U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended August 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Transition Period from ________ to _________
Commission File Number: 0-11868
CARDIODYNAMICS INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
California 95-3533362
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
6175 Nancy Ridge Drive, Suite 300, San Diego, California 92121
(Address of principal executive offices) (Zip Code)
(858) 535-0202
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act 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
--- ---
As of October 8, 2001, 45,656,022 shares of common stock and no shares of
preferred stock were outstanding.
CARDIODYNAMICS INTERNATIONAL CORPORATION
FORM 10-Q
TABLE OF CONTENTS
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of August 31, 2001 (unaudited) and
November 30, 2000 (audited). 3
Statements of Operations (unaudited) for the three and
nine months ended August 31, 2001 and August 31, 2000. 4
Statements of Cash Flows (unaudited) for the
nine months ended August 31, 2001 and August 31, 2000. 5
Notes to Financial Statements (unaudited). 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CARDIODYNAMICS INTERNATIONAL CORPORATION
Balance Sheets
(In thousands, except share data)
August 31, November 30,
2001 2000
Assets (Unaudited) (Audited)
----------------- ------------------
Current assets:
Cash and cash equivalents $ 6,797 $ 11,595
Accounts receivable, net of allowance for doubtful accounts
of $1,220 in 2001 and $1,649 in 2000 5,843 3,771
Inventory, net 3,016 2,255
Other current assets, net 2,351 1,142
----------------- ------------------
Total current assets 18,007 18,763
Property and equipment, net 467 575
Long-term receivables and note receivable, net 2,158 2,193
Deposits 30 30
----------------- ------------------
Total assets $ 20,662 $ 21,561
================= ==================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,413 $ 1,588
Accrued expenses 222 521
Accrued salaries, wages and benefits 664 671
Deferred revenue 368 43
Current maturities of long-term debt 84 85
----------------- ------------------
Total current liabilities 2,751 2,908
Long-term debt, less current maturities 15 87
----------------- ------------------
Total liabilities 2,766 2,995
Shareholders' equity:
Preferred Stock; no par value; 18,000,000 shares authorized; no shares
issued or outstanding at August 31, 2001 and November 30, 2000 -- --
Common stock; no par value; 100,000,000 shares authorized;
issued and outstanding 45,652,522 shares at August 31, 2001
and 45,518,475 shares at November 30, 2000 48,514 48,270
Accumulated deficit (30,618) (29,704)
----------------- ------------------
Total shareholders' equity 17,896 18,566
----------------- ------------------
Commitments and contingencies
Total liabilities and shareholders' equity $ 20,662 $ 21,561
================= ==================
See accompanying notes to financial statements.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Operations
(Unaudited, In thousands, except share and per share data)
Three Months Ended August 31, Nine Months Ended August 31,
-------------------------------- --------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
Net sales $ 5,231 $ 3,573 $ 13,675 $ 9,270
Cost of sales 1,474 1,144 3,972 2,993
-------------- -------------- -------------- --------------
Gross margin 3,757 2,429 9,703 6,277
-------------- -------------- -------------- --------------
Operating expenses:
Research and development 797 647 2,510 1,793
Selling, general, and administrative
expenses 3,016 2,281 8,526 5,998
-------------- -------------- -------------- --------------
Total operating expenses 3,813 2,928 11,036 7,791
-------------- -------------- -------------- --------------
Loss from operations (56) (499) (1,333) (1,514)
Other income (expense):
Interest income 130 136 485 251
Interest expense (10) (67) (39) (216)
Other, net (14) (13) (26) (17)
-------------- -------------- -------------- --------------
Total other income (expense) 106 56 420 18
-------------- -------------- -------------- --------------
Income (loss) before income taxes 50 (443) (913) (1,496)
Income taxes -- -- (1) (1)
-------------- -------------- -------------- --------------
Net income (loss) $ 50 $ (443) $ (914) $ (1,497)
============== ============== ============== ==============
Net income (loss) per share, basic $ .00 $ (.01) $ (.02) $ (.04)
============== ============== ============== ==============
Weighted-average number of common shares
outstanding, basic 45,591,170 43,517,874 45,545,516 42,367,288
============== ============== ============== ==============
Net income (loss) per share, diluted $ .00 $ (.01) $ (.02) $ (.04)
============== ============== ============== ==============
Weighted-average number of common shares
outstanding, diluted 47,983,349 43,517,874 45,545,516 42,367,288
============== ============== ============== ==============
See accompanying notes to financial statements.
