<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB\A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended AUGUST 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Transition Period from ________ to _________
Commission File Number: 0-11868
CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-3533362
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
6175 NANCY RIDGE DRIVE, SUITE 300, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
(619) 535-0202
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check whether the registrant has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes X No
--- ---
As of October 31, 1998, 32,120,434 shares of Common Stock were outstanding.
Transitional Small Business Disclosure Format
(check one):
Yes No X
----- -----
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CARDIODYNAMICS INTERNATIONAL CORPORATION
FORM 10-QSB
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C> <C>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited):
Balance Sheets at August 31, 1998 and November 30, 1997. 3
Statements of Operations for the three and nine months
ended August 31, 1998 and August 31, 1997. 4
Statements of Cash Flows for the nine months ended August 31,
1998 and August 31, 1997. 5
Notes to Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 2. CHANGES IN SECURITIES 13
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 18
</TABLE>
2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
AUGUST 31, NOVEMBER 30,
1998 1997
ASSETS (Unaudited) (Audited)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,119,056 $ 2,655,349
Accounts receivable, net of allowance for doubtful accounts
and returns of $26,562 and $161,824, respectively 544,845 51,568
Inventory, net 1,012,202 906,111
Other current assets 54,643 137,735
------------ ------------
Total current assets 5,730,746 3,750,763
Property and equipment, net 182,903 244,654
Deposits 40,099 27,788
------------ ------------
Total assets $ 5,953,748 $ 4,023,205
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 537,852 $ 295,524
Accrued expenses 140,327 22,292
Accrued salaries, wages and benefits 210,224 83,632
Note payable - related parties 1,000,000 --
Note payable to bank 2,000,000 --
Current maturities of long-term debt 11,280 11,300
Customer deposits 1,935 2,995
Reserve for inventory returns 93,850 614,860
------------ ------------
Total current liabilities 3,995,468 1,030,603
Long-term debt, less current maturities 50,333 26,523
Commitments and contingencies
Convertible Preferred stock, no par value; 18,000,000 shares authorized:
issued and outstanding 3,000 Series A shares at August 31, 1998, 2,880,903 --
No shares authorized or outstanding at November 30, 1997
Shareholders' equity:
Common stock, no par value; 50,000,000 shares authorized;
issued and outstanding 32,113,743 shares at August 31,
1998 and 32,085,743 at November 30, 1997 14,859,027 14,826,762
Accumulated deficit (15,831,983) (11,860,683)
------------ ------------
Total shareholders' equity (972,956) 2,966,079
------------ ------------
Total liabilities and shareholders' equity $ 5,953,748 $ 4,023,205
============ ============
</TABLE>
See accompanying notes to financial statements
3
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CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
AUGUST 31, AUGUST 31,
----------------------------- -----------------------------
1998 1997 1998 1997
----------------------------- -----------------------------
<S> <C> <C> <C> <C>
Net sales $ 670,723 $ 265,000 $ 1,295,961 $ 1,175,456
Cost of sales 299,172 191,717 784,750 653,319
------------ ------------ ------------ ------------
Gross margin 371,551 73,283 511,211 522,137
Operating expenses:
Research and development 564,562 479,183 1,709,040 883,178
Selling, general and
administrative expenses 1,023,944 661,954 2,708,204 2,103,125
------------ ------------ ------------ ------------
Total operating expenses 1,588,506 1,141,137 4,417,244 2,986,303
Loss from operations (1,216,955) (1,067,854) (3,906,033) (2,464,166)
Other income (expense):
Interest, net (76,121) 54,947 (68,368) 130,642
Loss on sales of securities -- -- -- (164,853)
Other, net 901 -- 3,901 --
------------ ------------ ------------ ------------
Total other income (expense) (75,220) 54,947 (64,467) (34,211)
Loss before income taxes (1,292,175) (1,012,907) (3,970,500) (2,498,377)
Income taxes -- -- (800) (800)
------------ ------------ ------------ ------------
Net loss $ (1,292,175) $ (1,012,907) $ (3,971,300) $ (2,499,177)
============ ============ ============ ============
Net loss per common share,
basic and diluted $ (0.04) $ (0.03) $ (0.12) $ (0.08)
============ ============ ============ ============
Weighted-average number of
common shares outstanding 32,105,450 31,926,368 32,097,451 31,159,407
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
4
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CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED AUGUST 31,
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
----------- -----------
<S> <C> <C>
Net loss $(3,971,300) $(2,499,177)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 55,359 41,041
Gain on sale of fixed assets (3,000) --
Loss on disposition of marketable securities -- 164,853
Provision for refurbishment of demonstration inventory units 113,307 76,145
Compensatory stock options granted 2,565 15,051
Provision for doubtful receivables (135,262) 7,553
Changes in operating assets and liabilities:
Accounts receivable (358,015) (328,992)
Inventory (219,398) (534,573)
Other current assets 83,092 (97,231)
Deposits (12,311) (15,773)
Accounts payable 242,328 119,998
Accrued expenses 118,035 (66,151)
Accrued salaries, wages and related benefits 126,592 28,859
Customer deposits (1,060) (23,012)
Reserve for inventory returns (521,010) --
----------- -----------
Net cash used in operating activities (4,480,078) (3,111,409)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (43,608) (91,888)
Proceeds from sale of fixed assets 53,000 --
Proceeds from sale of marketable securities -- 164,360
----------- -----------
Net cash provided by investing activities 9,392 72,472
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (8,460) (9,279)
Increase in long-term debt 32,250 --
Due to related parties 1,000,000 --
Repayment of bank debt (1,000,000) --
Proceeds from bank borrowings 3,000,000 --
Issuance of preferred stock - net 2,880,903 --
Issuance of common stock 29,700 5,946,895
----------- -----------
Net cash provided by financing activities 5,934,393 5,937,616
----------- -----------
Net increase in cash and cash equivalents 1,463,707 2,898,679
Cash and cash equivalents at beginning of period 2,655,349 706,190
----------- -----------
Cash and cash equivalents at end of period $ 4,119,056 $ 3,604,869
=========== ===========
</TABLE>
See accompanying notes to financial statements
5
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CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
DESCRIPTION OF BUSINESS
CardioDynamics International Corporation (the "Company") develops, manufactures
and markets noninvasive digital cardiac output monitoring devices, which provide
continuous data on a wide range of hemodynamic parameters (measurements of the
heart's ability to deliver oxygen-rich blood throughout the body). The Company's
primary products, the BioZ(TM) System, BioZ Portable(TM), and BioZ.com(TM), use
Thoracic Electrical Bioimpedance ("TEB") technology to obtain data which is
typically obtained through a time-consuming, costly and potentially dangerous
invasive Pulmonary Artery Catheterization ("PAC") procedure. The BioZ(TM)
product line uses the Company's core technology, the proprietary DISQ(TM)
(Digital Impedance Signal Quantifier) Technology, and the Z MARC(TM) (Modulating
Aortic Compliance) Algorithm, which together provide improved measurements of
impedance waveforms and automatic electronic calibration, thereby increasing the
repeatability and reliability of TEB technology. Since TEB monitoring is
noninvasive, it eliminates procedure risk and potentially decreases the length
of a hospital stay, thereby reducing patient cost.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with the
requirements for Form 10-QSB and therefore do not include all information and
footnotes, which would be presented, were such financial statements prepared in
accordance with generally accepted accounting principles.
