7.2 million of common stock at $2.85 per share to purchasers
in that offering. (Approximately $0.6 million represented exercises by
non-affiliates, who had purchased common stock in the fourth quarter of fiscal
1996, of a contractual right to rescind those purchases and re-invest the money
in the EVEREN offering).
Second, the BioZ System received FDA 510(k) clearance to market. Although
marketing and manufacturing the BioZ System will increase working capital
requirements, the FDA action opens the prospect for commercialization of the
BioZ System, which the Company believes can result in increased revenues.
20
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ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CardioDynamics International Corporation
We have audited the accompanying balance sheets of CardioDynamics International
Corporation (the "Company") as of November 30, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity and cash flows for the
years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CardioDynamics International
Corporation, as of November 30, 1996 and 1995, and the results of its
operations, changes in shareholders' equity and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
PETERSON & CO.
February 25, 1997
(except for Note 14, as to which the date
is March 6, 1997)
21
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CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS
November 30, 1996 and 1995
ASSETS
1996 1995
------------ -------------
Current assets:
Cash and cash equivalents $ 706,190 $ 7,441
Marketable securities 262,619 259,151
Receivables, less allowance for doubtful
receivables of $7,461 in 1996 and
$32,354 in 1995 24,925 75,861
Inventories, net 293,629 263,382
Other current assets 68,336 642
------------ -------------
Total current assets 1,355,699 606,477
------------ -------------
Property and equipment, at cost 265,781 404,207
Less: accumulated depreciation (156,149) (237,903)
------------ -------------
Net property and equipment 109,632 166,304
Other assets:
Deposits 4,250 6,615
------------ -------------
Total assets $ 1,469,581 $ 779,396
------------ -------------
------------ -------------
(continued)
The accompanying notes are an integral part of the financial statements.
22
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CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS (Continued)
November 30, 1996 and 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
1996 1995
------------ ------------
Current liabilities:
Accounts payable $ 125,385 $ 186,027
Accrued expenses 67,264 84,532
Accrued salaries, wages and related benefits 28,882 47,857
Customer deposits 23,012 26,075
Marketable securities held
for redeemed preferred shares 22,676 --
Current portion of long-term debt 12,100 14,231
------------ ------------
Total current liabilities 279,319 358,722
------------ ------------
Long-term debt, less current maturities 37,822 48,496
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par, 500,000 shares authorized;
issued and outstanding 183,115 and 246,793
shares in 1996 and 1995, respectively 457,791 616,986
Common stock, no par, 50,000,000 shares
authorized; issued and outstanding 29,581,696
shares in 1996 and 19,251,320 shares in 1995 8,366,514 4,919,858
Unrealized loss on marketable securities (89,270) (92,738)
Accumulated deficit (7,582,595) (5,071,928)
------------ ------------
Total shareholders' equity 1,152,440 372,178
------------ ------------
Total liabilities and shareholders'
equity $ 1,469,581 $ 779,396
------------ ------------
------------ ------------
The accompanying notes are an integral part of the financial statements.
23
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
For The Years Ended November 30, 1996 and 1995
1996 1995
------------- -------------
Net sales $ 146,655 $ 275,743
Cost of sales 240,987 631,807
------------- -------------
Gross margin (94,332) (356,064)
Operating expenses:
Selling, general and administrative expenses 1,690,710 1,936,566
Research and development 680,549 147,899
------------- -------------
Total operating expenses 2,371,259 2,084,465
------------- -------------
Loss from operations (2,465,591) (2,440,529)
Other income (expense) (44,276) 38,856
------------- -------------
Loss before provision for income taxes (2,509,867) (2,401,673)
------------- -------------
Provision for income taxes 800 800
------------- -------------
Net loss $ (2,510,667) $ (2,402,473)
------------- -------------
------------- -------------
Net loss per common share $ (.11) $ (.17)
------------- -------------
------------- -------------
Weighted average number of common and
common equivalent shares outstanding 22,926,074 13,980,288
------------- -------------
------------- -------------
The accompanying notes are an integral part of the financial statements.
24
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For The Years Ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------------------- -------------------------- Unrealized Loss
on Marketable
Shares Amount Shares Amount Securities Deficit Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1994 8,912,813 $ 2,479,119 246,793 $ 616,986 $ -- $ (2,669,455) $ 426,650
Issuance of common stock 810,507 202,627 -- -- -- -- 202,627
Issuance of common stock --
professional services 350,000 87,500 -- -- -- -- 87,500
Issuance of common stock --
related parties 9,178,000 2,150,612 -- -- -- -- 2,150,612
Unrealized loss on marketable
securities -- -- -- -- (92,738) -- (92,738)
Net loss -- -- -- -- -- (2,402,473) (2,402,473)
------------ ------------- ------------- ------------- ------------- ------------ ------------
Balance at November 30, 1995 19,251,320 4,919,858 246,793 616,986 (92,738) (5,071,928) (372,178)
------------ ------------- ------------- ------------- ------------- ------------ ------------
Issuance of common stock 236,220 625,000 -- -- -- -- 625,000
Issuance of common stock -
professional services 45,000 11,250 -- -- -- -- 11,250
Issuance of common stock --
related parties 9,948,000 2,487,000 -- -- -- -- 2,487,000
Compensatory stock options
granted -- 50,878 -- -- -- -- 50,878
Preferred shares redeemed 63,678 136,519 (63,678) (159,195) -- -- (22,676)
Unrealized gain on marketable
securities. -- -- -- -- 3,468 -- 3,468
Exercise of Class A warrants 113 226 -- -- -- -- 226
Exercise of Class B warrants 25,350 93,730 -- -- -- -- 93,730
Exercise of Class C warrants 12,015 42,053 -- -- -- -- 42,053
Net loss (2,510,667) (2,510,667)
------------ ------------- ------------- ------------- ------------- ------------ ------------
Balance at November 30, 1996 29,581,696 $ 8,366,514 183,115 $ 457,791 $ (89,270) $ (7,582,595) $ 1,152,440
------------ ------------- ------------- ------------- ------------- ------------ ------------
------------ ------------- ------------- ------------- ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
For The Years Ended November 30, 1996 and 1995
1996 1995
----------- -----------
Cash flows from operating activities:
Net loss $(2,510,667) $(2,402,473)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 92,029 37,273
Loss on disposal of fixed assets 37,348 4,395
Provision for doubtful receivables 7,575 18,000
Provision for inventory obsolescence 146,054 254,699
Compensation on compensatory stock options
granted 50,878 --
Income from forgiveness of long-term debt -- (13,792)
Income from forgiveness of debt to related
parties -- (48,007)
Changes in operating assets and liabilities:
Receivables 43,361 110,487
Inventories (205,591) (256,665)
Other current assets (67,694) 1,295
Deposits 2,365 (805)
Accounts payable (60,642) 217,289
Accrued expenses (17,268) 1,647
Accrued salaries, wages and related benefits (18,975) 33,610
Due to related parties -- (4,366)
Customer deposits (3,063) 26,075
Deferred revenue -- (14,100)
----------- -----------
Net cash used in operating activities (2,504,290) (2,035,438)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (43,415) (95,743)
----------- -----------
(Continued)
The accompanying notes are an integral part of the financial statements.
26
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS (Continued)
For The Years Ended November 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Repayment of long-term debt $ (12,805) $ (128,882)
Proceeds from debt issuance -- 30,644
Repayment of debt to related party -- (158,765)
Proceeds from debt issuance to related party 1,800,000 175,000
Issuance of common stock 1,459,259 2,203,239
------------ ------------
Net cash provided by financing activities 3,246,454 2,121,236
------------ ------------
Net increase (decrease) in cash and cash equivalents 698,749 (9,945)
Cash and cash equivalents at beginning of year 7,441 17,386
------------ ------------
Cash and cash equivalents at end of year $ 706,190 $ 7,441
------------ ------------
------------ ------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 9,490 $ 11,653
------------ ------------
------------ ------------
Cash paid for income taxes $ 800 $ 800
------------ ------------
------------ ------------
Supplemental disclosure of non-cash investing and financing activities:
Inventory transferred to property and equipment
for testing purposes $ -- $ 28,000
------------ ------------
------------ ------------
Common stock issued upon conversion of long-term debt $ 1,800,000 $ 150,000
------------ ------------
------------ ------------
Common stock issued upon redemption of preferred stock $ 136,519 $ --
------------ ------------
------------ ------------
Common stock issued in exchange for services $ -- $ 87,500
------------ ------------
------------ ------------
Increase in value of common stock resulting from
recognition of compensation expense $ 50,878 $ --
------------ ------------
------------ ------------
Marketable securities held for redeemed
preferred shares $ 22,676 $ --
------------ ------------
------------ ------------
Decrease (increase) in unrealized loss on marketable
securities $ 3,468 $ (92,738)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
27
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND OPERATIONS
CardioDynamics International Corporation (formerly BoMed Medical
Manufacturing, Ltd.) (the "Company") was incorporated in California on
June 9, 1980. The Company develops, manufactures and markets proprietary
non-invasive digital heart monitoring devices which provide continuous data
on a wide range of hemodynamic parameters.
LIQUIDITY
In 1995 and 1996, the Company incurred significant operating losses and
negative cash flows. Continuation of the Company's operations is dependent
upon the success of the Company's current and follow-on products. The
market for the Company's products is in a relatively early stage of
development and there can be no assurance that the market will ultimately
develop or that the Company will be successful in marketing its products.
In March 1997, the Company completed an offering of approximately 2,527,000
shares in a $7.2 million private placement. After issuance costs of
approximately $550,000, the Company obtained net cash proceeds of
$6,650,000. See Note 14.
Until such time, if ever, the Company is able to successfully market its
products and attain positive cash flow and profitability, the Company will
be dependent on outside financing sources to meet its liquidity needs.
There can be no assurance that such additional future funding will be
available on terms attractive to the Company, or at all.
CASH AND CASH EQUIVALENTS
For the purposes of presenting cash flows, the Company considers all highly
liquid debt instruments with a maturity of three months or less when
purchased to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed the federally insured limits. The Company has not experienced
any losses in such accounts and management believes it places its cash on
deposit with financial institutions which are financially stable.
At November 30, 1996 the Company has cash deposits in excess of federally
insured limits totalling $771,895.
28
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
MARKETABLE SECURITIES
The Company accounts for investments in marketable securities in accordance
with the provisions of Statement of Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. The
Company's investment securities are classified as "available-for-sale."
Accordingly, unrealized gains and losses and the related deferred income
tax effects are excluded from earnings and reported in a separate component
of shareholders' equity. Realized gains or losses are computed based on
specific identification of the securities sold.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined on a first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is calculated on
a straight-line basis over the estimated useful lives of the depreciable
assets, or related lease life, if shorter, which range from three to seven
years.
REVENUE RECOGNITION
Revenues are recognized when a product is shipped or a service is
performed.
WARRANTY COST
The Company provides, by a current charge to income, an amount it estimates
will be needed to cover future warranty obligations for products sold
during the year. The accrued liability for warranty costs is included in
the caption "Accrued Expenses" in the accompanying balance sheets.
RESEARCH AND DEVELOPMENT COSTS
All research and development costs are charged to expense as incurred,
except for equipment that has alternative future uses.
29
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities.
NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of common
shares outstanding during each period adjusted for the assumed conversion
of dilutive stock options and warrants using the treasury stock method. In
1996 and 1995, the effects of warrants and stock options are not considered
in the calculation as they are anti-dilutive.
SIGNIFICANT CUSTOMERS
During fiscal years 1996 and 1995, the Company's export sales accounted for
77% and 79% of total sales, respectively. During the years 1996 and 1995,
four and five major distributors accounted for 64% and 98% of the Company's
sales, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to 1995 financial statement
amounts in order to conform to current year presentation.
FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The Company estimates that the fair value of all
financial instruments at November 30, 1996, does not differ materially from
the aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and
appropriate valuation methodologies.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") This new standard encourages, but does not
require, companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments based on a fair-value method of
accounting.
30
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Companies that do not choose to adopt new expense recognition rules of SFAS
No. 123 will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion ("APB No. 25"), but will be required to
provide pro forma disclosures of the compensation expense determined under
the fair-value provisions of SFAS No. 123, if material. APB No. 25 requires
no recognition of compensation expense for most of the stock-based
compensation arrangements provided by the Company, namely, broad-based
employee stock purchase plans and option grants where the exercise price is
equal to the market price at the date of grant.
The Company is required to adopt either the recognition or the disclosure
provisions of SFAS No. 123 by no later than December 1, 1997. The Company
expects to continue to follow the accounting provisions of APB No. 25 for
stock-based compensation and to furnish the pro forma disclosures required
under SFAS No. 123, if material.
LONG-LIVED ASSETS
In March 1995, the FASB issued Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," which requires impairment losses to be recorded on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company will adopt Statement 121 in the first quarter of fiscal 1997 and,
based on current circumstances, does not believe the effect of adoption
will be material.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure 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 those
estimates.
31
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 2 - MARKETABLE SECURITIES
The amortized cost and estimated fair value of marketable securities is as
follows:
NOVEMBER 30, 1996
--------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
Available for sale securities:
Equity securities $ 351,889 -- 89,270 $ 262,619
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
NOVEMBER 30, 1995
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------------------------------------------------------
Available for sale securities:
Equity securities $ 351,889 -- 92,738 $ 259,151
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
NOTE 3 -- INVENTORIES
Inventories at November 30 consist of the following:
1996 1995
----------- -----------
Electronic components and subassemblies $ 134,371 $ 34,119
Finished goods 115,905 169,097
Demonstration units 117,119 67,316
----------- -----------
367,395 270,532
Less:
Valuation allowance-obsolescence (44,476) (7,150)
Depreciation on demonstration units (29,290) --
----------- -----------
$ 293,629 $ 263,382
----------- -----------
----------- -----------
32
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment at November 30 consist of the following:
1996 1995
----------- -----------
Furniture $ 40,084 $ 84,714
Exhibit booth 48,013 41,118
Other equipment 69,222 61,810
Lab equipment 48,381 141,140
Manufacturing equipment and fixtures 3,500 27,917
Sales equipment 48,917 43,062
Computers 7,664 4,446
----------- -----------
Subtotal 265,781 404,207
Less accumulated depreciation (156,149) (237,903)
----------- -----------
$ 109,632 $ 166,304
----------- -----------
----------- -----------
Depreciation expense for the years ended November 30, 1996 and 1995 was $62,739
and $37,273, respectively.
