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FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NUMBER 333-69669
PROSPECTUS
48,334 SHARES
CARDIODYNAMICS INTERNATIONAL CORPORATION
COMMON STOCK
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
"CDIC." On December 15, 1998, the closing sale price of CardioDynamics common
stock as reported on the Nasdaq SmallCap Market was $2.25 per share.
These shares of common stock are being sold by Imperial Bank, who received
them from us as part of our compensation for it extending us a loan. We will
not receive any part of the proceeds from the sale.
SEE "RISK FACTORS" ON PAGE 3.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
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The date of this prospectus is January 11, 1999.
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WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
SEC's public reference rooms in Washington, D.C., New York, and Chicago. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Our SEC filings are also available to the public at the SEC's web site
at http://www.sec.gov.
The SEC allows us to "incorporate by reference" the information we file
with them which means that we can disclose important information to you by
referring you to those documents instead of having to repeat the information in
this prospectus. The information incorporated by reference is considered to be
part of this prospectus, and later information that we file with the SEC will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934
until the selling shareholder sells all the shares.
-- Annual Report on Form 10-KSB for the year ended November 30, 1997;
-- Quarterly Reports on Form 10-QSB for the quarters ended February 28,
1998, May 31, 1998 and August 31, 1998;
-- Current Report on Form 8-K dated August 21, 1998 for an event on August
21, 1998 (filed September 3, 1998); and
-- Registration Statement on Form 8-A filed with the SEC on April 19,
1984. This filing describes the terms, rights and provisions applicable
to our common stock.
You may request a copy of these filings, at no cost, by writing or telephoning
us at the following address:
Shareholder Services
6175 Nancy Ridge Drive, Suite 300
San Diego, CA 92121
(619) 535-0202
You should rely only on the information incorporated by reference or
provided in this prospectus or any supplement. We have not authorized anyone
else to provide you with different information. The selling shareholder will
not make an offer of these shares in any state where the offer is not permitted.
You should not assume that the information in this prospectus or any supplement
is accurate as of any date other than the date on the front of those documents.
This prospectus is part of a registration statement we filed with the SEC
(Registration No. 333-69669).
ABOUT CARDIODYNAMICS INTERNATIONAL CORPORATION
At CardioDynamics International Corporation, we develop, manufacture and
market heart monitoring devices which provide doctors with continuous data on a
wide range of parameters relating to blood flow and heart function. Unlike
other monitoring technologies, our monitors do not require invasive surgery to
use. Our primary products, the BioZ(TM) System, the BioZ(TM) Portable, and the
BioZ.com(TM), use a technology called thoracic electrical bioimpedance to obtain
data which is typically available only through a time consuming, costly and
potentially dangerous invasive procedure known as right-heart catheterization or
as pulmonary artery catheterization. This data is then processed with digital
technology to provide real-time information to the doctors.
Our principal executive offices are located at 6175 Nancy Ridge Drive,
Suite 300, San Diego, California 92121, and our telephone number is (619) 535-
0202.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully
consider the risks described below and the other information contained in this
prospectus before deciding to invest in shares of our common stock.
DEPENDENCE ON BIOZ PRODUCT LINE WHOSE MARKET ACCEPTANCE IS UNCLEAR
Our future is dependent upon the success of the BioZ(TM) product line and
similar products which are based on the same technology. The market for
thoracic electrical bioimpedance products is in a relatively early stage of
development, and it is possible that this market will never fully develop. The
long-term commercial success of the BioZ product line and any follow-on
products requires widespread acceptance of our thoracic electrical bioimpedance
products as safe, efficacious and cost-effective alternatives to invasive
procedures. Widespread acceptance would represent a significant change in
medical practice patterns. Historically, some medical professionals have
indicated hesitancy in using thoracic electrical bioimpedance products such as
analog-based monitors previously manufactured by us. Invasive procedures, such
as right-heart catheterization, are generally accepted in the medical community
and have a long history of use.
We have limited clinical data with which to demonstrate the clinical
benefits of our products. However, we have sponsored and plan to continue to
sponsor and/or conduct clinical trials which we hope will demonstrate consistent
clinical benefits resulting from the use of our products. We do not know when
such clinical trials will be completed or if such clinical trials will have a
positive outcome or if a positive outcome in such trials would be sufficient to
enable acceptance of the BioZ product line by the medical community. We are
unable to predict how quickly, if at all, our products may be accepted by
members of the medical community.
Technological limitations of thoracic electrical bioimpedance make it
subject to inaccuracies in the case of:
. Severe septic shock
. Significant pulmonary hypertension
. Aortic valve regurgitation
. Severe hypertension (Maximum Arterial Pressure greater than
130mmHg)
. Tachycardia rates greater than 180 beats per minute
. Patient is shorter than 47" (120cm)*
. Patient weighs less than 66 lbs. (30 Kg) or more than 342 lbs.
(103Kg)*
. Extreme patient movement*
___________________
* We are currently working on algorithms which, if we succeed in them,
may allow the technology to function on patients with these
conditions.
Failure of the BioZ product line to gain widespread acceptance in the
medical community, and to maintain such acceptance, would be very dangerous for
us.