These statements should be read in conjunction with the Company's November 30,
1997 audited financial statements and notes thereto as presented in its Annual
Report on Form 10-KSB. Financial presentations for the prior periods have been
reclassified to conform with the current presentation.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of such operations. All such adjustments are of a normal
recurring nature. The results of operations for the three months and nine ended
August 31, 1998 are not necessarily indicative of the results that may be
expected for the full fiscal year ended November 30, 1998.
Options and warrants to purchase 4,090,848 shares of common stock at an average
exercise price of $2.43 per share were outstanding during the quarter ended
August 31, 1998 but were not included in the computation of earnings per share
because their effect would be anti-dilutive.
CONVERTIBLE PREFERRED STOCK
On August 21, 1998, the Company sold 3,000 shares of Series A convertible
preferred stock and 123,000 warrants to institutional investors for $3,000,000.
The Series A preferred stock is convertible into common stock at the lesser of
$2.70 or 95% of the then-current common stock market value. The holders of the
preferred stock can require redemption for cash (at 130% of stated value)
instead of conversion for shares in the event that the Company is acquired or
defaults in certain ways. The preferred stock has a cumulative dividend of 3%
per year.
6
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto included in this report, and with the Company's
audited financial statements and notes thereto for the fiscal year ended
November 30, 1997. Certain statements set forth herein are forward-looking and
involve risks and uncertainties. For information regarding identification of
such statements and potential factors that could have a material adverse effect
on the Company's business, operating results, and financial condition refer to
the Company's November 30, 1997 Form 10-KSB and page 18 of this report.
The Company received FDA 510(k) marketing clearance for the BioZ System in late
November 1996 and in September 1997, the Company received 510(k) marketing
clearance from the FDA for its BioZ Portable monitoring system and the Company's
proprietary Dynamic Impedance Signal Quantifier (DISQ(TM)) technology. In March
1998, the Company received 510(k) marketing clearance for the BioZ.com, the
Company's next generation monitoring system. The BioZ.com is even more compact
than the BioZ Portable and features a transport battery, integrated blood
pressure module and direct data interface to most hospital central monitoring
systems. The BioZ.com is the first product to fully utilize the Company's DISQ
technology which provides improved measurement of impedance waveforms and
automatic electronic calibration. These FDA clearances provide the Company the
opportunity to commercialize the three products, which could result in
significantly increased sales.
Results of Operations (Quarters referred to herein are fiscal quarters ended
August 31)
Net sales for the third quarter of fiscal 1998 increased 153% to $670,723, over
the same quarter of fiscal 1997 in which sales were $265,000. Sales for the
nine-month period ended August 31, 1998 increased to $1,295,961 from $1,175,456
for the same nine-month period in 1997. The increase in sales reflects the
growing demand and acceptance in the medical community of the Company's
noninvasive BioZ product line and technology. In addition, the majority of the
sales recorded in Fiscal 1997 were to domestic distributors for demonstration
and stocking inventory.
As a result of the Company's decision in late 1997 to add a direct sales force
in targeted metropolitan areas, a 100% reserve for distributor returns was
established against these distributor sales. Approximately $766,540 of the
distributor reserve related to sales recorded in the first nine months of Fiscal
1997.
The Company sold 31 BioZ systems, including 12 BioZ.com systems, during the
three month period ended August 31, 1998. During the third quarter of fiscal
1998 the Company's sales of BioZ.com systems included sales to four targeted
Luminary Accounts: UCSF Stanford Health Care (Stanford, California), Crawford
Long Hospital (Atlanta, Georgia), Harper Hospital (Detroit, Michigan), and
Medical University of South Carolina (Charleston, South Carolina).
7
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (Continued)
In addition, four BioZ systems, including one BioZ.com system, were shipped
during the third quarter under the Company's "No Risk" and "Preferred
Partnership" rental programs, whereby a BioZ System and "No Risk" disposable
sensors are provided to targeted accounts for little or no cost for a trial
period, in exchange for a minimum monthly usage-based charge.
The Company believes that allowing clinicians the opportunity to experience the
clinical benefits and cost savings of the BioZ products, without the risk
typically associated with a capital equipment purchase, will result in greater
knowledge and acceptance of the Company's products and provide local reference
sites to facilitate additional sales. During the third fiscal quarter of 1998
five "No-Risk" program participants made the decision to purchase the equipment.
The Company achieved a gross margin of 55% in the third quarter and 39% for the
first nine months of fiscal 1998 compared with a 28% gross margin in the third
quarter and 44% for the first nine months of fiscal 1997. The gross margin is
expected to improve as the Company's manufacturing capacity is more fully
utilized, the BioZ.com comprises a greater percentage of the overall product mix
and as average unit sales prices increase as a result of direct sales to
end-users. However, significant increases in sales will be required to enable
the Company to generate enough gross margin to cover operating expenses.
Selling, general and administrative costs for the three and nine months ended
August 31, 1998 increased 55% and 29% over the same quarter and nine months of
fiscal 1997 due to the Company's continued strategic investment in a direct
sales force and marketing related expenses. The Company's investment in sales
activities is expected to continue to increase as it expands its direct sales
force and develops selling and marketing materials customized for direct sales
targeted at both the hospital and outpatient markets. As a result of ongoing
cost containment efforts, general and administrative expenses were reduced by
14% in the third fiscal quarter and 7% in the first nine months of 1998, when
compared with the same periods of 1997.
Research and development expenses increased by $85,379, or 18%, during the third
quarter of fiscal 1998 over last year's same quarter. For the first nine months
of fiscal 1998 the Company's investment in research and development increased by
$825,862, or 94%, over the same period of fiscal 1997. The increases are mainly
due to the accelerated 11-month development cycle, from specification to
shipment, of the BioZ.com product and compliance testing toward European CE Mark
certification. Much of the non-proprietary product development was contracted
from Rivertek Medical Systems.
8
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In April of 1998, the Company signed a distribution alliance agreement with
Cardiomedics, Inc. under which the Company shipped five BioZ.com units during
the third quarter of fiscal 1998. In order to penetrate the BioZ product line's
numerous potential markets, the Company plans to seek additional alliances with
select medical device manufacturers and managed care facilities.