33
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 5 -- LONG-TERM DEBT
Long-term debt at November 30 consists of the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Capitalized equipment lease payable in 60
monthly installments of $350 including interest
at 18% through March 31, 1997. $ 820 $ 5,217
Prepetition and postpetition payroll taxes payable
in equal installments including interest at 8%
maturing in March 1999. 24,102 32,510
Note payable to CardioDynamics Holdings,
LLC, a related party, collateralized by assets
of the Company, bearing interest at 8% per
annum with interest only payments due
quarterly, maturing March 31, 1998.
Convertible into common stock at a rate
of $.25 per share. 25,000 25,000
----------- -----------
49,922 62,727
----------- -----------
Less current portion of long-term debt (12,100) (14,231)
----------- -----------
$ 37,822 $ 48,496
----------- -----------
----------- -----------
</TABLE>
Maturities of long-term debt are as follows:
Year Ended November 30
----------------------
1997 $ 12,100
1998 35,508
1999 2,314
2000 0
2001 0
-----------
$ 49,922
-----------
-----------
34
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 6 -- PREFERRED STOCK
At November 30, 1996 and 1995 the Company had outstanding 183,115 and
246,793 shares of preferred stock, respectively. The preferred stock has
the following characteristics:
- A stated value of $2.50 per share.
- No liquidation preference, but shares equally with common stock
in any proceeds of liquidation.
- Voting rights equal to that of common stock, on a share-for-share
basis.
- Non-cumulative six percent (6%) annual dividends priority over
common stock. Thus, no common dividends may be declared in any
year until outstanding preferred shares have received fifteen
cents ($.15) per share dividend for that year.
- The Company had, until October 7, 1995, the option to call any
part or all of the preferred stock, at a cash call price of $6.25
per share. Holders of preferred shares had an option to redeem
them during a period of 90 days following the "Redemption Date"
(the redemption date was January 23, 1996) by way of the
preferred shareholder's tender of each share of preferred stock
to the Company in exchange for one share of CDIc common stock and
the proceeds from the sale of certain marketable securities. The
Company may, but does not have any obligation to, honor
redemption requests following the 90-day redemption period which
ended on April 22, 1996.
NOTE 7 -- SHAREHOLDERS' EQUITY
On November 16, 1995, the Company's Articles of Incorporation were amended
to increase the authorized number of shares of common stock to 50,000,000
and to revise the terms of the Company's preferred stock.
35
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 -- SHAREHOLDERS' EQUITY (Continued)
During February 1995, the Company entered into an agreement with a related
party, CardioDynamics Holdings, LLC ("CDH"), a California limited liability
company, for the purchase of approximately 37.6% of the Company's common
stock. Under the terms of the agreement, CDH purchased 2,404,000 shares
from a shareholder, Helionetics, Inc. and 1,478,000 shares from the
Company. In exchange for the issuance of these shares the Company received
$225,000. Additionally, the Company issued a five year secured promissory
note (the "CDH" note) in the amount of $100,000. The note was
collateralized by an unsubordinated interest in substantially all of the
assets of the Company and provided for optional advances up to an aggregate
of $1,257,803. Advances under the note accrue interest at 8% with interest
only payable quarterly through maturity at February 6, 2000. At any time
after February 6, 1997, the note was convertible into the shares of the
Company's common stock at CDH's option at predetermined conversion prices.
Also, in conjunction with this transaction, certain litigation was settled,
CDH obtained five year proxies to vote the common shares owned by DaVinci
Scientific Corporation and other entities, CDH obtained the right to
purchase additional Company common stock from the Company in certain
situations and a stock purchase agreement between the Company and DaVinci
was terminated.
In May 1995, subsequent to additional optional advances of $75,000 being
made under the CDH note, CDH purchased 4,300,000 shares of common stock of
the Company for $1,000,000, converted $150,000 of the $175,000 outstanding
under the note into 300,000 shares of common stock of the Company and
agreed to make no further optional advances through December 31, 1995.
In fiscal 1996 the CDH note was amended to establish a per share conversion
price of $0.25 per share subject to adjustment under specified
circumstances and change the maturity date to March 31, 1998. In
conjunction with these amendments, CDH's right to lend additional amounts
under the note was amended to allow CDH to lend up to an additional
$1,800,000 through March 31, 1998. In March 1996, CDH advanced $1,800,000
under the note. This advance was converted into 7,200,000 shares of common
stock of the Company in June 1996 at a rate of $0.25 per share.
At various times during fiscal 1995, Allen Paulson, an affiliate of CDH and
of the Company, purchased a total of 2,230,000 shares of common stock,
James Gilstrap, Chairman of the Company, purchased a total of 510,000
shares of common stock and other related parties purchased a total of
360,000 shares of common stock, all from the Company for $0.25 cash per
share.
36
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 7 -- SHAREHOLDERS' EQUITY (Continued)
At various times during fiscal 1996, Allen Paulson purchased a total of
2,300,000 shares of common stock and James Gilstrap purchased a total of
360,000 shares of common stock all from the Company for $0.25 cash per
share.
During fiscal 1995 the Company issued 350,000 shares of common stock to
certain professionals including, 150,000 shares to James Gilstrap and
150,000 shares to Nicholas Diaco, an affiliate of CDH and of the Company,
in exchange for services rendered. Accordingly, the value of these shares,
$87,000, has been expensed in the accompanying statement of operations for
the year ended November 30, 1995.
During fiscal year 1995, the Company approved a stock issuance of 88,000
shares valued at $0.25 per share to the Board of Directors in exchange for
accrued directors fees relating to past service. At November 30, 1995
these shares remained unissued and the estimated value of shares owned of
$22,000 was included in accrued expenses. During fiscal 1996 these shares
were issued.
At November 30, 1996 the Company has outstanding warrants to purchase
shares of common stock as follows:
Common Exercise Exercisable
Stock Shares Price On or Before
------------ ----------- -----------------
Series B 488,594 $ 4.00 December 31, 1996
Series C 231,797 6.00 December 31, 1997
------------ -----------
Total warrants
exercisable into
common stock 720,391
------------
------------
On May 30, 1996 the Company reduced the exercise price of Series B and Series C
warrants to $3.50 per share through July 8, 1996. From May 30, 1996 to July 8,
1996 15,341 and 12,015 shares of Series B and Series C warrants were exercised
netting proceeds of $53,694 and $42,053 respectively. Additionally, during the
1996 fiscal year, 10,009 shares of Series B warrants were exercised at an
exercise price of $4.00 per share.
37
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8 -- STOCK OPTIONS
In 1995, the Board of Directors approved a Stock Option/Stock Issuance Plan
(the "Option Plan") that provides for the granting of options to officers,
Directors and key employees to purchase the Company's common stock. Under
the Option Plan, 1,529,000 shares of common stock have been reserved for
granting of options at 100% of the fair market value of the Company's
common stock on the date of grant.
The Option Plan also provides for monthly grants to each director of the
Company of options to purchase 1,000 shares of Company common stock as
payment for directors fees. The per share exercise price is calculated
using the mean market price over the three month period immediately
preceding the date of grant. The options are exercisable immediately upon
grant and expire upon the earlier of ten years from the date of grant or
two years after the director terminates his position on the Board. During
1996 and 1995, 103,000 and 36,000 options were granted to the Board of
Directors as compensation for past services. During 1996 the exercise
prices on options granted to the Board of Directors, at times, exceeded the
quoted market value on the date of grant. Accordingly, the Company has
recognized directors fees totalling $50,878 in the accompanying statement
of operation for the year ended November 30, 1996.
The Option Plan also provides for grants of options and issuances of stock
in exchange for professional services. During 1995 the Company granted
145,000 non qualified stock options and 45,000 stock awards to three
individuals in exchange for consulting services. The options were granted
at an exercise price equal to the quoted market price on the grant date,
are fully vested and expire two years from the date of grant. Consultation
fees of $11,250 were recognized in the accompanying statement of operations
for the year ended November 30, 1995 upon the granting of the stock award.
At November 30, 1996, options for 853,000 shares remain available for grant
in the future. Additional information with respect to such options under
the Option Plan follows:
Stock Price per
Options Share
------------- -------------
Outstanding at November 30, 1994 -- $ --
Granted 181,000 0.98-1.15
Expired or cancelled -- --
Exercised -- --
------------- -------------
Outstanding at November 30, 1995 181,000 0.98-1.15
Granted 495,000 0.81-4.38
Expired or cancelled -- --
Exercised -- --
------------- -------------
Outstanding at November 30, 1996 676,000 $ 0.81-4.38
------------- -------------
------------- -------------
38
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 8 -- STOCK OPTIONS (Continued)
At November 30, 1996, 284,000 of the options outstanding are fully vested
and exercisable at a price range of $0.81 to $4.38 per share.
During June 1995, the Company entered into an employment agreement with its
Chief Executive Officer ("CEO"). Under the terms of the agreement the CEO
was granted 500,000 non-transferable stock options (not under the Option
Plan) at an exercise price of $0.50 per share. The options vest if the
quoted market price of the Company's stock attains specified levels. At
November 30, 1996, none of the options are vested. The options expire June
15, 2005.
NOTE 9 -- INCOME TAXES
The provisions for income taxes in the accompanying statements of
operations are comprised of the following:
1996 1995
----------- -----------
Federal $ -- $ --
State 800 800
----------- -----------
$ 800 $ 800
----------- -----------
----------- -----------
At November 30, 1996, the Company had federal and state net operating loss
carryforwards of approximately $12,000,000 and $4,800,000, respectively. Of
these amounts approximately $6,800,000 and $2,200,000 are subject to
limitations of the amount that may be utilized each year of approximately
$50,000 per year expiring through fiscal 2009.
A 100% valuation allowance has been applied to the net deferred tax asset
created by these NOL carryforwards. Accordingly, no tax benefit has been
recorded for the years ended November 30, 1996 and 1995.
NOTE 10 -- OTHER INCOME
During fiscal 1995, the Company recognized a gain on the forgiveness of
debt from two creditors amounting to $61,799 and netted the gain against
minor expenses included in other income.
39
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO THE FINANCIAL STATEMENTS
NOTE 11 -- RELATED PARTY TRANSACTIONS
During fiscal 1995, the Company borrowed $30,644 from DaVinci Scientific
Corporation and repaid $158,765. The two parties agreed to forgiveness of
the remaining balance of $19,627 as well as approximately $28,000 in
consulting fees owed to DaVinci Scientific Corporation.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Rent -- During July 1994, DaVinci Scientific Corporation entered into an
office lease for the Company's office and support facility. The lease
expires in July 1998. The Company has continued to make the monthly lease
payments for this property. Facility rent expenses for fiscal years ended
November 30, 1996 and 1995 were $53,620 and $54,320, respectively.
NOTE 13 -- LEGAL PROCEEDINGS
During October 1994, a complaint entitled B. BO SRAMEK AND HEVKA H. SRAMEK
V. CARDIODYNAMICS INTERNATIONAL CORPORATION was filed in San Diego County
Superior Court. The complaint sought damages of approximately $86,000 on
behalf of B. Bo Sramek, a former CDIc officer, for breach of an alleged
Consulting Services Agreement dated June 2, 1993. The complaint sought
additional damages of approximately $45,000 on behalf of Hevka Sramek for
the alleged breach of an employment agreement by CDIc. During fiscal 1996,
as the result of a judgement against the Company, compensatory damages and
attorney fees totalling $64,478 were paid to the plaintiffs.
NOTE 14 -- SUBSEQUENT EVENT
On March 6, 1997, the Company completed the offering of approximately
2,527,000 shares of Common Stock in a $7.2 million private placement.
EVEREN Securities, Inc. served as placement agent as to 2,299,000 shares
($6.6 million) and another 228,000 shares ($0.6 million) were sold pursuant
to a related offering (see paragraph below). After issuance costs of
approximately $550,000, the Company received net proceeds of approximately
$6,650,000. Under the terms of the Private Placement Memorandum (the
"Memorandum"), the Company agreed to use its best efforts to, within 180
days after demand by two-thirds in interest of the private investors,
register such Common Stock for public resale.
In accordance with the terms of their stock purchase agreements, several
private investors rescinded their purchases of a total of 236,219 shares of
common stock (purchased in fiscal 1996 for $0.6 million cash) and
reinvested the $0.6 million in 228,151 shares of common stock, issued under
and subject to the terms of the Memorandum, at a price of $2.85 per share.
40
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the Company's directors and executive officers, together with
certain information regarding them, as of March 7, 1997 are as follows:
NAME AGE POSITION
---- --- --------
Allen E. Paulson 74 Co-Chairman of the Board of Directors
James C. Gilstrap 61 Co-Chairman of the Board of Directors
Richard E. Otto 47 President/CEO and Director
Rhonda F. Pederson 36 Chief Operating Officer
Stephenson M. Dechant 41 Chief Financial Officer and Director
Stephen P. Loomis 36 Vice President Finance
Markus J. Osypka, Ph.D. 32 Vice President Engineering
William P. Cordeiro, Ph.D. 52 Director
Nicholas V. Diaco, M.D. (1) 57 Director
Roger S. Kolasinski 51 Director
Michael D. Padilla 48 Director
Barry M. Zwick 62 Director
- --------------------
(1) Chairman of the Medical Advisory Board
ALLEN E. PAULSON. Mr. Paulson has been Co-Chairman of the Board since June
1996 and Director since February 1995. Mr. Paulson owns numerous companies
having substantial investments in diverse industries, including aircraft;
energy exploration; horse breeding, training, and racing; automobile
dealerships; gaming and entertainment; and real estate and resorts. Mr.
