<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended FEBRUARY 28, 1999
[_] 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 Identification No.)
incorporation or organization)
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 __
As of April 9, 1999 32,794,719 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.
--------
PART I - FINANCIAL INFORMATION
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Balance Sheets at February 28, 1999 (unaudited) and
November 30, 1998 (audited). 3
Statements of Operations for the three months
ended February 28, 1999 and February 28, 1998 (unaudited). 4
Statements of Cash Flows for the three months
ended February 28, 1999 and February 28, 1998 (unaudited). 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 12
ITEM 2. CHANGES IN SECURITIES 12
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
ITEM 5. OTHER INFORMATION 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CARDIODYNAMICS INTERNATIONAL CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 28, NOVEMBER 30,
1999 1998
ASSETS (UNAUDITED) (AUDITED)
------------------ -------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,349,612 $ 2,633,086
Accounts receivable, net of allowance for doubtful accounts
and returns of $88,504 in 1999 and $32,728 in 1998 1,167,494 632,190
Inventory, net 1,081,671 995,364
Other current assets 95,706 81,229
------------------- -------------------
Total current assets 3,694,483 4,341,869
------------------- -------------------
Property and equipment, net 270,937 266,917
Deposits 40,099 40,099
------------------- -------------------
Total assets $ 4,005,519 $ 4,648,885
=================== ===================
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 577,172 $ 577,836
Accrued expenses 263,093 112,703
Accrued salaries, wages and benefits 387,187 276,179
Revolving line of credit 208,600 --
Current maturities of long-term debt 37,816 37,816
Note payable to bank 2,000,000 2,000,000
------------------- -------------------
Total current liabilities 3,473,868 3,004,534
Note payable - related parties 1,000,000 1,000,000
Long-term debt, less current maturities 115,708 112,215
------------------ -------------------
Total liabilities 4,589,576 4,116,749
Convertible preferred stock, no par value; 18,000,000 shares
authorized; issued and outstanding 2,140 Series A shares at February
28, 1999 and 2,240 shares at November 30, 1998 2,049,455 2,152,294
Shareholders' deficit:
Common stock, no par value; 50,000,000 shares authorized; issued
and outstanding 32,743,126 shares at February 28, 1999 and
32,676,029 shares at November 30, 1998 15,713,152 15,598,274
Accumulated deficit (18,346,664) (17,218,432)
------------------ -------------------
Total shareholders' deficit (2,633,512) (1,620,158)
------------------- ------------------
Commitments and contingencies
Total liabilities and shareholders' deficit $ 4,005,519 $ 4,648,885
=================== ==================
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 28,
----------------------------------------------------
1999 1998
------------------------ ------------------------
<S> <C> <C>
Net sales $ 1,074,926 $ 147,512
Cost of sales 407,071 193,969
----------------------- ------------------------
Gross margin 667,855 (46,457)
Operating expenses:
Research and development 471,523 537,070
Selling, general, and administrative 1,248,747 728,630
---------------------- ------------------------
Total operating expenses 1,720,270 1,265,700
---------------------- ------------------------
Loss from operations (1,052,415) (1,312,157)
Other income (expense):
Interest, net (58,090) 24,403
Other, net (612) --
---------------------- -------------------------
Total other income (expense) (58,702) 24,403
Loss before income taxes (1,111,117) (1,287,754)
Income taxes (800) (800)
---------------------- --------------------------
Net loss (1,111,917) (1,288,554)
Preferred stock dividends (16,315) --
---------------------- --------------------------
Net loss to common shareholders $ (1,128,232) $ (1,288,554)
====================== ==========================
Net loss per common share, basic and diluted $ (.03) $ (.04)
====================== ==========================
Weighted-average number of common shares outstanding 32,719,426 32,085,910
====================== ==========================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
FEBRUARY 28,
----------------------------------------
1999 1998
----------------- ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,111,917) $ (1,288,554)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 19,067 19,488
Provision for warranty repairs 35,955 13,400
Provision for (reduction of) inventory returns -- (159,753)
Provision for (reduction of) doubtful receivables 55,776 (37,193)
Changes in operating assets and liabilities:
Accounts receivable (591,080) (15,376)
Inventory, net (86,307) 86,130
Other current assets (14,477) (5,346)
Deposits -- 2,805
Accounts payable (664) 148,437
Accrued expenses 115,289 (10,731)
Accrued salaries, wages and benefits 111,008 (4,694)
----------------- -------------------
Net cash used in operating activities (1,467,350) (1,251,387)
----------------- ------------------
Cash flows from investing activities:
Purchases of property and equipment (8,401) (27,776)
----------------- ------------------
Net cash used in investing activities (8,401) (27,776)
----------------- ------------------
Cash flows from financing activities:
Repayment of long-term debt (11,193) (2,820)
Proceeds from note payable to bank 208,600 750,000
Preferred stock issuance costs (7,070) --
Issuance of common stock 1,940 15,150
----------------- ------------------
Net cash provided by financing activities 192,277 762,330
----------------- ------------------
Net decrease in cash and cash equivalents (1,283,474) (516,833)
Cash and cash equivalents at beginning of period 2,633,086 2,655,349
----------------- ------------------
Cash and cash equivalents at end of period $ 1,349,612 $ 2,138,516
================= ==================
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
DESCRIPTION OF BUSINESS
At CardioDynamics International Corporation, we develop, manufacture and market
heart monitoring devices which provide physicians with continuous data on a wide
range of parameters relating to blood flow and heart function. Unlike other
cardiac function monitoring technologies, our monitors are non-invasive. Our
primary products, the BioZ(TM) System, the BioZ(TM) Portable, and the
BioZ.com(TM) use a technology called thoracic electrical bioimpedance to obtain
data which is typically available only through a time-consuming, costly, and
potentially dangerous invasive procedure known as right heart catheterization,
or pulmonary artery catheterization.
Many patients who might otherwise benefit from cardiac function monitoring are
often not given such treatment because the risks and costs associated with
pulmonary artery catheterization often outweigh the potential benefits. The
BioZ(TM) Systems allow such patients to receive treatment in a safe, efficient,
and cost-effective manner. Since the BioZ(TM) Systems provide cardiac function
monitoring noninvasively, these systems have the potential to expand the number
of clinical applications well beyond cardiology, intensive care, and surgery.
These include applications for emergency, hypertensive, congestive heart
failure, high risk obstetric, immune suppressed, dialysis, pacemaker, and sports
medicine patients.
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 the information
and footnotes which would be presented if these financial statements had been
prepared in accordance with generally accepted accounting principles.
These statements should be read in conjunction with the Financial Statements and
Notes that go along with our audited financial statements, as well as the other
financial information for the fiscal year ended November 30, 1998 as presented
in our Annual Report on Form 10-KSB. Financial presentations for prior periods
have been reclassified to provide consistency in reporting.
In our opinion, the information contained in this report reflects all
adjustments necessary to make the results of operations for the interim periods
a fair statement of our operations. All such adjustments are of a normal
recurring nature. The results of operations for the three months ended February
28, 1999 are not necessarily indicative of the results that may be expected for
the full fiscal year ended November 30, 1999.
Options and warrants to purchase 447,848 shares of common stock at an average
exercise price of $3.11 per share were outstanding during the quarter ended
February 28, 1999 but were not included in the computation of loss per share
because the effect would be anti-dilutive.
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 that go along with our audited financial statements, as
well as the other financial information for the fiscal year ended November 30,
1998. Some of our discussion is forward-looking and involves risks and
uncertainties. For information regarding risk factors that could have a
material adverse effect on the Company's business, refer to our November 30,
1998 Form 10-KSB and page 13 of this report.
Results of Operations (Quarters referred to herein are fiscal quarters ended
- ---------------------
February 28)
Net sales for the first quarter of fiscal 1999 were $1,074,926, a 629% increase
over first quarter of fiscal 1998 sales of $147,512. The strong increase in
sales during the first fiscal quarter of 1999 was primarily due to increased
physician acceptance of our non-invasive technology and the early success of our
direct sales force and expansion of international distribution. First quarter
1999 sales included $791,141 of revenue for shipments of our new Bioz.com(TM),
which was still in the product development stage at this time last year. Our
decision to add a direct sales force and target individual physician offices as
well as primary care facilities resulted in shipments of 32 BioZ(TM) systems to
end users during the first quarter of fiscal 1999 as compared to the 11 systems
shipped to end-users during the first quarter of fiscal 1998.
