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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: November 30, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 0-11868
CardioDynamics International Corporation
(Exact name of registrant as specified in its charter)
California 95-3533362
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (858) 535-0202
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for the year ending November 30, 2000, were $13,102,319.
The aggregate market value of the common stock held by nonaffiliates of the
registrant at February 22, 2001, was approximately $128,073,130 based on the
closing price for the common stock in the Nasdaq-Amex National Market. At
February 22, 2001, 45,520,749 shares of registrant's common stock were
outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No X .
---
This Form 10-KSB contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include statements regarding our plans,
goals, strategies, intent, beliefs or current expectations. These statements are
expressed in good faith and we believe had a reasonable basis when expressed,
but there can be no assurance that these expectations will be achieved or
accomplished. Sentences in this document containing verbs such as "plan",
"intend", "anticipate", "target", "estimate", "expect", etc., and/or future-
tense or conditional constructions ("will", "may", "could", "should", etc.)
constitute forward-looking statements that involve risks and uncertainties.
Items contemplating, or making assumptions about, actual or potential future
sales, market size, collaborations, trends or operating results also constitute
such forward-looking statements. These statements are only predictions and
actual results could differ materially. Certain factors that might cause such a
difference are discussed throughout this Form 10-KSB, including the section
entitled "Risk Factors" on pages 19 to 26 of this document. Any forward-looking
statement speaks only as of the date we made the statement, and we do not
undertake to update the disclosures contained in this document or reflect events
or circumstances that occur subsequently or the occurrence of unanticipated
events.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
CardioDynamics International Corporation is a medical technology and information
solutions company that develops, manufactures, and markets noninvasive heart-
monitoring devices using our proprietary impedance cardiography (ICG)
technology, DISQ(TM) technology, and ZMarc(TM) algorithm.
Our proprietary, patented technology noninvasively monitors the heart's ability
to deliver blood to the body. Our products measure 12 hemodynamic (blood flow)
parameters, the most significant of which is cardiac output, or the amount of
blood pumped by the heart each minute. Our lead product, the BioZ.com(R), has
been cleared by the Federal Drug Administration (FDA) and carries the CE mark.
We sell to US physicians through our own direct sales force and distribute our
products to domestic hospitals and targeted international markets through a
strategic alliance with GE Medical Systems Information Technologies and a
network of international distributors. In November 1998, Health Care Finance
Administration (HCFA) mandated Medicare reimbursement for our BioZ(R) procedures
and in January 2001, implemented uniform reimbursement throughout the United
States. To date, we have an installed base of over 1,000 units in over 650
physician offices and hospital sites throughout the world.
Our products help physicians assess, diagnose and treat cardiovascular disease,
which is the number one killer of adults in the United States. According to the
American Heart Association (AHA), approximately one in five Americans has some
form of cardiovascular disease. The AHA estimates that over $300 billion was
spent in the United States during 2000 as a result of cardiovascular disease and
stroke. This figure includes both the direct costs associated with physicians
and other professionals, hospital and nursing home services and medication and
the indirect costs associated with lost productivity resulting from morbidity
and mortality.
Electrocardiogram (EKG) is a widely used noninvasive assessment of the heart.
Its limitation is that it only measures the electrical characteristics of the
heart. Our ICG technology noninvasively quantifies the mechanical functioning of
the heart. Conditions that can interfere with the proper mechanical functioning
of the heart include hypertension, congestive heart failure, pulmonary disease,
high-risk pregnancy and kidney dysfunction. Our technology complements EKG and
supplements information obtained through the five vital signs - heart rate,
respiration rate, body temperature, blood pressure and oxygen saturation -
immediately, safely and cost effectively. We consider noninvasive cardiac output
to be the "Sixth Vital Sign(TM)."
1
Currently, the primary method used to measure hemodynamic parameters is
pulmonary artery catheterization (PAC). The invasive PAC procedure requires
hospitalization and involves an incision into the patient's neck or groin region
and the insertion of a catheter (plastic tube) through the heart directly into
the pulmonary artery. Complications associated with this procedure occur in as
many as one in four reported cases and include irregular heartbeats, infection,
pulmonary artery rupture and death.
Because of the high risk of complications, physicians generally prescribe PAC
only for critically ill patients. In the non-sterile environment of a
physician's office or outpatient clinic, PAC is simply unavailable. As a result,
in the great majority of situations, the physician seeking to diagnose
cardiovascular disease must indirectly assess the patient's hemodynamic status
by measuring blood pressure, checking the pulse, looking at neck veins and
employing subjective examination techniques that are prone to human error. A
compelling need exists for objective, noninvasive measurement tools, such as our
BioZ(R) systems, in order that physicians can safely prescribe more frequently
and at an earlier stage in treatment.
During ICG monitoring using our BioZ(R) systems, an undetectable electrical
signal is sent through our proprietary sensors on the patient's neck and chest.
Our sophisticated DISQ(TM) technology and ZMARC(TM) algorithm analyze and record
significant hemodynamic parameters. Based on this data, a physician can assess
the patient's condition, customize treatment, monitor patient compliance and the
effectiveness of prescribed medications and more accurately identify potential
complications.
Our objective is to establish the BioZ(R) product line as a standard of care in
cardiovascular medicine. Specifically, our strategy is to:
. accelerate market penetration through our direct sales force;
. broaden our distribution channels through strategic relationships;
. secure additional recurring revenue through enhanced proprietary sensors;
. maintain market leadership through product improvements and extensions;
. target new market opportunities through technology development; and
. develop ICG products for home healthcare.
We were incorporated as a California corporation in 1980 and changed our name in
1993. Our principal executive offices are located at 6175 Nancy Ridge Drive,
Suite 300, San Diego, California 92121, and our telephone number is 858-535-
0202. Our common stock trades under the symbol CDIC on the Nasdaq-Amex National
Market System.
Industry Overview and Company History
Cardiovascular disease is the number one killer of men and women in the United
States and in 31 of the 35 countries reporting mortality statistics. In the
United States alone, HFCA estimated that there were 60 million physician office
visits and over 4 million emergency room visits in 1996 with a primary diagnosis
of cardiovascular disease. Our proprietary technology provides medical
professionals in the hospital and physician's office with noninvasive access to
the objective patient data they need to effectively assess, diagnose and treat
congestive heart failure and hypertension, and to evaluate emergency, pacemaker
and dialysis patients.
In the hospital setting, the BioZ(R) is a noninvasive, cost-effective and safe
alternative to the invasive PAC procedure and may be used in many situations in
which PAC is not feasible. However, advantages of our proprietary technology are
not limited to the hospital or the critically ill. We believe that the greatest
potential for the BioZ(R) product line is in the new uses the medical community
will have for noninvasive hemodynamic measurements. We believe that the total
market opportunity is over $5 billion for our BioZ(R) product lines.
2
We envision expanding the domestic market from the current two million annual
invasive PAC procedures to nearly 60 million annual noninvasive ICG procedures,
as summarized in the chart below. Assuming total worldwide procedures are
approximately double those in the United States, there would be almost 120
million procedures worldwide. These numbers do not include home healthcare
monitoring, which we believe would, if implemented, significantly increase
demand for our technology.
Potential Annual Noninvasive Monitoring Procedures
US Patients
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Estimated Annual Total Annual
Disease State US Patients Monitoring Procedures
Procedures
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Congestive heart failure 5,000,000 4.0 20,000,000
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Hypertension 50,000,000 0.5 25,000,000
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Emergency departments 8,000,000 1.0 8,000,000
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Pacemaker 1,100,000 2.0 2,200,000
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Dialysis 300,000 12.0 3,600,000
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TOTAL 58,800,000
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Strategy
Our objective is to establish the BioZ(R) product line as a standard of care in
cardiovascular medicine. Our objective will be achieved if and when noninvasive
cardiac output, our primary measurement, becomes the Sixth Vital Sign(TM), as
oxygen saturation became the fifth vital sign in the mid-1980s. We intend to
position ICG technology as a key diagnostic and monitoring tool in assessing and
treating congestive heart failure, hypertension, pacemaker, emergency,
critically ill, surgical, high-risk obstetric, dialysis, cardiac rehabilitation,
immune suppressed and home healthcare patients. Key elements of our corporate
strategy include:
Accelerate market penetration through our direct sales force
We intend to expand our direct sales force to capitalize on our first-to-market
position in the United States to further penetrate the physician office market.
We believe that a strong direct sales force is best suited to educate the
medical community as to how the various applications of our technology improve
patient outcomes and decrease costs. We currently have 34 direct sales
representatives who focus exclusively on our products. Our goal is to have
approximately 40 to 50 direct sales representatives within the next 12 months.
We have added 4 clinical application specialists to our field sales team to
enhance customer understanding, usage and satisfaction. We believe that the
resulting improved device utilization will strengthen customer loyalty and
increase our recurring revenue from proprietary sensors.
Broaden our distribution channels through strategic relationships
We intend to establish strategic relationships with major patient monitoring
companies, pacemaker manufacturers and other medical products and technology
companies to increase the availability of our proprietary technology. We believe
that strategic relationships will accelerate market penetration of ICG
technology in markets not served by our direct sales team and provides us with
access to large installed bases of patient monitoring, cardiology and other
complementary medical equipment. We have an existing strategic relationship with
GE Medical Systems Information Technologies that provide increased distribution
capabilities and collaborative product development programs. We intend to enter
into similar arrangements with other patient monitoring companies. We also
intend to establish technology-sharing arrangements with leading pacemaker,
defibrillator, external enhanced counterpulsation and other medical products and
technology companies.
3
Secure additional recurring revenue through enhanced proprietary sensors
During fiscal 2000 we successfully developed and received FDA 510(K) clearance
on our proprietary BioZtect(TM) sensor technology that provides notable
improvements in performance and safety. Its unique shape and chemical
composition, adhesion characteristics and more user-friendly design optimize
signal transmission and detection sensitivity. The new sensor and cable system
has a proprietary interface, which promotes the exclusive use of our proprietary
sensors with our equipment. As our installed base of BioZ(R) products grows, we
expect that the recurring revenue stream from our proprietary sensors could
account for as much as 30% to 40% of our total revenue within five years. For
the fiscal year ended November 30, 2000, sensor revenue accounted for
approximately 8% of our total revenue.
Maintain market leadership through product improvements and extensions
We intend to advance the development of our core algorithms to provide
physicians with improved cardiac function measurement capabilities on a broad
class of patients. We believe that continued advances in our ICG technology will
increase physician loyalty and usage and strengthen our industry position. We
will capitalize on our expertise in ICG signal processing and sensor technology
to improve system performance in the presence of noise and patient movement. We
believe that these improvements will lead to additional applications in cardiac
stress testing and ambulatory cardiac function monitoring. We also plan to adapt
our current measurement algorithm and to develop a smaller BioZtect(TM) sensor
tailored for pediatric patients under 60 pounds.
Target new market opportunities through technology development
We will continue to focus on new applications for our core technology. Advances
in base impedance analysis could be applied in the areas of proper nutrition and
weight management, fluid management (including dialysis), oncology, drug
noncompliance, HIV patient management and pharmaceutical development and
testing. Pharmaceutical companies such as SmithKline Beecham Corporation,
Pfizer, Inc. and Eli Lilly and Company are currently using our technology to
document the cardiovascular effects of their pharmaceutical agents in both
animals and humans. We intend to collaborate with GE Medical Systems Information
Technologies in basic research in EKG and ICG technology to develop new clinical
applications that build upon advances in both technologies. Continued innovation
and commercialization of new proprietary products are essential elements in our
long-term growth strategy. We also intend to maintain our competitive advantage
through acquisitions of new technologies, and to seek additional patents and
other proprietary rights as we deem appropriate.
Develop ICG products for home healthcare
We intend to drive a broad utilization of our noninvasive technology. We believe
the broadest use of our technology could occur with frequent monitoring of
congestive heart failure and hypertensive patients in home healthcare or
extended care settings. We intend to enter into strategic relationships with
leading technology companies to capitalize on the power of the Internet and the
availability of wireless communication to monitor patients in their homes and
alternative care settings.
ICG Technology
As EKG technology noninvasively measures the heart's electrical characteristics,
our ICG technology makes it possible to measure the heart's mechanical or blood
flow characteristics. By using our products, physicians have an easy,
noninvasive and cost-effective way to monitor the heart's ability to deliver
blood to the body.
ICG technology is based on Ohm's Law and the fact that blood is the most
electrically conductive substance in the body. Blood volume and velocity change
with each heart beat and result in a change in the electrical conductivity, or
impedance, of the chest.
4
In order to measure this conductivity change, our BioZ(R) products use four dual
sensors (two on the neck and two on the chest) to deliver a painless, high
frequency (70 kHz), low magnitude (4 mA), alternating current through the chest.
Use of a high frequency current eliminates the possibility of interference with
bioelectrical activity of the heart and brain. Additionally, at a high
frequency, there is no sensation to the patient. By setting the current
deliveries at a constant magnitude, variations in blood volume and velocity in
the descending thoracic aorta which cause a proportional voltage change may be
measured.
Our proprietary DISQ(TM) technology measures the changes in impedance to the
electrical signal. The changes in impedance are then applied to the ZMARC(TM)
algorithm to measure hemodynamic status. Following are the 12 hemodynamic
parameters provided by our BioZ(R) systems:
[Enlarge/Download Table]
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Parameter Description
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Cardiac output / index* The amount of blood pumped by the heart each minute.
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Acceleration index* The measure of how quickly the blood reaches peak velocity.
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Systemic vascular resistance / index* The force the heart has to pump against to deliver blood throughout the body.
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Velocity index* A measure of how fast the blood is moving.
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Thoracic fluid content An indicator of the amount of fluid in the chest.
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Stroke volume The amount of blood pumped by the left ventricle each heart beat.
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Left ventricular ejection time (LVET) The time interval from the opening to the closing of the aortic valve.
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Pre-ejection period (PEP) The time that it takes for the electrical stimulation of the heart shown via EKG
to cause a mechanical contraction opening of the aortic valve shown via ICG
technology.
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Systolic time ratio The relationship between the electrical time period and the mechanical time period
of the heart. This ratio between PEP and LVET, measures ventricular performance.
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Left cardiac work / index* An indicator of the amount of work the left ventricle must perform to pump
blood each minute.
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Heart rate The number of times the heart beats each minute.
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Mean arterial pressure Average blood pressure.
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*Index means that the results are normalized for body surface area.
Of these 12 parameters, the ones most widely used by physicians are cardiac
output, systemic vascular resistance and thoracic fluid content. Another
important hemodynamic measure, the speed and strength of the heart's contraction
(also known as contractility), may be derived from the velocity index and the
acceleration index.
ICG technology measures the change in conductivity, or the inverse, which is
impedance, over a change in time and calculates stroke volume, or the volume of
blood pumped with each heartbeat. The physician receives a report with vital
patient data that allows him or her to customize and optimize treatment.
Some physical and medical conditions may diminish the accuracy of the
measurements provided by our products and therefore discourage their use. We
believe that inaccuracies most frequently occur in patients who are experiencing
severe septic shock, significant pulmonary hypertension, severe aortic valve
regurgitation, severe hypertension (where mean arterial pressure is greater than
180), severe irregular ventricular heartbeats or heart rates greater than 180
beats per minute. In addition, there is inadequate data demonstrating the
accuracy of our products in patients who are shorter than 47 inches or who weigh
less than 66 pounds or more than 342 pounds, as well as in patients who move
excessively during the BioZ(R) procedures.
5
Our Products, Services and Solutions
Pricing
Our stand-alone BioZ(R) systems, as sold to end users, range in list price from
$22,000 to $38,000 depending upon configuration. We discount the list prices of
our products in some circumstances based primarily upon volume commitments. We
also provide discounts on the purchase of demo equipment and to distributors who
perform sales and customer service functions for us. The list price for our
sensors and integrated sensors and leads are $9.95 and $29.95 per set. We offer
a sensor auto-ship program that allows discounts on sensor purchases based on
minimum monthly volume commitments.
BioZ.com(R)
Our lead noninvasive cardiac function monitoring device features a portable
design, transport battery and integrated blood pressure module the Bioz.com(R)
utilizes our proprietary DISQ(TM) technology and ZMARC(TM) algorithm, which
provide improved measurement of impedance waveforms and automatic electronic
calibration. The BioZ.com(R) is available with a pole cart, printer and keyboard
for end user data entry.
BioZ(R) system
The BioZ(R) system is our original noninvasive cardiac ICG monitoring device. It
consists of a Pentium-based central processing unit, 15-inch high-resolution
medical grade color monitor and keyboard. Included in the central processing
unit is our proprietary digital signal processing circuit board and software.
The BioZ(R) system is available in ergonomically designed shelf-cart or pole-
cart configurations.
BioZtect(TM) sensors
We also market disposable sensors designed specifically for use with the BioZ(R)
products. With each monitoring session, four dual sensors are utilized. We also
make available an optional integrated cable and sensor set with pre-attached
lead wires. The integrated cable and sensors are preferred in operating rooms
and for patients with infectious diseases. During fiscal 2000, we successfully
developed and released a new proprietary sensor and cable system that provides
enhanced features to our customers and promotes the exclusive use of our
proprietary sensors with our equipment.
BioZ.pc(TM) system
The BioZ.pc(TM) system is a customized noninvasive ICG monitoring device that we
developed through a collaborative research and development program with Profiles
in Health, Inc. We planned to provide customized monitors to Profiles in Health
in conjunction with its profiling system for use by healthcare providers and
managed care organizations throughout the United States.
BioZ(R) ICG module
The BioZ(R) ICG Module was jointly developed with GE Medical Systems Information
Technologies. The module integrates our proprietary BioZ(R) ICG technology into
GE's Solar patient monitoring systems. The BioZ(R) module was previewed by both
companies at the American Heart Association meeting in November 2000 and is
expected to be introduced to the market during the second quarter of fiscal
2001.
BioZ.sim
The BioZ.sim is a simulation and calibration tool specifically designed to allow
end-users and hospital biomedical engineering departments to test and verify the
functionality of their BioZ(R) systems.
6
Strategic Relationships
In August 1999, we entered into a strategic relationship with GE Medical Systems
Information Technologies for exclusive distribution of our BioZ.com(R) to select
countries in Europe. In January 2000, we expanded the GE Medical Systems
Information Technologies distribution agreement to include 18 additional
countries including Russia, Egypt, Saudi Arabia and the United Arab Emirates. In
September 2000 the agreement was also expanded to include Japan, the worlds
second largest health care market. Through GE Medical Systems Information
Technologies and our other international distributors, we now have
representation in over 70 countries throughout Europe, Asia Pacific, Africa, the
Middle East, Australia, New Zealand and Latin America.
In October 1999, we entered into an agreement with GE Medical Systems
Information Technologies for distribution of the BioZ.com(R) in the domestic
hospital market. The agreement grants GE Medical Systems Information
Technologies exclusive rights to market and sell our BioZ.com(R) in hospitals
with over 100 beds, which represents a market in which GE Medical Systems
Information Technologies has a significant presence. GE Medical Systems
Information Technologies is widely recognized for its success in introducing new
medical technologies, particularly in the areas of diagnostic cardiology,
clinical information systems and patient monitoring systems. Our direct sales
force continues to focus its efforts on the physician office and other
outpatient markets, along with smaller US hospitals.