-4-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Statements of Cash Flows
(Unaudited, in thousands)
Nine Months Ended August 31,
----------------------------------------
2001 2000
------------------ ------------------
Cash flows from operating activities:
Net loss $ (914) $ (1,497)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 209 140
Other non cash items -- (19)
Provision for warranty repairs 76 (98)
Provision for obsolete inventory 115 (155)
Provision for demonstration inventory 85 (39)
Provision for doubtful receivables (429) 187
Provision for doubtful long-term receivables (52) --
Compensatory stock options granted 47 23
Changes in operating assets and liabilities:
Accounts receivable (1,643) (356)
Inventory (961) (492)
Other current assets (1,209) (598)
Long-term receivables and note receivable 87 (1,094)
Deposits -- 19
Accounts payable (175) 141
Accrued expenses (375) 51
Deferred revenue 325 14
Accrued salaries, wages and benefits (7) 143
------------------ ------------------
Net cash used in operating activities (4,821) (3,630)
------------------ ------------------
Cash flows from investing activities:
Purchases of property and equipment (101) (269)
------------------ ------------------
Net cash used in investing activities (101) (269)
------------------ ------------------
Cash flows from financing activities:
Repayment of long-term debt (73) (3,063)
Repayment of revolving line of credit -- (1,000)
Exercise of warrants and options 224 2,273
Redemption of common stock -- (2,197)
Issuance of common stock, net (27) 20,441
------------------ ------------------
Net cash provided by financing activities 124 16,454
------------------ ------------------
Net (decrease) increase in cash and cash equivalents (4,798) 12,555
Cash and cash equivalents at beginning of period 11,595 2,406
------------------ ------------------
Cash and cash equivalents at end of period $ 6,797 $ 14,961
================== ==================
See accompanying notes to financial statements.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Description of Business
We are a medical technology company that develops, manufactures and markets
heart-monitoring devices that provide medical professionals with continuous data
on a wide range of parameters relating to blood flow and heart function. Unlike
other cardiac function monitoring technologies, our monitors are noninvasive
(without cutting into the body). Our BioZ(R) Systems use our proprietary
technology called impedance cardiography (ICG) to obtain data in a safe,
efficient and cost-effective manner not previously available in the physician's
office and many hospital settings. Just as Electrocardiography (ECG)
noninvasively measures the heart's electrical characteristics, ICG makes it
possible to noninvasively measure the heart's mechanical characteristics. Our
strategic partners include GE Medical Information Technologies, Spacelabs
Medical Systems, and Vasomedical. We were originally incorporated in California
in June 1980 as Bomed Medical Manufacturing, Ltd. and in October 1993 changed
our name to CardioDynamics International Corporation.
Basis of Presentation
The information contained in this report is unaudited, but in our opinion
reflects all adjustments necessary to make the financial position and results of
operations for the interim periods a fair statement of our financial position,
operations and cash flows. All such adjustments are of a normal recurring
nature. These statements should be read along with the financial statements and
notes that go along with our audited financial statements, as well as the other
financial information for the fiscal year ended November 30, 2000 as presented
in our Annual Report on Form 10-KSB. Financial presentations for prior periods
have been reclassified to conform to current year presentation. The results of
operations and cash flows for the three and nine months ended August 31, 2001
are not necessarily indicative of the results that may be expected for the full
fiscal year ending November 30, 2001.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Inventories
Inventory consists of the following: (in thousands)
August 31, November 30,
2001 2000
----------------- -------------------
Electronic components and subassemblies $ 1,856 $ 1,643
Finished goods 1,155 624
Work in process 117 95
Demonstration units 797 602
Less provision for obsolete inventory (620) (505)
Less provision for demonstration inventory (289) (204)
----------------- -------------------
$ 3,016 $ 2,255
================= ===================
Long-Term Receivables & Note Receivable
In our third and fourth fiscal quarters of 2000, we offered no-interest
financing of our BioZ(R) Systems with maturities ranging from 24 to 60 months.