In November of 1998, we received CE Mark approval and have been actively
pursuing European and Asian markets. The CE Mark is recognized worldwide as an
essential European regulatory approval. In anticipation of this approval, we had
begun to establish a network of International distributors to market the
BioZ.com(TM). As of February 28, 1999 agreements had been formalized with
fourteen medical distributors representing 22 countries in Europe, Asia, Africa,
the Middle East and South America. During the first quarter of fiscal 1999, we
sold 10 BioZ(TM) systems to our international distributors resulting in sales of
$212,404. There were no international sales made during the first fiscal quarter
of 1998.
Our gross margin for the quarter ended February 28, 1999 was $667,885, or 62% of
sales, a significant increase from the first fiscal quarter of 1998 in which we
had a negative margin of ($46,457) or (32%). The direct sales approach and the
introduction of the higher priced BioZ.com(TM) product resulted in an 11%
increase in our average unit sales price. In addition, with the increased sales
volume, our manufacturing capacity is being more fully utilized resulting in
better margins.
7
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations (Continued)
- ---------------------
With our continued investment in sales and marketing related activities,
selling, general and administrative costs for the first fiscal quarter of 1999
increased to $1,248,747, a 71% increase over the same period in 1998 of
$728,630. We intend to continue expansion of our direct sales force and
development of selling and marketing materials customized for direct sales
targeted at both the hospital and outpatient markets. However, as we increased
our investment in sales and marketing during the quarter, we trimmed our general
and administrative expenses 14% from last year's same period through judicious
allocation of resources and continued cost containment efforts.
Subsequent to the launch of our new Bioz.com(TM) in the second quarter of 1998
our research and development costs for the first quarter of 1999 decreased 12%
from the first fiscal quarter of 1998's expenditures of $537,070. We anticipate
that a significant portion of our resources will continue to be invested into
research, clinical studies, further enhancements to the BioZ(TM) product line,
and new product development.
We received $21,424 in interest income and incurred $79,514 of interest expense
in the first three months of fiscal 1999 compared with interest income of
$25,478 and interest expense of $1,075 in the same three month period of fiscal
1998. The increased interest expense is largely a result of increased
borrowings against our various financing agreements.
We generated a net loss to Common Shareholders in the first quarter of 1999 of
$1,128,232, or $.03 per Common share, compared with a net loss to Common
Shareholders of $1,288,554, or $.04 per Common share, for the same quarter last
year. The increase in the weighted average number of Common shares outstanding
was primarily due to the conversion of 760 shares in November 1998, and 100
shares in January 1999 of our Series A Convertible Preferred Stock into 611,660
shares of our Common Stock.
Liquidity and Capital Resources
- -------------------------------
To help provide the cash flow necessary to meet the increasing demand for the
Company's BioZ(TM) Systems, in January 1999 we established a secured revolving
credit line with a bank. The credit line provides for borrowing of up to
$3,000,000 at the bank's prime rate. Under the terms of the agreement, we are
required to meet certain loan covenants, including maintenance of a minimum
quick ratio and maximum quarterly losses. The credit line is collateralized by
all the assets of our company. At February 28, 1999, we had $208,600
outstanding under the credit line.
8
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources - (Continued)
- --------------------------------
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. Under the terms of
the agreement we 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
we borrowed $1,000,000 on this line of credit and used the proceeds to reduce
outstanding borrowings under the bank term loan. In February 1999, the line of
credit was extended to September 30, 2000. At February 28, 1999 we had
$1,000,000 outstanding under this line of credit.
In August of 1998, we completed the first phase of a $6,000,000 equity private
placement to institutional investors. The first phase provided $3,000,000
($2,882,537 net proceeds) through the issuance of Series A Convertible Preferred
Stock. The funding of the second phase was contingent upon certain conditions
being met including minimum daily stock trading volume and price. These
conditions were not met and therefore the second phase of the financing has not
been completed as of February 28, 1999.
In May of 1998, we entered into a six month unsecured term loan agreement with
Imperial Bank. Under the terms of the agreement we could borrow up to
$4,000,000, of which we borrowed $3,000,000. The loan bears interest at one
percent above the Bank's Prime Rate. In August 1998, we 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 April 7, 1999. At February 28,
1999 the $2,000,000 remains outstanding. On February 26, 1999 we signed a
commitment letter with City National Bank to enter into a three year unsecured
term loan agreement. The proceeds of the new loan will be used to repay the
existing Imperial Bank term loan. Under the terms of the City National Bank
agreement we will borrow $2,000,000 with monthly interest-only payments for the
first year at the Bank's Prime Rate. The loan is guaranteed by the co-chairmen
of our Board of Directors. Beginning March 2000, we will commence making
consecutive monthly principal installments of $83,333 each, plus interest at one
percent above the Bank's Prime Rate.
Nonetheless, without additional debt or equity financing in the second fiscal
quarter, our ability to execute the transition to a direct sales strategy will
be constrained, due to the strategy's higher cash requirements. We expect to
generate an operating loss for our fiscal year ended November 30, 1999. Longer
term, our liquidity will depend on our ability to successfully commercialize the
BioZ(TM) Systems and other diagnostic products and raise additional funds
through public or private financing, bank loans, collaborative relationships or
other arrangements. We can give no assurance that such additional funding will
be available on terms attractive to us, or at all.
9
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CARDIODYNAMICS INTERNATIONAL CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OTHER MATTERS
Year 2000 Compliance
- --------------------
Many computer systems experience problems handling dates beyond the year 1999.
This issue will impact virtually any business that relies on computers. In
addition to our own potential problems, there are governmental agencies,
financial institutions, utilities and other basic service providers that may
encounter problems that are outside of our control. In order to correct this
issue, some computer hardware and software will need to be modified prior to the
year 2000 in order for it to remain functional. We have taken steps to assess
the internal readiness of our computer systems and the compatibility of our
products for handling the year 2000 issue. We have created a Year 2000 task
force and we are addressing these issues. The project has been broken down into
the following phases.
. Awareness: To create awareness of the potential business implications of
the Year 2000 challenge within CardioDynamics. Our employees, when
appropriate, will be kept informed of the news and issues related to the
Year 2000 issue. We will focus on both our information technology systems
as well as our products.
. Inventory and Assessment: We have inventoried all of our computer software
and hardware as well as facilities, telecommunications, and external
interfaces. Significant third party vendors will be contacted to determine
their Year 2000 readiness.
. Renovation: As problems are discovered, strategies will be developed to
either correct the problem or determine if new equipment or software is
necessary.
. Testing: Testing of the renovated systems will occur to determine whether
they are performing reliably under Year 2000 conditions.
. 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.
. Contingency: In addition, we will develop a contingency plan in the event
that our internal systems, products or suppliers are not Year 2000
compliant.
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)
As of February 28, 1999 we have completed the inventory and assessment stage and
anticipate completing any necessary renovation, testing and implementation
within the next six months. It has already been determined that the internal
network, and manufacturing requirements planning software is certified as Year
2000 complaint. Additionally, our newest products have been specifically tested
for Year 2000 performance and no Year 2000 problems were identified. We are
still in the process of certifying key third party vendors Year 2000 compliance.
Renovation and testing has begun as problems were identified. We plan to have
all stages of the Year 2000 project completed no later than the fall of 1999.
Thus far, we have not had to spend significant amounts of money through this
phase of the process. We currently believe that the cost of addressing this
issue will not have a material adverse effect on our business, results of
operations, and financial condition. However, if our vendors of the most
important goods and services, or our suppliers of necessary energy,
telecommunications and transportation needs, fail to provide us with the
materials and services which are necessary to produce and sell our products,
such failure could have material adverse effect on the results of operations,
liquidity and financial condition of our Company.
