<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended MAY 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Transition Period from ________ to _________
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 (IRS Employer
incorporation or organization) Identification No.)
6175 NANCY RIDGE DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
(619) 535-0202
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
Check whether the registrant 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 [ ]
As of June 30, 1998, 32,100,743 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format
(check one):
Yes [ ] No [X]
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CARDIODYNAMICS INTERNATIONAL CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets at May 31, 1998 (Unaudited) and
November 30, 1997 (Audited). 3
Statements of Operations (Unaudited) for the three and six
Months ended May 31, 1998 and May 31, 1997. 4
Statements of Cash Flows (Unaudited) for the six months ended May
31, 1998 and May 31, 1997.
5
Notes to Financial Statements (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 10
ITEM 2. CHANGES IN SECURITIES 10
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 10
ITEM 5. OTHER INFORMATION 10
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
SIGNATURES 11
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, NOVEMBER 30,
1998 1997
(Unaudited) (Audited)
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,726,721 $ 2,655,349
Accounts receivable, net of allowance for doubtful accounts
and returns of $34,004 and $161,824, respectively 288,165 51,568
Inventory, net 939,175 906,111
Other current assets 107,140 137,735
------------ ------------
Total current assets 4,061,201 3,750,763
Property and equipment, net 190,647 244,654
Deposits 24,984 27,788
------------ ------------
Total assets $ 4,276,832 $ 4,023,205
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 456,148 $ 295,524
Accrued expenses 21,599 22,292
Accrued salaries, wages and benefits 101,937 83,632
Note payable to bank 3,000,000 --
Current maturities of long-term debt 11,280 11,300
Customer deposits 4,455 2,995
Reserve for inventory returns 326,156 614,860
------------ ------------
Total current liabilities 3,921,575 1,030,603
Long-term debt, less current maturities 53,153 26,523
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized; issued and
outstanding 32,100,743 shares at May 31,
1998 and 32,085,743 at November 30, 1997 14,841,912 14,826,762
Accumulated deficit (14,539,808) (11,860,683)
------------ ------------
Total shareholders' equity 302,104 2,966,079
------------ ------------
Total liabilities and shareholders' equity $ 4,276,832 $ 4,023,205
============ ============
</TABLE>
See accompanying notes to financial statements
3
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CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
MAY 31, MAY 31,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net sales $ 477,726 $ 778,528 $ 625,238 $ 910,456
Cost of sales 291,609 367,420 485,578 461,602
------------ ------------ ------------ ------------
Gross margin 186,117 411,108 139,660 448,854
Operating expenses:
Research and development 607,408 231,619 1,144,478 403,996
Selling, general and
administrative expenses 955,630 754,097 1,684,260 1,441,127
------------ ------------ ------------ ------------
Total operating expenses 1,563,038 985,716 2,828,738 1,845,123
Loss from operations (1,376,921) (574,608) (2,689,078) (1,396,269)
Other income (expense):
Interest, net (16,650) 71,746 7,753 75,696
Loss on sales of securities -- -- -- (164,853)
Other, net 3,000 -- 3,000 --
------------ ------------ ------------ ------------
Total other income (expense) (13,650) 71,746 10,753 (89,157)
Loss before income taxes (1,390,571) (502,862) (2,678,325) (1,485,426)
Income taxes -- -- (800) (800)
------------ ------------ ------------ ------------
Net loss $ (1,390,571) $ (502,862) $ (2,679,125) $ (1,486,226)
============ ============ ============ ============
Net loss per common share,
basic and diluted $ (0.04) $ (0.02) $ (0.08) $ (0.05)
============ ============ ============ ============
Weighted-average number of
common shares outstanding 32,100,743 31,865,439 32,093,408 30,771,712
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
4
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CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31,
---------------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,679,125) $(1,486,226)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 37,486 23,277
Gain on sale of fixed assets (3,000) --
Loss on disposition of marketable securities -- 164,853
Provision for refurbishment of demonstration inventory units 69,069 14,634
Provision for doubtful receivables (127,820) (1,829)
Changes in operating assets and liabilities:
Accounts receivable (108,777) (520,087)
Inventory (102,133) (411,994)
Other current assets 30,595 58,170
Deposits 2,804 (2,252)
Accounts payable 160,624 176,312
Accrued expenses (693) (51,151)
Accrued salaries, wages and related benefits 18,305 22,995
Customer deposits 1,460 (23,012)
Reserve for inventory returns (288,704) --
----------- -----------
Net cash used in operating activities (2,989,909) (2,036,310)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (33,479) (83,727)
Proceeds from sale of fixed assets 53,000 --
Proceeds from sale of marketable securities -- 164,360
----------- -----------
Net cash provided by investing activities 19,521 80,633
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (5,640) (6,459)
Increase in long-term debt 32,250 --
Proceeds from bank borrowings 3,000,000 --
Issuance of common stock 15,150 5,957,055
----------- -----------
Net cash provided by financing activities 3,041,760 5,950,596
----------- -----------
Net increase in cash and cash equivalents 71,372 3,994,919
Cash and cash equivalents at beginning of period 2,655,349 706,190
----------- -----------
Cash and cash equivalents at end of period $ 2,726,721 $ 4,701,109
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
<PAGE> 6
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
DESCRIPTION OF BUSINESS
CardioDynamics International Corporation (the "Company") develops, manufactures
and markets noninvasive digital cardiac output monitoring devices which provide
continuous data on a wide range of hemodynamic parameters, (measurements of the
heart's ability to deliver oxygen-rich blood throughout the body). The Company's
primary products, the BioZ(TM) System, BioZ Portable(TM), and BioZ.com(TM), use
Thoracic Electrical Bioimpedance ("TEB") technology to obtain data which is
typically obtained through a time-consuming, costly and potentially dangerous
invasive Pulmonary Artery Catheterization ("PAC") procedure. The BioZ(TM)
product line uses the Company's core technology, the proprietary DISQ(TM)
(Digital Impedance Signal Quantifier) Technology, and the Z MARC(TM) (Modulating
Aortic Compliance) Algorithm, which together provide improved measurements of
impedance waveforms and automatic electronic calibration, thereby increasing the
repeatability and reliability of TEB technology. Since TEB monitoring is
noninvasive, it eliminates procedure risk and potentially decreases the length
of a hospital stay, thereby reducing patient cost.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with the
requirements for Form 10-QSB and, therefore, do not include all information and
footnotes which would be presented were such financial statements prepared in
accordance with generally accepted accounting principles.
These statements should be read in conjunction with the Company's November 30,
1997 audited financial statements and notes thereto as presented in its Annual
Report on Form 10-KSB. Financial presentations for prior periods have been
reclassified to conform to the current presentation.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. The results of operations for the three months and six ended
May 31, 1998 are not necessarily indicative of the results that may be expected
for the full fiscal year ended November 30, 1998.
6
<PAGE> 7
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included in this report, and with the Company's
audited financial statements and notes thereto for the fiscal year ended
November 30, 1997. Certain statements set forth herein are forward-looking and
involve risks and uncertainties. For information regarding potential factors
that could have a material adverse effect on the Company's business, operating
results, and financial condition, refer to the Company's November 30, 1997 Form
10-KSB and page 11 of this report.
Results of Operations ("Second quarters" referred to herein are fiscal quarters
ended May 31)
The Company received FDA 510(k) marketing clearance for the BioZ System in late
November 1996; and in September 1997, the Company received 510(k) marketing
clearance from the FDA for its BioZ Portable monitoring system and the Company's
proprietary Dynamic Impedance Signal Quantifier (DISQ(TM)) technology. In March
1998, the Company received 510(k) marketing clearance for the BioZ.com, the
Company's next generation monitoring system. The BioZ.com is even more compact
than the BioZ Portable and features a transport battery, integrated blood
pressure module and direct data interface to most hospital patient monitoring
systems. The BioZ.com is the first product to fully utilize the Company's DISQ
technology, which provides improved measurement of impedance waveforms and
automatic electronic calibration. These FDA clearances provide the Company the
opportunity to commercialize the three products, which could result in
significantly increased sales.
Net sales for the second quarter of fiscal 1998 increased 224% to $447,726 over
first quarter fiscal 1998 sales due primarily to commencement of shipments of
the BioZ.com and the Company's transition to a direct sales force. Although
second quarter 1998 sales were lower than those recorded in the second quarter
of fiscal 1997, the majority of the 1997 sales were to domestic distributors for
demonstration and stocking inventory. As a result of the Company's decision in
late 1997 to add a direct sales force in targeted metropolitan areas, a 100%
reserve for distributor returns was established. Approximately $606,000 of the
reserve for distributor returns at November 30, 1997 related specifically to the
$778,528 of sales recorded in the second quarter of fiscal 1997. During the
second fiscal quarter of 1998, $128,951 of equipment was returned from
distributors whose agreements had been terminated, reducing the reserve balance
to $326,156 at May 31, 1998.
The Company sold 29 BioZ systems, including ten BioZ.coms in the second quarter
of fiscal 1998. In addition, ten BioZ systems were shipped during the second
quarter of 1998 under the Company's "No Risk" and "Preferred Partnership" rental
programs. Under these programs a BioZ System and disposable sensors are provided
to targeted accounts at little or no charge for a specified trial period, in
exchange for a minimum monthly usage-based charge.
7
<PAGE> 8
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations (Continued)
The Company believes that allowing clinicians the opportunity to experience the
clinical benefits and cost savings of the BioZ System, without the risks
typically associated with a capital equipment purchase, will result in greater
knowledge and acceptance of the Company's products and provide local reference
sites to facilitate additional sales.