The Company incurred interest expense of $76,121, net of interest earned on
invested funds, largely related to the $3 million Imperial Bank term loan at the
Bank's prime interest rate plus one percent, compared with net interest income
of $54,947 in the comparable quarter of fiscal 1997. In the first quarter of
1997, the Company recognized a loss of on the sale of securities of $164,853
related to the disposition of securities that had been held for payment to
preferred shareholders upon the exercise of a right to redeem their preferred
shares for common stock and a pro-rata portion of the proceeds of the marketable
securities.
The Company incurred a net loss for the third quarter and first nine months of
1998 of $1,292,175 and $3,971,300 or $.04 and $.12 per common share
respectively, compared with a net loss of $1,012,907 and $2,499,177 or $.03 and
$.08 per common share in the same fiscal periods last year. The increase in the
weighted average number of common shares outstanding during the third quarter
and first nine months of fiscal 1998 was primarily due to the automatic
conversion in August 1997 of 183,115 shares of the Company's preferred stock
into common stock and the issuance of approximately 2.5 million common shares in
a private placement through EVEREN Securities, Inc., in early 1997.
Liquidity and Capital Resources
In May of 1998, the Company entered into a six month unsecured term loan
agreement with Imperial Bank. Under the terms of the agreement the Company could
borrow up to $4,000,000, of which the Company borrowed $3,000,000. The loan
bears interest at one percent above the Bank's Prime Rate. In August 1998, the
Company repaid $1,000,000 of the $3,000,000, reducing the outstanding balance to
$2,000,000. In exchange, the Bank extended the term of the loan until February
28, 1999.
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%. In August of 1998 the Company borrowed $1,000,000 on this line of
credit and used the proceeds to reduce outstanding borrowings under the bank
term loan.
9
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources (Continued)
In August of 1998, the Company completed the first phase of a $6,000,000 equity
private placement to institutional investors. The first phase provided
$3,000,000 ($2,880,903 net proceeds) through the issuance of Series A
Convertible Preferred Stock. The funding of the remaining $3,000,000 of
Preferred Stock, which is targeted for February 1999, is contingent upon certain
conditions being met. There can be no assurance that this second phase of
financing will be completed then, or ever. The Company is using the net proceeds
from the first phase to further expand its direct sales force and execute
marketing programs for the new BioZ.com product line. If the second phase is
funded, the Company anticipates using the net proceeds to retire its existing
bank and private loans.
Longer term, the Company's liquidity will depend on its ability to successfully
commercialize the BioZ product line 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.
Other Matters
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. 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.
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.
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.
10
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Other Matters (Continued)
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. 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 1998, the FASB issued SFAS No.132, "Employer's Disclosures about
Pensions and Other Post Retirement Benefits." This statement specifies
information to be disclosed by employers for defined benefit plans or defined
benefit post retirement plans. This statement shall be in effect for financial
statement periods beginning after December 15, 1997. At this time the Company
does not believe that this statement has a significant impact on the financial
position or results of operations for the year ending November 30, 1998.
In June 1998, The FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement addresses hedging activities
relating to changes in foreign exchange rates and other futures contracts. As of
August 31, 1998 the Company has no investments in derivatives.
YEAR 2000 COMPLIANCE
Many computer systems experience problems handling dates beyond the year 1999.
Virtually any business that relies on computers will be impacted by this issue.
In addition to areas within the Company there are governmental agencies,
financial institutions, utilities and other basic service providers that may
encounter problems that are outside the control of the Company. In order to
correct this issue, some computer hardware and software will need to be modified
prior to the year 2000 in order for it to remain functional.
The Company has taken steps to assess the internal readiness of its computer
systems and the compatibility of its products sold to customers for handling the
year 2000 issue. The Company has created a Year 2000 task force and a plan to
address these issues. The project has been broken down into the following
phases.
o Awareness: To create awareness of the potential business implications of
the Year 2000 challenge within the Company. Appropriate Company employees
will be kept informed of the news and issues related to the Year 2000
issue. The Company will focus on both its technology systems as well as its
products.
11
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Other Matters (Continued)
o Inventory and Assessment: The Company will inventory all of its computer
software and hardware as well as facilities, telecommunications, and
external interfaces. Significant third party vendors will be contacted to
determine their are Year 2000 readiness.
o Renovation: As problems are discovered, strategies will be developed to
either correct the problem or determine if new equipment or software is
necessary.
o Testing: Testing of the renovated systems will occur to determine whether
they are performing reliably under Year 2000 conditions.
o Implementation: Upon successful completion of the testing process the
assets will be reintroduced into production in order to allow adequate time
to prevent any unforeseen circumstances.
o Contingency: In addition, the Company will develop a contingency plan in
the event that its internal systems, products or suppliers are not Year
2000 compliant.
The Company is currently in the inventory and assessment stage and anticipates
completing any necessary renovation, testing and implementation within the next
twelve months. It has already been determined that the internal network, and
manufacturing requirements planning software is certified as Year 2000
complaint. Additionally, the Company's newest products have been specifically
tested for Year 2000 performance and no Year 2000 problems were identified. The
Company is still in the early stages of contacting key third party vendors.
Renovation and testing, if required, will begin if problems are identified. The
Company plans to have all stages of the Year 2000 project completed no later
than the fall of 1999.
Thus far, the Company has not had to spend significant amounts of money through
this phase of the process. The Company currently believes that the cost of
addressing this issue will not have a material adverse effect on the Company's
business, results of operations, and financial condition. However, if the
vendors of the Company's most important goods and services, or suppliers of the
Company's necessary energy, telecommunications and transportation needs, fail to
provide the Company with the materials and services which are necessary to
produce and sell its products, such failure could have material adverse effect
on the results of operations, liquidity and financial condition of the Company.
12
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CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
(a) None.
(b) On July 24, 1998, the Company's articles of incorporation were amended
to provide therein for the creation of 18,000,000 shares of Preferred
Stock in one or more series with voting and other rights as determined
by the Board of Directors. In August the Company issued 3,000 shares
of Series A Convertible Preferred Stock, which has a cumulative
preferred dividend of 3% per year and a liquidation preference of
$3,000,000 plus accumulated dividends. The Company cannot pay cash
dividends on the Common Stock without the consent of a majority of the
Series A Convertible Preferred Stock outstanding.
(c) On August 21, 1998, the Company sold 3,000 shares of Series A
Convertible Preferred Stock and 123,000 common stock warrants to
institutional investors controlled by AG Ramius Partners, L.L.C. and
Angelo, Gordon & Co., L.P. The purchase price was $3,000,000. The
Company incurred $119,097 of expenses related to the offering
including a $60,000 finder's fee paid to EVEREN Securities, Inc. Under
Section 4(2) of the Securities Act, the transaction was exempt from
registration.