During the fourth quarter of fiscal 2000, we entered into an agreement with GE
Medical Systems Information Technologies for the development of a custom plug-in
module for the Marquette Solar 7000 Series of bedside monitors. This product
will extend the capabilities of the Solar 7000 product family to provide all of
the hemodynamic parameters of the BioZ.com(R) to GE Medical Systems Information
Technologies' installed customer base of over 30,000 units. The module is to be
built at GE Medical Systems Information Technologies' Milwaukee, Wisconsin
facility using circuit board assemblies, patient cables and sensors supplied by
us. The product will be distributed by the GE Medical Systems Information
Technologies direct sales force worldwide, and we will receive a royalty payment
for each module sold. We expect the module to be introduced to the market during
the second quarter of 2001. We believe that other patient monitoring companies
could benefit from the addition of similar modules to their estimated installed
base of over 300,000 modular bedside monitors.
In March 2000, we entered into an agreement to provide BioZ(R) monitors and
sensors sets to Profiles in Health, Inc., a privately held California
corporation. Under the terms of the agreement, we were to manufacture and sell
customized BioZ(R) monitors called BioZ.pc(TM), which would be integrated into
the Profiles in Health Proveillance(TM) system. The contract contemplated a
three-phase development program during which we would develop and provide to
Profiles in Health ICG components and sensors. We established a 100% allowance
for the receivables and inventory unique to Profiles in Health, Inc. as their
inability to pay became apparent in our fourth quarter.
Medicare and Other Third-Party Reimbursement
Most medical procedures are reimbursed by a variety of third-party payers,
including Medicare and private insurers. HCFA, the governmental body that
approves medical diagnosis and treatment for financial reimbursement under
Medicare, determines whether to reimburse for a given type of procedure and the
dollar amount allowed. In November 1998, HCFA mandated Medicare coverage of
BioZ(R) procedures on a nationwide basis. This reimbursement approval for our
BioZ(R) systems has improved our ability to penetrate the outpatient market, as
it provides for national coverage to over 75 million Americans. In November 2000
HCFA established a national reimbursement pricing for the use of our equipment
of $41.00, an approximate 37% increase in the national average reimbursement for
our BioZ(R) ICG technology. The national reimbursement rate became effective
January 1, 2001.
7
The financial and healthcare cost containment pressures at US hospitals,
resulting from per-capita compensation techniques required by health maintenance
organizations and diagnosis-related groups, are driving medical departments to
decrease costs. A managed care system involving capitation rewards healthcare
providers who utilize the most cost-effective methods available in order to
maintain per-patient costs within the monthly fees. When used instead of PAC,
our products could reduce direct hospital costs by an aggregate of $600 and
total hospital costs by an average of $13,600. As a result, a financial
incentive exists, independent of third-party reimbursement circumstances, for
hospitals to purchase and use our products.
Sales and Distribution
The United States medical marketplace consists of two distinct segments: the
hospital market and the outpatient market. The outpatient market for BioZ(R)
products include physician offices and hospital-based and free-standing
outpatient facilities. During fiscal 1997, we established distribution
agreements with 17 regional specialty distributors as our representatives in the
hospital market. By the end of fiscal 1997, it was apparent that we needed to
broaden our sales channels. We decided to add a direct sales force targeted at
both the hospital and outpatient markets in the majority of the United States,
and we reduced the number of our domestic distributors. During fiscal 2000, we
have added 4 clinical application specialists to our field sales team to enhance
customer understanding, usage and satisfaction. We believe that the resulting
improved device utilization will strengthen customer loyalty and increase our
recurring revenue from proprietary sensors.
During fiscal 1998 and 1999, our direct sales force began to produce an
increased percentage of our overall sales in the outpatient market. In contrast
to the hospital market, there are few, if any, formal capital equipment budget
processes in this market segment, and purchasing decisions can therefore be made
more quickly. Consequently, we focused our direct sales force primarily on the
outpatient markets and sought an alliance with a hospital-based industry leader
to penetrate the hospital market. Currently, we have a direct sales force of 34
focused primarily on the outpatient market.
In October 1999, we announced a strategic alliance with GE Medical Systems
Information Technologies for the distribution of our products to domestic
hospitals with over 100 beds. We now have 60 of GE Medical Systems Information
Technologies sales representatives promoting and selling our BioZ.com(R) in
larger domestic hospitals. Internationally, we utilize a variety of
distributors, including GE Medical Systems Information Technologies, to actively
promote the BioZ.com(R) in more than 70 countries. We also offer BioZ.buy(TM),
our electronic commerce solution that provides the ability to electronically
acquire our products, services and information through our company website. To
date, we have an installed base of over 1,000 units in over 650 physician
offices and hospital sites throughout the world.
Marketing
Until recently, comprehensive hemodynamic information has been available only in
acute care settings, such as an intensive care unit or operating room, through
the use of PAC. The BioZ(R) systems make obtaining and assessing this type of
information simple, fast, cost-effective, safe, continuous and painless. For
these reasons, the utilization of noninvasive ICG technology is expanding in
both hospital and outpatient environments.
Our primary prospects in the outpatient market include cardiologists and general
internists caring for congestive heart failure and hypertension patients,
dialysis centers and surgicenters. Patients in the United States who may benefit
from our technology include the 50 million hypertension patients, five million
congestive heart failure patients, over one million pacemaker patients, 8
million emergency patients and many patients requiring fluid management.
Congestive heart failure-related expenditures exceeded $40 billion in 1998, more
than any other illness.
8
Our marketing strategy is designed to:
. increase physician and hospital personnel knowledge of ICG technology;
. demonstrate the cost savings of providing ICG monitoring to patients;
. demonstrate the ability of the BioZ(R) systems to assist physicians in
the objective identification and appropriate pharmacological treatment
of congestive heart failure, hypertension and fluid management
patients;
. show the ability of the BioZ(R) systems to assist physicians in the
optimization of pacemakers;
. demonstrate cost savings through more efficient care and reimbursement
through HCFA-mandated Medicare and private insurers; and
. educate physicians and hospital staff of the importance of
hemodynamics in the treatment of patients who would normally not be
monitored with a PAC due to practice setting, costs and complications.
In addition, within the hospital setting, our marketing strategy is to emphasize
the benefits of our noninvasive technology over the invasive PAC procedure.
We believe that acceptance of our products within the outpatient and hospital
markets will lay the foundation for the utilization of ICG technology in the
home healthcare market which will allow patients with chronic illnesses, such as
congestive heart failure, to monitor their hemodynamic status simply and
inexpensively and to transmit this information, via telephone or Internet, on a
regular basis to their physicians. We believe that this "telemedicine"
application has the potential to alert the physician effectively and efficiently
to any changes in status, the need to adjust medications or patient
noncompliance with prescribed treatment.
Our marketing promotion strategy is based on key medical conference
participation, facsimile and mail direct response programs, select medical
journal advertising and product and clinical education literature.
We actively support research utilizing the BioZ(R) systems because it may
provide further clinical validation for ICG. We seek to have each study
published in a peer-reviewed journal or presented at a major medical conference.
Clinical publications and presentations at major medical conferences provide us
with the exposure necessary to establish credibility for ICG technology and the
BioZ(R) systems.
Research and Development
Our research and development team has extensive experience in the areas of ICG,
biological signal processing, hardware and software development and regulatory
compliance. The team is responsible for on-going product engineering, new
product development and basic research into ICG technology and additional
noninvasive monitoring applications.
To supplement our engineering staff, we utilize Rivertek Medical Systems, Inc.,
located in Minneapolis, Minnesota, as an integral part of our research and
development team. Rivertek serves as an engineering consulting firm for medical
device manufacturers, including Guidant Corporation and Medtronic, Inc., as well
as emerging medical technology companies. Dennis Hepp, our chief technology
officer, founded Rivertek in 1988. Rivertek employs 17 full time medical
hardware, software and biomedical engineers.
9
Clinical Studies
Our research and development team participates in monitoring and analysis of
company-sponsored clinical trials, for which we employ clinical research
specialists. Each of these individuals has a strong clinical background and is
responsible for monitoring clinical studies and assisting in research and
customer training.
Previous generation technology
More than 80 research papers on ICG technology have been published since 1993.
In general, these studies reported favorable results when comparing cardiac
output measurements with those of other techniques, such as PAC.
Previous generation technology worked reasonably well in a select group of
patients. However, significant limitations on the technology became evident when
monitoring ventilated patients and those with increasing heart rates, high heart
rates, abnormal heartbeats, high respiration rates and pacemakers. These
limitations related to both hardware and software inadequacies. As a result of
intense focus and concerted effort, combined with advances in computer
processing power, we have addressed these limitations by improving the
electronics and processing as well as the algorithms.
The BioZ(R) Systems
We are committed to supporting well-designed clinical research studies utilizing
ICG technology, several of which are currently in process. Studies which are of
most importance to us are those which demonstrate validity, reproducibility,
clinical utility and cost-effectiveness. The results of several major studies
addressing each of these areas have been released with positive results. Studies
conducted during the past fiscal year are as follows:
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STUDY CONCLUSIONS PRESENTED PUBLISHED
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Acute Treatment of Heart The routine use of noninvasive Society of Critical Care Critical Care Medicine
Failure with ICG monitoring of cardiac index Management December 1999
Impedance Cardiography in acute treatment February, 2000
monitoring of Cardiac Index of heart failure allows for
and The Ability to improve better identification of
patient outcome patients who demonstrate,
Georgetown University School improving patient early response
Of Medicine to therapy and trend to shorter
Washington, D.C. hospital stays
and reduced hospital costs,
improving patient outcomes
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Occult Perfusion Deficits in Prospective use of noninvasive Society of Critical Care Critical Care Medicine
Heart Failure Patients: cardiac output values allows the Management December 1999
Identification through treating Emergency Physician to February, 2000
Noninvasive Central improve the initial
Hemodynamic Monitoring determination of occult
Georgetown University School perfusion deficits in heart
Of Medicine failure and allows for better
Washington, D.C. outcomes
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Comparison of the Use of the TEB can be used to manage Society of Critical Care Critical Care Medicine
Pulmonary Artery Catheter critically ill surgical patients. Management December 1999
Versus Thoracic Electrical February, 2000
Bioimpedance in a Surgical
Intensive Care Unit
John Peter Smith Hospital,
Fort Worth, Texas
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STUDY CONCLUSIONS PRESENTED PUBLISHED
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Hemodynamic and Volume Effective control of BP requires American Society of The American Journal of
Changes balanced Hypertension Hypertension
During Intensive treatment reduction in systemic resistance April 2000 April 2000
for Resistant Hypertension and volume, as defined by
(RH) hemodynamic measurements
Mayo Clinic, Rochester, MN
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Artioventricular Interval Impedance plethysmography North American Society Pacing and Clinical
Optimization after appears to be a viable technique of Pacing and Electrophysiology
Biventricular Pacing: for AVI optimization Electrophysiology April 2000
Echo/Doppler vs. Impedance May 2000
Plethysmography
Mayo Clinic, Rochester, MN
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The Utility of Impedance ICG offers a mean of noninvasive Academic Society of Journal of Academic
Cardiography measurement of SV, CO, and SVR Emergency Medicine Emergency medicine
in the Emergency Room that may be of clinical utility May 2000 May 2000
UCSD Medical Center, San in the ED
Diego
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Does Permanent Right Right ventricular pacing in 7th World Congress on Journal of Heart Failure
Ventricular Pacing in resting patients with chronic Heart Failure July 2000
Resting Patients with atrial fibrillation July 2000
Chronic Atrial Fibrillation significantly increases CI.
Improve Hemodynamic
Parameters Guided by
Thoracic Electrical
Bioimpedance
Silesian School of Medicine
Karowice, Poland
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Outpatient Infusion of Short term BioZ hemodynamic 7th World Congress on Journal of Heart Failure
Positive Inotropes: Role of Monitoring in patients on Heart Failure July 2000
Bioimpedance, Noninvasive intermittent inotropic infusion July 2000
Hemodynamics Monitoring therapy under controlled
(BioZ) settings is reliable
Michael Reese Hospital,
Chicago, IL
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Intermittent Milrinone and Noninvasive hemodynamic Heart Failure Society Journal of Cardiac
Beta Blocker Therapy: monitoring may be useful in of America Failure
Hemodynamic (BioZ.com) tailoring weaning protocol for September 2000 September 2000
Indicators of Successful individuals patients and in
weaning from Inotropes selecting patients who can be
Michael Reese Hosptial, successfully discontinued from
Chicago, IL intermittent inotropic infusion
therapy
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Noninvasive Impedance Patients with low CI and normal Heart Failure Society Journal of Cardiac
Cardiography as an TFC are of America Failure
Adjunctive Tool to Predict more likely to be hospitalized September 2000 September 2000
Clinical Status and for decompensation
Outcomes in Patients with and exacerbation in one month
Advanced Heart Failure after the clinic visit
Tulane University, New
Orleans, LA
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11
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STUDY CONCLUSIONS PRESENTED PUBLISHED
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Physician Assessment of In the ED, ICG is well accepted American College of The Annals of Emergency
Impedance Cardiography by treating physicians. ICG may Emergency Physicians Medicine
Measurement be of use to treating physicians Scientific Assembly October 2000
of Hemodynamic Parameters and serve to modify therapy in a October 2000
in the Emergency Department small number of patients
UCSD Medical Center, San
Diego
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The Predictive Value of Noninvasive impedance American College of The Annals of Emergency
Noninvasive Impedance cardiography can help distinguish Emergency Physicians Medicine
Cardiography those patients with early response October 2000 October 2000
in Determining Patient to therapy and help
Outcome in Acute Heart predict shorter length of stay,
Failure: reduced hospital charges, and
A Prospective Blinded Study potentially
Providence Hospital, improved patient outcome
Georgetown University
Medical School
Washington, D.C.
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In addition, we are working with 15 facilities throughout the United States, in
which a study has been designed to determine if information generated by the
BioZ(R) systems will accurately identify and predict the occurrence of clinical
deterioration in patients with heart failure. The primary hypothesis being
tested is whether changes in hemodynamic composite score (derived from variables
generated by the BioZ(R) device) precede and predict the occurrence of a major
clinical event. The secondary hypotheses to be tested are whether patients with
a major clinical event will experience critical decreases in cardiac output,
increases in thoracic fluid content and decreases in acceleration index more
frequently or earlier than patients without a major clinical event.
Medical Advisory Board
We have established a distinguished medical advisory board consisting of 19
physicians, many of whom are affiliated with prestigious universities and well-
known medical institutions throughout the United States, such as Stanford
University School of Medicine, Cleveland Clinic, Scripps Clinic, University of
California, San Diego, and Baylor College of Medicine, Houston, Texas. Our
members, who have expertise in cardiology, electrophysiology, anesthesiology,
hypertension, pulmonary and critical care, internal medicine, heart failure and
emergency medicine, are as follows:
. Nicholas V. Diaco, M.D. has served as chairman of our medical advisory
board since February 1995. He is the director of the coronary care
unit and the heart catheterization laboratory at St. John's Hospital
and Health Center in Santa Monica, California.
. William T. Abraham, M.D. is director of the Heart Failure & Cardiac
Transplantation Department and the University of Kentucky Medical
Center in Lexington, Kentucky.
. Peter H. Belott, M.D. is a board certified internist and cardiologist
specializing in cardiac pacing and electrophysiology in San Diego,
California.
. Anthony N. DeMaria, M.D. is chief of cardiovascular medicine for the
cardiology division of the University of California, San Diego in San
Diego, California.
. Peter Alagona, Jr., M.D. is a private practice cardiologist at Health
Centers of Excellence in Tampa, Florida.
12
Medical Advisory Board - (Continued)
. Barry H. Greenberg, M.D. is the director of the heart
failure/transplant cardiology program at University of California, San
Diego Medical Center in San Diego, California
. Jonathan R. Jaffe, M.D. is a private practice cardiologist Neurology &
Cardiology in Hollywood, Florida.
. Meldon C. Levy, M.D. is director of the cardiac noninvasive laboratory
and vice chairman, governing board, of the Century City Hospital, Los
Angeles, California.
. William C. Maguire, M.D., Ph.D. has a private practice in critical
care and pulmonary disease and is on the staff of Grossmont and
Alvarado Hospitals, San Diego, California.
. Loi Phi Nguyen, M.D. is Chief of Cardiology at West Houston Hospital
in Houston, Texas.
. W. Scott Sageman, M.D. is a physician in private practice in critical
care and pulmonary medicine at the Community Hospital of Monterey
Peninsula in Monterey, California.
. Richard A. Schatz, M.D. is research director of cardiovascular
interventions at the heart, lung and vascular center at Scripps Clinic
and Research Foundation in La Jolla, California.
. John S. Schroeder, M.D. is the chief of the cardiovascular medicine
clinic and a professor of medicine at Stanford University School of
Medicine in Stanford, California.
. Marc A. Silver, M.D. is the director of the heart failure institute
and the cardiovascular disease fellowship program at Christ Hospital
and Medical Center in Oak Lawn, Illinois.
. Bruce D. Spiess, M.D. is a professor, chief of cardiothoracic
anesthesia and director of clinical research at the Medical College of
Virginia Commonwealth University in Richmond, Virginia.
. John E. Strobeck, M.D., Ph.D. is a member of the executive committee
and co-founder of the Heart Failure Society of America and medical
director of the Heart-Lung Center in Hawthorne, New Jersey.
. Guillermo Torre-Amione, M.D., Ph.D. is an assistant professor of
medicine and medical director at Baylor College of Medicine in
Houston, Texas.
. Richard F. Wright, M.D. is the research director at St. John's Pacific
Heart Institute in Santa Monica, California.
. Clyde W. Yancy, Jr., M.D. is the director of the congestive heart
failure program and medical director at the University of Texas
Southwestern Medical Center in Dallas, Texas.
Our medical advisory board provides guidance regarding clinical trials,
technological improvements and potential uses for our products. Members of the
medical advisory board receive reimbursement for their expenses in attending
company-sponsored meetings and, in some cases, receive consulting fees for time
spent working on our behalf. No fees were paid to the members during fiscal 1999
and 2000 for services on our medical advisory board. However, in some cases,
members receive options to purchase shares of our common stock for participating
in meetings and studies.
13
Manufacturing
We are licensed as a healthcare device manufacturer by the Food and Drug Branch
of the California Department of Health Services, which is the State of
California equivalent of the FDA, and operate under the FDA Good Manufacturing
Practice regulation.
We have an 18,000 square foot facility located in San Diego, California. In this
facility we assemble and service our BioZ(R) monitors. We currently outsource to
a third party the production of our BioZtect(TM) sensors.
Our production process for the BioZ(R) monitors consists primarily of final
assembly, integration and testing of standard and custom components. Qualified
subcontractors, who have met our supplier certification process and are placed
on an approved vendor list, produce various custom components for us.
We have implemented quality procedures and documentation required for successful
International Organization for Standardization (ISO) 9001 certification. In June
1998, we received ISO 9001 and EN 46001 quality certification for developing and
marketing medical devices.