11
<PAGE>
CARDIODYNAMICS INTERNATIONAL CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 8, 1999, the Official Post Confirmation Committee of
Unsecured Creditors of Helionetics, Inc. ("Plaintiff") filed a
Complaint in United States Bankruptcy Court for the Central District
of California, Santa Ana Division, naming CardioDynamics Holdings, LLC
("Holdings") and the Company as defendants. The Complaint relates to
an alleged fraudulent transfer of certain shares of the Company's
Common Stock from Helionetics, Inc. to Holdings in February 1995 and
seeks various relief including return of the subject shares to
Plaintiff and compensatory and punitive damages. The Company has not
filed an Answer to the Complaint pursuant to a stipulation among
counsel to the parties and an agreement by the Plaintiff to file an
amended Complaint.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
On December 9,1999 the Company received authorization from TUV
Rhineland of North America to place the CE Mark on the BioZ.com.(TM)
The CE Mark is recognized worldwide as an essential European
regulatory approval and enables the Company to expand its sales and
distribution of the BioZ.com(TM) throughout the European Community.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Amendment of Private Line of Credit Agreement, dated February 5,
1999, between Allen Paulson, James C. Gilstrap and the Company.
10.2 Line of Credit Agreement with Imperial Bank, dated January 15,
1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
None.
12
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CARDIODYNAMICS INTERNATIONAL CORPORATION
This document contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements include statements regarding plans, goals,
strategies, intent, beliefs or current expectations of the Company and its
management. These statements are expressed in good faith and are believed to
have a reasonable basis when expressed, but there can be no assurance that these
expectations will be achieved or accomplished. Sentences in this document
containing verbs such as "plan," "intend," "anticipate," "target," "estimate,"
"expect," etc., and/or future-tense or conditional constructions ("will," "may,"
"could," "should," etc.) constitute forward-looking statements that involve
risks and uncertainties. Items contemplating, or making assumptions about,
actual or potential future sales, market size, collaborations, trends or
operating results also constitute such forward-looking statements. Among the
factors that could cause the Company's actual results to differ materially from
those indicated in any such forward-looking statements are: (i) sole dependence
on the recently introduced BioZ(TM) System, BioZ Portable(TM) and BioZ.com(TM)
and related products, (ii) general acceptance in the medical community of
invasive procedures such as PAC and lack of general acceptance in the medical
community of TEB, (iii) its ability to raise additional funds on terms
attractive to the Company, or at all, (iv) competition from Baxter Healthcare
Corporation, the maker of the Swan-Ganz(TM) PAC device, (v) expansion of its
direct sales force, (vi)Year 2000 computer related issues, and (vii) 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, 1998 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: April 13, 1999 By: /s/ Michael K. Perry
-------------- -----------------------------------------
Michael K. Perry
Chief Executive Officer
Date: April 13, 1999 By: /s/ Stephen P. Loomis
-------------- ---------------------------------------
Stephen P. Loomis
Vice President, Finance
Chief Financial Officer and
Corporate Secretary
13
<PAGE>
EXHIBIT 10.1
AMENDMENT OF
PRIVATE LINE OF CREDIT AGREEMENT
This Amendment is entered in San Diego, California on February 5, 1999 to
amend the Private Line of Credit Agreement dated March 11, 1998 among
CardioDynamics International Corporation, a California corporation ("CDIc"),
Allen E. Paulson ("Paulson") and James C. Gilstrap ("Gilstrap"). Paulson and
Gilstrap are hereafter referred to jointly as the "Lenders".
1. Under the Private Line of Credit Agreement, the Lenders agreed to lend
up to an aggregate of $3,000,000 from time to time to CDIc, upon written request
by CDIc, against respective promissory notes in the form attached thereto
(the"Notes").
2. The parties hereby agree to amend the Notes by changing their maturity
dates (and, subject to Section 2 of the Private Line of Credit Agreement, the
time period during which CDIc may request funds under the line of credit) from
September 30, 1999 to September 30, 2000.
3. In order to effectuate the amendment described above, each Lender
shall mark the first line of the first paragraph of his respective Note to
change the date "September 30, 1999" to "September 30, 2000". Each Lender agrees
to provide to CDIc a photocopy of his Note, as so changed.
4. Except as expressly set forth herein, the Private Line of Credit
Agreement and the Notes remain unchanged and in full force and effect.
5. The parties acknowledge that Brobeck, Phleger & Harrison LLP
represents in various matters each of CDIc, Paulson, Gilstrap, and entities
controlled by Paulson and/or Gilstrap. This results in an actual conflict of
interest. The parties agree that in this transaction Brobeck, Phleger & Harrison
LLP is representing only CDIc, and is not representing either of the Lenders.
The parties consent to this representation alignment and waive the actual
conflict of interest involved. The Lenders acknowledge that they have been urged
to retain separate legal counsel to protect their interests in this transaction.
CARDIODYNAMICS INTERNATIONAL CORPORATION
By: /s/ Michael K. Perry
-------------------------------------
Chief Executive Officer
By: /s/ Steve P. Loomis
-------------------------------------
Secretary
/s/ Allen E. Paulson
------------------------------------------
ALLEN E. PAULSON
/s/ James C. Gilstrap
------------------------------------------
JAMES C. GILSTRAP
<PAGE>
EXHIBIT 10.2
CREDIT AGREEMENT
----------------
This Credit Agreement ("Agreement") is made and entered into on January 15,
1999, by and between CARDIODYNAMICS INTERNATIONAL CORPORATION, a California
corporation ("Borrower") and Imperial Bank, a California banking corporation,
("Bank").
Subject to the terms and conditions of this Agreement, any security agreement(s)
executed by Borrower in favor of Bank, any note(s) executed by Borrower in favor
of Bank, or any other agreements executed in conjunction therewith
(collectively, the "Loan Documents"), Bank shall make the loans and or advances
(individually a "Loan" and collectively "Loans") referred to below to Borrower.
In consideration of mutual covenants and conditions hereof, the parties hereto
agree as follows:
1. AMOUNT AND TERMS OF CREDIT
--------------------------
1.01 ASSET BASED LINE OF CREDIT COMMITMENT (ABL LINE OF CREDIT)
(a) LINE OF CREDIT - ACCOUNTS RECEIVABLE AND LIQUID ASSET BORROWING BASE
CONSTRAINED. Subject to all the terms and conditions of this Agreement, provided
that no event of default then has occurred and is continuing, Bank shall upon
Borrower's request, make advances ("ABL Loans") to Borrower, from time to time
and in such amounts as Borrower shall request up to an aggregate principal
amount outstanding not to exceed:
(1) Eighty percent (80%) maximum of Eligible Accounts Receivable;
plus
(2) Sixty percent (60%) of Liquid Assets (Liquid Asset advances to
become available following the satisfactory pay-off of the Prior Loan ("Loan
Number 00738000003-3")), including cash and marketable investments, not to
exceed
$2,000,000, as such Eligible Accounts and Liquid Assets may be
adjusted from time to time as provided for under 4.15 hereof (the "Borrowing
Base")
and in no event more than $2,000,000 (the "ABL Line of Credit");
however, upon Borrower achieving a minimum eligible Borrowing Base of
$2,000,000, the ABL Line Of Credit shall be increased to $3,000,000.
If at any time or for any reason, the outstanding principal amount of the
ABL Loan Account (as defined below) is greater than the lessor of: (x) the
Borrowing Base or (y) the ABL Line of Credit, Borrower shall immediately pay to
Bank, in cash, the amount of such excess. Any commitment of Bank, pursuant to
the terms of this Agreement, to make ABL Loans shall expire on the ABL Maturity
Date (as hereinafter defined), subject to Bank's right to renew said commitment
in its sole and absolute discretion at Borrower's request. Any such renewal of
said commitment shall not be binding upon Bank unless it is in writing and
signed by an officer of Bank. Provided
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that no Event of Default (as hereinafter defined) has occurred and is
continuing, all or any portion of the ABL Loans advanced by Bank which are
repaid by Borrower shall be available for reborrowing in accordance with the
terms hereof. Borrower promises to pay to Bank the entire outstanding unpaid
principal balance (and all accrued unpaid interest thereon) of the ABL Loan
Account on the earlier of demand by Bank or January 14, 2000 ("ABL Maturity
Date").
