<PAGE>
As filed with the Securities and Exchange Commission on December 23, 1998
Registration No. 333-___________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of Registrant as specified in its charter)
CALIFORNIA 95-3533362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121
(619) 535-0202
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
--------------
Michael K. Perry
Chief Executive Officer
CARDIODYNAMICS INTERNATIONAL CORPORATION
6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121
(619) 535-0202
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copy to:
Hayden J. Trubitt, Esq.
BROBECK, PHLEGER & HARRISON LLP
550 West C Street, Suite 1300
San Diego, California 92101
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Approximate date of commencement of proposed sale to the public:
From time to time after the effective date of this Registration Statement.
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If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 1,295,000 shares (1) $1.625 $2,104,375 $585.02
- ------------------------------------------------------------------------------------------------------------------------------
Total 1,295,000 shares (1) $1.625 $2,104,375 $585.02
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</TABLE>
(1) Includes (i) up to 1,295,000 shares of Common Stock to be issued upon
exercise of Common Stock Options and (ii) an indeterminate number of
additional shares of Common Stock as may from time to time become
exercisable upon exercise of the Common Stock Options by reason of stock
splits, stock dividends and similar transactions, which shares are
registered hereunder pursuant to Rule 416 under the Securities Act.
(2) Estimated solely for the purpose of computing the amount of the registration
fee in accordance with Rule 457 under the Securities Act of 1933, as
amended, based upon the exercise price of the Common Stock Options.
---------------------
================================================================================
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
PROSPECTUS
1,295,000 SHARES
CARDIODYNAMICS INTERNATIONAL CORPORATION
COMMON STOCK
Our Common Stock is traded on the Nasdaq SmallCap Market under the symbol
"CDIC." On December 15, 1998, the closing sale price of CardioDynamics Common
Stock as reported on the Nasdaq SmallCap Market was $2.25 per share.
These shares of Common Stock are being sold by Michael Perry, the Chief
Executive Officer of CardioDynamics. We will not receive any part of the
proceeds from the sale.
SEE "RISK FACTORS" ON PAGE 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is December 23, 1998.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, and Chicago. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public at the SEC's web site
at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them which means that we can disclose important information to you by
referring you to those documents instead of having to repeat the information in
this prospectus. The information incorporated by reference is considered to be
part of this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until the selling shareholder sells all the shares.
-- Annual Report on Form 10-KSB for the year ended November 30, 1997;
-- Quarterly Reports on Form 10-QSB for the quarters ended February 28,
1998, May 31, 1998 and August 31, 1998;
-- Current Report on Form 8-K dated August 21, 1998 for an event on August
21, 1998 (filed September 3, 1998); and
-- Registration Statement on Form 8-A filed with the SEC on April 19,
1984. This filing describes the terms, rights and provisions applicable
to our Common Stock.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Shareholder Services
6175 Nancy Ridge Drive, Suite 300
San Diego, CA 92121
(619) 535-0202
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. The selling shareholder will
not make an offer of these shares in any state where the offer is not permitted.
You should not assume that the information in this prospectus or any supplement
is accurate as of any date other than the date on the front of those documents.
This prospectus is part of a registration statement we filed with the SEC
(Registration No. 333-________).
ABOUT CARDIODYNAMICS INTERNATIONAL CORPORATION
At CardioDynamics International Corporation, we develop, manufacture and
market heart monitoring devices which provide doctors with continuous data on a
wide range of parameters relating to blood flow and heart function. Unlike
other monitoring technologies, our monitors do not require invasive surgery to
use. Our primary products, the BioZ(TM) System, the BioZ(TM) Portable, and the
BioZ.com(TM), use a technology called thoracic electrical bioimpedance to obtain
data which is typically available only through a time consuming, costly and
potentially dangerous invasive procedure known as right-heart catheterization or
as pulmonary artery catheterization. This data is then processed with digital
technology to provide real-time information to the doctors.
Our principal executive offices are located at 6175 Nancy Ridge Drive,
Suite 300, San Diego, California 92121, and our telephone number is (619) 535-
0202.
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<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information contained in this
prospectus before deciding to invest in shares of our Common Stock.
DEPENDENCE ON BIOZ PRODUCT LINE WHOSE MARKET ACCEPTANCE IS UNCLEAR
Our future is dependent upon the success of the BioZ(TM) product line and
similar products which are based on the same technology. The market for
thoracic electrical bioimpedance products is in a relatively early stage of
development, and it is possible that this market will never fully develop. The
long-term commercial success of the BioZ product line and any follow-on
products requires widespread acceptance of our thoracic electrical bioimpedance
products as safe, efficacious and cost-effective alternatives to invasive
procedures. Widespread acceptance would represent a significant change in
medical practice patterns. Historically, some medical professionals have
indicated hesitancy in using thoracic electrical bioimpedance products such as
analog-based monitors previously manufactured by us. Invasive procedures, such
as right-heart catheterization, are generally accepted in the medical community
and have a long history of use.
We have limited clinical data with which to demonstrate the clinical
benefits of our products. However, we have sponsored and plan to continue to
sponsor and/or conduct clinical trials which we hope will demonstrate consistent
clinical benefits resulting from the use of our products. We do not know when
such clinical trials will be completed or if such clinical trials will have a
positive outcome or if a positive outcome in such trials would be sufficient to
enable acceptance of the BioZ product line by the medical community. We are
unable to predict how quickly, if at all, our products may be accepted by
members of the medical community.
Technological limitations of thoracic electrical bioimpedance make it
subject to inaccuracies in the case of:
. Severe septic shock
. Significant pulmonary hypertension
. Aortic valve regurgitation
. Severe hypertension (Maximum Arterial Pressure greater than 130mmHg)
. Tachycardia rates greater than 180 beats per minute
. Patient is shorter than 47" (120cm)*
. Patient weighs less than 66 lbs. (30 Kg) or more than 342 lbs.
(103Kg)*
. Extreme patient movement*
___________________
* We are currently working on algorithms which, if we succeed in
developing them, may allow the technology to function on patients with
these conditions.
Failure of the BioZ product line to gain widespread acceptance in the
medical community, and to maintain such acceptance, would be very dangerous for
us.
HISTORY OF LOSSES AND EXPECTED CONTINUED LOSSES
Since our emergence from bankruptcy proceedings in 1993, we have had large
annual losses in the course of researching, developing and enhancing our
technology and products and establishing administrative and sales organizations.