HISTORY OF LOSSES AND EXPECTED CONTINUED LOSSES
Since our emergence from bankruptcy proceedings in 1993, we have had large
annual losses in the course of researching, developing and enhancing our
technology and products and establishing administrative and sales organizations.
We anticipate that our operating expenses will increase substantially in the
foreseeable future as we increase our sales and marketing activities, expand our
operations and management and continue the development of our technology.
Accordingly, we expect to incur additional losses in the future, and it is
possible that we will never achieve or sustain revenue growth or profitability.
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FUTURE ADDITIONAL CAPITAL REQUIREMENTS; NO ASSURANCE FUTURE CAPITAL WILL BE
AVAILABLE
Our commercialization of the BioZ product line and the development and
commercialization of any additional products will require substantial
expenditures. Our capital requirements will depend on numerous factors,
including:
. our rate of sales growth--fast growth could actually increase our need
for additional capital to hire additional staff, purchase additional
component supplies, and supply additional support services;
. our progress in marketing-related clinical evaluations and product
development programs--these programs represent potential avenues for
growth, but will require additional capital;
. our receipt of, and the time required to obtain, regulatory clearances
and approvals--the longer regulatory approval takes, the more working
capital we need to support our regulatory and development efforts in
advance of sales;
. resources we devote to the development, manufacture and marketing of our
products--any decision we make to improve, expand or simply change our
process, products or technology will require increased funds;
. resources required to hire and develop medical sales representatives and
independent distributors and to develop internal manufacturing
capacity--each of these strategic options is a route currently being
considered by us and each of them would require substantial working
capital to initiate;
. facilities requirements--as we grow we may need additional
manufacturing, warehousing and administration facilities and the costs
of the facilities would be borne long before any increased revenue from
growth would occur;
. market acceptance and demand for our products--although growth could
increase our capital needs, the lack of growth and continued losses
would also increase our need for capital; and
. our ability to speed up hospitals' otherwise lengthy purchasing
processes by offering leasing programs as an alternative to outright
purchasing--faster decisions by purchasers would reduce our need for
working capital.
The timing and amount of such capital requirements cannot be accurately
predicted. We may be required to raise additional funds through public or
private financings, bank loans, collaborative relationships or other
arrangements earlier than expected. It is possible that banks, venture
capitalists and other investors may perceive our current debt load, our history
of losses or our technology's lack of acceptance as too great a risk to bear
and, as a result, such additional funding may not be available on attractive
terms, or at all. If we cannot obtain additional capital when needed we might
be forced to agree to unattractive finance terms, or to finance internally by
discontinuing certain operations, such as research and development, which we
view as not essential to day-to-day operations. Such decisions could impair our
ability to go forward with our current plans, or at all.
COMPETITION FROM OTHER PRODUCERS; AND TECHNOLOGICAL CHANGE WHICH MAY BENEFIT OUR
COMPETITORS
We compete with other companies which are developing and marketing non-
invasive hemodynamic monitors. We are also subject to severe competition from
invasive-technology companies, including Baxter Healthcare Corporation, which
have more established and larger marketing and sales organizations,
significantly greater financial and technical resources and a larger installed
base of customers than we do. Such competitors may be able to devote greater
resources to the development, promotion and sales of their products. The
current widespread acceptance of pulmonary artery catheterization, and lack of
widespread acceptance of thoracic electrical bioimpedance, is an important
competitive disadvantage which we must overcome. In addition, our current and
potential competitors may establish cooperative relationships with large medical
equipment companies to gain access to greater research and development or
marketing resources. Competition may result in price reductions,
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reduced gross margins and loss of market share. Any of these could hurt our
business, results of operations and financial condition. It is possible that we
will not be able to compete successfully.
In addition, the introduction by others of products embodying new
technologies and the emergence of new industry standards could render our
products obsolete and unmarketable. Other companies may develop and introduce
products and processes competitive with or superior to ours. In addition, other
technologies or products may be developed that have an entirely different
approach or means of accomplishing the intended purposes of our products.
Accordingly, our products' life cycles are difficult to estimate. To compete
successfully, we must develop and introduce new products that keep pace with
technological developments, respond to evolving consumer requirements and
achieve market acceptance.
We may not succeed in satisfactorily and timely developing and introducing
additional products. Even if we succeed in developing and marketing products
that achieve market acceptance, our competitors may develop and market products
that will replace ours.
TECHNOLOGICAL CHANGE IS DIFFICULT TO PREDICT AND TO MANAGE
Although not in fact a new company, we currently face many of the
challenges which are typically faced by new companies just emerging from the
development phase. The BioZ product line has required, and any future products
will require, substantial development efforts and compliance with all
governmental clearance/approval requirements. We have to build up sales and
marketing. We may encounter unforeseen technological or scientific problems
which may force abandonment or substantial change in the development of a
specific product or process. Technological change or product developments by
others may also have a significant negative effect on us.
ABILITY TO MANAGE GROWTH
If successful, we will experience a period of growth that would place a
significant strain upon our managerial, financial and operational resources.
Our infrastructure, procedures and controls may not be adequate to support our
operations and our management may not be able to achieve the rapid execution
necessary to fully exploit any future market opportunity for our products. Our
future operating results will also depend on our ability to complete our
geographic network of direct sales agents and distributors, expand our sales and
marketing organizations, and fill out our support staff organization. If we are
unable to manage expansion effectively, our business, results of operations and
financial condition will suffer. However, we are not promising you that such
expansion or growth will occur.