The long-term receivables are collateralized by the systems. In our first fiscal
quarter of 2001, we established a similar program through a third-party
financing company to replace the internal equipment financing program. Under
certain circumstances we continue to provide financing to our customers,
although the contracts now typically include market rate interest provisions.
The fair value of each below-market, long-term receivable is estimated by
discounting the future cash flows based on our incremental borrowing rate.
In March 2000, we entered into a license and purchase agreement with Profiles in
Health, Inc., a privately held California corporation. Under the terms of the
agreement, we manufactured and provided custom ICG monitors called BioZ.pc(TM)
and disposable sensor sets. Under the terms of the agreement, we had a right to
suspend performance should Profiles in Health become delinquent on any amounts
due us. During the fourth quarter of fiscal 2000, when their inability to pay
became apparent, we suspended shipments and established a 100% allowance for the
receivable, note and inventory unique to this customer.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Notes to Financial Statements
(Unaudited)
Long-Term Receivables & Note Receivable - (continued)
Long-term receivables and note consist of the following: (in thousands)
August 31, November 30,
2001 2000
----------------- -------------------
Long-term receivables, net of deferred interest $ 4,297 $ 3,345
Secured note receivable 341 325
Less allowance for doubtful long-term receivables (514) (566)
----------------- -------------------
4,124 3,104
Less current portion of long-term receivables (1,966) (911)
----------------- -------------------
$ 2,158 $ 2,193
================= ===================
Net Income (Loss) Per Share
Net income (loss) per share is computed by dividing the net income (loss) by the
weighted-average number of common shares outstanding during the period. Diluted
income (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. The following table lists the options and
warrants, each convertible into one share of common stock, which were not
included in the diluted earnings per share calculation as their effect was
antidilutive.
Three Months Ended August 31, Nine Months Ended August 31,
2001 2000 2001 2000
-------------- -------------- -------------- -------------
Stock options 545,388 3,519,509 3,997,887 3,519,509
Warrants 0 2,472,170 2,472,170 2,472,170
-------------- -------------- -------------- -------------
Total 545,388 5,591,679 6,470,057 5,591,679
============== ============== ============== =============
-8-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Form 10-Q 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. Items contemplating, or making
assumptions about, actual or potential future sales, market size,
collaborations, trends or operating results also constitute such forward-looking
statements.
Although forward-looking statements in this report reflect the good faith
judgment of management, such statements can only be based on facts and factors
currently known by management. Consequently, forward-looking statements are
inherently subject to risks and uncertainties and actual results and outcomes
may differ materially from the results and outcomes discussed in, or anticipated
by the forward-looking statements. Factors that could cause or contribute to
such differences in results and outcomes include, without limitation, those
discussed in our Annual Report on Form 10-KSB for the year ended November 30,
2000. Readers are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. We undertake no
obligation to revise or update any forward-looking statements in order to
reflect any event or circumstance that may arise after the date of this report.
Readers are urged to carefully review and consider the various disclosures made
by us in our 10-KSB for the year ended November 30, 2000 and subsequently filed
registration statements, which attempt to advise interested parties of the risks
and factors that may affect the our business, financial condition, results of
operations and prospects.
The following discussion should be read along with the Financial Statements and
Notes to our audited financial statements, as well as the other financial
information for the fiscal year ended November 30, 2000.
-9-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
OVERVIEW
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 stand-alone 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 (GEMS-IT) and a network of international distributors. In November
1998, the Centers for Medicare & Medicaid Services (CMS), formerly Health Care
Finance Administration (HCFA), mandated Medicare reimbursement for our BioZ(R)
procedures and in January 2001, implemented uniform Medicare reimbursement
amounts throughout the United States. To date, we have an installed base of
nearly 1,500 units in over 950 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 have some
form of cardiovascular disease. The AHA estimated 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, medication and the
indirect costs associated with lost productivity resulting from morbidity and
mortality.
Electrocardiography (EKG or ECG) is a widely used noninvasive assessment of the
heart that measures the electrical characteristics of the heart. Our ICG
technology makes it possible to noninvasively measure the mechanical function of
the heart. Conditions that can impact the proper mechanical functioning of the
heart include hypertension (high blood pressure), congestive heart failure,
pulmonary disease, high-risk pregnancy and kidney dysfunction. Our technology
complements the 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)."
-10-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The three and nine month periods ended August 31, 2001 and August 31, 2000.