We anticipate that our operating expenses will increase substantially in the
foreseeable future as we increase our sales and marketing activities, expand our
operations and management and continue the development of our technology.
Accordingly, we expect to incur additional losses in the future, and it is
possible that we will never achieve or sustain revenue growth or profitability.
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<PAGE>
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL
WILL BE AVAILABLE
Our commercialization of the BioZ product line and the development and
commercialization of any additional products will require substantial
expenditures. Our capital requirements will depend on numerous factors,
including:
. our rate of sales growth--fast growth could actually increase our need
for additional capital to hire additional staff, purchase additional
component supplies, and supply additional support services;
. our progress in marketing-related clinical evaluations and product
development programs--these programs represent potential avenues for
growth, but will require additional capital;
. our receipt of, and the time required to obtain, regulatory clearances
and approvals--the longer regulatory approval takes, the more working
capital we need to support our regulatory and development efforts in
advance of sales;
. resources we devote to the development, manufacture and marketing of our
products--any decision we make to improve, expand or simply change our
process, products or technology will require increased funds;
. resources required to hire and develop medical sales representatives and
independent distributors and to develop internal manufacturing
capacity-- each of these strategic options is a route currently being
considered by us and each of them would require substantial working
capital to initiate;
. facilities requirements--as we grow we may need additional
manufacturing, warehousing and administration facilities and the costs
of the facilities would be borne long before any increased revenue from
growth would occur;
. market acceptance and demand for our products--although growth could
increase our capital needs, the lack of growth and continued losses
would also increase our need for capital; and
. our ability to speed up hospitals' otherwise lengthy purchasing
processes by offering leasing programs as an alternative to outright
purchasing--faster decisions by purchasers would reduce our need for
working capital.
The timing and amount of such capital requirements cannot be accurately
predicted. We may be required to raise additional funds through public or
private financings, bank loans, collaborative relationships or other
arrangements earlier than expected. It is possible that banks, venture
capitalists and other investors may perceive our current debt load, our history
of losses or our technology's lack of acceptance as too great a risk to bear
and, as a result, such additional funding may not be available on attractive
terms, or at all. If we cannot obtain additional capital when needed we might
be forced to agree to unattractive finance terms, or to finance internally by
discontinuing certain operations, such as research and development, which we
view as not essential to day-to-day operations. Such decisions could impair our
ability to go forward with our current plans, or at all.
COMPETITION FROM OTHER PRODUCERS; AND TECHNOLOGICAL CHANGE WHICH MAY BENEFIT OUR
COMPETITORS
We compete with other companies which are developing and marketing non-
invasive hemodynamic monitors. We are also subject to severe competition from
invasive-technology companies, including Baxter Healthcare Corporation, which
have more established and larger marketing and sales organizations,
significantly greater financial and technical resources and a larger installed
base of customers than we do. Such competitors may be able to devote greater
resources to the development, promotion and sales of their products. The
current widespread acceptance of pulmonary artery catheterization, and lack of
widespread acceptance of thoracic electrical bioimpedance, is an important
competitive disadvantage which we must overcome. In addition, our current and
potential competitors may establish cooperative relationships with large medical
equipment companies to gain access to greater research and development or
marketing resources. Competition may result in price reductions,
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<PAGE>
reduced gross margins and loss of market share. Any of these could hurt our
business, results of operations and financial condition. It is possible that we
will not be able to compete successfully.
In addition, the introduction by others of products embodying new
technologies and the emergence of new industry standards could render our
products obsolete and unmarketable. Other companies may develop and introduce
products and processes competitive with or superior to ours. In addition, other
technologies or products may be developed that have an entirely different
approach or means of accomplishing the intended purposes of our products.
Accordingly, our products' life cycles are difficult to estimate. To compete
successfully, we must develop and introduce new products that keep pace with
technological developments, respond to evolving consumer requirements and
achieve market acceptance.
We may not succeed in satisfactorily and timely developing and introducing
additional products. Even if we succeed in developing and marketing products
that achieve market acceptance, our competitors may develop and market products
that will replace ours.
TECHNOLOGICAL CHANGE IS DIFFICULT TO PREDICT AND TO MANAGE
Although not in fact a new company, we currently face many of the
challenges which are typically faced by new companies just emerging from the
development phase. The BioZ product line has required, and any future products
will require, substantial development efforts and compliance with all
governmental clearance/approval requirements. We have to build up sales and
marketing. We may encounter unforeseen technological or scientific problems
which may force abandonment or substantial change in the development of a
specific product or process. Technological change or product developments by
others may also have a significant negative effect on us.
ABILITY TO MANAGE GROWTH
If successful, we will experience a period of growth that would place a
significant strain upon our managerial, financial and operational resources.
Our infrastructure, procedures and controls may not be adequate to support our
operations and our management may not be able to achieve the rapid execution
necessary to fully exploit any future market opportunity for our products. Our
future operating results will also depend on our ability to complete our
geographic network of direct sales agents and distributors, expand our sales and
marketing organizations, and fill out our support staff organization. If we are
unable to manage expansion effectively, our business, results of operations and
financial condition will suffer. However, we are not promising you that such
expansion or growth will occur.
CONTROL BY OUR CO-CHAIRMEN
Allen E. Paulson and James C. Gilstrap, the co-chairmen of CardioDynamics,
beneficially own, directly or through CardioDynamics Holdings, LLC, which they
control, approximately 67% of the outstanding shares of our Common Stock
(including shares owned by others which CardioDynamics Holdings, LLC has the
right to vote). In addition, Mr. Paulson's sons beneficially own another 9% of
the outstanding shares of Common Stock. Accordingly, these persons,
individually and as a group, are able to control CardioDynamics and direct our
affairs and business, including any future issuances of Common Stock or other
securities, merger and acquisition decisions, declaration of dividends and the
election of directors. Further, in their position as holders of our stock, they
owe us no duty. Our stock price and our ability to raise capital could be
injured if they were to sell even a fraction of their holdings.
WE MAY NOT CONTINUE TO RECEIVE NECESSARY APPROVALS FROM THE FOOD AND DRUG
ADMINISTRATION
Our products and activities are subject to extensive regulation by the FDA
and other governmental authorities. Delays in receipt of, or failure to obtain,
regulatory clearances and approvals, or any failure to comply with regulatory
requirements, could have a very negative effect on our business.