The "stated value" of the Series A Convertible Preferred Stock
($3,000,000) and any accumulated dividends are convertible into Common
Stock at the Fixed Conversion Price, or the Floating Conversion Price,
whichever is more favorable to the investor. The Fixed Conversion
Price is $2.70 (subject to certain adjustments); the Floating
Conversion Price is 95% of the then-current Common Stock market value
(calculated using a formula involving closing bid prices) until August
21, 1999 and 92% of the then-current Common Stock market value
(calculated using the formula) thereafter.
The Series A Convertible Preferred Stock cannot be converted at all
before January 19, 1999 unless certain events occur, and in certain
circumstances the number of shares which could be converted after
January 19, 1999 and before April 19, 1999 is limited on a per-month
basis.
All Series A Convertible Preferred Stock still outstanding on the
Mandatory Conversion Date will automatically be converted then. The
Mandatory Conversion Date is August 21, 2002, subject to the
possibility of extension is certain events occur. The holders of the
preferred stock can require redemption for cash (at 130% of stated
value) instead of conversion for shares in the event that the Company
is acquired or defaults in certain ways.
13
<PAGE> 14
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES (CONTINUED)
No holder of Series A Convertible Preferred Stock may elect to convert
for Common Stock which would give it more than a 4.99% of the
Company's outstanding Common Stock, unless it has given the Company 61
days' advance notice of its intent to do so. Also, the Company shall
not be obligated to issue, upon conversion of the Series A Convertible
Preferred Stock as a whole, more shares than are allowed by Rule
4460(i) of the Nasdaq Stock Market, unless such above-the-threshold
conversion is approved by the Company's shareholders; the excess above
the threshold would, absent such shareholder approval, be handled by
redemption rather than by conversion. The Rule 4460(i) threshold is
6,422,748 shares of Common Stock (19.99% of the Company's outstanding
Common Stock at August 21, 1998).
In conjunction with the financing, the Company issued 123,000
warrants, exercisable for shares of Common Stock at $2.55 per share,
subject to anti-dilution adjustments. The Warrants expire on August
21, 2003.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders held on July 23, 1998, the
shareholders voted on the following proposals. Each such proposal was
approved.
Proposal 1: Election of Directors for the coming year. The balloting
for the directors was as follows:
<TABLE>
<CAPTION>
AGAINST/ ABSTAINED/
FOR WITHHELD NON-VOTES
----------------------------------------
<S> <C> <C> <C>
Stephenson M. Dechant 29,454,841 36,404 0
Nicholas V. Diaco 29,454,841 36,404 0
Louis P. Ferrero 29,454,841 36,404 0
Cam L. Garner 29,454,841 36,404 0
James C. Gilstrap 29,454,841 36,404 0
Richard O. Martin 29,454,841 36,404 0
Richard E. Otto 29,454,841 36,404 0
Michael D. Padilla 29,454,841 36,404 0
Allen E. Paulson 29,454,841 36,404 0
Michael K. Perry 29,453,931 37,314 0
</TABLE>
14
<PAGE> 15
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED)
Proposal 2: Approve certain May 20, 1998 amendments to the 1995 Stock
Option/Stock Issuance Plan.
28,152,310 shares voted in favor of the amendments, 223,626 shares
were voted against the amendments, 1,045,504 shares abstained and
66,804 shares were broker non-votes.
Proposal 3: Amend the Company's Articles of Incorporation to authorize
the issuance of up to 18,000,000 shares of Preferred Stock.
25,183,615 shares voted in favor of the amendment, 232,471 shares
voted against, 1,055,876 shares abstained and 3,019,282 shares were
broker non-votes.
Proposal 4: Ratify the Board's selection of KPMG Peat Marwick LLP as
the Company's independent accountants for the fiscal year ending
November 30, 1998.
29,449,060 shares voted in favor of the ratification, 8,200 shares
voted against ratification, 33,985 shares abstained and there were no
broker non-votes.
ITEM 5. OTHER INFORMATION
In July 1998 the Company received approval from the Japanese Ministry
of Health to begin marketing the Company's BioZ System throughout
Japan. The Japanese approval substantially expands the Company's
available market.
The Securities and Exchange Commission (the "SEC") recently amended
Rule 14a-4, which governs the use by Company-affiliated proxyholders
of discretionary voting authority with respect to shareholder
proposals. SEC Rule 14a-4(c)(1) provides that, if the proponent of a
shareholder proposal fails to notify the Company at least 45 days
prior to the month and day of mailing the prior year's proxy
statement, the Company-affiliated proxyholders would be permitted to
use their discretionary authority at the Company's next annual meeting
of shareholders if the proposal were raised at the meeting without any
discussion of the matter in the proxy statement.
15
<PAGE> 16
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3.1 Restated Articles of Incorporation as filed July 24, 1998.
(Incorporated by reference to August 31, 1998 Form 10-QSB, filed
October 15, 1998.)
3.2 Certificate of Determination of Preferences of Series A Convertible
Preferred Stock. (Incorporated by reference to Form 8-K for the event
of August 21, 1998, filed September 3, 1998.)
4.1 Sixth Amended and Restated Secured Convertible Promissory Note, dated
August 15, 1998 between CardioDynamics Holdings, LLC and the Company.
(Incorporated by reference to August 31, 1998 Form 10-QSB, filed
October 15, 1998.)
10.1 Promissory Note and Credit Agreement, dated August 19, 1998 between
Imperial Bank and the Company. (Incorporated by reference to August
31, 1998 Form 10-QSB, filed October 15, 1998.)
10.2 Warrants to purchase 33,334 shares of CardioDynamics International
Corporation Common Stock to Imperial Bank dated May 14, 1998.
(Incorporated by reference to August 31, 1998 Form 10-QSB, filed
October 15, 1998.)
10.3 Warrants to purchase 15,000 shares of CardioDynamics International
Corporation Common Stock to Imperial Bank dated August 21, 1998.
(Incorporated by reference to August 31, 1998 Form 10-QSB, filed
October 15, 1998.)
10.4 1995 Stock Option/Stock Issuance Plan, as amended June 10, 1997.
(Incorporated by reference to August 31, 1997 Form 10-QSB.)
10.5 Amendment to 1995 Stock Option/Stock Issuance Plan dated May 20, 1998.
(Incorporated by reference to August 31, 1998 Form 10-QSB, filed
October 15, 1998.)
10.6 Securities Purchase Agreement dated August 21, 1998 between the
Company and certain Selling Shareholders. (Incorporated by reference
to Form 8-K for event of August 21, 1997, filed September 3, 1998.)
16
<PAGE> 17
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II -- OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
10.7 Form of Warrant issued August 21, 1998 to certain Selling
Shareholders. (Incorporated by reference to Form 8-K for event of
August 21, 1998, filed September 3, 1998.)