The Company achieved a gross margin of 39% in the second quarter and 22% in the
first half of fiscal 1998 compared with a 53% gross margin in the second quarter
and 49% in the first half of fiscal 1997. The gross margin is expected to
improve as the Company's manufacturing capacity is more fully utilized and as
average unit sales prices increase as a result of a heavier mix of direct sales
to end-users. However, significant increases in sales will be required to enable
the Company to generate gross profit margins adequate to achieve profitability.
Selling, general and administrative costs for the quarter ended May 31, 1998
increased 27% and 17%, respectively, over the second quarter and first six
months of fiscal 1997 due to the Company's strategic investment in a direct
sales force and costs associated with development of sales and marketing
materials for the BioZ.com product release. The Company's investment in sales
activities is expected to continue to increase as the direct sales force is
expanded, and selling and marketing materials are developed for direct sales
targeted at both the hospital and outpatient markets. As a result of ongoing
cost containment efforts, general and administrative expenses were reduced by 2%
in the second fiscal quarter and 4% in the first half of 1998 compared with the
same periods of 1997.
Research and development expenses increased by $375,789 or 162% in the second
quarter of fiscal 1998 over last year's same quarter and $740,482 or 183% in the
first half of fiscal 1998 over the first half of fiscal 1997. The increases are
mainly due to the accelerated 11-month development cycle, from specification to
shipment, of the BioZ.com product. Much of the non-proprietary product
development was contracted from Rivertek Medical Systems. The Company will
continue to invest resources to develop new products and refine and enhance its
existing products.
In April of 1998, the Company signed a distribution alliance agreement with
Cardiomedics, Inc. The relationship with Cardiomedics is expected to expand
penetration in the emerging counterpulsation cardiology marketplace, which can
benefit from the BioZ's noninvasive hemodynamic monitoring capabilities, and
will assist Cardiomedics in demonstrating the value of its noninvasive
counterpulsation treatment for patients with angina pectoris. In order to
penetrate the BioZ's numerous potential markets, the Company plans to seek
additional alliances with select medical device manufactures, managed care
facilities and others.
8
<PAGE> 9
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations (Continued)
The Company incurred interest expense, net of interest income earned on invested
funds, of $16,650, largely as a result of interest on the May 1998 $3,000,000
term loan from Imperial Bank, compared with net interest income of $71,746 on
higher average cash balances in the same quarter of fiscal 1997. In the first
fiscal quarter of 1997, the Company recognized a loss of $164,853 on the sale of
marketable securities that had been held for payment to preferred shareholders
upon the exercise of a right to redeem their preferred shares for common stock
and a pro-rata portion of the proceeds of the marketable securities.
The Company incurred a net loss for the second quarter and first half of 1998 of
$1,390,570 and $2,679,125 or $.04 and $.08 per common share respectively,
compared with a net loss of $502,862 and $1,486,226 or $.02 and $.05 per common
share in the same fiscal periods last year. The increased weighted average
number of common shares resulted from the issuance of approximately 2,500,000
common shares in a private placement through EVEREN Securities, Inc., in early
1997 and the automatic conversion in August 1997 of 183,115 shares of the
Company's preferred stock into common stock.
Liquidity and Capital Resources
In May 1998, the Company entered into a six month unsecured term loan with
Imperial Bank. Under the terms of the agreement the Company may borrow up to
$4,000,000. The loan bears interest at one percent above the Bank's Prime Rate
and provides the Company with the capital necessary to commence expansion of its
direct sales force and execute marketing programs for new the BioZ.com product
line. At May 31, 1998 the Company has borrowed $3,000,000 in accordance with the
terms of the agreement. As a result of the bank loan, the Company's overall cash
balance increased by $71,372 in the six months ended May 31, 1998 despite the
Company's operating losses.
In March 1998, the Company entered into an 18 month unsecured private line of
credit agreement with the co-chairmen of the Company's Board of Directors. Under
the terms of the agreement the Company may borrow up to $3,000,000 on an
as-needed basis with monthly interest-only payments at an annual interest rate
of 10.0%. The Company has not borrowed any amounts under this private line of
credit agreement.
Longer term, the Company's liquidity will depend on its ability to successfully
commercialize the BioZ product line and other diagnostic products. Until then,
it will be necessary for the Company to raise additional funds through public or
private financing, bank loans, collaborative relationships or other
arrangements. There can be no assurance that such additional funding will be
available on terms attractive to the Company, or at all.
9
<PAGE> 10
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
In April of 1998 Michael K. Perry was appointed as Chief Executive
Officer and a Director. Mr. Perry replaces Richard E. Otto, who will
continue to serve on the Company's Board of Directors. Mr. Perry was
formerly Vice President of Operations at Pyxis Corporation, a publicly
traded company that provided healthcare automation and information
management services, as well as pharmacy management services, to
hospitals and outpatient facilities. Mr. Perry was part of the executive
team that successfully acquired and integrated three businesses into
Pyxis, and in 1996 sold the company to Cardinal Health, Inc. for $980
million.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment to Compensation and Employment Agreement, dated April
5, 1998, between the Company and Richard E. Otto.
10.2 Employment Agreement, dated March 23, 1998, between the Company
and Michael K. Perry.
10.3 Private line of Credit Agreement, dated March 11, 1998, between
Allen E. Paulson, James C. Gilstrap and the Company.
10.4 Promissory Note and Credit Agreement dated May 14, 1998, between
Imperial Bank and the Company.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
10
<PAGE> 11
CARDIODYNAMICS INTERNATIONAL CORPORATION
This document 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. These statements include statements regarding plans, goals, strategies,
intent, beliefs or current expectations of the Company and its management. These
statements are expressed in good faith and are believed to have a reasonable
basis when expressed, but there can be no assurance that these expectations will
be achieved or accomplished. 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, collaborations, trends or operating results
also constitute such forward-looking statements. Among the factors that could
cause the Company's actual results to differ materially from those indicated in
any such forward-looking statements are: (i) sole dependence on the
recently-introduced BioZ(TM) System, BioZ Portable(TM) and BioZ.com(TM) and
related products, (ii) general acceptance in the medical community of invasive
procedures such as PAC and lack of general acceptance in the medical community
of TEB, (iii) its ability to raise additional funds on terms attractive to the
Company, or at all, (iv) competition from Baxter Healthcare Corporation, the
maker of the Swan-Ganz(TM) PAC device, and (v) execution of the addition of a
direct sales force from exclusive reliance on distributors, (vi) various
uncertainties characteristic of companies just emerging from the development
stage; as well as other risks detailed in the Company's annual report on Form
10-KSB for the fiscal year ended November 30, 1997 and any later-filed SEC
reports. Any forward-looking statement speaks only as of the date on which the
statement is made, and the Company does not undertake to update the disclosures
contained in this document or reflect events or circumstances that occur
subsequently or to reflect the occurrence of unanticipated events.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CARDIODYNAMICS INTERNATIONAL CORPORATION
Date: July 10, 1998 By: /s/ MICHAEL K. PERRY
---------------- ------------------------------------
Michael K. Perry
Chief Executive Officer
Date: July 10, 1998 By: /s/ STEPHEN P. LOOMIS
---------------- ------------------------------------
Stephen P. Loomis
Vice President, Finance
Chief Financial Officer and
Corporate Secretary
11
<PAGE> 1
Exhibit 10.1
AMENDMENT OF COMPENSATION AND EMPLOYMENT AGREEMENT
With respect to the Compensation and Employment Agreement (the
"Agreement") dated as of June 16, 1995 between CardioDynamics International
Corporation ("EMPLOYER") and Richard E. Otto ("EMPLOYEE").
1. EMPLOYEE hereby resigns from all positions as an officer and
employee of EMPLOYER.
2. The parties hereby confirm that by mutual agreements
EMPLOYEE's prospective salary rate was reduced to the following rates as of the
following dates, and that no accrued or deferred salary exists:
Beginning February 1, 1996 : $120,000 per annum
Beginning July 31, 1997 : $ 72,000 per annum
No salary shall accrue or be paid with respect to any period after April 5,
1998.
3. The parties hereby agree to amend the Option Certificate
attached to the Agreement as Exhibit A, as follows:
a. The total number of stock options is reduced from
500,000 to 250,000. This reduction shall be spread evenly over all tranches; for
example, "the first 20% tranche of the Options" shall now be 50,000 options
instead of 100,000 options.
b. Section 1 of the Option Certificate is deleted.
4. No promises, representations or side agreements have been
given to EMPLOYEE to induce him to enter into this Amendment, and he has not
relied on any representation, agreement, understanding, arrangement or
commitment which has not been expressly set forth in this Amendment. EMPLOYEE
has been given the opportunity to consult with his own lawyer before signing
this Amendment.
5. Section 3.3 and Articles 7 and 8 of the Agreement shall
survive.
Dated: April 5, 1998
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By: /s/ RHONDA F. PEDERSON
-------------------------------
Rhonda F. Pederson
Title: President
----------------------------
/s/ RICHARD E. OTTO
----------------------------------
Richard E. Otto
<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made by and between CardioDynamics
International Corporation, a California corporation ("EMPLOYER"), and Michael K.
Perry ("EMPLOYEE") as of March 23, 1998.
R E C I T A L S:
WHEREAS, EMPLOYER and EMPLOYEE wish to set forth in this
Agreement the terms and conditions under which EMPLOYEE is to be employed by
EMPLOYER.
NOW, THEREFORE, EMPLOYER and EMPLOYEE, in consideration of the
mutual promises set forth herein, agree as follows:
ARTICLE 1
TERM OF AGREEMENT
1.1 Term. The term of this Agreement shall commence on April 6, 1998 or
such earlier date as the parties may agree, and shall continue until terminated
pursuant to Article 6.