Net Sales - For our third quarter ended August 31, 2001, net sales were
$5,231,000, an increase of 46% over net sales of $3,573,000 reported in the same
period of fiscal 2000. Net sales for the nine months ended August 31, 2001 were
$13,675,000, up 48% over the same period last year in which net sales were
$9,270,000. The third quarter sales increase was driven primarily by strong
revenue growth from our domestic direct sales force, sensor revenue and
increased purchases of BioZ(R) ICG module kits from our strategic partner, GE
Medical Information Technologies (GEMS-IT). As the medical community's
recognition of the clinical usefulness of our BioZ(R) increases, demand for our
products continues to grow. We now have nearly 1,500 systems being used in just
under 1,000 customer accounts, up 90% from one year ago.
Sales by our domestic direct sales force, which target physician offices and US
hospitals, increased 70% in the third quarter of 2001 over the third quarter of
2000, primarily as a result of higher average unit sales prices. The average
price per unit sold by our direct sales force has increased 34% over the same
quarter last year for several reasons, including: greater awareness and
acceptance of ICG technology, uniform nationwide Medicare reimbursement,
inclusion of additional options, warranty and accessories in the system price,
and the absence of competitive products or cost-effective alternative
technologies. Our direct sales force sold 122 BioZ Systems in the third quarter,
up from 107 systems sold in the third quarter last year. During the past several
quarters, we have continued to expand our direct sales force by hiring
additional territory managers and clinical sales specialists to assist in three
primary areas: pre-sale demonstration activities, post-sale installation and
training, and on-going customer support to increase customer satisfaction and
drive recurring revenues. At August 31, 2001, we had 53 sales associates,
including 36 direct sales representatives and seven clinical sales specialists.
Sales to our strategic partners, including shipment of 306 ICG module kits to
GEMS-IT, were $929,000 in the third quarter, up from $277,000 in the same
quarter last year. GEMS-IT committed to purchase $3.5 million of our BioZ(R)
products during fiscal 2001 with increasing quarterly commitments throughout the
year. In the second quarter we commenced shipments of the jointly developed
BioZ(R) ICG module to GEMS-IT, the first and only patient monitoring system
capable of non-invasively acquiring and displaying hemodynamic information. The
plug-in BioZ(R) ICG module extends the capabilities of the GE Solar(R) patient
monitoring product family to provide all of the cardiac function parameters of
the BioZ.com(R) to GE Medical System's installed customer base of over 30,000
units. The BioZ(R) ICG module is being sold by the GE Medical System's direct
sales force and is being assembled at GE Medical System's facility in Milwaukee,
Wisconsin using circuit board assemblies, patient cables and sensors that we
supply.
Sales to our international distributors during the third quarter were $114,000,
down from $558,000 in the third quarter of 2000. In May 2001, GEMS-IT, GmbH,
agreed to provide up to $600,000 of funding over the next two years to support
ICG clinical sales specialists in Germany, Italy and Egypt.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
In March 2001, we entered into an agreement with The Heart-Lung Associates of
America, PC. for use of our BioZ ICG technology in their DiTECTM pilot program
to enhance the cardiac care of end stage chronic kidney failure patients. The
program links kidney disease specialists with cardiologists and aims to
significantly reduce cardiac event rates, decrease costs, and improve dialysis
patient outcomes. During the quarter we filed for FDA 510(k) clearance on a new
lower cost BioZ.com and separately, a dialysis monitoring system that would
transmit hemodynamic data via the Internet. Upon receipt of FDA 510(k)
clearance, either of these products could serve as a cost-effective solution for
the dialysis market.
We have implemented various programs and partnerships to enhance our sales force
productivity. In April 2001, we entered into a co-promotional agreement with
Vasomedical, Inc. which allows our direct sales force, along with Vasomedical's
sales force, to jointly market our BioZ.com(R) ICG monitoring systems and
Vasomedical's EECP(R) enhanced external counterpulsation systems to physicians
and hospitals throughout the United States. That same month, we entered into an
agreement with Spacelabs Medical, Inc. for development of an interface using
Spacelab's Universal Flexport(R) to integrate and display our ICG technology on
their Ultraview Care Network(TM) monitoring system. In August 2001 we launched
the Government Market Initiative Program to target and further penetrate
Government markets. The program provides initiatives to our direct sales force
to promote sales to VA hospitals.