10.8 Registration Rights Agreement dated August 21, 1998 between the
Company and certain Selling Shareholders. (Incorporated by reference
to Form 8-K for event of August 21, 1998, filed September 3, 1998.)
10.9 Distribution Agreement dated March 31, 1998 between The Company and
CARDIOMEDICS, Inc.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
On September 3, 1998, the Company filed a report on From 8-K with
regard to an August 21, 1998 event: the completion of the first phase
of a $6,000,000 private placement of Convertible Preferred Stock
through a group of institutional investors. The report included
material under Item 5 and Item 7 of Form 8-K.
17
<PAGE> 18
CARDIODYNAMICS INTERNATIONAL CORPORATION
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding plans, goals, strategies,
intent, beliefs or current expectations of the Company and its management. These
statements are expressed in good faith and are believed to have a reasonable
basis when expressed, but there can be no assurance that these expectations will
be achieved or accomplished. Sentences in this document containing verbs such as
"plan," "intend," "anticipate," "target," "estimate," "expect," etc., and/or
future-tense or conditional constructions ("will," "may," "could," "should,"
etc.) constitute forward-looking statements that involve risks and
uncertainties. Items contemplating, or making assumptions about, actual or
potential future sales, market size, collaborations, trends or operating results
also constitute such forward-looking statements. Among the factors that could
cause the Company's actual results to differ materially from those indicated in
any such forward-looking statements are: (i) sole dependence on the
newly-introduced BioZ(TM) System, BioZ Portable(TM) and BioZ.com(TM) and related
products, (ii) general acceptance in the medical community of invasive
procedures such as PAC and lack of general acceptance in the medical community
of TEB, (iii) its ability to raise additional funds on terms attractive to the
Company, or at all, (iv) competition from Baxter Healthcare Corporation, the
maker of the Swan-Ganz(TM) PAC device, and (v) various uncertainties
characteristic of companies just emerging from the development stage; as well as
other risks detailed in the Company's annual report on Form 10-KSB for the
fiscal year ended November 30, 1997 and any later-filed SEC reports. Any
forward-looking statement speaks only as of the date on which the statement is
made, and the Company does not undertake to update the disclosures contained in
this document or reflect events or circumstances that occur subsequently or to
reflect the occurrence of unanticipated events.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CARDIODYNAMICS INTERNATIONAL CORPORATION
Date: November 18, 1998 By: /s/ Michael K. Perry
------------------------------------
Michael K. Perry
Chief Executive Officer
Date: November 18, 1998 By: /s/ Stephen P. Loomis
------------------------------------
Stephen P. Loomis
Vice President, Finance
Chief Financial Officer and
Corporate Secretary
18
<PAGE> 1
EXHIBIT 10.9
DISTRIBUTION AGREEMENT
This Distribution Agreement (the "Agreement") is entered as of March 31,
1998, by and between CardioDynamics International Corporation ("Supplier"), a
California corporation, with its registered office and/or place where business
is actually carried out at 6175 Nancy Ridge Drive, Suite 300, San Diego,
California and CARDIOMEDICS, Inc. ("Distributor"), with its registered office
and/or place where business is actually carried out at 18872 Bardeen Avenue,
Irvine, California.
1. Appointment; Territory; Products.
Supplier hereby appoints Distributor for the term of this Agreement as, and
Distributor agrees to act as, Supplier's external counterpulsation distributor
of the Products (as hereinafter defined) in the external counterpulsation market
for the Territory specified in Attachment A, subject to all the terms and
conditions hereof. So long during the term of this Agreement as Distributor
remains in full compliance with this Agreement, Supplier will not appoint
another external counterpulsation company to act as the distributor for the
Products in the external counterpulsation market in the Territory. Supplier's
Territory Managers and medical distributor's (that do not sell external
counterpulsation devices) will be allowed to sell Supplier's Products in the
external counterpulsation market. Distributor shall refrain from establishing or
maintaining any branch, warehouse or distribution depot for the Products outside
the Territory, and shall not engage in any advertising or promotional activities
relating to the Products directed primarily to customers located outside the
Territory. Furthermore, Products distributed by Distributor for further
distribution may be distributed only through sub-distributors who are bound in
writing to all the restrictions on Distributor contained in this Agreement.
"Product" shall mean the selected Supplier products, which are expressly set
forth in Attachment B. Any enhancement or improvement of a Product that is made
generally available by Supplier, that is substantially similar to such Product,
and that is marketed under the same product number and nomenclature as such
Product shall be added to Attachment B as a Product. Supplier reserves the right
to change, modify or discontinue any Product at any time. Supplier may add
Products to Attachment B and may remove any discontinued Product therefrom.
2. Payment and Supply Terms.
a. Products are delivered F.O.B. Supplier's applicable warehouse or place
of production. Purchase prices payable by Distributor are Supplier's then
current Territory Manager list prices less the discounts specified in Attachment
B. Supplier shall have the right, in its sole discretion, from time to time or
at any time to change such list prices with thirty (30) days written notice. New
prices will apply to all shipments made after such notice period. In addition,
Distributor will pay all charges, including without limitation freight,
shipping, customs charges and expenses, cost of special packaging or handling
1
<PAGE> 2
and insurance premiums, and shall be responsible for all taxes, including but
not limited to sales, value added and use taxes, duties and other governmental
assessments. Once shipped, Product is non-returnable. Payment is net thirty days
from date of invoice and shall be made in U.S. dollars in the United States.
b. During the term of this Agreement:
i. Supplier shall provide Distributor, at Supplier's expense, with
Samples of any applicable printed marketing materials that Supplier may in its
discretion produce for the Products, however, Supplier will not distribute them
unless approved in advance by Supplier in writing.
Distributor will prepare and produce similar and any additional materials needed
to promote the Products in the Territory. Distributor shall provide all such
materials (together with English translations) to Supplier and will not
distribute them unless approved in advance by Supplier in writing.
ii. Subject to the other terms and conditions of this Agreement,
Supplier shall use its reasonable efforts to promptly fill Distributor's written
purchase orders for Products after the purchase order is received by Supplier.
Should Supplier fail to supply Distributor with the Products ordered, the
purchase quotas for such period shall be reduced in direct proportion to the
extent of the shortfall. Supplier shall ship Products as specified in the Price
List and Distributor shall be responsible at its expense for any modifications
to the packaging, labeling or otherwise required to sell the Products in the
Territory.
iii. Supplier will provide Distributor with, and Distributor will
accept, such training as Supplier deems appropriate at locations specified by
Supplier, each party will bear its own expenses in connection with such
training.
c. Product will be deemed accepted if not rejected by written notice and
returned to Supplier in accordance with the warranty return procedure (Section
5) within ten (10) days of delivery. Otherwise distributor has no right of
return.
