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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHAGE ACT OF
1934
For the fiscal year ended: NOVEMBER 30, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Commission file number: 0-11868
CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
CALIFORNIA 95-3533362
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
6175 NANCY RIDGE DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (619) 535-0202
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ending November 30, 1997, were $477,588.
The aggregate market value of the common stock held by nonaffiliates of the
registrant at February 20, 1998, was approximately $26,859,645, based on the
closing price for the Common Stock in the Nasdaq SmallCap Market. At February
20, 1998, 32,085,743 shares of registrant's Common Stock were outstanding.
Indicate by check mark whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X].
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THIS FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934. THESE STATEMENTS INCLUDE STATEMENTS REGARDING PLANS,
GOALS, STRATEGIES, INTENT, BELIEFS OR CURRENT EXPECTATIONS OF THE COMPANY AND
ITS MANAGEMENT. THESE STATEMENTS ARE EXPRESSED IN GOOD FAITH AND ARE BELIEVED TO
HAVE A REASONABLE BASIS WHEN EXPRESSED, BUT THERE CAN BE NO ASSURANCE THAT THESE
EXPECTATIONS WILL BE ACHIEVED OR ACCOMPLISHED. SENTENCES IN THIS DOCUMENT
CONTAINING VERBS SUCH AS "PLAN," "INTEND," "ANTICIPATE," "TARGET," "ESTIMATE,"
"EXPECT," ETC., AND/OR FUTURE-TENSE OR CONDITIONAL CONSTRUCTIONS ("WILL," "MAY,"
"COULD," "SHOULD," ETC.) CONSTITUTE FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. ITEMS CONTEMPLATING, OR MAKING ASSUMPTIONS ABOUT,
ACTUAL OR POTENTIAL FUTURE SALES, MARKET SIZE, COLLABORATIONS, TRENDS OR
OPERATING RESULTS ALSO CONSTITUTE SUCH FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS ARE ONLY PREDICTIONS AND ACTUAL RESULTS COULD DIFFER MATERIALLY.
CERTAIN FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE DISCUSSED THROUGHOUT THIS
FORM 10-KSB INCLUDING THE SECTION ENTITLED "RISK FACTORS" ON PAGES 15 TO 20 OF
THIS DOCUMENT. ANY FORWARD-LOOKING STATEMENT SPEAKS ONLY AS OF THE DATE ON WHICH
THE STATEMENT IS MADE, AND THE COMPANY DOES NOT UNDERTAKE TO UPDATE THE
DISCLOSURES CONTAINED IN THIS DOCUMENT OR REFLECT EVENTS OR CIRCUMSTANCES THAT
OCCUR SUBSEQUENTLY OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CardioDynamics International Corporation ("CDIc" or the "Company") develops,
manufactures and markets noninvasive digital heart monitoring devices which
provide continuous data on a wide range of cardiac function parameters. The
Company's primary products, the BioZ(TM) System ("BioZ") and the BioZ(TM)
Portable System ("BioZ PortablE"), collectively referred to as ("BioZ Systems"),
use patented Thoracic Electrical Bioimpedance ("TEB") technology to obtain data
which is typically available only through a time consuming, costly, potentially
dangerous invasive procedure called Pulmonary Artery Catheterization ("PAC");
also referred to as "Swan-Ganz(TM) (Baxter HealthcarE Corporation's trade name)
Catheterization", thermodilution ("TD"), and "Right Heart Catheterization"
("RHC"). Many patients who might otherwise benefit from cardiac function
monitoring are presently excluded from such treatment because the risks and
costs associated with PAC often outweigh the potential benefits. TEB monitoring
permits such patients to receive treatment in a safe, efficient, cost-effective
manner.
In November 1996, the Company received 510(k) clearance from the U.S. Food and
Drug Administration ("FDA") to market the BioZ System, a completely
re-engineered, digital signal processing-based version of an earlier,
previously-approved analog TEB machine developed by the Company in the 1980's.
Additionally, in September 1997, the Company received 510(k) clearance from the
FDA to market the BioZ Portable System and its proprietary Dynamic Impedance
Signal Quantifier ("DISQTM") technology, which provides improved measurement of
impedance waveforms. To complement the receipt of its marketing clearance, the
Company is sponsoring several significant clinical trials which will further
expand the application of this technology.
Since the BioZ Systems provide cardiac function monitoring noninvasively, these
systems have the potential to expand the number of clinical applications well
beyond cardiac, intensive care, and surgery. These include applications for
emergency, hypertensive, congestive heart failure, high risk obstetric, immune
suppressed, dialysis, pacemaker, and sports medicine patients.
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The Company was incorporated as a California corporation in June 1980 as Bomed
Medical Manufacturing, Ltd. ("Bomed") and changed its name to CardioDynamics
International Corporation in October 1993. The Company is located at 6175 Nancy
Ridge Drive, Suite 300, San Diego, California 92121, and its telephone numbers
are (888) 522-2342 and (619) 535-0202. The Company's common stock trades on The
Nasdaq Stock MarketSM under the symbol CDIC.
INDUSTRY OVERVIEW
Hemodynamic measurements provide information about the cardiovascular system's
ability to deliver oxygen-rich blood throughout the body. There are several
parameters which are used to assess the effectiveness of the cardiovascular
system. For example, heart rate and blood pressure provide gross indices of the
effectiveness of the cardiovascular system. In healthy or minimally ill
patients, heart rate and blood pressure often provide physicians with sufficient
information to adequately evaluate their patients. However, in critically ill,
high-risk surgical, or patients with complex diseases, more precise
cardiac/hemodynamic function parameters are required for appropriate assessment
and patient management. Examples of these more physiologically precise
parameters include: contractility (the speed and strength of the heart's
contraction), stroke volume and cardiac output (the amount of blood pumped per
beat and per minute, respectively), systemic vascular resistance (the resistance
to the flow of blood throughout the vascular system), and fluid volume (the
amount of fluid in the thorax). The BioZ Systems continuously measure,
calculate, and display each of these physiological parameters.
Invasive Methodology. Although hemodynamic parameters are critical in assessing
cardiac function, they have been difficult to obtain. The primary method
currently used to measure hemodynamic parameters is Pulmonary Artery
Catheterization. PAC, which was introduced in the 1970's, is invasive in that it
requires direct access to the arterial circulation. The procedure involves an
incision into a patient's neck or groin region and insertion of a catheter
through the vascular system (vena cava) and heart (right atrium and right
ventricle), directly into the pulmonary artery.
This procedure has a morbidity (complication) rate of approximately 10% to 24%
(Moore et al., Surgical Clinics of North America, August 1991.) Complications
include pneumothorax, pulmonary artery rupture, arrhythmia and severe
infections. Additionally, a study performed at the University of Virginia
determined that the use of PAC to monitor cardiac output significantly increased
the risk of death in critically ill patients. The study, which was reported in
the September 1996 issue of the Journal of the American Medical Association
("JAMA") by Connors et al, examined data from 5,735 intensive-care patients
treated at five U.S. medical centers. Patients who underwent PAC had a 21%
higher risk of death within 30 days compared to those who did not undergo the
procedure. The importance of this finding is underscored by the fact that
patients in both groups were matched for disease severity and prognosis.
Another significant consideration in the use of PAC is cost. The PAC procedure
requires a hospital to allocate valuable resources in terms of an intensive care
unit bed, cardiac catheterization laboratory or operating room, highly skilled
medical personnel and expensive equipment to obtain non-continuous hemodynamic
data. According to the above referenced JAMA article, the mean cost of the
hospital stay for critically ill patients having a PAC was $49,300, or $13,600
(38%) greater than the $35,700 cost for similar critically ill patients who did
not undergo PAC. Overall, it is estimated by the authors of the JAMA article
that there are one million PACs performed annually in the U.S., with an
associated annual cost to the U.S. healthcare system estimated at $2 billion for
the cost of catheters and their insertion and $14 billion per year for the cost
of complications arising from the procedure.
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Many patients who might otherwise benefit from cardiac function monitoring are
excluded presently because the increased risks and costs associated with PAC
often outweigh the potential benefits. Conversely, TEB monitoring permits
cardiac function monitoring on these patients so they may receive treatment in a
safe, continuous and cost-effective manner.
Noninvasive Methodology. The Company's core technology, TEB, is a noninvasive
technology, which determines the mechanical activity of the heart (blood flow),
rather than its electrical activity (ECG).
TEB has significant advantages over PAC, including:
1) Elimination of PAC-caused morbidity and mortality;
2) Reduction in associated medical costs;
3) Reduction in set-up and procedure time;
4) Immediate availability of hemodynamic parameters;
5) Continuous, real time data; and
6) Expanded clinical applications.
TEB is based on Ohm's Law and the fact that blood is the most electrically
conductive substance in the body. Blood volume and velocity changes with each
left ventricular ejection and results in a change in the electrical
conductivity, or impedance, of the thorax.
In order to measure this conductivity change, the BioZ Systems utilize four dual
electrodes (two on the neck and two on the chest) to deliver a high frequency
(70 kHz), low magnitude (4 mA) alternating current through the thorax. Use of a
high frequency current eliminates the possibility of interference with
bioelectrical activity of the heart and brain. Additionally, as the
skin-to-electrode impedance is very low at high frequency, there are no thermal
effects to tissue, thus, no sensation to the patient. With current set at a
constant magnitude, variations in blood volume and velocity in the descending
thoracic aorta cause a proportional voltage change. The measured voltage change
is processed by the BioZ Systems, using sophisticated proprietary Digital Signal
Processing ("DSP") technology. An impedance waveform is generated and is
electronically differentiated to produce a rate of impedance change, dZ/dt.
Through impedance waveform generation, direct measurement of base impedance,
acceleration index, index of contractility, pre-ejection period, left
ventricular ejection time, fluid level and heart rate are made. Additionally,
the BioZ Systems calculate stroke volume, cardiac output, systemic vascular
resistance and several other parameters.
In the simplest of terms, TEB measures the change in conductivity (or the
inverse, which is impedance) over a change in time, while PAC measures the
change in temperature over a change in time. However, the key difference stems
from the fact that TEB is noninvasive, whereas PAC is invasive. Because the
Company's products measure cardiac function parameters noninvasively, broader
clinical applications exist for its products including use on critically ill,
surgical, emergency, hypertensive, congestive heart failure, high risk
obstetric, dialysis, sports medicine, and pacemaker patients.
Within the broad clinical applicability of the BioZ Systems, some measurements
of blood flow movement using TEB are subject to inaccuracies when the
theoretical calculations do not fit a particular patient's clinical
circumstances. The following conditions may limit the accuracy of TEB data:
severe septic shock, significant pulmonary hypertension, aortic valve
regurgitation, severe hypertension (MAP greater than 130mmHg), tachycardia rates
greater than 180 BPM, patients heights measuring less than 47", patients weight
measuring less than 66 pounds or greater than 342 pounds, extreme patient
movement.
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Managed Care Environment. In the 1970's, the healthcare environment was not as
focused on cost containment as it is today. Additionally, market acceptance of
noninvasive cardiac function methods was limited because of inaccuracies due to
the technological limitations of the then-available products. In the early
1980s, national attention focused on escalating healthcare costs. Congress
introduced a new Medicare payment system called Diagnosis-Related Groups
("DRG's"), which limited reimbursement amounts for patient care. Additionally,
third-party payers such as insurance companies, employers and Health Maintenance
Organizations ("HMO's") identified numerous factors driving healthcare costs,
one of which was the growing number of invasive procedures. To induce providers
to seek more cost-effective treatments, third-party payers began to institute
their own capitated payment systems, thereby shifting the financial risk of
offering patient care from the payer to the provider. In this environment,
payment incentives are shifting away from the more expensive invasive
technologies. Increasingly, providers are seeking technologies and products that
produce effective outcomes at lower cost.
COMPANY HISTORY
Even before managed care, noninvasive alternatives for cardiac function
monitoring were being studied. In fact, TEB has been researched since the
1940's. In the 1960's and 1970's, TEB research was funded by NASA, whose goal
was to monitor noninvasively astronauts' cardiac functions under conditions of
space flight. While this was not practical with the technological limitations of
that time, TEB found its way into medical research.
In 1980, Bomed was founded to capitalize on the advent of managed healthcare.
Throughout the 1980's, Bomed obtained patents on TEB and ultimately produced a
noninvasive analog-based cardiac output monitor. The product had only modest
commercial success due to reimbursement disincentives, microprocessor
limitations and inaccurate physiological assumptions. Bomed entered into Chapter
11 bankruptcy in March 1992, and emerged in October 1993, under the name of
CardioDynamics International Corporation.
Recognizing the potential value of TEB and the advancement of microprocessors, a
group of investors, which included Allen E. Paulson, James C. Gilstrap and
Nicholas V. Diaco, M.D., purchased control of the Company in February 1995. A
new management team was recruited to effect the revitalization of the Company
and commercial development of TEB. The management team brought substantial
experience to the Company, particularly in the development and marketing of high
technology medical devices, and in the management of rapid growth,
entrepreneurial companies. Management identified a number of key areas to
address before the Company could successfully launch a medical product. These
areas included:
1) Advanced development of TEB and the Company's product;
2) Identification of a credible medical manufacturing partner;
3) Implementation of quality assurance and regulatory programs;
4) Establishment of a prominent medical advisory board;
5) Commencement of clinical trials (with ultimate medical journal
publication/presentation);
6) Identification of primary medical markets;
7) Implementation of a sales and marketing plan; and
8) Arrangement of additional capital.
Since that time, the Company has made significant advances in each of the areas.
The Company believes its technological advancements, product improvements, high
quality clinical trials, strong medical advisory board, and the product's low
cost/low risk nature will enhance physician and third-party payer acceptance of
the BioZ Systems.
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PRODUCTS
BioZ System. The BioZ System is a noninvasive cardiac function monitoring
device, with a suggested retail price of $22,900. It consists of a Pentium-based
CPU, 15" high-resolution medical grade color monitor, and keyboard. Included in
the CPU is the Company's proprietary DSP circuit board and patented software.
The BioZ System is available in ergonomically designed shelf cart or roll cart
configurations. With the application of four dual electrodes to the patient's
neck and chest, the physician is able to immediately assess twelve hemodynamic
parameters.
Portable BioZ System. The Portable BioZ System is a noninvasive cardiac function
monitoring device, with a suggested retail price of $23,400. This more compact
version contains a Pentium-based CPU, 10.4" active matrix display, and built-in
keyboard. The Company's proprietary DSP circuit board and patented software are
also an integral part of this system.
CARDIAC FUNCTION PARAMETERS PROVIDED BY THE BIOZ SYSTEMS AND CORRESPONDING PAC
PARAMETERS
<TABLE>
<CAPTION>
- --------------------------------------- ------------------- --------------------------------------------------------
BIOZ SYSTEM PAC COMMENTS
PARAMETERS PARAMETERS
- --------------------------------------- ------------------- --------------------------------------------------------
<S> <C> <C>
SV (Stroke Volume, ml) and SVI SV, SVI BioZ measures volumes of blood flow; PAC measures
(Stroke Volume Indexed, ml/m2) pressures of blood flow. SVI = SV divided by BSA
(body surface area)
- --------------------------------------- ------------------- --------------------------------------------------------
CO (Cardiac Output, l/min) and CI CO, CI Calculated parameters in both techniques:
(Cardiac Output Indexed, l/min/m2) CO = SV x HR, CI = CO divided by BSA
- --------------------------------------- ------------------- --------------------------------------------------------
SVR (Systemic Vascular Resis-tance, SVR Calculated from Mean Arterial Pressure (mmHg)
mmHg x min x liters-1)
- --------------------------------------- ------------------- --------------------------------------------------------
EDV (End Diastolic Volume, ml) PAOP or "wedge Wedge provides a reflection of left ventricular
pressure" pressure via measurement of the "back pressure" of
blood flow in the pulmonary artery; inaccurate in
patients with mitral valve disease. The BioZ EDV
(which is an estimated value) provides a left
ventricular end diastolic volume instead of pressure.
- --------------------------------------- ------------------- --------------------------------------------------------
IC (Index of Contractility, No similar Index of velocity of blood in the aorta; provides
liters/seconds) measurement insight into LV contractility.
- --------------------------------------- ------------------- --------------------------------------------------------
ACI (Acceleration Index, No similar Index of acceleration of blood in the aorta; provides
liters/seconds2) measurement insight into LV contractility.
- --------------------------------------- ------------------- --------------------------------------------------------
LCW (Left Cardiac Work, No similar Useful clinical data regarding LV contractility and
kg x m x m-2) measurement volemic status
- --------------------------------------- ------------------- --------------------------------------------------------
PEP (Pre-Ejection Period, No similar Time from onset of ventricular depolarization to
msec) measurement opening of aortic valve. Used in calculation of STR
- --------------------------------------- ------------------- --------------------------------------------------------
LVET (Left Ventricular Ejection Time, No similar Time from opening to closing of the aortic valve.
msec) measurement Used in calculation of STR
- --------------------------------------- ------------------- --------------------------------------------------------
STR (Systolic Time Ratio, No similar An index of LV performance. An increase in STR
PEP/LVET) measurement indicates LV dysfunction; whereas, a decrease in STR
indicates a stronger, more athletic heart.
- --------------------------------------- ------------------- --------------------------------------------------------
TFC (Thoracic Fluid Content, ohms-1) No similar Useful clinical data regarding patients' thoracic
measurement fluid status (intravascular, interstitial,
intra-alveolar) and is important in distinguishing
between cardiac and pulmonary problems. Also, TFC
trends with shock.
- --------------------------------------- ------------------- --------------------------------------------------------
No similar measurement PVR (Pulmonary Determines pressure within the pulmonary vascular
Vascular circulation
Resistance)
- --------------------------------------- ------------------- --------------------------------------------------------
HR (Heart Rate, beats/min) No similar meas. BioZ measures HR via modified ECG leads
- --------------------------------------- ------------------- --------------------------------------------------------
</TABLE>
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BioZ Transducer/Sensor Electrodes. The Company markets disposable sensors
designed specifically for use with the BioZ Systems. With each monitoring event,
four dual sensors are utilized. These sensors are placed on the patient's neck
and chest and are generally replaced after each use or every 24 - 36 hours.
Sales of this high margin disposable component of the product mix should
continue to increase as the installed base of the Company's monitoring systems
grows. The suggested retail price of the sensors is $10.00 per set (four dual
sensors). An optional transducer sensor set with pre-attached lead wires is
priced at $30.00 per set. The transducer sensors are often preferred for use in
operating rooms or patients with infectious diseases.