Our thoracic electrical bioimpedance products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Under the federal Food, Drug, and Cosmetic Act (the "FDC
Act"), the FDA regulates the clinical testing, manufacture, labeling, packaging,
marketing, distribution
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and record keeping for medical devices, in order to ensure that medical devices
distributed in the United States are safe and effective for their intended use.
Before a new device can be introduced into the market, the manufacturer
generally must obtain either FDA 510(k) clearance or approval of a premarket
approval application. Following submission of a 510(k) or PMA application, the
manufacturer may not market the new device until an order is issued by the FDA
granting clearance or approval, which can entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ System,
the BioZ Portable and the BioZ.com. However, such clearances are subject to
continued FDA audits and can be rescinded. Further, we plan to submit
additional new products for FDA approval in the future. It is possible that our
future products might not gain FDA approval in a timely fashion, or at all. It
is also possible that our current products may someday lose their FDA approval.
We are also subject to routine inspection by the FDA and state agencies,
such as the California Department of Health Services, for compliance with Good
Manufacturing Practice requirements, Medical Device Reporting requirements and
other applicable regulations. Although we work hard at attempting to comply
with all governmental regulations, it is possible that an inspector could
someday find a violation. Such a violation could result in government action
ranging from warning letters to fines to criminal prosecution. Should we ever
incur a significant penalty it is possible it would be detrimental to us. The
FDC Act requires that medical devices be manufactured in accordance with the
current Good Manufacturing Practice requirements. Good Manufacturing Practice
requirements require, among other things, that:
. the manufacturing process be regulated and controlled by the use of
written procedures;
. the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every
aspect of the process; and
. any deficiencies in the manufacturing process or in the products
produced be investigated and detailed records kept.
Manufacturing facilities are subject to FDA inspection on a periodic basis
to monitor compliance with current GMP requirements. Labeling and promotional
activities are regulated by the FDA and, in certain circumstances, by the
Federal Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses. For any medical
device cleared through the 510(k) process, modifications or enhancements that
could significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device require a new 510(k)
submission. If the FDA requires us to submit a new 510(k) notice for any
product modification, we may be prohibited from marketing the modified product
until the 510(k) notice is cleared by the FDA.
The FDA regulates computer software that performs the function of a
regulated device or that is intimately associated with a given device, such as
control software for diagnostic devices like our products. The FDA is
reevaluating its regulation of such software, and if the FDA undertakes
increased or more rigorous regulation of such software, the BioZ product line
and related products may become subject to further regulatory processes and
clearance requirements.
Laws and regulations regarding the manufacture, sale and use of medical
devices are subject to change and depend heavily on administrative
interpretations. Future changes in the regulations or interpretations made by
the FDA or other regulatory bodies, with possible retroactive effect, may
adversely affect us.
WE MAY NOT RECEIVE APPROVALS BY FOREIGN REGULATORS WHICH ARE NECESSARY FOR
FOREIGN SALES
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary from country to country. We currently
rely on our international distributors and sub-distributors for the receipt of
premarket approvals and compliance with clinical trial requirements in those
countries that require them, and we expect to continue to rely on them in those
countries where we continue to use distributors. If our international
distributors fail to obtain or maintain required premarket approvals or fail to
comply with foreign regulations, foreign regulatory authorities may require us
to cause the applicable distributor to file revised governmental
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notifications, cease commercial sales of our products in the applicable
countries, or otherwise cure the problem. Such enforcement action by regulatory
authorities could be costly.
In order to sell our products within the European Economic Area, we have to
achieve compliance with the European Commission's Medical Device Directive and
to affix a "CE" marking on our products to attest such compliance. We have
fulfilled all the requirements for a CE mark and we are now authorized to use
the CE mark. However, future regulatory changes could remove our ability to use
the CE mark and any new products we develop may not qualify for the CE mark.
Failure to obtain authorization to use the CE mark or loss of such authorization
would render us unable to sell our products in the European Economic Area and
this would limit our potential.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES
Our commercial success will depend in part on the availability of adequate
reimbursement from third-party healthcare payers, such as government and private
health insurers and managed care organizations. Third-party payers are
increasingly challenging the pricing of medical products and services. Even
with an FDA approved device, third-party payers may not cover the device and
related services, and they may place significant restrictions on the
circumstances in which coverage will be available. Medicare reimbursement for
use of the BioZ product line is now available under the heading of
plethysmography, but private third-party payers are not required to follow
Medicare's lead. We may not be able to obtain a specific code for reimbursement
of thoracic electrical bioimpedance tests in a reasonable time frame, or at all,
from either Medicare or private third-party payers. In addition, reimbursement
may not be at or stay at price levels sufficient to allow medical professionals
to realize an appropriate return on an investment in our products.
Downward pricing pressure in the industry could hurt our operations.
Our business plan contemplates an income stream from sales of disposable
sensors (which are more profitable than some of our other products) and which
are compatible with an installed base of our monitors. We may be subject,
however, to price competition from other sensor manufacturers.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
We are dependent upon a limited number of key management and technical
personnel and we do not have insurance on these people. The loss of the
services of one or more of such key employees could hurt our business. In
addition, our success depends upon our ability to attract and retain additional
highly qualified sales, management, manufacturing and research and development
personnel. We face intense competition in our recruiting activities and we may
not be able to attract and/or retain qualified personnel.
DEPENDENCE ON RIVERTEK MEDICAL SYSTEMS FOR DEVELOPMENT SERVICES AND OTHER THIRD
PARTIES FOR DEVELOPMENT AND MANUFACTURING SERVICES
Our strategy for development and commercialization of certain of our
products depends upon entering into various arrangements with third parties and
upon the subsequent success of these parties in performing their obligations.
It is possible that we will not be able to negotiate acceptable arrangements in
the future or that our existing arrangements will not be successful. We rely
heavily on contracted development services, particularly from Rivertek Medical
Systems, Inc. Also, we have limited experience manufacturing products for
commercial purposes and currently do not manufacture the BioZ System and the
BioZ Portable ourselves. Therefore we are dependent on contract manufacturers.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
Our patents and proprietary technology may not be able to prevent effective
competition by others. Although we believe that we have effective patent
protection, our products could possibly be found to infringe the rights of
others. Intellectual property litigation, whether defensive or offensive, would
have no certain outcome other than to drain our resources.
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The validity and breadth of claims in medical technology patents involve
complex legal and factual questions. Future patent applications may not be
issued, the scope of any patent protection may not exclude competitors and it
may not provide competitive advantages to us. Further, our patents may be found
to be invalid, and other companies may claim rights in or ownership of the
patents and other proprietary rights held or licensed by us. Also, our existing
patents might not cover products we want to bring out in the future. Moreover,
when our key patents expire, the inventions will enter the public domain.