ARTICLE 2
EMPLOYMENT DUTIES
2.1 Title/Responsibilities. EMPLOYEE shall serve as an employee of
EMPLOYER and hold the position of Chief Executive Officer of EMPLOYER, and shall
have the powers and responsibilities consistent with such position. Subject to
the ultimate direction and management of EMPLOYER's Board of Directors, EMPLOYEE
will have general charge of the management and operations of EMPLOYER. EMPLOYEE
shall also
<PAGE> 2
perform all duties which from time to time are assigned to him by EMPLOYER's
Board of Directors, and shall provide the Board with periodic reports upon
request.
2.2 Directorship. EMPLOYEE agrees, if and when elected, to serve (at the
pleasure of EMPLOYER's shareholders) as a Director on EMPLOYER's Board of
Directors (and on such Board committees to which he may be appointed) at no
additional compensation during the time he is an employee of EMPLOYER. It is
understood that EMPLOYEE shall forthwith be elected to fill a newly-created seat
on EMPLOYER's Board of Directors and shall, as long as he remains Chief
Executive Officer, be included on management's slate of director nominees.
2.3 Full Time Attention. EMPLOYEE shall perform his duties hereunder in
a diligent and professional manner and devote his full time and attention, best
efforts, energy and skills to EMPLOYER during the time he is employed hereunder
as Chief Executive Officer of EMPLOYER. During the term of this Agreement
EMPLOYEE shall not without the express consent of EMPLOYER's Board of Directors
serve or act as a shareholder (except passive holdings of less than 1% of the
stock), employee, agent, consultant, officer, director, partner, representative
or owner of any other business entity, nor (if it would require more than an
insubstantial amount of time or attention) of any non-profit entity.
2.4 Compliance with Rules. EMPLOYEE shall comply with all applicable
governmental laws, rules and regulations and with all of EMPLOYER's policies,
rules and/or regulations applicable to all employees of EMPLOYER.
-2-
<PAGE> 3
ARTICLE 3
COMPENSATION
3.1 Base Salary. EMPLOYER shall pay (semi-monthly and in arrears) to
EMPLOYEE a salary of $1 per annum until June 1, 1999 and from and after June 2,
1999 a salary of $190,000 per annum (subject to any salary rate increases which
may be approved by EMPLOYER's Board of Directors from time to time).
3.2 Additional Compensation (Stock Options).
(a) In addition to the salary provided in Section 3.1, EMPLOYER
hereby grants to EMPLOYEE as additional compensation for EMPLOYEE's services
(but not for any capital-raising purposes or in connection with any
capital-raising activities) a non-qualified stock option to purchase 1,500,000
shares of EMPLOYER Common Stock (the "Option Stock"), as set forth in Exhibit A
hereto.
(b) In connection with such stock options, EMPLOYEE hereby
represents, warrants and acknowledges to EMPLOYER as follows:
(i) EMPLOYEE acknowledges that the purchase, if made, of
the Option Stock involves a high degree of risk and further acknowledges that he
can bear the economic risk of the acquisition of the Option Stock, including the
total loss of his investment.
(ii) By reason of his business and financial experience,
EMPLOYEE has the capacity to protect his own interests in this transaction and
is acquiring the stock options and Option Stock (and would acquire the Option
Stock) for his own account and not with a view to distribution.
-3-
<PAGE> 4
(iii) EMPLOYEE understands that the stock options are
being, and the Option Stock is being and would be, offered and sold to him in
reliance on specific exemptions from the registration requirements of Federal
and State securities laws and that EMPLOYER is relying upon the truth and
accuracy of the representations, warranties, and acknowledgements of EMPLOYEE
set forth herein in order to determine the applicability of such exemptions and
the suitability of EMPLOYEE to acquire the stock options and the Option Stock.
(iv) EMPLOYEE understands that no Federal or State agency
has passed on or made any recommendation or endorsement of the stock options
and/or the Option Stock.
(c) EMPLOYEE hereby agrees that, during the period of duration
(not to exceed 180 days) specified by EMPLOYER and an underwriter of Common
Stock or other securities of EMPLOYER, following the effective date of each
respective registration statement of EMPLOYER filed under the Securities Act, he
shall not, to the extent requested by EMPLOYER and such underwriter, directly or
indirectly sell, offer to sell, contract to sell (including, without limitation,
any short sale), pledge, hypothecate, grant any option to purchase or otherwise
transfer or dispose of (other than to donees who agree to be similarly bound)
any securities of EMPLOYER held by him at any time during such period. In order
to enforce this Section 3.2(c), EMPLOYER may impose stop-transfer instructions
with respect to the securities of EMPLOYEE (and the shares or securities of
every other person subject to the foregoing restriction) until the end of such
period.
3.3 Performance Bonus. If EMPLOYEE is still employed by EMPLOYER on June
2, 1999 and EMPLOYER's net sales in the 12 months from June 1998 to May 1999
increase
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by at least 100% over EMPLOYER's net sales from June 1997 to May 1998, EMPLOYER
shall pay EMPLOYEE a bonus of $205,000 on June 2, 1999.
3.4 Bonus for Certain Exit Transactions. In the event of an acquisition
of EMPLOYER (a) by merger into another entity, (b) by reverse triangular merger,
or (c) by purchase of all or substantially all of EMPLOYER's assets (an "Exit
Transaction") during the term of EMPLOYEE's employment in which total
consideration of $50,000,000 or more is paid to the shareholders of EMPLOYER
(including, at the full Exit Transaction price per share, any shares held by the
acquiror at the time of consummation of the Exit Transaction) or to EMPLOYER,
then effective immediately before the consummation of the Exit Transaction
EMPLOYEE shall be awarded a bonus in the form of shares of Common Stock of
EMPLOYER. In the case where the total consideration is $50,000,000 or more but
less than $75,000,000, the number of bonus shares shall be sufficient to enable
EMPLOYEE to receive in the Exit Transaction (in respect of such bonus shares) 1%
of such total consideration; and in the case where the total consideration is
$75,000,000 or more, the number of bonus shares shall be sufficient to enable
EMPLOYEE to receive in the Exit Transaction (in respect of such bonus shares) 2%
of such total consideration. Provided, however, that in either case, the number
of bonus shares shall be reduced by a number of shares equal to the Option
Spread divided by the Exit Transaction price per share. The "Option Spread" is
the product of 1,500,000 times the excess, if any, of the Exit Transaction price
per share over $2.55. The parties further agree that no bonus shall be awarded
hereunder for an Exit Transaction under $50,000,000.
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ARTICLE 4
OTHER BENEFITS
4.1 Fringe Benefits. EMPLOYEE shall be entitled during the term of his
employment under this Agreement to all employee benefit plans, compensation
programs and fringe benefits made available from time to time by EMPLOYER to its
executives generally and/or its employees generally, including without
limitation participation in EMPLOYER's group health insurance plan and executive
cash bonus plan (if, as and when designed), subject in each case to the
generally applicable conditions of such plans and programs as in effect from
time to time.
4.2 County Club Membership. EMPLOYEE shall be entitled during the term
of his employment under this Agreement to an honorary membership in the Del Mar
Country Club (of Rancho Santa Fe, California), subject to payment of dues by
EMPLOYEE.
4.3 Expenses. EMPLOYER shall reimburse EMPLOYEE, not less often than
monthly, for reasonable out-of-pocket business expenses incurred by EMPLOYEE in
the course of his duties hereunder, upon submission by EMPLOYEE of appropriate
expense account reports and substantiating receipts.
4.4 Vacation. EMPLOYEE shall be entitled to three weeks paid vacation
per full year of service, in accordance with and subject to EMPLOYER's vacation
accrual plan and accrual policies as they may be amended from time to time.
EMPLOYEE acknowledges the "cap" on vacation accruals set forth in such plan and
policies. In availing himself of such vacation EMPLOYEE shall reasonably take
into consideration EMPLOYER's business interests.
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<PAGE> 7
ARTICLE 5
FORMER EMPLOYMENT
5.1 No Conflict. EMPLOYEE represents and warrants that the execution and
delivery by him of this Agreement, his employment by EMPLOYER and his
performance of duties under this Agreement will not conflict with and will not
be constrained by any prior employment or consulting agreement or relationship,
or any other contractual obligation.
5.2 No Use of Prior Confidential Information. EMPLOYEE will not
intentionally disclose to EMPLOYER or use on its behalf any confidential
information belonging to any of his former employers, but during his employment
by EMPLOYER he will use in the performance of his duties all information (but
only such information) which is generally known and used by persons with
training and experience comparable to his own or is common knowledge in the
industry or otherwise legally in the public domain.
ARTICLE 6
TERMINATION
6.1 "At-Will" Employment. The term of EMPLOYEE'S employment shall
continue until terminated by either EMPLOYER or EMPLOYEE. Such termination of
EMPLOYEE's employment shall be effected by written notification and may be
effected at any time, with or without cause, for any reason or no reason.
6.2 Severance. If this Agreement and/or EMPLOYEE's employment is
terminated at any time (with or without cause, for any reason or no reason)
EMPLOYEE shall be entitled to no severance pay except as expressly provided in
this Section 6.2. (Payments under Section 3.3(b) and/or Section 4.3 and accrued
vacation time do not constitute severance pay.) If
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EMPLOYEE's employment with EMPLOYER terminates before June 2, 1999 other than
due to Cause (as defined in Section 10 of the Option Certificate form attached
hereto as Exhibit A), EMPLOYEE shall be entitled to the following amounts of
severance pay, and no more, to be paid in one lump sum on June 2, 1999:
(a) If EMPLOYEE's employment with EMPLOYER terminates before
October 6, 1998 other than due to Cause: the product of $438.36 times the number
of days between April 6, 1998 and the date of employment termination.
(b) If EMPLOYEE's employment with EMPLOYER terminates after
October 5, 1998 but before June 2, 1999, $80,000 plus the product of $520.55
times the number of days between October 6, 1998 and the date of employment
termination.
6.3 Termination for Cause. Termination for Cause shall be without
prejudice to any other substantive right or remedy to which EMPLOYER and
EMPLOYEE may be entitled at law, in equity, or under this Agreement.