Paulson is the founder and Chairman Emeritus of Gulfstream Aerospace
Corporation, the world's leading designer, manufacturer and marketer of large
corporate jets. He has earned numerous awards including the Horatio Alger
Award for Distinguished Americans, the American Academy of Achievement's
Golden Plate Award, as well as five honorary doctorates.
41
<PAGE>
JAMES C. GILSTRAP. Mr. Gilstrap served as Chairman of the Board from February
1995 to June 1996, and has been Co-Chairman of the Board since June 1996. Mr.
Gilstrap is retired from Jefferies & Company, where he served as Senior
Executive Vice President, Partner and Member of the Executive Committee. Mr.
Gilstrap is past President of the Dallas Securities Dealers as well as a past
member of the Board of Governors of the National Association of Securities
Dealers, Inc.
RICHARD E. OTTO. Mr. Otto joined the Company in June 1995 as President and
Chief Executive Officer and has been a Director since June 1996. Mr. Otto has
more than 26 years of healthcare experience including as an entrepreneurial
executive in the identification, development and distribution of high technology
devices for the cardiology and cardiovascular markets. From September 1987 to
May 1994, Mr. Otto was with Sensor Technology, Inc., a privately held medical
distributor company, of which he was a founder. In 1994, the company was sold
to a division of Eli Lilly and Company. Prior to that time, Mr. Otto held
positions with Medtronic, Inc., Cardiac Pacemakers, Inc., Intermedics, Inc. and
Eli Lilly and Company. Mr. Otto holds a Bachelor of Science degree from the
University of Georgia and serves on the Boards of Directors of the Georgia
Chapter of the Leukemia Society, College Football Hall of Fame Foundation, and
the University of Georgia Student Educational Fund.
RHONDA F. PEDERSON. Ms. Pederson joined the Company in June 1995 as Vice
President of Operations and was promoted to Chief Operating Officer in February
1996. Ms. Pederson has over 13 years health care experience, including medical
product development, rapid growth transitions and sales and marketing
management. From July 1992 until May 1995, Ms. Pederson held positions
including President/Chief Executive Officer, Vice President of Sales and
Marketing and Board member at Culture Technology, Inc., a privately held
biotechnology company specializing in culturing autologous skin for burn
patients. Prior to that, Ms. Pederson held positions at General Electric
Medical Systems and Quinton Instrument Company, both medical device subsidiaries
of publicly held companies. Ms. Pederson holds a Bachelor of Pharmacy from
Washington State University and is completing a Masters in Business
Administration from Pepperdine University in Los Angeles.
STEPHENSON M. DECHANT. Mr. Dechant has been Chief Financial Officer and a
Director of the Company since February 1995. Mr. Dechant has been Chief
Financial Officer for Mr. Paulson's companies since 1992. His previous
experience involves over 15 years financial management and reporting for high
net worth individuals and companies primarily involved in the food industry,
including Dole Fresh Fruit and Chart House Enterprises. Mr. Dechant graduated
from the University of Southern California with a Bachelor of Science in
Business Administration and a Masters from the University of San Diego.
STEPHEN P. LOOMIS. Mr. Loomis joined the Company in September 1996 as Vice
President of Finance. Mr. Loomis is a Certified Public Accountant with more than
11 years experience in finance and business development with both publicly
traded and privately held companies. From 1993 until joining the Company, he
served as Director of Financial Reporting at the Kinko's Inc. group of
companies. From 1988 to 1993, Mr. Loomis was the Chief Financial Officer for
Terminal Data Corporation, a publicly traded high speed document imaging
company. Prior to that, Mr. Loomis was at Peat Marwick Main & Co. He earned
his Bachelor of Science Degree in Business Administration from California State
University at Northridge.
42
<PAGE>
MARKUS J. OSYPKA, PH.D. Dr. Osypka joined the Company in January 1996 to
oversee engineering and was promoted to Vice President of Engineering in March
1996. Dr. Osypka had more than six years experience in the medical device
industry in Germany. From 1993 to 1995, he held the positions of Director of
Product Management and Director of International Sales at Dr. Ing P. Osypka
GmbH, a privately held medical device manufacturer in Germany. Prior to that,
he earned a Ph.D. in Electrical Engineering at the University of Karlsruhe in
Germany, where he did extensive research in Electrical Impedance Tomography.
WILLIAM P. CORDEIRO, PH.D. Dr. Cordeiro has served as a Director of the Company
since 1994, and currently is the Director at the Health Care Management
Institute at California State University, Los Angeles. In that capacity, he
develops a variety of programs as a liaison between providers, funders and the
academic community. He is also a Management Professor in the School of Business
and Economics where he teaches strategic planning and management and is a
partner with Bartik, Cordeiro & Associates, Inc., a privately held business
consulting firm. Previously, Dr. Cordeiro worked for The Veta Grande Companies
and ARCO Transportation and Products companies. Dr. Cordeiro received his B.S.
from the University of San Francisco, his MBA in Finance from University of
Southern California, his M.A. and Ph.D. from the Claremont Graduate School.
NICHOLAS V. DIACO, M.D. Dr. Diaco has served as a Director of the Company and
Chairman of the Company's Medical Advisory Board since February 1995.
Currently, he is the Director of the Coronary Care Unit and the Heart
Catheterization Laboratory at St. John's Hospital and Health Center in Santa
Monica, California. Dr. Diaco has practiced cardiology for over 25 years. He
is a Fellow of the American College of Cardiology and is board certified in
Cardiovascular Disease. He serves as a Clinical Assistant Professor of Medicine
at the University of California, Los Angeles. Dr. Diaco was a chief of internal
medicine in the U.S. Air Force and has published numerous articles on the
effects of exercise on the heart. He received his M.D. with honors from
Hahnemann Medical College and Hospital in Pennsylvania.
ROGER S. KOLASINSKI. Mr. Kolasinski has served as a Director of the Company
since 1993. Mr. Kolasinski is Chairman and CEO of Kol Bio Medical Instruments,
Inc., a privately-held medical distributorship. Mr. Kolasinski is also on the
Dean's Board of Advisors for Michigan State University's School of Natural
Sciences. Mr. Kolasinski received his B.S. in Microbiology/Zoology from
Michigan State University.
MICHAEL D. PADILLA. Mr. Padilla has served as a Director of the Company since
1995. Mr. Padilla is a partner with the law firm Thorsnes, Bartolotta, McGuire
& Padilla. He has practiced law in San Diego since 1972, specializing in
personal injury, product liability and medical malpractice litigation. He is a
member of the Consumer Attorney associations in both California and the local
branch in San Diego. Mr. Padilla received his J.D. from University of San Diego
School of Law.
BARRY M. ZWICK. Mr. Zwick has served as a Director of the Company since 1994.
Mr. Zwick has been in the securities business in various capacities for over 30
years, including as an Investment Advisor and as a Managing Director at
Ladenburg, Thalmann & Co. Inc. until 1988. In 1992, Mr. Zwick formed a
corporation that is the general partner for two investment partnerships, both of
which deal with quantitative methods of investing in U.S. equities. Prior to
that, Mr. Zwick founded Zwick Financial Corp. and Brandt, Zwick & Co., Inc. Mr.
Zwick is a member of the CBOE, the Midwest Stock Exchange and the Chicago Board
of Trade. He is currently a Director of Naturade, Inc., a publicly traded
company that specializes in vitamins and skincare products. Mr. Zwick is a
graduate of the U.S. Military Academy at West Point, and received an MBA from
the University of Southern California.
43
<PAGE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Except as set forth below, the Company believes that each person who, at any
time during the fiscal year ended November 30, 1996, was a director, officer, or
beneficial owner of more than 10% of a class of registered equity securities of
the Company filed on a timely basis all reports required by Section 16(a) of the
Securities Exchange Act.
Markus Osypka (Vice President, Engineering) filed his Form 3 late, and did not
include on the Form 3, a stock option which had been granted him. He later
reported the stock option on Form 5. Rhonda F. Pederson (Chief Operating
Officer) filed her Form 3 late. Barry Zwick (Director) reported insufficient
detail on 12 monthly automatic stock option grants on Form 5.
DaVinci Scientific Corporation (10% owner) and Kenneth W. Miller (Director)
failed to file Form 4's reflecting the transfers of Common Stock owned by
DaVinci to a number of DaVinci's creditors. Also, Mr. Miller failed to file
Form 4's reflecting acquisitions of Common Stock by Edge Financial Group, Inc.
within six months after Mr. Miller ceased to be a Director of the Company.
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides information regarding the annual and long-term
compensation earned by Richard E. Otto, the Company's Chief Executive
Officer, for services rendered in all capacities to the Company for the three
fiscal years, ending November 30, 1996. None of the Company's other Executive
Officers had in fiscal 1996, total annual salary and bonus exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
AWARDS PAYOUTS
NAME AND ANNUAL COMPENSATION OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) PAYOUTS ($) COMPENSATION ($)
- ------------------ ---- ---------- --------- -------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Otto 1996 122,870 -0- -0- -0- -0-
President, Chief 1995 87,500 -0- -0- -0- -0-
Executive Officer 1994 -0- -0- -0- -0- -0-
</TABLE>
STOCK OPTIONS AND LONG TERM INCENTIVE PLANS
No stock options or stock appreciation rights were granted to or exercised by
Mr. Otto during fiscal 1996. The Company does not have any long-term incentive
plans (as defined in the Securities and Exchange Commission regulations).
Non-employee directors receive, for their service as a director, automatic
grants of 1,000 stock options.
44
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS AT
SHARES AT FY-END (#) FY-END ($)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------- -------------
Richard E. Otto - 0 - - 0 - - 0 - /500,000 - 0 - /1,500,000
EMPLOYMENT AGREEMENT
The Company entered into a Compensation and Employment Agreement, June, 1995,
with Mr. Otto. In addition to providing Mr. Otto the 500,000 stock options
described above, the Agreement provided for a salary of $150,000 per year and
standard fringe benefits. Although the Agreement may be modified or terminated
by either party at will, the stock options will survive termination of the
Agreement unless Mr. Otto's employment terminates due to cause (as defined in
the Agreement), voluntary resignation, death or permanent disability.
45
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following are the only persons known by the Company to own beneficially, as
of March 7, 1997, five percent (5%) or more of the outstanding shares of its
Common Stock.
SHARES BENEFICIALLY OWNED
NAME AND ADDRESS OF -------------------------------
BENEFICIAL OWNER NUMBER (1) PERCENTANGE (2)
- ---------------- ---------- ---------------
Allen E. Paulson (3) 24,946,490 78.0%
P.O. Box 9660
Rancho Santa Fe, CA 92067
James C. Gilstrap (4) 21,346,490 66.8%
5067 Shore Drive
Carlsbad, CA 92008
Nicholas V. Diaco, M.D. (5) 20,576,490 64.2%
1302 - 20th Street, Suite 400
Santa Monica, CA 90404
Joseph F. Diaco, M.D. (6) 20,304,490 63.5%
4700 North Habana Ave., Suite 403
Tampa, FL 33614
CardioDynamics Holdings, LLC (7) 20,304,490 63.5%
P.O. Box 9660
Rancho Santa Fe, CA 92067
Edge Financial Group, Inc. (8) 2,451,559 7.7%
16225 Park Ten Place, Suite 380
Houston, TX 77084
Joe C. Richardson, Jr. (9) 2,206,929 6.9%
P.O. Box 8246
Amarillo, TX 79114
- ----------------------
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
46
<PAGE>
(3) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Mr. Paulson is a member with a
majority interest. Mr. Paulson disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. See footnote (7). Also includes 19,000
shares of Common Stock Mr. Paulson beneficially owns, by virtue of his
right to acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days.
(4) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Mr. Gilstrap is a member with a
minority interest. Mr. Gilstrap disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. See footnote (7). Also includes 19,000
shares of Common Stock Mr. Gilstrap beneficially owns, by virtue of his
right to acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days. Excludes 60,000 shares of
Common Stock owned by Mr. Gilstrap's daughters; Mr. Gilstrap disclaims
beneficial ownership of such shares.
(5) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Dr. Nicholas Diaco is a member with
a minority interest. Dr. Diaco disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. See footnote (7). Also includes 119,000
shares of Common Stock Dr. Diaco beneficially owns, by virtue of his right
to acquire such shares from the Company under stock options now exercisable
or exercisable within 60 days.
(6) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Dr. Joseph Diaco is a member with a
minority interest. Dr. Diaco disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. See footnote (7).
(7) Includes 15,682,243 shares of Common Stock over which CardioDynamics
Holdings, LLC exercises sole voting and investment power, and 4,522,247
shares of Common Stock over which CardioDynamics Holdings, LLC exercises
sole voting, but no investment power. Also includes 100,000 shares of
Common Stock issuable upon conversion of a Note issued by the Company.
(8) Includes 1,492,998 shares of Common Stock beneficially owned by Medical
Assets, CardioDynamics Holdings, LLC, of which Edge Financial Group, Inc.
is a member. Edge Financial Group, Inc. disclaims beneficial ownership of
these shares except to the extent of its ownership interest in Medical
Assets, CardioDynamics Holdings, LLC. Medical Assets, CardioDynamics
Holdings, LLC exercises sole investment power, but no voting power, over
all its share of Common Stock.
(9) Includes 1,492,998 shares of Common Stock beneficially owned by Medical
Assets, CardioDynamics Holdings, LLC, of which Mr. Richardson is a member.
Mr. Richardson disclaims beneficial ownership of these shares except to the
extent of his ownership interest in Medical Assets, CardioDynamics
Holdings, LLC. Medical Assets, CardioDynamics Holdings, LLC exercises sole
investment power, but no voting power, over all its shares of Common Stock.