THE FEATURES AND BENEFITS OF THE BIOZ SYSTEMS, AS COMPARED TO PAC
<TABLE>
<CAPTION>
- -------------------------------- -----------------------------------------------------------------------------------
FEATURE BENEFIT
- -------------------------------- -----------------------------------------------------------------------------------
<S> <C>
Noninvasive Painless
No morbidity or mortality
Reduced costs and liabilities
May be used on wider range of patient populations
- -------------------------------- -----------------------------------------------------------------------------------
Portable May be easily transported and used in any setting, including all hospital
departments, physician offices and clinics
- -------------------------------- -----------------------------------------------------------------------------------
Two Minute Setup Simple procedure performed by
nurses or technicians Rapid assessment with
potential for improved patient outcomes Quick
clinical decision capabilities
- -------------------------------- -----------------------------------------------------------------------------------
Continuous Data Reports immediate change
Potential for improved patient outcomes
- -------------------------------- -----------------------------------------------------------------------------------
Disposable Sensors Reduced cost per evaluation
Simple procedure performed by nurses or technicians
- -------------------------------- -----------------------------------------------------------------------------------
</TABLE>
WARRANTY AND SERVICE
The Company's products are sold with a limited twelve month parts and labor
warranty commencing at the date of shipment. When warranty repairs are
necessary, the Company performs them at its headquarters or, in some cases, by
its distributors in authorized service centers. The Company provides field
clinical application specialists, as well as 24-hour on-call field engineers.
The Company offers extended service agreements for hardware and software
maintenance beyond the warranty period. Otherwise, the Company may also service
equipment on a time and materials basis.
MARKETING
Until recently, comprehensive cardiac function information has been available
only in acute care settings, such as an ICU. The BioZ Systems make obtaining and
assessing this type of information simple, rapid, cost-effective, safe,
continuous and painless. For these reasons, the Company expects utilization of
noninvasive cardiac function information to spread from the ICU to other areas
of the hospital and expand beyond the hospital setting.
Departments serving high-risk surgical, critical care, obstetrics, acute
dialysis, and emergency patients are the primary targets in the hospital market.
The primary targets in the outpatient market include: cardiologists/general
internists caring for congestive heart failure, hypertension, surgicenters, and
obstetric/gynecology patients. The Company has also identified a number of
secondary target markets where TEB has potential applicability including:
pharmaceutical companies, pacemaker companies, cardiac rehabilitation, burn
units, home health care, exercise stress testing, neonatal and pediatric
critical care units, medical and veterinarian schools.
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MARKETING (Continued)
The Company's marketing strategy has been designed to: 1) increase physicians'
and hospital personnel's knowledge of TEB; 2) remind physicians and hospital
staff of the limitation and relative contraindications of PACs; 3) present the
BioZ as the system of choice; and 4) build sales to establish the Company as the
market leader. To accomplish this, the Company has invested considerable
resources on market research, development of product literature, and attendance
at trade shows that target the Company's primary markets.
The Company will continue to present at key medical trade shows including the
North American Society of Pacing and Electrophysiologists, the American Society
of Anesthesiology, the American Heart Association, the Society for Critical Care
Medicine, the American College of Cardiology, the American Society of
Cardiovascular Professionals, the American College of Emergency Physicians, the
American Society of Nephrology, California Society of Anesthesiologists, and
others. These trade shows resulted not only in valuable exposure of the Company
and its products, but also were a good source of leads, some of which have
resulted in product sales.
Advertising in key medical publications is an important part of the Company's
marketing strategy. The target audience and publications have been carefully
selected to maximize exposure at a reasonable cost. Targeted direct mailing
campaigns were used in fiscal 1997. In 1998, these will be refined and expanded
to support the direct sales efforts. Targeted audiences will include
anesthesiologists, surgeons (ortho-pedic, vascular, and general), critical care
physicians, biomedical technicians, hospital Chief Financial Officers,
cardiologists, internists, and home health care agencies.
The Company is active in supporting research utilizing the BioZ Systems. In
addition to providing further clinical validation for TEB, the Company hopes to
have each of these studies published in a peer reviewed journal and/or presented
at major medical conferences. Both publications and presentations at major
medical conferences provide Company exposure and help establish credibility of
TEB in general, and the BioZ Systems in particular.
The Company plans to sponsor "Technology Acceptance Seminars" in conjunction
with medical conferences throughout the United States in 1998. These seminars
are typically presented by well-known and respected physicians, who share their
experience with new/emerging technologies.
SALES AND DISTRIBUTION
The United States medical marketplace consists of two distinct segments: the
hospital (acute care) market, and the outpatient (primary care) market. During
fiscal 1997, the Company established distribution agreements with seventeen
regional specialty distributors to represent the Company in the hospital market.
These distributors collectively covered 44 states, and employed over 100 sales
representatives. By the end of fiscal 1997, it was apparent that there was a
need to broaden the sales channel. The Company opted to add a direct sales force
targeted at both the hospital and outpatient markets in the majority of the
United States, and has reduced the number of distributors. The Company has made
the determination that a direct sales force can more effectively demonstrate the
cost and safety advantages of the BioZ over traditional invasive techniques by
directly marketing to, and educating, health care professionals and third-party
payers, including HMOs, as to the positive cost advantages and clinical outcome
profiles of the BioZ.
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SALES AND DISTRIBUTION (Continued)
Despite the significant benefits and numerous applications of the BioZ Systems,
it is a "concept sale" that requires physicians to change conventional practices
(some of which are reimbursed at a higher rate than TEB). In addition, the
hospital buying cycle can be long and difficult, particularly for a new product
that is unbudgeted. Consequently, the amount of time and effort required to
penetrate these markets is often greater than the time and effort many of the
distributor sales representatives were willing to invest.
Subsequent to the 1997 fiscal year end, the Company hired five direct sales
representatives and its four existing Territory Sales Managers have assumed
their new responsibilities as direct sales representatives. Key major
metropolitan areas have been targeted for placing additional direct sales
representatives. The Company intends to retain a distributor channel and has
developed a means for evaluating and supporting successful distributors as well
as an aggressive hiring plan that calls for as many as 30 direct sales
representatives to be in place by the end of 1998. The remaining distributors
will be supported by the Company's Clinical Application Specialists and direct
sales representatives.
As the Company begins to expand its direct sales force in targeted metropolitan
areas, it recognizes that it may not be able to maintain satisfactory
relationships with its current regional specialty distributors. Under the terms
of the distribution agreements, distributors have the right, under certain
circumstances (including the Company placing a direct sales representative in
the distributor's territory), to terminate the distribution agreement and return
demonstration and stocking inventory purchased from the Company. Because the
Company may be required to take back BioZ Systems and unused supplies and refund
amounts paid by distributors (net of contracted depreciation and restocking
charges), the Company established a substantial reserve for distributor returns.
This reserve represents 100% of sales to domestic distributors which had not, as
of November 30, 1997, been resold to end-users.
The Company has contracted with a major medical distributor to sell the
Company's products to the Canadian market. European and Asian distribution is
handled by Landice International, Inc. ("Landice") which has agreements with
sub-distributors in eight countries, including England, Italy, Spain, Belgium,
Ireland, Japan, South Korea, and Taiwan. Landice is currently negotiating
similar arrangements relating to the Company's products in other countries of
Europe and Asia. The local sub-distributors in each country are responsible for
the necessary international regulatory approvals.
RESEARCH AND DEVELOPMENT AND CLINICAL STUDIES
The Company's research and development ("R&D") team presently includes 35
individuals engaged as employees and independent contractors. Individuals in the
research and development team have extensive experience in the areas of
impedance tomography, TEB, biological signal processing, hardware/software
development, and regulatory compliance. The team is responsible for on-going
product engineering, new product development, and basic research into TEB and
additional noninvasive monitoring applications.
To supplement its engineering staff, the Company utilizes Rivertek Medical
Systems, Inc. ("Rivertek"), located in Minneapolis, Minnesota. Rivertek serves
as an engineering consulting firm for medical device manufacturers, including
Guidant Corporation and Medtronic, Inc., as well as emerging medical technology
companies. Rivertek was founded in 1988 by Dennis Hepp, the Company's Chief
Technology Officer, and employs 25 medical hardware, software, and biomedical
engineers.
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RESEARCH AND DEVELOPMENT AND CLINICAL STUDIES (Continued)
The R&D team participates in monitoring and analysis of Company-sponsored
clinical trials, for which the Company employs Clinical Application Specialists
("CAS"). Presently, the Company has five CAS's, three at the corporate
headquarters, one in the Eastern U.S., and one in the Southeastern U.S. Each of
these individuals has strong clinical backgrounds and is responsible for
monitoring clinical studies and assisting in customer training.
Studies Utilizing Previous Generation CDIc (Bomed) Technology. A considerable
amount of research has been published on the technique of TEB. In fact, more
than 80 research papers have been published using the company's previous system,
the Bomed NCCOM System ("Bomed System"). In general, the majority of these
studies reported favorable results when comparing the cardiac output of the
Bomed System with that of other techniques, such as thermodilution (TD).
The Bomed System worked very well, in selected patients. However, there were
significant limitations of the system. These became evident when monitoring
patients with increasing heart rates, high heart rates, abnormal heartbeats,
high respiration rates, pacemakers, and hospitalized ventilated patients. These
limitations related to both hardware and software inadequacies of the Bomed
System. As a result of intense focus and concerted effort, these limitations
have been successfully addressed in the BioZ Systems by improving both computer
hardware and software.
Studies Utilizing the BioZ Systems. The Company is committed to supporting
well-designed clinical research studies utilizing its technology. Studies which
are of most importance to the Company are those which demonstrate 1) validity,
2) reproducibility, and 3) clinical utility of the BioZ. The Company is
currently sponsoring several studies which are intended to demonstrate the
validity or accuracy of the BioZ by comparing BioZ data to an accepted standard
such as PAC. In addition to a product providing valid or accurate data, it must
also provide reproducible and repeatable data. The Company is also sponsoring
several important studies in order to establish reproducibility and
repeatability of the BioZ since these statistics are essential in evaluating the
effects of therapeutic intervention. Additionally, the Company is sponsoring
studies designed to demonstrate clinical utility of the BioZ in specific
applications.
MEDICAL ADVISORY BOARD
The Company has established a distinguished Medical Advisory Board ("MAB")
comprised of 14 doctors, many of whom are affiliated with prestigious
universities and well-known medical institutions. Members of the MAB have
expertise in cardiology, anesthesiology, hypertension, internal medicine and
emergency medicine. The MAB provides guidance to the Company on structuring
clinical trials as well as identifying technological improvements and potential
uses for the Company's products.
Members of the MAB receive reimbursement for their expenses in attending Company
sponsored meetings and generally receive consulting fees for time spent working
on behalf of the Company. During the fiscal year ended November 30, 1997, the
members of the MAB each received an average of $2,000 in consulting fees.
10
<PAGE> 11
MANUFACTURING
The Company is licensed as a healthcare device manufacturer by the Food and Drug
Branch of the California Department of Health Services (equivalent to a State
FDA). In addition, in 1996 the Company was inspected by the U. S. FDA for
compliance with Good Manufacturing Practice ("GMP") regulation 21 CFR 820 with
no material findings.
The Company has contracted with Arrow Schweber, Inc., a subsidiary of Arrow
Electronics, Inc. ("Arrow") to perform component assembly work with
CardioDynamics performing final assembly and product testing. As the largest
distributor of Intel Corporation products in North America, and as an
experienced medical device manufacturer, Arrow is well positioned to assist the
Company in the manufacture of its products. The agreement with Arrow is
terminable on 30 days notice without cause.
ISO 9000 Series. In concert with management's commitment to quality, the Company
has endeavored to implement quality procedures and documentation required for
successful International Organization for Standardization ("ISO") 9001
certification. The ISO 9000 series standards for quality management and quality
assurance are becoming an internationally recognized common standard. The
Company believes ISO 9001 certification can streamline the Company's
international sales processes. The Company aims to receive ISO 9001
certification in 1998, although there can be no assurance the Company will
succeed in obtaining such certification or that it will derive the benefits it
expects such certification to bring.
COMPETITION
INDIRECT COMPETITION
Pulmonary Artery Catheterization - Also known as thermodilution, right heart
catheterization, and Swan-Ganz(TM) catheterization. The PAC procedure was
introduced in the early 1970's and has significant limitations. Some of the
limitations include:
LIMITATIONS OF THE PAC PROCEDURE
<TABLE>
<CAPTION>
- ------------------------------------- ------------------------------------------------ -----------------------------
LIMITATION EXPLANATION REFERENCE (IF APPLICABLE)
- ------------------------------------- ------------------------------------------------ -----------------------------
<S> <C> <C>
Morbidity (complications) Rates of 10% to 24%, including infection, Per Moore, op. cit.
cardiac arrhythmia, air embolus, pulmonary
infarction, pulmonary artery rupture and
pneumothorax
- ------------------------------------- ------------------------------------------------ -----------------------------
Mortality (death) Increased 30 day death rates in patients Per Connors, op. cit.
undergoing PAC as compared to those patients
not receiving PAC
- ------------------------------------- ------------------------------------------------ -----------------------------
Costs Average increased hospitalization costs Per Connors, op. cit.
of $13,600 per patient
- ------------------------------------- ------------------------------------------------ -----------------------------
Insertion requirements Hospitalization in an intensive care bed,
operating room or cardiac catheterization
laboratory; sterile environment; physician,
nurses and trained personnel required for
insertion; X-ray confirmation of placement
- ------------------------------------- ------------------------------------------------ -----------------------------
Availability of data Intermittent; requires personnel
- ------------------------------------- ------------------------------------------------ -----------------------------
Variability of data +/-20% error/inconsistency Per Moore, op. cit.
- ------------------------------------- ------------------------------------------------ -----------------------------
Conditions that may limit Obesity; anatomical, vascular and cardiac
placement or accuracy structure anomalies; tricuspid, pulmonary and
mitral valve abnormalities
- ------------------------------------- ------------------------------------------------ -----------------------------
</TABLE>
11
<PAGE> 12
INDIRECT COMPETITION (Continued)
Despite the above limitations, PAC is the most commonly used invasive technology
for monitoring a patient's hemodynamic status. It is estimated that PAC
procedures are used more than one million times per year in the United States
and more than two million times per year worldwide. The estimated cost to the
U.S. healthcare system is estimated at $2 billion for the cost of the catheters
and their insertion and $14 billion per year for the cost of complications
arising from the procedure (see "Description of Business - Industry Overview").
Baxter Healthcare Corporation, Abbott Laboratories and B. Braun Medical, Inc.
produce the majority of right heart catheters used in the U.S.
Echocardiography (Doppler and Trans-esophageal). Echocardiography ("Echo") is a
medical diagnostic tool utilizing ultrasound frequency waves to detect
anatomical abnormalities of the heart, valvular structures, and great vessels.
Echo technology was developed during the 1970's, and has advanced through the
years with the addition of sophisticated electronics and digitalization for
acquisition of better images.
A continuous wave suprasternal doppler echo measures cardiac output
noninvasively by placing a doppler transducer on the chest, aiming it toward the
ascending aorta, and measuring aortic blood flow velocity. Specifically, it
measures the aortic diameter and the moving red blood cells to determine the
velocity and direction of blood flow to calculate stroke volume, and hence
calculate cardiac output.
Limitations in measuring cardiac output via Echo include: (i) inconsistency in
images and in the data generated, due to differences in technician ability and
experience, patient size and diagnosis; (ii) difficulty in procuring images in
patients with evidence of pulmonary disease, tracheotomies, chest wounds, and
obesity; and (iii) time consuming procedure that may require 30-45 minutes. In
some patients, reliable, accurate Echo images simply cannot be obtained by
doppler echo for unknown reasons.
Due to many of the above limitations, Trans-esophageal Echo ("TEE") has been
developed in recent years to obtain closer images of the heart. It is useful in
patients in whom examination from the usual position is technically impossible
and in patients undergoing cardiac surgery. TEE is performed with the ultrasound
transducer placed invasively in the esophagus through the mouth. Although this
procedure enables more direct, accurate images of the heart, several
disadvantages accompany this technique because of its invasive nature including
increased patient discomfort and the requirement for patient sedation to promote
procedure tolerance. In addition, patient airway complications may result,
necessitating the need for available emergency equipment, such as oxygen,
intubation equipment, and ECG monitoring. Consequently, the procedure
customarily is performed in an outpatient clinic or hospital setting with
several attendants, usually an Echo technician, a nurse and a physician. For
these reasons, TEE is used much less frequently than non-invasive Echo.
DIRECT COMPETITION
Management is aware of only three additional manufacturers of TEB cardiac
function monitors. Since all three companies are privately held, exact sales and
financial figures for these potential competitors are not available.
INTELLECTUAL PROPERTY
The Company's success will, to some extent, depend on its ability to maintain
patent protection for its products and processes, to preserve its trade secrets
and proprietary technology and to operate without infringing upon the patents or
proprietary rights of third parties. As of November 30, 1997, the Company had
seven issued U.S. patents and multiple international patents and patent
applications based on its U.S. patents.
12
<PAGE> 13
INTELLECTUAL PROPERTY (Continued)
All of the Company's existing patents were issued prior to the re-engineering of
the products to a DSP-based system. As such, several of the patents are not
integral to the design of BioZ. The Company also possesses proprietary software,
which it has strategically elected not to disclose through patents. In addition,
the Company expects to file new patent applications covering certain
modifications to its products and algorithms during 1998.
The Company filed a trademark application for the rights to the "CardioDynamics"
name in January 1997. The Patent Office responded on August 14, 1997 requesting
additional information which was provided in February, 1998. The Company does
not believe its business would be materially impaired if it were required to use
a different trade name.
GOVERNMENT REGULATION
The Company's TEB products are subject to extensive and rigorous regulation by
the FDA and, to varying degrees, by state and foreign regulatory agencies. Under
the federal Food, Drug, and Cosmetic Act (the "FDC Act"), the FDA regulates the
clinical testing, manufacture, labeling, packaging, marketing, distribution and
record keeping for medical devices, in order to ensure that medical devices
distributed in the United States are safe and effective for their intended use.
Before a new device can be introduced into the market, the manufacturer
generally must obtain FDA 510(k) clearance or premarket approval ("PMA").
Following submission of a 510(k) or PMA application, the manufacturer may not
market the new device until an order is issued by the FDA granting clearance or
approval, which can entail an expensive, lengthy and uncertain process.
The Company is also subject to routine inspection by the FDA and state agencies,
such as the California Department of Health Services, for compliance with Good
Manufacturing Practice ("GMP") regulation, (21 CFR 820), Medical Device
Reporting requirements (21 CFR 803), and other applicable regulations.
Noncompliance with applicable requirements can result in warning letters, import
detentions, fines, civil penalties, injunctions, suspensions or losses of
regulatory approvals, recall or seizure of products, operating restrictions,
refusal of the government to approve product export applications or allow the
Company to enter into supply contracts and criminal prosecution. Delays in
receipt of, or failure to obtain, regulatory clearances and approvals, if
obtained, or any failure to comply with regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company has received a marketing clearance for its
BioZ System and Portable BioZ System.