CONTROL BY OUR CO-CHAIRMEN
Allen E. Paulson and James C. Gilstrap, the co-chairmen of CardioDynamics,
beneficially own, directly or through CardioDynamics Holdings, LLC, which they
control, approximately 67% of the outstanding shares of our common stock
(including shares owned by others which CardioDynamics Holdings, LLC has the
right to vote). In addition, Mr. Paulson's sons beneficially own another 9% of
the outstanding shares of our common stock. Accordingly, these persons,
individually and as a group, are able to control CardioDynamics and direct our
affairs and business, including any future issuances of our common stock or
other securities, merger and acquisition decisions, declaration of dividends and
the election of directors. Further, in their position as holders of our stock,
they owe us no duty. Our stock price and our ability to raise capital could be
injured if they were to sell even a fraction of their holdings.
WE MAY NOT CONTINUE TO RECEIVE NECESSARY APPROVALS FROM THE FOOD AND DRUG
ADMINISTRATION
Our products and activities are subject to extensive regulation by the FDA
and other governmental authorities. Delays in receipt of, or failure to obtain,
regulatory clearances and approvals, or any failure to comply with regulatory
requirements, could have a very negative effect on our business.
Our thoracic electrical bioimpedance products are subject to extensive and
rigorous regulation by the FDA and, to varying degrees, by state and foreign
regulatory agencies. Under the federal Food, Drug, and Cosmetic Act (the "FDC
Act"), the FDA regulates the clinical testing, manufacture, labeling, packaging,
marketing, distribution
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and record keeping for medical devices, in order to ensure that medical devices
distributed in the United States are safe and effective for their intended use.
Before a new device can be introduced into the market, the manufacturer
generally must obtain either FDA 510(k) clearance or approval of a premarket
approval application. Following submission of a 510(k) or PMA application, the
manufacturer may not market the new device until an order is issued by the FDA
granting clearance or approval, which can entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ System,
the BioZ Portable and the BioZ.com. However, such clearances are subject to
continued FDA audits and can be rescinded. Further, we plan to submit
additional new products for FDA approval in the future. It is possible that our
future products might not gain FDA approval in a timely fashion, or at all. It
is also possible that our current products may someday lose their FDA approval.
We are also subject to routine inspection by the FDA and state agencies,
such as the California Department of Health Services, for compliance with Good
Manufacturing Practice requirements, Medical Device Reporting requirements and
other applicable regulations. Although we work hard at attempting to comply
with all governmental regulations, it is possible that an inspector could
someday find a violation. Such a violation could result in government action
ranging from warning letters to fines to criminal prosecution. Should we ever
incur a significant penalty it is possible it would be detrimental to us. The
FDC Act requires that medical devices be manufactured in accordance with the
current Good Manufacturing Practice requirements. Good Manufacturing Practice
requirements require, among other things, that:
. the manufacturing process be regulated and controlled by the use of
written procedures;
. the ability to produce devices which meet the manufacturer's
specifications be validated by extensive and detailed testing of every
aspect of the process; and
. any deficiencies in the manufacturing process or in the products
produced be investigated and detailed records kept.
Manufacturing facilities are subject to FDA inspection on a periodic basis
to monitor compliance with current GMP requirements. Labeling and promotional
activities are regulated by the FDA and, in certain circumstances, by the
Federal Trade Commission. Current FDA enforcement policy prohibits the
marketing of approved medical devices for unapproved uses. For any medical
device cleared through the 510(k) process, modifications or enhancements that
could significantly affect the safety or effectiveness of the device or that
constitute a major change to the intended use of the device require a new 510(k)
submission. If the FDA requires us to submit a new 510(k) notice for any
product modification, we may be prohibited from marketing the modified product
until the 510(k) notice is cleared by the FDA.
The FDA regulates computer software that performs the function of a
regulated device or that is intimately associated with a given device, such as
control software for diagnostic devices like our products. The FDA is
reevaluating its regulation of such software, and if the FDA undertakes
increased or more rigorous regulation of such software, the BioZ product line
and related products may become subject to further regulatory processes and
clearance requirements.
Laws and regulations regarding the manufacture, sale and use of medical
devices are subject to change and depend heavily on administrative
interpretations. Future changes in the regulations or interpretations made by
the FDA or other regulatory bodies, with possible retroactive effect, may
adversely affect us.
WE MAY NOT RECEIVE APPROVALS BY FOREIGN REGULATORS WHICH ARE NECESSARY FOR
FOREIGN SALES
Sales of medical devices outside of the United States are subject to
foreign regulatory requirements that vary from country to country. We currently
rely on our international distributors and sub-distributors for the receipt of
premarket approvals and compliance with clinical trial requirements in those
countries that require them, and we expect to continue to rely on them in those
countries where we continue to use distributors. If our international
distributors fail to obtain or maintain required premarket approvals or fail to
comply with foreign regulations, foreign regulatory authorities may require us
to cause the applicable distributor to file revised governmental
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notifications, cease commercial sales of our products in the applicable
countries, or otherwise cure the problem. Such enforcement action by regulatory
authorities could be costly.