47
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
COMMON STOCK
The following table sets forth the beneficial ownership of Common Stock of the
Company as of March 7, 1997 by each director, (including Mr. Otto) and by all
directors and Executive Officers of the company as a group.
SHARES BENEFICIALLY OWNED
------------------------------
NAME NUMBER (1) PERCENT (2)
- ------------------------------ ---------- -----------
William P. Cordeiro, Ph.D. (3) 29,000 *
Stephenson M. Dechant (4) 25,000 *
Nicholas V. Diaco, M.D. (5) 20,576,490 64.2%
James C. Gilstrap (6) 21,346,490 66.8%
Roger S. Kolasinski (7) 175,000 *
Stephen P. Loomis - 0 - *
Markus J. Osypka - 0 - *
Richard E. Otto 40,000 *
Michael D. Padilla (8) 25,000 *
Allen E. Paulson (9) 24,946,940 78.0%
Rhonda F. Pederson - 0 - *
Barry M. Zwick (10) 307,879 1.0%
All Directors and Executive
Officers as a group - (12 persons) (11) 26,252,078 82.4%
- ------------------------------
*Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them, subject to community
property laws, where applicable. Share ownership in each case includes
shares issuable on exercise of certain outstanding options as described in
the footnotes below.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3d(1).
48
<PAGE>
(3) Includes 10,000 shares held by Bartik, Cordeiro & Associates, Inc.
Mr. Cordeiro is the Chief Executive Officer of Bartik, Cordeiro &
Associates, Inc.
(4) Includes 19,000 shares of Common Stock Mr. Dechant beneficially owns, by
virtue of his right to acquire such shares from the Company under stock
options now exercisable or exercisable within 60 days.
(5) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Dr. Nicholas Diaco is a member with
a minority interest. Dr. Diaco disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. Also includes 119,000 shares of Common Stock
Dr. Diaco beneficially owns, by virtue of his right to acquire such shares
from the Company under stock options now exercisable or exercisable within
60 days.
(6) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdings, LLC, of which Mr. Gilstrap is a member with a
minority interest. Mr. Gilstrap disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in
CardioDynamics Holdings, LLC. See footnote (9). Also includes 19,000
shares of Common Stock Mr. Gilstrap beneficially owns, by virtue of his
right to acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days. Excludes 60,000 shares of
Common Stock owned by Mr. Gilstrap's daughters; Mr. Gilstrap disclaims
beneficial ownership of such shares.
(7) Includes 120,000 shares of Common Stock of the Company beneficially owned
by Kol Bio Medical Instruments, of which Mr. Kolasinksi is Chief Executive
Officer. Also, includes 19,000 shares of Common Stock Mr. Kolasinski
beneficially owns, by virtue of his right to acquire such shares from the
Company under stock options now exercisable or exercisable within 60 days.
(8) Includes 19,000 shares of Common Stock Mr. Padilla beneficially owns, by
virtue of his right to acquire such shares from the Company under stock
options now exercisable or exercisable within 60 days.
(9) Includes 20,304,490 shares of Common Stock beneficially owned by
CardioDynamics Holdlings, LLC, of which Mr. Paulson is a member with a
majority interest. Mr. Paulson disclaims beneficial ownership of these
shares except to the extent of his individual ownership interest in LLC.
See footnote (9). Also includes 19,000 shares of Common Stock Mr. Paulson
beneficially owns, by virtue of his right to acquire such shares from the
Company under stock options now exercisable or exercisable within 60 days.
(10) Includes 200,00 shares of Common Stock of the Company beneficially owned by
a related trust . Also includes 19,000 shares of Common Stock Mr. Zwick
beneficially owns, by virtue of his right to acquire such shares from the
Company under stock options now exercisable or exercisable within 60 days.
(11) Shares beneficially owned include shares held by entities affiliated with
certain directors as described above in the footnotes (but do not
include any shares more than once).
49
<PAGE>
PREFERRED STOCK
No Director or Executive Officer owns any of the Company's Preferred Stock,
except Roger S. Kolasinski who (indirectly through Kol Bio Medical Instruments,
Inc.) owns 126,259 shares, or 69.0% of the class.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In early 1995, CardioDynamics Holding, LLC ("CDH") obtained control of the
Company by purchasing 1,477,910 shares of unregistered Common Stock from the
Company in exchange for $225,739 and purchasing 2,404,333 shares of Common Stock
held by Helionetics, Inc. in exchange for $666,458. CDH also loaned the
Company $100,000 and obtained the right to purchase at the then-applicable
conversion price (currently $0.25 per share) the same number of shares of Common
Stock as the Company may from time to time issue to any other person. In
addition, in consideration of CDH lending money to the Company, as set forth
above, the holders of no fewer than 4,522,247 shares of Common Stock granted CDH
an irrevocable proxy to vote their shares.
CDH and its members Allen E. Paulson, James C. Gilstrap and Nicholas V. Diaco,
engaged in several subsequent significant transactions with the Company,
substantially all resulting in the issuance of unregistered Common Stock at
$0.25 per share or convertible note amounts convertible (and later converted)
into Common Stock at $0.25 per share. Of the Company's outstanding shares of
Common Stock, currently CDH owns 15,682,243 shares. Members of CDH also now own
5,808,000 outstanding shares of Common Stock of the Company (aside from CDH's
own holdings); of the members' shares, Allen E. Paulson owns 4,626,000, James C.
Gilstrap owns 1,206,000 and Nicholas V. Diaco owns 156,000.
As a result of the transactions described above, at March 7, 1997, CDH and its
members together are the beneficial owners of 82% of the Common Stock of the
Company.
In fiscal 1995, each of James C. Gilstrap and Nicholas V. Diaco received 150,000
shares of common stock as a fee for services in connection with CDH's
acquisition of an interest in the Company.
Nichalas V. Diaco is also a member of the Company's Medical Advisory Board. In
that capacity, he received 100,000 stock options in June 1995 and consulting
fees in fiscal 1995 and 1996 of $37,500 and $1,500, respectively.
50
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
The following exhibits are attached to this Report and are
incorporated herein by reference.
EXHIBIT TITLE
- ------- -----
2.1 Fourth Amended Plan of Reorganization. (Incorporated by reference
from November 30, 1994 Form 10-KSB.)
2.2 Purchase Agreement dated February 7, 1995 between the Company and
CardioDynamics Holdings, LLC. (Incorporated by reference from
February 28,1995 Form 10-QSB.)
3.1 Bylaws, as amended through May 15, 1995. (Incorporated by reference
from May 31, 1995 Form 10-QSB.)
3.2 Articles of Incorporation as in effect before November 16, 1995,
(Incorporated by reference from November 30, 1995 Form 10-KSB)
3.3 Certificate of Amendment of Articles of Incorporation Filed November
16, 1995.
4.2 Secured Convertible Promissory Note, dated February 7, 1995, in favor
of CardioDynamics Holdings, LLC. (Incorporated by reference from
February 28,1995 Form 10-QSB.)
4.3 Promissory Note, dated February 3, 1995, in favor of DaVinci
Scientific Corporation. (Incorporated by reference from February 28,
1995 Form 10-QSB.)
4.4 First Amended and Restated Secured Convertible Promissory Note, dated
March 30, 1995 in favor of CardioDynamics Holdings, LLC.
(Incorporated by reference from May 31, 1995 Form 10-QSB.)
4.5 Second Amended and Restated Secured Convertible Promissory Note, dated
May 19, 1995 in favor of CardioDynamics Holdings, LLC. (Incorporated
by reference from May 31, 1995 Form 10-QSB.)
4.6 Third Amended and Restated Secured Convertible Promissory Note, dated
March 31, 1996 in favor of CardioDynamics Holdings, LLC.
(Incorporated by reference from May 31, 1996 Form
10-QSB.)
4.7 Fourth Amended and Restated Secured Convertible Promissory Note, dated
June 30, 1996 in favor of CardioDynamics Holdings, LLC. (Incorporated
by reference from August 31, 1996 Form 10-QSB.)
51
<PAGE>
EXHIBIT TITLE
- ------- -----
10.1 Amendment to Purchase Agreement, dated March 31, 1996, between the
Company and CardioDynamics Holdings, LLC, (Incorporated by reference
from May 31, 1996 Form 10-QSB).
10.2 Purchase Agreement. See Exhibit 2.2.
10.3 Secured Convertible Promissory Note. See Exhibit 4.2.
10.4 Promissory Note. See Exhibit 4.3.
10.5 Security Agreement, dated February 7, 1995 between the Company and
CardioDynamics Holdings, LLC. (Incorporated by reference from
February 28,1995 Form 10-QSB.)
10.6 Patent Security Agreement, dated February 7, 1995 between the company
and CardioDynamics Holdings, LLC. (Incorporated by reference from
February 28, 1995 Form 10-QSB.)
10.7.1 Irrevocable Offer to Sell Shares of CardioDynamics International
Corporation, dated January 1995, among the Company, Helionetics, Inc.,
and Dr. L. S. Smith. (Incorporated by reference from February 28,
1995 Form 10-QSB.)
10.7.2 February 7, 1995 letter from Helionetics, Inc. (Incorporated by
reference from February 28, 1995 Form 10-QSB.)
10.7.3 Notice to Dr. L. S. Smith, dated February 7, 1995. (Incorporated by
reference from February 28, 1995 Form 10-QSB.)
10.7.4 Notice to Helionetics, Inc., dated February 7, 1995. (Incorporated by
reference from February 28, 1995 Form 10-QSB.)
10.8.1 Offer to Grant Irrevocable Proxy and Agreement and Mutual General
Release, dated February 2, 1995 between the Company and DaVinci
Scientific Corporation. (Incorporated by reference from February 28,
1995.)
10.8.2 February 3, 1995 extension letter. (Incorporated by reference from
February 29, 1995 Form 10-QSB.)
10.8.3 Notice to DaVinci Scientific Corporation, dated February 7, 1995.
(Incorporated by reference from February 28, 1995 Form 10-QSB.)
10.9 Investment Agreement (as amended and restated) dated April 12, 1995
between the Company and CardioDynamics Holdings, LLC. (Incorporated
by reference from May 31, 1995
Form 10-QSB.)
52
<PAGE>
EXHIBIT TITLE
- ------- -----
10.10* Compensation and Employment Agreement with Richard E. Otto.
(Incorporated by reference from August 31, 1995 Form 10-QSB.)
10.11 1995 Stock Option/Stock Issuance Plan, as amended. (Incorporated by
reference from August 31, 1995 Form 10-QSB.)
10.12 Agreement and Release with DaVinci Scientific Corporation and
CardioDynamics Holdings, LLC. (Incorporated by reference from August
31, 1995 Form 10-QSB.)
10.13* General Release and Settlement Agreement between the Company and G.
Robert Tatum, III, dated November 21, 1995. (Incorporated by reference
from November 30, 1995 Form 10-kSB.)
10.14 International Distribution Agreement, dated June 20, 1996, between the
Company and Landice International Corporation (Incorporated by
reference from August 31, 1996 Form 10-QSB)
10.15 Stock Issuance Agreement with Alan Charles Newman and Janet Marie
Newman, Trustees, dated October 23, 1996.
10.16 Stock Issuance Agreement with Suzy W. Duff and Wallace E. Duff,
Trustee, dated November 20, 1996.
10.17 Engagement letter with EVEREN Securities, Inc., dated November 15,
1996.
23.1 Consent of Independent Auditors
27.0 Financial Data Schedule
- --------------------
*This management contract or compensatory plan or arrangement is required to be
filed as an exhibit.
(b) REPORTS ON FORM 8-K:
None.
53
<PAGE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 12, 1997 CARDIODYNAMICS INTERNATIONAL CORPORATION
By /s/ Richard E. Otto
-------------------------------
Richard E. Otto
Director, President and Chief
Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ---------------------------- ------------------------ --------------
/s/Richard E. Otto Director, President and March 12,1997
- ---------------------------- Chief Executive Officer
Richard E. Otto
/s/Stephenson M. Dechant Director and March 12,1997
- ---------------------------- Chief Financial Officer
Stephenson M. Dechant
/s/Stephen P. Loomis Vice President of Finance March 12,1997
- ---------------------------- (Principal Accounting Officer)
Stephen P. Loomis
/s/William P. Cordeiro Director March 12,1997
- ----------------------------
William P. Cordeiro
/s/Nicholas V. Diaco Director March 12,1997
- ----------------------------
Nicholas V. Diaco, M.D.
/s/James C. Gilstrap Director March 12,1997
- ----------------------------
James C. Gilstrap
/s/Roger S. Kolasinski Director March 12,1997
- ----------------------------
Roger S. Kolasinski
/s/Michael D. Padilla Director March 12,1997
- ----------------------------
Michael D. Padilla
/s/Allen E. Paulson Director March 12,1997
- ----------------------------
Allen E. Paulson
/s/Barry M. Zwick Director March 12,1997
- ----------------------------
Barry M. Zwick
54
<PAGE>
STOCK ISSUANCE AGREEMENT
THIS STOCK ISSUANCE AGREEMENT (this "Agreement"), dated as of October
23, 1996, by and among CardioDynamics International Corporation, a California
corporation ("CDIc"), and Alan Charles Newman and Janet Marie Newman, Trustees
of the Alan Charles Newman and Janet Marie Newman Family Trust UDT dated
December 10, 1991 (the "Purchasers").
ARTICLE I.
PURCHASE OF SHARES
SECTION 1.1 PURCHASE OF SHARES. (a) Upon the terms and subject to the
conditions set forth herein, upon the execution and delivery of this Agreement,
CDIc shall issue and sell 94,488 shares of common stock of CDIc to the
Purchasers for $250,000 cash.