Labeling and promotional activities are subject to scrutiny by the FDA and, in
certain circumstances, by the Federal Trade Commission. Current FDA enforcement
policy prohibits the marketing of approved medical devices for unapproved uses.
For any medical device cleared through the 510(k) process, modifications or
enhancements that could significantly affect the safety or effectiveness of the
device or that constitute a major change to the intended use of the device
require a new 510(k) submission. If such additional 510(k) clearances are
required, there can be no assurance that the Company will obtain them on a
timely basis, if at all, and delays in receipt of or failure to receive such
approvals could have a material adverse effect on the Company's business,
financial condition and results of operations. If the FDA requires the Company
to file a new 510(k) submission for any product modification, the Company may be
prohibited from marketing the modified product until the 510(k) submission is
cleared by the FDA.
13
<PAGE> 14
GOVERNMENT REGULATION (Continued)
The FDC Act requires that medical devices be manufactured in accordance with the
current GMP's. GMP's require, among other things that (i) the manufacturing
process be regulated and controlled by the use of written procedures, (ii) the
ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process and
(iii) any deficiencies in the manufacturing process or in the products produced
be investigated and detailed records kept. Manufacturing facilities are subject
to FDA inspection on a periodic basis to monitor compliance with current GMP's.
The FDA regulates computer software that performs the function of a regulated
device or that is intimately associated with a given device, such as control
software for diagnostic devices. The FDA is in the process of reevaluating its
regulation of such software, and if the FDA undertakes increased or more
rigorous regulation of such software, the BioZ Systems and related products may
become subject to further regulatory processes and clearance requirements.
Laws and regulations regarding the manufacture, sale and use of medical devices
are subject to change and depend heavily on administrative interpretations.
There can be no assurance that future changes in the regulations or
interpretations made by the FDA or other regulatory bodies, with possible
retroactive effect, will not adversely affect the Company.
Sales of medical devices outside of the United States are subject to foreign
regulatory requirements that vary from country to country. The Company currently
relies on its international distributors and sub-distributors for the receipt of
premarket approvals and compliance with clinical trial requirements in those
countries that require them, and it expects to continue to rely on distributors
in most countries. In the event that the Company's international distributors
fail to obtain or maintain required premarket approvals or fail to comply with
foreign regulations, foreign regulatory authorities may require the Company to
cause the applicable distributor to file revised governmental notifications,
cease commercial sales of its products in the applicable countries or otherwise
act so as to stop any ongoing noncompliance in such countries. Such enforcement
action by regulatory authorities could have a material adverse effect on the
Company's business, financial condition and results of operations.
In order to sell its products within the European Economic Area ("EEA")
following June 14, 1998, the Company will be required to achieve compliance with
the European Commission's Medical Device Directive (93\42\EEC) and to affix CE
marking on its products to attest such compliance. Failure by the Company to
comply with CE marking requirements by June 1998 would mean that the Company
would be unable to sell its products in the EEA unless and until compliance was
achieved, which could have a material adverse effect upon the Company's
business, financial condition and results of operations.
THIRD-PARTY REIMBURSEMENT
Most medical procedures are reimbursed by a variety of third-party payers,
including Medicare and private insurers. Health Care Finance Association, the
governmental body that approves medical diagnosis and treatment for financial
reimbursement for Medicare coverage, determines whether to reimburse for a given
type of procedure and what dollar amount should be allowed. The Company believes
that establishment of a specific reimbursement code for the BioZ Systems and TEB
would improve it's ability to penetrate the outpatient market.
14
<PAGE> 15
THIRD-PARTY REIMBURSEMENT (Continued)
While management of the Company expects to pursue obtaining a separate
reimbursement code for TEB procedures, it is quite possible that cost
containment pressures on the hospitals and doctors will lead to substantially
increased usage of TEB even without a change in reimbursement policies. The
financial and health care cost containment pressures at U.S. hospitals,
resulting from per-capita compensation techniques required by HMOs, are driving
medical departments to decrease costs. In a managed care system involving
capitation, the health care provider is strongly induced to utilize the most
cost-efficient methods available in order to maintain per-patient costs within
the monthly fees. TEB devices can reduce hospital costs by an estimated minimum
of $600 per patient in non-complicated cases (Clancy, T.V., et al., Journal of
Trauma, August 1991) to as much as $13,600 where PAC is used (Connors, op.
cit.). Therefore, a financial incentive exists, independent of third-party
reimbursement circumstances, for hospitals to purchase and use the Company's
products.
EMPLOYEES
As of February 26, 1998, the Company had 38 employees. The Company believes that
the success of its business will depend, in part, on its ability to identify,
attract and retain qualified personnel. In the future, the Company will need to
add additional skilled personnel or retain consultants in such areas as research
and development, manufacturing, administration and marketing and sales. The
Company considers its relationship with its employees to be good.
RISK FACTORS
HISTORY OF LOSSES. Since its emergence from bankruptcy proceedings in 1993, the
Company has incurred substantial losses in the course of researching, developing
and enhancing its technology and products and establishing sales and
administrative organizations. The Company anticipates that its operating
expenses will increase substantially in the foreseeable future as it increases
its direct sales and marketing activities, expands its operations, and continues
the development of its technology. Accordingly, the Company expects to incur
additional losses for fiscal 1998, and there can be no assurance that the
Company will achieve or sustain revenue growth or profitability.
FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE. Commercialization by the Company of the BioZ Systems, implementation
of a direct sales force and the development and commercialization of any
additional products will require substantial expenditures. The Company's capital
requirements will depend on numerous factors, including the rate of sales
growth; the progress of the Company's marketing-related clinical evaluations and
product development programs; the receipt of regulatory clearances and
approvals; the resources the Company devotes to developing, manufacturing and
marketing its products; the resources required to hire and develop medical sales
representatives and to gain market acceptance and demand for its products; the
ability of the Company to avoid increased working capital requirements arising
from hospitals' lengthy capital equipment purchase processes by offering leasing
programs; and other factors. The timing and amount of such capital requirements
cannot be accurately predicted. The Company will likely be required to raise
additional funds through public or private financing, bank loans, collaborative
relationships or other arrangements. There can be no assurance that such
additional funding will be available on terms attractive to the Company, or at
all.
15
<PAGE> 16
RISK FACTORS (Continued)
DEPENDENCE ON PRIMARY PRODUCT LINE; UNCERTAINTY OF MARKET ACCEPTANCE. The
Company's future is substantially dependent upon the success of the BioZ Systems
and follow-on products. The market for TEB products is in a relatively early
stage of development, and there can be no assurance that this market will
develop. The long-term commercial success of the BioZ Systems and any follow-on
TEB products require widespread acceptance, by a significant portion of the
medical community, of the Company's TEB products as safe, efficacious and
cost-effective alternatives to invasive procedures. Widespread acceptance would
represent a significant change in practice patterns. Historically, some medical
professionals have indicated hesitancy in using TEB products, including
analog-based TEB monitors previously manufactured by the Company. Invasive
procedures, such as PAC, are generally accepted in the medical community and
have a long history of use.
The Company continues to sponsor clinical trials and gather data, the Company
currently has limited clinical data with which to demonstrate the clinical
benefits of its products. The Company is currently sponsoring clinical trials
which it hopes will demonstrate consistent clinical benefits resulting from the
use of its products (including reduced procedure time, reduced patient trauma
and lower costs). There can be no assurance that such clinical trials will have
a positive outcome or that a positive outcome in such trial would be sufficient
to enable acceptance of the BioZ Systems by the medical community.
The Company is unable to predict how quickly, if at all, its products may be
accepted by members of the medical community. Like most medical devices,
technological limitations make the BioZ Systems subject to inaccuracies where a
patient has certain identified clinical circumstances. Failure of the BioZ
Systems or any of the other Company's products to gain widespread acceptance in
the medical community, and to maintain such acceptance, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
COMPETITION AND TECHNOLOGICAL CHANGE. The Company competes with other entities
developing and marketing noninvasive cardiac function monitors. The Company is
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 the Company. Such competitors may
be able to devote greater resources to the development, promotion and sales of
their products than the Company. The current widespread acceptance of PAC, and
lack of widespread acceptance of TEB, is an important competitive disadvantage,
which the Company must overcome. In addition, current and potential competitors
of the Company may establish cooperative relationships with large medical
equipment companies to gain access to greater research and development or
marketing resources. Competition may result in price reductions, reduced gross
margins, and loss of market share, any of which could have a material adverse
effect on the Company's business, results of operations and financial condition.
There can be no assurance that the Company will be able to compete successfully.
In addition, the introduction by others of products embodying new technologies
and the emergence of new cardiac function monitoring equipment industry
standards could render the Company's products obsolete and unmarketable. Other
companies may develop and introduce products and processes competitive with or
superior to those of the Company. In addition, other technologies or products
may be developed that have an entirely different approach or means of
accomplishing the intended purposes of the Company's products. Accordingly, the
life cycles of the Company's products are difficult to estimate. To compete
successfully, management believes the Company must develop and introduce new
products that keep pace with technological developments, respond to evolving
consumer requirements and achieve market acceptance.
16
<PAGE> 17
RISK FACTORS (Continued)
There can be no assurance that the Company can satisfactorily and timely develop
and introduce those or any other additional products. Even if the Company
succeeds in developing and marketing products that achieve market acceptance,
there can be no assurance that competitors will not in the future develop and
market products that will replace those of the Company.
EARLY STAGE COMPANY AND PRODUCTS. Although not in fact a new company, currently
the Company faces many of the challenges characteristic of new companies in or
just emerging from the development phase. The BioZ Systems have required, and
any future products will require, substantial development efforts and compliance
with all governmental clearance/approval requirements. The Company may encounter
unforeseen technological or scientific challenges, which may force abandonment
or substantial change in the development of a specific product or process, or
technological change or product developments by others, any of which may have a
material adverse effect on the Company. Further, even after successful technical
development and receipt of governmental approval, a product may not achieve
commercial success.
ABILITY TO MANAGE GROWTH. The Company, if successful, will experience a period
of growth that would place a significant strain upon its managerial, financial
and operational resources. There can be no assurance that the Company's
infrastructure, systems, procedures or controls will be adequate to support the
Company's operations or that the Company's management will be able to achieve
the rapid execution necessary to fully exploit any future market opportunity for
the Company's products. The Company's future operating results will also depend
on its ability to expand its sales and marketing organizations, and fill its
support staff organization. If the Company is unable to manage expansion
effectively, the Company's business, results of operations and financial
condition could be materially and adversely affected. There can be no assurance,
however, that such expansion or growth will occur.
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL SHAREHOLDERS. Allen E. Paulson and
James C. Gilstrap, the co-chairmen of the Company, beneficially own, directly or
through CardioDynamics Holdings, LLC ("CDH") which they control, approximately
66.6% of the outstanding shares of the Company's common stock (including shares
owned by others which CDH has the right to vote). Accordingly, these persons,
individually and as a group, are able to control the Company and direct its
affairs and business, including any future issuance of common stock or other
securities by the Company, merger and acquisition decisions, declaration of
dividends and the election of directors. CDH also has a contractual right to
purchase at $0.25 per share the same number of shares of common stock as the
Company may issue from time to time. See "ITEM 11 - Security Ownership of
Certain Beneficial Ownership and Management."
DISTRIBUTOR NETWORK. The Company has distributorship agreements with specialty
regional distributors with expertise in distributing medical devices such as the
BioZ Systems. As the Company begins to expand its direct sales force to target
metropolitan areas, there can be no assurance that the Company will be able to
maintain satisfactory relationships with its distributors. Under the terms of
the distribution agreements, distributors have the right, under certain
circumstances (including the Company placing a direct sales representative in
the distributor's territory), to terminate the distribution agreement and return
demonstration and stocking inventory purchased from the Company. There can be no
assurance that the Company will not be required to take back any or all of the
BioZ Systems and supplies sold and refund amounts paid by distributors (net of
contracted depreciation and restocking charges). See "Description of Business -
Sales and Distribution."
17
<PAGE> 18
RISK FACTORS (Continued)
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is dependent upon
a limited number of key management and technical personnel. The loss of the
services of one or more of such key employees could have a material adverse
effect on the Company's business, financial condition, and results of
operations. In addition, the Company's success depends upon its ability to
attract and retain additional highly qualified sales, management, manufacturing
and R&D personnel. The Company faces intense competition in its recruiting
activities and there can be no assurance that the Company will be able to
attract and/or retain qualified personnel. See "PART III - Directors and
Executive Officers."
POTENTIAL VOLATILITY OF STOCK PRICE. The market prices of securities of emerging
companies, including CDIc, have historically been highly volatile. The market
price of the Company's common stock is likely to be highly volatile and could be
subject to wide fluctuations in response to various factors beyond the control
of the Company, including (i) quarterly variations in operating results, (ii)
announcements of technological innovations, new products or pricing by the
Company's competitors, (iii) changes in, or failure of the Company to meet,
financial estimates of securities analysts, (iv) the rate of adoption by
physicians of TEB technology in markets targeted by the Company, (v) timing of
patent and regulatory approvals, (vi) timing and extent of technological
advancements, (vii) results of clinical studies, (viii) sales of stock by
institutional holders or affiliates, (ix) lack of analyst coverage or
unfavorable coverage, (x) litigation or public concern as to the safety of the
Company's products; and (xi) general market conditions. In addition, the stock
market has experienced significant price and volume fluctuations that have
affected the market prices of equity securities of many medical device companies
and that often have been unrelated to the operating performance of such
companies. These broad market fluctuations may adversely affect the market price
of the Company's common stock.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES. The Company's commercial success
will depend in part on the availability of adequate reimbursement from
third-party health care 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 devise,
there can be no assurance that third-party payers including Medicare will cover
the device and related services, or they may place certain restrictions on the
circumstances in which coverage will be available. There can be no assurance
that the Company will be able to obtain a specific code for TEB reimbursement in
a reasonable time frame, or at all, in order to enable the Company to achieve
market acceptance of its products or to maintain price levels sufficient to
realize an appropriate return on the Company's investment. Further, there can be
no assurance that downward pricing pressure in the industry generally will not
negatively impact the Company's operations. The Company's business plan
contemplates an income stream from sales of higher-margin sensors toward an
installed base of Company monitors. The Company may be subject, however, to
price competition from other sensor manufacturers.
LIMITED FLOAT OF COMMON STOCK. The Company has a market float of approximately
11 million shares, which may not be adequate to provide market liquidity and
mitigate stock price volatility (see above). The Company shares are currently
quoted on the Nasdaq SmallCap Market, and the Company's objective is to have the
shares quoted on the Nasdaq National Market ("NNM"). However, there can be no
assurance that the Company will succeed in having the shares quoted on NNM or
that a more liquid or active public market for the common stock will develop or
be sustained.
18
<PAGE> 19
RISK FACTORS (Continued)
GOVERNMENT REGULATION. The Company's products and activities are subject to
extensive regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Delays in receipt of, or failure to obtain, regulatory
clearances and approvals, or any failure to comply with regulatory requirements,
could have a material adverse effect on the Company's business, financial
condition, and results of operations. See "Description of Business - Government
Regulation."
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE. While the
Company has taken, and will continue to take, what it believes are appropriate
precautions, there can be no assurance that it will avoid significant product
liability exposure. The nature of the Company's business exposes it to risks of
product liability or product recalls that are inherent in the design,
development, manufacture and marketing of medical devices, in the event that use
of the Company's products is alleged to have caused adverse effects on a patient
or such products are believed to be defective. Medical devices as complex as
those offered by the Company frequently contain errors or failures, especially
when first introduced or when new versions are released. The Company's products
are designed to be used in certain procedures where there may be 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.
Due to limited capital, the Company did not carry product liability insurance
during certain periods prior to May 15, 1995. Therefore, it has no coverage for
analog TEB monitors manufactured and sold prior to that time. Since then, the
Company has maintained product liability insurance at levels which it believes
to be sufficient and consistent with industry standards for companies with its
current sales levels. The Company intends to increase its $2,000,000 product
liability insurance policy limit as sales grow. There can be no assurance that
the Company's product liability insurance is adequate or that such insurance
coverage will continue to be available on commercially reasonable terms or at
all. In addition, product liability claims or recalls could result in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation or increased service and warranty costs.
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES. The Company believes it is
possible that international sales will represent a meaningful portion of revenue
in the future. This would require significant management attention and financial
resources and subject the Company to the risks of selling internationally. These
risks include unexpected changes in regulatory requirements, tariffs and other
barriers and restrictions, and an adverse effect from reduced protection for
intellectual property rights and the burdens of complying with a variety of
foreign laws. In addition, fluctuations in the rates of exchange could increase
the price in local currencies of the Company's products in foreign markets and
make the Company's products relatively more expensive than competitors' products
that may be denominated in local currencies.
DEPENDENCE ON THIRD PARTIES. The Company's strategy for development and
commercialization of certain of its products is dependent upon entering into
various arrangements with third parties and upon the subsequent success of these
parties in performing their obligations. There can be no assurance that the
Company will be able to negotiate acceptable arrangements in the future or that
such arrangements or its existing arrangements will be successful. The Company
has limited experience manufacturing products for commercial purposes and
currently does not have the capability to manufacture its BioZ Systems and
therefore is dependent on contract manufacturers for the production of such
products for development and commercial purposes. The manufacture of the
Company's products is subject to GMP regulations prescribed by the FDA.
19
<PAGE> 20
RISK FACTORS (Continued)
The Company relies on a single manufacturer for each of its products. In the
event that the Company is unable to obtain or retain third-party manufacturing,
it may not be able to continue commercialization of its products as planned.
There can be no assurance that the Company will be able to continue to obtain
adequate supplies of such products in a timely fashion at acceptable quality and
prices. Also, there can be no assurance that the Company will be able to enter
into agreements for the manufacture of future products with manufacturers whose
facilities and procedures comply with GMP and other regulatory requirements. The
Company's current dependence upon others for the manufacture of its products may
adversely affect future profit margins, if any, on the sale of those products
and the Company's ability to develop and deliver products on a timely and
competitive basis.
UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTH CARE REFORM. The health
care industry is undergoing fundamental changes resulting from political,
economic, and regulatory influences. In the United States, comprehensive
programs have been proposed that seek to (i) increase access to health care for
the uninsured, (ii) control the escalation of health care expenditures within
the economy, and (iii) use health care reimbursement policies to help control
the federal deficit. The Company anticipates that Congress and state
legislatures will continue to review and assess such proposals, and public
debate of these issues will likely continue. The Company cannot predict which,
if any, of such reform proposals will be adopted and when they might be adopted.