6.4 References. In the event that EMPLOYEE's employment is terminated by
EMPLOYER without cause, EMPLOYER shall provide favorable positive written and
oral references to help enable EMPLOYEE to obtain future employment.
ARTICLE 7
ARBITRATION
7.1 Final and Binding Arbitration. Any controversy, claim or dispute
between (a) a party to this Agreement, on the one hand, and (b) the other party
to this Agreement and/or such second party's parents, subsidiaries or affiliates
and/or any of their directors, officers, employees, agents, successors, assigns,
heirs, executors, administrators, or legal
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<PAGE> 9
representatives, on the other hand, arising out of, in connection with, or in
relation to (t) the interpretation, validity, performance or breach of this
Agreement, (u) EMPLOYEE's stock options and the underlying Option Stock, (v)
EMPLOYEE's employment by EMPLOYER, (w) any termination of such employment, (x)
any actions during or with respect to EMPLOYEE's work for EMPLOYER, (y) any
claims for breach of contract, tort, or breach of the covenant of good faith and
fair dealing, or (z) any claims of discrimination or other claims under any
federal, state or local law or regulation now in existence or hereinafter
enacted and as amended from time to time concerning in any way the subject of
EMPLOYEE's employment with EMPLOYER or its termination, shall, at the request of
either party, be resolved to the exclusion of a court of law by binding American
Arbitration Association arbitration in San Diego, California, in accordance with
the Employment Dispute Resolution Arbitration Rules of the American Arbitration
Association then in effect. This paragraph shall not have the effect of
diminishing the remedies to which EMPLOYEE may be due under any of such claims,
but shall merely affect the forum in which such claims are made. Each of
EMPLOYEE and EMPLOYER understands and agrees that the arbitration shall be
instead of any civil litigation and that the arbitrator's decision shall be
final and binding to the fullest extent permitted by law and enforceable by any
court having jurisdiction thereof. The only claims not covered by this Section
7.1 are claims for benefits under the workers' compensation laws or claims for
unemployment insurance benefits, which will be resolved pursuant to those laws.
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<PAGE> 10
ARTICLE 8
GENERAL PROVISIONS
8.1 Governing Law. This Agreement and the rights of the parties
thereunder shall be governed by and interpreted under California law.
8.2 Assignment. EMPLOYEE may not delegate, assign, pledge or encumber
his rights or obligations under this Agreement or any part thereof.
8.3 Notice. Any notice required or permitted to be given under this
Agreement shall be sufficient if it is in writing and is sent by registered or
certified mail, postage prepaid, or personally delivered, to the following
addresses, or to such other addresses as either party shall specify by giving
notice under this section:
TO EMPLOYER: CardioDynamics International Corporation
6175 Nancy Ridge Drive, Suite 300
San Diego, CA 92121
Attention: Chairman
Copy to: Hayden J. Trubitt
Brobeck, Phleger & Harrison LLP
550 West C Street, Suite 1300
San Diego, CA 92101
TO EMPLOYEE: Michael K. Perry
P.O. Box 7011
Rancho Santa Fe, CA 92067
8.4 Amendment. This Agreement may be waived, amended or supplemented
only by an express writing signed by both of the parties hereto. To be valid,
EMPLOYER's signature must be by a person specially authorized by EMPLOYER's
Board of Directors to sign such particular document.
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<PAGE> 11
8.5 Waiver. No waiver of any provision of this Agreement shall be
binding unless and until set forth expressly in writing and signed by the
waiving party. To be valid, EMPLOYER's signature must be by a person specially
authorized by EMPLOYER's Board of Directors to sign such particular document.
The waiver by either party of a breach of any provision of this Agreement shall
not operate or be construed as a waiver of any preceding or succeeding breach of
the same or any other term or provision, or a waiver of any contemporaneous
breach of any other term or provision, or a continuing waiver of the same or any
other term or provision. No failure or delay by a party in exercising any right,
power, or privilege hereunder or other conduct by a party shall operate as a
waiver thereof, in the particular case or in any past or future case, and no
single or partial exercise thereof shall preclude the full exercise or further
exercise of any right, power, or privilege. No action taken pursuant to this
Agreement shall be deemed to constitute a waiver by the party taking such action
of compliance with any representations, warranties, covenants or agreements
contained herein.
8.6 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.
8.7 Headings. Article and section headings are inserted herein for
convenience of reference only and in no way are to be construed to define, limit
or affect the construction or interpretation of the terms of this Agreement.
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<PAGE> 12
8.8 Drafting Party. The provisions of this Agreement have been prepared,
examined, negotiated and revised by each party hereto, and no implication shall
be drawn and no provision shall be construed against either party by virtue of
the purported identity of the drafter of this Agreement, or any portion thereof.
8.9 No Outside Representations. No representation, warranty, condition,
promise, understanding or agreement of any kind with respect to the subject
matter hereof has been made by either party, nor shall any such be relied upon
by either party, except those contained herein. There were no inducements to
enter into this Agreement, except for what is expressly set forth in this
Agreement.
8.10 Withholding. Notwithstanding any other provision of this Agreement,
EMPLOYER may withhold from amounts payable under this Agreement all federal,
state, local and foreign taxes that are required to be withheld by applicable
law or regulations.
8.11 Entire Agreement. This Agreement, together with EMPLOYER's standard
Proprietary Information and Inventions Agreement, constitutes the entire
agreement between the parties pertaining to the subject matter hereof and
completely supersedes all prior or contemporaneous agreements, understandings,
arrangements, 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 he or
it has not relied on any representation, agreement, understanding, arrangement
or commitment which has not been expressly set forth in this Agreement. 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
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<PAGE> 13
intend that the literal words of this Agreement shall, alone, conclusively
determine all questions concerning the parties' intent.
IN WITNESS WHEREOF, the parties have executed and delivered this
Employment Agreement in San Diego, California as of the date first written
above.
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By: /s/ James C. Gilstrap
-----------------------------------
James C. Gilstrap, Co-Chairman
/s/ Michael K. Perry
-----------------------------------
MICHAEL K. PERRY
Attachment: Exhibit A (Option Certificate)
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<PAGE> 14
EXHIBIT A
NEITHER THESE OPTIONS NOR THE SHARES ISSUABLE UPON THE EXERCISE OF THESE OPTIONS
HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND THEY MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO REGISTRATION (OR AN EXEMPTION FROM
REGISTRATION) THEREUNDER. THESE OPTIONS HAVE BEEN ISSUED IN RELIANCE UPON THE
REPRESENTATION OF THE OPTIONHOLDER THAT THESE OPTIONS (AND, CORRESPONDINGLY, THE
UNDERLYING SHARES) HAVE BEEN ACQUIRED FOR INVESTMENT PURPOSES AND NOT WITH A
VIEW TOWARD THE RESALE OR OTHER DISTRIBUTION OF THESE OPTIONS OR THE UNDERLYING
SHARES. THE TRANSFER OF THESE OPTIONS IS SUBJECT TO RESTRICTIONS CONTAINED
HEREIN.
March 23, 1998
1,500,000 Options
CARDIODYNAMICS INTERNATIONAL CORPORATION
COMMON STOCK OPTIONS
(Void after 5:00 p.m. California time,
March 22, 2008)
Certificate Evidencing 1,500,000 Options
(One Option is required for the purchase
of one share of Common Stock, subject to
adjustment as provided below)
This is to certify that, for value received and subject to the
conditions herein set forth, Michael K. Perry (the "Optionholder") is entitled
to purchase, at any time after March 23, 1998 (subject, however, to the proviso
to this sentence), and in any event no later than 5:00 p.m. California time on
March 22, 2008 (the "Expiration Date"), 1,500,000 shares of Common Stock of
CardioDynamics International Corporation, a California corporation (the
"Company")
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<PAGE> 15
(such shares purchasable upon exercise of the Options are herein called the
"Option Stock"), at $2.55 per share; provided that such right of exercise shall
be limited by Section 1 and Section 2(c) of this Option Certificate providing
for early termination of the Options and by the following vesting schedule: (i)
the first 12.5% tranche of the Options shall first vest and become exercisable
on September 23, 1998; (ii) the second 12.5% tranche of the Options shall first
vest and become exercisable on March 23, 1999; (iii) the next 25% tranche of the
Options shall first vest and become exercisable on March 23, 2000; (iv) the next
25% tranche of the Options shall first vest and become exercisable on March 23,
2001; and (v) the final 25% tranche of the Options shall first vest and become
exercisable on March 23, 2002. Such vesting schedule is subject to acceleration
as provided in Section 2(c) below. The $2.55 amount per share specified above,
as adjusted from time to time pursuant to the provisions hereinafter set forth,
is herein called the "Exercise Price."
1. Early Termination of Options. Notwithstanding anything to the
contrary herein, all of the Options shall immediately and entirely cease to be
exercisable, and shall never again be exercisable to any extent, (a) if the
Optionholder's employment with the Company or the Company's acquiror
(collectively, "EMPLOYER") terminates due to Fault Cause (as defined in Section
10 below), (b) 30 days after the Optionholder's employment with EMPLOYER
terminates other than due to Cause (as defined in Section 10 below), or (c) 365
days after the Optionholder's employment with EMPLOYER terminates due to death
or extended disability as defined in Section 10(b) below (but in no event shall
any Option be exercisable after the Expiration Date). The above language shall
have no effect on and shall not diminish the rights of the Optionholder as to
shares issued in respect of Options that have already vested and been exercised;
and the above language shall (during the 30-day period
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<PAGE> 16
described in subsection (b) or the 365-day period described in subsection (c))
have no effect on and not diminish the rights of the Optionholder as to Options
that have (as of the date of such termination of employment) already vested.