SECTION 1.2 PAYMENT AND DELIVERY AT CLOSING. At the Closing occurring at
the same time as the execution and delivery of this Agreement, CDIc shall
deliver to the Purchasers a duly executed share certificate representing 94,488
shares of CDIc common stock, against payment in full of the purchase price.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS. The
Purchasers hereby jointly and severally represent and warrant to CDIc as
follows:
(a) AUTHORITY. Each of the Purchasers has the full right, power and
authority to enter into, execute, deliver and carry out the terms of this
Agreement and
<PAGE>
the transactions contemplated hereby and to perform his/her obligations
hereunder. This Agreement constitutes the valid and binding obligation of the
Purchasers enforceable in accordance with its terms.
(b) CONSENTS AND APPROVALS. All authorizations, approvals and
consents, if any, required to be obtained from, and all registrations,
declarations and filings, if any, required to be made with, all governmental
authorities and regulatory bodies to permit the Purchasers to execute and
deliver this Agreement, and to perform their obligations hereunder, have been
obtained or made, as the case may be, and all such authorizations, approvals,
consents, registrations, declarations and filings are in full force and effect.
(c) NO VIOLATIONS. Neither the execution or delivery by the
Purchasers of this Agreement, nor the consummation by the Purchasers of the
transactions herein contemplated, nor the fulfillment by the Purchasers of the
terms and provisions hereof (i)will conflict with, violate or result in a breach
of, any of the terms, conditions or provisions of any law, regulation, order,
writ, injunction, decree, judgment or award of any court, governmental
department, board, agency or instrumentality or any arbitrator, applicable to
the Purchasers (or either Purchaser) or (ii) will conflict with, violate or
result in a breach of, or constitute a default under, any of the terms,
conditions or provisions of any agreement or instrument to which the Purchasers
(or either Purchaser) is a party.
-2-
<PAGE>
(d) INVESTMENT INTENT.
(1) Each of the Purchasers has received, carefully read and
understood the documents provided to them by CDIc, including CDIc's most recent
Form 10-KSB and the three following Forms 10-QSB. Additionally, CDIc has
afforded them access to and ample opportunity to obtain other information
regarding CDIc. They have not relied on any oral representations of any kind.
(2) Each of the Purchasers has such knowledge and experience in
financial and business matters (including experience with investments of a
similar nature), that they are capable of evaluating the merits and risks of an
investment in CDIc common stock.
(3) The CDIc common stock is being acquired solely for their own
account for investment only and not with a view to or for any resale or
distribution thereof or with any present intention of distributing or selling
all or any part of such securities. They agree that the CDIc common stock is
UNREGISTERED and may not be transferred except upon registration under the
Securities Act of 1933, and under any applicable state securities or "blue sky"
laws, or upon receipt by CDIc of evidence in form and substance reasonably
satisfactory to CDIc, to the effect that such transfer may be made without
registration under the Securities Act of 1933 and applicable state securities
or "blue sky" laws. The Purchasers' share certificate representing CDIc common
stock will bear a legend to that effect. CDIc has no obligation to register the
Purchasers' CDIc common stock.
-3-
<PAGE>
(4) Each of the Purchasers recognizes that the purchase of the
CDIc Common Stock by them is a speculative investment that involves a high
degree of risk and is suitable only for persons with the financial capability of
making and holding long-term investments not readily reducible to cash.
SECTION 2.2 REPRESENTATIONS AND WARRANTIES OF CDIC. CDIc hereby
represents and warrants as follows:
(a) AUTHORITY. CDIc is a validly existing California corporation in
good standing. CDIc has the full right, power and capacity necessary to enter
into, execute, deliver and perform its obligations under this Agreement. This
Agreement constitutes a valid and binding agreement of CDIc, enforceable in
accordance with its terms.
(b) CONSENTS AND APPROVALS. All authorizations, approvals and
consents, if any, required to be obtained from, and all registrations,
declarations and filings, if any, required to be made with, all governmental
authorities and regulatory bodies to permit CDIc to execute and deliver, and to
perform its obligations under, this Agreement have been obtained or made, as the
case may be, and all such authorizations, approvals, consents, registrations,
declarations and filings are in full force and effect.
(c) NO VIOLATIONS. Neither the execution or delivery by CDIc of this
Agreement, nor the consummation by CDIc of the transactions herein contemplated,
nor the fulfillment by CDIc of the terms and provisions hereof (i) will conflict
with, violate or result in a breach of any of the terms, conditions or
provisions of any law, regulation, order, writ, injunction, decree, judgment or
award of any court, governmental department, board, agency or instrumentality or
any arbitrator, applicable to CDIc, or
-4-
<PAGE>
(ii) will conflict with, violate or result in a breach of, or constitute a
default under, any of the terms, conditions or provisions of any agreement or
instrument to which CDIc is a party.
(d) CAPITALIZATION. The current capitalization of CDIc consists of
50,000,000 shares of authorized Common Stock, 29,282,588 shares of which are
outstanding, and 500,000 shares of Preferred Stock, 235,944 shares of which are
outstanding. In addition, options to purchase 1,160,000 shares of Common Stock
are outstanding.
(e) NO MISSTATEMENTS OR OMISSIONS. The oral and written
information regarding CDIc provided, inside and outside this Agreement, by CDIc
to the Purchasers does not contain any misstatements of a material fact or omit
to state anything necessary to avoid making materially misleading the statements
which were provided.
ARTICLE III.
COVENANTS
SECTION 3.1 MARKET STAND-OFF AGREEMENT. Each of the Purchasers hereby
agrees that, during the period of duration (not to exceed 180 days) specified by
CDIc and an underwriter of Common Stock or other securities of CDIc, following
the effective date of a registration statement of CDIc filed under the
Securities Act of 1933, he/she will not, to the extent requested by CDIc and
such underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to transferees or donees who agree
to be similarly bound) any securities of CDIc held by
-5-
<PAGE>
him/her at any time during such period; PROVIDED, HOWEVER, that all officers and
directors of CDIc enter into similar agreements. In order to enforce the
foregoing covenant, CDIc may impose stop-transfer instructions with respect to
the Purchasers' CDIc Common Stock until the end of such period. CDIc is NOT
representing to the Purchasers that it will engage in any such public offering
by any particular date, or ever.
SECTION 3.2 RESCISSION/REINVESTMENT OPTION. CDIc is considering making
in the near future a private placement of securities, which may or may not be on
the same terms and conditions as this Agreement. CDIc shall have no obligation
to the Purchasers to make any private placement of securities. Nonetheless, if
within the next four months CDIc does make through an outside placement agent a
private placement of securities in excess of $2,000,000, not counting this
Agreement's $250,000 and a contemporaneous direct investment of approximately
$1,000,000, CDIc shall so notify the Purchasers in writing and the Purchasers
shall have an option, which shall expire 15 days after such notice, to rescind
their purchase of CDIc common stock under this Agreement on condition that they
immediately reinvest the $250,000 in the CDIc securities offered in the private
placement, on whatever terms and conditions are established for the private
placement.
ARTICLE IV.
MISCELLANEOUS
SECTION 4.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
completely supersedes all prior or contemporaneous agreements, understandings,
arrangements,
-6-
<PAGE>
commitments, negotiations and discussions of the parties, whether oral or
written (all of which shall have no substantive significance or evidentiary
effect). Each party acknowledges, represents and warrants that this Agreement
is fully integrated and not in need of parol evidence in order to reflect the
intentions of the parties. The parties specifically intend that the literal
words of this Agreement shall, alone, conclusively determine all questions
concerning the parties' intent.
SECTION 4.2 WAIVERS. The failure at any time of any party hereto to
require performance by any other party hereto of any responsibility or
obligation required by this Agreement shall in no way affect a party's right to
require such performance at any time thereafter, nor shall the waiver by the
party of a breach of any provision of this Agreement by any other party
constitute a waiver of any other breach of the same or any other provision of
this Agreement nor constitute a waiver of the responsibility or obligation
itself.
SECTION 4.3 ASSIGNABILITY. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of each party hereto, and, for each
Purchaser, his/her administrators, executors, personal representatives,
beneficiaries, heirs or legatees.
SECTION 4.4 NOTICES. In any case where any notice or other communication
is required or permitted to be given under this Agreement such notice or
communication shall be in writing and (a)personally delivered,(b) sent by
registered United States mail, postage prepaid, return receipt requested,(c)
transmitted by telecopy or (d) sent by way
-7-
<PAGE>
of a recognized overnight courier service, with instructions to deliver on the
next business day, in each case as follows:
(i) If to CDIc, to:
6155 Cornerstone Court East
Suite 125
San Diego, CA 92121
Attn: President
Telecopy: (619) 535-0055
with a copy to:
Hayden J. Trubitt
Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1200
San Diego, California 92101
Telecopy: (619) 234-3848
(ii) If to the Purchasers, to:
300 Carlsbad Village Drive, Suite 220
Carlsbad, CA 92008
Attn: Alan Charles Newman
Telecopy: (619) 759-8766
All such notices or other communications shall be deemed to have been
given or received (i) upon receipt if personally delivered, (ii) on the fifth
day following posting if by registered United States mail, (iii) when sent if by
confirmed telecopy or (iv) on the next business day following deposit with an
overnight courier.
SECTION 4.5 THIRD PARTY RIGHTS. Nothing in this Agreement, whether
express or implied, is intended or shall be construed to confer, directly or
indirectly, upon or give to any person other than the Purchasers and CDIc, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
-8-
<PAGE>
SECTION 4.6 CHOICE OF LAW. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of California without
giving effect to the principles of conflict of laws of the State of California.
SECTION 4.7 SEVERABILITY. All provisions contained herein are severable
and in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be construed as if it were written so as to effectuate to the greatest
possible extent the parties' expressed intent; and in every case the remainder
of this Agreement shall not be affected thereby and shall remain valid and
enforceable, as if such affected provision were not contained herein.
SECTION 4.8 ENFORCEMENT OF AGREEMENT. Any action or proceeding brought by
any party to this Agreement, in connection with or relating to this Agreement or
any provision hereof, shall be brought only in a federal or state court of
competent jurisdiction in San Diego County, California. Each of the parties
hereto, solely in connection with any such action or proceeding, does hereby (a)
submit to the jurisdiction of any such court,(b) waive any defense of or
relating to lack of jurisdiction with respect to any such action or proceeding
in any such court, and (c) agree not to claim improper venue or attempt to
transfer such proceeding out of such court.
SECTION 4.9 REFERENCES TO AGREEMENT. Any reference herein to this
Agreement shall be deemed to be a reference to such Agreement as the same may be
modified, varied, amended or supplemented from time to time by the parties in
accordance with the provisions hereof. Unless the context otherwise expressly
requires, the words
-9-
<PAGE>
"herein," "hereof" and "hereunder" and other words of similar importance refer
to this Agreement as a whole and not to any particular Article, Section or other
subdivision.
SECTION 4.10 HEADINGS, ETC. The Article and Section headings in this
Agreement are inserted for convenience of reference only and shall not affect
the interpretation of this Agreement. Whenever the context shall require, each
term stated in either the singular or plural shall include the singular and the
plural. References herein to masculine, feminine or neuter pronouns shall be
construed to refer to another gender when the context may require.
SECTION 4.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 4.12 SURVIVAL. All acknowledgments, representations and
warranties made by any party herein shall survive the Closing.
SECTION 4.13 AMENDMENTS. This Agreement may be amended or modified only
by a written instrument executed by each of the parties hereto.
SECTION 4.14 AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties shall cooperate and use his/her/its
respective best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement.
SECTION 4.15 FURTHER ACTION. If at any time hereafter any party shall
consider that any further agreements, documents, instruments or assurances in
law or any other
-10-
<PAGE>
things are necessary or desirable to carry out the provisions of this Agreement,
the parties to this Agreement shall execute and deliver any and all such
agreements, documents, instruments or assurances in law and do all other things
necessary or proper which shall be reasonably requested to carry out the
provisions of this Agreement.
SECTION 4.16 EXPENSES. All expenses incurred by the parties hereto in
connection with or related to the authorization, preparation and execution of
this Agreement and the Closing of the transactions contemplated hereby shall be
borne solely and entirely by the party which has incurred the same.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Stock Issuance
Agreement to be duly executed and delivered as of the day and year first written
above.
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By:
-----------------------------------------------
Name:
Title:
--------------------------------------------------
ALAN CHARLES NEWMAN, TRUSTEE OF THE ALAN
CHARLES NEWMAN AND JANET MARIE NEWMAN FAMILY
TRUST UDT DATED DECEMBER 10, 1991
--------------------------------------------------
JANET MARIE NEWMAN, TRUSTEE OF THE ALAN
CHARLES NEWMAN AND JANET MARIE NEWMAN FAMILY
TRUST UDT DATED DECEMBER 10, 1991
-12-
<PAGE>
EXHIBIT 10.16
STOCK ISSUANCE AGREEMENT
THIS STOCK ISSUANCE AGREEMENT (this "Agreement"), dated as of November
20, 1996, by and between CardioDynamics International Corporation, a California
corporation ("CDIc"), and Suzy W. Duff ("S. Duff") and Wallace E. Duff, Trustee
of Mid America Ent. Money Purchase Pension Plan ("W. Duff") (collectively, the
"Purchasers").
ARTICLE I.
PURCHASE OF SHARES
SECTION 1.1 PURCHASE OF SHARES. (a) Upon the terms and subject to the
conditions set forth herein, upon the execution and delivery of this Agreement,
CDIc shall issue and sell 112,629 shares of common stock of CDIc to S. Duff for
$298,000 cash and 29,102 shares of common stock of CDIc to W. Duff for $77,000
cash.
SECTION 1.2 PAYMENT AND DELIVERY AT CLOSING. At the Closing occurring at
the same time as the execution and delivery of this Agreement, CDIc shall
deliver to S. Duff a duly executed share certificate representing 112,629 shares
of CDIc common stock, against payment in full of the purchase price, and to W.