Other countries also are considering health care reform. Significant changes in
health care systems are likely to have a substantial impact over time on the
manner in which the Company conducts its business and could have a material
adverse effect on the Company's business, financial condition, results of
operations, and ability to market its products as currently contemplated.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY. The Company's patents and
proprietary technology may not be able to prevent effective competition by
others. Although the Company believes that it has effective patent protection,
no assurance can be given that the Company's products will not be found to
infringe the rights of others. Intellectual property litigation, whether
defensive or offensive, would have no certain outcome other than to drain the
Company's resources. See "Description of Business - Intellectual Property."
ITEM 2. DESCRIPTION OF PROPERTY
The Company is located in an approximately 19,000 square foot leased facility in
San Diego, California. This facility houses all of the Company's research,
development, manufacturing, marketing, sales and administrative activities
except for field and contract personnel.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
20
<PAGE> 21
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The common stock of the Company trades on the Nasdaq SmallCap market under the
symbol CDIC. The following table sets forth for the periods indicated the high
and low closing prices of the common stock as furnished by The Nasdaq Stock
Market(SM).
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDING NOVEMBER 30, 1997
Fourth Quarter .................... $ 4.63 $ 2.38
Third Quarter ..................... 4.94 3.09
Second Quarter .................... 4.09 2.81
First Quarter ..................... 4.00 3.16
YEAR ENDING NOVEMBER 30, 1996
Fourth Quarter .................... $ 4.88 $ 2.25
Third Quarter ..................... 4.38 2.00
Second Quarter .................... 4.07 0.85
First Quarter ..................... 1.01 0.86
</TABLE>
On February 20, 1998 there were approximately 500 holders of record of the
common stock.
The Company has not declared or paid any cash dividends on shares of its common
stock and does not anticipate paying any cash dividends on the common stock in
the foreseeable future. The Company currently intends to retain any future
earnings for use in the operation of its business.
21
<PAGE> 22
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements, Notes thereto, and other financial information included herein.
Certain statements set forth herein are forward-looking and involve risks and
uncertainties. For information regarding potential factors that could have a
material adverse effect on the Company's business, operating results, and
financial condition refer to Item I of this Form10-KSB, Description of Business
- - Risk Factors.
RESULTS OF OPERATIONS (Years referred to herein are fiscal years ended November
30)
FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996
The Company received FDA 510(k) marketing clearance for the BioZ(TM) System in
late November 1996. In addition, in September 1997, the Company received 510(k)
marketing clearance from the FDA for its Portable BioZ monitoring system and for
its proprietary Dynamic Impedance Signal Quantifier (DISQ) technology which
provides improved measurement of impedance waveforms and automatic electronic
calibration. These FDA clearances, provide the Company the opportunity to
commercialize the BioZ(TM) Systems, which could result in significantly
increased sales.
Despite the significant benefits and numerous applications of the BioZ Systems,
it is a "concept sale" that requires physicians to change habits (some of which
are reimbursed at a higher rate than TEB). In addition, the hospital buying
cycle can be long and difficult, particularly for a new product that is
unbudgeted. Consequently, the amount of time and effort required to penetrate
these markets, to the extent needed for the Company to be successful, is often
greater than the time and effort many of the distributor sales representatives
were willing to invest.
Net sales for fiscal 1997 increased to $477,588, up 226% from $146,655 recorded
in fiscal 1996. The increase in sales in 1997 is due to the commencement of
shipments of the Company's BioZ(TM) noninvasive cardiac function monitoring
system. Sales in the comparable periods of 1996 were of a prior product line.
During fiscal 1997, the Company established distribution agreements with
seventeen regional specialty distributors to represent the Company in the
hospital market. These distributors collectively covered 44 states, and employed
over 100 sales representatives. The Company shipped $1,423,048 of BioZ Systems
and disposable bioimpedance dual electrodes in fiscal 1997, primarily to its
network of specialty distributors for demonstration and stocking units.
During the third fiscal quarter of 1997, the Company terminated three
distribution agreements with underperforming distributors, and the Company
established a reserve for returns of $168,920 for anticipated returns of
demonstration and stocking units from these distributors. By the end of fiscal
1997, it was apparent that there was a need to broaden the sales channel. The
Company opted to add a direct sales force targeted at both the hospital and
outpatient markets in the United States. The Company determined that, in many
situations, a direct sales force can more effectively demonstrate the cost and
safety advantages of the BioZ over traditional invasive techniques. This is
accomplished, in part, by marketing to, and educating, health care professionals
and third-party payers, including HMOs, as to the positive cost advantages and
clinical outcome profiles of the BioZ Systems.
22
<PAGE> 23
RESULTS OF OPERATIONS (Continued)
Subsequent to the 1997 fiscal year end, the Company hired five direct sales
representatives and its four existing Territory Sales Managers have assumed
their new responsibilities as direct sales representatives. The Company intends
to retain a distributor channel for certain geographical areas and also
implement an aggressive hiring plan for as many as 30 direct sales
representatives to be placed in key metropolitan areas by the end of 1998. The
success of the direct sales approach will depend, to a large degree, on the
ability of the Company to identify, attract and retain qualified sales
representatives with successful medical device capital equipment sales
experience. In the outpatient market, the ability of the physician to obtain
adequate reimbursement for the procedure will play an important role in the
commercial acceptance of the BioZ Systems.
As the Company begins to expand its direct sales force in targeted metropolitan
areas, it recognizes that it may not be able to maintain satisfactory
relationships with its current regional specialty distributors. Under the terms
of the distribution agreements, distributors have the right, under certain
circumstances (including the Company placing a direct sales representative in
the distributor's territory), to terminate the distribution agreement and return
demonstration and stocking inventory purchased from the Company. Because the
Company may be required to take back BioZ Systems and unused supplies and refund
amounts paid by distributors (net of contracted depreciation and restocking
charges), the Company established a $776,540 reserve for distributor returns.
This reserve represents 100% of sales to domestic distributors which, as of
November 30, 1997, had not been resold to end-users. Of the reserve for returns,
$161,680 was applied against distributor accounts receivable as an allowance for
returns with the $614,860 balance classified as a current liability. Included in
inventory, is $367,367 of equipment at distributors which may be returned.
Subsequent to November 30, 1997, the Company terminated five distributor
agreements and agreed to take back $286,460 of equipment which had been fully
reserved.
The Company had a negative gross margin in both fiscal 1997 and 1996 primarily
due to expenses related to BioZ Systems built and shipped to distributors and to
clinical study sites for which no revenue has been recognized. The Company's
gross margins are expected to improve as the manufacturing capacity is more
fully utilized and direct sales to end users garner a larger share of the
overall sales mix.
Selling, general and administrative costs for the twelve month period ended
November 30, 1997 were $2,832,908, up 68% from $1,690,710 in the comparable
period of fiscal 1996. The Company increased its investment in sales and
marketing related activities by 121% in fiscal 1997 over 1996. The majority of
the increase was related to the costs associated with establishment of a network
of specialty distributors, addition of regional sales managers, development of
advertising and marketing materials for the BioZ Systems, and the addition in
June 1997, of a Chief Operating Officer to coordinate and direct the clinical,
sales and marketing teams. The Company's investment in sales activities is
expected to continue to increase as it expands its direct sales force and
develop selling and marketing materials customized for direct sales to both the
hospital and outpatient markets.
The Company continues to invest a significant portion of its resources into
research, clinical studies, further enhancements to the BioZ Systems, and new
product development. As a result, research and development expenses increased by
$654,351 or 96% in fiscal 1997 over fiscal 1996.
23
<PAGE> 24
RESULTS OF OPERATIONS (Continued)
The Company recorded $179,272 in interest income on funds available for
investment and $5,943 of interest expense in fiscal 1997 compared with interest
income of $13,282 and interest expense of $20,796 in fiscal 1996. In the first
fiscal quarter of 1997, the Company recognized a loss of $164,853 related to the
disposition of certain marketable securities. These securities had been held for
payment to preferred shareholders upon exercise of a right to redeem their
preferred shares for common stock and a pro-rata portion of the proceeds of the
marketable securities. Because the time for exercising the redemption right had
expired, the Company sold the securities to provide additional cash for
operating activities.
The Company incurred a net loss in 1997 of $4,278,088 or $.14 per common share
versus a net loss of $2,510,667 or $.11 per share in fiscal 1996. The fiscal
1997 increase in common shares was primarily due to the net issuance of
approximately 2.3 million shares in a private placement through EVEREN
Securities, Inc., in February and March 1997 and the automatic conversion in
August 1997 of the Company's 183,115 shares of preferred stock into common
stock.
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995
Net sales during the fiscal years ended November 30, 1996 and 1995 relate to the
Company's CDM 3000 and CDM 4000 monitors and electrodes which have now been
rendered obsolete by the BioZ System. Since CardioDynamics Holdings, LLC
purchased control of the Company in February 1995 and new management was brought
in shortly thereafter, the focus of the Company was on re-engineering the
product, further development of the technology, identification of a
manufacturing partner, implementation of quality and regulatory programs,
establishment of a medical advisory board, commencement of clinical trials and
development of a sales and marketing plan. During 1995 and 1996, the Company did
not emphasize efforts to sell its earlier generation, analog-based product line.
On November 26, 1996, the Company received Food and Drug Administration
clearance to market the BioZ System.
The net losses recorded by the Company in fiscal 1996 and 1995 were not
materially different. Included in cost of sales are inventory write-down and
obsolescence charges of $146,054 and $254,699 in fiscal 1996 and 1995,
respectively, related to the earlier generation equipment. Fiscal 1996 research
and development expenses include approximately $354,000 of consulting fees
related to the product redesign and regulatory programs instrumental in
achieving FDA 510(k) clearance for the BioZ System.
LIQUIDITY AND CAPITAL RESOURCES
To fund the Company's BioZ(TM) product commercialization, ongoing research and
development efforts, marketing programs, capital expenditures and working
capital requirements, the Company raised gross proceeds of approximately $7.2
million in a private placement of approximately 2.5 million shares of common
stock through EVEREN Securities, Inc. in February and March 1997.
Despite the Company's use of cash in operations, the overall cash and cash
equivalents balance increased by $1,949,159 in fiscal 1997 and working capital
increased to $2,720,160, up from $1,076,380 at November 30, 1996, due primarily
to the private placement. As a result of ramping up commercial activities,
accounts receivable increased by $181,006 in fiscal 1997 and $681,819 of cash
was used to build inventories for distributors, clinical trials and anticipated
sales to end users.
24
<PAGE> 25
LIQUIDITY AND CAPITAL RESOURCES (Continued)
In June 1997, the Company entered into a five year lease for a 19,000
square-foot manufacturing facility which also houses the Company's research,
development, marketing, sales and administrative activities. The lease commenced
on September 1, 1997 with current lease payments of $16,486 per month. In fiscal
1997, the Company invested $217,700 in property and equipment, principally for
computer equipment, and leasehold improvements on its' new manufacturing and
office facility.
To further assure the availability of financial resources and provide the
working capital required for growth, in February 1998, the Company established a
secured revolving credit line with a bank. The credit line provides for
borrowing of up to $2,000,000 at the bank's prime rate plus 0.25%.
In March 1998, the Company entered into an 18 month unsecured private line of
credit agreement with the co-chairmen of the Company's Board of Directors. Under
the terms of the agreement the Company may borrow up to $3,000,000 on an
as-needed basis with monthly interest-only payments at an annual interest rate
of 10.0%. Equity or debt financing to replace this credit agreement and to
provide additional capital will be necessary in the relatively near future.
Nonetheless, without additional debt or equity financing, the ability of the
Company to execute the transition to a direct sales strategy will be
constrained, due to the strategy's higher cash requirements. The Company expects
its operating losses to continue through at least the short term. Longer term,
the Company's liquidity will depend on its ability to successfully commercialize
the BioZ Systems and other diagnostic products and raise additional funds
through public or private financing, bank loans, collaborative relationships or
other arrangements. There can be no assurance that such additional funding will
be available on terms attractive to the Company, or at all.
The Company has federal operating loss carryforwards of approximately
$14,500,000. The Tax Reform Act of 1986 contains provisions which limit the
federal net operating loss carryforwards that can be used in any given year in
the event of certain occurrences, including significant ownership changes. A
valuation allowance has been recognized for the full amount of the deferred tax
asset created by these carryforwards.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share." This statement specifies the computation,
presentation, and disclosure requirements for earnings per share for entities
with publicly held common stock or potential common stock. This statement shall
be effective for financial statements for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted, however,
retroactive restatement is required. At this time, the Company does not believe
that this statement will have a significant impact on the financial position or
results of operations for the year ending November 30, 1998.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure." This statement shall be effective for financial statements
for both interim and annual periods ending after December 15, 1997. At this
time, the Company does not believe that this statement will have a significant
impact on the financial statement disclosures for the year ending November 30,
1998.
25
<PAGE> 26
NEW ACCOUNTING STANDARDS (Continued)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
This statement established standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general purpose financial statements. This statement shall be effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement established standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that enterprises report
selected information about operating segments in interim financial reports
issued to stockholders. This statement shall be effective for fiscal years
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated.
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk. The Company is addressing this risk by testing its current products
and designing Year 2000 capabilities into its new products, as well as upgrading
its financial and operating systems to be compliant with the Year 2000. The cost
of achieving Year 2000 compliance is not expected to be material to the
operations of the Company.
26
<PAGE> 27
ITEM 7. FINANCIAL STATEMENTS
[KPMG PEAT MARWICK, LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CardioDynamics International Corporation:
We have audited the accompanying balance sheet of CardioDynamics International
Corporation as of November 30, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements referred to above present fairly,
in all material respects, the financial position of CardioDynamics International
Corporation as of November 30, 1997, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK, LLP
San Diego, California
March 11, 1998
27
<PAGE> 28
[PETERSON & CO. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CardioDynamics International Corporation
We have audited the accompanying balance sheets of CardioDynamics International
Corporation (the "Company") as of November 30, 1996 and 1995, and the related
statements of operations, changes in shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CardioDynamics International
Corporation, as of November 30, 1996 and 1995, and the results of its
operations, changes in shareholders' equity and its cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ PETERSON & CO.
PETERSON & CO.
February 25, 1997
(except for Note 14, as to which the date
is March 6, 1997)
28
<PAGE> 29
CARDIODYNAMICS INTERNATIONAL CORPORATION
Balance Sheets
November 30, 1997 and 1996
<TABLE>
<CAPTION>
ASSETS (NOTES 4 AND 5) 1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,655,349 706,190
Investments in marketable securities -- 262,619
Accounts receivable, less allowance for doubtful accounts and returns of
$161,824 in 1997 and $7,461 in 1996 (notes 7 and 10) 51,568 24,925
Inventory, net (notes 2, 7 and 10) 906,111 293,629
Other current assets 137,735 68,336
------------ ------------
Total current assets 3,750,763 1,355,699
------------ ------------
Property and equipment, net (note 3) 244,654 109,632
Deposits 27,788 4,250
------------ ------------
Total assets $ 4,023,205 1,469,581
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 295,524 125,385
Accrued expenses 22,292 67,264
Accrued salaries, wages and benefits 83,632 28,882
Current maturities of long-term debt (note 4) 11,300 12,100
Customer deposits 2,995 23,012
Marketable securities held for redeemed preferred shares -- 22,676
Reserve for inventory returns (note 7) 614,860 --
------------ ------------
Total current liabilities 1,030,603 279,319
------------ ------------
Long-term debt, less current maturities (note 4) 26,523 37,822
------------ ------------
Shareholders' equity: (notes 4, 5 and 6)
Preferred stock, no par value; No shares authorized in 1997 and 500,000
shares authorized in 1996; no shares issued and outstanding in 1997 and
183,115 shares issued and outstanding at November 30, 1996 -- 457,791
Common stock, no par value; 50,000,000 shares authorized; issued and
outstanding 32,085,743 shares at November 30, 1997 and
29,581,696 shares at November 30, 1996 14,826,762 8,366,514
Unrealized loss on marketable securities -- (89,270)
Accumulated deficit (11,860,683) (7,582,595)
------------ ------------
Total shareholders' equity 2,966,079 1,152,440
------------ ------------
Commitments and contingencies (notes 7, 9 and 10)
Total liabilities and shareholders' equity $ 4,023,205 1,469,581
============ ============
</TABLE>
See accompanying notes to financial statements.
29
<PAGE> 30
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Operations
For the years ended November 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Net sales $ 477,588 146,655
Cost of sales 582,344 240,987
------------ ------------
Gross margin (104,756) (94,332)
Operating expenses:
Research and development 1,334,900 680,549
Selling, general, and administrative expenses 2,832,908 1,690,710
------------ ------------
Total operating expenses 4,167,808 2,371,259
------------ ------------
Loss from operations (4,272,564) (2,465,591)
Other income (expense):
Interest, net 173,329 (7,514)
Loss on sale of securities (164,853) --
Other, net (13,200) (36,762)
------------ ------------
(4,724) (44,276)
------------ ------------
Loss before income taxes (4,277,288) (2,509,867)
Income taxes (800) (800)
------------ ------------
Net loss $ (4,278,088) (2,510,667)
============ ============
Net loss per common share $ (.14) (.11)
============ ============
Weighted-average number of common and common equivalent shares outstanding 31,385,507 22,926,074
============ ============
</TABLE>
See accompanying notes to financial statements.