2. Adjustments.
(a) If the Company shall, prior to the exercise of any Options,
divide its outstanding shares of Common Stock by split-up, or if the Company
shall declare a stock dividend or distribute shares of Common Stock to its
shareholders, the number of shares of Common Stock purchasable upon exercise of
these Options immediately prior to such subdivision shall be proportionately
increased, and if the Company shall at any time combine the outstanding shares
of Common Stock by recapitalization, reclassification or combination, the number
of shares of Common Stock purchasable upon exercise of these Options immediately
prior to such combination shall be proportionately decreased. Any resulting
adjustment to the Exercise Price (see Paragraph 2(b)) shall be effective at the
close of business on the effective date of such subdivision or combination or if
any adjustment is the result of a stock dividend or distribution then the
effective date for such adjustment based thereon shall be the record date
therefor.
(b) Whenever the number of shares of Common Stock purchasable
upon the exercise of these Options is required to be adjusted as provided in
this Section 2, the Exercise Price shall be adjusted (to the nearest cent) by
multiplying such Exercise Price immediately prior to such adjustment by a
fraction (x) the numerator of which shall be the number of shares of Common
Stock purchasable upon the exercise of these Options immediately prior to such
adjustment, and (y) the denominator of which shall be the number of shares of
Common Stock so purchasable immediately thereafter.
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<PAGE> 17
(c) In the case of an Acquisition (as defined in Section 9
below), the Company shall give the Optionholder at least two days' advance
notice of such transaction. If the acquiror does not assume the Options in
connection with the Acquisition, then subject to the closing of such
transaction, (i) all of the Options shall be deemed to be immediately and fully
vested, (ii) the Optionholder may exercise, as provided herein, such Options as
of immediately before (but in fact subject to the condition subsequent of) such
closing, and (iii) to the extent unexercised, all Options will terminate at such
closing. If the Options are assumed in connection with an Acquisition, they
shall thereafter be exercisable only for the applicable securities of the
acquiror and not for securities of the Company; and all of the assumed Options
shall be deemed to be immediately and fully vested.
(d) When any adjustment is required to be made pursuant to this
Section 2, the Company, upon the subsequent written request of any holder of the
Options, shall promptly mail to said holder a certificate setting forth the
Exercise Price after such adjustment and setting forth a brief statement of the
facts requiring such adjustment. Such certificate shall also set forth, if
applicable, the kind and amount of stock or other securities or property for
which the Options shall be exercisable following the occurrence of any of the
events specified.
(e) The Company shall not be required upon the exercise of any of
the Options to issue any fraction of shares, but shall make any adjustment
therefor in cash on the basis of the fair market value of any such fractional
interest as it shall appear on the public market for such shares, or, if there
is no public market for such shares, then as shall be reasonably determined by
the Company.
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<PAGE> 18
(f) The Company may at any time in its sole discretion which
shall be conclusive make any change in the form of Option Certificate that the
Company may deem appropriate and that does not affect the substance thereof; and
any Option Certificate thereafter issued or signed, whether in exchange or
substitution for an outstanding Option Certificate or otherwise, may be in the
form as changed.
3. Reservation. The Company agrees that a number of shares of Common
Stock and other securities and property sufficient to provide for the exercise
of all outstanding Options shall at all times during the term of said Options be
reserved for the exercise thereof.
4. Exercise. Exercise may be made of all or any part of the Options
evidenced by this Option Certificate by surrendering it, with the subscription
form provided for herein duly executed by the Optionholder, at the office of the
Company, 6175 Nancy Ridge Drive, San Diego, California 92121 or at such other
office or agency as the Company may designate, accompanied by payment in full,
in cashier's or certified check, of the Exercise Price payable in respect of the
Options being exercised (plus an amount equal to required federal and state tax
withholding on the taxable income recognized at the time of such exercise). If
less than all of the Options evidenced by this Option Certificate are exercised,
the Company will, upon such exercise, execute and deliver to the Optionholder a
new certificate (dated the date hereof) evidencing the Options not so exercised.
5. Additional Conditions.
(a) The exercise of the Options and the issuance of Option Stock
upon such exercise shall be subject to compliance by the Company and the
Optionholder with all applicable requirements of law relating thereto and with
all applicable regulations of any stock
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<PAGE> 19
exchange on which shares of the Company's Common Stock may be listed at the time
of such exercise and issuance.
(b) In connection with and as a condition to the exercise of the
Options, the Optionholder shall execute and deliver to the Company such
representations in writing as may be requested by the Company in order for it to
comply with the applicable requirements of federal and state securities laws.
(c) Share certificates issued upon exercise of the Options shall
contain any appropriate restrictive legends in connection with federal and state
securities laws.
6. Fully Paid. All shares of Common Stock or other securities delivered
upon the exercise of the Options shall be validly issued, fully paid and
nonassessable.
7. Nontransferable. This Certificate and the Options evidenced hereby
shall be nontransferable by the Optionholder except upon death.
8. No Shareholder Rights. The Optionholder shall not, by virtue of
ownership of Options, be entitled to any rights whatsoever of a shareholder of
the Company.
9. Definition of Acquisition. "Acquisition" shall be defined to mean an
acquisition of the Company (a) by merger into another entity, (b) by reverse
triangular merger, (c) by purchase of all or substantially all of the Company's
assets, or (d) by private purchase of Allen Paulson's shares of the Company by a
strategic corporate buyer which intends to exercise control over the Company.
10. Definition of Cause. "Cause" shall be defined to mean:
(a) Death;
(b) Extended disability (defined as the Optionholder's inability
to perform, with or without reasonable accommodation, the essential functions of
his position for any 120
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<PAGE> 20
business days -- exclusive of vacation days taken -- within any continuous
period of 150 business days by reason of physical or mental illness or
incapacity);
(c) Voluntary resignation (other than because of Constructive
Termination (as defined in Section 11 below) or a material breach by EMPLOYER of
its obligations under the Optionholder's Employment Agreement;
(d) The Optionholder's repudiation of his Employment Agreement
other than because of Constructive Termination;
(e) The Optionholder being convicted of a felony, or being
convicted of a misdemeanor involving moral turpitude;
(f) The Optionholder's demonstrable fraud, misappropriation,
embezzlement or dishonesty;
(g) The Optionholder's use of alcohol, drugs or any illegal
substance in such a manner as to interfere with the performance of his duties
under his Employment Agreement;
(h) The Optionholder's intentional, reckless or grossly negligent
action which causes material harm to EMPLOYER, including any misappropriation or
unauthorized use of EMPLOYER's property or improper use or disclosure of
confidential information (but excluding any good faith exercise of business
judgment);
(i) The Optionholder's intentional failure to substantially
perform material duties under his Employment Agreement if such failure has
continued for 15 days after the Optionholder has been notified in writing by
EMPLOYER of the nature of the Optionholder's failure to perform (it being
understood that the performance of material duties is satisfied if the
Optionholder has reasonable attendance and makes good faith business efforts to
perform
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<PAGE> 21
his duties on behalf of EMPLOYER. EMPLOYER may not terminate the Optionholder
based solely upon the operating performance of EMPLOYER); or
(j) EMPLOYEE's chronic absence from work for reasons other than
illness or permitted vacation.
Items (c) through (j) shall together be referred to as "Fault
Cause".
11. Definition of Constructive Termination. A "Constructive Termination"
shall occur when the Optionholder resigns within six (6) months of any one or
more of the following events: (a) a material reduction in the level of his
responsibilities or executive functions, (b) a material breach of his Employment
Agreement or this Certificate by EMPLOYER, or (c) a relocation of his place of
employment to a location more than thirty-five (35) miles from the current
offices of the Company.
12. Governing Law; Arbitration. This Certificate and these Options shall
be governed by and construed and interpreted in accordance with the internal
laws of the State of California. All disputes arising hereunder shall be decided
by binding arbitration in San Diego, California as provided in the Employment
Agreement between the Optionholder and the Company.
13. Notice. Notice pursuant to these Options shall be sufficiently
given, if sent by first-class mail, postage pre-paid, addressed, if to the
Optionholder, to such holder at his last known address as it shall appear in the
records of the Company, and if to the Company, at 6175 Nancy Ridge Drive, San
Diego, California 92121, attn: Secretary. The parties may alter the addresses to
which communications are to be sent hereunder by giving notice of such change of
address to the other party in conformity with the provisions of this Section for
the giving of notice.
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<PAGE> 22
14. Employment Termination. Nothing in this Certificate confers upon the
Optionholder any right to continue in the employ of the Company or interferes
with or restricts in any way the rights of the Company, which are hereby
expressed reserved, to discharge the Optionholder at any time for any reason or
no reason, with or without cause.
15. Amendment. No amendment, modification, or supplement of this
Certificate shall be binding unless executed in writing and signed by the
Company and the Optionholder.
Executed by the Company as of March 23, 1998 in San Diego, California.
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By: /s/ JAMES C. GILSTRAP
-------------------------------
James C. Gilstrap
Co-Chairman
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<PAGE> 23
CARDIODYNAMICS INTERNATIONAL CORPORATION
SUBSCRIPTION FORM
To be Executed by the Optionholder
In Order to Exercise Options
The undersigned Optionholder hereby delivers $_____ and irrevocably
elects to exercise _________ Common Stock Options represented by this Option
Certificate, and to purchase the securities issuable upon the exercise of such
Common Stock Options, and requests that certificates for such securities shall
be issued (bearing appropriate legends) in the name of such Optionholder as
follows:
(Please Insert Name and Social Security or Other Identifying Number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and be delivered to such Optionholder at
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
and if such number of Common Stock Options shall not be all the Common Stock
Options evidenced by this Option Certificate, that a new Option Certificate for
the balance of such Common Stock Options be registered in the name of, and
delivered to, the Optionholder at the address stated below.
- ----------------------------- -------------------------------------
Date Name (Printed)
-------------------------------------
Signature
-------------------------------------
-------------------------------------
Address
-------------------------------------
Social Security No.