In order to sell our products within the European Economic Area, we have to
achieve compliance with the European Commission's Medical Device Directive and
to affix a "CE" marking on our products to attest such compliance. We have
fulfilled all the requirements for a CE mark and we are now authorized to use
the CE mark. However, future regulatory changes could remove our ability to use
the CE mark and any new products we develop may not qualify for the CE mark.
Failure to obtain authorization to use the CE mark or loss of such authorization
would render us unable to sell our products in the European Economic Area and
this would limit our potential.
THIRD-PARTY REIMBURSEMENT; PRICING PRESSURES
Our commercial success will depend in part on the availability of adequate
reimbursement from third-party healthcare payers, such as government and private
health insurers and managed care organizations. Third-party payers are
increasingly challenging the pricing of medical products and services. Even
with an FDA approved device, third-party payers may not cover the device and
related services, and they may place significant restrictions on the
circumstances in which coverage will be available. Medicare reimbursement for
use of the BioZ product line is now available under the heading of
plethysmography, but private third-party payers are not required to follow
Medicare's lead. We may not be able to obtain a specific code for reimbursement
of thoracic electrical bioimpedance tests in a reasonable time frame, or at all,
from either Medicare or private third-party payers. In addition, reimbursement
may not be at or stay at price levels sufficient to allow medical professionals
to realize an appropriate return on an investment in our products.
Downward pricing pressure in the industry could hurt our operations.
Our business plan contemplates an income stream from sales of disposable
sensors (which are more profitable than some of our other products) and which
are compatible with an installed base of our monitors. We may be subject,
however, to price competition from other sensor manufacturers.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL
We are dependent upon a limited number of key management and technical
personnel and we do not have insurance on these people. The loss of the
services of one or more of such key employees could hurt our business. In
addition, our success depends upon our ability to attract and retain additional
highly qualified sales, management, manufacturing and research and development
personnel. We face intense competition in our recruiting activities and we may
not be able to attract and/or retain qualified personnel.
DEPENDENCE ON RIVERTEK MEDICAL SYSTEMS FOR DEVELOPMENT SERVICES AND OTHER THIRD
PARTIES FOR DEVELOPMENT AND MANUFACTURING SERVICES
Our strategy for development and commercialization of certain of our
products depends upon entering into various arrangements with third parties and
upon the subsequent success of these parties in performing their obligations.
It is possible that we will not be able to negotiate acceptable arrangements in
the future or that our existing arrangements will not be successful. We rely
heavily on contracted development services, particularly from Rivertek Medical
Systems, Inc. Also, we have limited experience manufacturing products for
commercial purposes and currently do not manufacture the BioZ System and the
BioZ Portable ourselves. Therefore we are dependent on contract manufacturers.
RELIANCE ON PATENTS AND PROPRIETARY TECHNOLOGY
Our patents and proprietary technology may not be able to prevent effective
competition by others. Although we believe that we have effective patent
protection, our products could possibly be found to infringe the rights of
others. Intellectual property litigation, whether defensive or offensive, would
have no certain outcome other than to drain our resources.
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The validity and breadth of claims in medical technology patents involve
complex legal and factual questions. Future patent applications may not be
issued, the scope of any patent protection may not exclude competitors and it
may not provide competitive advantages to us. Further, our patents may be found
to be invalid, and other companies may claim rights in or ownership of the
patents and other proprietary rights held or licensed by us. Also, our existing
patents might not cover products we want to bring out in the future. Moreover,
when our key patents expire, the inventions will enter the public domain.
Since patent applications in the United States are maintained in secrecy
until patents issue, our patent applications may infringe patents that may be
issued to others. In the event our products are found to infringe patents held
by competitors, we may have to modify our product to avoid infringement, and it
is possible that our modified products would not be commercially successful.
SMALL MARKET FLOAT CAN PRODUCE BOTH STOCK PRICE VOLATILITY AND A POTENTIAL LACK
OF LIQUIDITY
Market float is the aggregate value of all of a company's publicly traded
stock. Our market float is smaller than that of most other publicly traded
companies. Because our market float is smaller, changes in the opinion of one
investor or one analyst can have a significant effect on our stock price. As a
result, the market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to various factors beyond our
control, including:
(i) quarterly variations in operating results;
(ii) announcements of technological innovations, new products or pricing
by our competitors;
(iii) changes in, or failure to meet, financial estimates of securities
analysts;
(iv) the rate of adoption by physicians of thoracic electrical
bioimpedance technology in targeted markets;
(v) timing of patent and regulatory approvals;
(vi) timing and extent of technological advancements;
(vii) results of clinical studies;
(viii) short sales of our common stock by the holders of our Series A
Convertible Preferred Stock, or other persons; and
(ix) general market conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have affected the market prices of the stock of many medical
device companies and that often have been unrelated to the operating performance
of such companies. These broad market fluctuations may directly influence the
market price of our common stock. Our somewhat small market float may not be
entirely adequate to provide market liquidity and mitigate stock price
volatility.