30
<PAGE> 31
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Shareholders' Equity
For the years ended November 30, 1997 and 1996
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance at November 30, 1995 246,793 $ 616,986 19,251,320 $ 4,919,858
Issuance of common stock -- -- 236,220 625,000
Issuance of common stock - professional
services -- -- 45,000 11,250
Issuance of common stock - related parties -- -- 9,948,000 2,487,000
Compensatory stock options granted -- -- -- 50,878
Preferred shares redeemed (63,678) (159,195) 63,678 136,519
Unrealized gain on marketable securities -- -- -- --
Exercise of Class A warrants -- -- 113 226
Exercise of Class B warrants -- -- 25,350 93,730
Exercise of Class C warrants -- -- 12,015 42,053
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at November 30, 1996 183,115 457,791 29,581,696 8,366,514
Issuance of common stock, net of issuance
costs and rescinded stock purchases -- -- 2,290,882 5,946,015
Issuance of common stock - upon exercise of
stock options -- -- 30,000 37,600
Compensatory stock options granted -- -- -- 18,642
Preferred shares converted (183,115) (457,791) 183,115 457,791
Unrealized loss on marketable securities -- -- -- --
Exercise of Class C warrants -- -- 50 200
Net loss -- -- -- --
----------- ----------- ----------- -----------
Balance at November 30, 1997 -- $ -- 32,085,743 $14,826,762
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
LOSS ON
MARKETABLE ACCUMULATED
SECURITIES DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance at November 30, 1995 (92,738) (5,071,928) 372,178
Issuance of common stock -- -- 625,000
Issuance of common stock - professional
services -- -- 11,250
Issuance of common stock - related parties -- -- 2,487,000
Compensatory stock options granted -- -- 50,878
Preferred shares redeemed -- -- (22,676)
Unrealized gain on marketable securities 3,468 -- 3,468
Exercise of Class A warrants -- -- 226
Exercise of Class B warrants -- -- 93,730
Exercise of Class C warrants -- -- 42,053
Net loss -- (2,510,667) (2,510,667)
----------- ----------- -----------
Balance at November 30, 1996 (89,270) (7,582,595) 1,152,440
Issuance of common stock, net of issuance
costs and rescinded stock purchases -- 5,946,015
Issuance of common stock - upon exercise of
stock options -- -- 37,600
Compensatory stock options granted -- -- 18,642
Preferred shares converted -- -- --
Unrealized loss on marketable securities 89,270 -- 89,270
Exercise of Class C warrants -- -- 200
Net loss -- (4,278,088) (4,278,088)
----------- ----------- -----------
Balance at November 30, 1997 -- (11,860,683) 2,966,079
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
31
<PAGE> 32
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Cash Flows
For the years ended November 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(4,278,088) (2,510,667)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 82,678 92,029
Loss on disposal of fixed assets -- 37,348
Loss on disposition of marketable securities 164,853 --
Provision for refurbishment of demonstration inventory units 69,337 73,766
Provision for doubtful receivables 154,363 7,575
Compensatory stock options granted 18,642 50,878
Changes in operating assets and liabilities:
Accounts receivable (181,006) 43,361
Inventory (681,819) (133,303)
Other current assets (69,399) (67,694)
Deposits (23,538) 2,365
Accounts payable 170,139 (60,642)
Accrued expenses (44,972) (17,268)
Accrued salaries, wages and related benefits 54,750 (18,975)
Customer deposits (20,017) (3,063)
Reserve for inventory returns 614,860 --
----------- -----------
Net cash used in operating activities (3,969,217) (2,504,290)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (217,700) (43,415)
Proceeds from sale of marketable securities 164,360 --
----------- -----------
Net cash used in investing activities (53,340) (43,415)
----------- -----------
Cash flows from financing activities:
Repayment of long-term debt (12,099) (12,805)
Proceeds from debt issuance to related party -- 1,800,000
Issuance of common stock 5,983,815 1,459,259
----------- -----------
Net cash provided by financing activities 5,971,716 3,246,454
----------- -----------
Net increase in cash and cash equivalents 1,949,159 698,749
Cash and cash equivalents at beginning of year 706,190 7,441
----------- -----------
Cash and cash equivalents at end of year $ 2,655,349 706,190
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 5,943 9,490
Cash paid for income taxes $ 800 800
Supplemental disclosures of noncash investing and financing activities:
Common stock issued upon redemption of preferred stock $ 457,791 136,519
Decrease in unrealized loss on marketable securities $ 89,270 3,468
Common stock issued upon conversion of long-term debt $ -- 1,800,000
Marketable securities held for redeemed preferred shares $ -- 22,676
</TABLE>
See accompanying notes to financial statements.
32
<PAGE> 33
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
CardioDynamics International Corporation (the "Company") develops,
manufactures and markets noninvasive digital heart monitoring devices
which provide continuous data on a wide range of hemodynamic parameters
(measurements of the heart's ability to deliver oxygen-rich blood
throughout the body). The Company's primary product, the BioZ(TM) System,
uses Thoracic Electrical Bioimpedance (TEB) technology to obtain data
which is typically available only through a time consuming, costly,
potentially dangerous invasive procedure called Pulmonary Artery
Catheterization (PAC). Since TEB monitoring is noninvasive, it eliminates
procedure risk and potentially decreases the length of a hospital stay,
thereby reducing patient cost. The Company was incorporated as a
California corporation in June 1980 as Bomed Medical Manufacturing Ltd.
and changed its name to CardioDynamics International Corporation in
October 1993.
LIQUIDITY
The Company has incurred significant operating losses and negative cash
flows from operations. Continuation of the Company's operations is
dependent upon the success of the Company's current and follow-on
products. The market for the Company's products is in a relatively early
stage of development, and there can be no assurance that the market will
ultimately develop or that the Company will be successful in marketing its
products.
Until such time, if ever, the Company is able to successfully market its
products and attain positive cash flow and profitability, the Company will
be dependent on outside financing sources to meet its liquidity needs.
There can be no assurance that such additional future funding will be
available on terms attractive to the Company, or at all.
CASH EQUIVALENTS
Cash equivalents consist of short-term money market funds and commercial
paper and are stated at cost, which approximates fair market value. The
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts which, at times,
may exceed the federally insured limits. The Company has not experienced
any losses in such accounts and management believes it places its cash on
deposit with financial institutions which are financially stable. At
November 30, 1997, the Company has cash deposits in excess of federally
insured limits totaling $275,062.
33
<PAGE> 34
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
INVESTMENTS IN MARKETABLE SECURITIES
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, Accounting for Certain Investments in Debt and Equity Securities,
management has classified the Company's investments as available-for-sale
securities in the accompanying financial statements. Available-for-sale
securities are carried at fair-value, with the unrealized gains and
losses, net of tax (if applicable), reported as a separate component of
shareholders' equity until realized. Realized gains and losses and
declines in value deemed to be other-than-temporary are charged to
operations, and a new cost basis for the security is established. The cost
of securities sold is based on the specific identification method.
Interest on securities available-for-sale is included in other expense,
net. As of November 30, 1996, the Company's investments consisted of
equity securities with an amortized cost of $351,889 and estimated fair
value of $262,619. During fiscal 1997, these equity securities were sold
for a loss of $164,853. The Company had no investments in marketable
securities as of November 30, 1997.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Leasehold improvements are
amortized using the straight-line method over the shorter of the remaining
lease term or the estimated useful life. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally 3 to 7 years.
REVENUE RECOGNITION
Revenue is recognized when a product is shipped or a service is provided
to the customer with appropriate provisions for returns and allowances.
During the first three quarters of 1997, the Company recognized revenue
upon shipment to distributors. As a result of the Company's decision to
sell its products primarily through a direct sales force (Note 7), a 100%
reserve for returns was established for sales to distributors which had
not, as of November 30, 1997, been resold to end users.
WARRANTY COST
The Company provides, by a current charge to operations, an amount it
estimates will be needed to cover future warranty obligations for products
sold during the year. The accrued liability for warranty costs is included
in accrued expenses in the accompanying balance sheets.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed in the period incurred.
ADVERTISING
All advertising costs are expensed in the period incurred. Advertising
costs, including trade show expenses, amounted to $329,354 and $137,895 in
1997 and 1996, respectively.
34
<PAGE> 35
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
PATENTS
Costs to obtain, maintain and defend patents are expensed in the period
incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
NET LOSS PER SHARE
Net loss per common share is based on the weighted-average number of
common shares outstanding during each period adjusted for the assumed
conversion of dilutive stock options and warrants using the treasury stock
method. In 1997 and 1996, the effects of warrants and stock options are
not considered in the calculation as they are anti-dilutive.
SIGNIFICANT CUSTOMERS
During fiscal years 1997 and 1996, the Company's sales to customers and
distributors outside of the United Stated accounted for 30% and 77% of net
sales, respectively. In 1997, one distributor accounted for 29% and one
end user accounted for 12% of total net sales. In 1996, the top four
distributors accounted for 64% of net sales of the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, cash equivalents, investments in marketable
securities, accounts receivable, accounts payable and accrued expenses are
considered to be representative of their fair values because of the
short-term nature of these financial instruments. The carrying amount of
long-term debt is a reasonable estimate of fair value as the loans bear
interest based on market rates available for debt with similar terms.
STOCK-OPTION PLAN
The Company accounts for its stock option plan in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price.
On December 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro
forma net income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied. The
Company has elected to continue to apply the provisions of APB Opinion No.
25 and provide the pro forma disclosure provisions of SFAS No. 123.
35
<PAGE> 36
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on January 1, 1996. This Statement requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amounts of the assets exceed the fair
values of the assets. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. Adoption of this
Statement did not have a material impact on the Company's financial
position or results of operations.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses,
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to certain prior year balances in
order to conform with current year presentation.
(2) INVENTORY
Inventory at November 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Electronic components and subassemblies $490,707 134,371
Finished goods -- 115,905
Demonstration units 48,037 43,353
Distributor inventory to be returned (note 7) 367,367 --
-------- --------
$906,111 293,629
======== ========
</TABLE>
The Company purchases most electronic components and subassemblies from
three suppliers. The Company believes that, should these suppliers not be
able to provide inventory to the Company, it would be able to obtain
alternate suppliers within a reasonable amount of time to meet production
demands.
36
<PAGE> 37
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
(3) PROPERTY AND EQUIPMENT
Property and equipment at November 30 consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Furniture $ 82,840 40,084
Exhibit booth 48,013 48,013
Other equipment 91,924 69,222
Lab equipment 68,122 48,381
Manufacturing equipment and fixtures 13,532 3,500
Sales equipment 55,040 48,917
Computers 10,814 7,664
Leasehold improvements 113,196 --
--------- ---------
483,481 265,781
Less accumulated depreciation and amortization (238,827) (156,149)
--------- ---------
$ 244,654 109,632
========= =========
</TABLE>
Depreciation and amortization expense for property and equipment for the
years ended November 30, 1997 and 1996 was $82,678 and $62,739, respectively.
(4) LONG-TERM DEBT
Long-term debt at November 30 consists of the following:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Capitalized equipment lease payable in 60 monthly installments of
$350 including interest at 18% through
March 31, 1997 $ -- 820
Prepetition and postpetition payroll taxes payable in installments
including interest at 8% through March 1999 12,823 24,102
Note payable to CardioDynamics Holdings, LLC, a related party,
collateralized by substantially all assets of the Company,
bearing interest at 7.5% per annum with interest-only payments
due quarterly, maturing March 31, 2000, convertible into common
stock at a rate of $.25 per share through March 30, 1998, $.30
per share through March 30, 1999, and $.36 per share thereafter 25,000 25,000
-------- --------
37,823 49,922
Less current maturities of long-term debt (11,300) (12,100)
-------- --------
$ 26,523 37,822
======== ========
</TABLE>
The aggregate maturities of long-term debt subsequent to November 30, 1997 are
as follows: 1998, $11,300; 1999, $1,523; and 2000, $25,000.
37
<PAGE> 38
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
(5) SHAREHOLDERS' EQUITY
During February 1995, the Company entered into an agreement with a related
party, CardioDynamics Holdings, LLC ("CDH"), a California limited
liability company, for the purchase of approximately 37.6% of the
Company's common stock. In exchange for the issuance of these shares, the
Company received $225,000. Additionally, the Company issued a five-year
secured promissory note (the "CDH note") in the amount of $100,000. In
fiscal 1996 and 1997, the CDH note was amended to increase the loan
amount, establish a per share conversion price of $0.25 per share, subject
to adjustment under specified circumstances, and change the maturity date
to March 31, 2000. In March 1996, CDH advanced $1,800,000 under the CDH
note. This advance was converted into 7,200,000 shares of common stock of
the Company in June 1996 at a rate of $0.25 per share. The CDH note is
collateralized by an unsubordinated interest in substantially all of the
assets of the Company. Advances under the CDH note accrue interest at 7.5%
with interest-only payable quarterly through maturity at March 31, 2000.
At any time after February 6, 1997, the CDH note is convertible into the
shares of the Company's common stock at CDH's option at predetermined
conversion prices. Additionally, CDH obtained the right to purchase, at
$0.25 per share, the same number of shares of common stock as the Company
may from time to time issue to others. At November 30, 1997 and 1996
$25,000 was outstanding under this note.
At various times during fiscal 1996, a shareholder and board member
purchased a total of 2,300,000 shares of common stock and another
shareholder and board member purchased a total of 360,000 shares of common
stock all from the Company for $0.25 cash per share.
On March 6, 1997, the Company completed the offering of 2,527,102 shares
of common stock in a $7.2 million private placement. EVEREN Securities,
Inc. served as placement agent for 2,298,950 shares ($6.6 million), and
another 228,152 shares ($0.6 million) were sold pursuant to a related
offering. After issuance costs of approximately $550,000, the Company
received net proceeds of approximately $6,650,000. Under the terms of the
Private Placement Memorandum (the "Memorandum"), the Company registered
such common stock for public resale.
In accordance with the terms of their stock purchase agreements, several
private investors rescinded their purchases of a total of 236,220 shares
of common stock (purchased in fiscal 1996 for $0.6 million cash) and
reinvested the $0.6 million in 228,152 shares of common stock, issued
under and subject to the terms of the Memorandum, at a price of $2.85 per
share.
The Company converted all outstanding preferred stock to common stock
during 1997.
38
<PAGE> 39
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
At November 30, 1997, the Company has outstanding warrants to purchase
shares of common stock as follows:
<TABLE>
<CAPTION>
COMMON EXERCISE EXERCISABLE
STOCK SHARES PRICE ON OR BEFORE
------------ ------------ -----------------
<S> <C> <C> <C>
EVEREN Securities, Inc. 276,514 $ 3.56 March 6, 2002
Series C warrants 231,747 6.00 December 31, 1997
-----------
Total warrants exercisable for
common stock 508,261
===========
</TABLE>
On May 30, 1996, the Company reduced the exercise price of Series B and
Series C warrants to $3.50 per share through July 8, 1996. During fiscal
1996, 15,341 and 12,015 shares of Series B and Series C warrants were
exercised, netting proceeds of $53,694 and $42,053, respectively.
Additionally, during the 1996 fiscal year, 10,009 shares of Series B
warrants were exercised at an exercise price of $4.00 per share. All
Series C warrants outstanding as of November 30, 1997 expired unexercised
on December 31, 1997.
(6) STOCK OPTIONS
In 1995, the shareholders approved a Stock Option/Stock Issuance Plan (the
"Option Plan") that provides for the granting of options to officers,
directors and key employees to purchase the Company's common stock. Under
the Option Plan, as amended in 1997, 2,529,000 shares of common stock have
been reserved for granting of options at 100% of the fair market value of
the Company's common stock on the date of grant.
The Option Plan also provides for monthly grants, at fair market value to
each director of the Company, of options to purchase 1,000 shares of
Company common stock as payment for directors fees for each full month of
service. The options are exercisable immediately upon grant and expire
upon the earlier of ten years from the date of grant or two years after
the director terminates his position on the Board. During 1997 and 1996,
156,000 and 103,000 options were granted to the Board of Directors.
The Option Plan also provides for grants of options and issuances of stock
in exchange for professional services. During 1997, the Company granted a
total of 35,000 non-qualified stock options to four individuals in
exchange for professional services. The options were granted at an
exercise price equal to the fair market price on the grant date, vest over
two years and expire ten years from the date of grant. Consultation fees
of $18,642 were recognized in the accompanying statement of operations for
the year ended November 30, 1997 as a result of these grants.
At November 30, 1997, there were 1,055,000 shares available for grant
under the Option Plan. The per share weighted-average fair value of stock
options granted during 1997 and 1996 was $1.81 and $0.97 on the date of
grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 1997 - expected dividend yield 0%, risk-free
interest rate of 6.21%, expected volatility of 67% and an expected life of
4 years; 1996 - expected dividend yield 0%, risk-free interest rate of
6.26%, expected volatility of 67% and an expected life of 4 years.
39
<PAGE> 40
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
The Company applies APB Opinion No. 25 in accounting for its Option Plan
and, accordingly, no compensation cost has been recognized in the
financial statements for its stock options issued to officers, directors,
and employees. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Net loss, as reported $ (4,278,088) (2,510,667)
Pro forma net loss $ (4,627,069) (2,662,271)
Net loss per share, as reported $ (.14) (.11)
Pro forma net loss per share $ (.15) (.12)
</TABLE>
Pro forma net loss reflects only options granted since November 30, 1995.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net income
amounts presented above because compensation cost is reflected over the
options' vesting period of up to 10 years, and compensation cost for
options granted prior to December 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
---------- --------
<S> <C> <C>
Balance at November 30, 1995 186,000 $ 1.26
Granted 495,000 1.73
---------- --------
Balance at November 30, 1996 681,000 1.60
Granted 829,000 3.23
Exercised (30,000) 1.25
Forfeited (28,000) 3.12
Expired (8,000) 3.44
---------- --------
Balance at November 30, 1997 1,444,000 $ 2.50
========== ========
</TABLE>
40
<PAGE> 41
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
At November 30, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $.95 - $4.56 and 7.7
years. At November 30, 1997 and 1996, the number of options exercisable
was 534,500 and 291,170, respectively, and the weighted-average exercise
price of those options was $2.25 and $1.53, respectively. The following
table sets forth information regarding options outstanding at November 30,
1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE WEIGHTED-
REMAINING EXERCISE AVERAGE
RANGE OF NUMBER CONTRACTUAL PRICE EXERCISE
EXERCISE PRICES OUTSTANDING LIFE EXERCISABLE NUMBER PRICE
- ---------------- ----------- ----------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.95 - 1.31 485,000 5.9 $ 1.08 265,000 $ 1.16
2.16 - 3.19 608,000 8.9 3.03 124,000 2.89
3.25 - 4.56 351,000 8.1 3.55 145,500 3.69
----------- -------
1,444,000 7.7 2.50 534,500 2.25
=========== =======
</TABLE>
During June 1995, the Company entered into an employment agreement with
its Chief Executive Officer ("CEO"). Under the terms of the agreement, the
CEO was granted 500,000 non-transferable stock options (not under the
Option Plan) at an exercise price of $0.50 per share. The options vest if
the quoted market price of the Company's stock attains specified levels.
Upon the attainment of the specified levels, the Company will record
compensation cost. During 1997, the CEO voluntarily agreed to reduce the
number of options to 250,000. At November 30, 1997, none of the options
are vested. The options expire June 15, 2005.
(7) REVENUE RECOGNITION AND DISTRIBUTOR AGREEMENTS
During fiscal 1997, the Company established exclusive distribution
agreements with seventeen regional specialty distributors to represent the
Company in the U.S. hospital market. Together these distributors covered
44 states and employed over 100 sales representatives. During the third
quarter of fiscal 1997, the Company terminated three of these distributor
agreements and established a reserve for returns of $168,920 for
anticipated returns of demonstration and stocking units from these
underperforming distributors. By the end of fiscal 1997, it was apparent
that there was a need to broaden the sales channel. The Company opted to
add a direct sales force targeted at both the hospital and outpatient
markets in the majority of the U.S. The Company believes that in many
situations, a direct sales force can more effectively leverage the cost
and safety advantages of the BioZ over traditional invasive techniques by
marketing to and educating health care professionals and third-party
payers, including HMOs, as to the positive cost advantages and positive
clinical outcome profiles of the BioZ.