Since patent applications in the United States are maintained in secrecy
until patents issue, our patent applications may infringe patents that may be
issued to others. In the event our products are found to infringe patents held
by competitors, we may have to modify our product to avoid infringement, and it
is possible that our modified products would not be commercially successful.
SMALL MARKET FLOAT CAN PRODUCE BOTH STOCK PRICE VOLATILITY AND A POTENTIAL LACK
OF LIQUIDITY
Market float is the aggregate value of all of a company's publicly traded
stock. Our market float is smaller than that of most other publicly traded
companies. Because our market float is smaller, changes in the opinion of one
investor or one analyst can have a significant effect on our stock price. As a
result, the market price of our Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to various factors beyond our
control, including:
(i) quarterly variations in operating results;
(ii) announcements of technological innovations, new products or pricing
by our competitors;
(iii) changes in, or failure to meet, financial estimates of securities
analysts;
(iv) the rate of adoption by physicians of thoracic electrical
bioimpedance technology in targeted markets;
(v) timing of patent and regulatory approvals;
(vi) timing and extent of technological advancements;
(vii) results of clinical studies;
(viii) short sales of our Common Stock by the holders of our Series A
Convertible Preferred Stock, or other persons; and
(ix) general market conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have affected the market prices of the stock of many medical
device companies and that often have been unrelated to the operating performance
of such companies. These broad market fluctuations may directly influence the
market price of our Common Stock. Our somewhat small market float may not be
entirely adequate to provide market liquidity and mitigate stock price
volatility.
POTENTIAL DROP IN STOCK PRICE DUE TO CONVERSION FEATURE OF PREFERRED STOCK
Our Series A Convertible Preferred Stock is convertible into our Common
Stock at either a fixed conversion price or a floating conversion price,
whichever is more favorable to the holder. The floating conversion price is
tied to our Common Stock market price. If the Common Stock price declines, the
Series A Convertible Preferred Stock will be convertible into a substantially
increased number of shares of Common Stock, resulting in a meaningful dilution
to other holders of Common Stock and a potential adverse effect on the Common
Stock price thereafter. In addition, if the holders of our Series A Convertible
Preferred Stock convert part of their Series A Convertible Preferred Stock and
sell the Common Stock in the market, this could result in an imbalance of supply
and demand for our Common Stock and reduce its price. Because there is no lower
limit on the floating conversion
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price, all this could lead to a vicious cycle, driving the stock price ever
further down. The further our stock price declines, the further the floating
conversion price will fall and the greater the number of shares we will have to
issue upon conversion. For example:
<TABLE>
<CAPTION>
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Date Aug. 21, 1998 Nov. 9, 1998 sample sample
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<S> <C> <C> <C> <C>
Public Market Value $ 2.01 $ 1.39 $ 1.10 $ 0.90
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Number of Shares of Common Stock into which 1,175,263 1,699,349 2,143,541 2,364,444
the remaining Series A Stock Would Convert
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Estimate of TOTAL number of shares of Common 1,730,859 2,254,945 2,699,137 2,920,040
Stock into which Series A Stock is
convertible (including 555,596 shares Common
Stock which have already been issued upon
conversion)
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Percentage of Total Shares Outstanding that 5.1% 6.6% 7.8% 8.4%
Such Converted Shares Will Represent
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</TABLE>
Further, it is likely that we will pay dividends on the Series A
Convertible Preferred Stock in the form of Common Stock. Such an issue would
further dilute current holders and could also lead to a drop in our stock price.
WE COULD BE REQUIRED TO ISSUE DILUTIVE SERIES B PREFERRED STOCK
Under certain conditions the original purchasers of our Series A Preferred
Stock can require us to sell them up to 3,000 shares of Series B Preferred Stock
at a purchase price of $1,000 per share. They can only require this between
approximately February 17, 1999 and November 19, 1999 and they can only require
it if and when our Common Stock price exceeds $2.70 per share for ten
consecutive days. The Series B Preferred Stock would be substantially similar
to the Series A Preferred Stock, but it would have a fixed conversion price of
at least $3.10 per share which is higher than the $2.70 fixed conversion price
of the Series A Preferred Stock. There are other technical requirements, but
each of those can be waived by the original purchasers.
If we were required to issue the Series B Preferred Stock on these terms,
the convertibility of the Series B Preferred Stock would be potentially dilutive
and could cause our Common Stock price to drop. This could impair our ability
to raise capital in the future.
WE COULD BE REQUIRED TO REDEEM THE SERIES A CONVERTIBLE PREFERRED STOCK
The holders of the Series A Convertible Preferred Stock can require us to
redeem for cash (at 130% of stated value) instead of conversion for shares of
our Common Stock in the event that we are acquired by another company or in the
event that we default in any of the following four ways:
1. If either our stock is suspended from trading on Nasdaq for more than
five consecutive days or more than thirty days in any year-long
period, or
2. If the registration statement, as amended, which covers the Common
Stock underlying the Series A Convertible Preferred Stock has its
effectiveness or its use suspended for more than 30 days in any year-
long period, or
3. If our common stock is not listed on either the Nasdaq National
Market, the Nasdaq SmallCap Market, the American Stock Exchange, or
the New York Stock Exchange, for a period of fifteen consecutive days
or thirty days in any year-long period, or
4. If we fail to deliver shares of our Common Stock as required upon
conversion.
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<PAGE>
If the event that we are required to redeem the Series A Convertible Preferred
Stock under any of these mandatory situations, it is likely that we would not
have sufficient cash available to effect the redemption. In such case we would
be forced to attempt to find other sources of financing. If we could find such
financing at all, it is likely that that such financing would be on unfavorable
terms. The inability to find financing or the terms of such unfavorable
financing and our resulting lack of liquidity could force us to close portions
of, or all of, our operations.
LOW STOCK PRICE COULD RESULT IN OUR BEING DE-LISTED FROM NASDAQ AND SUBJECT US
TO CERTAIN CUMBERSOME REGULATIONS WHICH COULD REDUCE OUR ABILITY TO RAISE FUNDS
If our stock price were to drop below $1.00 per share and remain below
$1.00 per share for an extended period of time, certain Nasdaq regulations would
require the de-listing of our shares and then our shares could no longer be
traded on Nasdaq. In such an event, our shares could only be traded on the
over-the-counter bulletin board system. This method of trading would
significantly impair or completely remove our ability to raise new capital.