3. License, Trademarks and Trade Names.
a. The Distributor shall not use Supplier's name or any other trademark or
trade name used or claimed by Supplier (all of which names or marks shall
hereinafter be referred to as the "Marks") in connection with any business
conducted by the Distributor other than dealing with the Products.
b. Supplier hereby grants to the Distributor a royalty free non-exclusive
license to use the Marks, but only with respect to the sales of the Products.
2
<PAGE> 3
c. Distributor shall include and shall not alter, obscure or remove any
trademark or trade name used or claimed by Supplier, or any markings, colors or
other insignia which are contained on or in or affixed to Product at the time of
shipment.
d. Any advertising or promotional literature or announcement to the press
by Distributor regarding its relationship with Supplier or otherwise utilizing
Supplier's name or trademarks must be approved by Supplier in advance in
writing.
e. Distributor agrees that it will not use, without Supplier's prior
written consent, any mark which is likely to be similar to or confused with the
Marks.
f. Distributor agrees that it has not and will not register the name
"CardioDynamics International Corporation (CDIc)" or any forms thereof for use
in connection with any business entity without the prior written approval of
Supplier. Distributor also agrees not to use or contest during or after the term
of this Agreement any name, mark or designation used by Supplier anywhere in the
world (or any name, mark or designation similar thereto) and to promptly
register at Distributor's expense all Marks throughout the Territory in the name
of and for the sole benefit and ownership of Supplier.
g. The Distributor agrees that its use of the Marks shall not create in
its favor any right, title or interest therein and acknowledges Supplier's
exclusive right, title and interest in the Marks.
h. The Distributor hereby acknowledges and agrees that any and all
rights, title and interest in any and all trademarks and other proprietary
rights that are related in any way to the production, manufacture or sale of the
Initial Products, or form the basis for the development of the Initial Products
are owned solely and exclusively by Supplier, and Supplier may, in its
discretion, seek to secure and maintain any such rights. In the event that
Supplier seeks to secure or maintain or initiate any infringement action
regarding such rights, the Distributor agrees to cooperate with Supplier in any
way reasonably requested.
4. Distributor Covenants and Representations.
Except as expressly and unambiguously provided herein, Distributor
represents, warrants and agrees:
a. To use its best efforts to successfully market (including, without
limitation, conducting periodic promotions and market research, maintaining a
well staffed sales force and adequate inventory, and prompt inclusion of the
Products in all applicable trade shows and in Distributor's catalogs and other
promotional materials), distribute and support (including training and other
support) the Products on a continuing basis and to comply with good business
practices and all laws and regulations relevant to
3
<PAGE> 4
this Agreement or the subject matter hereof. In its distribution efforts,
Distributor will use Marks (but will not represent or imply that it is Supplier
or is a part of Supplier). However, all advertisements, promotional materials,
packaging and anything else bearing a Mark shall identify Supplier as the Mark
owner and Product manufacturer and shall be subject to prior written approval of
Supplier, which approval shall not be unreasonably withheld.
b. To keep Supplier informed of relevant market trends, customer needs,
competitive activity, economic and regulatory conditions and Distributor's sales
and inventory by Product. Distributor will also provide Supplier with a written
quarterly report with respect to these matters.
c. That it does not currently represent or promote any lines or products
that compete with the Products. Distributor will conduct its business in a
manner that reflects favorably on the Products and shall not, without Supplier's
prior written consent, represent, promote or otherwise try to sell within the
Territory any lines or products that, in Supplier's judgment, compete with the
Products covered by this Agreement.
d. That neither this Agreement (or any term hereof) nor the performance
of or exercise of rights under this Agreement, is restricted by, contrary to, in
conflict with, ineffective under, requires registration or approval or tax
withholding under, or affects Supplier's proprietary rights (or the duration
thereof) under, or will require any termination payment or compulsory licensing
under, any law or regulation of any organization, country, group of countries or
political or governmental entity located within or including all or a portion of
the Territory.
e. That Distributor will purchase the quota of Product specified in
Attachment C during the periods specified therein. If Distributor fails during
any period specified in Attachment C to purchase from Supplier the sales quota
of Product for that period, Supplier shall have the right to convert the
Distributor's rights in the Territory to non-exclusive (or terminate this
Agreement).
f. To ascertain and comply with, at Distributor's sole expense, all
applicable laws and regulations.
g. To ascertain and comply with all applicable laws and regulations and
standards of industry or professional conduct, including without limitation,
those applicable to product claims, labels, instructions, packaging or the like,
which consent shall not be unreasonably withheld.
h. To use best efforts, at its sole expense, to obtain and maintain any
applicable approvals, registrations, notifications or the like with regard to
marketing, using, selling, labeling or otherwise promoting or making claims
regarding the Products or their uses or reimbursement therefore in the
Territory. This includes, without limitation, conducting any necessary clinical
studies and preparing and filing any
4
<PAGE> 5
necessary applications or documents. Distributor shall not file any such
application or document or conduct any study without Supplier's prior written
consent, which shall not be unreasonably withheld. To the extent allowed by law
all approvals, registrations, notifications and the like (and all documents,
applications and information related thereto) and all rights thereunder or
thereto shall be for the sole benefit of and shall be solely owned by and in the
name of Supplier. Distributor will provide Supplier with any information
regarding the foregoing that Supplier may request (with English translations);
Supplier may use such information in its discretion.
i. To immediately notify Supplier of any adverse or unexpected results or
any actual or potential government action relevant to a Product and, if and to
the extent requested by Supplier in writing to suspend distribution of that
Product.
j. To report on a monthly basis the names and addresses of customers who
purchase the Products with their serial numbers. To keep for five years after
termination of this Agreement records of all Product sales and customers
sufficient to adequately administer a recall of any Product and to fully
cooperate in any decision by Supplier to recall, retrieve and/or replace any
Product.
l. To keep Supplier informed as to any problems encountered with the
Products and any resolutions arrived at for those problems, and to communicate
promptly to Supplier any and all modifications, design changes or improvements
of the Products suggested by any customer, employee or agent. Distributor
further agrees that Supplier shall have any and all right, title and interest in
and to any such suggested modifications, design changes or improvements of the
Products, without the payment of any additional consideration therefore either
to Distributor, or its employees, agents or customers. Distributor will also
promptly notify Supplier of any infringement of any trademarks or other
proprietary rights relating to the Products.
5. Compliance with United States Laws.
a. Distributor acknowledges that the export from the United States of the
Products may be subject to regulation by the U.S. Export Administration Act of
1979, as amended, and the rules and regulations promulgated thereunder, which
restrict exports and re-exports of any Products or direct product thereof.