-------------------------------------
Signature Guaranteed
<PAGE> 1
Exhibit 10.3
PRIVATE LINE OF CREDIT AGREEMENT
This Agreement is entered in San Diego, California on March 11, 1998
among CardioDynamics International Corporation, a California corporation
("CDIc"), Allen E. Paulson ("Paulson") and James C. Gilstrap ("Gilstrap").
Paulson and Gilstrap are hereafter referred to jointly as the "Lenders".
1. The Lenders shall lend up to an aggregate of $3,000,000 from time to
time to CDIc, upon written request by CDIc, against respective promissory notes
in the form attached hereto (the "Notes"). The initial advances, to be made
today, shall be $85 by Paulson and $15 by Gilstrap.
2. The Lenders agree to honor all requests for funds from CDIc, up to
the maximum set forth in paragraph 1, provided only that (a) CDIc's written
request is delivered to the Lenders at the Del Mar Country Club, P.O. Box 9660,
Rancho Santa Fe, California at least 14 days before the funding date specified
in the request, (b) of the amount requested, 85% is requested from Paulson and
15% is requested from Gilstrap, and (c) at the time the request is delivered
CDIc is not in bankruptcy proceedings and is not in default in the payment of
interest under the Notes.
3. CDIc agrees that any payments under the Notes shall be in the same
85%/15% ratio.
4. This is the entire agreement among the parties with regard to the
subject matter of this Agreement. It cannot be amended except in a writing
signed by all parties.
5. The parties acknowledge that Brobeck, Phleger & Harrison LLP
represents in various matters each of CDIc, Paulson, Gilstrap, and entities
controlled by Paulson and/or Gilstrap. The results in an actual conflict of
interest. The parties agree that in this transaction Brobeck, Phleger & Harrison
LLP is representing only CDIc, and is not representing either of the Lenders.
The parties consent to this representation alignment and waive the actual
conflict of interest involved. The Lenders acknowledge that they have been urged
to retain separate legal counsel to protect their interests in this transaction.
CARDIODYNAMICS INTERNATIONAL
CORPORATION
By: /s/ Rhonda Pederson
-------------------------------
President
By: /s/ Steve P. Loomis
-------------------------------
Secretary
/s/ Allen E. Paulson
----------------------------------
ALLEN E. PAULSON
/s/ James C. Gilstrap
----------------------------------
JAMES C. GILSTRAP
<PAGE> 1
Exhibit 10.4
IMPERIAL BANK
INNOVATIVE BUSINESS BANKING
Member, FDIC
PROMISSORY NOTE
Borrower:CARDIODYNAMICS INTERNATIONAL Lender:Imperial Bank
CORPORATION Emerging Growth Industries Group
6175 NANCY RIDGE DRIVE, Southern California Regional Office
SUITE 300 701 B Street, Suite 600
SAN DIEGO, CA 92121 San Diego, CA 92101-8120
Principal Amount: $4,000,000.00 Initial Rate; 9.500% Date of Note: May 14, 1998
PROMISE TO PAY. CARDIODYNAMICS INTERNATIONAL CORPORATION ("Borrower") promises
to pay to Imperial Bank ("Lender"), or order, in lawful money of the United
States of America, the principal amount of Four Million & 00/100 Dollars
($4,000,000.00) or so much as may be outstanding, together with Interest on the
unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid Interest on November 16, 1998. In addition, Borrower
will pay regular monthly payments of accrued unpaid Interest beginning June 30,
1998, and all subsequent Interest payments are due on the last day of each month
after that. The annual interest rate for this Note is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the Imperial Bank Prime Rate
(the "Index). The Prime Rate is the rate announced by Lender as its Prime Rate
of interest from time to time. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The Interest rate change will not occur more often than
each day. The Index currently is 8.500%. The Interest rate to be applied to the
unpaid principal balance of this Note will be at a rate of 1.000 percentage
point over the Index, resulting In an Initial rate of 9.500%. NOTICE: Under no
circumstances will the interest rate on this Note be more than the maximum rate
allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a minimum Interest
charge of $250.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term,* obligation, covenant, or condition contained in this Note
or any agreement related to this Note, or in any other agreement or loan
Borrower has with Lender. (c) Any representation or statement made or furnished
to Lender by Borrower or on Borrower's behalf is false or misleading in any
material respect either now or at the time made or furnished. (d) Borrower
becomes insolvent, a receiver is appointed for any part of Borrower's property,
Borrower makes an
<PAGE> 2
assignment for the benefit of creditors, or any proceeding is commenced either
by Borrower or against Borrower under any bankruptcy or insolvency laws. (a) Any
creditor takes any of Borrower's property on or in which Lender has a lien or
security interest. This includes a garnishment of any of Borrowers accounts with
lender. (f) Any guarantor dies or any of the other events described in this
default section occurs with respect to any guarantor of this Note. (g) A
material adverse change occurs in Borrower's financial condition, or lender**
believes the prospect of payment or performance of the indebtedness is ***
impaired. *material **reasonably ***materially /s/ SPL
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within ten (10) days; or (b) if the
cure requires more than ten (10) days, immediately initiates steps which Lender
deems in Lender's sole discretion to be sufficient to cure the default and
thereafter continues and completes all reasonable and necessary steps sufficient
to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon Borrower's failure to pay
all amounts declared due pursuant to this section, including failure to pay upon
final maturity, Lender, at its option, may also, if permitted under applicable
law, do one or both of the following: (a) increase the variable interest rate on
this Note to 6.000 percentage points over the Index, and (b) add any unpaid
accrued interest to principal and such sum will bear interest therefrom until
paid at the rate provided in this Note (including any increased rate). Lender
may hire or pay someone else to help collect this Note if Borrower does not pay.
Borrower also will pay Lender that amount. This includes, subject to any limits
under applicable law, Lender's attorneys' fees and Lender's legal expenses
whether or not there is a lawsuit, including attorneys' fees and legal expenses
for bankruptcy proceedings (including efforts to modify or vacate any automatic
stay or injunction), appeals, and any anticipated post-judgment collection
services. Borrower also will pay any court costs, in addition to all other sums
provided by law. This Note has been delivered to Lender and accepted by Lender
In the State of California. If there Is a lawsuit, Borrower agrees upon Lender's
request to submit to the jurisdiction of the courts of Los Angeles County, the
State of California. Lender and Borrower hereby waive the right to any jury
trail in any action, proceeding, or counterclaim brought by either Lender or
Borrower against the other. (Initial here/s/ SPL) This Note shall be governed by
and construed in accordance with the law of the State of California.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $25.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
LINE OF CREDIT. This Note evidences a straight line of credit. Once the total
amount of principal has been advanced Borrower is not entitled to further loan
advances. Advances under this Note may be requested orally by Borrower or by an
authorized person. All oral requests shall be confirmed in writing on the day of
the request. All communications, instructions, or directions by telephone or
otherwise to Lender are to be directed to Lender's office shown above. The
following parties are authorized to request advances under the line of credit
until Lender receives from Borrower at Lender's address shown above written
notice of revocation of their authority: MICHAEL PERRY, CEO; STEVE LOOMIS,
SECRETARY/CFO; AND RHONDA PEDERSON, PRESIDENT. Borrower agrees to be liable for
all sums either; (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Note at any time maybe evidenced by
endorsement of this Note or by Lender's internal records, including daily
computer print-
1
<PAGE> 3
outs. Lender will have no obligation to advance funds under this Note if: (a)
Borrower or any guarantor is in default under the terms of this Note or any
agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (C) any guarantor seeks,
claims, or otherwise attempts to limit, modify or revoke such guarantors
guarantee of this Note or any other loan with Lender; (d) Borrower has applied
funds provided pursuant to this Note for purposes other than those authorized by
Lender.
REFERENCE PROVISION. 1. Other than (I) non-judicial foreclosure and all matters
in connection therewith regarding security interest in real or personal
property; or (ii) the appointment of receiver, or the exercise of other
provisional remedies (any and all of which may be initiated pursuant to
applicable law), each controversy, dispute or claim between the parties arising
out of or relating to this document ("Agreement"), which controversy, dispute or
claim is not settled in writing within thirty (30) days after the "Claim Date"
(defined as the date on which a party subject to the Agreement gives written
notice to all other parties that a controversy, dispute or claim exists), will
be settled by a reference proceeding in California in accordance with the
provisions of Section 638 et seq. Of the California Code of Civil Procedure, or
their successor section ("CCP"), which shall constitute exclusive remedy for the
settlement of any controversy, dispute or claim concerning this Agreement,
including whether such controversy, dispute or claim is subject to the reference
proceeding and except as set forth above, the parties waive their rights to
initiate any legal proceedings against each other in any court or jurisdiction
other than the Superior Court in the County where the Real Property, if any, is
located or Los Angeles County if none (the "Court"). The referee shall be a
retired Judge of the Court selected by mutual agreement of the parties, and if
they cannot so agree within forty-five (45) days after the Claim Date, the
referee shall be promptly selected by the Presiding Judge of the Court (or his
representative). The referee shall be appointed to sit as a temporary judge,
with all of the powers for a temporary judge, as authorized by law, and upon
selection should take and subscribe to the oath of office as provided for in
Rule 244 of the California Rules of Court (or any subsequently enacted Rule).
Each party shall have one preemptory challenge pursuant to CCP 170.6. The
referee shall (a) be requested to set the matter for hearing within sixty (60)
days after the Claim Date and (b) try any and all issues of law or fact and
report a statement of decision upon them. If possible, within ninety (90) days
of the Claim Date. Any decision rendered by the referee will be final, binding
and conclusive and judgment shall be entered pursuant to CCP 644 in any court in
the State of California having jurisdiction. Any party may apply for a reference
proceeding at any time after thirty (30) days following notice to any other
party of the nature of the controversy, dispute or claim, by filing a petition
for a hearing and/or trial,. All discovery permitted by this Agreement shall be
completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies
as appropriate.