Further, in the event that we were de-listed from Nasdaq due to low stock
price, we might be subject to certain rules, called penny stock rules, that
impose additional sales practice requirements on broker-dealers who sell such
securities. For any transaction involving a penny stock the rules require,
among other things, the delivery, prior to the transaction, of a disclosure
schedule required by the SEC relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the broker-
dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the customer's account.
Although we believe that our Common Stock is not penny stock due to its
continued listing on the Nasdaq SmallCap Market, in the event our Common Stock
subsequently becomes characterized as a penny stock, our market liquidity could
be severely affected. In such event, the regulations relating to penny stocks
could limit the ability of broker-dealers to sell our Common Stock and thus, the
ability of purchasers in this offering to sell their Common Stock in the
secondary market.
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES
We believe it is possible that international sales will represent a
meaningful portion of revenue in the future (in fiscal 1998 international sales
accounted for approximately 15% of our revenue). This would require significant
management attention and financial resources and subject us to the risks of
selling internationally. These risks include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions, and an adverse effect
from reduced protection for intellectual property rights. We would have to
comply with a variety of foreign laws. In addition, fluctuations in the rates
of exchange could increase the price in local currencies of our products in
foreign markets and make our products relatively more expensive than
competitors' products that are denominated in local currencies.
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE
The nature of our business exposes us to risks of product liability or
product recalls that are typical in the medical devices industry. Medical
devices as complex as ours frequently contain errors or failures, especially
when first introduced or when new versions are released. Our products are
designed to be used in certain procedures where there is a high risk of serious
injury or death. Such risks will exist even with respect to those products that
have received, or may in the future receive, regulatory clearance for commercial
sale.
We did not carry product liability insurance during certain periods before
May 15, 1995. So far, this has not hurt us. Since then, we have maintained
product liability insurance at levels which we believe are sufficient and
consistent with industry standards for companies with our current sales levels.
We intend to increase our product liability insurance policy limits as sales
grow. Currently, our product liability insurance policy limits are $5,000,000
per occurrence and $5,000,000 in the aggregate. Our product liability insurance
may not be adequate and it is possible that such insurance coverage may not
continue to be available on commercially reasonable terms or at all. In
addition, product liability claims or recalls could hurt us in various ways even
if we have adequate insurance coverage.
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<PAGE>
UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTHCARE REFORM
The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to:
(i) increase access to health care for the uninsured;
(ii) control the escalation of healthcare expenditures within the
economy; and
(iii) use health care reimbursement policies to help balance the federal
budget.
We anticipate that Congress and state legislatures will continue to review and
assess such proposals, and public debate of these issues will likely continue.
We cannot predict which, if any, of such reform proposals will be adopted and
when they might be adopted. Other countries also are considering healthcare
reform. Significant changes in healthcare systems are likely to have a
substantial impact on the manner in which we conduct our business and could
disrupt our strategies.
NO DIVIDENDS
We do not intend to pay any cash dividends on the Common Stock any time
soon. Payment of such cash dividends would, in any event, be prohibited or
limited under the terms of our bank loans and/or the Series A Convertible
Preferred Stock.
YEAR 2000 RISKS
Many computer systems experience problems handling dates beyond the year
1999. Virtually any business that relies on computers will be impacted by this
issue. In addition to our own potential problems, there are governmental
agencies, financial institutions, utilities and other basic service providers
that may encounter problems that are outside of our control. In order to correct
this issue, some computer hardware and software will need to be modified prior
to the year 2000 in order for it to remain functional. We have taken steps to
assess the internal readiness of our computer systems and the compatibility of
our products for handling the year 2000 issue. We have created a Year 2000 task
force and we plan to address these issues. The project has been broken down into
the following phases.
(a) Awareness: To create awareness of the potential business
implications of the Year 2000 challenge within CardioDynamics. Our
employees, when appropriate, will be kept informed of the news and
issues related to the Year 2000 issue. We will focus on both our
technology systems and our products.
(b) Inventory and Assessment: We will inventory all of our computer
software and hardware as well as facilities, telecommunications,
and external interfaces. Significant third party vendors will be
contacted to determine their Year 2000 readiness.
(c) Renovation: As problems are discovered, strategies will be
developed to either correct the problem or determine if new
equipment or software is necessary.
(d) Testing: Testing of the renovated systems will occur to determine
whether they are performing reliably under Year 2000 conditions.
(e) Implementation: Upon successful completion of the testing process
the assets will be reintroduced into production in order to allow
adequate time to prevent any unforeseen circumstances.
(f) Contingency: In addition, we will develop a contingency plan in the
event that our internal systems, products or suppliers are not Year
2000 compliant.
-11-
<PAGE>
Currently, we are in the inventory and assessment stage and we anticipate
completing any necessary renovation, testing and implementation within the next
twelve months. It has already been determined that the internal network, and
manufacturing-requirements-planning software is certified as Year 2000
compliant. Additionally, our newest products have been specifically tested for
Year 2000 performance and no Year 2000 problems were identified. We are still
in the early stages of contacting key third party vendors. Renovation and
testing, if required, will begin if problems are identified. We plan to have all
stages of the Year 2000 project completed no later than the fall of 1999. We
have not had to spend significant amounts of money through this stage of the
process. We currently believe that the cost of addressing this issue will not
have a significant effect on us. However, it is possible that because of Year
2000 problems, the vendors of our most important goods and services, or the
suppliers of our necessary energy, telecommunications and transportation needs,
could fail to provide us with the materials and services which are necessary to
produce and sell our products.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this
prospectus contain forward-looking statements that are based on current
expectations, estimates and projections about our industry, management's
beliefs, and assumptions made by management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict; therefore, actual results may differ materially from those
expressed or forecasted in any forward-looking statements. Such risks and
uncertainties include those noted in "Risk Factors" above and in the documents
incorporated by reference. We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of Common
Stock by the selling shareholder.
SELLING SHAREHOLDER
The following table sets forth certain information regarding the selling
shareholder's beneficial ownership of our Common Stock as of December 15, 1998.
The table treats all shares of Common Stock issuable upon exercise of the
Options as being outstanding on December 15, 1998, despite the fact that such
exercise could not occur before the respective tranches of the Options vest.