(b) LIMITATION ON ADVANCE OF ANY ABL LOANS. Notwithstanding any of the
provisions contained in Section 1.01(a) hereof, prior to any advance of a ABL
Loan, a representative of Bank shall have conducted an audit of Borrower's books
and records relating to the Accounts and Inventory and any other Collateral for
the ABL Loans and made extracts therefrom, and arranged for verification of the
Accounts, directly with the account debtors or otherwise, and of the Inventory
all with results satisfactory to Bank, the cost of such audit of which shall be
at Borrower's sole expense. Based on Bank's review of such audit, and prior to
the advance of an ABL Loan in accordance with the terms of this hereof, Bank may
adjust the Borrowing Base percentage, in its sole and reasonable discretion, as
provided for under Section 4.15 hereof.
(c) LOAN LEDGER ACCOUNT. The amount of each ABL Loan made by Bank to
Borrower hereunder shall be debited to the loan ledger account of Borrower
maintained by Bank for the ABL Line of Credit (herein called the "ABL Loan
Account") and Bank shall credit the ABL Loan Account with all loan repayments in
respect thereof made by Borrower. ABL Loans may only be used for general
corporate purposes and to support trading assets.
(d) ABL LOANS INTEREST. Borrower further promises to pay to Bank from the
date of the advance of the initial ABL Loan through the ABL Maturity Date, on or
before the tenth (10) day of each month, interest on the unpaid balance of the
ABL Loan Account at a rate of interest equal to the rate of interest which Bank
has announced as its prime lending rate (the "Prime Rate"), which shall vary
concurrently with any change in the Prime Rate. Interest shall be computed at
the above rate on the basis of the actual number of days during which the
principal balance of the ABL Loans are outstanding divided by 360, which shall
for interest computation purposes be considered one (1) year.
(e) APPLICATION OF RECEIPTS. All sums received by Bank, whether from
Borrower or from Borrower's account debtors shall be applied to the outstanding
ABL Loan balance immediately upon receipt thereof by the Bank. The Borrower will
be charged, on a monthly basis, for the uncollected balance fees.
(f) CERTAIN DEFINITIONS. As used herein the following terms shall have the
following meanings:
"Accounts" means any right to payment for goods sold or leased, or
rented, or to be sold or to be leased, or to be rented, or for services rendered
or to be rendered no matter how evidenced, including accounts receivable,
contract rights, chattel paper, instruments, purchase orders, notes, drafts,
acceptances, general intangibles and other forms of obligations and receivables.
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"Collateral" means any and all property of Borrower which is assigned,
or hereafter is assigned to Bank as security or in which Bank now has or
hereafter acquires a security interest.
"Eligible Accounts" Eligible Accounts shall only include such
accounts, as Bank in its sole discretion shall determine are eligible from time
to time. "Eligible Accounts" shall also NOT include any of the following:
(1) All Accounts under which payment is not received within 60 days
from any due date; not to exceed 90 days from invoice date.
(2) All Accounts against which the account debtor or any other person
obligated to make payment thereon asserts any defense, offset, counterclaim or
other right to avoid or reduce the liability represented by the Account;
(3) Any Accounts if the account debtor or any other person liable in
connection therewith is insolvent, subject to bankruptcy or receivership
proceedings or has made an assignment for the benefit of creditors or whose
credit standing is unacceptable to Bank and Bank has so notified Borrower.
(4) Account balances over 90 days from invoice date60 days past the
due date.
(5) Credit balances greater than 60 days past the due date
(6) Accounts due from a debtor if 50% or more of the aggregate amount
of accounts of such debtor have at that time remained unpaid for more than 90
days from invoice date / 60 days past the due date.
(7) For accounts representing more than 20% of Borrower's total
accounts receivable, the balance in excess of the 20% is not eligible. However,
the Bank may deem, in its sole discretion, the entire amount, or any portion
thereof, eligible.
(8) Accounts with respect to international transactions unless
insured by an insurance company acceptable to the Bank or covered by letters of
credit issued or confirmed by a bank acceptable to the Bank. Bank, in its sole
discretion, may deem as eligible amounts due from major, publicly owned foreign
companies.
(9) Accounts with respect to which the account debtor is an officer,
director, shareholder, employee, subsidiary or affiliate of Borrower.
(10) Accounts where the account debtor is a seller to Borrower,
whereby a potential offset (contra) exists.
(11) Consignment or guaranteed sales.
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(12) Bill and hold accounts.
(13) Collection accounts.
(14) C.O.D. accounts.
(15) Salesmen's accounts for promotional purposes.
(16) For United States Government receivables, the balance in excess
of 30% of Borrower's total accounts receivable, unless those balances in excess
of 30% are formally assigned to the Bank.
(17) Accounts representing billings for service or maintenance
contracts or for inventory or equipment on rent to the account debtor.
(18) Deferred revenues.
(19) Pre-billings.
"Liquid Assets" means all of the Borrower's cash and marketable
investments.
(g) REQUESTS FOR ABL LOANS. Requests for ABL Loans hereunder shall be in
writing duly executed by Borrower in a form satisfactory to Bank and shall
contain a certification setting forth the matters referred to in Section 1,
which shall disclose that Borrower is entitled to the amount of loan being
requested.
(h) LATE CHARGE. If any installment payment, interest payment, principal
payment or principal balance due under the ABL Line of Credit is delinquent
twenty (20) or more days, Borrower agrees to pay Bank a late charge in the
amount of five percent (5%) of the payment so due and unpaid, in addition to the
payment; but nothing in this paragraph is to be construed as any obligation on
the part of the Bank to accept payment of any payment past due or less than the
total unpaid principal balance after maturity. All payments, at Bank's sole
discretion, shall be applied first to any late charges owing, then to interest
and the remainder, if any, to principal.
(i) DEFAULT RATE. If an Event of Default occurs hereunder, then during the
continuance thereof at the Bank's option, the interest rate shall be five
percent (5%) per year in excess of the rate otherwise applicable.
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(j) INTEREST CALCULATIONS. The term "Prime Rate" shall mean the rate that
the Bank has announced as its prime lending rate, which shall vary concurrently
with any change in the Prime Rate. Interest based on the Prime Rate shall vary
concurrently with any change in the Prime Rate. All interest shall be computed
at the rate specified in any note on the basis of the actual number of days
during which the principal balance of the corresponding Loans are outstanding
divided by 360, which shall for interest computation purposes be considered one
(1) year.
1.02 PRIOR LOAN(S). Bank made a term loan in the original principal amount
of $4,000,000 to the Borrower on May 18, 1998, evidenced by a promissory note
dated May 14, 1998, payable to the Bank and amended on August 19, 1998 to reduce
the commitment to $3,020,250, which is evidenced by a promissory note dated
August 19, 1998 ("Prior Loan"). Borrower agrees that the Prior Loan is subject
to the terms and conditions of this Agreement and that the interest rate,
payments of principal and interest and other the terms contained in the note
evidencing the Prior Loan remain in full force and effect, and Borrower agrees
to continue to make payments in accordance with the terms of the Prior Loan.
Guarantees from Allen Paulson and James Gilstrap will be released by Bank upon
payment in full of Prior Loan.
1.03 DOCUMENTATION FEE, COSTS AND EXPENSES. In addition to any other
amounts due, or to become due, concurrently with the execution hereof, Borrower
agrees to pay to Bank a documentation fee in the amount of $250, and all other
costs and expenses incurred by the Bank in the preparation of this Agreement,
the other Loan Documents and the perfection of any security interest granted to
Bank by Borrower.
1.04 COLLATERAL. Borrower shall grant or cause to be granted to Bank a
first priority lien on any and all personal property assets of Borrower which is
assigned or hereafter is assigned to Bank as security or in which Bank now has
or hereafter acquires a security interest or pursuant to the terms of any
security agreement, an intellectual property security agreement or otherwise as
security for all of Borrower's obligations to Bank, all as may be subject to
Section 5.03 herein.
2. REPRESENTATIONS OF BORROWER
---------------------------
Borrower represents and warrants that:
2.01 EXISTENCE AND RIGHTS. Borrower is a corporation, duly organized and
existing and in good standing under the laws of the state of California, without
limit as to the duration of its existence each Borrower is authorized and in
good standing to do business in the state of its incorporation; each Borrower
has the appropriate powers and adequate authority, rights and franchises to own
its property and to carry on its business as now conducted, and is duly
qualified and in good standing in each state in which the character of the
properties owned by it therein or the conduct of its business makes such
qualification necessary; and Borrower has
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the power and adequate authority to make and carry out this Agreement. Borrower
has no investment in any other business entity unless specified in writing to
Bank.