Duff a duly executed share certificate representing 29,102 shares of CDIc common
stock, against payment in full of the purchase price.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
SECTION 2.1 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The
Purchasers hereby jointly and severally represent and warrant to CDIc as
follows:
<PAGE>
(a) AUTHORITY. Each of the Purchasers has the full right, power and
authority to enter into, execute, deliver and carry out the terms of this
Agreement and the transactions contemplated hereby and to perform her/his
obligations hereunder. This Agreement constitutes the valid and binding
obligation of the Purchasers enforceable in accordance with its terms.
(b) CONSENTS AND APPROVALS. All authorizations, approvals and
consents, if any, required to be obtained from, and all registrations,
declarations and filings, if any, required to be made with, all governmental
authorities and regulatory bodies to permit the Purchasers to execute and
deliver this Agreement, and to perform their obligations hereunder, have been
obtained or made, as the case may be, and all such authorizations, approvals,
consents, registrations, declarations and filings are in full force and effect.
(c) NO VIOLATIONS. Neither the execution or delivery by the
Purchasers of this Agreement, nor the consummation by the Purchasers of the
transactions herein contemplated, nor the fulfillment by the Purchasers of the
terms and provisions hereof (i)will conflict with, violate or result in a breach
of, any of the terms, conditions or provisions of any law, regulation, order,
writ, injunction, decree, judgment or award of any court, governmental
department, board, agency or instrumentality or any arbitrator, applicable to
either of the Purchasers or (ii) will conflict with, violate or result in a
breach of, or constitute a default under, any of the terms, conditions or
provisions of any agreement or instrument to which either of the Purchasers is a
party.
-2-
<PAGE>
(d) INVESTMENT INTENT.
(1) Each of the Purchasers has received, carefully read and
understood the documents provided to her/him by CDIc, including CDIc's most
recent Form 10-KSB and the three following Forms 10-QSB. Additionally, CDIc has
afforded her/him access to and ample opportunity to obtain other information
regarding CDIc. She/he has not relied on any oral representations of any kind.
(2) Each of the Purchasers has such knowledge and experience in
financial and business matters (including experience with investments of a
similar nature), that she/he is capable of evaluating the merits and risks of an
investment in CDIc common stock.
(3) The CDIc common stock is being acquired solely for her/his
own account for investment only and not with a view to or for any resale or
distribution thereof or with any present intention of distributing or selling
all or any part of such securities. She/he agrees that the CDIc common stock is
UNREGISTERED and may not be transferred except upon registration under the
Securities Act of 1933, and under any applicable state securities or "blue sky"
laws, or upon receipt by CDIc of evidence in form and substance reasonably
satisfactory to CDIc, to the effect that such transfer may be made without
registration under the Securities Act of 1933 and applicable state securities
or "blue sky" laws. The Purchasers' share certificates representing CDIc common
stock will bear a legend to that effect. CDIc has no obligation to register the
Purchasers' CDIc common stock.
-3-
<PAGE>
(4) Each of the Purchasers recognizes that the purchase of the
CDIc Common Stock by her/him is a speculative investment that involves a high
degree of risk and is suitable only for persons with the financial capability of
making and holding long-term investments not readily reducible to cash.
SECTION 2.2 REPRESENTATIONS AND WARRANTIES OF CDIC. CDIc hereby
represents and warrants as follows:
(a) AUTHORITY. CDIc is a validly existing California corporation in
good standing. CDIc has the full right, power and capacity necessary to enter
into, execute, deliver and perform its obligations under this Agreement. This
Agreement constitutes a valid and binding agreement of CDIc, enforceable in
accordance with its terms.
(b) CONSENTS AND APPROVALS. All authorizations, approvals and
consents, if any, required to be obtained from, and all registrations,
declarations and filings, if any, required to be made with, all governmental
authorities and regulatory bodies to permit CDIc to execute and deliver, and to
perform its obligations under, this Agreement have been obtained or made, as the
case may be, and all such authorizations, approvals, consents, registrations,
declarations and filings are in full force and effect.
(c) NO VIOLATIONS. Neither the execution or delivery by CDIc of this
Agreement, nor the consummation by CDIc of the transactions herein contemplated,
nor the fulfillment by CDIc of the terms and provisions hereof (i) will conflict
with, violate or result in a breach of any of the terms, conditions or
provisions of any law, regulation, order, writ, injunction, decree, judgment or
award of any court, governmental department, board, agency or instrumentality or
any arbitrator, applicable to CDIc, or
-4-
<PAGE>
(ii) will conflict with, violate or result in a breach of, or constitute a
default under, any of the terms, conditions or provisions of any agreement or
instrument to which CDIc is a party.
(d) CAPITALIZATION. The current capitalization of CDIc consists of
50,000,000 shares of authorized Common Stock, 29,377,076 shares of which are
outstanding, and 500,000 shares of Preferred Stock, 235,944 shares of which are
outstanding. In addition, options to purchase 1,168,000 shares of Common Stock
are outstanding.
(e) NO MISSTATEMENTS OR OMISSIONS. The oral and written
information regarding CDIc provided, inside and outside this Agreement, by CDIc
to the Purchasers does not contain any misstatements of a material fact or omit
to state anything necessary to avoid making materially misleading the statements
which were provided.
ARTICLE III.
COVENANTS
SECTION 3.1 MARKET STAND-OFF AGREEMENT. Each of the Purchasers hereby
agrees that, during the period of duration (not to exceed 180 days) specified by
CDIc and an underwriter of Common Stock or other securities of CDIc, following
the effective date of a registration statement of CDIc filed under the
Securities Act of 1933, she/he will not, to the extent requested by CDIc and
such underwriter, directly or indirectly sell, offer to sell, contract to sell
(including, without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than to transferees or donees who agree
to be similarly bound) any securities of CDIc held by
-5-
<PAGE>
her/him at any time during such period; PROVIDED, HOWEVER, that all officers and
directors of CDIc enter into similar agreements. In order to enforce the
foregoing covenant, CDIc may impose stop-transfer instructions with respect to
the Purchasers' CDIc Common Stock until the end of such period. CDIc is NOT
representing to the Purchasers that it will engage in any such public offering
by any particular date, or ever.
SECTION 3.2 RESCISSION/REINVESTMENT OPTION. CDIc is considering making
in the near future a private placement of securities, which may or may not be on
the same terms and conditions as this Agreement. CDIc shall have no obligation
to the Purchasers to make any private placement of securities. Nonetheless, if
within the next four months CDIc does make through an outside placement agent a
private placement of securities in excess of $2,000,000, not counting this
Agreement's $375,000 and a recent direct investment of approximately $250,000,
CDIc shall so notify the Purchasers in writing and the Purchasers shall have an
option, which shall expire 15 days after such notice, to rescind their purchase
of CDIc common stock under this Agreement on condition that they immediately
reinvest the $375,000 in the CDIc securities offered in the private placement,
on whatever terms and conditions are established for the private placement.
ARTICLE IV.
MISCELLANEOUS
SECTION 4.1 ENTIRE AGREEMENT. This Agreement constitutes the entire
agreement among the parties pertaining to the subject matter hereof and
completely supersedes all prior or contemporaneous agreements, understandings,
arrangements,
-6-
<PAGE>
commitments, negotiations and discussions of the parties, whether oral or
written (all of which shall have no substantive significance or evidentiary
effect). Each party acknowledges, represents and warrants that this Agreement
is fully integrated and not in need of parol evidence in order to reflect the
intentions of the parties. The parties specifically intend that the literal
words of this Agreement shall, alone, conclusively determine all questions
concerning the parties' intent.
SECTION 4.2 WAIVERS. The failure at any time of any party hereto to
require performance by any other party hereto of any responsibility or
obligation required by this Agreement shall in no way affect a party's right to
require such performance at any time thereafter, nor shall the waiver by the
party of a breach of any provision of this Agreement by any other party
constitute a waiver of any other breach of the same or any other provision of
this Agreement nor constitute a waiver of the responsibility or obligation
itself.
SECTION 4.3 ASSIGNABILITY. This Agreement shall be binding upon and inure
to the benefit of the successors and assigns of each party hereto, and, for S.
Duff, her administrators, executors, personal representatives, beneficiaries,
heirs or legatees.
SECTION 4.4 NOTICES. In any case where any notice or other communication
is required or permitted to be given under this Agreement such notice or
communication shall be in writing and (a)personally delivered,(b) sent by
registered United States mail, postage prepaid, return receipt requested,(c)
transmitted by telecopy or (d) sent by way of a recognized overnight courier
service, with instructions to deliver on the next business day, in each case as
follows:
-7-
<PAGE>
(i) If to CDIc, to:
6155 Cornerstone Court East
Suite 125
San Diego, CA 92121
Attn: President
Telecopy: (619) 535-0055
with a copy to:
Hayden J. Trubitt
Brobeck, Phleger & Harrison LLP
550 West "C" Street, Suite 1200
San Diego, California 92101
Telecopy: (619) 234-3848
(ii) If to the Purchasers:
c/o Suzy W. Duff
11127 William Plaza
Omaha, NE 68144
Telecopy: (402) 393-3715
All such notices or other communications shall be deemed to have been
given or received (i) upon receipt if personally delivered, (ii) on the fifth
day following posting if by registered United States mail, (iii) when sent if by
confirmed telecopy or (iv) on the next business day following deposit with an
overnight courier.
SECTION 4.5 THIRD PARTY RIGHTS. Nothing in this Agreement, whether
express or implied, is intended or shall be construed to confer, directly or
indirectly, upon or give to any person other than the Purchasers and CDIc, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision contained herein.
SECTION 4.6 CHOICE OF LAW. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of California without
giving effect to the principles of conflict of laws of the State of California.
-8-
<PAGE>
SECTION 4.7 SEVERABILITY. All provisions contained herein are severable
and in the event that any of them shall be held to be to any extent invalid or
otherwise unenforceable by any court of competent jurisdiction, such provision
shall be construed as if it were written so as to effectuate to the greatest
possible extent the parties' expressed intent; and in every case the remainder
of this Agreement shall not be affected thereby and shall remain valid and
enforceable, as if such affected provision were not contained herein.
SECTION 4.8 ENFORCEMENT OF AGREEMENT. Any action or proceeding brought by
any party to this Agreement, in connection with or relating to this Agreement or
any provision hereof, shall be brought only in a federal or state court of
competent jurisdiction in San Diego County, California. Each of the parties
hereto, solely in connection with any such action or proceeding, does hereby (a)
submit to the jurisdiction of any such court,(b) waive any defense of or
relating to lack of jurisdiction with respect to any such action or proceeding
in any such court, and (c) agree not to claim improper venue or attempt to
transfer such proceeding out of such court.
SECTION 4.9 REFERENCES TO AGREEMENT. Any reference herein to this
Agreement shall be deemed to be a reference to such Agreement as the same may be
modified, varied, amended or supplemented from time to time by the parties in
accordance with the provisions hereof. Unless the context otherwise expressly
requires, the words "herein," "hereof" and "hereunder" and other words of
similar importance refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
-9-
<PAGE>
SECTION 4.10 HEADINGS, ETC. The Article and Section headings in this
Agreement are inserted for convenience of reference only and shall not affect
the interpretation of this Agreement. Whenever the context shall require, each
term stated in either the singular or plural shall include the singular and the
plural. References herein to masculine, feminine or neuter pronouns shall be
construed to refer to another gender when the context may require.
SECTION 4.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
constitute one and the same instrument.
SECTION 4.12 SURVIVAL. All acknowledgments, representations and
warranties made by any party herein shall survive the Closing.
SECTION 4.13 AMENDMENTS. This Agreement may be amended or modified only
by a written instrument executed by each of the parties hereto.
SECTION 4.14 AGREEMENT TO COOPERATE. Subject to the terms and conditions
herein provided, each of the parties shall cooperate and use her/his/its
respective best efforts to take, or cause to be taken, all action and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement.
SECTION 4.15 FURTHER ACTION. If at any time hereafter any party shall
consider that any further agreements, documents, instruments or assurances in
law or any other things are necessary or desirable to carry out the provisions
of this Agreement, the parties to this Agreement shall execute and deliver any
and all such agreements,
-10-
<PAGE>
documents, instruments or assurances in law and do all other things necessary or
proper which shall be reasonably requested to carry out the provisions of this
Agreement.
SECTION 4.16 EXPENSES. All expenses incurred by the parties hereto in
connection with or related to the authorization, preparation and execution of
this Agreement and the Closing of the transactions contemplated hereby shall be
borne solely and entirely by the party which has incurred the same.
IN WITNESS WHEREOF, the parties hereto have caused this Stock Issuance
Agreement to be duly executed and delivered as of the day and year first written
above.
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By:
-----------------------------------------------
Name:
Title:
--------------------------------------------------
SUZY W. DUFF
--------------------------------------------------
WALLACE E. DUFF, TRUSTEE
OF MID AMERICA ENT.
MONEY PURCHASE PENSION PLAN
-11-
<PAGE>
November 15, 1996
CardioDynamics International Corporation
6155 Cornerstone Court East, Suite 125
San Diego, CA 92191
Attn: Richard E. Otto
President/CEO
Gentlemen:
We are pleased to set forth the terms of the retention of EVEREN
Securities, Inc. ("EVEREN") by CardioDynamics International Corporation (the
"Company") in connection with the private placement of equity securities of the
Company. This letter agreement (the "Agreement") will confirm EVEREN's
engagement by the Company on the following terms and conditions:
1. DESCRIPTION OF ENGAGEMENT. EVEREN will assist the Company as its exclusive
financial advisor and placement agent in connection with the Financing (as such
term is defined below). EVEREN has been advised by the Company that the Company
will require an aggregate of approximately $7.0 million to finance initial
production, inventory buildup, marketing and launch of the BioZ System
hemodynamic monitor. EVEREN has been further advised that such amount is
anticipated to be obtained from the proceeds of a single offering of privately
placed common equity securities of the Company (such securities being
hereinafter referred to as the "Securities" and such offering being hereinafter
referred to as the "Financing"). Subject to the approval of EVEREN's Private
Placement Review Committee, EVEREN agrees to assist the Company in the Company's
efforts to structure and obtain the Financing, solely from institutional
investors. EVEREN makes no representations, express or implied, that it will
succeed in its efforts to assist the Company in securing the Financing.