The first tranche (161,875 shares) is scheduled to vest on April 16, 1998 and
the final tranche is not scheduled to vest until October 16, 2002. Vesting of
the Options would accelerate if we are acquired. The numbers set forth in the
column "Number of Shares Being Offered" below constitute all of the shares that
the selling shareholder may distribute in this offering; however, there are
currently no agreements, arrangements or understandings with respect to the sale
of any of the shares and the table below assumes the sale of all shares. The
shares are being registered to permit public secondary trading of the shares,
and the selling shareholder may offer the shares for resale from time to time
after the shares are issued upon exercise.
The selling shareholder is party to an Employment Agreement dated March 23,
1998, and has been Chief Executive Officer and a Director of CardioDynamics
since April 1998. The selling shareholder received 1,500,000 stock options in
connection with his employment on March 23, 1998. Those stock options were
exercisable at $2.55 per share, subject to vesting requirements. The first
tranche of the old stock options (187,500 shares) vested on September 23, 1998,
and the final tranche was not scheduled to vest until March 23, 2002.
On October 16, 1998, our Compensation Committee adopted a stock option
cancellation/regrant program. Each employee was given the opportunity to
exchange his existing stock options for new options, exercisable at $1.625 per
share. All accrued vesting under the old stock options would be lost, and the
optionee would have to
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<PAGE>
begin a new vesting schedule (of the same number of years as the old option's
vesting schedule). For all employees other than executive officers, the new
options would be for the same number of shares as the old options were. For
executive officers such as the selling shareholder, however, the new options
would be for a fewer number of shares. The reduction in option shares for the
executive officers was calculated by a formula based on the Black-Scholes option
valuation model.
Under this program, the selling shareholder had the opportunity to cancel
his 1,500,000 old options in exchange for the new grant of 1,295,000 Options.
He effected this exchange in November 1998. The Options have an exercise price
of $1.625 per share, and expire on October 15, 2008. The Options cease to be
exercisable immediately if his employment is terminated for cause; or 30 days
after termination without cause; or one year after termination due to death or
extended disability; or immediately if and when we are acquired.
The selling shareholder represented to us that he was acquiring the
Options, and would acquire the shares, for investment and not with a view to
distributing the shares.
We agreed orally to prepare and file a registration statement in due course
and to bear all expenses other than fees and expenses of counsel for the selling
shareholder and underwriting discounts and commissions and brokerage commissions
and fees.
The following table sets forth the number of shares of CardioDynamics
Common Stock owned beneficially by the selling shareholder as of December 7,
1998 (based on the special convention described above), and the number of shares
which may be offered pursuant to this Prospectus.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE NUMBER OF
OWNED PRIOR TO OF SHARES BEING
SELLING SHAREHOLDER OFFERING CLASS OFFERED
- -------------------------------------------- ---------------------- ------------- ---------------
<S> <C> <C> <C>
Michael K. Perry 1,302,000 4.0% 1,295,000
</TABLE>
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholder and any
donees and pledgees who may sell shares received from the named selling
shareholder after the date of this Prospectus. All costs, expenses and fees in
connection with the registration of the shares offered hereby (other than
certain fees and expenses of the selling shareholder's counsel) will be borne by
us. Brokerage commissions and similar selling expenses, if any, attributable to
the sale of shares will be borne by the selling shareholder. Sales of shares
may be effected by the selling shareholder from time to time in one or more
types of transactions (which may include block transactions) on the Nasdaq
SmallCap Market, in the over-the-counter market, in negotiated transactions,
through put or call transactions relating to the shares, through short sales of
shares, or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers or dealers. The selling shareholder has advised us that he has
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of his securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling shareholder.
The selling shareholder may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular broker-
dealer might be in excess of customary commissions).
The selling shareholder and any broker-dealers that act in connection with
the sale of shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions received by such
broker-dealers and any profit on the resale of the shares sold by them while
acting as principals
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<PAGE>
might be deemed to be underwriting discounts or commissions under the Securities
Act. The selling shareholder may agree to indemnify any agent, dealer or broker-
dealer that participates in transactions involving sales of the shares against
certain liabilities, including liabilities arising under the Securities Act.
Because the selling shareholder may be deemed to be an "underwriter" within
the meaning of Section 2(11) of the Act, the selling shareholder will be subject
to the prospectus delivery requirements of the Securities Act. We have informed
the selling shareholder that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to his sales in the market.
The selling shareholder also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided he meets the criteria and conforms to the requirements of such Rule.
When the selling shareholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, a supplement to this Prospectus will be filed,
if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i)
the name of the selling shareholder and of the participating broker-dealer(s),
(ii) the number of shares involved, (iii) the price at which such shares were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this Prospectus and (vi) other facts material to the transaction.
In addition, when the selling shareholder notifies us that a donee or pledgee
intends to sell more than 500 shares, we will file a supplement to this
Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the shares may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
LEGAL MATTERS
Our outside law firm, Brobeck, Phleger & Harrison LLP, San Diego,
California will issue an opinion about the legality of the shares.
EXPERTS
The financial statements as of and for the year ended November 30, 1997,
have been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
Peterson & Co., independent certified public accountants, audited our
fiscal 1996 annual financial statements and schedules. These documents are
incorporated by reference on reliance upon the authority of Peterson & Co. as
experts in accounting and auditing in giving the audit report.
INDEMNIFICATION
Section 317 of the California General Corporation Law allows companies to
indemnify their officers and directors against expenses, judgments, fines and
amounts paid in settlement under certain conditions and subject to certain
limitations.
Article Three of our Bylaws provides that we shall indemnify any person who
is or was a director, officer, employee or agent of ours, or any person who is
or was serving at our request as a director, officer, employee or agent of
another corporation, subject to certain limitations. In addition, expenses
incurred by a director, officer, employee or agent in defending a lawsuit by
reason of that person's relationship with us, may be paid by us in
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<PAGE>
advance of the final disposition of such lawsuit after we receive an undertaking
by or on behalf of such person to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by us.
Our Articles of Incorporation, as amended, provide that none of our
directors shall be liable for monetary damages in an action by or in
CardioDynamics' right for breach of a director's duties to us and our
shareholders, as set forth in Section 309 of the California Corporations Code.