We maintain a quality-assurance program covering our manufacturing operations.
Suppliers of purchased components are required to meet stated specifications. We
certify suppliers prior to use by conducting audits and product inspections. We
engage in ongoing evaluations of the performance of our suppliers by evaluating
the results of inspections and tests as well as the timeliness of product
deliveries. We employ numerous quality-assurance procedures during our in-house
manufacturing processes to ensure that our finished products meet our
specifications. Quality assurance procedures include operator training, process
validation, equipment calibration, inspection and testing. All manufacturing
procedures and processes are formally approved and updated using established
revision control procedures. Documentation of in-house and final testing results
is maintained in device history records for every unit. We maintain an ongoing
post-sale performance-monitoring program.
In November 1998, we received authorization from TUV Rhineland of North America
to place the CE mark on the BioZ.com(R). The CE mark is recognized worldwide as
an essential European regulatory approval and enables us to expand our sales and
distribution of the BioZ.com(R) throughout Europe. We also received
authorization from Underwriter's Laboratories in November 1998 to use the UL
mark in connection with the BioZ.com(R). In November 2000, we received a
Canadian Medical Device License to market and sell the BioZ.com(R) in Canada.
Warranty and Service
Our systems are available with either a limited 13-month or 60-month parts and
labor warranty commencing at the date of shipment. When warranty repairs are
necessary, we generally perform them at our headquarters. In some cases, our
distributors perform repairs in authorized service centers. We also provide
field clinical application specialists as necessary, as well as 24-hour on-call
technical support. In addition to the standard warranty, we offer extended
service agreements, called Zcare(R), for hardware and software maintenance
beyond the warranty period. We also service equipment on a time and materials
basis.
14
Competition
Direct competition
We are aware of three domestic and two international manufacturers of ICG
monitors. Since all five companies are privately held, sales and financial
figures for these competitors are not available. We believe that our BioZ(R)
products provide the most advanced ICG monitoring and commercially attractive
designs, at prices that are competitive. Thus far, we have not observed sales
and marketing efforts by our competitors in the marketplace.
PAC
Also known as thermodilution, right heart catheterization or Swan-Ganz(TM)
catheterization, the PAC procedure was introduced in the early 1970's. Despite
its limitations, costs and risks, PAC remains the most commonly used technology
for monitoring hemodynamic status. Medical Data International estimates that PAC
procedures are used nearly 2 million times per year worldwide. The estimated
cost of PAC to the US healthcare system in 1997 was $2 billion for the cost of
the catheters and their insertion and $15 billion per year for the cost of
complications arising from the procedure. Edwards Lifesciences, Abbott
Laboratories and Datex-Ohmeda produce the majority of right heart catheters used
in the United States.
PAC is an invasive procedure involving an incision into a patient's neck or
groin region and the insertion of a catheter (plastic tube) through the vascular
system and through the heart directly into the pulmonary artery. Complications
associated with this procedure occur in as many as one in four reported cases
and include irregular heartbeats, infection, pulmonary artery rupture and death.
Additionally, a September 1996 study published in the Journal of the American
Medical Association (JAMA) determined that the use of PAC to monitor cardiac
output significantly increased the risk of death in critically ill patients.
This study, which examined data from 5,735 intensive-care patients treated at
five US medical centers, reported that patients who underwent PAC had a 21%
higher risk of death within 30 days of discharge, as compared to those who did
not undergo the procedure. The importance of this finding is underscored by the
fact that patients in both groups were matched for disease severity and
prognosis.
Another significant drawback in the use of PAC is cost. The PAC procedure
requires a hospital to allocate valuable resources in terms of an intensive care
unit bed, a cardiac catheterization laboratory or operating room, highly skilled
medical personnel and expensive equipment to obtain non-continuous hemodynamic
data. According to the JAMA study, the mean cost of the hospital stay for
critically-ill patients having a PAC was $13,600 greater than the $35,700 cost
for similar critically-ill patients who did not undergo a PAC.
Many patients who might otherwise benefit from hemodynamic monitoring are
excluded presently because the risks and costs associated with PAC often
outweigh the potential benefits. ICG technology eliminates PAC-caused
complications and death, lowers costs, reduces procedure time, expands clinical
applications and offers immediate availability of vital, real-time and
continuous hemodynamic data.
Echocardiography
Echocardiography (echo) is a medical diagnostic tool utilizing ultrasound
frequency waves to detect anatomical abnormalities of the heart and blood
vessels. Echo technology was developed during the 1970's and has advanced
through the years with the addition of sophisticated electronics and
digitalization for acquisition of better images. A continuous wave suprasternal
Doppler echo measures cardiac output noninvasively by placing a Doppler
transducer on the chest, aiming it toward the ascending aorta and measuring
aortic blood flow velocity. Specifically, echo measures the aortic diameter and
the movement of red blood cells to determine the velocity and direction of blood
flow to calculate stroke volume and thus calculate cardiac output.
15
Limitations in measuring cardiac output via echo include:
. inconsistency in images and in the data generated due to differences
in technician skill and experience, patient size and disease state;
and
. difficulty in procuring images in patients with evidence of pulmonary
disease, tracheotomies, chest wounds or obesity.
In addition, echo is a time-consuming procedure that typically requires 30-45
minutes, and in some patients, reliable, accurate images simply cannot be
obtained for unknown reasons.
Trans-esophageal echo
Trans-esophageal echo has been developed in recent years to obtain closer images
of the heart. It is useful in patients for whom examination from the usual
position is technically impossible and for hospitalized patients undergoing
cardiac surgery. Trans-esophageal echo is performed with the ultrasound
transducer placed invasively in the esophagus through the mouth. Although this
procedure enables more direct, accurate images of the heart, disadvantages
include its invasive nature, increased patient discomfort and the requirement
for patient sedation to promote procedure tolerance. In addition, patient airway
complications may result, causing the need for available emergency equipment,
such as oxygen, intubation equipment and EKG monitoring. The procedure is
customarily performed with several attendants, including an echo technician, a
nurse and a physician.
Direct Fick
Direct Fick was the original method conceived in the late 1800's to measure
cardiac output. It is based on calculating the oxygen difference between the
arterial and venous blood, along with oxygen inhalation and expiration. The
Direct Fick method is seldom used because it is time consuming, costly and
complicated. A variation of the Direct Fick method, called Fick Partial Re-
breathing, was introduced in late 1998 to the hospital surgical market. Fick
Partial Re-breathing uses carbon dioxide instead of oxygen to measure cardiac
output. The Fick Partial Re-breathing method is limited to patients who are
mechanically ventilated, which severely restricts the number of patients who are
candidates for the procedure. In addition, lack of HCFA-mandated reimbursement
creates a barrier for adoption by the medical community.
Intellectual Property
Our success will, to some extent, depend on our ability to maintain patent
protection for our products and processes, to preserve our trade secrets and
proprietary technology and to operate without infringing upon the patents or
proprietary rights of others. In January 2001 we applied for two new patents and
currently hold 3 United States patents.
All of our existing patents were issued prior to the re-engineering of our
products to incorporate a digital signal processing-based system. The lead
patent on our technology expires in 2001. We also possess proprietary software,
which we have elected not to disclose through patents. We may in the future file
new patent applications covering modifications to our products and algorithms .
Government Regulation
In November 1996, we received 510(k) clearance from the FDA to market the
BioZ(R) system. In September 1997, the FDA granted 510(k) clearance to market
the BioZ(TM) Portable and to implement our proprietary DISQ(TM) technology into
redesigned monitors. DISQ provides improved measurement of impedance waveforms
through enhanced digital signal processing and automatic calibration.
16
In March 1998, we received 510(k) marketing clearance for our BioZ.com(R)
monitoring system. The BioZ.com(R) incorporates our ZMARC(TM) algorithm, which
allows the system to sense and modulate values on patients with over-compliant
or under-compliant aortas. The BioZ.com(R) is compact and features a transport
battery, integrated blood pressure module and the ability to directly interface
with most hospital central monitoring systems. In November 1998, HCFA-mandated
Medicare coverage became available for BioZ(R) procedures on a nationwide basis
and in November 2000, HCFA established a national reimbursement amount for
BioZ(R) procedures of $41.00.
Our products and activities are subject to extensive, ongoing regulation by the
FDA and other governmental and foreign regulatory agencies. Under the Federal
Food, Drug and Cosmetic Act, the FDA regulates the clinical testing,
manufacture, labeling, packaging, marketing, distribution and record keeping for
medical devices. Delays in receipt of, or failure to obtain or maintain,
regulatory clearances and approvals, or any failure to comply with regulatory
requirements, could delay or prevent our ability to market our product line.
Before a new device may be introduced or marketed, the manufacturer generally
must obtain either FDA 510(k) clearance or approval of a premarket approval
application. FDA clearance or approval may entail an expensive, lengthy and
uncertain process. We have received a marketing clearance for the BioZ(R)
system, the BioZ.pc(TM) and the BioZ.com(R). These clearances are nevertheless
subject to continued FDA audits and may be rescinded if we change the design of
our technology. Further, we plan to submit additional new products for FDA
clearance or approval in the future. It is possible that our future products may
not gain FDA clearance or approval in a timely fashion, or at all.
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. Violation or alleged violation of these
regulations may result in government action ranging from warning letters to
criminal prosecution. Companies who violate these regulations are also subject
to penalties of up to $500,000.
The Federal Food, Drug and Cosmetic Act requires that medical devices be
manufactured in accordance with good manufacturing practice requirements. Good
manufacturing practice requirements specify, 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 the extensive and detailed testing of
every aspect of the process; and
. 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 good manufacturing practice requirements.
Labeling and promotional activities are regulated by the FDA and, in some
circumstances, by the Federal Trade Commission. Modifications or enhancements
that could significantly affect the safety or effectiveness of a 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.
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 may have retroactive effect and may adversely affect us.
17
In order to sell our products within the European community, we must comply with
the European Commission's medical device directive. In late 1998 we received
authorization from TUV Rhineland of North America to place the CE mark on our
BioZ.com(R). The CE mark is recognized worldwide as an essential European
regulatory approval and enables us to expand our sales and distribution of the
BioZ.com(R) throughout Europe. Future regulatory changes could limit our ability
to use the CE mark, and any new products we develop may not qualify for the CE
mark. If we fail to obtain authorization to use the CE mark or lose this
authorization, we will not be able to sell our products in the European
community. In May 2000, we received approval from the State Drug Administration
of the People's Republic of China and in November 2000, we received a Canadian
Medical Device License.
Employees
As of February 22, 2001, we had 109 employees, one of which is considered part-
time. Of this number, 48 are in sales and marketing, 19 are in manufacturing, 19
are in research and development, and the balance are in management or
administration. Not included in these figures are 60 members of GE Medical
Systems Information Technologies' U.S. sales force, over 100 members of GE
Medical Systems Information Technologies' European sales force and 17 Rivertek
engineers who work on our behalf through third-party arrangements with these
companies. We consider our relationships with our employees to be good.
18
RISK FACTORS
We depend upon on our BioZ(R) product line, the market acceptance of which is in
its early stages.
Our future is dependent upon the success of the BioZ(R) product line and similar
products that are based on the same core technology. The market for these
products is in a relatively early stage of development and may never fully
develop as we expect. The long-term commercial success of the BioZ(R) product
line requires widespread acceptance of our products as safe, efficient and cost-
effective. Widespread acceptance would represent a significant change in medical
practice patterns. In the past, some medical professionals have hesitated to use
ICG products because of limitations experienced with older, analog-based
monitors. Invasive procedures, such as PAC, are generally accepted in the
medical community and have a long history of use.
We have sponsored, and will continue to sponsor or conduct clinical trials. We
cannot be certain that clinical trials will be completed, that they will have a
positive outcome or that a positive outcome in these trials will be sufficient
to promote widespread acceptance of our products within the medical community.
Technological change is difficult to predict and to manage.
We face the challenges that are typically faced by companies emerging from the
development phase. Our product line has required, and any future products will
require, substantial development efforts and compliance with governmental
clearance or approval requirements. We may encounter unforeseen technological or
scientific problems that force abandonment or substantial change in the
development of a specific product or process.
We must maintain and develop strategic relationships with third parties to
increase market penetration of our product lines.
We distribute our products to domestic hospitals and targeted international
markets through our strategic alliance with GE Medical Systems Information
Technologies. We also have an agreement in place with Profiles in Health, Inc.,
a privately held California corporation, for distribution capabilities and
collaborative product development. We intend to enter into similar agreements
with other major patient monitoring companies and to establish technology
partnerships with pacemaker and other medical product and technology companies.
Widespread acceptance of our BioZ(R) products is dependent on our establishing
and maintaining these strategic relationships with third parties and on the
successful distribution efforts of third parties.
Many aspects of our relationships with third parties, and the success with which
third parties promote distribution of our products, are beyond our control. We
may be unsuccessful in maintaining our existing strategic relationships and in
identifying and entering into future development and distribution agreements
with third parties.
Our success depends in part upon the availability of third-party reimbursement
at adequate price levels.
Our success will depend in part on the availability of adequate reimbursement
from third-party healthcare payers, such as Medicare, private health insurers
and managed care organizations. Third-party payers increasingly challenge the
pricing of medical products and services. Third-party payers may not cover the
cost of a device and related services, or they may place significant
restrictions on the circumstances in which coverage will be available. In
addition, reimbursement may not be at or remain at price levels adequate to
allow medical professionals to realize an appropriate return on the purchase of
our products.
19
We depend on management and other key personnel.
We dependent on a limited number of key management and technical personnel. The
loss of one or more of our key employees may hurt our business if we are unable
to identify other individuals to provide us with similar services. We do not
maintain "key person" insurance on any of our employees. 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 may not
be able to attract or retain qualified personnel.
We depend on Rivertek Medical Systems and other third parties for development
and manufacturing services.
Our strategy for development and commercialization of some of our products
depends upon entering into various arrangements with third parties and upon the
subsequent success of these parties in performing their obligations. We may not
be able to negotiate acceptable arrangements in the future, and our existing
arrangements may not be successful. We rely on contracted development services,
particularly from Rivertek Medical Systems, Inc. Also, we currently assemble our
products from components manufactured by a limited number of manufacturers.
Therefore, we are dependent on component and subassembly manufacturers. If we
experience a termination, modification or disruption of any of our development
or manufacturing arrangements, we may be unable to deliver products to our
customers on a timely basis, which may lead to customer dissatisfaction and
damage to our reputation.
We may not have adequate intellectual property protection.
Although we believe that we have effective patent protection, our patents and
proprietary technology may not be able to prevent competition by others. In
addition, in the future our products may be found to infringe upon the rights of
others. From time to time, we have received communications from third parties
asserting that features of some of our products may infringe on the intellectual
property rights of others. Any claims resulting in intellectual property
litigation, whether defensive or offensive, would have no certain outcome other
than to drain our resources.
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 our patents may
not provide competitive advantages to us. 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 may
not cover products that we develop in the future. Moreover, when our key patents
expire, the inventions will enter the public domain. Our lead patent expires in
2001. See "Business - Intellectual Property."
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. If our products were found to infringe patents held by competitors,
we may have to modify our products to avoid infringement, and it is possible
that our modified products would not be commercially successful.
We face competition from other companies and technologies.
We compete with other companies that are developing and marketing noninvasive
hemodynamic monitors. We are also subject to competition from companies that
support invasive technologies. Many of these companies 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. The
introduction by others of products embodying new technologies and the emergence
of new industry standards may render our products obsolete and unmarketable. 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, the life cycles of our products are difficult to
estimate.
20
To compete successfully, we must develop and introduce new products that keep
pace with technological advancements, respond to evolving consumer requirements
and achieve market acceptance. We may be unable to develop new products that
address our competition.
Our business plan contemplates an income stream from sales of disposable sensors
that are compatible with an installed base of our monitors. We may be subject to
price competition from other sensor manufacturers whose products are also
compatible with our monitors. To mitigate this we successfully developed
proprietary sensor technology that provides enhanced features to our customers
and promotes the exclusive use of our proprietary sensors with our equipment.
The current widespread acceptance of PAC, and the lack of widespread acceptance
of noninvasive technologies like ours, is an important competitive disadvantage
that 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, reduced gross margins and loss of
market share.
The cost and availability of power in the State of California is subject to
uncertainty.
In late 2000 and continuing into 2001, the State of California has been subject
to a deterioration in the ability of major utilities to provide energy for the
State's needs. In Northern California, the crisis has resulted in "rolling
blackouts" where certain areas are not provided with any electricity for
periods of up to two hours. To date the most immediate impact has been the
significant increase in power rates for most users, including us. In addition,
the major utility providers are purchasing power on a "spot" basis. The cost of
such purchases has exceeded their ability to fully collect the increases from
their customers. Any future interruption in power or further increases in power
costs could delay production or increase our operating costs and could have a
material adverse affect on our operations.
We have no experience with home healthcare.
We intend to enter the home healthcare market through strategic relationships
with other parties. We have not concluded any agreements or understandings with
any third parties, and we may not be able to enter into any arrangements on
terms satisfactory to us. Even if we are successful in negotiating acceptable
arrangements with third parties, the parties may not perform their obligations
to us for reasons beyond our control. If we are not able to negotiate
arrangements with other parties to implement our home healthcare strategy, or if
such arrangements, once negotiated, are not successful, we will not be able to
meet our business objectives in this area.
We have a history of losses and may experience continued losses.
We have experienced losses every year. These losses have resulted because we
have expended more money in the course of researching, developing and enhancing
our technology and products and establishing our sales, marketing and
administrative organizations than we have generated in revenues. We expect that
our operating expenses will increase substantially in the foreseeable future as
we increase our sales and marketing activities, expand our operations and
continue to develop our technology. It is possible that we will never achieve or
sustain the revenue levels required for profitability.
21
We may need additional capital, which may be unavailable.
The commercialization of our product line and the development and
commercialization of any additional products may require greater expenditures
than expected in our current business plan. Our capital requirements will depend
on numerous factors, including:
. our rate of sales growth--fast growth may actually increase our need
for additional capital to hire additional staff, purchase additional
component inventories, finance the increase in accounts receivable and
supply additional support services;
. our progress in marketing-related clinical evaluations and product
development programs, all of which 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 will need to support our regulatory and development efforts
in advance of sales;
. the level of resources that 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;
. 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 may
increase our capital needs, the lack of growth and continued losses
would also increase our need for capital; and
. financing strategies--our attempt to accelerate the otherwise lengthy
purchasing processes of hospitals by offering leasing programs as an
alternative to outright purchasing and by providing purchasers with
extended payment terms and financing options will require additional
capital.
We may be unable to predict accurately the timing and amount of our capital
requirements. We may be required to raise additional funds through public or
private financing, bank loans, collaborative relationships or other arrangements
earlier than expected. It is possible that banks, venture capitalists and other
investors may perceive our capital structure, our history of losses or the need
to achieve widespread acceptance of our technology as too great a risk to bear.
As a result, additional funding may not be available on attractive terms, or at
all. If we cannot obtain additional capital when needed, we may be forced to
agree to unattractive financing terms, to change our method of operation or to
curtail our operations.
We may not be able to manage growth.