2.02 AGREEMENT AUTHORIZED. The execution, delivery and performance of this
Agreement and the Loan Documents are duly authorized and do not require the
consent or approval of any governmental body or other regulatory authority; are
not in contravention of or in conflict with any law or regulation or any term or
provision of Borrower's charter/articles of incorporation, by-laws or similar
document as the case may be, and this Agreement is the valid, binding and
legally enforceable obligation of Borrower in accordance with its terms; subject
only to bankruptcy, insolvency or similar laws affecting creditors rights
generally.
2.03 NO CONFLICT. The execution, delivery and performance of this Agreement
and the Loan Documents are not in contravention of or in conflict with any
agreement, indenture or undertaking to which Borrower is a party or by which it
or any of its property may be bound or affected, and do not cause any lien,
charge or other encumbrance to be created or imposed upon any such property by
reason thereof.
2.04 LITIGATION. Except as disclosed in writing to bank by Borrower, there
is no litigation or other proceeding pending or threatened against or affecting
Borrower which if determined adversely to Borrower or its interest would have a
material adverse effect on the financial condition of Borrower, and Borrower is
not in default with respect to any order, writ, injunction, decree or demand of
any court or other governmental or regulatory authority.
2.05 FINANCIAL CONDITION. The balance sheet of Borrower as of October 31,
1998, and the related profit and loss statement for the 11 month period ended as
of that date, a copy of which has heretofore been delivered to Bank by Borrower,
and all other statements and data submitted in writing by Borrower to Bank in
connection with this request for credit are true and correct, and said balance
sheet truly presents the financial condition of Borrower as of the date thereof,
and has been prepared in accordance with generally accepted accounting
principles on a basis consistently maintained. Since such date there have been
no material adverse changes in the financial condition or business of Borrower.
Borrower has no knowledge of any liabilities, contingent or otherwise, at such
date not reflected in said balance sheet, and Borrower has not entered into any
special commitments or substantial contracts which are not reflected in said
balance sheet, other than in the ordinary and normal course of its business,
which may have a materially adverse effect upon its financial condition,
operations or business as now conducted.
2.06 TITLE TO ASSETS. Borrower has good title to its assets, and the same
are not subject to any liens or encumbrances other than those permitted by
Section 5.03 hereof.
2.07 TAX STATUS. Borrower has no liability, except as disclosed to Bank in
writing, for any delinquent state, local or federal taxes, and, if Borrower has
contracted with any government agency, Borrower has no liability for
renegotiation of profits.
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2.08 TRADEMARKS, PATENTS. Borrower, as of the date hereof, possesses all
necessary trademarks, trade names, copyrights, patents, patent rights, and
licenses to conduct its business as now operated, without any known conflict
with the valid trademarks, trade names, copyrights, patents and license rights
of others.
2.09 REGULATION U. None of the proceeds of any Loan shall be used to
purchase or carry margin stock (as defined within Regulation U of the Board of
Governors of the Federal Reserve system).
2.10 ERISA. All defined benefit pension plans as defined in the Employees
Retirement Income Security Act of 1974, as amended ("ERISA"), of Borrower meet,
as of the date hereof, the minimum funding standards of Section 302 of ERISA,
and no Reportable Event or Prohibited Transaction as defined in ERISA has
occurred with respect to any such plan.
2.11 YEAR 2000 COMPLIANCE. Borrower and its subsidiaries, as applicable,
have reviewed the areas within their operations and business which could be
adversely affected by, and have developed or are developing a program to address
on a timely basis, the Year 2000 Problem and have made related appropriate
inquiry of material suppliers and vendors, and based on such review and program,
the Year 2000 Problem will not have a material adverse effect upon its financial
condition, operations or business as now conducted. "Year 2000 Problem" means
the possibility that any computer applications or equipment used by Borrower may
be unable to recognize and properly perform date sensitive functions involving
certain dates prior to and any date one or after December 31, 1999.
3. CONDITIONS PRECEDENT TO LOAN.
----------------------------
Prior to Bank being obligated to make any Loan pursuant to this
Agreement, Bank must receive all of the following, each of which must be in form
and substance satisfactory to Bank:
3.01 SECURITY AGREEMENT. Original, executed security agreement(s) covering
the personal property collateral securing the Loan.
3.02 FINANCING STATEMENT. Financing statement executed by Borrower.
3.03 INSURANCE. Borrower shall have delivered to Bank evidence of insurance
coverage required pursuant to that Agreement to Provide Insurance executed by
Borrower, in form, substance, amounts, covering risks and issued by companies
satisfactory to Bank, and where required by Bank, with loss payable endorsements
in favor of Bank.
3.04 DOCUMENTS. Copies of the charter/articles of incorporation, or similar
document as the case may be, of the Borrower.
3.05 AUTHORIZATIONS. Certified copies of all action taken by the Borrower
and each Guarantor to authorize the execution, delivery and performance of the
Loan Documents.
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3.06 GOOD STANDING . Good standing certificates from the appropriate
secretary of state of the state in which the Borrower is organized and in each
state in which it is required to be qualified to do business.
3.07 SUBORDINATION AGREEMENTS. Subordination Agreements in favor of Bank
executed by Allen Paulson in the amount of $850,000 and James Gilstrap in the
amount of $150,000. Subordinated Shareholder Line of Credit to remain in place
until Prior Loan is repaid in full.
3.08 ADDITIONAL DOCUMENTS. Such other documents as Bank may reasonable deem
necessary.
4. AFFIRMATIVE COVENANTS OF BORROWER
---------------------------------
Borrower agrees that so long as it is indebted to Bank, under borrowings, or
other indebtedness, or so long as Bank has any obligation to extend credit to
Borrower it will, unless Bank shall otherwise consent in writing:
4.01 RIGHTS AND FACILITIES. Maintain and preserve all rights, franchises
and other authority adequate for the conduct of its business; maintain its
properties, equipment and facilities in good order and repair; conduct its
business in an orderly manner without voluntary interruption and, if a
corporation or partnership, maintain and preserve its existence.
4.02 USE OF PROCEEDS. Use the proceeds of the Loans only for purposes
specified in Section1 of this Agreement.
4.03 INSURANCE. Maintain public liability, property damage and workers'
compensation insurance and insurance on all its insurable property against fire
and other hazards with responsible insurance carriers to the extent usually
maintained by similar businesses and/or in the exercise of good business
judgment, and as required by that Agreement to Provide Insurance executed by
Borrower, with the Bank to be shown as Lenders Loss Payee on such policies.
4.04 TAXES AND OTHER LIABILITIES. Pay and discharge, before the same become
delinquent and before penalties accrue thereon, all taxes, assessments and
governmental charges upon or against it or any of its properties, and all its
other liabilities at any time existing, except to the extent and so long as:
(a) The same are being contested in good faith and by appropriate
proceedings in such manner as not to cause any materially adverse effect upon
its financial condition or the loss of any right of redemption from any sale
thereunder; and
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(b) It shall have set aside on its books reserves (segregated to the
extent required by generally accepted accounting practice) deemed by it to be
adequate with respect thereto.
4.05 RECORDS AND REPORTS. Maintain a standard and modern system of
accounting in accordance with generally accepted accounting principles on a
basis consistently maintained; permit Bank's representatives to have access to,
and to examine its properties, books and records at all reasonable times and
upon reasonable notice during normal business hours; and furnish Bank:
(a) MONTHLY FINANCIAL STATEMENT. As soon as available, and in any event
within thirty (30) days after the close of each month, a balance sheet, profit
and loss statement and reconciliation of Borrower's capital balance accounts as
of the close of such period and covering operations for the portion of
Borrower's fiscal year ending on the last day of such period, all in reasonable
detail and reasonably acceptable to Bank, in accordance with generally accepted
accounting principles on a basis consistently maintained by Borrower and
certified by an appropriate officer of Borrower.