However, such provision does not eliminate or limit the liability of a director:
(i) for acts or omissions that involve intentional misconduct or
knowing or culpable violation of law;
(ii) for acts or omissions that a director believes to be contrary to
our best interests or those of our shareholders or that involve the
absence of good faith on the part of a director;
(iii) for any transaction from which a director derives an improper
personal benefit;
(iv) for acts or omissions that show a reckless disregard of the
director's duty in circumstances in which the director was aware,
or should have been aware in the ordinary course of performing the
director's duties, of a risk of serious injury to us or to our
shareholders;
(v) for acts or omissions that constitute an unexecuted pattern of
inattention that amounts to an abdication of the director's duty to
us;
(vi) under Section 310 of the California Corporations Code; or
(vii) under Section 316 of the California Corporations Code.
Such provision eliminating liability does not eliminate or limit the liability
of an officer for any act or omission as an officer notwithstanding that the
officer is also a director or that his or her actions, if negligent or improper,
have been ratified by the directors.
We are authorized to provide indemnification of our agents (as defined in
Section 317 of the California Corporations Code) for breach of duty to us and
our shareholders through bylaw provisions or through agreements with the agents,
or both, in excess of the indemnification otherwise permitted by Section 317 of
the California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.
We have entered into such indemnification agreements with each of our directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
CardioDynamics pursuant to these provisions, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
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<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
TABLE OF CONTENTS
Page
----
WHERE YOU CAN FIND MORE INFORMATION....................... 2
ABOUT CARDIODYNAMICS INTERNATIONAL CORPORATION............ 2
RISK FACTORS.............................................. 3
FORWARD-LOOKING STATEMENTS................................ 12
USE OF PROCEEDS........................................... 12
SELLING SHAREHOLDER....................................... 12
PLAN OF DISTRIBUTION...................................... 13
LEGAL MATTERS............................................. 14
EXPERTS................................................... 14
INDEMNIFICATION........................................... 14
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various costs and expenses we are paying
with respect to the sale and distribution of the securities being registered.
All of the amounts shown are estimates except the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration Fee........................................................ $ 585.02
Printing Expenses *......................................................... $ 1,000.00
Expenses associated with complying with various states' registrations*...... $10,000.00
Legal Fees and Expenses*.................................................... $ 8,000.00
Nasdaq SmallCap Market Listing Fee*......................................... $ 7,500.00
Accounting Fees and Expenses*............................................... $ 1,000.00
Miscellaneous*.............................................................. $ 914.98
----------
Total.................................................................... $29,000.00
==========
</TABLE>
----------------
*Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 317 of the California General Corporation Law allows companies to
indemnify their officers and directors against expenses, judgments, fines and
amounts paid in settlement under certain conditions and subject to certain
limitations.
Article Three of our Bylaws provides that we shall indemnify any person who
is or was a director, officer, employee or agent of ours, or any person who is
or was serving at our request as a director, officer, employee or agent of
another corporation, subject to certain limitations. In addition, expenses
incurred by a director, officer, employee or agent in defending a lawsuit by
reason of that person's relationship with us, may be paid by us in advance of
the final disposition of such lawsuit after we receive an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that he or she is not entitled to be indemnified by us.
Our Articles of Incorporation, as amended, provide that none of our
directors shall be liable for monetary damages in an action by or in
CardioDynamics' right for breach of a director's duties to us and our
shareholders, as set forth in Section 309 of the California Corporations Code.
However, such provision does not eliminate or limit the liability of a director:
(i) for acts or omissions that involve intentional misconduct or
knowing or culpable violation of law;
(ii) for acts or omissions that a director believes to be contrary to
our best interests or those of our shareholders or that involve
the absence of good faith on the part of a director;
(iii) for any transaction from which a director derives an improper
personal benefit;
(iv) for acts or omissions that show a reckless disregard of the
director's duty in circumstances in which the director was aware,
or should have been aware in the ordinary course of performing the
director's duties, of a risk of serious injury to us or to our
shareholders;
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<PAGE>
(v) for acts or omissions that constitute an unexecuted pattern of
inattention that amounts to an abdication of the director's duty
to us;
(vi) under Section 310 of the California Corporations Code; or
(vii) under Section 316 of the California Corporations Code;
Such provision eliminating liability does not eliminate or limit the liability
of an officer for any act or omission as an officer notwithstanding that the
officer is also a director or that his or her actions, if negligent or improper,
have been ratified by the directors.
We are authorized to provide indemnification of our agents (as defined in
Section 317 of the California Corporations Code) for breach of duty to us and
our shareholders through bylaw provisions or through agreements with the agents,
or both, in excess of the indemnification otherwise permitted by Section 317 of
the California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.
We have entered into such indemnification agreements with each of our directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
CardioDynamics pursuant to these provisions, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 16. EXHIBITS
EXHIBIT NUMBER
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Peterson & Co.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
99.1 Employment Agreement between CardioDynamics and Michael K. Perry,
March 23, 1998. (Incorporated by reference to Form 10-QSB for the
quarter ended May 31, 1998.)
99.2 Option Agreement from CardioDynamics to Michael K. Perry, March 23,
1998. (Same as Exhibit A to the Exhibit 99.1 Employment Agreement.)
99.3 Replacement Option Agreement from CardioDynamics to Michael K. Perry,
November 2, 1998.
ITEM 17. UNDERTAKINGS
We hereby undertake:
(1) To file, during any period in which we offer or sell securities, a
post-effective amendment to this registration statement to include any
additional or changed material information on the plan of distribution;
(2) That, for determining liability under the Securities Act, each such
post-effective amendment shall be treated as a new registration statement of the
securities offered, and the offering of the securities at that time shall be
treated as the initial bona fide offering; and
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
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<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by our director, officer, or
controlling person in the successful defense of any action, suit, or proceeding)
is asserted by such director, officer, or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the question has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, we certify that
we have reasonable grounds to believe that we meet all of the requirements for
filing on Form S-3 and have duly caused this Registration Statement to be signed
on our behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on the 23rd day of December, 1998.
CARDIODYNAMICS INTERNATIONAL CORPORATION
By /s/ Michael K. Perry
-----------------------------------------
Michael K. Perry, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Michael
K. Perry, as attorney-in-fact, with the power of substitution, for him in any
and all capacities, to sign any amendment to this Registration Statement and to
file the same, with exhibits thereto and other documents in connection
therewith, with the SEC, granting to said attorney-in-fact full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in connection therewith, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------- --------------------------------------------- ---------------------
<S> <C> <C>
/s/ Michael K. Perry Director and Chief Executive Officer December 23, 1998
- ------------------------------------------- (Principal Executive Officer)
Michael K. Perry
/s/ Stephen P. Loomis Vice President, Finance and Chief Financial December 23, 1998
- ------------------------------------------- Officer (Principal Financial Officer
Stephen P. Loomis and Principal Accounting Officer)
/s/ Stephenson M. Dechant Director December 23, 1998
- -------------------------------------------
Stephenson M. Dechant
/s/ Nicholas V. Diaco, M.D. Director December 23, 1998
- -------------------------------------------
Nicholas V. Diaco, M.D.