Each time our BioZ products are used, disposable sets of four dual sensors are
required. In May 2000, we received FDA 510(k) clearance for our new proprietary
"BioZtect(TM)" sensor. The BioZtect(TM) sensors for our stand-alone systems have
a list price of $9.95 per application and $19.95 per application for the ICG
module. Sensor revenue for our third quarter of 2001 was $477,000, an increase
of 155% over last year's same quarter revenue of $187,000. For the nine months
ended August 31, 2001 sensor revenue was $1,263,000, or 9% of net sales, up from
$499,000, or 5% of sales for the same period in fiscal 2000. As the installed
base of BioZ systems grows, we expect the revenue generated by our disposable
sensors to continue to comprise and increasingly larger portion or our overall
revenue stream.
Gross Margin - Our gross margin for the quarter ended August 31, 2001, increased
55%, to $3,757,000, or 71.8% of sales, up from $2,429,000 or 68.0% of sales, in
the third quarter of fiscal 2000. In the first three quarters of fiscal 2001 we
generated $9,703,000 of gross margin representing 71.0% of sales. For the same
period last year, our gross margin was $6,277,000, or 67.7% of sales. The
improved gross margin during the quarter and first nine months of fiscal 2001
was due principally to the higher sales volumes along with a higher average
sales price per unit. In addition, we have reduced our direct material cost per
unit by 8% from one year ago through material procurement cost reduction
initiatives. At the beginning of this year, we set a cost reduction goal of
$1,000 per unit. We expect to achieve that goal when we commence shipments of
our new, re-engineered lower manufactured cost BioZ.com late in the fourth
quarter of fiscal 2001.
-12-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
Research and Development - Our investment in clinical research and product
development activities for the third fiscal quarter of 2001 was $797,000, 23%
higher than the same period in fiscal 2000, of $647,000. Year to date research
and development expenses were $2,510,000 compared to $1,793,000 for the same
period last year, an increase of 40%. We continue to invest a significant
portion of our resources into research, clinical studies, and further
enhancements to the BioZ systems and new product development. During the past
year, we have increased our internal research and development and clinical
research associates to 14 at August 31, 2001. We anticipate that the expenses
associated with research, heart failure, hypertension and emergency department
clinical studies, further enhancements to the BioZ systems and new product
development will continue to comprise a substantial portion of our overall
expense for the balance of fiscal 2001.
Selling, General and Administrative - Selling, general and administrative
expenses for the third fiscal quarter of fiscal 2001 increased to $3,016,000, a
32% increase over the same period in fiscal 2000 with expenditures of
$2,281,000. For the nine months ended August 31, 2001, selling, general and
administrative expenses were $8,526,000, up 42% from $5,998,000 for the same
period of fiscal 2000. At the end of our third quarter fiscal 2001, we had 36
direct sales representatives and seven clinical sales specialists, up from 24
direct sales representatives and three clinical sales specialists at the end of
our fiscal 2000 third quarter. We continue to invest in areas of the business
that directly contribute to revenue growth and we intend to continue to expand
our direct sales force and clinical sales specialists as we identify qualified
candidates in targeted metropolitan areas.
Included in selling, general and administrative expense for the third quarter of
fiscal 2001, is $419,000 of general and administrative expenses related to the
overall infrastructure and management of the company. This reflects a decrease
of 10% from the $466,000 incurred during the third quarter of fiscal 2000. For
the nine-month period ended August 31, 2001, general and administrative expenses
were $1,265,000, down 5% from $1,206,000 in same period of fiscal 2000. We
continue to reduce our general and administrative expenses as a percentage of
sales, to 9% in the first nine months of fiscal 2001, from 13% in the first nine
months of fiscal 2000.
Interest Income and Expense - We earned $70,000 of interest income on our
invested funds in the third quarter of fiscal 2001, slightly lower than the
$136,000 earned in the third quarter of fiscal 2000. The decrease is primarily
due to having fewer funds available for investment and slightly lower interest
rates earned during the period. This decrease was largely offset by $60,000 of
interest recognized on our in-house equipment-financing program that was offered
in the latter half of fiscal 2000. In the third quarter of fiscal 2000, we
repaid nearly $3 million of debt which resulted in an 82% reduction in interest
expense for the first nine months of fiscal 2001 at $39,000, down from the
$216,000 incurred in the same period of fiscal 2000.