If successful, we will experience a period of growth that could 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 to achieve the rapid execution necessary to successfully market
our products. Our future operating results will also depend on our ability to
expand our direct sales force and our internal sales, marketing and support
staff. If we are unable to manage future expansion effectively, our business,
results of operations and financial condition will suffer, our senior management
will be less effective, and our revenues and product development efforts may
decrease.
22
Our quarterly operating results frequently vary due to factors outside our
control.
We have experienced and expect to continue to experience fluctuations in
quarterly operating results as a result of a number of factors. We cannot
control many of these factors, which include the following:
. the timing and number of new product introductions;
. the mix of sales of higher and lower margin products in a quarter;
. the market acceptance of our products;
. development and promotional expenses relating to the introduction of new
products or enhancements of existing products;
. product returns;
. changes in pricing policies by us and our competitors;
. the timing of orders from major customers and distributors; and
. delays in shipment.
For these reasons, you should not rely on period-to-period comparisons of our
financial results as indications of future results.
We may not continue to receive necessary FDA clearances or approvals.
Our products and activities are subject to extensive, ongoing regulation by the
Food and Drug Administration and other governmental authorities. Delays in
receipt of, or failure to obtain or maintain, regulatory clearances and
approvals, or any failure to comply with regulatory requirements, could delay or
prevent our ability to market our product line.
We may not receive approvals by foreign regulators which are necessary for
international sales.
Sales of medical devices outside the United States are subject to foreign
regulatory requirements that vary from country to country. If we, or our
international distributors, fail to obtain or maintain required pre-market
approvals or fail to comply with foreign regulations, foreign regulatory
authorities may require us to file revised governmental notifications, cease
commercial sales of our products in the applicable countries or otherwise cure
the problem. Such enforcement action by regulatory authorities may be costly.
In order to sell our products within the European community, we must comply with
the European community's medical device directive. The CE marking on our
products attests to this compliance. Future regulatory changes may limit our
ability to use the CE mark, and any new products we develop may not qualify for
the CE mark. If we lose this authorization or fail to obtain authorization on
future products, we will not be able to sell our products in the European
community.
Members of our Board of Directors own a large percentage of our common stock and
may influence our decisions.
J. Michael Paulson and James C. Gilstrap, both of whom are members of our board
of directors, beneficially own approximately 31% of the outstanding shares of
our common stock. In addition, Mr. Paulson's brothers beneficially own another
4% of the outstanding shares of our common stock as of February 22, 2001.
Accordingly, Messrs. Paulson and Gilstrap are able to substantially influence us
and our affairs and business, including any future issuance's of common stock or
other securities, merger and acquisition decisions, declaration of dividends and
the election of directors. In addition, our stock price and our ability to raise
capital could be injured if these shareholders were to sell a significant
portion of their holdings on the open market.
23
We do not know the effects of healthcare reform proposals.
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 increase access to
healthcare for the uninsured, control the escalation of healthcare expenditures
within the economy and use healthcare reimbursement policies to balance the
federal budget.
We expect that Congress and state legislatures will continue to review and
assess healthcare 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 could have a
substantial impact on the manner in which we conduct our business and could
require us to revise our strategies.
We are subject to product liability claims and product recalls that may not be
covered by insurance.
The nature of our business exposes us to risks of product liability claims and
product recalls. Medical devices as complex as ours frequently experience errors
or failures, especially when first introduced or when new versions are released.
Our products are sometimes used in procedures where there is a high risk of
serious injury or death. These 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 some periods before May 15,
1995. We currently maintain product liability insurance at $10,000,000 per
occurrence and $10,000,000 in the aggregate. Our product liability insurance may
not be adequate. In the future, insurance coverage may not be available on
commercially reasonable terms, or at all. In addition, product liability claims
or product recalls could damage our reputation even if we have adequate
insurance coverage.
Our common stock is subject to price volatility.
The market price of our common stock has been and is likely to continue to be
highly volatile. Our stock price could be subject to wide fluctuations in
response to various factors beyond our control, including:
. quarterly variations in operating results;
. announcements of technological innovations, new products or pricing by
our competitors;
. changes in, or failure to meet, financial estimates of securities
analysts;
. the rate of adoption by physicians of ICG technology in targeted
markets;
. the timing of patent and regulatory approvals;
. the timing and extent of technological advancements;
. results of clinical studies;
. the sales of our common stock by affiliates or other shareholders with
large holdings; and
. general market conditions.
Our future operating results may fall below the expectations of securities
industry analysts or investors. Any such shortfall could result in a significant
decline in the market price of our common stock. 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.
24
We may be required to issue additional shares of common stock at prices that are
below then market value.
The holders of warrants to purchase our common stock could require us to issue
additional shares of common stock to them pursuant to anti-dilution rights.
These rights would cause us to issue additional common stock upon exercise of
their warrants if we sell common stock at a price less than the exercise price
of their warrants. If we need to sell common stock at a time when the market
price for our shares is depressed, these anti-dilution rights could further
depress the market price and impair our ability to raise needed capital.
Our international sales expose us to unique risks.
In fiscal 2000, international sales accounted for approximately 9% of our
revenue. We believe that international sales will represent a meaningful portion
of our revenue in the future. We rely on GE Medical Systems Information
Technologies and other regional distributors to assist us with our international
operations. In addition, we are exposed to risks from international sales, which
include unexpected changes in regulatory requirements, tariffs and other
barriers and restrictions and reduced protection for intellectual property
rights. Moreover, fluctuations in the rates of exchange may increase the price
in local currencies of our products in foreign markets and make our products
relatively more expensive than competitive products.
Common stock which is available for immediate resale may depress our market
price.
We have filed registration statements with the Securities and Exchange
Commission covering the potential resale by our shareholders of up to 14,417,000
shares of common stock, the majority of which have not been sold. The existence
of a substantial number of shares of common stock subject to immediate resale
could depress the market price for our common stock and impair our ability to
raise needed capital.
A low stock price could result in our being de-listed from the Nasdaq Market and
subject us to 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, or if we fail to maintain other Nasdaq
criteria, Nasdaq may de-list our common stock from the Nasdaq-Amex National
Market. In such an event, our shares could only be traded on over-the-counter
bulletin board systems. This method of trading could significantly impair our
ability to raise new capital.
In the event that our common stock was de-listed from the Nasdaq-Amex National
Market due to low stock price, we may become subject to special rules, called
penny stock rules, that impose additional sales practice requirements on broker-
dealers who sell our common stock. The rules require, among other things, the
delivery, prior to the transaction, of a disclosure schedule required by the
Securities and Exchange Commission 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, and monthly statements must be sent disclosing recent price
information.
In the event that our common stock becomes characterized as a penny stock, our
market liquidity could be severely affected. 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.
25
We do not intend to pay dividends in the foreseeable future.
We do not intend to pay any cash dividends on our common stock in the
foreseeable future. Payment of such cash dividends would, in any event, be
prohibited or limited under the terms of our line of credit with Imperial Bank.
ITEM 2. DESCRIPTION OF PROPERTY
Our executive offices are located in an approximately 18,000 square foot leased
facility in San Diego, California. This facility houses all of our research,
development, manufacturing, marketing, sales and administrative activities
except for field and contract personnel. Approximately 12,000 square feet of the
facility is being utilized by our research, development and manufacturing
functions with the balance occupied by our marketing, sales and administrative
staff. The five-year lease expires in June 2002. We believe that alternative
facilities are available for future expansion.
ITEM 3. LEGAL PROCEEDINGS
On February 8, 1999, the Official Post Confirmation Committee of Unsecured
Creditors of Helionetics, Inc. filed a complaint in United States Bankruptcy
Court for the Central District of California, Santa Ana Division, naming us and
CardioDynamics Holdings, LLC (CDH) as defendants. The co-chairmen of our board
of directors control CDH. The complaint alleged fraudulent transfer of our
common stock from Helionetics to CDH in February 1995 and sought various
relief's, including return of the stock and compensatory and punitive damages.
In February 2000, our motion to dismiss the complaint was granted without leave
for Helionetics to amend. We are unable to predict what effect, if any, an
unfavorable outcome to CDH in this matter could have on us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
26
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our common stock is quoted on the Nasdaq-Amex National Market(SM) under the
symbol CDIC. The following table sets forth for the periods indicated the high
and low closing prices per share of common stock as furnished by The Nasdaq-Amex
National Market(SM).
[Enlarge/Download Table]
High Low
------ ------
Year Ending November 30, 2000
Fourth Quarter.............................................................. $ 6.50 $ 4.31
Third Quarter .............................................................. 7.28 4.00
Second Quarter.............................................................. 13.13 4.66
First Quarter............................................................... 7.00 3.16
Year Ending November 30, 1999
Fourth Quarter.............................................................. $ 3.35 $ 2.50
Third Quarter............................................................... 3.75 1.38
Second Quarter.............................................................. 1.88 1.50
First Quarter............................................................... 2.56 1.56
In May 2000, the Company moved from the Nasdaq Small Cap Market to the Nasdaq-
Amex National Market System.
On February 22, 2001 there were approximately 13,000 holders of record of our
common stock. We have not declared or paid any cash dividends on shares of our
common stock and do not anticipate paying any cash dividends in the foreseeable
future. We currently intend to retain any future earnings for use in the
operation of our business.
27
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read together with our Financial Statements
and the Notes related to those statements, as well as the other financial
information included in this Form 10-KSB. 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 our company's business,
refer to Item I of this Form 10-KSB, Description of Business - Risk Factors
Results of Operations (This discussion refers to fiscal years which end on
November 30)
In March 1998, we received FDA 510(k) marketing clearance for our BioZ.com(R)
ICG monitoring system. The BioZ.com(R) is compact and features a transport
battery, integrated blood pressure module and the ability to directly interface
with most hospital central monitoring systems. The BioZ.com(R) utilizes our
proprietary DISQ(TM) technology and ZMARC(TM) algorithm for improved measurement
of impedance waveforms and automatic electronic calibration. The BioZ.com(R)
accounted for 95% of our overall equipment sales in fiscal 2000, up from 90% in
fiscal 1999.
Net sales in fiscal 2000 increased to $13,102,319, an increase of 80% over net
sales of $7,280,908 recorded in fiscal 1999. The significant sales growth in
fiscal 2000 is primarily due to the success of our domestic direct sales force,
expansion of our international distributor network, our strategic alliance with
GE Medical Systems Information Technologies and the growing awareness of the
availability and clinical usefulness of our BioZ(R) products. As of November 30,
2000, we had an installed base of over 1,000 units in over 650 physician offices
and hospital sites throughout the world.
Our direct sales force targets individual physician offices as well as hospitals
in the United States with fewer than 100 beds. During fiscal 2000, we increased
our direct sales force from 25 territory sales representatives and three
regional sales managers at the beginning of the year, to 30 territory sales
representatives, four regional sales managers and a U.S. distribution channels
manager. In addition, we added four clinical sales specialists to our sales
team in fiscal 2000. These clinical sales specialist assist in three primary
areas: pre-sales activities including demonstrations, in-servicing post-sales
customers, and on-going customer support to increase customer satisfaction and
drive recurring revenues. In fiscal 2001 we plan to continue to expand our
direct sales force and the number of clinical sales specialists as qualified
candidates are identified in targeted metropolitan areas. However, the success
of our direct sales expansion will be dependent, to a large degree, on our
ability to identify, attract and retain qualified sales representatives with
successful medical industry sales experience.
In November of 1998, we received CE Mark approval for our BioZ.com(R) which
expanded our opportunities for distribution in Europe. During fiscal 1998 and
1999, we established international distribution agreements with 15 medical
device distributors and in August 1999, we entered into a strategic alliance
with GE Medical Systems Information Technologies for exclusive distribution of
our BioZ.com(R) to select countries in Europe. In January 2000, the GE Medical
Systems Information Technologies distribution agreement was expanded to include
18 additional countries including Russia, Egypt, Saudi Arabia, and United Arab
Emirates. In September 2000, the agreement was again expanded to include Japan,
the world's second largest healthcare market. Through GE Medical Systems
Information Technologies and our other international distributors, we now have
representation in over 70 countries throughout Europe, Asia Pacific, Africa, the
Middle East, Australia, New Zealand and Latin America. In May 2000, we received
State Drug Administration approval from the People's Republic of China and in
November 2000, a Canadian Medical Device License.
28
Results of Operations - (Continued)
In October 1999, we entered into an agreement with GE Medical Systems
Information Technologies for distribution of the BioZ.com(R) in the domestic
hospital market. The agreement grants GE Medical Systems Information
Technologies exclusive rights to market and sell our BioZ.com(R) in hospitals
with over 100 beds, a market in which GE Medical Systems Information
Technologies has a significant presence. GE Medical Systems Information
Technologies is widely recognized for its success at introducing new
technologies, particularly in the areas of diagnostic cardiology, clinical
information systems and patient monitoring systems. Our direct sales force
continues to focus their efforts on the outpatient market and the smaller US
hospitals.
During the third quarter of fiscal 2000 we entered into an agreement with GE
Medical Systems Information Technologies to jointly develop a custom plug-in
module for the GE Solar(R) patient monitoring systems. The BioZ(R) ICG module
will extend the capabilities of the Solar 7000 product family to provide all of
the hemodynamic parameters of the BioZ.com(R) to GE Medical Systems Information
Technologies installed customer base of over 30,000 units. The module is to be
built at GE Medical Systems Information Technologies' facility in Milwaukee,
Wisconsin using circuit board assemblies, patient cables and sensors supplied by
us. The product will be distributed by the GE Medical Systems Information
Technologies direct sales force worldwide, and we will receive a royalty payment
for each module sold. We expect the module will be introduced to the market
during the second quarter of 2001. We believe that other patient monitoring
companies could benefit from the addition of similar modules to their estimated
installed base of over 300,000 modular bedside monitors. In January 2001, GE
Medical Systems Information Technologies committed to purchase $3.5 million of
BioZ(R) products and modules from us during our 2001 fiscal year.
In March 2000, we entered into an agreement to provide ICG monitors and sensors
to Profiles in Health, Inc., a privately held California corporation organized
to provide a variety of healthcare data and support services for many diseases
states, infection control and exposure management. Under the terms of the
agreement, we manufactured and sold customized ICG monitors called BioZ.pc(TM),
for integration into the Profiles in Health Proveillance(TM) system for use by
healthcare providers and managed care organizations throughout the United
States. On July 6, 2000 we received FDA 510(k) clearance for the BioZ.pc(TM)
system. Pricing of the customized ICG components and sensors under the Profiles
in Health agreement reflect a substantial volume discount. In our fourth fiscal
quarter we established a 100% allowance for the receivables and inventory unique
to Profiles in Health, Inc. as their inability to pay became apparent in the
fourth quarter.
As a result of the increased working capital available from our July 25, 2000
financing, we offered an in-house no-interest equipment financing program
through our direct sales force that provided a means for customers to purchase
our BioZ.com(R) systems and receive financing for up to 60 months. This program
was well received by our customers and accounted for approximately 40% of our
net sales in the last half of fiscal 2000. We have established a similar program
through a third-party financing company for future sales and do not intend to
continue the internal equipment financing program in 2001.
In fiscal 2000, 74% of our overall sales were generated through our direct sales
force with 19% coming through our distributor network, including GE Medical
Systems Information Technologies. Of the sales generated through our distributor
network, 9% involved international distributors and the remaining 10% related to
domestic distributors.
29
Results of Operations - (Continued)
Each time our BioZ(R) products are used, disposable sets of four dual sensors
are required. The disposable sensors have a list price of $9.95 per application.
In fiscal 2000, recurring revenue, which is primarily related to sales of our
disposable sensors, increased by over 200% to $1,060,177, up from $342,210 in
fiscal 1999. In May 2000, we received FDA 510(k) clearance on the BioZtect(TM)
sensor and cable system which provide enhanced features to our customers and
promotes the exclusive use of our proprietary sensors with our equipment. Its
unique shape, chemical composition, adhesion characteristics and more user-
friendly design optimize signal transmission and detection sensitivity. In
October 2000, we filed two patent applications covering the utility and unique
design features of the BioZtect(TM) sensors. During fiscal 2000 we implemented
an auto-ship sensor program that allows customers to receive sensor pricing
discounts in exchange for minimum monthly sensor purchase commitments. As the
installed base of BioZ(R) equipment grows, we anticipate that the revenue
generated by our disposable sensors will comprise an increasingly larger
percentage of our overall sales.
We achieved a gross margin of $8,557,006, or 65%, in fiscal 2000, compared to a
gross margin of $4,681,717, or 64%, in fiscal 1999. The improvement is primarily
the result of a higher average unit sales price resulting from a greater
percentage of our products being sold through our direct sales force, and a 15%
reduction in our BioZ.com(R) direct material costs. These improvements were
partially offset by an increase in our inventory obsolescence provision
of $251,000 primarily related to the older BioZ(R) and the BioZ.pc(TM) systems.
During fiscal 2000 we continued to increase our internal capabilities for
research and development, through the hiring of additional staff, thereby
decreasing our reliance on outside engineering consulting services. Research and
development expenses increased 44%, from $1,913,920 in 1999 to $2,757,855 in
2000, due to increased spending for the development of our BioZtect(TM)
proprietary sensors, integration of our technology into the GE Solar(R) patient
monitoring system and development of the BioZ.pc(TM). Included in research and
development in fiscal 1999 is a non-cash charge of $350,479 related to the
vesting of common stock warrants issued to GE Medical Systems Information
Technologies to obtain access to their technology. This access has allowed us to
commence development and integration of our proprietary ICG technology into GE
Medical Systems Information Technologies patient monitoring systems. We continue
to invest a significant portion of our resources in research, clinical studies,
further enhancements to the BioZ(R) systems, joint technology and new product
development. As a result, our research and development expenses continue to
represent a substantial portion of our overall expense structure.
Selling, general and administrative expenses in fiscal 2000 were $14,300,442, up
137% from $6,041,919 in fiscal 1999. Included in the selling, general and
administrative amount is a non-cash charge of $3,382,000 related to the vesting
of the remaining 1,000,000 performance-based warrants issued to GE Medical
Systems Information Technologies in August 1999 and $1,927,910 of bad debt
expense related to past due accounts receivable balances including a 100%
provision for amounts due from Profiles in Health. Excluding the non-cash
charge for the warrants included in selling, general and administrative,
expenses increased 81%. The majority of the increase was related to expansion of
both our domestic direct sales force and our international distribution
capabilities. During fiscal 2000 we increased the number of direct sales
representatives to 30, and we plan to continue to expand our direct sales force
and increase our investment in sales and marketing activities in fiscal 2001 and
beyond.
Included in selling, general and administrative expenses in fiscal 2000 is
$1,662,254 of administrative expenses related to the overall infrastructure and
management of our company. We continue to focus on ongoing cost containment and
targeting our investments to areas of the business that directly contribute to
revenue growth. Although general and administrative expenses increased by 21%
from $1,369,144 in fiscal 1999, as a percent of sales, general and
administrative expenses decreased from 19% in fiscal 1999, to 13% in fiscal
2000.