Despite the significant benefits of the BioZ Systems and their numerous
applications, it is a "concept sale" that requires physicians to change
old habits (some of which are reimbursed at a higher rate than the BioZ
System). In addition, the hospital buying cycle can be long and difficult,
particularly for a product that is unbudgeted. Consequently, the amount of
time and effort required to penetrate these markets is often greater than
the time and effort many of the distributor sales representatives were and
are willing to invest.
41
<PAGE> 42
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
Subsequent to the fiscal year-end, the Company has hired five direct sales
representatives, and its four existing Territory Sales Managers have
assumed their new responsibilities as direct sales representatives. Key
major metropolitan areas have been targeted for placing additional direct
sales representatives. The Company has developed an aggressive hiring plan
that calls for as many as 30 direct sales representatives to be in place
by September 1998. The remaining distributors will be supported in the
field by CDIc's Clinical Application Specialists, and by the direct sales
representatives.
As the Company begins to expand its direct sales force in targeted
metropolitan areas, it recognizes that it may not be able to maintain
satisfactory relationships with its current regional specialty
distributors. Under the terms of the distribution agreements, distributors
have the right, under certain circumstances (including the Company placing
a direct sales representative in the distributor's territory), to
terminate the distribution agreement and return demonstration and stocking
inventory purchased from the Company. Because the Company may be required
to take back BioZ Systems and unused supplies, and refund amounts paid by
distributors (net of contracted depreciation and restocking charges), the
Company established a $776,540 reserve for distributor returns which
represents 100% of sales to domestic distributors which had not, as of
November 30, 1997 been resold to end users. During 1997, a $161,680
reserve for returns was applied against distributor accounts receivable as
an allowance for returns with the $614,860 balance classified as a current
reserve for inventory returns on the accompanying balance sheet. Included
in inventory is $367,367 of equipment at distributors, which may be
returned. Subsequent to November 30, 1997, the Company terminated five
distributor agreements and agreed to take back $286,460 of equipment,
which had been fully reserved.
(8) INCOME TAXES
Income taxes in the accompanying statements of operations are comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Federal $ -- --
State 800 800
---------- ----------
$ 800 800
========== ==========
</TABLE>
At November 30, 1997, the Company had federal net operating loss
carryforwards of approximately $14,500,000. This amount may be subject to
significant limitations under IRC Section 382.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of November 30, 1997 are as
follows:
42
<PAGE> 43
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements, Continued
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,208,800
Inventory principally due to the reserve 346,207
Other 164,193
-----------
Total gross deferred tax assets 5,719,200
Valuation allowance (5,719,200)
-----------
Net deferred tax assets $ --
===========
</TABLE>
A 100% valuation allowance has been applied to these net deferred tax
assets. Accordingly, no tax benefit has been recorded for the years ended
November 30, 1997 and 1996.
(9) LEASES
In June 1997, the Company entered into a five-year operating lease for a
19,000 square-foot manufacturing facility which also houses the Company's
research, development, marketing, sales and administrative activities. The
Company also has several noncancelable operating leases, primarily for
computer equipment, that expire over the next three to five years. Rental
expense for operating leases was $114,102 and $53,620 during 1997 and
1996, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of November 30,
1997 are:
<TABLE>
<CAPTION>
YEAR ENDING NOVEMBER 30,
------------------------
<S> <C>
1998 $ 261,970
1999 256,932
2000 245,069
2001 212,772
2002 165,293
----------
Total minimum lease payments $1,142,036
==========
</TABLE>
(10) SUBSEQUENT EVENTS
In February 1998, the Company obtained a secured revolving credit line
with a bank. The credit line provides for borrowing of up to $2,000,000 at
the bank's prime rate plus 0.25%. Under the terms of the agreement, the
Company is required to meet certain loan covenants, including maintenance
of minimum; debt to net worth ratio, tangible net worth, liquidity ratio,
quick ratio and maximum quarterly losses. The credit line is
collateralized by the accounts receivable and inventory of the Company.
On March 11, 1998, the Board of Directors approved a line of credit from
two of the Company's shareholders under which the shareholders will
provide for maximum borrowings to the Company of $3 million. Interest on
outstanding amounts accrue at an annual rate of 10% and interest-only
payments are due in monthly installments. The maturity date of the line of
credit is September 30, 1999, upon which outstanding principal amounts,
including accrued interest, are due. The Company shall repay this line of
credit from the net proceeds of any future-arranged debt or equity
financing.
43
<PAGE> 44
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In June 1997, the Audit Committee of the Board of Directors recommended, and the
Board of Directors approved, the engagement of the independent certified public
accounting firm of KPMG Peat Marwick LLP to audit the financial statements of
the Company for the fiscal year ended November 30, 1997. Accordingly, that firm
was so engaged on June 26, 1997 and the engagement of Peterson & Co. as the
Company's independent auditors was discontinued on June 26, 1997.
The report of Peterson & Co. on the Company's financial statements for the
fiscal year ended November 30, 1995 did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to audit scope or
accounting principles. The report did contain, however, an explanatory paragraph
regarding the Company's ability to continue as a going concern. The Company's
financial statements for the fiscal year ended November 30, 1996 did not contain
an adverse opinion or a disclaimer of opinion and was not qualified or modified
as to uncertainty, audit scope or accounting principles.
There were no disagreements between the Company and Peterson & Co. on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which, if not resolved to the satisfaction of
Peterson & Co., would have caused Peterson & Co. to make reference to the matter
in their reports, and Peterson & Co. never advised the Company of any event of
the kind mentioned in Item 304(d)(1)(iv)(B) of Regulation S-B.
The Company had not consulted with KPMG Peat Marwick LLP during the prior two
years or subsequent interim period prior to June 26, 1997 on either the
application of accounting principles to a specific completed or contemplated
transaction, or the type of opinion KPMG Peat Marwick LLP might issue on the
Company's financial statements. No written or oral advice was provided to the
Company by KPMG Peat Marwick LLP that was an important factor considered by the
Company in reaching a decision as to any accounting, auditing or financial
reporting issues.
The Company requested Peterson & Co. to furnish it with a letter addressed to
the Securities and Exchange Commission stating whether or not Peterson & Co.
agrees with the above statements. The furnished letter states that Peterson &
Co. agrees with the above statements.
44
<PAGE> 45
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the Company's directors and executive officers, together with
certain information regarding them, as of February 20, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Allen E. Paulson 75 Co-Chairman of the Board of Directors
James C. Gilstrap 61 Co-Chairman of the Board of Directors
Richard E. Otto 48 Chief Executive Officer and Director
Rhonda F. Pederson 37 President
Stephen P. Loomis 37 Vice President, Chief Financial Officer
Richard E. Trayler 47 Chief Operating Officer
Dennis G. Hepp 49 Chief Technology Officer
Markus J. Osypka, Ph.D. 34 Vice President, Research
Stephenson M. Dechant 42 Director
Nicholas V. Diaco, M.D. (1) 58 Director
Louis P. Ferrero 55 Director
Cam L. Garner 49 Director
Richard O. Martin, Ph.D. 58 Director
Michael D. Padilla 49 Director
Ronald R. Taylor 50 Director
</TABLE>
- ----------
(1) Chairman of the Medical Advisory Board
During the past five years, the business experience, principal occupations and
employment of the directors and executive officers of the Company have been as
follows:
Allen E. Paulson. Mr. Paulson has been Co-Chairman of the Board since June 1996
and Director since February 1995. Mr. Paulson owns numerous companies having
substantial investments in diverse industries, including aircraft; energy
exploration; horse breeding, training, and racing; automobile dealerships;
gaming and entertainment; and real estate and resorts. Mr. Paulson is the
founder and Chairman Emeritus of Gulfstream Aerospace Corporation, the world's
leading designer, manufacturer and marketer of large corporate jets. He has
earned numerous awards including the Horatio Alger Award for Distinguished
Americans, the American Academy of Achievement's Golden Plate Award, as well as
five honorary doctorates.
45
<PAGE> 46
James C. Gilstrap. Mr. Gilstrap served as Chairman of the Board of the Company
from February 1995 to June 1996, and has been Co-Chairman of the Board since
June 1996. Mr. Gilstrap is retired from Jefferies & Company, where he served as
Senior Executive Vice President, Partner, and Member of the Executive Committee.
Mr. Gilstrap is past President of the Dallas Securities Dealers as well as a
past member of the Board of Governors of the National Association of Securities
Dealers, Inc.
Richard E. Otto. Mr. Otto has been the Chief Executive Officer of the Company
since June 1995 and a Director since September 1996. He also served as President
from June 1995 to June 1997. Mr. Otto has more than 27 years of healthcare
experience including as an entrepreneurial executive in the identification,
development and distribution of high technology devices for the cardiology and
cardiovascular markets. From September 1987 to May 1994, Mr. Otto was with
Sensor Technology, Inc., a privately held medical distribution company, of which
he was a founder. In 1994, the company was sold to a division of Eli Lilly and
Company. Prior to that time, Mr. Otto held positions with Medtronic, Inc.,
Cardiac Pacemakers, Inc., Intermedics, Inc. and Eli Lilly & Company. Mr. Otto
holds a Bachelor of Science degree from the University of Georgia and serves on
the Boards of Directors of the Georgia Chapter of the Leukemia Society, the
College Football Hall of Fame Foundation, and the University of Georgia Student
Educational Fund.
Rhonda F. Pederson. Ms. Pederson has been the President of the Company since
June 1997. She served as Vice President of Operations from June 1995 to January
1996 and as Chief Operating Officer from February 1996 to May 1997. Ms. Pederson
has over 14 years of healthcare experience, including medical product
development, rapid growth transitions, sales and marketing, and executive
management. From July 1992 until May 1995, Ms. Pederson held the positions of
President/Chief Executive Officer, Vice President of Sales and Marketing, and
Board member at Culture Technology, Inc., a privately held biotechnology company
specializing in culturing autologous skin for burn patients. Ms. Pederson has
also held positions at General Electric Medical Systems and Quinton Instrument
Company, both medical device subsidiaries of publicly held companies. Ms.
Pederson holds a Bachelor of Pharmacy from Washington State University and is
completing a Masters in Business Administration, Executive Program, from UCLA
Anderson School of Business in Los Angeles.
Stephen P. Loomis. Mr. Loomis joined the Company in September 1996 as Vice
President of Finance and has held the positions of Vice President of Finance,
Chief Financial Officer and Corporate Secretary since April 1997. Mr. Loomis is
a Certified Public Accountant with more than 12 years experience in finance and
business development with both publicly traded and privately held companies.
From 1993 until joining the Company, he served as Director of Financial
Reporting at the Kinko's Inc. group of companies. From 1988 to 1993, Mr. Loomis
was the Chief Financial Officer for Terminal Data Corporation, a publicly traded
high speed document imaging company. Prior to that, Mr. Loomis was with Peat
Marwick Main & Co. He earned his Bachelor of Science Degree in Business
Administration from California State University at Northridge.
Richard E. Trayler. Mr. Trayler joined the Company in June 1997 as Chief
Operating Officer. From 1985 to 1997, Mr. Trayler held positions of Regional and
Divisional Sales Manager at Quinton Instrument Company, a medical device
subsidiary of American Home Products Corporation. He has also held positions at
the Heart Institute for CARE, the University of Washington, and the Boeing
Company where he assisted cardiologists in the clinical assessment of cardiac
patients. Mr. Trayler was also the founder of the Health Enrichment Institute
and the Amarillo Cardiopulmonary Rehabilitation Program, specializing in
cardiology/health hazard appraisals and the development of cardiopulmonary
exercise programs. Mr. Trayler earned a Bachelor of Science Degree from Texas
A&M University, a Master of Science Degree from the University of Washington,
and a Master of Christian Leadership Degree from Western Conservative Baptist
Seminary (Phoenix Seminary).
46
<PAGE> 47
Dennis G. Hepp. Mr. Hepp became Chief Technology Officer of the Company in June
1997. Mr. Hepp has served as a consultant to the Company since July 1995. He has
over 28 years experience in cardiovascular clinical medicine and the medical
device industry. From 1974 to 1986, Mr. Hepp held various engineering and
management positions at Medtronic, Inc. In 1989, Mr. Hepp founded Rivertek
Medical Systems, Inc., Minneapolis, Minnesota, which serves as an engineering
consulting firm to medical device manufacturers, including Guidant Corporation
and Medtronic, Inc., as well as emerging medical technology companies such as
CDIc. Mr. Hepp holds a Bachelor of Electrical Engineering from the University of
Detroit.
Markus J. Osypka, Ph.D. Dr. Osypka joined the Company's Engineering Department
in January 1996, was promoted to Vice President of Engineering in March 1996 and
has been Vice President of Research since June 1997. Dr. Osypka has more than
nine years experience in the medical device industry in the U.S. and Germany.
From 1993 to 1995, he held the positions of Director of Product Management and
Director of International Sales at Dr. Ing P. Osypka GmbH, a privately held
medical device manufacturer in Germany. Prior to that, he earned a Ph.D. in
Electrical Engineering at the University of Karlsruhe in Germany, where he did
extensive research in Electrical Impedance Tomography.
Stephenson M. Dechant. Mr. Dechant has been a Director of the Company since
February 1995 and served as Chief Financial Officer of the Company from February
1995 to March 1997 and Corporate Secretary from February 1995 to July 1997. Mr.
Dechant has been Chief Financial Officer for many of Mr. Paulson's companies
since 1992. His previous experience involves over 16 years in financial
management and reporting for high net worth individuals and companies primarily
involved in the food industry, including Dole Fresh Fruit and Chart House
Enterprises. Mr. Dechant graduated from the University of Southern California
with a Bachelor of Science in Business Administration and from the University of
San Diego with a Masters in Business Administration.
Nicholas V. Diaco, M.D. Dr. Diaco has served as a Director of the Company and
Chairman of the Company's Medical Advisory Board since February 1995. Currently,
he is the Director of the Coronary Care Unit and the Heart Catheterization
Laboratory at St. John's Hospital and Health Center in Santa Monica, California.
Dr. Diaco has practiced cardiology for over 26 years. He is a Fellow of the
American College of Cardiology and is board certified in Cardiovascular Disease.
He serves as a Clinical Assistant Professor of Medicine at the University of
California, Los Angeles. Dr. Diaco was a Chief of Internal Medicine in the U.S.
Air Force and has published numerous articles on the effects of exercise on the
heart. He received his M.D. with honors from Hahnemann Medical College and
Hospital in Pennsylvania.
Louis P. Ferrero. Mr. Ferrero has served as a Director of the Company since July
1997. Mr. Ferrero is currently Chairman and Chief Executive Officer of Conseco
Global Investments, an investment company, which identifies emerging investment
opportunities for Conseco, Inc., a major insurance holding company. Before
joining Conseco Global Investments, Mr. Ferrero was Chairman and Chief Executive
Officer of Anacomp, Inc., a full-service provider of computer and micrographics
equipment, service and supplies. Mr. Ferrero holds a Bachelor of Economics and
Marketing degree from the University of Florida.
47
<PAGE> 48
Cam L. Garner. Mr. Garner has served as a Director of the Company since July
1997. Mr. Garner has been Chairman, President and Chief Executive Officer of
Dura Pharmaceuticals, Inc., a respiratory products company, since 1990. Prior to
joining Dura Pharmaceuticals, Inc., Mr. Garner was Senior Vice President of
Sales and Marketing with Hybritech, Inc., a division of Eli Lilly & Co. Mr.
Garner serves as Director for Trega Biosciences, Inc., Safeskin Corporation and
Spiros Development Corporation. Mr. Garner earned a Masters Degree in Business
Administration from Baldwin-Wallace College and a Bachelor of Arts degree in
Biology from Virginia Wesleyan.
Richard O. Martin, Ph.D. Dr. Martin has served as a Director of the Company
since July 1997. Dr. Martin is currently Chairman and Chief Executive Officer of
Physio-Control Corporation, a medical device company which designs, manufactures
and sells external defibrillators and heart monitors. Prior to joining
Physio-Control Corporation, Dr. Martin was Vice President of Cardiovascular
Business Development with Sulzer Medica and has held several management
positions at Intermedics, Inc. and Medtronic, Inc. Dr. Martin serves on the
Boards of Maxxim Medical, Inc., SeaMED Corporation, Encore Medical and is
Chairman of the Board of the Medical Device Manufacturers Association and the
American Heart Association, Washington affiliate. Dr. Martin earned a Doctorate
in Electrical/ Biomedical Engineering at Duke University.
Michael D. Padilla. Mr. Padilla has served as a Director of the Company since
1995. Mr. Padilla is a partner with the law firm Thorsnes, Bartolotta, McGuire &
Padilla. He has practiced law in San Diego since 1972, specializing in personal
injury, product liability and medical malpractice litigation. He is a member of
the Consumer Attorney Associations in both California and the local branch in
San Diego. Mr. Padilla received his J.D. from the University of San Diego School
of Law.
Ronald R. Taylor. Mr. Taylor has served as a Director of the Company since
November 1997. Mr. Taylor founded Pyxis Corporation and, from 1987 to 1996,
served as its Chairman, President, and Chief Executive Officer. Pyxis
Corporation was a pioneer of healthcare automation and information management
services as well as pharmacy management services to hospitals and outpatient
facilities. Prior to founding Pyxis, Mr. Taylor held management positions at
Hybritech, Inc. and Allergan Pharmaceuticals. Mr. Taylor currently serves as a
Director on the Boards of Watson Pharmaceuticals, Inc., Allelix
Biopharmaceuticals, VIA Medical Corp., SCS Corporation, FluidSense Corporation,
Woodside Biomedical and MedicaLogic, Inc. Mr. Taylor received a Bachelor of Arts
degree from the University of Saskatchewan, and a Masters degree from the
University of California at Irvine.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Except as set forth below, the Company believes that each person who, at any
time during the fiscal year ended November 30, 1997, was a director, officer, or
beneficial owner of more than 10% of a class of registered equity securities of
the Company filed on a timely basis all reports required by Section 16(a) of the
Securities Exchange Act.
48
<PAGE> 49
ITEM 10. EXECUTIVE COMPENSATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION
The following table provides information regarding the annual and long-term
compensation earned for services rendered in all capacities to the Company for
the fiscal years ended November 30, 1995, 1996 and 1997 of those persons who
were, at November 30, 1997 (i) the Chief Executive Officer and (ii) the other
executive officers of the Company, whose aggregate direct remuneration from the
Company during the fiscal year ended November 30, 1997 exceeded $100,000 ("Named
Officers"). None of the Company's other executive officers had, in fiscal 1997,
total annual salary and bonus exceeding $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------
AWARDS PAYOUTS
---------- ----------
SECURITIES
ANNUAL COMPENSATION(1) UNDERLYING
NAME AND ----------------------- OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SARS (#) PAYOUTS($) COMPENSATION($)
- ------------------ ---- ---------- --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard E. Otto 1997 101,271 -0- 50,000 -0- 4,000(2)
Chief Executive 1996 122,870 -0- -0- -0- -0-
Officer 1995 87,500(3) -0- 500,000 -0- -0-
Rhonda F. Pederson 1997 111,308 17,228 75,000 -0- 14,000(4)
President 1996 95,000 -0- 150,000 -0- -0-
1995 38,750(5) -0- -0- -0- -0-
Stephen P. Loomis 1997 103,416 22,849 70,000 -0- 3,000(2)
Vice President 1996 18,025(6) -0- 80,000 -0- -0-
Finance, Chief 1995 n/a n/a n/a n/a n/a
Financial Officer
</TABLE>
- ----------
(1) Employee benefits provided to each of the Named Officers under various
Company programs do not exceed the disclosure thresholds established under
the SEC rules and are therefore not included.