Distributor agrees to comply with U.S. Export Administration Regulations as in
effect from time to time (including, without limitation, all record-keeping
requirements imposed thereunder), and will not re-export the Products in
violation of such Regulations.
b. Without limitation of the foregoing, Distributor agrees to commit no
act which, directly or indirectly, would violate any United States law,
regulation, or treaty, or any other international treaty or agreement, relating
to or applicable to the export or re-export of the Products, to which the United
States adheres or with which the United States complies.
5
<PAGE> 6
c. Distributor shall obtain, at its expense, any necessary licenses
and/or exemptions with respect to the export from the U.S. of all material or
items deliverable by Supplier and shall demonstrate to Supplier its compliance
with all applicable laws and regulations prior to delivery thereof by Supplier.
d. Distributor agrees to comply with the U.S. Foreign Corrupt Practices
Act of 1977, as amended, and the Regulations promulgated thereunder. Without
limiting the foregoing, Distributor will not pay or give anything of value
directly or indirectly to any officer, employee, or agent of a political party
or government, or candidate for public office, for the purpose of obtaining or
retaining business.
e. Distributor agrees to indemnify and hold harmless Supplier from any
and all fines, damages, losses, costs and expenses (including reasonable
attorneys' fees) incurred by Supplier as a result of the breach of this Section
5 by Distributor.
6. Confidentiality.
Distributor agrees that all inventions, know-how and ideas it obtains from
Supplier and all other business, technical and financial information it obtains
from Supplier are the confidential property of Supplier ("Proprietary
Information"). Except as expressly and unambiguously allowed herein, Distributor
will hold in confidence and not use or disclose any Proprietary Information and
shall similarly bind its employees in writing. Distributor's nondisclosure
obligation shall not apply to information it can document has entered the public
domain and is generally available to the public. Distributor will promptly
report to Supplier any actual or suspected violation of the terms of this
Section 6, and will take all reasonable further steps requested by Supplier to
prevent, control or remedy any such violation. Distributor shall, upon the
termination of the Agreement or the request of Supplier at any time, return to
Supplier all tangible manifestations of confidential information received by
Distributor pursuant to this Agreement (and all copies and reproductions
thereof).
7. Warranty and Disclaimer.
Supplier warrants only to Distributor that the Products will be free from
manufacturing and material defects for thirteen (13) months from date of
shipment to Distributor. Products purchased from Supplier which do not comply
with the warranty and are returned (by Distributor only) to Supplier during such
period (with proof of the date of purchase) will be repaired or replaced,
provided Distributor bears the cost of freight and insurance for return of good
to Distributor. Distributor must return any such Products in the original
container, which shall conspicuously bear the Return Material Authorization
(RMA) number Distributor obtains from Supplier prior to return. If Supplier
cannot, or determines that is not practical to, repair or replace the returned
Product, the purchase price therefore will be refunded. Supplier MAKES NO OTHER
WARRANTIES WITH RESPECT TO THE PRODUCTS OR ANY SERVICES AND DISCLAIMS ALL OTHER
WARRANTIES, INCLUDING WARRANTIES OF
6
<PAGE> 7
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NONINFRINGEMENT. The above
warranty does not extend to any Product that is modified or altered, is not
maintained to Supplier's maintenance recommendations, is operated, handled or
stored in a manner other than that specified by Supplier, has its serial number
removed or altered or is treated with abuse, negligence or other improper
treatment (including, without limitation, use outside the recommended
environment). Distributor's sole remedy with respect to any warranty or defect
is as stated above. Distributor is fully responsible for satisfaction of its
customers and will be responsible for all claims, damages, settlements, expenses
and attorneys fees incurred by Supplier with respect to Distributor's customers
or their claims beyond Supplier's above warranty obligation to Distributor.
8. Limited Liability.
NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, Supplier WILL
NOT BE LIABLE UNDER ANY SECTION OF THIS AGREEMENT OR UNDER ANY CONTRACT,
NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY (A) FOR ANY
AMOUNTS IN EXCESS IN THE AGGREGATE OF THE AMOUNTS PAID TO Supplier HEREUNDER
DURING THE TWELVE MONTH PERIOD PRIOR TO DATE THE CAUSE OF ACTION AROSE OR (B)
FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES. (C) FOR COST OF PROCUREMENT OF
SUBSTITUTE GOODS, TECHNOLOGY OR SERVICES, OR (D) DAMAGES ARISING FROM THE LOSS
OF PROFITS OR LOSS OF BUSINESS. Supplier SHALL HAVE NO LIABILITY FOR ANY FAILURE
OR DELAY DUE TO MATTERS BEYOND ITS REASONABLE CONTROL. DISTRIBUTOR SHALL
INDEMNIFY Supplier AGAINST ALL CLAIMS ASSERTED BY ITS CUSTOMERS OR OTHER THIRD
PARTIES AS A RESULT OF DISTRIBUTOR'S ACTS OR OMISSIONS.
9. Relationship of Parties.
The parties hereto expressly understand and agree that Distributor is an
independent contractor in the performance of each and every part of this
Agreement, is not an agent, and is solely responsible for all its employees and
agents and its labor costs and expenses arising in connection therewith and is
responsible for an will indemnify Supplier from any and all claims, liabilities,
damages, debts, settlements, costs, attorneys' fees, expenses and liabilities of
any type whatsoever that may arise on account of Distributor's activities or
omissions, or those of, its employees or agents, including without limitation,
providing unauthorized representations or warranties (or failing to effectively
disclaim all warranties and liabilities on behalf of Supplier) to its customers
or breaching any term, representation or warranty of this Agreement. Supplier is
in no manner associated with or otherwise connected with the actual performance
of this Agreement on the part of Distributor, nor with Distributor's employment
of other persons or incurring of other expenses. Except as expressly provided
herein, Supplier shall have
7
<PAGE> 8
no right to exercise any control whatsoever over the activities or operations of
Distributor.
10. Assignment.
This Agreement and the rights hereunder are not transferable or assignable
by a party without the prior written consent of the other party, except for
rights to payment and except to a person or entity who acquires all or
substantially all of the assets or business of Supplier, whether by sale, merger
or otherwise.
11. Term and Termination.
Unless terminated earlier as provided herein, this Agreement shall have a
term extending from the date of this Agreement to May 30, 1999. Distributor
understands that after the date specified above or earlier termination, it shall
have no right whatsoever to purchase Products or continue as a dealer or
distributor or otherwise regardless of any undocumented continuation of the
relationship with Supplier.
a. This Agreement may be terminated by a party for cause immediately by
written notice upon the occurrence of any of the following events:
i. If the other ceases to do business, or otherwise terminates its
business operations; or
ii. If the other shall fail to secure or renew any license, registration,
permit, authorization or approval for the conduct of its business in the manner
contemplated by this Agreement or if any such license, registration, permit,
authorization or approval is revoked or suspended; or
iii. If the other breaches any provision of this Agreement and falls to
fully cure such breach within 30 days (10 days in the case of a failure to pay)
of written notice describing the breach; or
iv. If the other seeks protection under any bankruptcy, receivership,
trust deed, creditors arrangement, composition or comparable proceeding, or if
any such proceeding is instituted against the other.
b. Supplier may immediately terminate this Agreement upon notice if
Distributor or Distributors' assets or business is acquired by a third party.