2. AUTHORITY. EVEREN shall have no authority to bind the Company to any
person in any way, and shall not purport to do so.
3. INFORMATION. In connection with EVEREN's activities on the Company's
behalf, the Company will cooperate with EVEREN and will furnish EVEREN with all
information and data concerning the Company, the Financing and such other
information which EVEREN deems appropriate (the "Information") and will provide
EVEREN and any prospective Financing sources with access to the Company's
officers, directors, employees, agents, representatives, independent accountants
and legal counsel. The Company warrants and represents that, to its knowledge,
all Information, as such may be amended or supplemented, provided or otherwise
made available to EVEREN by or on behalf of the
<PAGE>
Mr. Richard E. Otto
Page 2
November 15, 1996
Company will, at all times during the period of the engagement of EVEREN
hereunder, be complete and correct in all material respects and will not
knowingly contain any untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein not misleading
in the light of the circumstances under which such statements are made. The
Company warrants and represents that all Information, as such may be amended or
supplemented, contained in any private placement memorandum prepared by the
Company and EVEREN with respect to the Financing (the "Memorandum") will, at all
times during the period of the engagement of EVEREN hereunder, be complete and
correct in all material respects and will not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein not misleading in the light of the circumstances under which
such statements are made. The Company further warrants and represents that any
projections provided by it to EVEREN or contained in the Memorandum will have
been prepared in good faith and will be based upon assumptions which, in light
of the circumstances under which they are made, are reasonable. The Company
acknowledges and agrees that, in rendering its services hereunder, EVEREN will
be using and relying upon the Information (and information available from public
sources and other sources deemed reliable by EVEREN) without independent
verification thereof by EVEREN or independent appraisal by EVEREN of any of the
Company's assets. EVEREN assumes no responsibility for the accuracy or
completeness of the Information or any other information regarding the Company
or the Financing, to the extent that the Information or such other information
is provided by the Company or on the Company's behalf. EVEREN agrees not to use
the Information except in connection with the Financing, agrees that the
Information will be disclosed to outside parties only in connection with their
prospective interest in the Financing, and further agrees not to use in
marketing the Financing any written materials (including the Memorandum), broker
sales memoranda or other oral scripted materials that have not previously been
expressly approved by the Company. Any advice rendered by EVEREN pursuant to
this Agreement may not be publicly disclosed without the express prior written
consent of EVEREN.
4. FURTHER AGREEMENTS AND REPRESENTATIONS OF THE COMPANY. The Company further
agrees to the undertakings and representations set forth in Appendix A hereto
and made a part hereof.
5. AGREEMENTS AND REPRESENTATIONS OF EVEREN. EVEREN represents and warrants
to the Company that, assuming compliance by the Company with all relevant
provisions of the Securities Act of 1933, as amended (the "Act") in connection
with the registration statement filed with respect to the Securities (the
"Registration Statement"), EVEREN will conduct all offers and sales of the
Securities in compliance with the relevant provisions of the Act and the rules
and regulations promulgated under the Act (the "Rules and Regulations") and
various state securities laws and regulations.
6. COMPENSATION. In consideration of the services to be rendered by EVEREN to
the Company pursuant to this Agreement, EVEREN shall be entitled to receive, and
the Company shall pay to EVEREN, the following compensation:
(a) Upon execution of this Agreement, the Company shall pay to EVEREN an
initial cash fee in the amount of $25,000, which amount shall be non-
refundable so long as
<PAGE>
Mr. Richard E. Otto
Page 3
November 15, 1996
EVEREN does not terminate this Agreement prior to marketing the
Securities to investors (in which case it shall be refundable net of
EVEREN's out-of-pocket costs);
(b) As of the closing date of the consummation of the sale of the
Securities (the "Closing Date"), the Company shall pay to EVEREN an
additional cash fee (against which shall be credited any fee paid to
EVEREN pursuant to subparagraph 6(a) above) equal to $500,000 (or
7.14% of any amount raised less than $7 million);
(c) In addition, on the Closing Date, the Company shall grant to EVEREN
300,000 warrants (or 0.043 warrants per dollar raised for any amount
raised less than $7 million) for common stock of the Company,
exercisable at 125% of the price per share applicable to the
Financing. Such warrants shall be exercisable at any time during the
five years following the closing of the Financing;
7. OTHER FEES. The fees set forth in "Compensation" shall be in addition to
other fees, if any, that the Company may be required to pay directly to any
Financing source to secure its financing commitment. This Agreement does not
constitute a commitment or undertaking on the part of EVEREN or any of its
affiliates to provide any part of the Financing and does not ensure the
successful arrangement or completion of the Financing or any portion thereof.
8. EXPENSES. In addition to the fees described in "Compensation" above, the
Company agrees to promptly reimburse EVEREN, upon request from time to time, for
all reasonable out-of-pocket expenses incurred by EVEREN (including, without
limitation, fees and disbursements of counsel, and of other consultants and
advisors retained by EVEREN) in connection with the matters contemplated by this
Agreement, which expenses shall not exceed $75,000 without the prior written
consent of the Company, with such consent not to be unreasonably withheld. In
addition, should the Company be requested to pay fees and expenses of the
Financing sources' legal counsel, the Company acknowledges that such expense is
not the obligation of EVEREN.
9. SUBSEQUENT FINANCING. Assuming that EVEREN succeeds in obtaining the
Financing from one or more institutional investors ("Investors"), and such
Investors provide additional capital (debt or equity) to the Company during the
two-year period next following the closing of the Financing ("Subsequent
Financing"), then the Company shall pay to EVEREN an additional fee equal to
one-half of the percentage specified in subparagraph (b) of "Compensation"
above relating to such Subsequent Financing.
10. RIGHT OF FIRST REFUSAL. If at any time during the two-year period next
following the Closing Date, the Company determines to retain a financial
adviser, investment banker or other similar agent in connection with any
financial advisory, investment banking or related service engagement on behalf
of the Company, the Company shall first offer to retain EVEREN as its financial
adviser, investment banker or agent, as the case may be, for the provision of
such services on the basis of EVEREN's usual and customary terms, conditions and
fees; provided such terms, conditions and fees are not less favorable than those
generally available to the Company from another comparable financial adviser,
investment banker or similar agent.
<PAGE>
Mr. Richard E. Otto
Page 4
November 15, 1996
11. INDEMNIFICATION. The Company hereby agrees to indemnify EVEREN in
accordance with the indemnification provisions (the "Indemnification
Provisions") attached as Appendix B to this Agreement, which Indemnification
Provisions are incorporated herein and made a part hereof.
12. TERMINATION; SURVIVAL. The duration of this Agreement shall be the earlier
of six months from the date of acceptance by the Company or until the Closing
Date. Either party hereto may terminate this Agreement at any time after 30
days following the date of acceptance of this Agreement, upon written notice,
without liability or continuing obligation except as set forth in this
paragraph. EVEREN may terminate this Agreement, at or prior to the Closing
Date, if it determines in its sole discretion (which determination shall be
conclusive absent manifest error) that: (a) trading in the Company's common
stock or securities generally shall have been suspended by the Securities and
Exchange Commission (the "Commission") or on the over-the-counter market; (b) a
banking moratorium shall have been declared by New York or United States
authorities; or (c) there shall have been (I) an outbreak or escalation of
hostilities between the United States and any foreign power, (II) an outbreak or
escalation of any other insurrection or armed conflict involving the United
States, or (III) any other calamity or crisis having an effect on the financial
markets that makes it impracticable or inadvisable to proceed with the placement
contemplated hereby or the delivery of the Securities as contemplated hereby.
Neither the termination, for whatever reason, of this Agreement nor the
completion of the engagement contemplated hereby shall affect: (i) any
compensation earned by EVEREN up to the date of termination or completion, or
after termination, as the case may be, pursuant to the paragraph herein entitled
"Compensation"; (ii) any compensation to be earned by EVEREN after termination
pursuant to the paragraphs herein entitled "Subsequent Financing" and "Right of
First Refusal" or the obligations of the Company thereunder; (iii) the
reimbursement of expenses incurred by EVEREN up to the date of termination or
completion, as the case may be, pursuant to paragraph herein entitled
"Expenses"; and (iv) the provisions of the paragraphs herein entitled
"Information," "Indemnification", "Governing Law; Jurisdiction" and "Successors
and Assigns", all of which shall remain operative, and in full force and effect.
13. GOVERNING LAW; JURISDICTION. The validity and interpretation of this
Agreement shall be governed by and construed in accordance with the laws of the
State of Illinois, applicable to agreements made and to be fully performed
therein.
14. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of the
respective successors and assigns of the parties hereto and of the indemnified
parties hereunder and their successors and assigns and representatives, and the
obligations and liabilities assumed in this Agreement by the parties hereto
shall be binding upon their respective successors and assigns.
15. ADVERTISEMENT. EVEREN may publish, at its own expense, an advertisement
announcing the successful completion of a Financing and EVEREN's role therein.
EVEREN hereby agrees that any such advertisement shall be submitted to the
Company for prior approval, which shall not be unreasonably withheld.
<PAGE>
Mr. Richard E. Otto
Page 5
November 15, 1996
16. COUNTERPARTS; AMENDMENT. For the convenience of the parties, any number of
counterparts of this Agreement may be executed by the parties hereto. Each such
counterpart shall be, and shall be deemed to be, an original instrument, but
all such counterparts taken together shall constitute one and the same
Agreement. This Agreement may not be modified or amended except in writing
signed by the parties hereto.
If the foregoing correctly sets forth our mutual understanding and
agreement, please indicate your acceptance hereof by dating and signing the
enclosed copy of this letter in the space provided and returning it, together
with a check in the amount of $25,000, payable to EVEREN Securities, Inc., to
the undersigned.
Very truly yours,
EVEREN SECURITIES, INC.
By:
-------------------------------------
Catharine E. White
Managing Director
Accepted and Agreed to this
day of , 1996
- ------ -------------------
CARDIODYNAMICS INTERNATIONAL CORPORATION
By:
----------------------------
Title:
--------------------------
<PAGE>
APPENDIX A
FURTHER UNDERTAKINGS AND REPRESENTATIONS
AND WARRANTIES OF THE COMPANY
1. The Company will:
(a) Cause the Company's independent public accountants to address and deliver
to the Company and EVEREN a letter or letters (which letters are frequently
referred to as "comfort letters") dated as of the effective date of the
Registration Statement, and a "bring-down" letter as of the Closing Date, both
of which letters will at all times be in form and substance reasonably
satisfactory to the Company and EVEREN.
(b) On the Closing Date, cause outside general counsel to the Company, to
deliver an opinion to EVEREN to the following effect and regarding such
additional matters as EVEREN shall reasonably request:
The Registration Statement of the Company and the Prospectus as amended and
supplemented to date (other than the financial statements and related schedules,
and other financial and statistical data therein, as to which it need express no
opinion) comply as to form in all material respects with the requirements of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder; and it has no reason to believe that either the
Registration Statement or the Prospectus which forms a part thereof, as amended
and supplemented, contains any untrue statement of any material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading (it being understood that counsel need express
no opinion with respect to patents or the financial statements, related
schedules, and other financial and statistical data therein).
2. The Company represents and warrants to EVEREN as of the date hereof (except
as to matters that are to occur subsequent to the date hereof and prior to the
Closing Date) and as of the Closing Date as follows:
(a) At such time as the Registration Statement becomes effective, when any
supplement to the prospectus contained therein (the "Prospectus") is filed with
the Commission and at the Closing Date referred to in paragraph 1, (i) the
Registration Statement and the Prospectus complied, complies and will comply in
all material respects with the requirements of the Act and the regulations
promulgated under the Act; (ii) the Registration Statement, as amended or
supplemented as of any such time, did not, does not and will not contain an
untrue statement of material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading;
(iii) the Prospectus, as amended or supplemented as of any such time, did not,
does not and will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading; PROVIDED,
HOWEVER, that the representations and warranted in this subsection shall not
apply to statements in or omissions from
A-1
<PAGE>
the Registration Statement or Prospectus made in reliance upon and in conformity
with information furnished to the Company in writing by or on behalf of EVEREN
expressly for use in the Registration Statement or Prospectus. There are not
contracts or other documents required to be filed as exhibits to the
Registration Statement by the Act or the Rules and Regulations that have not
been so filed.
(b) There has been no (i) issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or institution or, to
the knowledge of the Company, threat of any proceeding for that purpose or (ii)
notification with respect to the suspension of the qualification of the
Securities for sale in any jurisdiction or initiation or, to the knowledge of
the Company, threat of any proceeding for such purpose.
(c) The accountants who certified the financial statements and supporting
schedules included in the Registration Statement are independent public
accountants as required by the Act and the Rules and Regulations.
(d) The financial statements and supporting schedules included in the
Registration Statement and the Prospectus present fairly the financial position
of the Company and its consolidated subsidiaries as at the dates indicated and
the results of their operations for the periods specified; except as otherwise
stated in the Registration Statement, said financial statements have been
prepared in conformity with generally accepted accounting principles applied on
a consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein.
(e) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated therein,
(A) there has been no material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, (B) there have been no transactions
entered into by the Company or any of its subsidiaries, other than those in the
ordinary course of business, which are material with respect to the Company and
its subsidiaries considered as one enterprise, and (C) except for regular
quarterly dividends, there has been no dividend or distribution of any kind
declared, paid or made by the Company on any class of its capital stock.