POTENTIAL DROP IN STOCK PRICE DUE TO CONVERSION FEATURE OF PREFERRED STOCK
Our Series A Convertible Preferred Stock is convertible into our common
stock at either a fixed conversion price or a floating conversion price,
whichever is more favorable to the holder. The floating conversion price is
tied to our common stock market price. If the common stock price declines, the
Series A Convertible Preferred Stock will be convertible into a substantially
increased number of shares of common stock, resulting in a meaningful dilution
to other holders of common stock and a potential adverse effect on the common
stock price thereafter. In addition, if the holders of our Series A Convertible
Preferred Stock convert part of their Series A Convertible Preferred Stock and
sell the common stock in the market, this could result in an imbalance of supply
and demand for our common stock and reduce its price. Because there is no lower
limit on the floating conversion price, all this
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could lead to a vicious cycle, driving the stock price ever further down. The
further our stock price declines, the further the floating conversion price will
fall and the greater the number of shares we will have to issue upon conversion.
For example:
<TABLE>
<CAPTION>
Date Aug. 21, 1998 Nov. 9, 1998 sample sample
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<S> <C> <C> <C> <C>
Public Market Value $2.01 $1.39 $1.10 $0.90
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Number of Shares of Common Stock into which 1,175,263 1,699,349 2,143,541 2,364,444
the remaining Series A Stock Would Convert
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Estimate of TOTAL number of shares of Common 1,730,859 2,254,945 2,699,137 2,920,040
Stock into which Series A Stock is
convertible (including 555,596 shares Common
Stock which have already been issued upon
conversion)
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Percentage of Total Shares Outstanding that 5.1% 6.6% 7.8% 8.4%
Such Converted Shares Will Represent
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</TABLE>
Further, it is likely that we will pay dividends on the Series A
Convertible Preferred Stock in the form of Common Stock. Such an issue would
further dilute current holders and could also lead to a drop in our stock price.
WE COULD BE REQUIRED TO ISSUE DILUTIVE SERIES B PREFERRED STOCK
Under certain conditions the original purchasers of our Series A Preferred
Stock can require us to sell them up to 3,000 shares of Series B Preferred Stock
at a purchase price of $1,000 per share. They can only require this between
approximately February 17, 1999 and November 19, 1999 and they can only require
it if and when our Common Stock price exceeds $2.70 per share for ten
consecutive days. The Series B Preferred Stock would be substantially similar
to the Series A Preferred Stock, but it would have a fixed conversion price of
at least $3.10 per share which is higher than the $2.70 fixed conversion price
of the Series A Preferred Stock. There are other technical requirements, but
each of those can be waived by the original purchasers.
If we were required to issue the Series B Preferred Stock on these terms,
the convertibility of the Series B Preferred Stock would be potentially dilutive
and could cause our common stock price to drop. This could impair our ability
to raise capital in the future.
WE COULD BE REQUIRED TO REDEEM THE SERIES A CONVERTIBLE PREFERRED STOCK
The holders of the Series A Convertible Preferred Stock can require us to
redeem for cash (at 130% of stated value) instead of conversion for shares of
our common stock in the event that we are acquired by another company or in the
event that we default in any of the following four ways:
1. If either our stock is suspended from trading on Nasdaq for more than
five consecutive days or more than thirty days in any year-long period,
or
2. If the registration statement, as amended, which covers the common stock
underlying the Series A Convertible Preferred Stock has its
effectiveness or its use suspended for more than 30 days in any year-
long period, or
3. If our common stock is not listed on either the Nasdaq National Market,
the Nasdaq SmallCap Market, the American Stock Exchange, or the New York
Stock Exchange, for a period of fifteen consecutive days or thirty days
in any year-long period, or
4. If we fail to deliver shares of our common stock as required upon
conversion.
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If the event that we are required to redeem the Series A Convertible Preferred
Stock under any of these mandatory situations, it is likely that we would not
have sufficient cash available to effect the redemption. In such case we would
be forced to attempt to find other sources of financing. If we could find such
financing at all, it is likely that that such financing would be on unfavorable
terms. The inability to find financing or the terms of such unfavorable
financing and our resulting lack of liquidity could force us to close portions
of, or all of, our operations.
LOW STOCK PRICE COULD RESULT IN OUR BEING DE-LISTED FROM NASDAQ AND SUBJECT US
TO CERTAIN CUMBERSOME REGULATIONS WHICH COULD REDUCE OUR ABILITY TO RAISE FUNDS
If our stock price were to drop below $1.00 per share and remain below
$1.00 per share for an extended period of time, certain Nasdaq regulations would
require the de-listing of our shares and then our shares could no longer be
traded on Nasdaq. In such an event, our shares could only be traded on the
over-the-counter bulletin board system. This method of trading would
significantly impair or completely remove our ability to raise new capital.
Further, in the event that we were de-listed from Nasdaq due to low stock
price, we might be subject to certain rules, called penny stock rules, that
impose additional sales practice requirements on broker-dealers who sell such
securities. For any transaction involving a penny stock the rules require,
among other things, the delivery, prior to the transaction, of a disclosure
schedule required by the SEC relating to the market for penny stocks. The
broker-dealer also must disclose the commissions payable both to the broker-
dealer and the registered representative, and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information for the penny stocks held in the customer's account.
Although we believe that our common stock is not penny stock due to its
continued listing on the Nasdaq SmallCap Market, in the event our common stock
subsequently becomes characterized as a penny stock, our market liquidity could
be severely affected. In such event, the regulations relating to penny stocks
could limit the ability of broker-dealers to sell our common stock and thus, the
ability of purchasers in this offering to sell their common stock in the
secondary market.