(2) Amount represents Company paid allowance for automobile expenses.
(3) Represents compensation earned by Mr. Otto from his employment with the
Company commencing in June 1995.
(4) Amount represents Company paid allowance for automobile expenses and
lodging.
(5) Represents compensation earned by Ms. Pederson from her employment with
the Company commencing in June 1995.
(6) Represents compensation earned by Mr. Loomis from his employment with the
Company commencing in September 1996.
49
<PAGE> 50
The following table provides information regarding option exercises during the
fiscal year ended November 30, 1997, as well as information with respect to
unexercised options to purchase the Company's common stock granted to the Named
Officers in fiscal 1997 and prior years under the 1995 Employee Stock
Option/Stock Issuance Plan ("1995 Plan") and held by them at November 30, 1997.
None of the Named Officers exercised any stock options during fiscal 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
% OF TOTAL
OPTIONS GRANTED
OPTIONS TO EMPLOYEES EXERCISE EXPIRATION
NAME GRANTED IN FISCAL 1997 PRICE(1) DATE
- ---------------------- ------- --------------- -------- ----------
<S> <C> <C> <C> <C>
Richard E. Otto 10,000 1.2 % $ 3.25 4/2/2007
40,000 4.8 % $ 3.09 6/9/2007
Rhonda F. Pederson 75,000 9.0 % $ 3.09 6/9/2007
Stephen P. Loomis 70,000 8.4 % $ 3.09 6/9/2007
</TABLE>
- ----------
(1) All options were granted at fair market value (closing price for the
Company's common stock as reflected on The NASDAQ Stock Market on the date
of grant).
The following table provides further information regarding the grants of stock
options under the 1995 Plan during the fiscal year ended November 30, 1997 to
the Named Officers. No stock appreciation rights were granted during fiscal
1997.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING VALUE(1) OF
UNEXERCISED UNEXERCISED
OPTIONS/SARS IN-THE-MONEY
AT FY-END (#) OPTIONS/SARS AT FY-
SHARES ACQUIRED VALUE EXERCISABLE/ END ($) EXERCISABLE/
NAME ON EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE(2)
- ---- --------------- ------------ ------------- --------------------
<S> <C> <C> <C> <C>
Richard E. Otto - 0 - - 0 - - 0 - / 300,000 - 0 - / 531,250
Rhonda F. Pederson - 0 - - 0 - - 0 - / 225,000 - 0 - / 243,750
Stephen P. Loomis - 0 - - 0 - 50,000 / 100,000 - 0 - / - 0 -
</TABLE>
- ----------
(1) Represents the difference between the closing price of the Company's
common stock as reported on NASDAQ on November 30, 1997 and the exercise
price of the options.
(2) These options could not be exercised by the respective Named Officers as
of November 30, 1997 and future exercisability is subject to certain
vesting provisions including specific stock price thresholds and remaining
in the employ of the Company for up to three additional years.
50
<PAGE> 51
EMPLOYMENT AGREEMENT
The Company entered into a Compensation and Employment Agreement, dated June 16,
1995, with its Chief Executive Officer, Richard E. Otto. Under the terms of the
agreement Mr. Otto was granted 500,000 non-transferable stock options (not under
the 1995 Plan) at an exercise price of $0.50 per share. The options vest as the
quoted market price of the Company's common stock attains and holds specific
levels. At November 30, 1997, none of the options were vested. The options
expire June 15, 2005. The Agreement provided for a salary of $150,000 per year
and standard fringe benefits. In January 1996, Mr. Otto voluntarily reduced his
annual salary to $120,000 per year and then again in June 1997, he further
reduced it to $72,000 per year and reduced the number of stock options to
250,000. Although the Agreement may be modified or terminated by either party at
will, the stock options will survive termination of the Agreement unless Mr.
Otto's employment terminates due to cause (as defined in the Agreement),
voluntary resignation, death or permanent disability.
LONG TERM INCENTIVE PLANS
The Company does not have any long-term incentive plans (as defined in the
Securities and Exchange Commission regulations).
DIRECTORS' FEES
Each non-employee director receives 1,000 automatic monthly stock options
granted at fair market value (or, in the case of 10% shareholders Mr. Paulson
and Mr. Gilstrap, at 110% of fair market value) on the last day of the month for
each full month of service as a director of the Company. On August 1, 1997, Cam
L. Garner, a Director of the Company, entered into a consulting agreement with
the Company whereby Mr. Garner is paid a monthly fee of $2,083.33 and received a
one-time grant of 5,000 stock options to purchase the Company's common stock in
exchange for consulting services to the Company. Total fees paid to Mr. Garner
in fiscal 1997 were $8,333.32.
51
<PAGE> 52
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following are the only persons known by the Company to own beneficially, as
of February 20, 1998, five percent (5%) or more of the outstanding shares of its
common stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
NAME AND ADDRESS OF ----------------------------------
BENEFICIAL OWNER NUMBER (1) PERCENTAGE (2)
- ------------------- ---------- --------------
<S> <C> <C>
Allen E. Paulson (3) 18,009,983 54.9%
P.O. Box 9660
Rancho Santa Fe, CA 92067
James C. Gilstrap (4) 8,116,894 24.7%
5067 Shore Drive
Carlsbad, CA 92008
Nicholas V. Diaco, M.D. (5) 4,971,546 15.1%
1302 - 20th Street, Suite 400
Santa Monica, CA 90404
Joseph F. Diaco, M.D. (6) 4,685,546 14.3%
4700 North Habana Ave., Suite 403
Tampa, FL 33614
CardioDynamics Holdings, LLC (7) 4,180,240 12.8%
P.O. Box 9660
Rancho Santa Fe, CA 92067
Edge Financial Group, Inc. (8) 2,471,068 7.6%
16225 Park Ten Place, Suite 380
Houston, TX 77084
Joe C. Richardson, Jr. (9) 2,206,929 6.8%
P.O. Box 8246
Amarillo, TX 79114
</TABLE>
- ----------
(1) Except as indicated the footnotes to this table, the persons named in the
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws, where applicable.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
(3) Includes 4,180,240 shares of common stock beneficially owned by CDH, of
which Mr. Paulson is a member with a majority interest. Mr. Paulson
disclaims beneficial ownership of these shares except to the extent of his
individual ownership interest in CDH. See footnote (7). Also includes
30,000 shares of common stock Mr. Paulson beneficially owns, by virtue of
his right to acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days. Excludes 3,000,000 shares of
common stock owned by Mr. Paulson's sons; Mr. Paulson disclaims beneficial
ownership of such shares.
52
<PAGE> 53
(4) Includes 4,180,240 shares of common stock beneficially owned by CDH, of
which Mr. Gilstrap is a member with a minority interest. Mr. Gilstrap
disclaims beneficial ownership of these shares except to the extent of his
individual ownership interest in CDH. See footnote (7). Includes 1,015,000
shares held in the Jim and Sue Gilstrap Family Limited Partnership. Also
includes 30,000 shares of common stock Mr. Gilstrap beneficially owns, by
virtue of his right to acquire such shares from the Company under stock
options now exercisable or exercisable within 60 days. Excludes 65,000
shares of common stock owned by Mr. Gilstrap's daughters; Mr. Gilstrap
disclaims beneficial ownership of such shares.
(5) Includes 4,180,240 shares of common stock beneficially owned by CDH, of
which Dr. Nicholas Diaco is a member with a minority interest. Dr. Diaco
disclaims beneficial ownership of these shares except to the extent of his
individual ownership interest in CDH. See footnote (7). Also includes
30,000 shares of common stock Dr. Diaco beneficially owns, by virtue of
his right to acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days.
(6) Includes 4,180,240 shares of common stock beneficially owned by CDH, of
which Dr. Joseph Diaco is a member with a minority interest. Dr. Diaco
disclaims beneficial ownership of these shares except to the extent of his
individual ownership interest in CDH. See footnote (7).
(7) Includes 2,243 shares of common stock over which CDH exercises sole voting
and investment power, and 4,177,997 shares of common stock over which CDH
exercises sole voting power, but no investment power. Also includes
100,000 shares of common stock issuable upon conversion of a Note issued
by the Company.
(8) Includes 1,446,549 shares of common stock beneficially owned by Medical
Assets, LLC, of which Edge Financial Group, Inc. is a member. Edge
Financial Group, Inc. disclaims beneficial ownership of these shares
except to the extent of its ownership interest in Medical Assets, LLC.
Medical Assets, LLC exercises sole investment power, but no voting power,
over all its shares of common stock. See footnote (9). Edge Financial
Group, Inc. has investment power, but not voting power, with respect to
all it's shares.
(9) Includes 1,446,549 shares of common stock beneficially owned by Medical
Assets, LLC, of which Mr. Richardson is a member. Mr. Richardson disclaims
beneficial ownership of these shares except to the extent of his ownership
interest in Medical Assets, LLC. See footnote (8). Mr. Richardson. has
investment power, but not voting power, with respect to all his shares.
53
<PAGE> 54
SECURITY OWNERSHIP OF MANAGEMENT
COMMON STOCK
The following table sets forth the beneficial ownership of common stock of the
Company as of February 20, 1998 by each director and by all directors and
executive officers of the Company as a group. Each such person has a business
address, care of the Company
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------
NAME NUMBER (1) PERCENT (2)
- ---------------------------------------- ---------- ------------
<S> <C> <C>
Stephenson M. Dechant (3) 41,000 *
Nicholas V. Diaco, M.D. (4) 4,971,546 15.1%
Louis P. Ferrero (5) 6,000 *
Cam L. Garner (6) 14,000 *
James C. Gilstrap (7) 8,116,894 24.7%
Dennis G. Hepp (8) 98,500 *
Stephen P. Loomis (9) 50,000 *
Richard O. Martin, Ph.D. (10) 6,000 *
Markus J. Osypka, Ph.D. (11) 40,000 *
Richard E. Otto (12) 50,000 *
Michael D. Padilla (13) 36,000 *
Allen E. Paulson (14) 18,009,983 54.9%
Rhonda F. Pederson - 0 - *
Ronald R. Taylor (15) 2,000 *
Richard E. Trayler - 0 - *
All Directors and executive
officers as a group - (15 persons) (16) 22,881,443 70.0%
</TABLE>
- ----------
*Less than 1%
(1) Except as indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by
them, subject to community property laws, where applicable. Share
ownership in each case includes shares issuable on exercise of
certain outstanding options as described in the footnotes below.
(2) Percentage of ownership is calculated pursuant to SEC Rule
13d-3d(1).
54
<PAGE> 55
(3) Includes 40,000 shares of common stock Mr. Dechant beneficially
owns, by virtue of his right to acquire such shares under stock
options now exercisable or exercisable within 60 days.
(4) Includes 4,180,240 shares of common stock beneficially owned by CDH,
of which Dr. Nicholas Diaco is a member with a minority interest.
Dr. Diaco disclaims beneficial ownership of these shares except to
the extent of his individual ownership interest in CDH. See footnote
(16). Also includes 130,000 shares of common stock Dr. Diaco
beneficially owns, by virtue of his right to acquire such shares
from the Company under stock options now exercisable or exercisable
within 60 days.
(5) Includes 6,000 shares of common stock Mr. Ferrero beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(6) Includes 6,000 shares of common stock Mr. Garner beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(7) Includes 4,180,240 shares of common stock beneficially owned by CDH,
of which Mr. Gilstrap is a member with a minority interest. Mr.
Gilstrap disclaims beneficial ownership of these shares except to
the extent of his individual ownership interest in CDH. See footnote
(16). Includes 1,015,000 shares held in the Jim and Sue Gilstrap
Family Limited Partnership. Also includes 30,000 shares of common
stock Mr. Gilstrap beneficially owns, by virtue of his right to
acquire such shares from the Company under stock options now
exercisable or exercisable within 60 days. Excludes 65,000 shares of
common stock owned by Mr. Gilstrap's daughters; Mr. Gilstrap
disclaims beneficial ownership of such shares.
(8) Includes 98,500 shares of common stock Mr. Hepp beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(9) Includes 50,000 shares of common stock Mr. Loomis beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(10) Includes 6,000 shares of common stock Mr. Martin beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(11) Includes 40,000 shares of common stock Mr. Osypka beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(12) Includes 10,000 shares of common stock Mr. Otto beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(13) Includes 30,000 shares of common stock Mr. Padilla beneficially
owns, by virtue of his right to acquire such shares under stock
options now exercisable or exercisable within 60 days.
(14) Includes 4,180,240 shares of common stock beneficially owned by CDH,
of which Mr. Paulson is a member with a majority interest. Mr.
Paulson disclaims beneficial ownership of these shares except to the
extent of his individual ownership interest in CDH. See footnote
(16). Also includes 30,000 shares of common stock Mr. Paulson
beneficially owns, by virtue of his right to acquire such shares
from the Company under stock options now exercisable or exercisable
within 60 days. Excludes 3,000,000 shares of common stock owned by
Mr. Paulson's sons; Mr. Paulson disclaims beneficial ownership of
such shares.
(15) Includes 2,000 shares of common stock Mr. Taylor beneficially owns,
by virtue of his right to acquire such shares under stock options
now exercisable or exercisable within 60 days.
(16) Shares beneficially owned include shares held by entities affiliated
with certain directors as described above in the footnotes (but do
not include any shares more than once).
55
<PAGE> 56
PREFERRED STOCK
The Company converted all preferred stock to common stock during fiscal 1997.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two years, CardioDynamics Holdings, LLC and its members engaged
in several significant transactions with the Company, substantially all
resulting in the issuance of unregistered common stock or convertible note
amounts convertible (and later converted) into common stock at $0.25 per share.
Of the Company's outstanding shares of common stock, currently CDH owns 2,243
shares and has the right under a Note to obtain an additional 100,000 shares
upon conversion. members of CDH individually own 18,473,009 shares of common
stock of the Company (aside from CDH's own holdings); of the members' shares,
Allen E. Paulson owns 13,699,743, James C. Gilstrap owns 3,806,654 and Nicholas
V. Diaco, M.D. owns 561,306. At February 20, 1998, CDH and its members together
are the beneficial owners of 70% of the common stock of the Company.
In March 1998, the Company entered into an 18 month unsecured private line of
credit agreement with Allen E. Paulson and James C. Gilstrap. Under the terms
of the agreement the Company may borrow up to $3,000,000 on an as-needed basis
with monthly interest-only payments at an annual interest rate of 10.0%. The
Company will repay this line of credit from the net proceeds of any
future-arranged debt or equity financing.
Prior to becoming an executive officer of the Company in June 1997, Dennis G.
Hepp served as a consultant and vendor to the Company since July 1995 through
the company he founded in 1989, Rivertek Medical Systems, Inc., located in
Minneapolis, Minnesota. Rivertek, which is 100% owned by Mr. Hepp and his wife,
provides engineering consulting to medical device manufacturers, and continues
to be one of the Company's largest vendors. In fiscal 1996 and fiscal 1997, the
Company paid $219,232 and $238,278, respectively, to Rivertek.
56
<PAGE> 57
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT INDEX
The following exhibits are attached to this Report and are incorporated
herein by reference:
EXHIBIT TITLE
- ------- -----
2.1 Fourth Amended Plan of Reorganization. (Incorporated by reference from
November 30, 1994 Form 10-KSB.)
2.2 Purchase Agreement dated February 7, 1995 between the Company and
CardioDynamics Holdings, LLC. (Incorporated by reference from February
28,1995 Form 10-QSB.)
3.1 Bylaws, as amended through May 15, 1995. (Incorporated by reference from
May 31, 1995 Form 10-QSB.)
3.2 Restated Articles of Incorporation as filed October 9, 1997.
4.2 Secured Convertible Promissory Note, dated February 7, 1995, in favor of
CardioDynamics Holdings, LLC. (Incorporated by reference from February
28,1995 Form 10-QSB.)
4.4 First Amended and Restated Secured Convertible Promissory Note, dated
March 30, 1995 in favor of CardioDynamics Holdings, LLC. (Incorporated
by reference from May 31, 1995 Form 10-QSB.)
4.5 Second Amended and Restated Secured Convertible Promissory Note, dated
May 19, 1995 in favor of CardioDynamics Holdings, LLC. (Incorporated by
reference from May 31, 1995 Form 10-QSB.)
4.6 Third Amended and Restated Secured Convertible Promissory Note, dated
March 31, 1996 in favor of CardioDynamics Holdings, LLC. (Incorporated
by reference from May 31, 1996 Form 10-QSB.)
4.7 Fourth Amended and Restated Secured Convertible Promissory Note, dated
June 30, 1996 in favor of CardioDynamics Holdings, LLC. (Incorporated by
reference from August 31, 1996 Form 10-QSB.)
4.8 Fifth Amended and Restated Secured Convertible Promissory Note, dated
February 1, 1997 between CardioDynamics Holdings, LLC and the Company.
(Incorporated by reference from February 28, 1997 Form 10-QSB.)
57
<PAGE> 58
(a) EXHIBIT INDEX (Continued)
EXHIBIT TITLE
- ------- -----
10.1 Amendment to Purchase Agreement, dated March 31, 1996, between the
Company and CardioDynamics Holdings, LLC, (Incorporated by reference
from May 31, 1996 Form 10-QSB.)
10.2 Purchase Agreement. (Incorporated by reference from November 30, 1996
Form 10- KSB.)
10.3 Secured Convertible Promissory Note. (Incorporated by reference from
November 30, 1996 Form 10-KSB.)
10.4 Promissory Note. (Incorporated by reference from November 30, 1996 Form
10-KSB.)
10.5 Security Agreement, dated February 7, 1995 between the Company and
CardioDynamics Holdings, LLC. (Incorporated by reference from February
28,1995 Form 10-QSB.)
10.6 Patent Security Agreement, dated February 7, 1995 between the Company
and CardioDynamics Holdings, LLC. (Incorporated by reference from
February 28, 1995 Form 10-QSB.)
10.8.1 Offer to Grant Irrevocable Proxy and Agreement and Mutual General
Release, dated February 2, 1995 between the Company and DaVinci
Scientific Corporation. (Incorporated by reference from February 28,
1995.)