/s/ Louis P. Ferrero Director December 23, 1998
- -------------------------------------------
Louis P. Ferrero
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
/s/ Cam L. Garner Director December 23, 1998
- -------------------------------------------
Cam L. Garner
/s/ James C. Gilstrap Director December 23, 1998
- -------------------------------------------
James C. Gilstrap
/s/ Richard O. Martin Director December 23, 1998
- -------------------------------------------
Richard O. Martin
/s/ Richard E. Otto Director December 23, 1998
- -------------------------------------------
Richard E. Otto
/s/ Michael D. Padilla Director December 23, 1998
- -------------------------------------------
Michael D. Padilla
/s/ Allen E. Paulson Director December 23, 1998
- -------------------------------------------
Allen E. Paulson
</TABLE>
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<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM S-3
UNDER
SECURITIES ACT OF 1933
CARDIODYNAMICS INTERNATIONAL CORPORATION
II-5
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EXHIBIT INDEX
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Exhibit
Number Exhibit
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5.1 Opinion of Brobeck, Phleger & Harrison LLP.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Peterson & Co.
23.3 Consent of Brobeck, Phleger & Harrison LLP (included in
Exhibit 5.1).
99.1 Employment Agreement between CardioDynamics and Michael K.
Perry, March 23, 1998. (Incorporated by reference to
Form 10-QSB for the quarter ended May 31, 1998.)
99.2 Option Agreement from CardioDynamics to Michael K. Perry,
March 23, 1998. (Same as Exhibit A to the Exhibit 99.1
Employment Agreement.)
99.3 Replacement Option Agreement from CardioDynamics to Michael K.
Perry, November 2, 1998.
II-6
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EXHIBIT 5.1
OPINION OF BROBECK, PHLEGER & HARRISON LLP
December 23, 1998
CardioDynamics International Corporation
6175 Nancy Ridge Drive
Suite 300
San Diego, California 92121
Re: CardioDynamics International Corporation
Registration Statement on Form S-3 for Resale of
1,295,000 Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to CardioDynamics International Corporation,
a California corporation (the "Company"), in connection with the registration
for resale of 1,295,000 shares of Common Stock (the "Shares"). The Shares are
issuable upon exercise of certain Options dated October 16, 1998 as described in
the Company's Registration Statement on Form S-3 ("Registration Statement")
filed with the Securities and Exchange Commission under the Securities Act of
1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16 of Form S-3 and Item 601(b)(5)(i) of Regulation S-B.
We have reviewed the Company's charter documents, the corporate
proceedings taken by the Company in connection with the original issuance of the
Options, and a certificate of a Company officer regarding (among other things)
the Company's receipt of consideration upon the original issuance of the
Options. Based on such review, we are of the opinion that the Shares, if, as
and when issued upon exercise of the Options in accordance with the terms of the
Options (including payment of the indicated exercise price), will be duly
authorized, validly issued, fully paid and nonassessable.
We consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-B.
EXHIBIT 5.1
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This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
/s/ Brobeck, Phleger & Harrison LLP
BROBECK, PHLEGER & HARRISON LLP
EXHIBIT 5.1
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CardioDynamics International Corporation
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
San Diego, California
December 22, 1998
EXHIBIT 23.1
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EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CardioDynamics International Corporation
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ Peterson & Co.
PETERSON & CO.
San Diego, California
December 23, 1998
EXHIBIT 23.2
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EXHIBIT 99.3
OPTION AGREEMENT
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.
October 16, 1998
1,295,000 Options
CARDIODYNAMICS INTERNATIONAL CORPORATION
COMMON STOCK OPTIONS
(Void after 5:00 p.m. California time,
October 16, 2008)
Certificate Evidencing 1,295,000 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 October 16, 1998 (subject, however, to the proviso to this
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sentence), and in any event no later than 5:00 p.m. California time on October
16, 2008 (the "Expiration Date"), 1,295,000 shares of Common Stock of
CardioDynamics International Corporation, a California corporation (the
"Company") (such shares purchasable upon exercise of the Options are herein
called the "Option Stock"), at $1.625 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 April 16, 1999; (ii) the second 12.5% tranche of the
Options shall first vest and become exercisable on October 16, 1999; (iii) the
next 25% tranche of the Options shall
EXHIBIT 99.3
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first vest and become exercisable on October 16, 2000; (iv) the next 25% tranche
of the Options shall first vest and become exercisable on October 16, 2001; and
(v) the final 25% tranche of the Options shall first vest and become exercisable
on October 16, 2002. Such vesting schedule is subject to acceleration as
provided in Section 2(c) below. The $1.625 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
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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 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.
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(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.
EXHIBIT 99.3
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(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.
(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.
(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.
EXHIBIT 99.3
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3. Reservation. The Company agrees that a number of shares of Common Stock
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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
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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.
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(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 exchange on which shares of the Company's Common Stock
may be listed at the time of such exercise and issuance.
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.
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
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delivered upon the exercise of the Options shall be validly issued, fully paid
and nonassessable.
7. Nontransferable. This Certificate and the Options evidenced
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hereby shall be nontransferable by the Optionholder except upon death.
8. No Shareholder Rights. The Optionholder shall not, by virtue of
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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
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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
EXHIBIT 99.3
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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:
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(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 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 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.
EXHIBIT 99.3
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Items (c) through (j) shall together be referred to as "Fault
Cause".
11. Definition of Constructive Termination. A "Constructive Termination"
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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
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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
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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.
14. Employment Termination. Nothing in this Certificate confers upon the
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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
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Certificate shall be binding unless executed in writing and signed by the
Company and the Optionholder.
Executed by the Company as of November 2, 1998 in San Diego, California.
CARDIODYNAMICS INTERNATIONAL CORPORATION
By: /s/ James C. Gilstrap
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Co-Chairman
EXHIBIT 99.3
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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.
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<C> <S>
_____________________________ -------------------------------------------------------------
Date Name (Printed)
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Signature
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Address
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Social Security No.
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Signature Guaranteed
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EXHIBIT 99.3