(b) ANNUAL FINANCIAL STATEMENT. As soon as available, and in any event
within ninety (90) days after and as of the close of each fiscal year of
Borrower, a report of audit of Company, all in reasonable detail, audited by a
certified public accountant selected by Borrower and reasonably acceptable to
Bank, in accordance with generally accepted accounting principles on a basis
consistently maintained by Borrower and certified by an appropriate officer of
Borrower;
(c) OFFICER'S CERTIFICATE. Within thirty (30) days after the end of each
month and fiscal year of Borrower, a certificate of the chief financial officer
of Borrower, stating that Borrower has performed and observed each and every
covenant contained in this Agreement to be performed by it and that no event has
occurred and no condition then exists which constitutes an event of default
hereunder or would constitute such an event of default upon the lapse of time or
upon the giving of notice and the lapse of time specified herein; or, if any
such event has occurred or any such condition exists, specifying the nature
thereof.
(d) AUDIT REPORTS. Promptly after the receipt thereof by Borrower, copies
of any detailed audit reports submitted to Borrower by independent accountants
in connection with each annual or interim work on the accounts of Borrower made
by such accountants;
(e) ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE AGINGS. Within twenty (20)
days from each month-end, deliver to Bank a detailed accounts receivable aging
reconciled to the general ledger of Borrower, a detailed accounts payable aging
reconciled to the Borrower's general ledger and setting forth the amount of any
book overdraft or the amount of checks issued but not sent.. All the foregoing
will be in a form and with such detail as Bank may request from time to time.
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(f) BORROWING BASE CERTIFICATE. Within twenty (20) days from each month end,
deliver to Bank, on a monthly basis, a Borrowing Base Certificate including
sales and cash receipts
(g) GUARANTORS' FINANCIAL STATEMENTS. As long as Prior Loan is outstanding,
cause each Guarantor to submit to Bank such Guarantor's financial statement,
confirmed as to its correctness by Guarantor's signature, either on Bank's form
or prepared by an independent certified public accountant, together with a
completed copy of such Guarantor's federal income tax return for the previous
calendar year, no later than forty-five (45) after filing of same with the
Internal Revenue Service.
(h) STOCKHOLDER, SECURITY AND EXCHANGE COMMISSION STATEMENTS AND REPORTS
Promptly after the same are available, copies of all such proxy statements,
financial statements and reports as Borrower or any subsidiary shall send to its
members or stockholders as appropriate, if any, and copies of all reports which
Borrower or any subsidiary may file with the Securities and Exchange Commission.
(i) OTHER INFORMATION. Such other information relating to the affairs of
Borrower as the Bank reasonably may request from time to time.
4.06 QUICK RATIO. Maintain on monthly basis a quick ratio of cash plus net
accounts receivable divided by current liabilities, excluding bridge loan, as
follows: for the quarter ending February 28, 1999, of at least 1.20:1; for the
quarter ending May 31, 1999, of at least .65:1; for the quarter ending August
30, 1999, of at least .65:1; and for the quarter ending November 30, 1999, of at
least .55:1. In the event the Quick Ratio falls below .75:1 and the Borrower
remains in compliance with the minimum loss covenant (defined in section 4.07),
the ABL Line of Credit is to convert to a streamline credit facility with daily
reporting. In the event Borrower raises additional equity, in an amount greater
than $3,000,000, the quick ratio will be mutually re-evaluated and the minimum
quarterly requirements shall be increased to reflect the additional new equity.
4.07 PROFITABILITY. Maintain maximum quarterly losses not to exceed the
following: quarter ending February 28, 1999, not to exceed $(1,400,000); quarter
ending May 31, 1999, not to exceed $(950,000); quarter ending August 31, 1999,
not to exceed $(575,000). Borrower to be profitable (meaning a net profit after
taxes) for the quarter ending November 30, 1999.
4.08 ERISA. Cause all defined benefit pension plans, as defined in ERISA, of
Borrower to, at all times, meet the minimum funding standards of Section 302 of
ERISA, and ensure that no Reportable Event or Prohibited Transaction, as defined
in ERISA, will occur with respect to any such plan.
4.09 LAWS. At all times comply with, or cause to be complied with, all laws,
statues, rules, regulations, orders and directions of any governmental authority
having jurisdiction over Borrower or Borrower's business.
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4.10 USE OF PROCEEDS. Use the proceeds of the Loans only for the purposes
specified in Section 1 herein.
4.11 GAAP. Compliance with all financial covenants shall be calculated based on
generally accepted accounting principles applied on a consistent basis as
maintained by Borrower.
4.12 YEAR 2000 COMPLIANT. Borrower shall perform all acts reasonably necessary
to ensure that (a) Borrower and any business in which Borrower holds a
substantial interest, and (b) all customers, suppliers and vendors whose
compliance is likely to be material to Borrower's business, become Year 2000
Compliant in a timely manner. Such acts shall include, without limitation,
performing a comprehensive review and assessment of all Borrower's systems and
adopting a detailed plan, with itemized budget, for the remediation, monitoring
and testing of such systems. As used in this paragraph, "Year 2000 Compliant"
shall mean, in regard to any entity, that all software, hardware, firmware,
equipment, goods or systems utilized by or material to the business operations
or financial condition of such entity, will properly perform date sensitive
functions before, during and after the year 2000. Borrower shall, immediately
upon request, provide to Agent such certifications or other evidence of
Borrower's compliance with the terms of this paragraph as Bank may from time to
time require.
4.13 OPERATING ACCOUNTS. Maintain all primary accounts and banking relationship
with the Bank.
4.14 NOTICES. Promptly notify Bank in writing of (i) the occurrence of any Event
of Default hereunder or any event which upon notice and lapse of time would be
an Event of Default; (ii) all litigation affecting Borrower where the amount is
$100,000 or more; any substantial dispute which may exist between Borrower and
any governmental regulatory body or law enforcement authority; any change in
Borrower's name or principal place of business; or any other matter which has
resulted or might result in a material adverse change in Borrower's financial
condition or operations.
4.15 AUDITS. Permit representatives of Bank to conduct audits of Borrower's
books and records relating to the Accounts, Liquid Assets, and other Collateral
and make extracts therefrom, with results satisfactory to Bank, provided that
Bank shall use its best efforts to not interfere with the conduct of Borrower's
business, and to the extent possible to arrange for verification of the Accounts
directly with the account debtors obligated thereon or otherwise, all under
reasonable procedures acceptable to Bank and at Borrower's sole expense (not to
exceed $1,500.00); provided further that, prior to an Event of Default, Borrower
shall not be responsible for the expense of more than two (2) such audits, in
any fiscal year. Notwithstanding any of the provisions contained in Section
1.01(b) hereof, Borrower hereby acknowledges and agrees that upon completion of
any such audit, Bank shall have the right to adjust the Borrowing Base
percentage, in its sole and reasonable discretion, based on its review of the
results of such collateral audit.
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4.16 COVENANTS RELATING TO COLLATERAL. In addition to any covenants in any Loan
Document relating to any Collateral the Borrower agrees:
(a) To execute and deliver to Bank such assignments, including Bank's standard
forms of Specific or General Assignment covering individual Accounts, notices,
financing statements, and other documents and papers as Bank may require in
order to affirm, effectuate or further assure the assignment to Bank of the
Collateral or to give any third party, including the account debtors obligated
on the Accounts, notice of Bank's interest in the Collateral.
(b) Upon the occurrence and during the continuance of an Event of Default and
upon Bank's exercises of its rights to collect the Accounts and Inventory
proceeds pursuant to Section 4.16 (d), Borrower will collect with diligence all
Borrower's Accounts and Inventory proceeds. Any collection of Accounts or
Inventory proceeds by Borrower, whether in the form of cash, checks, notes, or
other instruments for the payment of money (properly endorsed or assigned where
required to enable Bank to collect same), shall be in trust for Bank, and
Borrower shall keep all such collections separate and apart from all other funds
and property so as to be capable of identification as the property of Bank and
deliver said collections, together with the proceeds of all cash sales, daily to
Bank in the identical form received. The proceeds of such collections when
received by Bank may be applied by Bank directly to the payment of Borrower's
Loan Account or any other obligation secured hereby. Any credit given by Bank
upon receipt of said proceeds shall be conditional credit subject to collection.
Returned items at Bank's option may be charged to Borrower's general account.
All collections of the Accounts and Inventory proceeds shall be set forth on an
itemized schedule, showing the name of the account debtor, the amount of each
payment and such other information as Bank may request.