30
Results of Operations - (Continued)
We incurred interest expense of $226,056 in fiscal 2000, down from $311,461 in
fiscal 1999. The $85,405 decrease is primarily because in August 2000, we repaid
our term loan with City National Bank and our line of credit agreement with our
Chairmen. We earned $481,066 of interest income on invested funds in fiscal
2000, up 429% from the $90,944 earned in fiscal 1999 due primarily to increased
funds available for investment from the various financings during the year.
To achieve an orderly conversion of the shares of our Series A convertible
preferred stock and minimize the potential impact on the market price of our
common stock, in June of 1999, we identified a group of strategic investors and
facilitated the private sale of the common shares issued upon conversion of the
remaining portion of our Series A preferred stock. As a result of this
transaction, we recorded a non-cash charge of $491,954.
In the third fiscal quarter of 1999, we declared a $191,564 stock dividend
related to warrants issued to the Series A preferred shareholders in exchange
for the relinquishment of their contractual right to purchase an additional
$3,000,000 of convertible preferred stock. Preferred stock dividends were
$226,030 in fiscal 1999 and due to the elimination of the preferred stock in
August 1999 there were no dividends in fiscal 2000.
Fiscal 2000's net loss to common shareholders was $8,266,825, or $.19 per common
share, versus a net loss to common shareholders of $4,218,957, or $.12 per
share, in fiscal 1999. The fiscal 2000 net loss included non-cash charges of
$3,382,000 for warrants that vested in the fourth quarter to GE Medical Systems
Information Technologies and additional allowance for doubtful accounts of
$1,927,910 related to past due accounts receivables including a 100% provision
for amounts due from Profiles in Health, Inc.
The weighted-average number of common shares that we had outstanding during
fiscal 2000 increased by 19% primarily due to the issuance of additional shares
in the December 1999 and July 2000 common stock financings as well as the
exercise of options and warrants during the year.
Liquidity and Capital Resources
In June 1997, we entered into a five-year lease for an 18,000 square-foot
manufacturing facility that also houses our research, development, marketing,
sales and administrative activities. The lease commenced on September 1, 1997
and current lease payments are $16,991 per month. In fiscal 2000 and 1999, we
invested $446,402 and $186,534 respectively, in property and equipment,
including equipment acquired under capital lease, principally for new computers,
software and equipment to be used in our manufacturing process.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. In February 1999 the
maturity date of this line of credit was extended to September 30, 2000. Under
the terms of the agreement, we could borrow up to $3,000,000 on an as-needed
basis at an annual interest rate of 10%. In August of 1998, we borrowed
$1,000,000 on this line of credit and used the proceeds to reduce outstanding
borrowings under the Imperial Bank credit facility. In August 2000, the private
line of credit was repaid in full.
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 term loan bore interest at 1%
above the bank's prime rate and was guaranteed by the co-chairmen of our Board
of Directors. In August 1998 we repaid $1,000,000, reducing the outstanding
balance to $2,000,000. In exchange, the bank extended the loan to February 28,
1999. In February 1999, the bank term loan was repaid in full.
31
Liquidity and Capital Resources - (Continued)
In August of 1998, we sold $3,000,000 of Series A convertible preferred stock.
During fiscal 1999, we facilitated conversion of the remaining shares of the
Series A preferred stock into common stock.
On February 26, 1999 we entered into a three-year unsecured term loan agreement
with City National Bank which initially bore interest at the bank's prime rate.
Under the terms of the agreement, we borrowed $2,000,000, the proceeds of which
were used to repay the Imperial Bank term loan. The co-chairmen of our Board of
Directors guaranteed the loan. The loan agreement contemplated principal
installments of $83,333, plus accrued interest at 1% above the bank's prime
rate, which commenced in March 2000. In August 2000, the bank term loan was
repaid in full.
In January 1999, we established a secured revolving credit line with Imperial
Bank. The credit line provides for borrowings of up to $3,000,000 at the bank's
prime rate. Under the terms of the agreement, we are required to maintain
minimum ratios of current assets to liabilities and not to exceed certain loss
levels. Although there were no borrowings under this line at November 30, 2000,
the bank provided a waiver since our fourth quarter loss exceeded the maximum
allowed under the line of credit. All the assets of the company collateralize
the credit line. The Company is in the process of extending the line of credit
for another year, through February 2002.
On May 28, 1999 we sold $5.2 million of common stock in a private placement to
institutional and other accredited investors including Domain Associates,
L.L.C., a Princeton, New Jersey-based venture capital group and Veritas Societe
Generale. The investors purchased unregistered shares with a six-month holding
restriction for $1.00 per share, representing a 27% discount from the closing
bid price.
On December 3, 1999, we sold $3.3 million of common stock in a private placement
to institutional investors who purchased unregistered shares with a four-month
holding restriction for $2.50 per share, representing a 9% discount from the 30-
day average closing bid price.
In May 2000, we moved from the Nasdaq Small Cap Market to the Nasdaq-Amex
National Market System (NMS). We believe trading on the NMS enables companies
to address a broader investor base and to increase the liquidity of their stock.
On July 25, 2000 we sold $18.7 million of common stock in a private placement of
approximately 3.3 million shares of our common stock to institutional and other
accredited investors. The investors purchased unregistered common stock at $5.59
per share, a 13% discount to the 20-day weighted-average closing price as of the
June 21, 2000 pricing date. In addition, a portion of the proceeds were used to
repurchase, at $5.59 per share, and retire 418,908 shares from the estate of
Allen E. Paulson. The financing was exempt from the registration requirement of
the Securities Act of 1933, as amended, in reliance upon Regulation D
promulgated under the Act. In connection with the private placement, we incurred
issuance costs totaling $1,382,086.
These financings, together with the bank credit facilities and the line of
credit previously described, have provided the capital required to fund
commercialization of our BioZ(R) products and ongoing research and development
efforts. These financings have also allowed us to expand of our direct sales
force and international sales presence, increase capital expenditures and meet
our working capital requirements, including cash flow needs relating to the
significant increase in accounts receivable resulting from higher sales volumes
and extended payment terms.
32
Our long-term liquidity will depend on our ability to commercialize the BioZ(R)
and other diagnostic products and to 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.
We have operating loss carryforwards of approximately $29,044,000 for federal
income tax purposes. The Tax Reform Act of 1986 contains provisions which limit
the federal net operating loss carryforwards that can be used in any given year
in the event of specified occurrences, including significant ownership changes.
A valuation allowance has been recognized for the full amount of the deferred
tax asset created by these carryforwards.
33
Item 7. Financial Statements
Independent Auditors' Report
The Board of Directors and Shareholders
CardioDynamics International Corporation:
We have audited the accompanying balance sheets of CardioDynamics International
Corporation as of November 30, 2000 and 1999, and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
two year periods ended November 30, 2000. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CardioDynamics International
Corporation as of November 30, 2000 and 1999, and the results of its operations
and its cash flows for each of the years in the two year periods ended November
30, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
San Diego, California
January 23, 2001
34
CardioDynamics International Corporation
Balance Sheets
November 30, 2000 and 1999
[Enlarge/Download Table]
Assets 2000 1999
-------------- ---------------
Current assets:
Cash and cash equivalents $ 11,595,050 $ 2,405,710
Accounts receivable, net of allowance for doubtful accounts
of $1,648,760 in 2000 and $552,648 in 1999 3,770,915 4,226,470
Inventory, net (note 2) 2,254,579 1,344,527
Other current assets, net (note 4) 1,142,288 116,070
-------------- ---------------
Total current assets 18,762,832 8,092,777
Property and equipment, net (note 3) 575,455 335,760
Long-term receivables and note receivable, net (note 4) 2,192,520 25,973
Deposits 29,792 42,500
-------------- ---------------
Total assets $ 21,560,599 $ 8,497,010
============== ===============
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,587,568 $ 1,125,068
Accrued expenses 563,773 183,910
Accrued salaries, wages and benefits 670,867 309,083
Current maturities of long-term debt (note 6) 85,151 885,932
Line of credit (note 5) -- 1,000,000
Notes payable related parties (notes 5 and 7) -- 1,000,000
-------------- ---------------
Total current liabilities 2,907,359 4,503,993
Long-term debt, less current maturities (note 6) 87,087 1,350,425
-------------- ---------------
Total liabilities 2,994,446 5,854,418
Shareholders' equity: (notes 6, 7, 8 and 9)
Preferred Stock; no par value; 18,000,000 shares authorized; no shares
issued or outstanding at November 30, 2000 or 1999 -- --
Common stock; no par value; 100,000,000 shares authorized; issued
and outstanding 45,518,475 shares at November 30, 2000 and 39,888,811
shares at November 30, 1999 48,270,367 24,079,981
Accumulated deficit 29,704,214) (21,437,389)
-------------- ---------------
Total shareholders' equity 18,566,153 2,642,592
-------------- ---------------
Commitments and contingencies (note 11)
Total liabilities and shareholders' equity $ 21,560,599 $ 8,497,010
============== ===============
See accompanying notes to financial statements.
35
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Operations
For the years ended November 30, 2000 and 1999
[Download Table]
2000 1999
------------- -------------
Net sales $ 13,102,319 $ 7,280,908
Cost of sales 4,545,313 2,599,191
------------- -------------
Gross margin 8,557,006 4,681,717
------------- -------------
Operating expenses:
Research and development 2,757,855 1,913,920
Selling, general, and administrative expenses 14,300,442 6,041,919
------------- -------------
Total operating expenses 17,058,297 7,955,839
------------- -------------
Loss from operations (8,501,291) (3,274,122)
Other expense:
Interest, net 255,010 (220,517)
Other, net (note 8) (9,452) (497,488)
------------- -------------
Total other expense: 245,558 (718,005)
Loss before income taxes (8,255,733) (3,992,127)
Income taxes (note 10) (11,092) (800)
------------- -------------
Net loss (8,266,825) (3,992,927)
Preferred stock dividends -- (226,030)
------------- -------------
Net loss to common shareholders $ (8,266,825) $ (4,218,957)
============= =============
Net loss per common share, basic and diluted $ (.19) $ (.12)
============= =============
Weighted-average number of common shares outstanding 43,145,043 36,296,495
============= =============
See accompanying notes to financial statements.
36
CardioDynamics International Corporation
Statements of Shareholders' Equity
For the years ended November 30, 2000 and 1999
[Enlarge/Download Table]
Common Stock Accumulated
-----------------------------
Shares Amount Deficit Total
------------ ------------- -------------- -------------
Balance at November 30, 1998 32,676,029 $ 15,598,274 $ (17,218,432) $ (1,620,158)
Compensatory stock options granted -- 8,274 -- 8,274
Issuance of common stock warrants -- 554,174 -- 554,174
Issuance of common stock, net 5,527,272 5,577,338 -- 5,577,338
Issuance of common stock - upon exercise of
stock options 91,000 151,000 -- 151,000
Issuance of common stock - upon conversion of
preferred stock 1,567,962 2,145,224 -- 2,145,224
Preferred stock dividends paid in common stock
and warrants 26,548 45,697 (226,030) (180,333)
Net loss -- -- (3,992,927) (3,992,927)
------------ ------------- -------------- -------------
Balance at November 30, 1999 39,888,811 24,079,981 (21,437,389) 2,642,592
Compensatory stock options granted -- 63,796 -- 63,796
Issuance of common stock - upon conversion of
long-term debt 101,521 25,380 -- 25,380
Issuance of common stock warrants -- 3,382,000 -- 3,382,000
Issuance of common stock, net 4,667,767 20,398,918 -- 20,398,918
Issuance of common stock - upon exercise of
stock options and warrants 1,279,284 2,516,934 -- 2,516,934
Redemption of common stock from related party (418,908) (2,196,642) -- (2,196,642)
Net loss -- -- (8,266,825) (8,266,825)
------------ ------------- -------------- -------------
Balance at November 30, 2000 45,518,475 $ 48,270,367 $ (29,704,214) $ 18,566,153
============ ============= ============== =============
See accompanying notes to financial statements.
37
CardioDynamics International Corporation
Statements of Cash Flows
For the years ended November 30, 2000 and 1999
[Enlarge/Download Table]
2000 1999
-------------- -------------
Cash flows from operating activities:
Net loss $ (8,266,825) $ (3,992,927)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 206,707 116,807
Gain on sale of fixed assets -- (614)
Provision for obsolete inventory 138,148 69,829
Provision for warranty repairs (94,531) 75,752
Reduction in reserve for inventory returns -- (23,040)
Provision for demonstration inventory (56,698) 60,459
Provision for doubtful receivables 1,096,112 519,920
Provision for doubtful long-term receivables 565,810 --
Compensatory stock options granted 63,796 8,274
Warrants issued 3,382,000 350,479
Non-cash expense for retirement of Series A preferred stock -- 483,333
Other non-cash items (19,313) --
Changes in operating assets and liabilities:
Accounts receivable (640,557) (4,114,200)
Inventory (991,502) (479,451)
Other current assets (1,026,218) (28,274)
Long-term receivables and note (2,732,357) (25,973)
Deposits 12,708 (2,401)
Accounts payable 462,500 547,232
Accrued expenses 431,568 29,726
Accrued salaries, wages and benefits 361,784 32,904
Deferred service revenue 42,826 --
-------------- -----------
Net cash used in operating activities (7,064,042) (6,372,165)
-------------- -----------
Cash flows from investing activities:
Purchases of property and equipment (380,434) (33,542)
Proceeds from sale of fixed assets -- 1,498
-------------- -----------
Net cash used in investing activities (380,434) (32,044)
-------------- -----------
(Continued)
See accompanying notes to financial statements.
38
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Cash Flows, (Continued)
For the years ended November 30, 2000 and 1999
[Enlarge/Download Table]
2000 1999
------------ -------------
Cash flows from financing activities:
Repayment of long-term debt $ (2,085,394) $ (2,066,666)
Borrowing of long-term debt -- 2,000,000
Proceeds from line of credit -- 1,000,000
Repayment of revolving line of credit (1,000,000) --
Repayment of note payable - related party (1,000,000) --
Exercise of options and warrants 2,516,934 151,507
Redemption of common stock from related party (2,196,642) --
Preferred stock issuance costs -- (8,608)
Issuance of common stock, net 20,398,918 5,100,600
------------ -------------
Net cash provided by financing activities 16,633,816 6,176,833
------------ -------------
Net increase (decrease) in cash and cash equivalents 9,189,340 (227,376)
Cash and cash equivalents at beginning of year 2,405,710 2,633,086
------------ -------------
Cash and cash equivalents at end of year $ 11,595,050 $ 2,405,710
============ =============
2000 1999
------------ -------------
Supplemental disclosures of cash flow information:
Cash paid for interest $ 226,056 $ 311,461
Cash paid for income taxes $ 11,092 $ 800
Supplemental disclosures of non-cash investing and financing activities:
Common stock issued upon redemption or conversion of preferred stock -- $ 2,145,224
Common stock issued to extinguish long-term debt including interest $ 25,380 --
Fixed assets acquired by capital lease $ 65,968 $ 152,992
Preferred stock dividends paid in common stock and warrants -- $ 226,030
See accompanying notes to financial statements.
39
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(1) Summary of Significant Accounting Policies
Description of Business
CardioDynamics International Corporation (the "Company") was incorporated
in California in June 1980 as Bomed Medical Manufacturing, Ltd. and changed
its name to CardioDynamics International Corporation in October 1993. The
Company develops, manufactures and markets heart-monitoring devices that
provide physicians with continuous data on a wide range of parameters
relating to blood flow and heart function. Unlike other cardiac function
monitoring technologies, the Company's monitors are noninvasive. The
Company's primary products, the BioZ(R) System, the BioZ(TM) Portable, and
the BioZ.com(R), use a technology called impedance cardiography (ICG) to
obtain data which is typically available only through a time-consuming,
costly and potentially dangerous invasive procedure known as pulmonary
artery catheterization, or PAC.
Many patients who might otherwise benefit from cardiac function monitoring
are often not monitored because the risks and costs associated with PAC
outweigh the potential benefits. The BioZ(R) Systems allow these patients
to be monitored in a safe, efficient and cost-effective manner. Since the
BioZ(R) Systems provide cardiac function monitoring noninvasively, they
have the potential to expand the number of clinical applications well
beyond cardiology, intensive care and surgery. These include applications
for congestive heart failure, high blood pressure, emergency, dialysis,
immune suppressed, high risk obstetric and pacemaker patients.
Cash Equivalents
Cash equivalents consist of short-term money market funds and commercial
paper and are stated at cost, which approximates fair market value. The
Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
The Company maintains its cash in bank deposit accounts, which, at times,
may exceed the federally insured limits. The Company has not experienced
any losses in such accounts, and management believes it places its cash on
deposit with financial institutions that are financially stable. At
November 30, 2000, the Company has cash deposits in excess of federally
insured limits totaling $11,395,050.
Inventory
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out (FIFO) basis. The Company evaluates inventory on
hand against historical and planned usage to determine appropriate
provisions for obsolete, slow-moving and non-saleable inventory.
Property and Equipment
Property and equipment are recorded at cost. Property and equipment
acquired under capital leases are recorded at the present value of future
minimum lease payments. Leasehold improvements are amortized using the
straight-line method over the shorter of the remaining lease term or the
estimated useful life. Depreciation is computed using the straight-line
method over the estimated useful lives of the assets, generally three to
seven years.
40
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(1) Summary of Significant Accounting Policies - (Continued)
Revenue Recognition
Revenue is recognized when a product is shipped or a service is provided to
the customer with appropriate provisions for estimated returns and
allowances.
Warranty Cost
The Company provides, by a current charge to cost of goods sold, an amount
it estimates will be needed to cover future warranty obligations for
products sold during the year. The accrued liability for warranty costs is
included in accrued expenses in the accompanying balance sheets.
Research and Development
All research and development costs are expensed in the period incurred.
Patents
Costs to obtain, maintain and defend patents are expensed in the period
incurred.
Advertising
All advertising costs are expensed in the period incurred. Advertising
costs, including trade show expenses, amounted to $745,012 in 2000 and
$320,728 in 1999.
Segment Reporting
Statement of Financial Accounting Standard ("SFAS") No. 131, Disclosures
about Segments of an Enterprise and Related Information, establishes annual
and interim reporting standards for an enterprise's operating segments and
related disclosures about its products, services, geographic areas and
major customers. An operating segment is defined as a component of an
enterprise that engages in business activities from which it may earn
revenues and incur expenses, and about which separate financial information
is regularly evaluated by the chief operating decision maker in deciding
how to allocate resources. All of the Company's business activities are
aggregated into one reportable segment given the similarities of economic
characteristics between the activities and the common nature of the
Company's services and customers.
41
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(1) Summary of Significant Accounting Policies - (Continued)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Net Loss Per Share
Net loss per common share is computed by dividing the net loss to common
shareholders by the weighted-average number of shares outstanding during
the period. Diluted loss per share is calculated by including the
additional shares of common stock issuable upon exercise of outstanding
options and warrants in the weighted-average share calculation. Basic and
diluted loss per share of common stock are the same for the years ended
November 30, 2000 and 1999 as all potentially dilutive securities are
antidilutive. For fiscal years ended November 30, 2000 and 1999, the
following options and warrants, each convertible into one share of common
stock, were not included in the diluted earnings per share calculation as
their effect was antidilutive.