RISKS ASSOCIATED WITH INTERNATIONAL ACTIVITIES
We believe it is possible that international sales will represent a
meaningful portion of revenue in the future (in fiscal 1998 international sales
accounted for approximately 15% of our revenue). This would require significant
management attention and financial resources and subject us to the risks of
selling internationally. These risks include unexpected changes in regulatory
requirements, tariffs and other barriers and restrictions, and an adverse effect
from reduced protection for intellectual property rights. We would have to
comply with a variety of foreign laws. In addition, fluctuations in the rates
of exchange could increase the price in local currencies of our products in
foreign markets and make our products relatively more expensive than
competitors' products that are denominated in local currencies.
PRODUCT LIABILITY RISK AND PRODUCT RECALL; LIMITED INSURANCE COVERAGE
The nature of our business exposes us to risks of product liability or
product recalls that are typical in the medical devices industry. Medical
devices as complex as ours frequently contain errors or failures, especially
when first introduced or when new versions are released. Our products are
designed to be used in certain procedures where there is a high risk of serious
injury or death. Such risks will exist even with respect to those products that
have received, or may in the future receive, regulatory clearance for commercial
sale.
We did not carry product liability insurance during certain periods before
May 15, 1995. So far, this has not hurt us. Since then, we have maintained
product liability insurance at levels which we believe are sufficient and
consistent with industry standards for companies with our current sales levels.
We intend to increase our product liability insurance policy limits as sales
grow. Currently, our product liability insurance policy limits are $5,000,000
per occurrence and $5,000,000 in the aggregate. Our product liability insurance
may not be adequate and it is possible that such insurance coverage may not
continue to be available on commercially reasonable terms or at all. In
addition, product liability claims or recalls could hurt us in various ways even
if we have adequate insurance coverage.
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UNCERTAINTY AND POTENTIAL NEGATIVE EFFECTS OF HEALTHCARE REFORM
The healthcare industry is undergoing fundamental changes resulting from
political, economic and regulatory influences. In the United States,
comprehensive programs have been proposed that seek to:
(i) increase access to health care for the uninsured;
(ii) control the escalation of healthcare expenditures within the economy;
and
(iii) use health care reimbursement policies to help balance the federal
budget.
We anticipate that Congress and state legislatures will continue to review and
assess such proposals, and public debate of these issues will likely continue.
We cannot predict which, if any, of such reform proposals will be adopted and
when they might be adopted. Other countries also are considering healthcare
reform. Significant changes in healthcare systems are likely to have a
substantial impact on the manner in which we conduct our business and could
disrupt our strategies.
NO DIVIDENDS
We do not intend to pay any cash dividends on the common stock any time
soon. Payment of such cash dividends would, in any event, be prohibited or
limited under the terms of our bank loans and/or the Series A Convertible
Preferred Stock.
YEAR 2000 RISKS
Many computer systems experience problems handling dates beyond the year
1999. Virtually any business that relies on computers will be impacted by this
issue. In addition to our own potential problems, there are governmental
agencies, financial institutions, utilities and other basic service providers
that may encounter problems that are outside of our control. In order to correct
this issue, some computer hardware and software will need to be modified prior
to the year 2000 in order for it to remain functional. We have taken steps to
assess the internal readiness of our computer systems and the compatibility of
our products for handling the year 2000 issue. We have created a Year 2000 task
force and we plan to address these issues. The project has been broken down into
the following phases.
(a) Awareness: To create awareness of the potential business
implications of the Year 2000 challenge within CardioDynamics. Our
employees, when appropriate, will be kept informed of the news and
issues related to the Year 2000 issue. We will focus on both our
technology systems and our products.
(b) Inventory and Assessment: We will inventory all of our computer
software and hardware as well as facilities, telecommunications,
and external interfaces. Significant third party vendors will be
contacted to determine their Year 2000 readiness.
(c) Renovation: As problems are discovered, strategies will be
developed to either correct the problem or determine if new
equipment or software is necessary.
(d) Testing: Testing of the renovated systems will occur to determine
whether they are performing reliably under Year 2000 conditions.
(e) Implementation: Upon successful completion of the testing process
the assets will be reintroduced into production in order to allow
adequate time to prevent any unforeseen circumstances.
(f) Contingency: In addition, we will develop a contingency plan in
the event that our internal systems, products or suppliers are not
Year 2000 compliant.
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Currently, we are in the inventory and assessment stage and we anticipate
completing any necessary renovation, testing and implementation within the next
twelve months. It has already been determined that the internal network, and
manufacturing-requirements-planning software is certified as Year 2000
compliant. Additionally, our newest products have been specifically tested for
Year 2000 performance and no Year 2000 problems were identified. We are still
in the early stages of contacting key third party vendors. Renovation and
testing, if required, will begin if problems are identified. We plan to have all
stages of the Year 2000 project completed no later than the fall of 1999. We
have not had to spend significant amounts of money through this stage of the
process. We currently believe that the cost of addressing this issue will not
have a significant effect on us. However, it is possible that because of Year
2000 problems, the vendors of our most important goods and services, or the
suppliers of our necessary energy, telecommunications and transportation needs,
could fail to provide us with the materials and services which are necessary to
produce and sell our products.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference into this
prospectus contain forward-looking statements that are based on current
expectations, estimates and projections about our industry, management's
beliefs, and assumptions made by management. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates," and variations
of such words and similar expressions are intended to identify such forward-
looking statements. These statements are not guarantees of future performance
and are subject to certain risks, uncertainties and assumptions that are
difficult to predict; therefore, actual results may differ materially from those
expressed or forecasted in any forward-looking statements. Such risks and
uncertainties include those noted in "Risk Factors" above and in the documents
incorporated by reference. We undertake no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of shares of our
common stock by the selling shareholder.