(c) To promptly notify Bank of any attachment or other legal process levied
against any of the Collateral and any information received by Borrower relative
to the Collateral, including the Accounts, the account debtors or other persons
obligated in connection therewith, which may in any way affect the value of the
Collateral or the rights and remedies of Bank in respect thereto
(d) That Bank may at any time, upon the occurrence and during the continuance
of an Event of Default, without prior notice to Borrower, collect the Accounts
and Inventory proceeds and may give notice of assignment to any and all account
debtors, and Borrower does hereby make, constitute and appoint Bank its
irrevocable, true and lawful attorney with power to receive, open and dispose of
all mail addressed to Borrower, to endorse the name of Borrower upon any checks
or other evidences of payment that may come into the possession of Bank upon the
Accounts or as proceeds of Inventory; to endorse the name of the undersigned
upon any document or instrument relating to the Collateral; in its name or
otherwise, to demand, sue for, collect and give acquittances for any and all
moneys due or to become due upon the Accounts; to compromise, prosecute or
defend any action, claim or proceeding with respect thereto; and to do any and
all things necessary and proper to carry out the purpose herein contemplated.
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(e) To do all acts necessary to maintain, preserve, and protect the Inventory,
keep all Inventory in good condition and repair and not to cause any waste or
unusual or unreasonable depreciation thereof.
(f) In the event any unpaid balance of Borrower's Loan Account shall exceed the
maximum amount of outstanding Loans to which the Borrower is entitled under
Section 1 hereof, Borrower shall immediately pay to Bank for credit to
Borrower's Loan Account the amount of such excess.
5. NEGATIVE COVENANTS OF BORROWER
------------------------------
Borrower agrees that so long as it is indebted to Bank, or so long as Bank has
any obligation to extend credit to Borrower, it will not, without Bank's written
consent:
5.01 TYPE OF BUSINESS; MANAGEMENT; CHANGE IN CONTROL. Make any substantial
change in the character of its business; make any change in its Chief Executive
Officer.
5.02 OUTSIDE INDEBTEDNESS. Create, incur, assume or permit to exist any
indebtedness for borrowed moneys other than Loans from the Bank except operating
leases and obligations now existing as shown in the financial statement dated
October 31, 1998, excluding those obligations being refinanced by Bank, and or
sell or transfer, either with or without recourse, any accounts or notes
receivable or any moneys due or to become due.
5.03 LIENS AND ENCUMBRANCES. Create, incur, permit to exist, or assume any
mortgage, pledge, encumbrance, lien or charge of any kind upon any asset now
owned or hereafter acquired by it, other than operating leases and liens for
taxes not delinquent and liens in Bank's favor and other than liens agreed to in
writing by Bank.
5.04 LOANS, INVESTMENTS, SECONDARY LIABILITIES. Make any loans or advances to
any person or other entity other than in the ordinary and normal course of its
business as now conducted or make any investment in the securities of any person
or other entity other than the United States Government; or guarantee or
otherwise become liable upon the obligation of any person or other entity,
except by endorsement of negotiable instruments for deposit or collection in the
ordinary and normal course of its business.
5.05 ACQUISITION OR SALE OF BUSINESS; MERGER OR CONSOLIDATION. Purchase or
otherwise acquire the assets or business of any person or other entity; or
liquidate, dissolve, merge or consolidate, or commence any proceedings therefor;
or sell any assets except in the ordinary and normal course of its business as
now conducted; or sell, lease, assign, or transfer any substantial part of its
business or fixed assets, or any property or other assets necessary for the
continuance of its business as now conducted, including without limitation the
selling of any property or other asset accompanied by the leasing back of the
same.
5.06 DIVIDENDS. Declare or pay any dividend or make any other distribution on
any of its capital stock now outstanding or hereafter issued or purchase, redeem
or retire any of such
13
<PAGE>
stock other than in dividends or distributions payable in Borrower's capital
stock, except for preferred stock dividends as specified in the Preferred Stock
Security Purchase Agreement dated August 23, 1998 and the repurchase of
Borrower's capital stock from officers, directors, employees or consultants of
Borrower upon termination of their employment with or rendering of service to
Borrower.
5.07 SUBORDINATED LIABILITIES. Make any payments on any Borrower's obligation
subordinated to the obligations to Bank, other than in accordance with the
provisions of any subordination agreement executed by the Bank and the
subordinated debt holder.
6. EVENTS OF DEFAULT
-----------------
The occurrence of any of the following events of default ("Events of Default")
shall, at Bank's option, terminate Bank's commitment to lend and make all sums
of principal and interest then remaining unpaid on all Borrower's indebtedness
to Bank immediately due and payable, all without demand, presentment or notice,
all of which are hereby expressly waived:
6.01 FAILURE TO PAY. Failure to pay any installment of principal or of interest
on any indebtedness of Borrower to Bank within, five (5) days of its due date.
6.02 BREACH OF COVENANT. Failure of Borrower to perform any other term or
condition of this Agreement or any Loan Document binding upon Borrower.
6.03 BREACH OF WARRANTY. Any of Borrower's representations or warranties made
herein or any statement or certificate at any time given in writing pursuant
hereto or in connection herewith shall be false or misleading in any respect.
6.04 INSOLVENCY; RECEIVER OR TRUSTEE. Borrower shall become insolvent; or admit
its inability to pay its debts as they mature; or make an assignment for the
benefit of creditors; or apply for or consent to the appointment of a receiver
or trustee for it or for a substantial part of its property or business.
6.05 JUDGMENTS, ATTACHMENTS. Any money judgment in excess of $100,000, writ or
warrant of attachment, or similar process shall be entered or filed against
Borrower or any of its assets and shall remain unvacated, unbonded or unstayed
for a period of ten (10) days or in any event later than five (5) days prior to
the date of any proposed sale thereunder.
6.06 RIGHT TO CURE. If any default, other than a payment default, is curable and
if Borrower has not been given a prior notice of breach of the same provision of
this Agreement, it may be cured (and no Event of Default will have occurred) if
Borrower, after Bank sends written notice demanding cure of such default, (a)
cures the default within ten (10) days; or (b), if the cure requires more than
ten (10) days, immediately initiates steps which Bank deems in Bank's sole
discretion to be sufficient to cure the default and thereafter continues and
completes all reasonable and necessary steps sufficient to produce compliance as
soon as reasonably practical.
14
<PAGE>
6.07 BANKRUPTCY. Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against Borrower and, if
instituted against it, shall not be dismissed within thirty (30) days
thereafter.
6.08 REVOCATION OF GUARANTEE OR SUBORDINATION AGREEMENT. Any guarantee or
subordination agreement required hereunder is breached or becomes ineffective;
or any Guarantor or subordination creditor disavows or attempts to revoke or
terminate such guarantee or subordination agreement.
6.09 CESSATION OF BUSINESS. Borrower shall voluntarily suspend its business.
6.10 ADVERSE CHANGE. Any change which, in the opinion of Bank, is materially
adverse to the financial condition of Borrower or any Guarantor; or should Bank,
for any reason, believe that the prospect of Borrower's payment or performance
hereunder or under any other agreement or instrument with Bank be impaired.
6.11 OTHER DEFAULTS. Borrower, or any Guarantor of Borrower's obligations to
Bank, shall commit or do or fail to commit or do any act or thing which would
constitute an event of default under any of the terms of any other agreement,
document or instrument executed or to be executed by it concerning the
obligation to pay money.
6.12 ADVANCES. Notwithstanding anything to the contrary contained herein, Bank
shall have no duty to make advances while any event of default exists
notwithstanding any cure period provided for herein.
7. MISCELLANEOUS PROVISIONS
------------------------
7.01 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of Bank
or any holder of notes issued hereunder, in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege. All rights and
remedies existing under this Agreement or any note (s) issued in connection with
a Loan that Bank may make hereunder, are cumulative to, and not exclusive of,
any rights or remedies otherwise available.
7.02 COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement. This Agreement, and the other Loan Documents constitute the entire
understanding among the parties hereto with respect to the subject matter hereof
and supersedes any prior agreements, written or oral, with respect thereto.