[Download Table]
For the Year Ended November 30,
-------------------------------
2000 1999
------------ ------------
Stock options.................... 3,533,915 3,831,666
Warrants......................... 2,472,170 2,993,184
Significant Customers
In August 1999, the Company entered into a strategic alliance with GE
Medical Systems Information Technologies for distribution of our
BioZ.com(R) in Europe. In October 1999 the Company expanded on the European
agreement by signing a US hospital distribution agreement with GE Medical
Systems Information Technologies. In September 2000, the alliance was
expanded to include Japan. During fiscal 1999 sales to GE Medical Systems
Information Technologies resulted in $1,075,800 of revenue, representing
15% of net sales. Sales to international distributors including GE Medical
Systems Information Technologies represented 21% of net sales during fiscal
1999. During fiscal 2000 sales to GE Medical Systems Information
Technologies resulted in $1,768,860 of revenue, representing 14% of net
sales. Sales to international distributors including GE Medical Systems
Information Technologies represented 9% of net sales during fiscal 2000.
42
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(1) Summary of Significant Accounting Policies - (Continued)
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, long
term receivables, accounts payable, accrued expenses and accrued salaries,
wages and benefits, are considered to be representative of their fair
values because of the short-term nature of these financial instruments. The
carrying amount of long-term debt is a reasonable estimate of fair value as
the loans bear interest based on market rates available for debt with
similar terms. It is not practical to estimate the fair value of notes
payable to related parties because of the related party nature.
Stock-Option Plan
The Company accounts for stock options granted to employees in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No. 25.
As such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price.
The Company applies the disclosure only provisions of SFAS No. 123, which
established accounting and disclosure requirements using fair-value-based
methods of accounting for stock based employee compensation plans.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
In accordance with SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of, the Company
reviews long-lived assets and identifiable intangibles for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Impairment losses for long-lived
assets to be held and used are recorded by reducing the carrying value, to
the fair value of the asset. Assets to be disposed of are reported at the
lower of the carrying amount or fair value, less costs to sell.
Reclassifications
Certain reclassifications have been made to certain prior year balances in
order to conform to current year presentation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities, revenue and expenses
and the disclosure of contingent assets and liabilities to prepare these
financial statements in conformity with accounting principles generally
accepted in the United States of America. Actual results could differ from
those estimates.
43
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(1) Summary of Significant Accounting Policies - (Continued)
Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS 133), "Accounting for
Derivative Instruments and Hedging Activities," which established
accounting and reporting standards for derivative instruments and hedging
activities. SFAS 133 requires that entities recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. This Statement was amended by SFAS
137, which deferred the effective date to fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS 133, as amended by SFAS 137 and
SFAS 138, is effective for the first quarter in the fiscal year ending
November 30, 2001. Adoption of this standard is not expected to have a
material effect on our financial position or results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101) "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's staff views in
applying generally accepted accounting principles to revenue recognition in
the financial statements. Adoption of this standard did not materially
effect the Company's financial position or results of operations.
(2) Inventory
Inventory at November 30, 2000 and 1999 consists of the following:
[Download Table]
2000 1999
----------- -----------
Electronic components and subassemblies $ 1,737,265 $ 791,603
Finished goods 623,764 552,025
Demonstration units 602,291 628,190
Less provision for obsolete inventory (504,862) (366,714)
Less provision for demonstration inventory (203,879) (260,577)
----------- -----------
$ 2,254,579 $ 1,344,527
=========== ===========
In 2000 and 1999 the Company used a number of vendors for components and
subassemblies and believes that, should these suppliers not be able to
provide inventory to the Company in the future, it would be able to obtain
alternate suppliers within a reasonable amount of time to meet production
demands.
44
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(3) Property and Equipment
Property and equipment at November 30, 2000 and 1999 consist of the
following:
[Download Table]
2000 1999
------------ ------------
Furniture $ 149,290 $ 81,165
Exhibit booth 4,800 4,800
Other equipment 101,277 93,779
Lab equipment 67,533 58,175
Manufacturing equipment and fixtures 160,596 52,070
Sales equipment 26,282 26,282
Computer software and equipment 444,914 193,134
Leasehold improvements 117,000 115,885
------------ ------------
1,071,692 625,290
Less accumulated depreciation and amortization (496,237) (289,530)
------------ ------------
$ 575,455 $ 335,760
============ ============
At November 30, 2000 and 1999, the Company had $310,204 and $244,236, of
property and equipment under capital lease, respectively. Accumulated
amortization on the leased equipment was $143,107 in 2000 and $60,338 in
1999.
(4) Long-Term Receivables and Note Receivable
In March 2000, the Company entered into a license and purchase agreement
with Profiles in Health, Inc., a privately held California corporation.
Under the terms of the agreement, the Company manufactured and provided
custom ICG monitors called BioZ.pc(TM) and disposable sensor sets. Under
the terms of the agreement, the Company has a right to suspend performance
should Profiles in Health become delinquent on any amounts due us. As of
November 30, 2000, the Company has suspended shipments and established a
100% allowance for the receivables and inventory unique to this customer.
Beginning in the third fiscal quarter, the Company began offering no-
interest financing of it's BioZ(TM) systems with a maturity ranging from 24
to 60 months and are collateralized by the equipment.
45
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(4) Long-Term Receivables and Note Receivable - (continued)
Long-term receivables and note at November 30, 2000 and 1999 consist of the
following:
[Download Table]
2000 1999
--------------- -------------
Long-term receivables, net of deferred interest $ 3,344,703 $ 25,973
Secured note receivable 324,991 --
Less allowance for doubtful long-term receivables (565,810) --
--------------- -------------
3,103,884 25,973
Less current portion of long-term receivables (911,364) --
--------------- -------------
$ 2,192,520 $ 25,973
=============== =============
The fair value of the long-term receivable is estimated by discounting the
future cash flows using an interest rate of 8.5%. At November 30, 2000, the
fair value of the receivable approximated the carrying value.
(5) Financing Agreements
In February of 1999 the Company entered into a three-year $2,000,000
unsecured term loan agreement with City National Bank. Under the terms of
the agreement the Company borrowed $2,000,000 with monthly interest only
payments for the first 12 months at the bank's prime rate. During the
second fiscal quarter of 2000 the Company began making monthly principal
installments of $83,333 each, plus interest at one percent above the bank's
prime rate. In connection with the loan, the Company issued to the bank
50,000 warrants to purchase our common stock at $2.20 per share. The co-
chairmen of the Company's Board of Directors guaranteed the loan. During
the quarter ended August 31, 2000, the loan was repaid in full.
In January 1999, the Company established a secured revolving credit line
with Imperial Bank. The credit line provides for borrowings of up to
$3,000,000 at the bank's prime rate. Under the terms of the agreement, the
Company is required to maintain minimum ratios of current assets to
liabilities and not to exceed certain loss levels. Although there were no
borrowings under this line at November 30, 2000, the bank provided a waiver
since the Company's fourth quarter loss exceeded the maximum allowed under
the line of credit. All the assets of the company collateralize the credit
line. The Company is in the process of extending the line of credit for
another year, through February 2002.
In May of 1998, the Company entered into a six-month unsecured term loan
agreement with Imperial Bank. Under the terms of the agreement, the Company
could borrow up to $4,000,000, of which the Company borrowed $3,000,000.
The term loan bore interest at one percent above the bank's prime rate and
was guaranteed by the co-chairmen of the Company's board of directors. In
August 1998 the Company repaid $1,000,000, reducing the outstanding balance
to $2,000,000. In exchange, the Bank extended the loan until February 28,
1999. In February 1999, the term loan was repaid in full.
46
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(6) Long-term Debt
In March 1998, the Company 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 the Company could 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 1998, the Company borrowed $1,000,000 on this line
of credit and used the proceeds to reduce outstanding borrowings under the
Imperial Bank term loan. During the quarter ended August 31, 2000, the loan
was repaid in full.
Long-term debt at November 30, 2000 and 1999 consists of the following:
[Download Table]
2000 1999
---------- ----------
Prepetition and postpetition payroll taxes payable in
installments including interest at 8%. -- $ 22,513
Note payable to City National Bank, payable in monthly
principal installments of $83,333 each plus interest at
1% above the bank's prime rate, beginning in March 2000,
guaranteed by certain shareholders. -- 2,000,000
Capital lease obligations payable in monthly installments
between $52 and $1,192, bearing interest at rates
between 10% and 20.8%, maturing from December 2000 to
February 2005. $ 172,238 188,884
Note payable to CardioDynamics Holdings, LLC, a related
party, collateralized by a subordinated interest in
substantially all assets of the Company, bearing
interest at 7.5% per annum with interest-only payments
due quarterly, maturing March 31, 2000. -- 25,000
---------- ----------
172,238 2,236,357
Less current maturities of long-term debt (85,151) (885,932)
---------- ----------
$ 87,087 $1,350,425
========== ==========
The aggregate maturities of long-term debt subsequent to November 30, 2000
are as follows: 2001, $85,151; 2002, $69,394; 2003, $13,833; 2004, $2,589;
and 2005 $ 1,271.
47
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(7) Shareholders' Equity
During February 1995, the Company entered into an agreement with a related
party, CardioDynamics Holdings, LLC ("CDH"), a California limited liability
company, for the sale of approximately 37.6% of the Company's common stock.
Additionally, the Company issued a five-year secured promissory note (the
"CDH note") in the amount of $100,000. In fiscal 1996 and 1997, the CDH
note was amended to increase the loan amount, establish a per share
conversion price of $0.25 per share, subject to adjustment under specified
circumstances, and change the maturity date to March 31, 2000. The CDH note
was collateralized by a subordinated interest in substantially all of the
assets of the Company. Advances under the CDH note accrued interest at 7.5%
with interest-only payable quarterly through maturity at March 31, 2000.
Upon maturity, the balance including interest, was converted into 101,521
shares of CardioDynamics common stock.
On March 6, 1997, in connection with the $7.2 million private placement the
Company issued 276,514 common stock warrants to EVEREN Securities, Inc.
which served as placement agent. Each warrant represents the right to
purchase one share of the Company's common stock at an exercise price of
$3.56, until the expiration date of March 5, 2002. During fiscal 2000,
183,880 of the warrants were exercised.
On May 15, 1998, in connection with the completion of the Imperial Bank
financing agreement, 33,334 common stock purchase warrants were issued to
the bank. Each warrant represents the right to purchase one share of the
Company's common stock at an exercise price of $3.00, until the expiration
date of May 14, 2003. On August 21, 1998 an additional 15,000 common stock
purchase warrants were issued to the bank. Each warrant represented the
right to purchase one share of the Company's stock at an exercise price of
$2.00, until the expiration date of August 21, 2003. In March 2000, all of
the warrants were exchanged resulting in the issuance of 37,934 shares of
common stock.
On August 21, 1998, in connection with the shares of Series A convertible
preferred stock issuance, 123,000 common stock purchase warrants were
issued. Each warrant represents the right to purchase one share of the
Company's common stock at an exercise price of $2.55, until the expiration
date of August 21, 2003. During fiscal 2000, 113,800 of the warrants were
exercised.
In March 1999, in connection with the City National Bank financing
agreement, the Company issued 50,000 common stock warrants. Each warrant
represented the right to purchase one share of the Company's stock at an
exercise price of $2.20, until the expiration date of March 7, 2004. In
September 2000, all of the warrants were exercised.
On May 28, 1999 the Company completed a $5.2 million private placement of
common stock to institutional and other accredited investors who purchased
unregistered shares with a six-month holding restriction for $1.00 per
share, representing a 27% discount from the closing bid price.
48
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(7) Shareholders' Equity - (Continued)
On August 25, 1999 the Company issued 2,000,000 common stock warrants to GE
Medical Systems Information Technologies. 1,000,000 of the warrants were
granted to GE Medical Systems Information Technologies to obtain access to
their technology. In connection with these warrants, the Company recorded a
non-cash charge of $350,479 in fiscal 1999. The final 1,000,000 performance
based warrants vested during November 2000 because GE Medical Systems
Information Technologies met its minimum sales objectives. This resulted in
a non-cash charge included in sales and marketing expense of $3,382,000
based on the fair market value of the warrants. Each warrant represents the
right to purchase one share of the Company's stock at an exercise price of
$4.10, until the expiration date of August 25, 2004.
On December 3, 1999, the Company completed a $3.3 million private placement
of common stock to institutional investors who purchased unregistered
shares with a four-month holding restriction for $2.50 per share,
representing a 9% discount from the 30-day average closing bid price.
On July 25, 2000, the Company completed an $18.7 million private placement
of approximately 3.3 million shares of common stock to institutional and
other accredited investors. The investors purchased unregistered common
stock at $5.59 per share, a 13% discount to the 20-day weighted-average
closing price as of the June 21, 2000 pricing date. In addition, a portion
of the proceeds were used to repurchase, at $5.59 per share, and retire
418,908 shares from the estate of Allen E. Paulson. The financing was
exempt from the registration requirement of the Securities Act of 1933, as
amended, in reliance upon Regulation D promulgated under the Act. In
connection with the private placement the Company incurred issuance costs
totaling $1,382,086.
(8) Convertible Preferred Stock
On August 21, 1998, the Company sold 3,000 shares of Series A convertible
preferred stock to institutional investors for $3,000,000, net of issuance
costs of $117,463. The Series A preferred stock was convertible into common
stock at the lesser of $2.70 or 95% of the then-current common stock market
value (92% after August 21, 1999). The Series A preferred stock had a
cumulative dividend of 3% per year, which could be paid in cash or the
Company's common stock at the discretion of the Company. For the year ended
November 30, 1999, the Company issued 26,548 shares of common stock as
dividends to the preferred shareholders. There were no dividends paid
during the fiscal year ended November 30, 2000.
49
CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
November 30, 2000 and 1999
(8) Convertible Preferred Stock - (Continued)
To achieve an orderly conversion of the outstanding shares of the Series A
convertible preferred stock and minimize the potential impact on the market
price of the Company's common stock, in June 1999, the Company identified a
group of strategic investors and facilitated the private sale of the common
shares issued upon conversion of the remaining portion of the Series A
preferred stock. In conjunction with this transaction, the Company issued
305,772 additional shares of common stock at the market price of $1.56 per
share and 20,336 common stock purchase warrants at an exercise price of
$1.63, with an expiration date of June 2002. As a result of the Series A
preferred stock retirement, the Company recorded a non-cash accounting
charge of $483,333, which is included in other expenses. During fiscal 1999
all outstanding shares of the Series A preferred stock were converted into
1,567,962 shares of common stock.
The original purchasers of the Series A preferred stock could, under
specified conditions, require the Company to sell them up to 3,000 shares
of Series B preferred stock. In August 1999, we declared $191,564 of
preferred stock dividends related to 375,000 premium priced warrants issued
to the Series A preferred shareholders in exchange for the relinquishment
of their contractual right to purchase an additional $3,000,000 of
convertible preferred stock. Each warrant represents the right to purchase
one share of the Company's common stock at an exercise price of $3.54 per
share, until the expiration date in August 2004. In March 2000, 25,000 of
these warrants were exercised.
(9) Stock Options
In 1995, the shareholders approved a Stock Option/Stock Issuance Plan (the
"Option Plan") that provides for the granting of options to officers,
directors and key employees to purchase the Company's common stock. Under
the Option Plan, as amended in 1998, 4,000,000 shares of common stock have
been reserved for granting of options at not less than 85% of the fair
market value of the Company's common stock on the date of grant.
The Option Plan also provides for monthly grants, at fair market value to
each non-employee director of the Company, of options to purchase 1,000
shares of Company common stock as payment for director fees for each full
month of service. The options are exercisable immediately upon grant and
expire upon the earlier of ten years from the date of grant or two years
after the director terminates his position on the Board. During fiscal 2000
and 1999, 68,000 and 81,000 options, respectively, were granted to the
Board of Directors. The Option Plan also provides for grants of options and
issuance's of stock in exchange for professional services. During fiscal
years 2000 and 1999 30,800 and 37,500 options were granted in exchange for
services. The options were valued at $63,796 and $8,274, respectively.
At November 30, 2000, there were 1,132,415 shares available for grant under
the Option Plan. The per share weighted-average fair value of stock options
granted during fiscal 2000 and 1999 was $3.96 and $0.80 on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected dividend yield 0%, risk-free
interest rate of 5.66%, expected volatility of 90.9% and an expected life
of 4 years; 1999 - expected dividend yield 0%, risk-free interest rate of
5.17%, expected volatility of 33.2% and an expected life of 4 years.
50
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(9) Stock Options - (Continued)
The Company applies APB Opinion No. 25 in accounting for its Option Plan
and, accordingly, no compensation cost has been recognized in the financial
statements for its stock options issued to officers, directors and
employees. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net loss would have been increased to the pro forma amounts
below:
[Enlarge/Download Table]
2000 1999
---------------- ----------------
Net loss to common shareholders, as reported $ (8,266,825) $ (4,218,957)
Pro forma net loss to common shareholders $ (11,378,057) $ (4,740,510)
Net loss per common share, basic and diluted, as reported $ (.19) $ (.12)
Pro forma net loss per common share, basic and diluted $ (.26) $ (.13)
Stock option activity during the periods indicated is as follows:
[Download Table]
Weighted-average
Number of shares exercise price
------------------ ----------------
Balance at November 30, 1998 2,005,000 $ 1.91
Granted 655,700 2.34
Exercised (91,000) 1.66
Forfeited (244,834) 1.89
Expired (38,000) 2.85
----------------- ----------------
Balance at November 30, 1999 2,286,866 $ 2.04
Granted 793,568 5.92
Exercised (571,670) 1.85
Forfeited (196,181) 3.27
Expired (16,668) 3.22
----------------- ----------------
Balance at November 30, 2000 2,295,915 $ 3.30
================= ================
At November 30, 2000 the weighted-average exercise price and weighted-
average remaining contractual life of outstanding options was $3.30 and
eight years. At November 30, 2000 and 1999, the numbers of options
exercisable were 1,091,629 and 968,269, respectively, and the weighted-
average exercise prices of those options were $2.55 and $2.15,
respectively.
51
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(9) Stock Options - (Continued)
The following table sets forth information regarding options outstanding at
November 30, 2000:
[Enlarge/Download Table]
Options Outstanding Options Exercisable
------------------------------------------------------------ ------------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average average
exercise Number contractual exercise Number exercise
prices outstanding life price exercisable price
--------------- ------------- ------------------ ------------------ --------------- ------------
$ 0.00 - 1.18 128,000 5.3 $ 1.00 78,000 $ 1.00
1.19 - 2.37 1,038,047 7.7 1.84 599,979 1.83
2.38 - 3.56 380,500 7.1 3.03 300,207 3.06
3.57 - 4.75 76,850 9.2 4.21 23,799 4.06
4.76 - 5.94 264,450 9.7 5.29 28,900 5.35
5.95 - 7.12 338,800 9.2 6.21 33,900 6.32
7.13 - 8.31 61,268 9.3 8.02 20,844 8.03
8.32 - 9.50 7,000 8.2 8.71 6,000 8.71
9.51 - 11.88 1,000 9.3 11.88 -- --
------------ -----------
2,295,915 8.0 $ 3.30 1,091,629 $ 2.55
============ ===========
On October 16, 1998, the Company adopted a Stock option
cancellation/regrant program. Each employee was given the opportunity to
exchange their existing options for new options, exercisable at $1.625 per
share, the fair value of the Company's common stock on October 16, 1998.