-13-
CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS - (Continued)
Net Income (Loss) - We earned $50,000 of net income or $.00 per basic and
diluted share, in the third quarter of fiscal 2001, up from a loss of $443,000,
or $.01 per basic and diluted share, in the same quarter last year. Our
year-to-date net loss was $914,000, or $.02 per basic and diluted share, down
39% from a loss of $1,497,000, or $.04 per basic and diluted share, in the first
nine months of fiscal 2000. The weighted-average number of common shares
outstanding increased over last year's number of share outstanding, primarily as
a result of the July 2000, common stock private placement.
LIQUIDITY AND CAPITAL RESOURCES
In May of 1999, we raised $5.2 million through a private placement of common
stock to institutional and accredited investors, in December 1999, we raised
$3.3 million, and in July 2000, we raised $18.7 million (net $15.1 million)
through additional private placements of common stock. To date, these
financings, together with the lines of credit and the bank loan described below,
have provided the capital required to fund initial commercialization of our
BioZ(TM) products, ongoing research and development efforts, expansion of our
direct sales force and international sales presence, capital expenditures and to
meet our working capital requirements.
Net cash used in operating activities for the nine months ended August 31, 2001
was $4.8 million, compared with $3.6 million used during the first nine months
of fiscal 2000. The change from period to period was primarily due to increases
in trade and long-term receivables and inventory, each driven by increased sales
volumes. We have also reduced our level of accounts payable and accrued expenses
from the November 30, 2000 levels.
For the first nine months of fiscal 2001, net cash provided by financing
activities was $124,000, primarily from stock option exercises. In the first
nine months of fiscal 2000, $16.5 million of cash was provided from financing
activities, primarily as a result of the issuance of 4.2 million shares of
common stock in two private placements and receipt of $2.3 million from the
exercise of options and warrants. Proceeds of these financings were used to
repay $4.1 million of long-term debt.
In March 1998, we entered into an 18-month unsecured private line of credit
agreement with the co-chairmen of our Board of Directors. Under the terms of the
agreement we could borrow up to $3,000,000 on an as-needed basis with at an
annual interest rate of 10.0%. In February 1999, this line of credit was
extended to September 30, 2000. In August 2000, the private line of credit was
repaid in full.
In January 1999, we established a revolving credit line with Imperial Bank. The
credit line provided for borrowings of up to $3,000,000 at the bank's prime
rate. In June 2001, the line was renewed and increased to $4,000,000. Under the
terms of the agreement, we are required to meet certain loan covenants,
including maximum quarterly losses. All the assets of our company collateralize
the credit line. At August 31, 2001, there were no borrowings outstanding under
the line of credit.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES - (Continued)
In February 1999, we entered into a three-year, $2,000,000 unsecured term loan
agreement with City National Bank at the bank's prime rate. The co-chairmen of
our Board of Directors guaranteed the loan. Under the terms of the agreement we
initially made interest only payments. In May 2000, we began making monthly
principal installments of $83,333 each, plus interest at one percent above the
bank's prime rate. In August 2000, the bank term loan was repaid in full.
In December 1999, we raised $3.3 million in a private placement to institutional
investors who purchased unregistered common shares with a four-month holding
restriction. In July 2000, we raised $18.7 million 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.
Over the past several years we have assisted in increasing institutional
ownership and reducing the Paulson estate beneficial ownership from
approximately 78% to now less than 20%. During the third fiscal quarter of 2001,
we introduced purchasers of additional two million shares from the estate who
purchased in private transactions outside of the public market. In certain of
these situations we agreed to register the shares sold for resale in the hands
of the purchaser and agreed to indemnify the purchasers from certain liabilities
arising under the securities laws. We were reimbursed by the Paulson estate for
certain of our expenses incurred in these introductions and registrations and we
received additional payments from the estate upon conclusion of the sales.
We have operating loss carryforwards of approximately $30,000,000 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.