15
<PAGE>
7.03 ATTORNEY'S FEES. Borrower will pay promptly to Bank without demand after
notice, with interest thereon from the date of expenditure at the rate
applicable to the Loan, reasonable attorneys' fees and all costs and expenses
paid or incurred by Bank in collecting or compromising the Loan after the
occurrence of an Event of Default, whether or not suit is filed. If suit is
brought to enforce any provision of this Agreement, the prevailing party shall
be entitled to recover its reasonable attorneys' fees and court costs in
addition to any other remedy or recovery awarded by the court.
7.04 ADDITIONAL REMEDIES. The rights, powers and remedies given to Bank
hereunder shall be cumulative and not alternative and shall be in addition to
all rights, powers and remedies given to Bank by law against Borrower or any
other person, including but not limited to Bank's rights of setoff or banker's
lien.
7.05 INUREMENT. The benefits of this Agreement shall inure to the successors and
assigns of Bank and the permitted successors and assigns of Borrower.
7.06 APPLICABLE LAW. This Agreement and all other agreements and instruments
required by Bank in connection therewith shall be governed by and construed
according to the laws of the state of California, to the jurisdiction of whose
courts the parties hereby agree to submit.
7.07 OFFSET. In addition to and not in limitation of all rights of offset that
Bank or other holder of the Loan may have under applicable law, Bank or other
holder of any note issued hereunder shall, upon the occurrence of any Event of
Default or any event which with the passage of time or notice would constitute
such an Event of Default, have the right to appropriate and apply to the payment
of the Loan any and all balances, credits, deposits, accounts or monies of
Borrower then or thereafter with Bank or other holder, within ten (10) days
after the Event of Default, and notice of the occurrence of any Event of Default
by Bank to Borrower.
7.08 SEVERABILITY. Should any one or more provisions of the Agreement be
determined to be illegal or unenforceable, all other provisions nevertheless
shall be effective.
7.09 TIME OF THE ESSENCE. Time is hereby declared to be of the essence of this
Agreement and of every part hereof.
7.10 ACCOUNTING. All accounting terms shall have the meanings applied under
generally accepted accounting principles unless otherwise specified.
7.11 REFERENCE PROVISION.
(a) Other than (i) nonjudicial foreclosure and all matters in connection
therewith regarding security interests in real or personal property; or (ii) the
appointment of a receiver, or the exercise of other provisional remedies (any
and all of which may be initiated pursuant to applicable law), each controversy,
dispute or claim between the parties arising out of or relating to
16
<PAGE>
this Credit Agreement, any security agreement executed by Borrower in favor of
Bank or any note executed by Borrower in favor of Bank or any other agreement or
instrument issued in favor of Bank by Borrower (collectively in this Section,
the "Agreement") which controversy, dispute or claim is not settled in writing
within thirty (30) days after the "Claim Date" (defined as the date on which a
party subject to this Agreement gives written notice to all other parties that a
controversy, dispute or claim exists), will be settled by a reference proceeding
in California in accordance with the provisions of Section 638 et seq. of the
California Code of Civil Procedure, or their successor section ("CCP"), which
shall constitute the exclusive remedy for the settlement of any controversy,
dispute or claim concerning this Agreement, including whether such controversy,
dispute or claim is subject to the reference proceeding and except as set forth
above, the parties waive their rights to initiate any legal proceedings against
each other in any court or jurisdiction other than the Superior Court in the
County where the Real Property, if any, is located or San Diego County if none
(the "Court"). The referee shall be a retired Judge of the Court selected by
mutual agreement of the parties, and if they cannot so agree within forty-five
(45) days after the Claim Date, the referee shall be promptly selected by the
Presiding Judge of the Court (or his representative). The referee shall be
appointed to sit as a temporary judge, with all of the powers for a temporary
judge, as authorized by law, and upon selection should take and subscribe to the
oath of office as provided for in Rule 244 of the California Rules of Court (or
any subsequently enacted Rule). Each party shall have one peremptory challenge
pursuant to CCP ss.170.6. The referee shall (a) be requested to set the matter
for hearing within sixty (60) days after the date of selection of the referee
and (b) try any and all issues of law or fact and report a statement of decision
upon them, if possible, within ninety (90) days of the Claim Date. Any decision
rendered by the referee will be final, binding and conclusive and judgment shall
be entered pursuant to CCP ss.644 in any court in the state of California having
jurisdiction. Any party may apply for a reference proceeding at any time after
thirty (30) days following notice to any other party of the nature of the
controversy, dispute or claim, by filing a petition for a hearing and/or trial.
All discovery permitted by this Agreement shall be completed no later than
fifteen (15) days before the first hearing date established by the referee. The
referee may extend such period in the event of a party's refusal to provide
requested discovery for any reason whatsoever, including, without limitation,
legal objections raised to such discovery or unavailability of a witness due to
absence or illness. No party shall be entitled to "priority" in conducting
discovery. Depositions may be taken by either party upon seven (7) days written
notice, and request for production or inspection of documents shall be responded
to within ten (10) days after service. All disputes relating to discovery which
cannot be resolved by the parties shall be submitted to the referee whose
decision shall be final and binding upon the parties. Pending appointment of the
referee as provided herein, the Superior Court is empowered to issue temporary
and/or provisional remedies, as appropriate.
(b) Except as expressly set forth in this Agreement, the referee shall
determine the manner in which the reference proceeding is conducted including
the time and place of all hearings, the order of presentation of evidence, and
all other questions that arise with respect to the course of the reference
proceeding. All proceedings and hearings conducted before the referee, except
for trial, shall be conducted without a court reporter except that when any
party so requests, a court reporter will be used at any hearing conducted before
the referee. The party making such a request shall have the obligation to
arrange for and pay for the court reporter. The costs of the court reporter at
the trial shall be borne equally by the parties.
17
<PAGE>
(c) The referee shall be required to determine all issues in accordance with
existing case law and the statutory laws of the state of California. The rules
of evidence applicable to proceedings at law in the state of California will be
applicable to the reference proceeding. The referee shall be empowered to enter
equitable as well as legal relief, to provide all temporary and/or provisional
remedies and to enter equitable orders that will be binding upon the parties.
The referee shall issue a single judgment at the close of the reference
proceeding, which shall dispose of all of the claims of the parties that are the
subject of the reference. The parties hereto expressly reserve the right to
contest or appeal from the final judgment or any appealable order or appealable
judgment entered by the referee. The parties hereto expressly reserve the right
to findings of fact, conclusions of laws, a written statement of decision, and
the right to move for a new trial or a different judgment, which new trial, if
granted, is also to be a reference proceeding under this provision.
(d) In the event that the enabling legislation which provides for appointment
of a referee is repealed (and no successor statute is enacted), any dispute
between the parties that would otherwise be determined by the reference
procedure herein described will be resolved and determined by arbitration. The
arbitration will be conducted by a retired judge of the Court, in accordance
with the California Arbitration Act, ss.1280 through ss.1294.2 of the CCP as
amended from time to time. The limitations with respect to discovery as set
forth hereinabove shall apply to any such arbitration proceeding.
7.12 This Agreement may be modified only by a writing signed by all parties
hereto.
This Agreement is executed on behalf of the parties by duly authorized officers
as of the date first above written.
IMPERIAL BANK CARDIODYNAMICS INTERNATIONAL
("BANK") CORPORATION
("BORROWER")
By:________________________ By: ________________________
Michael Perry
Its:_________________________ Its: CEO
------------------------
By: ________________________
Steve Loomis
Its: Secretary/CFO
________________________
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM QUARTER
ENDED FEBRUARY 28, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-START> DEC-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 1,349,612
<SECURITIES> 0
<RECEIVABLES> 1,255,998
<ALLOWANCES> 88,504
<INVENTORY> 1,081,671
<CURRENT-ASSETS> 3,694,483
<PP&E> 464,289
<DEPRECIATION> 193,352
<TOTAL-ASSETS> 4,005,519
<CURRENT-LIABILITIES> 3,473,868
<BONDS> 0
0
2,049,455
<COMMON> 15,713,152
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,005,519
<SALES> 1,074,926
<TOTAL-REVENUES> 1,074,926
<CGS> 407,071
<TOTAL-COSTS> 1,720,270
<OTHER-EXPENSES> 612
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 58,090
<INCOME-PRETAX> (1,111,117)
<INCOME-TAX> 800
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,111,917)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> 0
</TABLE>