SELLING SHAREHOLDER
We shifted our primary banking relationship to Imperial Bank in May 1998,
and the selling shareholder loaned $3,000,000 to us on May 14, 1998. Although
the loan documentation suggested a $4,000,000 loan, borrowings under the loan
were limited to $3,000,000, with the final $1,000,000 to become available only
if and when we signed a term sheet with an acceptable investment banker for
further equity financing. Our co-Chairman guaranteed the loan, with Allen
Paulson guaranteeing 85% of the $4,000,000 and James Gilstrap guaranteeing 15%
of the $4,000,000.
On August 19, 1998, we entered into a new promissory note with the selling
shareholder to, in effect, extend the loan's maturity from November 16, 1998 to
February 28, 1999. Although the new loan documentation suggested a $3,020,250
indebtedness, we, in fact, paid down $1,020,250 immediately, leaving a
$2,000,000 principal balance outstanding. The new promissory note capped the
ongoing principal balance at $2,000,000.
The numbers set forth in the column "Number of Shares Being Offered" below
constitute all of the shares that the selling shareholder may distribute in this
offering; however, there are currently no agreements, arrangements or
understandings with respect to the sale of any of the shares and the table below
assumes the sale of all shares. The shares are being registered to permit
public secondary trading of the shares, and the selling shareholder may offer
the shares for resale from time to time after the shares are issued upon
exercise.
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The selling shareholder received the warrants in connection with the Loan
Transactions. The first warrant, for 33,334 shares, has an exercise price of
$3.00 per share and expires on May 14, 2003. The second warrant, for 15,000
shares, has an exercise price of $2.00 per share and expires on August 21, 2003.
In connection with the receipt of the warrants, the selling shareholder
represented that it was acquiring the warrants, and would acquire our common
stock, for investment and not with a view to distributing our common stock. We
agreed in the warrants that the selling shareholder will have "piggyback"
registration rights on registration statements that we file for CardioDynamics
or for other securitiesholders. We have recently filed a resale registration
statement for other securitiesholders, and Imperial Bank requested that the
shares be included in that registration statement on a "piggyback" basis. We
and the selling shareholder then agreed that, for administrative convenience,
our common stock which underlies their warrants would be registered for resale
in an independent registration statement instead of by "piggybacking". The
registration rights provisions of the warrants require us to bear all
registration expenses other than fees and expenses of counsel for the selling
shareholder and underwriting discounts and commissions and brokerage commissions
and fees. Accordingly, we filed with the Commission a Registration Statement on
Form S-3, of which this Prospectus forms a part, with respect to the resale of
the shares from time to time. We also agreed to prepare and file such amendments
and supplements to the Registration Statement as may be necessary to keep the
Registration Statement effective until all of our common stock offered hereby
has been sold or until the shares are no longer, by reason of Rule 144 under the
Securities Act, required to be registered for resale.
The following table sets forth the name of the selling shareholder, the
number of shares of CardioDynamics common stock owned beneficially by the
selling shareholder as of December 7, 1998, and the number of shares which may
be offered pursuant to this Prospectus.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY PERCENTAGE NUMBER OF
OWNED PRIOR TO OF SHARES BEING
SELLING SHAREHOLDER OFFERING CLASS OFFERED
---------------------------- ------------------- ----------- ------------
<S> <C> <C> <C>
Imperial Bank 48,334 Less than 1% 48,334
</TABLE>
PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholder and any
donees and pledgees who may sell shares received from the named selling
shareholder after the date of this Prospectus. All costs, expenses and fees in
connection with the registration of the shares offered hereby (other than
certain fees and expenses of the selling shareholder's counsel) will be borne by
us. Brokerage commissions and similar selling expenses, if any, attributable to
the sale of shares will be borne by the selling shareholder. Sales of shares
may be effected by the selling shareholder from time to time in one or more
types of transactions (which may include block transactions) on the Nasdaq
SmallCap Market, in the over-the-counter market, in negotiated transactions,
through put or call transactions relating to the shares, through short sales of
shares, or a combination of such methods of sale, at market prices prevailing at
the time of sale, or at negotiated prices. Such transactions may or may not
involve brokers or dealers. The selling shareholder has advised us that it has
not entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of his securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling shareholder.
The selling shareholder may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling shareholder and/or the
purchasers of shares for whom such broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular broker-
dealer might be in excess of customary commissions).