2. Except as expressly set forth in this Agreement, the referee shall determine
the manner in which the reference proceeding is conducted including the time and
place of all hearings, the order of presentation of evidence, and all other
questions that arise with respect to the course of the reference proceeding. All
proceedings and hearings conducted before the referee, except for trial shall be
conducted without a court reporter, except that when any party so requests, a
court report will be used at any hearing conducted before the referee. The party
making such a request shall have the obligation to arrange for and pay for the
court reporter. The costs of the court reporter at the trial shall be borne
equally by the parties.
3. The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the State of California. The rules
of evidence applicable to proceedings at law in the State of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issues a single judgment at the close of the
2
<PAGE> 4
reference proceeding which shall dispose of all of the claims of the parties
that are at the subject of the reference. The parties hereto expressly reserve
the right to contest or appeal from the final judgment or any appealable order
or appealable judgment entered by the referee. The parties hereto expressly
reserve the right to findings of fact, conclusion of law, a written statement of
decision, and the right to move for a new trial or different judgment, which new
trial if granted, is also to be a reference proceeding under this provision.
4. In the event that the enabling legislation which provides for appointment of
a referee is repealed (and no successor statute is enacted), any dispute between
the parties that would otherwise be determined by the reference procedure herein
described will be resolved and determined by arbitration. The arbitration will
be conducted by a retired Judge of the Court, in accordance with the California
Arbitration Act, 1280 through 1294.2 of the CCP as amended from time to time.
The limitations with respect to discovery as set forth hereinabove shall apply
to any such arbitration proceeding.
CREDIT AGREEMENT. This Note is subject to the provisions of the Credit Agreement
dated May 14, 1998 and all amendments thereto and replacements thereof.
GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its right to
remedies under this Note without losing them. Borrower and any other person who
signs, guarantees or endorses this Note, to the extent allowed by law, waive any
applicable statute of limitations, presentment, demand for payment, protest and
notice of dishonor. Upon any change in the terms of this note, and unless
otherwise expressly stated in writing, no party who signs this Note, whether by
maker, guarantor, accommodation maker or endorser, shall be released from
liability. All such parties agree that Lender may renew or extend (repeatedly
and for any length of time) this loan, or release any party or guarantor or
collateral; or impair, fail to realize upon or perfect lender's security
interest in the collateral; and take any other action deemed necessary by Lender
without the consent of or notice to anyone. All such parties also agree that
Lender may modify this loan without the consent of or notice to anyone other
than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
BORROWER:
CARDIODYNAMICS INTERNATIONAL CORPORATION
BY /s/ Michael Perry BY: /s/ Steve Loomis
------------------------------- -------------------------------
MICHAEL PERRY, CEO STEVE LOOMIS, SECRETARY/CFO
3
<PAGE> 5
i
CREDIT AGREEMENT
This Agreement is made by and between CardioDynamics International
Corporation ("Borrower") and Imperial Bank, a California banking corporation,
("Bank").
Subject to the terms and conditions of this Agreement, any security agreement(s)
executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), and to induce Bank to make loans to
Borrower and in consideration of any loan or loans Bank may make to Borrower,
Borrower warrants and agrees as follows:
1. REPRESENTATIONS OF BORROWER
Borrower represents and warrants that:
1.01 EXISTENCE AND RIGHTS. Borrower is a corporation duly organized and existing
and in good standing under the laws of California, without limit as to the
duration of its existence and is authorized and in good standing to do business
in the State of California; Borrower has corporate powers and adequate
authority, rights and franchises to own its property and to carry on its
business as now conducted, and is duly qualified and in good standing in each
State in which the character of the properties owned by it therein or the
conduct of its business makes such qualification necessary; and Borrower has the
power and adequate authority to make and carry out this Agreement
1.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement are duly authorized and do not require the consent or approval of any
governmental body or other regulatory authority; are not in contravention of or
in conflict with any law or regulation or any term or provision of Borrower's
articles of incorporation, by-laws, as the case may be, and this Agreement is
the valid, binding and legally enforceable obligation of Borrower in accordance
with its terms; subject only to bankruptcy, insolvency or similar laws affecting
creditors rights generally.
1.03 NO CONFLICT. The execution, delivery and performance of this Agreement are
not in contravention of or in conflict with any agreement, indenture or
undertaking to which Borrower is a party or by which it or any of its property
may be bound or affected, and do not cause any lien, charge or other encumbrance
to be created or imposed upon any such property by reason thereof.
1.04 LITIGATION. There is no litigation or other proceeding pending or
threatened against or affecting Borrower which if determined adversely to
Borrower or its interest would have a material adverse effect on the financial
condition of Borrower, and Borrower is not in default with respect to any order,
writ, injunction, decree or demand of any court or other governmental or
regulatory authority.
4
<PAGE> 6
CREDIT AGREEMENT
May 14, 1998
1.05 FINANCIAL CONDITION. The balance sheet of Borrower as of March 31, 1998, a
copy of which has heretofore been delivered to Bank by Borrower, and all other
statements and data submitted in writing by Borrower to Bank in connection with
this request for credit are true and correct, and said balance sheet truly
presents the financial condition of Borrower as of the date thereof, and has
been prepared in accordance with generally accepted accounting principles on a
basis consistently maintained. Since such date, there have been no material
adverse changes in the ordinary course of business. Borrower has no knowledge of
any liabilities, contingent or otherwise, at such date not reflected in said
balance sheet, and Borrower has not entered into any special commitments or
substantial contracts which are not reflected in said balance sheet, other than
in the ordinary and normal course of its business, which may have a materially
adverse effect upon its financial condition, operations or business as now
conducted.
1.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same are
not subject to any liens or encumbrances other than those permitted by Section
3.03 hereof.
1.07 TAX STATUS. Borrower has no liability for any delinquent state, local or
federal taxes, and, if Borrower has contracted with any government agency,
Borrower has no liability for renegotiation of profits.
1.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
1.09 REGULATION U. None of the proceeds of any loan from the Bank to Borrower
shall be used to purchase or carry margin stock (as defined within Regulation U
of the Board of Governors of the Federal Reserve system).
2. AFFIRMATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, under
borrowings, or other indebtedness, or so long as Bank has any obligation to
extend credit to Borrower, it will, unless Bank shall otherwise consent in
writing:
2.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises and
other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
2.02 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment and as to property insurance have Bank named as loss payee in an
Lenders "Loss Payable" Endorsement Form 438BFU or equivalent.
5
<PAGE> 7
CREDIT AGREEMENT
May 14, 1998
2.03 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
a. The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse
effect upon its financial condition or the loss of any right of
redemption from any sale thereunder; and
b. It shall have set aside on its books reserves (segregated to
the extent required by generally accepted accounting practice)
deemed by it adequate with respect thereto.
2.04 RECORDS AND REPORTS. Maintain a standard and modern system of accounting in
accordance with generally accepted accounting principles on a basis consistently
maintained; permit Bank's representatives to have access to, and to examine its
properties, books and records at all reasonable times and upon reasonable notice
during normal business hours; and furnish Bank:
a. MONTHLY FINANCIAL STATEMENT. Within thirty (30) days after the
close of each month of each fiscal year of Borrower, commencing
with the month next ending, a balance sheet, profit and loss
statement and reconciliation of Borrower's capital accounts as of
the close of such period and covering operations for the portion
of Borrower's fiscal year ending on the last day of such period,
all in reasonable detail, prepared in accordance with generally
accepted accounting principles on a basis consistently maintained
by Borrower and certified by an appropriate officer of Borrower;
b. ANNUAL FINANCIAL STATEMENT. As soon as available, and in any
event within one hundred twenty (90) days after the close of each
fiscal year of Borrower, a report of Company as of the close of
and for each fiscal year, all in reasonable detail, prepared on a
audited basis by an independent certified public accountant
selected by Borrower and reasonably acceptable to Bank, in
accordance with generally accepted accounting principles on a
basis consistently maintained by Borrower and certified by an
appropriate officer of Borrower;
c. 10Q & 10K. Quarterly 10Q within 45 days of each fiscal quarter
end and annual 10K within 90 days of fiscal year end.
d. OTHER INFORMATION. Such other information relating to the
affairs of Borrower as the Bank reasonably may request from time
to time;
e. MANAGEMENT LETTER. In connection with each fiscal year end
financial statement furnished to Bank hereunder, any management
letter of Borrower's independent certified public accountant.
2.05 NOTICE OF DEFAULT. Promptly notify Bank in writing of the occurrence of any
Event of Default hereunder or any event which upon notice and lapse of time
would be an Event of Default.
2.06 OPERATING ACCOUNTS. Maintain all operating accounts with Bank during the
term of any loans from Bank to Borrower. Borrower shall maintain, or cause to be
maintained, on deposit with
6
<PAGE> 8
CREDIT AGREEMENT
May 14, 1998
Imperial Bank, non-interest bearing demand deposit balances sufficient to
compensate Bank for all services provided by Bank. Balances shall be calculated
after reduction for the reserve requirement of the Federal Reserve Board and
uncollected funds. Any deficiencies shall be charged directly to the Borrower on
a monthly basis.
2.07 ATTORNEY'S FEES. Pay promptly to Bank without demand after notice, with
interest thereon from the date of expenditure at the rate applicable to any
loans from Bank to Borrower, reasonable attorneys' fees and all costs and
expenses paid or incurred by Bank in collecting or compromising any such loan
after the occurrence of an Event of Default, whether or not suit is filed. If
suit is brought to enforce any provision of this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
2.09 COMMITMENT FEE. $20,000 to be paid upon closing.
2.10 GUARANTEES. Cause the following entities to issue and maintain continuing
guarantees of Borrower's obligations hereunder in the respective amounts set
forth herein: Mr. Allen Paulson in the amount of $3,400,000; and Mr. James
Gilstrap in the amount of $600,000.