We expect our cash usage to continue through at least the short term, however,
we believe that we have sufficient financial resources available to support our
anticipated working capital and capital expenditure requirements with cash on
hand and available credit line borrowings. Longer term, our liquidity will
depend on our ability to successfully commercialize the BioZ(TM) systems and
other diagnostic products and raise additional funds through public or private
financings, 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.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") 141, Business Combinations, and 142,
Goodwill and Other Intangible Assets, which supersede Accounting Principles
Board Opinion 17, Intangible Assets. SFAS 141 requires that all business
combinations be accounted for under the purchase method. The statement further
requires separate recognition of intangible assets that meet one of the two
criteria, as defined in the statement. This statement applies to all business
combinations initiated after June 30, 2001. Under SFAS 142, goodwill and
intangible assets with indefinite lives are no longer amortized but are tested
at least annually for impairment. Separable intangible assets with defined lives
will continue to be amortized over their useful lives. The provisions of SFAS
142 will apply to goodwill and intangible assets acquired before and after the
statement's effective date, fiscal years beginning after December 15, 2001 or
the beginning of the Company's Fiscal year 2003. It is not anticipated that the
adoption of the provisions of SFAS 141 and 142 will have a material impact on
our results of operations or financial position.
In August 2001, the Financial Accounting Standards Board issued Statement No.
143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset. Statement No. 143 requires that the fair value
of a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
fair value of the liability is added to the carrying amount of the associated
asset and this additional carrying amount is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement. We are required to adopt the provisions of Statement No. 143 for the
quarter ending February 28, 2003. We are evaluating the effect that the adoption
of SFAS 143 will have on our results of operations and financial position.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve principal,
while at the same time, maximizing the income we receive from our investments
without significantly increasing risk. In the normal course of business, we
employ established policies and procedures to manage our exposure to changes in
the fair market value of our investments. Under our current policies, we do not
use interest rate derivative instruments to manage exposure to interest rate
changes. We ensure the safety and preservation of our invested principal funds
by limiting default risks, market risk and reinvestment risk. We mitigate
default risk by investing in investment grade securities. Some of the securities
that we have invested in may be subject to market risk. This means that a change
in prevailing interest rates may cause the principal amount of the investment to
fluctuate. For example, if we hold a security that was issued with a fixed rate
equal to the then-prevailing interest rate and the prevailing interest rate
later rises, the fair value of our investment will decline. To minimize this
risk, we maintain substantially all of our portfolio of cash equivalents in
commercial paper, certificates of deposit and money market funds. Our interest
income is sensitive to changes in the general level of U.S. interest rates,
however, due to the nature of our short-term investments, we have concluded that
there is no material market risk exposure.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
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CARDIODYNAMICS INTERNATIONAL CORPORATION
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on July 19, 2001, the
shareholders voted on the following proposals. Each such proposal was
approved.
Proposal 1: Election of Directors for the coming year. The
balloting for the directors was as follows:
Against/ Abstained/
For Withheld Non-Votes
--------------------------------------
Connie R. Curran 27,666,241 581,224 0
Jacques C. Douziech 28,188,399 59,066 0
Cam L. Garner 27,349,390 898,075 0
James C. Gilstrap 28,187,767 59,698 0
Richard O. Martin 28,188,199 59,266 0
J. Michael Paulson 28,178,245 69,220 0
Michael K. Perry 26,598,694 1,648,771 0
Proposal 2: To approve an amendment to the 1995 Stock Option/Stock
Issuance Plan to increase the number of shares reserved for issuance
thereunder from 4,000,000 shares to 6,000,000 shares and to allow
transfer of certain options by gift to immediate family members and
tax-exempt charities.
Of the shares voted, 24,837,641 shares were voted in favor of the
amendment, 3,320,106 shares were voted against amendment, 89,718
shares abstained from voting and there were no broker non-votes.
Proposal 3: Ratify the Board's selection of KPMG LLP as the Company's
independent accountants for the fiscal year ending November 30, 2001.
Of the shares voted, 28,167,158 shares were voted in favor of the
ratification, 41,351 shares were voted against ratification, 38,956
shares abstained from voting and there were no broker non-votes.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: October 12, 2001 By: /s/ Michael K. Perry
---------------- -------------------------------------
Michael K. Perry
Chief Executive Officer
(Principal Executive Officer)
Date: October 12, 2001 By: /s/ Steve P. Loomis
---------------- -------------------------------------
Steve P. Loomis
Vice President, Finance,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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