The selling shareholder and any broker-dealers that act in connection with
the sale of shares might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act, and any commissions
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received by such broker-dealers and any profit on the resale of the shares sold
by them while acting as principals might be deemed to be underwriting discounts
or commissions under the Securities Act. The selling shareholder may agree to
indemnify any agent, dealer or broker-dealer that participates in transactions
involving sales of the shares against certain liabilities, including liabilities
arising under the Securities Act.
Because the selling shareholder may be deemed to be an "underwriter" within
the meaning of Section 2(11) of the Act, the selling shareholder will be subject
to the prospectus delivery requirements of the Securities Act. We have informed
the selling shareholder that the anti-manipulative provisions of Regulation M
promulgated under the Exchange Act may apply to his sales in the market.
The selling shareholder also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided he meets the criteria and conforms to the requirements of such Rule.
When the selling shareholder notifies us that a material arrangement has
been entered into with a broker-dealer for the sale of shares through a block
trade, special offering, exchange distribution or secondary distribution or a
purchase by a broker or dealer, a supplement to this Prospectus will be filed,
if required, pursuant to Rule 424(b) under the Securities Act, disclosing (i)
the name of the selling shareholder and of the participating broker-dealer(s),
(ii) the number of shares involved, (iii) the price at which such shares were
sold, (iv) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable, (v) that such broker-dealer(s) did not
conduct any investigation to verify the information set out or incorporated by
reference in this Prospectus and (vi) other facts material to the transaction.
In addition, when the selling shareholder notifies us that a donee or pledgee
intends to sell more than 500 shares, we will file a supplement to this
Prospectus.
In order to comply with the securities laws of certain states, if
applicable, the shares may be sold in such jurisdictions only through registered
or licensed brokers or dealers. In addition, in certain states the shares may
not be sold unless they have been registered or qualified for sale or an
exemption from registration or qualification requirements is available and is
complied with.
LEGAL MATTERS
Our outside law firm, Brobeck, Phleger & Harrison LLP, San Diego,
California will issue an opinion about the legality of the shares.
EXPERTS
The financial statements as of and for the year ended November 30, 1997,
have been incorporated by reference herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
Peterson & Co., independent certified public accountants, audited our
fiscal 1996 annual financial statements and schedules. These documents are
incorporated by reference on reliance upon the authority of Peterson & Co. as
experts in accounting and auditing in giving the audit report.
INDEMNIFICATION
Section 317 of the California General Corporation Law allows companies to
indemnify their officers and directors against expenses, judgments, fines and
amounts paid in settlement under certain conditions and subject to certain
limitations.
Article Three of our Bylaws provides that we shall indemnify any person who
is or was a director, officer, employee or agent of ours, or any person who is
or was serving at our request as a director, officer, employee or agent of
another corporation, subject to certain limitations. In addition, expenses
incurred by a director, officer, employee or agent in defending a lawsuit by
reason of that person's relationship with us, may be paid by us in
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advance of the final disposition of such lawsuit after we receive an undertaking
by or on behalf of such person to repay such amount if it shall ultimately be
determined that he or she is not entitled to be indemnified by us.
Our Articles of Incorporation, as amended, provide that none of our
directors shall be liable for monetary damages in an action by or in
CardioDynamics' right for breach of a director's duties to us and our
shareholders, as set forth in Section 309 of the California Corporations Code.
However, such provision does not eliminate or limit the liability of a director:
(i) for acts or omissions that involve intentional misconduct or knowing
or culpable violation of law;
(ii) for acts or omissions that a director believes to be contrary to our
best interests or those of our shareholders or that involve the
absence of good faith on the part of a director;
(iii) for any transaction from which a director derives an improper
personal benefit;
(iv) for acts or omissions that show a reckless disregard of the
director's duty in circumstances in which the director was aware, or
should have been aware in the ordinary course of performing the
director's duties, of a risk of serious injury to us or to our
shareholders;
(v) for acts or omissions that constitute an unexecuted pattern of
inattention that amounts to an abdication of the director's duty to
us;
(vi) under Section 310 of the California Corporations Code; or
(vii) under Section 316 of the California Corporations Code.
Such provision eliminating liability does not eliminate or limit the liability
of an officer for any act or omission as an officer notwithstanding that the
officer is also a director or that his or her actions, if negligent or improper,
have been ratified by the directors.
We are authorized to provide indemnification of our agents (as defined in
Section 317 of the California Corporations Code) for breach of duty to us and
our shareholders through bylaw provisions or through agreements with the agents,
or both, in excess of the indemnification otherwise permitted by Section 317 of
the California Corporations Code, subject to the limits on such excess
indemnification set forth in Section 204 of the California Corporations Code.
We have entered into such indemnification agreements with each of our directors
and officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
CardioDynamics pursuant to these provisions, or otherwise, we have been advised
that, in the opinion of the SEC, such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
WHERE YOU CAN FIND MORE INFORMATION.............. 2
ABOUT CARDIODYNAMICS INTERNATIONAL CORPORATION... 2
RISK FACTORS..................................... 3
FORWARD-LOOKING STATEMENTS....................... 12
USE OF PROCEEDS.................................. 12
SELLING SHAREHOLDER.............................. 12
PLAN OF DISTRIBUTION............................. 13
LEGAL MATTERS.................................... 14
EXPERTS.......................................... 14
INDEMNIFICATION.................................. 14
</TABLE>