All accrued vesting under the old stock options was forfeited, and the new
options began a new vesting schedule (over the same number of years as the
old option's vesting schedule). For all employees other than executive
officers, the new options were granted for the same number of shares as the
old options. For executive officers, the new options were granted for a
fewer number of shares. The reduction in option shares for the executive
officers was calculated by a formula based on the Black-Scholes option
valuation model.
Under the program 2,267,000 options were cancelled with an average exercise
price of $2.74. In exchange, 1,968,000 new options were granted with an
exercise price of $1.625 per share and 299,000 options were forfeited with
an average price of $2.75. Eligible optionees representing 678,000 options
with an average price $1.75 elected not to participate in the program.
52
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(9) Stock Options - (Continued)
As part of an employment agreement with its then chief executive officer,
Richard Otto, 250,000 non-transferable stock options were granted (outside
the Option Plan) to Mr. Otto at an exercise price of $0.50 per share. The
options vest if the quoted market price of the Company's common stock
attains specified levels. During fiscal 2000, 100,000 of these options
vested and were exercised. At November 30, 2000, of the remaining 150,000
options, none were vested. The options expire June 15, 2005.
On March 23, 1998, the Company entered into an employment agreement with
Michael K. Perry, who succeeded Mr. Otto as chief executive officer. Under
the terms of the agreement, Mr. Perry was granted 1,500,000 non-
transferable stock options (outside the Option Plan) at an exercise price
of $2.55 per share, subject to vesting requirements. The first tranche
vested on September 23, 1998, and the final tranche is not scheduled to
vest until March 23, 2002. Under the stock option cancellation/regrant
program, Mr. Perry relinquished his 1,500,000 old options in exchange for a
new grant of 1,295,000 options. The new options have an exercise price of
$1.625 per share, and all accrued vesting was forfeited. The new options
vest over a four-year period with a commencement date of October 16, 1998.
At November 30, 2000, 440,500 of the options are vested. The options expire
on October 15, 2008.
(10) Income Taxes
Income taxes in the accompanying statements of operations are comprised of
the following:
[Download Table]
2000 1999
---------- ----------
Federal -- --
State $ 11,092 $ 800
---------- ----------
$ 11,092 $ 800
========== ==========
At November 30, 2000, the Company had federal net operating loss
carryforwards of approximately $29,044,000, expiring as follows:
[Download Table]
2001 $ 443,000 2010 $ 2,376,000
2002 1,284,000 2011 2,444,000
2005 753,000 2012 3,201,000
2006 787,000 2018 4,445,000
2007 557,000 2019 3,549,000
2008 433,000 2020 8,259,000
2009 513,000
53
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(10) Income Taxes - (Continued)
These amounts may be subject to significant limitations under section 382
of the Internal Revenue Code of 1986. The Tax Reform Act of 1986 contains
provisions which limit the federal net operating loss carryforwards that
may be used in any given year in the event of specified occurrences,
including significant ownership changes. A valuation allowance has been
recognized for the full amount of the deferred tax asset created by these
carryforwards.
At November 30, 2000, the Company had state of California net operating
loss carryforwards of approximately $21,907,000 that expire between 2000
and 2005.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets as of November 30, 2000 and 1999 are as
follows:
[Download Table]
2000 1999
------------ -----------
Deferred tax assets:
Net operating loss carryforwards $ 11,811,500 $ 8,707,200
Allowance for doubtful accounts and returns 948,700 236,700
Inventory 624,900 792,300
Deferred Compensation 1,637,900 --
Accrued expenses 246,400 220,900
Other 26,400 21,900
------------ -----------
Total gross deferred tax assets 15,295,800 9,979,000
Valuation allowance (15,295,800) (9,979,000)
------------ -----------
Net deferred tax assets $ -- $ --
============ ===========
A 100% valuation allowance has been applied to these net deferred tax
assets. Accordingly, no tax benefit has been recorded for the years ended
November 30, 2000 and 1999.
The difference between the provision for income taxes and income taxes
computed using the U.S. federal income tax rate were as follows for the
years ended November 30,
[Download Table]
2000 1999
------------ -----------
Computed "expected" tax benefit $ (2,806,949) $(1,357,600)
State and local taxes, net of federal benefit (434,411) (209,200)
Change in valuation allowance, net 3,394,447 1,406,700
Other (141,995) 160,900
------------ -----------
Provision for Income Taxes $ 11,092 $ 800
============ ===========
54
CardioDynamics International Corporation
Notes to Financial Statements
November 30, 2000 and 1999
(11) Leases
In June 1997, the Company entered into a five-year operating lease for a
18,000 square-foot manufacturing facility that also houses the Company's
research, development, marketing, sales and administrative activities.
Future minimum lease payments under all non-cancelable operating leases
(with initial or remaining lease terms in excess of one year) as of
November 30, 2000 are:
[Download Table]
Years ending November 30,
-----------------------------------
2001 $ 223,066
2002 165,293
-----------
Total minimum lease payments $ 388,359
===========
Rent expense under operating leases was $264,045 and $286,570 for the years
ended November 30, 2000 and 1999, respectively.
(12) 401(k) Plan
Effective April 1996, the Company established a qualified savings plan
under section 401(k) of the Internal Revenue Code of 1986. Employees who
have completed three months of service and are 21 years of age are eligible
to participate in the plan, subject to limitations. The Company may make
discretionary contributions to the plan. Eligible employees may contribute
up to 20% of eligible wages. Employer matching contributions were $42,232
and $24,107 for the fiscal years ended November 30, 2000 and 1999,
respectively.
(13) Related Party Transactions
The Company receives certain engineering, development and consulting
services from a related party. The Company paid $898,439 and $391,293 for
these services in fiscal 2000 and 1999, respectively. Amounts payable to
this related party at November 30, 2000 and 1999 were $246,400 and $38,509,
respectively. Cam Garner, a member of our Board of Directors, was paid
$25,000 in each of the last two fiscal years for consulting services.
(14) Segment Information
Revenues derived by geographic segment are as follows:
[Download Table]
2000 1999
----------- ----------
U.S. $11,981,926 $5,759,630
Foreign 1,120,393 1,521,278
----------- ----------
$13,102,319 $7,280,908
=========== ==========
55
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE ACT CONTROL EXCHANGE ACT
Directors and Executive Officers
Our directors and executive officers as of February 22, 2001 are as
follows:
[Enlarge/Download Table]
Name Age Position(s)
---- --- -----------------------------------
James C. Gilstrap............................ 64 Chairman of the Board of Directors
Michael K. Perry............................. 40 Chief Executive Officer and Director
Rhonda F. Rhyne.............................. 40 President
Stephen P. Loomis............................ 40 Chief Financial Officer
Richard E. Trayler........................... 49 Chief Operating Officer
Dennis G. Hepp............................... 52 Chief Technology Officer
Russell H. Bergen............................ 54 Vice President of Operations
Connie R. Curran, Ed.D., RN.................. 53 Director
Jaques C. Douziech........................... 53 Director
Cam L. Garner................................ 52 Director
Richard O. Martin, Ph.D...................... 61 Director
J. Michael Paulson........................... 45 Director
James C. Gilstrap served as the chairman of our board of directors
from May 1995 to June 1996 and co-chairman of the board from June 1996 until Mr.
Paulson's death in July 2000, at which time Mr. Gilstrap resumed his role as
chairman. Mr. Gilstrap is retired from Jefferies & Company, where he served as
senior executive vice president, partner and a member of the executive
committee. Mr. Gilstrap is past president of the Dallas Securities Dealers, as
well as a past member of the board of governors of the National Association of
Securities Dealers, Inc.
Michael K. Perry has been our chief executive officer and a director
since April 1998. From 1994 to 1997, Mr. Perry was vice president of operations
at Pyxis Corporation, a leading provider of healthcare automation, information
management services and pharmacy management services to hospitals and outpatient
facilities. Pyxis was sold to Cardinal Health, Inc. in 1996. Prior to joining
Pyxis, Mr. Perry served in management with the medical products group of Hewlett
Packard Company. Additionally, he was director of quality for a division of
Hewlett-Packard's deskjet printer group. Mr. Perry holds a bachelor's degree in
mechanical engineering from General Motors Institute and a master's degree in
business administration from Harvard University. Mr. Perry serves on the
advisory board of the University of California San Diego Cardiovascular Center.
56
Rhonda F. Rhyne has been our president since June 1997, previously
serving as chief operating officer from 1996 to 1997 and as vice president of
operations from 1995 to 1996. From 1992 until 1995, Ms. Rhyne was president,
chief executive officer and vice president of sales and marketing of Culture
Technology, Inc. Ms. Rhyne has also held positions at GE Medical Systems and
Quinton Instrument Company, both medical device subsidiaries of publicly held
companies. Ms. Rhyne holds a bachelor's degree in pharmacy from Washington State
University and a master's degree in business administration, executive program,
from University of California Los Angeles, Anderson School of Business.
Stephen P. Loomis joined us in September 1996 as vice president of
finance and has held the positions of chief financial officer and corporate
secretary since April 1997. From 1993 until 1996, he served as director of
financial reporting at Kinko's Inc. From 1988 to 1993, Mr. Loomis was chief
financial officer for Terminal Data Corporation, a publicly traded company. He
earned his bachelor's degree in business administration from California State
University at Northridge. Mr. Loomis is a certified public accountant.
Richard E. Trayler has served as our chief operating officer since
July 1997. From 1982 to 1997, Mr. Trayler held the positions of regional and
divisional sales manager at Quinton Instrument Company. He has also held
positions at the Heart Institute for CARE, the University of Washington and the
Boeing Company. Mr. Trayler earned a bachelor's degree from Texas A&M University
and a master's degree from the University of Washington.
Dennis G. Hepp has been our chief technology officer since June 1997
and has served as a consultant to us since July 1995. From 1974 to 1986, Mr.
Hepp held engineering and management positions at Medtronic, Inc. In 1989, Mr.
Hepp founded, and remains a key employee and managing director of, Rivertek
Medical Systems, Inc., an engineering consulting firm to medical device
manufacturers. Mr. Hepp holds a bachelor's degree in electrical engineering from
the University of Detroit.
Russell H. Bergen has served as our vice president of operations since
September 1998. From 1971 to 1998, Mr. Bergen held management positions in the
instrument group, peripheral products group and inkjet business unit of Hewlett
Packard Company. Previously, Mr. Bergen was employed at Honeywell, Inc. as a
procurement engineer. Mr. Bergen earned a bachelor's degree in aerospace
engineering and manpower management from the University of Colorado at Boulder.
Connie R. Curran, Ed.D., RN became a director in February 2000. Dr.
Curran has been president and chief executive officer of CurranCare since 1995,
has held a variety of executive positions in academia and multi-system
healthcare operations and serves as vice president of the American Hospital
Association, national director of patient care for APM, Inc. and a director for
Allegiance Corporation and Finova Group. Dr. Curran holds a master's degree in
medical-surgical nursing from De Paul University and a doctorate in educational
psychology from Northern Illinois University.
Jacques C. Douziech has served as a director since July 2000. Mr.
Douziech is Venture Advisor for Sofinov, Biotechnology and Life Sciences
Division, a subsidiary of the Caisse de depot et placement du Quebec. From 1998
to March 2000, Mr. Douziech was Vice President and served as Director of
Business Development at Procrea Biosciences, and from 1980 to 1989 and 1991 to
1998, he held executive positions at Boehringer Mannheim Canada (now Roche
Diagnostics). He was also Marketing Director at Kodak Canada Inc. and Vice
President, Sales & Marketing of Synermed Diagnostics from 1989 to 1991. Douziech
worked from 1965 to 1979 at the Queen Elizabeth Hospital of Montreal where he
was the Assistant-Chief of the Biochemistry and Immunology laboratories. Mr.
Douziech holds a Licentiate and fellowship degree in Medical Laboratory Sciences
with a specialty in Clinical Biochemistry.
57
Cam L. Garner has served as a director since July 1997 and provides us
with consulting services for $25,000 per year. Mr. Garner served as president
and chief executive officer of Dura Pharmaceuticals, Inc. since 1989 and was
named Chairman in 1995. Dura Pharmaceuticals was acquired by Elan Corporation,
PLC in November 2000 for $1.8 billion. Prior to joining Dura, Mr. Garner was a
member of the management team that built Hybritech Inc., a division of Eli Lilly
& Co., which developed monoclonal antibodies for use in diagnostic and
pharmaceutical products. Mr. Garner currently serves on several boards including
Favrille, Inc., Cancer-Vax Corporation, Nanogen, Inc., San Diego Children's
Hospital and Health Center and the San Diego Economic Development Corporation.
Mr. Garner earned his Master's Degree in Business Administration from Baldwin-
Wallace College in Berea, Ohio, and his Bachelor of Arts Degree in Biology from
Virginia Wesleyn.
Richard O. Martin, Ph.D. has served as a director since July 1997. Dr.
Martin is president of Medtronic-Physio-Control Corporation, a medical device
company that designs, manufactures and sells external defibrillators and heart
monitors. Until Medtronic's acquisition in 1998 of Physio-Control Corporation,
Dr. Martin was chairman and chief executive officer. He was vice president of
cardiovascular business development with Sulzer Medica and has held management
positions at Intermedics, Inc. and Medtronic, Inc. Dr. Martin serves on the
boards of directors of Scout Medical technologies, LLC and Cardias Dimentions,
Inc. and Encore Medical. Dr. Martin earned a bachelor's degree in electrical
engineering from Christian Brothers College, a master's degree in electrical
engineering from Notre Dame University and a doctorate in electrical/biomedical
engineering from Duke University.
J. Michael Paulson has served as a director since July 2000. He is the
founder and president of Nevastar Investments Corp. and Construction Specialist
of Nevada, Inc. and has been in the real estate development and investment
business since 1986. His companies have developed and sold over 500 properties
in the Western U.S. Mr. Paulson has also worked in the aerospace industry for 17
years, including 11 years with Gulfstream Aerospace Corporation serving in
various marketing positions, including Regional Vice President of Sales for
Western U.S. and Canada. In addition, he currently services as a trustee,
director and officer of various companies. Mr. Paulson holds a Bachelor's Degree
in Business Administration.
Section 16(a) Beneficial Ownership Reporting Compliance
We believe that each person who, at any time during the fiscal year ended
November 30, 1999, was a director, officer, or beneficial owner of more than 10%
of a class of registered equity securities of CardioDynamics, filed on a timely
basis all reports required by Section 16(a) of the Securities Exchange Act.
58
ITEM 9. EXECUTIVE COMPENSATION
The following table provides information regarding the annual and long-term
compensation earned for services rendered in all capacities to CardioDynamics
for the fiscal years ended November 30, 1998, 1999 and 2000 of those persons who
were, at November 30, 2000 (i) the Chief Executive Officer and (ii) the other
executive officers of CardioDynamics whose aggregate direct remuneration from
CardioDynamics during the fiscal year ended November 30, 2000 exceeded $100,000
(collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
[Enlarge/Download Table]
Long Term Compensation
-----------------------------------------
Awards
--------------
Annual Compensation /(1)/ Securities
--------------------------------------------------------
Other Underlying
Name and Annual Options/
Principal Position Year Salary($) Bonus($) Compensation($) SARs (#)
----------------------- ------- ------------- --------------- ------------------- --------------
Michael K. Perry 2000 $181,480 $ 44,153 $ -0- 50,000
Chief Executive 1999 91,450 216,170 /(3)/ -0- 45,000
Officer 1998 1 /(4)/ 750 4,000 /(2)/ 1,295,000 /(6)/
Rhonda F. Rhyne 2000 176,000 35,550 -0- 40,900
President 1999 148,020 11,045 17,000 /(5)/ 40,000
1998 127,833 751 18,000 /(5)/ 250,000
Stephen P. Loomis 2000 122,000 24,750 -0- 30,300
Chief Financial 1999 137,543 8,520 -0- 30,000
Officer 1998 116,583 1,663 -0- 120,000 /(6)/
Richard E. Trayler 2000 130,000 2,475 -0- 30,300
Chief Operating 1999 129,584 8,745 -0- 35,000
Officer 1998 123,750 1,502 -0- 80,000 /(6)/
Russell H. Bergen 2000 120,000 24,175 -0- 30,000
Vice President of 1999 120,000 5,800 -0- -0-
Operations 1998 25,923 /(7)/ -0- -0- 75,000
__________________
(1) Employee benefits provided to each of the Named Officers under various
Company programs do not exceed the disclosure thresholds established under
the SEC rules and are therefore not included.
(2) Amount represents Company paid allowance for automobile expenses.
(3) Bonus amount paid in 1999 includes $205,000 pursuant to Mr. Perry's
employment agreement dated March 23, 1998, under which Mr. Perry was paid a
salary of $1.00 for the initial 14 months of his employment. In exchange,
he was eligible to receive a performance bonus based on achieving a 100%
increase in sales during the 12-month period ending May 31, 1999, over the
previous 12-month period.
(4) Represents compensation earned by Mr. Perry from his employment with our
Company commencing April of 1998.
59
Executive Compensation - (Continued)
(5) Amounts represent Company paid lodging of $12,000 in 1998 and $11,000 in
1999. The balance in each year is for automobile expenses.
(6) Amounts represent options granted under Company Stock Option
Cancellation/Regrant program.
(7) Represents compensation earned by Mr. Bergen from his employment with our
Company commencing September of 1998.
The following table provides information regarding option grants during the
fiscal year ended November 30, 2000 to the Named Officers in fiscal 2000.
CardioDynamics has not granted any stock appreciation rights.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Enlarge/Download Table]
Individual Grants
-------------------------------------------------------
Number of
Securities % of Total
Underlying Options Granted
Options to Employees Exercise Expiration
Name Granted in Fiscal 2000 Price($/Sh) /(1)/ Date
---------------------------------------- ---------- ---------------- --------------- ----------
Michael K. Perry 50,000 6% $6.125 01/27/2010
Rhonda F. Rhyne 40,000 5% $6.125 01/27/2010
900 0% $6.000 06/28/2010
Stephen P. Loomis 30,000 4% $6.125 01/27/2010
300 0% $6.000 06/28/2010
Richard E. Trayler 30,000 4% $6.125 01/27/2010
300 0% $6.000 06/28/2010
Russell H. Bergen 30,000 4% $6.125 01/27/2010
___________________________________________
(1) All options were granted at fair market value (closing sale price for our
common stock on the NASDAQ/AMEX Stock Market on the date of grant).
