<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: NOVEMBER 30, 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)
CALIFORNIA 95-3533362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6175 NANCY RIDGE DRIVE, SUITE 300 92121
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive offices)
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 November 20, 1998, was approximately $88,331,191, based on the
closing price for the Common Stock in the Nasdaq SmallCap Market. At November
20, 1998, 32,120,434 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].
<PAGE> 2
PART I, ITEM 7 Has been replaced in its entirety to eliminate the reference to
fiscal 1995 in the Independent Auditors' Report of Peterson & Co.
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
CardioDynamics International Corporation
We have audited the accompanying balance sheet of CardioDynamics International
Corporation (the "Company") as of November 30, 1996, and the related statements
of operations, changes in 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 financial statements referred to above present fairly, in
all material respects, the financial position of CardioDynamics International
Corporation, as of November 30, 1996, and the results of its operations, changes
in shareholders' equity and its cash flows for the year then ended in conformity
with generally accepted accounting principles.
/s/ PETERSON & CO.
------------------
PETERSON & CO.
San Diego, CA
February 25, 1997
2
<PAGE> 3
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
3
<PAGE> 4
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.
4
<PAGE> 5
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.
5
<PAGE> 6
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 - private placement -- -- 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 - private placement -- -- 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.
6
<PAGE> 7
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 or conversion of $ 457,791 $ 136,519
preferred stock
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.
7
<PAGE> 8
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.
8
<PAGE> 9
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 three to seven 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.
9
<PAGE> 10
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.
10
<PAGE> 11
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.
11
<PAGE> 12
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.
12
<PAGE> 13
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.
At November 30, 1997, the Company has outstanding warrants to purchase
shares of common stock as follows:
<TABLE>
<CAPTION>
COMMON STOCK EXERCISE EXERCISABLE
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>
13
<PAGE> 14
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
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.
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>
14
<PAGE> 15
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
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>
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-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE 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.
15
<PAGE> 16
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(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.
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.
16
<PAGE> 17
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
(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:
<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.
17
<PAGE> 18
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
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 prepay this line of
credit from the net proceeds of any future arranged debt or equity
financing.
18
<PAGE> 19
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:
<TABLE>
<CAPTION>
EXHIBIT TITLE
- ------- -----
<S> <C>
23.1 Consent of Independent Auditors, KPMG Peat Marwick, LLP
23.2 Consent of Independent Auditors, Peterson & Co.
(b) REPORTS ON FORM 8-K:
None.
</TABLE>
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 in the city of San Diego, State of California, on the
24th day of November, 1998.
CARDIODYNAMICS INTERNATIONAL CORPORATION
By: /s/ Michael K. Perry
Michael K. Perry
Director and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Michael K.
Perry, as attorney-in-fact, with the power of substitution, for him in any and
all capacities, to sign any amendment to this Registration Statement and to file
the same, with exhibits thereto and other documents in connection therewith,
with the SEC, granting to said attorney-in-fact full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
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/ MICHAEL K. PERRY Director and November 24, 1998
- ---------------------------- Chief Executive Officer
Michael K. Perry (Principal Executive Officer)
/s/ STEPHEN P. LOOMIS Vice President, Finance and November 24, 1998
- ---------------------------- Chief Financial Officer
Stephen P. Loomis (Principal Financial Officer
and
Principal Accounting Officer)
/s/ STEPHENSON M. DECHANT* Director November 24, 1998
- ----------------------------
Stephenson M. Dechant
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ NICHOLAS V. DIACO, M.D.* Director November 24, 1998
- ----------------------------
Nicholas V. Diaco, M.D.
/s/ LOUIS P. FERRERO* Director November 24, 1998
- ----------------------------
Louis P. Ferrero
/s/ CAM L. GARNER* Director November 24, 1998
- ----------------------------
Cam L. Garner
/s/ JAMES C. GILSTRAP* Director November 24, 1998
- ----------------------------
James C. Gilstrap
/s/ RICHARD O. MARTIN* Director November 24, 1998
- ----------------------------
Richard O. Martin
/s/ RICHARD E. OTTO* Director November 24, 1998
- ----------------------------
Richard E. Otto
/s/ MICHAEL D. PADILLA* Director November 24, 1998
- ----------------------------
Michael D. Padilla
/s/ ALLEN E. PAULSON* Director November 24, 1998
- ----------------------------
Allen E. Paulson
</TABLE>
*By Michael K. Perry, as attorney-in-fact
20
<PAGE> 1
EXHIBIT 23.1
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-KSB/A of CardioDynamics International Corporation.
/s/ KPMG PEAT MARWICK LLP
-------------------------
San Diego, California
November 23, 1998
<PAGE> 1
EXHIBIT 23.2
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/A, Amended 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 on the financial statements of CardioDynamics
International Corporation for the year ended November 30, 1996.
/s/ PETERSON & CO.
------------------
PETERSON & CO.
November 24, 1998
San Diego, California