Additionally, the Supplier may terminate this Agreement upon two years written
notice if Supplier or Suppliers' assets or business is acquired by a third
party. "Acquired" for purposes of this provision means that the third party has
obtained 50% or more of the capital shares or voting power.
Either party may terminate this Agreement at any time with or without cause upon
60 days written notice.
8
<PAGE> 9
c. Each party understands that the rights of termination hereunder are
absolute. Neither party shall incur any liability whatsoever for any damage,
loss or expenses of any kind suffered or incurred by the other arising from or
incident to any termination of this Agreement by such party which complies with
the terms of the Agreement whether or not such party is aware of any such
damage, loss or expenses.
d. In the event of any termination, Supplier may elect to continue or
terminate any purchase order then pending.
e. In addition to any provisions that survive termination according to
their terms and any restrictions on Distributor's distribution of Products, the
following sections shall survive termination of this Agreement: Sections 2.a; 3
through 10.
f. Upon termination, if Distributor has any right, title or interest in
any Mark (as defined in Section 3.b) or any registration related thereto or in
anything referred to in Section 3.h, it will immediately assign all such right,
title and interest to Supplier and take all necessary action to ensure that
Supplier obtains the full benefit thereof or, if Supplier so requests in writing
with respect to any such item, take any necessary action to surrender and cancel
such item and the related rights, title and interest.
g. Termination is not the sole remedy under this Agreement and, whether
or not termination is effected, all other remedies will remain available.
12. Duties of Distributor Upon Termination.
Upon the termination of this Agreement for any reason whatsoever,
Distributor shall:
a. Pay to Supplier, in full within thirty (30) days of such termination,
all amounts owed to Supplier. Supplier shall be entitled to set off and deduct
from any money due Distributor, whether or not arising under this Agreement, any
and all amounts due Supplier from Distributor.
b. Promptly return to Supplier any and all Supplier-owned Product or
other materials, documentation or data, including without limitation all
promotional material, in the possession of Distributor for whatever reason or
purpose, such Product, material, documentation and data to be in the same
condition as when delivered to Distributor.
c. Cooperate with Supplier in completing all outstanding obligations to
customers, including the fulfillment, at Distributor's expense, of each warranty
term and condition.
d. Within seven (7) days after notice of termination by either
Distributor or Supplier, prepare a statement listing all active and prospective
customers and the type and amount of orders of Product expected to be sold to
such customers by Distributor during the sixty (60) day period following the
date of termination of this Agreement. Distributor
9
<PAGE> 10
shall also deliver to Supplier within such seven (7) day period all orders for
Product received by Distributor on or prior to the date of the notice of
termination.
13. General.
a. Amendment and Waiver -- Except as otherwise expressly provided herein,
any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or any particular
instance and either retroactively or prospectively) only with the written
consent of the parties. However, it is the intention of the parties that this
Agreement be controlling over additional or different terms of any purchase
order, confirmation, invoice or similar document, even if accepted in writing by
both parties, and that waivers and amendments shall be effective only if made by
non-preprinted agreements clearly understood by both parties to be an amendment
or waiver.
b. Governing Law and Legal Actions -- This Agreement shall be governed by
and construed under the laws of the State of California and the United States
without regard to conflicts of laws provisions thereof and without regard to the
United Nations Convention on Contracts for the International Sale of Goods.
Unless otherwise elected by Supplier for the particular instance (which Supplier
may do at its option), the sole jurisdiction and venue for actions related to
the subject matter hereof shall be the California state and U.S. federal courts
having within their jurisdiction of such courts and agree that process may be
served in the manner provided herein for giving of notices or otherwise as
allowed by California or federal law. In any action or proceeding to enforce
rights under this Agreement, the prevailing party shall be entitled to recover
costs and attorney's fees.
c. Headings and Language -- Headings and captions are for convenience
only and are not to be used in the interpretation of this Agreement. The
official text of this Agreement shall be the English language, and such English
text shall be controlling in all respects, notwithstanding any translation
hereof required under the laws or regulations of any other country. The parties
undertake to translation hereof required under the laws or regulations of any
other country. The parties undertake to use the English language in respect of
all documents and communications contemplated hereby, except where another
language must be used under the laws and regulations of another country. In any
such case, a certified English translation shall be supplied to the other party
by the party using such document or making such communication.
d. Notices -- For purposes of this Agreement, and for all notices and
correspondence hereunder, the addresses of the respective parties have been set
out at the beginning of this Agreement, and no change of address shall be
binding upon the other party hereto until written notice thereof is received by
such party at the address shown herein. All notices shall be deemed received
when personally delivered or two (2) days
10
<PAGE> 11
after being sent via telecopy, or three (3) after being sent by overnight
courier, return receipt requested.
e. Entire Agreement -- This Agreement supersedes all proposals, oral or
written, all negotiations, conversations or discussions between or among parties
relating to the subject matter of this Agreement and all past dealing or
industry custom. This Agreement does not contain or constitute any express or
implied license to make, have made or modify any Product under any
circumstances.
f. Severability -- If any provision of this Agreement is held to be
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so that this Agreement shall otherwise remain in full
force and effect and enforceable.
SUPPLIER DISTRIBUTOR
CardioDynamics International Corporation CARDIOMEDICS, Inc.
a California corporation
BY /s/ Richard Trayler BY /s/ William R. Schilt
------------------------------------- --------------------------------
Name: Richard Trayler Name: William R. Schilt
Title: Chief Operating Officer Title: President, C.O.O.
Date: 4-10-98 Date: 4-8-98
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
10-QSB\A QUARTER ENDED AUGUST 31, 1998
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 4,119,056
<SECURITIES> 0
<RECEIVABLES> 571,407
<ALLOWANCES> 26,562
<INVENTORY> 1,012,202
<CURRENT-ASSETS> 5,730,746
<PP&E> 433,076
<DEPRECIATION> 250,173
<TOTAL-ASSETS> 5,953,748
<CURRENT-LIABILITIES> 3,995,468
<BONDS> 0
0
2,880,903
<COMMON> 14,859,027
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,953,748
<SALES> 670,723
<TOTAL-REVENUES> 670,723
<CGS> 299,172
<TOTAL-COSTS> 1,588,506
<OTHER-EXPENSES> (901)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 76,121
<INCOME-PRETAX> (1,292,175)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,292,175)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