60
The following table provides further information regarding the Named Officers'
exercises and outstanding stock options as of November 30, 2000. No stock
appreciation rights were granted or exercised.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR END OPTION/SAR VALUES
[Enlarge/Download Table]
Number of
Securities
Underlying Value/(1)/ of
Unexercised Unexercised
Options/SARs In-the-Money
at FY-End (#) Options/SARs at FY-
Shares Acquired Value Exercisable/ End ($) Exercisable/
Name on Exercise (#) Realized ($) Unexercisable Unexercisable/(2)/
------------------- ------------------ ----------------- ------------------- ------------------------
Michael K. Perry 207,000 1,013,271 461,124 / 721,876 1,284,021 / 1,874,416
Rhonda F. Rhyne 80,000 390,959 280,898 / 195,002 624,496 / 401,567
Stephen P. Loomis 70,000 385,280 27,369 / 82,931 67,538 / 138,712
Richard E. Trayler 10,000 53,815 61,888 / 73,412 163,191 / 110,247
Russell H. Bergen 10,000 45,952 30,624 / 64,376 99,451 / 111,636
___________________________________________
(1) Represents the difference between the closing sale price of our common
stock on the NASDAQ/AMEX Stock Market of $4.4375 on November 30, 2000 and
the exercise price of the options.
(2) The respective Named Officers as of November 30, 2000 could not exercise
these options and future exercisability is subject to certain vesting
provisions including specific stock price thresholds and/or remaining in
the employ of the Company for up to four additional years.
Stock Options
On October 16, 1998, we adopted a Stock Option Cancellation/Regrant program.
Each employee was given the opportunity to exchange his or her existing options
for new options, exercisable at $1.625 per share. All accrued vesting under the
old stock options was forfeited, and the new optionee began a new vesting
schedule (over the same number of years as the old option's vesting schedule).
For all employees other than executive officers, the new options were granted
for the same number of shares as the old options. For executive officers, the
new options were granted for a fewer number of shares. The reduction in option
shares for the executive officers was calculated by a formula based on the
Black-Scholes option valuation model.
Under the program 2,267,000 options were cancelled with an average exercise
price of $2.74. In exchange, 1,968,000 new options were granted with an exercise
price of $1.625 per share and 299,000 options were forfeited with an average
price of $2.75. Eligible optionees representing 678,000 options with an average
price $1.75 elected not to participate in the program.
61
Employment Agreements
On March 23, 1998, we entered into an employment agreement with Michael Perry
who succeeded Mr. Otto as Chief Executive Officer. Under the terms of the
agreement, Mr. Perry was granted 1,500,000 non-transferable stock options (not
under our Option Plan) at an exercise price of $2.55 per share, subject to
vesting requirements. The first tranche vested on September 23, 1998, and the
final tranche was not scheduled to vest until March 23, 2002. Under the October
16, 1998 Stock Option Cancellation/Regrant program, Mr. Perry cancelled his
1,500,000 old options in exchange for a new grant of 1,295,000 options. The new
options have an exercise price of $1.625 per share, and all accrued vesting was
forfeited. The new options vest over the same four-year period with a
commencement date of October 16, 1998. At November 30, 2000, 440,500 of the
options are vested. The options expire on October 15, 2008.
We entered into a Compensation and Employment Agreement, dated June 16, 1995,
with our then Chief Executive Officer, Richard E. Otto. Under the terms of the
agreement Mr. Otto was granted 500,000 non-transferable stock options (not under
our 1995 Plan) at an exercise price of $0.50 per share. In June 1997, the
Company and Mr. Otto agreed to reduce the number of stock options to 250,000.
The options vest when and if the quoted market price of our common stock attains
and holds the following stock prices:
50,000 vest at $5.00
50,000 vest at $6.00
50,000 vest at $7.00
50,000 vest at $8.00
50,000 vest at $9.00
During fiscal 2000, 100,000 of these options vested and were exercised. At
November 30, 2000, of the remaining 150,000 options, none were vested. The
options expire June 15, 2005.
Long Term Incentive Plans
We do not have any long-term incentive plans (as defined in the Securities and
Exchange Commission regulations).
Directors' Fees
Each non-employee director who has not been employed by us during the proceeding
two years receives 1,000 automatic monthly stock options granted at fair market
value on the last day of the month for each full month of service as a director
of our Company. In the case of 10% shareholders the options are granted at 110%
of fair market value. Mr. Allen Paulson received 1,000 options per month through
June 2000. On August 1, 1997, Cam L. Garner, a Director of our Company, entered
into a consulting agreement with our Company whereby Mr. Garner is paid a
monthly fee of $2,083.33 and received a one-time grant of 5,000 stock options to
purchase CardioDynamics' common stock in exchange for consulting services. Total
fees paid to Mr. Garner in fiscal 2000 were $25,000. He received the same
compensation during fiscal 1999.
62
ITEM 10. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock - Certain Beneficial Holders
The following are the only persons known by us to own beneficially, as of
February 22, 2001, five percent (5%) or more of the outstanding shares of our
common stock.
[Download Table]
Name and Address of Shares Beneficially Owned
---------------------------
Beneficial Owner Number (1) Percentage (2)
---------------------------- ----------- --------------
J. Michael Paulson(3) 11,047,598 24.2%
P.O. Box 9660
Rancho Santa Fe, CA 92067
James C. Gilstrap (4) 3,306,918 7.3%
5067 Shore Drive
Carlsbad, CA 92008
Domain Partners LP 4,350,000 9.6%
One Palmer Square
Princeton, NJ 08542
Societe Generale Veritas 3,000,000 6.6%
4 New York Plaza
New York, NY 10004
______________________
1) Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares
of common stock shown as beneficially owned by them, subject to community
property laws, where applicable.
2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3(d)(1).
3) Includes 10,000,234 shares held in the Allen E Paulson Living Trust dated
12-23-86 of which J. Michael Paulson is the co-executor. Also includes
59,000 shares of common stock beneficially owned by the Allen E. Paulson
Living Trust Date 12-23-86, by virtue of its right to acquire such shares
from CardioDynamics under stock options now exercisable or exercisable
within 60 days. Also includes 7,000 shares of common stock beneficially
owned J. Michael Paulson, by virtue of its right to acquire such shares
from CardioDynamics under stock options now exercisable or exercisable
within 60 days. Includes 103,764 shares of common stock beneficially owned
by CardioDynamics Holding, LLC (CDH), of which the estate is a member with
a majority interest and 2,243 shares of common stock over which CDH
exercises sole voting and investment power. Mr. Paulson disclaims
beneficial ownership of these shares except to the extent of the estate's
pecuniary interest in CDH. Excludes 2,000,000 shares of common stock owned
by Mr. Paulson's bothers; Mr. Paulson disclaims beneficial ownership of
such shares.
4) Includes 103,764 shares of common stock beneficially owned by CDH, of which
Mr. Gilstrap is a member with a minority interest and 2,243 shares of
common stock over which CDH exercises sole voting and investment power. Mr.
Gilstrap disclaims beneficial ownership of these shares except to the
extent of his individual pecuniary interest in CDH. Includes 965,000 shares
held in the Jim and Sue Gilstrap Family Limited Partnership. Mr. Gilstrap
disclaims beneficial ownership of these shares except to the extent of his
and his wife's ownership interest in the Jim and Sue Gilstrap Family
Limited Partnership. Also includes 66,000 shares of common stock Mr.
Gilstrap beneficially owns, by virtue of his right to acquire such shares
from CardioDynamics under stock options now exercisable or exercisable
within 60 days.
63
Common Stock - Management
The following table sets forth the beneficial ownership of common stock of
CardioDynamics as of February 22, 2001 by each Director and each officer of
CardioDynamics named in the Summary Compensation Table, and by all Directors and
executive officers of our Company as a group. Each such person has a business
address, care of CardioDynamics.
[Download Table]
Shares Beneficially Owned
-----------------------------
Name Number (1) Percent (2)
---------------------------------------- -------------- -------------
Russell H. Bergen (3) 57,186 *
Connie R. Curran 14,000 *
Jacques C. Douziech(3) 1,259,486 2.8%
Cam L. Garner (3) 115,000 *
James C. Gilstrap (4) 3,306,918 7.3%
Stephen P. Loomis (3) 65,905 *
Richard O. Martin, Ph.D. (3) 102,000 *
J. Michael Paulson (5) 11,047,598 24.2%
Michael Perry (3) 497,395 1.1%
Rhonda F. Rhyne (3) 341,146 *
Richard E. Trayler (3) 186,391 *
All Directors and executive
officers as a group - (12 persons) (6) 16,984,248 36.3%
----------------
*Less than 1%
(1) Except as indicated in the footnotes to this table, the persons named
in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to
community property laws, where applicable. Share ownership in each
case includes shares issuable on exercise of certain outstanding
options as described in the footnotes below.
(2) Percentage of ownership is calculated pursuant to SEC Rule 13d-3d(1).
(3) Includes shares of common stock that may be acquired pursuant to stock
options exercisable currently or exercisable within 60 days.
(4) Includes 103,764 shares of common stock beneficially owned by CDH, of
which Mr. Gilstrap is a member with a minority interest and 2,243
shares of common stock over which CDH exercises sole voting and
investment power. Mr. Gilstrap disclaims beneficial ownership of these
shares except to the extent of his individual pecuniary interest in
CDH. Includes 965,000 shares held in the Jim and Sue Gilstrap Family
Limited Partnership. Mr. Gilstrap disclaims beneficial ownership of
these shares except to the extent of his and his wife's ownership
interest in the Jim and Sue Gilstrap Family Limited Partnership. Also
includes 66,000 shares of common stock Mr. Gilstrap beneficially owns,
by virtue of his right to acquire such shares from CardioDynamics
under stock options now exercisable or exercisable within 60 days.
64
Common Stock - Management - (Continued)
(5) Includes 10,000,234 shares held in the Allen E Paulson Living Trust
dated 12-23-86 of which J. Michael Paulson is the co-executor. Also
includes 59,000 shares of common stock beneficially owned by the Allen
E. Paulson Living Trust Date 12-23-86, by virtue of its right to
acquire such shares from CardioDynamics under stock options now
exercisable or exercisable within 60 days. Also includes 7,000 shares
of common stock beneficially owned J. Michael Paulson, by virtue of
its right to acquire such shares from CardioDynamics under stock
options now exercisable or exercisable within 60 days. Includes
103,764 shares of common stock beneficially owned by CDH, of which the
estate is a member with a majority interest and 2,243 shares of common
stock over which CDH exercises sole voting and investment power. Mr.
Paulson disclaims beneficial ownership of these shares except to the
extent of the estate's pecuniary interest in CDH. Excludes 2,000,000
shares of common stock owned by Mr. Paulson's bothers; Mr. Paulson
disclaims beneficial ownership of such shares.
(6) Shares beneficially owned include shares held by entities affiliated
with certain directors and named Officers as described above in the
footnotes.
Preferred Stock
All previously outstanding preferred stock was converted to common stock during
fiscal 1999.
ITEM 11. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During fiscal 1996, CardioDynamics Holdings, LLC and its members engaged in
several significant transactions with us, substantially all resulting in the
issuance of unregistered common stock or notes convertible (and later converted)
into common stock. As of November 30, 2000 CDH owns 103,764 shares of our common
stock. Members of CDH individually own 14,030,000 shares of common stock of
CardioDynamics (aside from CDH's own holdings); of the members' shares, The
Estate of Allen Paulson owns 10,000,234, James C. Gilstrap owns 3,137,154. At
February 22, 2001, CDH and its members together are the beneficial owners of
30.4% of our common stock.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with Allen E. Paulson and James C. Gilstrap. Under the terms of the
agreement we can 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 February 1999,
the term was extended one year, to September 2000. In August of 2000 the line of
credit repaid in full.
Before and after becoming an executive officer of CardioDynamics in June 1997,
Dennis G. Hepp has served as a consultant and vendor to our Company since July
1995 through the company he founded in 1989, Rivertek Medical Systems, Inc.,
located in Minneapolis, Minnesota. Rivertek, which is 100% owned by Mr. Hepp and
his wife, provides engineering consulting to medical device manufacturers, and
continues to be one of our largest vendors. In fiscal 2000 and fiscal 1999, we
paid $898,439 and $391,293, respectively, to Rivertek.
65
ITEM 12. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
The following exhibits are attached to this Report and are incorporated herein
by reference:
Exhibit Title
--------- -----
2.1 Fourth Amended Plan of Reorganization. (Incorporated by
reference from November 30, 1994 Form 10-KSB.)
2.2 Purchase Agreement dated February 7, 1995 between CardioDynamics
and CardioDynamics Holdings, LLC. (Incorporated by reference
from February 28,1995 Form 10-QSB.)
2.2.1 Amendment to Purchase Agreement, dated March 31, 1996, between
the Company and CardioDynamics Holdings, LLC, (Incorporated by
reference from May 31, 1996 Form 10-QSB.)
3.1 Bylaws, as amended through May 15, 1995. (Incorporated by
reference from May 31, 1995 Form 10-QSB.)
3.1.1 Amendment to Bylaws, dated June 2, 1999. (Incorporated by
reference from August 31, 1999 Form 10-QSB.)
3.2 Restated Articles of Incorporation as filed October 9, 1997.
(Incorporated by reference from November 30, 1997 Form 10-KSB.)
3.2.1 Amendment to Articles of Incorporation as filed July 24, 1998.
(Incorporated by reference from August 31, 1998 Form 10-QSB.)
3.2.2 Amendment to Articles of Incorporation as filed July 27, 2000.
(Incorporated by reference from August 31, 2000 Form 10-QSB.)
3.3 Certificate of Determination of Preferences of Series A
Convertible preferred stock. (Incorporated by reference to Form
8-K for the event of August 21, 1998, filed September 3, 1998.)
10.1* Compensation and Employment Agreement with Richard E. Otto.
(Incorporated by reference from August 31, 1995 Form 10-QSB.)
10.1.1* Amendment to Compensation and Employment Agreement, dated April
5, 1998, between the Company and Richard E. Otto. (Incorporated
by reference from May 31, 1998 Form 10-QSB.)
10.2 Warrants to purchase 276,514 shares of CardioDynamics
International Corporation common stock to EVEREN Securities,
Inc. dated February 26, 1997 and March 6, 1997. (Incorporated by
reference from February 28, 1997 Form 10-QSB.)
10.3 Service Agreement among Rivertek Medical Systems, Inc., Dennis
G. Hepp and the Company, dated October 16, 1998. (Incorporated
by reference from November 30, 1998 Form 10-KSB.)
66
(a) Exhibit Index - (Continued)
Exhibit Title
------- -----
10.4* Consulting Services Agreement, dated August 1, 1997, between Cam
L. Garner and the Company. (Incorporated by reference from
November 30, 1997 Form 10-KSB.)
10.5 Lease between AGBRI Nancy Ridge, LLC and the Company dated June
20, 1997. (Incorporated by reference from August 31, 1997 Form
10-QSB.)
10.6* Employment Agreement, dated March 23, 1998, between the Company
and Michael K. Perry. (Incorporated by reference from May 31,
1998 Form 10-QSB.)
10.7 Warrants to purchase 33,334 shares of CardioDynamics
International Corporation common stock to Imperial Bank dated
May 14, 1998. (Incorporated by reference from August 31, 1998
Form 10-QSB.)
10.8 1995 Stock Option/Stock Issuance Plan, as amended June 10, 1997.
(incorporated by reference from August 31, 1997 Form 10-QSB.)
10.8.1 Amendment to 1995 Stock Option/Stock Issuance Plan dated May 20,
1998. (Incorporated by reference from August 31, 1998 Form 10-
QSB.)
10.9 Warrants to purchase 15,000 shares of CardioDynamics
International Corporation common stock to Imperial Bank dated
August 21, 1998. (Incorporated by reference from August 31, 1998
Form 10-QSB.)
10.10 Form of Warrant issued August 21, 1998 to certain selling
stockholders. (Incorporated by reference to Form 8-K for event
of August 21, 1998, filed September 3, 1998.)
10.11 Certificate of Determination of Preferences of Series A
Convertible preferred stock. (Incorporated by reference to Form
8-K for event of August 21, 1998, filed September 3, 1998.)
10.12 Line of Credit Agreement with Imperial Bank, dated January 15,
1999. (Incorporated by reference from February 28, 1999 Form 10-
QSB.)
10.12.1 1/st/ Amendment and extension to Line of Credit agreement with
Imperial Bank, Dated February 14, 2000. (Incorporated by
reference from February 29, 2000 Form 10-QSB.)
10.13 Warrants to purchase 50,000 shares of CardioDynamics
International Corporation common stock to City National Bank
dated March 31, 1999. (Incorporated by reference from May 31,
1999 Form 10-QSB.)
10.14 Purchase agreement between CardioDynamics International
Corporation and GE Marquette Medical Systems, Inc. dated August
25, 1999. (Incorporated by reference from August 31, 1999 Form
10-QSB.)
67
(a) Exhibit Index - (Continued)
Exhibit Title
------- -----
10.15 Warrants to purchase 2,000,000 shares of CardioDynamics
International Corporation common stock to GE Marquette Medical
Systems, Inc., Dated August 25, 1999. (Incorporated by reference
from August 31, 1999 Form 10-QSB.)
10.16 Purchase agreement between CardioDynamics International
Corporation and GE Marquette Medical Systems, Inc. dated October
20, 1999. (Incorporated by reference from November 30, 1999 Form
10-KSB.)
10.17 ** License and Purchase Agreement between CardioDynamics
International Corporation and Profiles in Health, Inc., dated
March 1, 2000. (Incorporated by reference from May 31, 2000 Form
10-QSB.)
10.18 ** OEM Development and Purchase Agreement between CardioDynamics
International Corporation and GE Marquette Medical Systems,
Inc., dated July 7, 2000. (Incorporated by reference from August
31, 2000 Form 10-QSB.)
Omnibus Amendment between CardioDynamics International
10.19*** Corporation and GE Medical Systems Information Technologies,
Inc., dated November 22, 2000.
23.1 Consent of Independent Auditors, KPMG LLP
____________________
* This management contract or compensatory plan or arrangement is required to
be filed as an exhibit.
** Confidential treatment has been granted as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
portions have been omitted and filed separately with the Securities and
Exchange Commission.
*** Confidential treatment has been requested as to certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act. Such
portions have been omitted and filed separately with the Securities and
Exchange Commission.
(b) Reports on Form 8-K:
None.
68
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange Act,
the Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: February 28, 2000 CARDIODYNAMICS INTERNATIONAL CORPORATION
By: /s/ Michael K. Perry
-----------------------------
Michael K. Perry
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
[Enlarge/Download Table]
Signature Title Date
------------------------------ ------------------------- -----------------------------
/s/ Michael K. Perry Chief Executive Officer February 28, 2000
------------------------------
Michael K. Perry (Principal Executive Officer)
/s/ Stephen P. Loomis Vice President Finance, February 28, 2000
------------------------------
Stephen P. Loomis Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Connie R. Curran, Ed.D. RN Director February 28, 2000
------------------------------
Connie R. Curran, Ed.D. RN
/s/ Jacques C. Douziech Director February 28, 2000
------------------------------
Jacques C. Douziech
/s/ Cam L. Garner Director February 28, 2000
------------------------------
Cam L. Garner
/s/ James C. Gilstrap Director February 28, 2000
------------------------------
James C. Gilstrap
/s/ Richard O. Martin, Ph.D. Director February 28, 2000
------------------------------
Richard O. Martin, Ph.D.
Director
------------------------------
J. Michael Paulson
69
Dates Referenced Herein and Documents Incorporated By Reference
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