2.11 AVAILABILITY. Borrowings to be limited to $3,000,000 with last $1,000,000
to become available following confirmation of a signed term sheet with an
acceptable investment banking firm.
3. NEGATIVE COVENANTS OF BORROWER
Borrower agrees that so long as it is indebted to Bank, or so
long as Bank has any obligation to extend credit to Borrower, it will not,
without Bank's written consent:
3.01 TYPE OF BUSINESS; MANAGEMENT. Make any substantial change in the character
of its business; or make any change in its executive management.
3.02 OUTSIDE INDEBTEDNESS. Other than in the ordinary course of business and
consistent with past practices, create, incur, assume or permit to exist any
indebtedness for borrowed moneys, other than loans from the Bank, except
obligations now existing as shown in the financial statement dated March 31,
1998, excluding those obligations being refinanced by Bank.
3.03 LIENS AND ENCUMBRANCES. Other than in the ordinary course of business and
consistent with past practices, create, incur, or assume any mortgage, pledge,
encumbrance, lien or charge of any kind upon any asset now owned, other than
liens for taxes not delinquent and liens in Bank's favor, except for those
already existing as of March 31, 1998.
3.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business and consistent with past practices or make any investment in the
securities of any person or other entity other than the United States
Government; or guarantee or otherwise become liable upon the obligation of any
person or other entity, except by endorsement of negotiable instruments for
deposit or collection in the ordinary and normal course of its business and
consistent with past practices.
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<PAGE> 9
CREDIT AGREEMENT
May 14, 1998
3.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Except in the
ordinary course of business or for the betterment of the business, purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary course of its business consistent with
past practices or for the betterment of the business; or except in the ordinary
course of business or for the betterment of the business, sell, lease assign or
transfer any substantial part of its business or fixed assets, or any property
or other assets necessary for the continuance of its business as now conducted,
including without limitation the selling of any dividends, property or other
asset accompanied by the leasing back of the same.
4. EVENTS OF DEFAULT
The occurrence of any of the following events (each an "Event of
Default") shall, at Bank's option, terminate Bank's commitment to lend and make
all sums of principal and interest then remaining unpaid on all Borrower's
indebtedness to Bank immediately due and payable, all without demand,
presentment or notice, all of which are hereby expressly waived:
4.01 FAILURE TO PAY. Failure to pay any installment of principal or interest on
any indebtedness of Borrower to Bank.
4.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement binding upon Borrower.
4.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any respect.
4.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
4.05 JUDGMENTS, ATTACHMENTS. Any money judgment, writ or warrant of attachment,
or similar process shall be entered or filed against Borrower or any of its
assets and shall remain unvacated, unbonded or unstayed for a period later than
five days prior to the date of any proposed sale thereunder.
4.06 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall be consented to.
4.07 RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower has not been given a prior notice of breach of the same
provision of this Agreement, it may be cured (and no Event of Default will have
occurred) if Borrower, after Bank sends written notice demanding cure of such
default, (a) cures the default within ten (10) days; or (b), if the cure
requires more than ten (10) days, immediately initiates steps which Bank deems
in Bank's sole discretion to be sufficient to cure the default and thereafter
continues and completes all reasonable and necessary steps sufficient to produce
compliance as soon as reasonably practical.
8
<PAGE> 10
CREDIT AGREEMENT
May 14, 1998
5. MISCELLANEOUS PROVISIONS
5.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank
or any holder of any note issued by Borrower to Bank, in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege. All
rights and remedies existing under this Agreement or any note issued in
connection with a loan that Bank may make hereunder, are cumulative to, and not
exclusive of, any rights or remedies otherwise available.
5.02 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
5.03 INUREMENT. The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower.
5.04 APPLICABLE LAW. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the State of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
5.05 OFFSET. In addition to and not in limitation of all rights of offset that
Bank or other holder of any note issued by Borrower in favor of Bank may have
under applicable law, Bank or other holder of such notes shall, upon the
occurrence of any Event of Default or any event which with the passage of time
or notice would constitute such an Event of Default, have the right to
appropriate and apply to the payment of the outstanding under any such note any
and all balances, credits, deposits, accounts or monies of Borrower then or
thereafter with Bank or other holder, within ten (10) days after the Event of
Default, and notice of the occurrence of any Event of Default by Bank to
Borrower.
5.06 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
5.07 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this
Agreement and of every part hereof.
5.08 INTEGRATION CLAUSES. Except for the Loan Documents, the Agreement
constitutes the entire agreement between Bank and Borrower regarding any loan or
loans from Bank to Borrower, and all prior communications verbal or written
between Borrower and Bank shall be of no further effect or evidentiary value. In
the event of a conflict or inconsistency among any other documents and
instruments and this Agreement, the provisions of this Agreement shall prevail.
5.09 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
5.10 MODIFICATION. This Agreement may be modified only by a writing signed by
both parties hereto.
9
<PAGE> 11
CREDIT AGREEMENT
May 14, 1998
6. GOVERNING LAW; JUDICIAL REFERENCE.
6.01 GOVERNING LAW. This Agreement shall be deemed to have been made in the
State of California and the validity, construction, interpretation, and
enforcement hereof, and the rights of the parties hereto, shall be determined
under, governed by, and construed in accordance with the internal laws of the
State of California, without regard to principles of conflicts of law.
6.02 JUDICIAL REFERENCE.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to the Loan
Documents, which controversy, dispute or claim is not settled in writing within
thirty (30) days after the "Claim Date" (defined as the date on which a party
subject to the Loan Documents gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning the Loan Documents, including whether such
controversy, dispute or claim is subject to the reference proceeding and except
as set forth above, the parties waive their rights to initiate any legal
proceedings against each other in any court or jurisdiction other than the
Superior Court in the County where the Real Property, if any, is located or Los
Angeles County if none (the "Court"). The referee shall be a retired Judge of
the Court selected by mutual agreement of the parties, and if they cannot so
agree within forty-five (45) days after the Claim Date, the referee shall be
promptly selected by the Presiding Judge of the Court (or his representative).
The referee shall be appointed to sit as a temporary judge, with all of the
powers for a temporary judge, as authorized by law, and upon selection should
take and subscribe to the oath of office as provided for in Rule 244 of the
California Rules of Court (or any subsequently enacted Rule). Each party shall
have one peremptory challenge pursuant to CCP Section 170.6. The referee shall
(a) be requested to set the matter for hearing within sixty (60) days after the
date of selection of the referee and (b) try any and all issues of law or fact
and report a statement of decision upon them, if possible, within ninety (90)
days of the Claim Date. Any decision rendered by the referee will be final,
binding and conclusive and judgment shall be entered pursuant to CCP Section 644
in any court in the State of California having jurisdiction. Any party may apply
for a reference proceeding at any time after thirty (30) days following notice
to any other party of the nature of the controversy, dispute or claim, by filing
a petition for a hearing and/or trial. All discovery permitted by this Agreement
shall be completed no later than fifteen (15) days before the first hearing date
established by the referee. The referee may extend such period in the event of a
party's refusal to provide requested discovery for any reason whatsoever,
including, without limitation, legal objections raised to such discovery or
unavailability of a witness due to absence or illness. No party shall be
entitled to "priority" in conducting discovery. Depositions may be taken by
either party upon seven (7) days written notice, and request for production or
inspection of documents shall be responded to within ten (10) days after
service. All disputes relating to discovery which cannot be resolved by the
parties shall be submitted to the referee whose decision shall be final and
binding upon the parties. Pending appointment of the referee as provided herein,
the Superior Court is empowered to issue temporary and/or provisional remedies,
as appropriate.
10
<PAGE> 12
CREDIT AGREEMENT
May 14, 1998
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
(c) The referee shall be required to determine all issues in accordance
with existing case law and the statutory laws of the State of California. The
rules of evidence applicable to proceedings at law in the State of California
will be applicable to the reference proceeding. The referee shall be empowered
to enter equitable as well as legal relief, to provide all temporary and/or
provisional remedies and to enter equitable orders that will be binding upon the
parties. The referee shall issue a single judgment at the close of the reference
proceeding which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for
appointment of a referee is repealed (and no successor statute is enacted), any
dispute between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, Section 1280 through Section 1294.2 of the
CCP as amended from time to time. The limitations with respect to discovery as
set forth hereinabove shall apply to any such arbitration proceeding.
This Agreement is executed on behalf of the parties by duly authorized
representatives as of May 14, 1998.
IMPERIAL BANK ("BANK")
By: /s/ Tim Bubnack
-------------------------------
Tim Bubnack, Vice President
Date: May 14, 1998
CARDIODYNAMICS INTERNATIONAL CORPORATION
("BORROWER")
By: /s/ Steve P. Loomis
-------------------------------
Steve P. Loomis, Vice President,
Chief Financial Officer
Date: May 14, 1998
-----------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDED MAY 31, 1998.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> MAY-31-1998
<CASH> 2,726,721
<SECURITIES> 0
<RECEIVABLES> 322,169
<ALLOWANCES> 34,004
<INVENTORY> 939,175
<CURRENT-ASSETS> 4,061,201
<PP&E> 422,947
<DEPRECIATION> 232,300
<TOTAL-ASSETS> 4,276,832
<CURRENT-LIABILITIES> 3,921,575
<BONDS> 0
0
0
<COMMON> 14,841,912
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,276,832
<SALES> 477,726
<TOTAL-REVENUES> 477,726
<CGS> 291,609
<TOTAL-COSTS> 1,563,038
<OTHER-EXPENSES> (3,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,650
<INCOME-PRETAX> (1,390,571)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,390,571)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