10.8.2 February 3, 1995 extension letter. (Incorporated by reference from
February 29, 1995 Form 10-QSB.)
10.8.3 Notice to DaVinci Scientific Corporation, dated February 7, 1995.
(Incorporated by reference from February 28, 1995 Form 10-QSB.)
10.10* Compensation and Employment Agreement with Richard E. Otto.
(Incorporated by reference from August 31, 1995 Form 10-QSB.)
10.11* Consulting Services Agreement, dated August 1, 1997, between Cam L.
Garner and the Company.
10.14 International Distribution Agreement, dated June 20, 1996, between the
Company and Landice International Corporation (Incorporated by reference
from August 31, 1996 Form 10-QSB.)
10.15 Stock Issuance Agreement with Alan Charles Newman and Janet Marie
Newman, Trustees, dated October 23, 1996. (Incorporated by reference
from November 30, 1996 Form 10-KSB.)
10.16 Stock Issuance Agreement with Suzy W. Duff and Wallace E. Duff, Trustee,
dated November 20, 1996. (Incorporated by reference from November 30,
1996 Form 10-KSB.)
10.17 Engagement letter with EVEREN Securities, Inc., dated November 15, 1996.
(Incorporated by reference from November 30, 1996 Form 10-KSB.)
- ----------
* This management contract or compensatory plan or arrangement is required to
be filed as an exhibit.
58
<PAGE> 59
(a) EXHIBIT INDEX (Continued)
EXHIBIT TITLE
- ------- -----
10.18 Warrants to purchase 276,514 shares of CardioDynamics International
Corporation common stock to EVEREN Securities, Inc. dated February 26,
1997 and March 6, 1997. (Incorporated by reference from February 28,
1997 Form 10-QSB.)
10.19 Form of Stock Purchase Agreement for 1997 EVEREN private placement.
(Incorporated by reference from February 28, 1997 Form 10-QSB.)
10.20 Distribution Agreement, dated March 27, 1997, between the Company and
Kol Bio Medical Instruments, Inc. (Incorporated by reference from May
30, 1997 Form 10-QSB.)
10.21 Lease between AGBRI Nancy Ridge, LLC and the Company dated June 20,
1997. (Incorporated by reference from August 31, 1997 Form 10-QSB.)
10.22 1995 Stock Option/Stock Issuance Plan, as amended June 10, 1997.
(Incorporated by reference from August 31, 1997 Form 10-QSB.)
10.23 Amendment No. 1 to Service Agreement among Rivertek Medical Systems,
Inc., Dennis G. Hepp and the Company, dated July 25, 1997. (Incorporated
by reference from August 31, 1997 Form 10-QSB.)
16.1 Letter dated June 26, 1997 from Peterson & Co. (Incorporated by
reference from June 26, 1997 Form 8-K.)
23.1 Consent of Independent Auditors, KPMG Peat Marwick, LLP
23.2 Consent of Independent Auditors, Peterson & Co.
27.0 Financial Data Schedule
- ----------
* This management contract or compensatory plan or arrangement is required to
be filed as an exhibit.
(b) REPORTS ON FORM 8-K:
None.
59
<PAGE> 60
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: March 12, 1998 CARDIODYNAMICS INTERNATIONAL CORPORATION
By: /s/ Richard E. Otto
------------------------------------------
Richard E. Otto
Director and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Richard E. Otto Director and Chief March 12, 1998
- ------------------------------------ Executive Officer
Richard E. Otto
/s/ Stephen P. Loomis Vice President of Finance, March 12, 1998
- ------------------------------------ Chief Financial Officer
Stephen P. Loomis (Principal Accounting Officer)
/s/ Stephenson M. Dechant Director March 12, 1998
- ------------------------------------
Stephenson M. Dechant
/s/ Nicholas V. Diaco Director March 12, 1998
- ------------------------------------
Nicholas V. Diaco, M.D.
/s/ Louis P. Ferrero Director March 12, 1998
- ------------------------------------
Louis P. Ferrero
Director
- ------------------------------------
Cam L. Garner
/s/ James C. Gilstrap Director March 12, 1998
- ------------------------------------
James C. Gilstrap
Director
- ------------------------------------
Richard O. Martin, Ph.D.
Director
- ------------------------------------
Michael D. Padilla
/s/ Allen E. Paulson Director March 12, 1998
- ------------------------------------
Allen E. Paulson
/S/ Ronald R. Taylor Director March 12, 1998
- ------------------------------------
Ronald R. Taylor
</TABLE>
60
<PAGE> 1
EXHIBIT 3.2
RESTATED ARTICLES OF INCORPORATION OF
CARDIODYNAMICS INTERNATIONAL CORPORATION
Rhonda F. Pederson and Steve P. Loomis hereby certify that:
1. They are the President and Secretary, respectively, of
CardioDynamics International Corporation, a California corporation.
2. The Articles of Incorporation of this corporation as amended to the
date hereof are as follows:
"ARTICLE ONE: The name of the corporation is: CardioDynamics
International Corporation.
ARTICLE TWO: The purpose of this corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of California other than the banking business, the trust
company business, or the practice of a profession permitted to be incorporated
by the California Corporations Code.
ARTICLE THREE: This corporation shall have one class of authorized
capital stock. The title of such class is Common Stock. The authorized number of
shares of Common Stock is 50,000,000.
ARTICLE FOUR: No director of this Corporation shall be liable for
monetary damages in an action by or in the right of the Corporation for breach
of a director's duties to this Corporation and its shareholders, as set forth in
Section 309 of the California Corporations Code, provided however that:
(a) This provision does not eliminate or limit the liability of a
director of this Corporation: (i) for acts or omissions that involve
intentional misconduct or a knowing or culpable violation of law, (ii) for
acts or omissions that a director of this Corporation believes to be
contrary to the best interests of this Corporation or its shareholders or
that involves the absence of good faith on the part of a director of this
Corporation, (iii) or any transaction from which a director of this
Corporation derives an improper personal benefit, (iv) for acts or
omissions that show a reckless disregard of the director's duty to this
Corporation or its shareholders 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 this Corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused
pattern of inattention that amounts to an abdication of the director's
duty to this Corporation or its shareholders, (vi) under Section 310 of
the California Corporations Code, or (vii) under Section 316 of the
California Corporations Code;
(b) This provision eliminating liability shall not eliminate or
limit the ability 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.
<PAGE> 2
This Corporation is authorized to provide indemnification of its
agents (as defined in Section 317 of the California Corporations Code) for
breach of duty to the Corporation and its stockholders 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."
3. The foregoing restated Articles of Incorporation have been duly
approved and were entitled to be approved by the Board of Directors alone
because this certificate does not alter or amend the articles in any respect.
We further declare under penalty of perjury under the laws of the
State of California that the matters set forth in this certificate are true and
correct of our own knowledge.
DATED: October 9, 1997
/s/ Rhonda F. Pederson
-----------------------------------------
Rhonda F. Pederson, President
/s/ Steve P. Loomis
-----------------------------------------
Steve P. Loomis, Secretary
-2-
<PAGE> 1
EXHIBIT 10.11
CONSULTING SERVICES AGREEMENT
August 1, 1997
Following is the agreement between Cam L. Garner (the "Consultant") and
CardioDynamics International Corporation, a California corporation (together
with its successors and assigns, the "Company"), with respect to consulting
services of Consultant for the Company:
1. Consultant agrees to render consulting services ("Services") to the
Company, upon request by the Company, for the term of this Agreement.
Consultant's duties shall include, but are not limited to, those duties set
forth in Attachment A hereto and such other duties as the Company may from time
to time prescribe. Consultant shall report directly to the President of the
Company and shall provide Services in accordance with the instructions of the
President, and with such reasonable instructions given to Consultant by any
other officer of the Company.
2. Consultant shall be paid a monthly fee of $2,083.33 for performing
Services under this Agreement. In addition, the Company shall reimburse
Consultant for reasonable long distance travel (transportation, lodging, and
meals) and telephone expenses Consultant is required to incur in providing the
Services. All long-distance travel and lodging will be coach class or equivalent
and must be authorized in writing by the Company in advance. The foregoing fees
and expense reimbursements are Consultant's sole compensation for rendering
Services to the Company.
3. Consultant's performance of Services under this Agreement shall be
conducted with due diligence and in full compliance with the highest
professional standards of practice in the industry. Consultant shall comply with
all applicable laws and Company safety rules in the course of performing the
Services.
4. Consultant is an independent contractor and is solely responsible
for all taxes, withholdings, and other similar statutory obligations, including,
but not limited to, Workers' Compensation Insurance; and Consultant agrees to
defend, indemnify and hold Company harmless from any and all claims made by any
person or entity on account of an alleged failure by Consultant to satisfy any
such tax or withholding obligations.
5. Consultant has no authority to act on behalf of or to enter into any
contract, incur any liability or make any representation on behalf of the
Company, and Consultant agrees not to purport to do any of such things.
6. Consultant will indemnify and hold Company harmless as well as
defend Company against any and all loss, liability, damage, settlements, claims,
demands or suits
62
<PAGE> 2
plus related costs and expenses to persons or property that arise (directly or
indirectly) from acts or omissions of Consultant, or breach of any term or
condition of this Agreement.
7. In consideration of the mutual covenants and agreements herein set
forth, the parties further agree as follows:
a. Consultant understands that the Company possesses and will
possess Proprietary Information which is important to its business. For purposes
of this Agreement, "Proprietary Information" is information that was or will be
developed, created, or discovered by or on behalf of the Company, or which
become or will become known by, or was or is conveyed to the Company (including,
without limitation, "Results" as defined above), which has commercial value in
the Company's business. "Proprietary Information" includes, but is not limited
to, information about trade secrets, computer programs, software, code,
algorithms, designs, technology, ideas, know-how, processes, formulas,
compositions, data, techniques, improvements, inventions (whether patentable or
not), works of authorship, business and product development plans, the salaries
and terms of compensation of Company employees and other consultants, customers
and other information concerning the Company's actual or anticipated business,
research or development, or which is received in confidence by or for the
Company from any other person. Consultant understands that the consulting
arrangement between Consultant and the Company creates a relationship of
confidence and trust between Consultant and the Company with respect to
Proprietary Information.
b. Consultant understands that the Company possesses or will
possess "Company Materials" which are important to its business. For purposes of
this Agreement, "Company Materials" are documents or other media or tangible
items that contain or embody Proprietary Information or any other information
concerning the business, operations or plans of the Company, whether such
documents have been prepared by Consultant or by others. "Company Materials"
include, but are not limited to, blueprints, drawings, photographs, charts,
graphs, notebooks, customer lists, computer disks, tapes or printouts, sound
recordings and other printed, typewritten or handwritten documents, as well as
samples, prototypes, models, products and the like.
c. All Proprietary Information and all title, patents, patent
rights, copyrights, mask work rights, trade secret rights, and other
intellectual property and rights anywhere in the world (collectively "Rights")
in connection therewith shall be the sole property of the Company. Consultant
hereby assigns to the Company any Rights Consultant may have or acquire in such
Proprietary Information. At all times, both during the term of this Agreement
and after its termination, Consultant will keep in confidence and trust and will
not use or disclose any Proprietary Information or anything relating to it
without the prior written consent of an officer of the Company. Consultant
acknowledges that any disclosure or unauthorized use of Proprietary Information
will constitute a material breach of this Agreement and cause substantial harm
to the Company for which damages would not be a fully adequate remedy, and,
therefore, in the event of any such
63
<PAGE> 3
breach, in addition to other available remedies, the Company shall have the
right (without posting any bond or other security) to obtain temporary,
preliminary and/or permanent injunctive relief.
d. All Company Materials shall be the sole property of the
Company. Consultant agrees that during the term of this Agreement, Consultant
will not remove any Company Materials from the business premises of the Company
or deliver any Company Materials to any person or entity outside the Company,
without the Company's prior express written consent. Consultant further agrees
that, immediately upon the Company's request and in any event upon completion of
the Services, Consultant shall deliver to the Company all Company Materials, any
document or media which contains Results, apparatus, equipment and other
physical property or any reproduction of such property, excepting only
Consultant's copy of this Agreement. At all times before or after completion of
the Services, the Company shall have the right to examine the Results and any
materials relating thereto to ensure Consultant's compliance with the provisions
of this Agreement.
e. During the term of this Agreement and for one (1) year
thereafter, Consultant will not encourage or solicit any employee or consultant
of the Company to leave the Company for any reason.
f. Consultant represents that performance of all the terms of
this Agreement will not breach any agreement to keep in confidence proprietary
information acquired by Consultant in confidence or in trust prior to the
execution of this Agreement. Consultant has not entered into and Consultant
agrees not to enter into, any agreement either written or oral that conflicts or
might conflict with Consultant's performance of the Service under this
Agreement.
g. Consultant agrees that during the term of this Agreement
Consultant will not engage in any employment, business, or activity that in any
way involves or is in any way competitive with the business or proposed business
of the Company, and Consultant will not assist any other person or organization
in competing with the Company or in preparing to engage in competition with the
business or proposed business of the Company.
8. This Agreement will terminate on December 31, 1998, unless
terminated earlier pursuant to Section 9 of this Agreement.
9. Consultant agrees that this Agreement may be terminated by either
the Company or the Consultant at any time, for any reason, with or without
cause, by giving written notice to the other party; termination to be effective
upon the other party's receipt of notice. Termination shall not relieve either
party of liability for prior breach.
10. Consultant agrees that all obligations under Section 4, 6, 7(c),
7(d), and 7(e) of this Agreement shall continue in effect after any expiration
or termination of this
64
<PAGE> 4
Agreement, and that the Company is entitled to communicate Consultant's
obligations under this Agreement to any future client or potential client (or
employer or potential employer) of Consultant.
11. This Agreement shall be binding upon, and inure to the benefit of,
the parties hereto and their respective heirs, successors, assigns, and personal
representatives; provided, however, that is shall not be assignable by
Consultant.
12. Consultant agrees that any dispute concerning the breach, meaning,
effect or validity of this Agreement shall be resolved in accordance with the
laws of the State of California without regard to the conflict of laws
provisions thereof, and shall at the Company's option be litigated in San Diego,
California courts. Consultant agrees to submit to the personal and exclusive
jurisdiction and venue of such courts and not to seek the transfer of any case
or proceeding out of such courts. Consultant further agrees that if one or more
provisions of this Agreement are held to be illegal or unenforceable under
applicable California law, such illegal or unenforceable portion(s) shall be
limited or excluded from this Agreement to the minimum extent required and the
balance of the Agreement shall be interpreted as if such portion(s) were so
limited or excluded and shall otherwise remain in full force and effect and be
enforceable in accordance with its terms.
13. All notices required or given under this Agreement shall be
addressed to the Company or Consultant at the designated addresses shown below
(or such other address as either party may notify the other party of by notice
given under this Section 13) by registered mail or by certified courier service:
a. To Company:
CardioDynamics International Corporation
6155 Cornerstone Court East
Suite 125
San Diego, CA 92121
b. To Consultant:
Cam L. Garner
Dura Pharmaceuticals
7474 Lusk Blvd.
San Diego, CA 92121
14. This Agreement contains the entire understanding of the parties
regarding its subject matter and can only be modified or waived by a subsequent
written agreement executed by Consultant and the President of the Company, which
expressly refers to this Agreement and expressly states an intention to modify
or waive it. Any such modification or waiver shall be limited to its express
terms and scope. Consultant acknowledges that Consultant has not relied on any
representation, warranty, condition, promise,
65
<PAGE> 5
understanding, arrangement, agreement or inducement of any kind in entering into
this Agreement.
CONSULTANT HAS READ THIS AGREEMENT CAREFULLY AND UNDERSTANDS AND ACCEPTS
THE OBLIGATIONS WHICH IT IMPOSES UPON CONSULTANT WITHOUT RESERVATION. NO
PROMISES OR REPRESENTATIONS HAVE BEEN MADE TO CONSULTANT TO INDUCE CONSULTANT TO
SIGN THIS AGREEMENT. CONSULTANT SIGNS THIS AGREEMENT VOLUNTARILY AND FREELY, IN
DUPLICATE, WITH THE UNDERSTANDING THAT ONE COUNTERPART WILL BE RETAINED BY THE
COMPANY AND THE OTHER COUNTERPART WILL BE RETAINED BY CONSULTANT.
Dated: August 1, 1997 [SIG]
-----------------------------------------
Consultant
Accepted and Agreed to:
CARDIODYNAMICS INTERNATIONAL COPRORATION
By: [SIG]
------------------------------------
President
66
<PAGE> 6
ATTACHMENT A
DUTIES OF CONSULTANT
To advise/consult the Company on various business activities including, but not
limited to strategies, alliances, capitalization, sales & marketing, and
corporate strategies.
67
<PAGE> 1
EXHIBIT 23.1
[KPMG PEAT MARWICK, LLP LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
CardioDynamics International Corporation:
We consent to incorporation by reference in registration statements No.
333-40969 on Form S-8 and No. 333-31275 on Form S-3 of CardioDynamics
International Corporation of our report dated March 11, 1998, relating to the
balance sheet of CardioDynamics International Corporation as of November 30,
1997, and the related statements of operations, shareholders' equity, and cash
flows for the year ended November 30, 1997, which report appears in the 1997
Annual Report on Form 10-K of CardioDynamics International Corporation.
/s/ KPMG PEAT MARWICK, LLP
San Diego, California
March 12, 1998
<PAGE> 1
EXHIBIT 23.2
[PETERSON & CO. LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the reference of our firm under the caption "Experts" and to the
incorporation by reference in Form 10-KSB, Annual Report Under Section 13 or
15(d) of the Securities Exchange Act of 1934 for the fiscal year ended November
30, 1997, of CardioDynamics International Corporation of our report dated
February 25, 1997 (except for Note 14, as to which the date is March 6, 1997)
on the financial statements of CardioDynamics International Corporation for the
fiscal year ended November 30, 1996.
/s/ Peterson & Co.
PETERSON & CO.
San Diego, California
March 12, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FISCAL YEAR
END NOVEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<CASH> 2,655,349
<SECURITIES> 0
<RECEIVABLES> 213,392
<ALLOWANCES> 161,824
<INVENTORY> 906,111
<CURRENT-ASSETS> 5,949,105
<PP&E> 483,481
<DEPRECIATION> 238,827
<TOTAL-ASSETS> 4,023,205
<CURRENT-LIABILITIES> 1,030,603
<BONDS> 0
0
0
<COMMON> 14,826,762
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,203,205
<SALES> 477,588
<TOTAL-REVENUES> 477,588
<CGS> 582,344
<TOTAL-COSTS> 4,167,808
<OTHER-EXPENSES> 4,724
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,277,288)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,278,088)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
</TABLE>