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of California with
corporate power an authority to own and lease its properties and to conduct its
business as described in the Registration Statement; and the Company is duly
qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required, whether by reason
of the ownership or leasing of property or the conduct of business, except where
the failure to so qualify would not have a material adverse effect on the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise.
(g) The authorized, issued and outstanding capital stock of the Company is as
set forth in the Registration Statement under "Capitalization" (except for
subsequent issuances, if any, pursuant
A-2
<PAGE>
to reservations, agreements, employee benefit plans or the exercise of
convertible securities referred to in the Registration Statement); the shares of
issued and outstanding common stock have been duly authorized and validly issued
and are fully paid and non-assessable; the Securities have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and delivered
by the Company pursuant to this Agreement against payment therefor, will be
validly issued and fully paid and non-assessable; the common stock conforms to
all statements relating thereto contained in the Registration Statement; and the
issuance of the Securities is not subject to preemptive or other similar rights.
(h) Neither the Company nor any of its subsidiaries is in violation of its
charter or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other instrument or
agreement to which the Company or any of its subsidiaries is a party or by which
it or any of them may be bound, or to which any subsidiaries is subject; and
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein and therein have been duly authorized by all
necessary corporate action and will not conflict with or constitute a breach of,
or default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any contract, indenture, mortgage, loan agreement,
note, lease or other instrument or agreement to which the Company or any of its
subsidiaries is a party or by which it or any of them may be bound, or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor will such action result in any violation of the provisions of the
charter or by-laws of the Company or any applicable law, administrative
regulation or administrative or court decree.
(i) The Company is not required to be registered under the Investment Company
Act of 1940, as amended.
(j) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or any of
its subsidiaries, which is required to be disclosed to the purchasers of the
Securities (other than as disclosed in the offering documents delivered to such
Purchasers), or which might result in any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, or which might materially and adversely affect their respective
property or assets or which might materially and adversely affect the
consummation of this Agreement; all pending legal or governmental proceedings to
which the Company or any of its subsidiaries is a party or of which any of their
respective property or assets is the subject which are not described in such
offering documents, including ordinary routine litigation incidental to the
business of the Company, are, considered in the aggregate, not material; and
there are not contracts or documents of the Company or any of its subsidiaries
which are required to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations which have not been so filed.
A-3
<PAGE>
(k) No authorization, approval or consent of any court or governmental
authority or agency is necessary in connection with the sale of the Securities
hereunder, except such as may be required under the Act or the Rules and
Regulations or state securities laws or real estate syndication laws.
(l) The Company and its subsidiaries possess such certificates, authorities or
permits issued by the appropriate state, federal or foreign regulatory agencies
or bodies necessary to conduct the business now conducted by them, and neither
the Company nor any of its subsidiaries has received any notice of proceedings
relating to the revocation or modification of any such certificate, authority or
permit which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would materially and adversely affect the
condition, financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise.
(m) The Company and its subsidiaries have good and indefeasible title in fee
simple to all real property and interest in real property owned by each of them
and marketable title to all items of personal property owned by each of them, in
each case free and clear of any and all security interest, liens, encumbrances,
equities, claims and other defects, except such as have been disclosed in the
Registration Statement and except such as do not materially and adversely affect
the value of such property or interests by the Company.
(n) The Company has full right, power and authority to enter into this
Agreement and this Agreement has been duly authorized, executed and delivered by
the Company.
(o) Any certificate signed by an officer of the Company and delivered to EVEREN
in connection with the closing shall be deemed a representation and warranty by
the Company to EVEREN as to the matters covered thereby.
A-4
<PAGE>
APPENDIX B
INDEMNIFICATION PROVISIONS
The Company (as such term is defined in the attached Agreement (the
"Agreement") agrees to indemnify and hold harmless EVEREN Securities, Inc.
("EVEREN") from and against any and all losses, claims, damages, obligations,
penalties, judgments, awards, liabilities, costs, expenses and disbursements
(including without limitation fees and disbursements of counsel), and any and
all actions, suits, proceedings and investigations in respect thereof and any
and all legal and other costs, expenses and disbursements, whether in giving
testimony, furnishing documents in response to a subpoena or otherwise,
including, without limitation, the costs, expenses and disbursements, as and
when incurred, of investigating, preparing or defending any such action, suit,
proceeding or investigation (whether or not in connection with litigation to
which EVEREN is a party), directly or indirectly caused by, relating to, based
upon, arising out of, or in connection with any transactions or services
contemplated by, referred to in or in any manner otherwise arising out of the
Agreement and/or any act or omission of EVEREN under or pursuant to the
Agreement; PROVIDED, HOWEVER, such indemnity agreement shall not apply to any
portion of any such loss, claim, damage, obligation, penalty, judgment, award,
liability, cost, expense or disbursement to the extent it is found in a final
judgment by a court of competent jurisdiction (not subject to further appeal) to
have resulted from the gross negligence or willful misconduct of EVEREN. The
Company also agrees that EVEREN shall not have any liability (whether direct or
indirect, in contract or tort or otherwise) to the Company or to any person
(including, with limitation, Company shareholders) claiming by or through the
Company for or in connection with the engagement of EVEREN pursuant to the
Agreement, except to the extent that any such liability is found in a final
judgment by a court of competent jurisdiction (not subject to further appeal) to
have resulted from the gross negligence or willful misconduct of EVEREN.
This indemnification shall be in addition to any liability which the
Company may otherwise have to EVEREN or the persons indemnified below in this
sentence and shall extend to the following: EVEREN Capital Corporation, EVEREN
Securities, Inc., their respective affiliated entities, directors, officers,
employees, legal counsel, agents and any other person that directly or
indirectly controls or is controlled by or is under common control with any
person referred to above (within the meaning of the federal securities laws).
All references to EVEREN in these Indemnification Provisions shall be understood
to include any and all of the foregoing.
If any action, suit, proceeding or investigation is commenced, as to which
EVEREN proposes to demand indemnification, it shall notify the Company with
reasonable promptness; PROVIDED, HOWEVER, that any failure by EVEREN to notify
the Company shall not relieve the Company from its obligations hereunder except
to the extent the Company is prejudiced by such failure or delay. Subject to
EVEREN's approval which shall not be unreasonably withheld, the Company shall
have the right to retain counsel of its own choice to represent EVEREN, and the
Company shall pay the fees, expenses and disbursements of such counsel; and such
counsel shall, to the extent consistent with its professional responsibilities,
cooperate with the Company and any counsel designated by the Company. The
Company shall be liable for any settlement of any claim against EVEREN made with
the Company's written consent, which consent shall not be unreasonably withheld.
The Company shall have the right to settle any claim against EVEREN; provided
that the Company shall not, without the prior written
B-1
<PAGE>
consent of EVEREN, settle or compromise any claim, or permit a default or
consent to the entry of any judgment in respect thereof, unless such settlement,
compromise or consent includes, as an unconditional term thereof, the giving by
the claimant to EVEREN of an unconditional release from any and all liability in
respect of such claim.
EVEREN shall reimburse the Company for any monies paid by the Company
pursuant to these Indemnification Provisions with respect to all fees, costs,
expenses and disbursements if liability is found in a final judgment by a court
of competent jurisdiction (not subject to further appeal) to have resulted from
the gross negligence or willful misconduct of EVEREN.
In order to provide for just and equitable contribution, if a claim for
indemnification pursuant to this Indemnification Agreement is made but it is
found in a final judgment by a court of competent jurisdiction (not subject to
further appeal) that such indemnification may not be enforced in such case, even
though the express provisions hereof provide for indemnification in such case,
then the Company, on the one hand, and EVEREN, on the other hand, shall
contribute to the losses, claims, damages, obligations, penalties, judgments,
awards, liabilities, costs, expenses and disbursements to which the indemnified
persons may be subject in accordance with (i) the relative benefits received by
the Company, on the one hand, and EVEREN, on the other hand; (ii) the relative
fault of the Company on the one hand and EVEREN on the other hand, in connection
with the statements, acts or omissions, as the case may be, which resulted in
such losses, claims, damages, obligations, penalties, judgments, awards,
liabilities, costs, expenses or disbursements; and (iii) consideration of
relevant equitable principles. No person found liable for a fraudulent
misrepresentation shall be entitled to contribution from any person who is not
also found liable for such fraudulent misrepresentation. Notwithstanding the
foregoing, EVEREN shall not be obligated to contribute any amount hereunder that
exceeds the amount of fees previously received by EVEREN pursuant to the
Agreement unless EVEREN shall have been found liable in a final judgment by a
court of competent jurisdiction (not subject to further appeal) of gross
negligence or willful misconduct.
Neither the termination nor completion of the Agreement or of the engagement of
EVEREN referred to therein shall affect the indemnification provided for
hereunder, which shall remain operative and in full force and effect.
B-2
<PAGE>
SUMMARY OF PROPOSED TERMS
- --------------------------------------------------------------------------------
CARDIODYNAMICS INTERNATIONAL CORP.
___,000 SHARES OF COMMON STOCK
AUTOMATIC REGISTRATION FORMAT
ISSUER: CardioDynamics International Corp. (the "Company"
or the "Issuer").
ISSUE: ___,000 newly-issued, restricted shares of Common
Stock (the "Shares"), no par, to be sold on a
private placement basis to U.S. and foreign
institutional investors. The Shares shall
represent approximately __% of the pro forma
primary number of shares of Common Stock of the
Company (__% fully diluted) outstanding at [date].
AMOUNT: $7,000,000.
PRICE PER SHARE: To be set at a 10% - 20% discount to the average
closing bid price for the Common Stock for the
[ten] consecutive trading days prior and including
the Pricing Date.
MINIMUM PURCHASE: 250,000 shares.
EXPECTED PRICING DATE: On or about [December 16], 1996.
EXPECTED CLOSING DATE: Three business days following the Pricing Date.
NOTIFICATION OF TERMS;
ACCEPTANCE BY PURCHASERS: Purchasers will be notified of the purchase price,
Closing Date and other terms on the Pricing Date
and will be required to fax their acceptance of
such terms and confirmation that they have
executed a Purchase Agreement or transmit by fax a
completed and executed copy of the signature page
of such Agreement within 24 hours of such
notification. See "Issuance of Shares" below.
DIVIDENDS: No dividends are currently being paid. Subject to
the prior rights of any preferred stock then
outstanding, the holders of Common Stock are
entitled to receive dividends when, as and if
declared by the Board of Directors.
VOTING RIGHTS: One vote per share held of record on all matters
submitted to a vote of holders of Common Stock.
REGISTRATION RIGHTS: The Company shall make every effort to effect the
registration of the Shares on Form S-3 under the
Securities Act of 1933, as amended (the
1
<PAGE>
"Act") on or before 100 days following the Closing
Date, giving notice to all holders of the Shares
who may include all or any portion of their Shares
in such registration. Such registration shall be
kept effective until the earlier of the date that
(i) such Shares are sold pursuant to the
registration statement, or (ii) the required
holding period imposed on such Shares by SEC Rule
144 has expired. The registration will be subject
to the provision that the Company shall have the
right to postpone registration or require the
Investors not to sell pursuant to the Registration
Statement for up to [60] days at any time if the
Company is actively contemplating or is involved
in any extraordinary transaction (merger,
takeover, unusual commercial negotiation, etc.),
and may postpone registration for up to [____]
days if the Company is not eligible to use Form S-
3 for resales but reasonably expects to become
eligible within such period.
RANKING: The Common Stock shall rank junior to any
preferred stock of the Company and to any other
class or series of capital stock of the Company
with respect to dividends and liquidating
distributions, unless the terms of such class or
series specifically provide that such class or
series shall rank on a parity with the Common
Stock.
LIQUIDATION: In a liquidation, the Common Stock shall be
entitled to the assets legally available for
distribution to holders of Common Stock, on a pro
rata basis, subject to the rights, if any, of
holders of any preferred stock or other class or
series of capital stock senior to the Common
Stock.
ISSUANCE OF SHARES: Each purchaser of Shares will be required to
execute a Purchase Agreement and return same to
the Placement Agent at or before the close of
business on the second business day following the
Pricing Date. The Purchase Agreement will confirm
that the Shares have been sold on a private
placement basis and that the Shares may not be
sold, transferred or otherwise disposed of by an
investor except pursuant to a registration
statement or an exemption from the registration
requirements of the Act.
INVESTOR SUITABILITY: Each purchaser of the Shares will be required to
represent in writing to the Company and the
Placement Agent, among other things, that it is an
"accredited investor" as such term is defined in
Regulation D promulgated under the Act.
ANTI-DILUTION PROVISIONS: None.
BOARD OBSERVATION RIGHTS: Any holder of Shares equal to or greater than a 5%
ownership interest in the Company shall be
entitled to observation rights at meetings of the
Board of Directors.
PLACEMENT AGENT: EVEREN Securities, Inc.
2
<PAGE>
[LETTERHEAD]
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference into the CardioDynamics
International Corporation (the "Company") registration statement on Form S-8
(#333-14515) of our report dated February 25, 1997 (except for Note 14 as to
which the date is March 6, 1997) on the financial statements of the Company for
the years ended November 30, 1996 and 1995.
/s/ Peterson & Co.
PETERSON & CO.
San Diego, California
March 12, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 706,190
<SECURITIES> 262,619
<RECEIVABLES> 32,386
<ALLOWANCES> 7,461
<INVENTORY> 293,629
<CURRENT-ASSETS> 1,355,699
<PP&E> 265,781
<DEPRECIATION> 156,149
<TOTAL-ASSETS> 1,469,581
<CURRENT-LIABILITIES> 279,319
<BONDS> 0
0
457,791
<COMMON> 8,366,514
<OTHER-SE> (89,270)
<TOTAL-LIABILITY-AND-EQUITY> 1,469,581
<SALES> 146,655
<TOTAL-REVENUES> 146,655
<CGS> 240,987
<TOTAL-COSTS> 2,371,259
<OTHER-EXPENSES> 44,276
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,509,867)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,510,667)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
