<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the Transition Period from to
----------- -----------
COMMISSION FILE NUMBER 0-27540
ENDOVASCULAR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 94-3096794
(State of Incorporation) (I.R.S. Employer Identification No.)
1360 O'BRIEN DRIVE
MENLO PARK, CALIFORNIA 94025
415-325-1600
(Address, Zip Code and Telephone Number of Principal Executive Offices)
Indicate by check mark whether the Registrant (1) has 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
--- ---
The number of shares outstanding of each of the issuer's classes of common stock
as of March 31, 1996 was: 8,291,563
This document contains 20 pages and the Exhibit Index is on Page 19
Page 1 of 20
<PAGE> 2
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
- ----------------------------------------- ----
<S> <C> <C>
Item 1. Financial Statements
Balance Sheets as of December 31, 1995 and
March 31, 1996 3
Statements of Operations for the Three Months Ended
March 31, 1995 and March 31, 1996 4
Statements of Cash Flows for the Three Months Ended
March 31, 1995 and March 31, 1996 5
Notes to Financial Statements 6
Risk Factors 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibit Index 19
Exhibit 11 Computation of Net Loss Per Share 20
</TABLE>
Page 2 of 20
<PAGE> 3
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1995 1996
---- ----
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 2,203,937 $ 2,887,018
Available for sale securities 7,944,782 21,123,562
Interest receivable 154,768 229,522
Accounts receivable -- 97,000
Prepaids and other 434,082 507,793
Notes receivable from employees 112,750 112,750
------------ ------------
Total current assets 10,850,319 24,957,645
Property and equipment, net 819,921 1,096,691
Available for sale securities, non-current -- 4,932,680
Other assets 57,156 56,406
------------ ------------
Total assets $ 11,727,396 $ 31,043,422
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current portion of obligations under capital lease $ 15,131 $ --
Accounts payable 146,388 266,662
Accrued and other liabilities 1,304,383 1,627,294
------------ ------------
Total current liabilities 1,465,902 1,893,956
Stockholders' Equity
Convertible preferred stock, $0.00001 par value:
Authorized: 40,000,000 shares at December 31, 1995; issued and
outstanding: 5,118,265 at December 31; (liquidation value of
$33,883,943 at December 31, 1995); converted at March 31, 1996 51 --
Common stock, $0.00001 par value:
Authorized: 35,000,000 shares at December 31, 1995 and March 31,
1996; issued and outstanding: 1,160,869 and 8,291,563 at
December 31, 1995 and March 31, 1996, respectively 12 83
Additional paid-in capital 34,375,515 56,012,378
Unrealized loss on securities -- (89,794)
Deferred compensation (109,242) (102,415)
Deficit accumulated during the development stage (24,004,842) (26,670,786)
------------ ------------
Total stockholders' equity 10,261,494 29,149,466
------------ ------------
Total liabilities and stockholders' equity $ 11,727,396 $ 31,043,422
============ ============
</TABLE>
See accompanying notes to financial statements
Page 3 of 20
<PAGE> 4
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
July 1, 1989 Quarter Ended March 31,
(Inception), to -----------------------
March 31, 1996 1995 1996
-------------- ---- ----
<S> <C> <C> <C>
Net sales $ 103,000 $ -- $ 103,000
Cost of goods sold 117,040 -- 117,040
------------ ----------- -----------
Gross margin (14,040) -- (14,040)
Operating costs and expenses
Research and development 24,541,113 2,014,936 2,458,652
General and administrative 3,995,927 280,906 431,569
------------ ----------- -----------
Total operating costs and expenses 28,537,040 2,295,842 2,890,221
Loss from operations (28,551,080) (2,295,842) (2,904,261)
Interest income 1,880,294 234,472 238,317
------------ ----------- -----------
Net loss $(26,670,786) $(2,061,370) $(2,665,944)
============ =========== ===========
Net loss per common and equivalent share $ (0.33) $ (0.35)
=========== ===========
Shares used in computing net loss per share 6,276,087 7,660,677
=========== ===========
</TABLE>
See accompanying notes to financial statements
Page 4 of 20
<PAGE> 5
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
July 1, 1989 Quarter Ended March 31,
(Inception), to -----------------------
March 31, 1996 1995 1996
-------------- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(26,670,786) $(2,061,370) $ (2,665,944)
Adjustments to reconcile net loss to net cash used in operating activities -
Depreciation and amortization 729,127 54,038 64,352
Amortization of deferred compensation 6,827 -- 6,827
Write-off of other assets 386,611 -- --
Stock issued for services and patents 21,440 -- --
Changes in current assets and liabilities -
Interest receivable (229,522) 66,749 (74,754)
Accounts receivable (97,000) -- (97,000)
Prepaids and other (507,793) 36,282 (73,711)
Note receivable from employees (112,750) -- --
Other assets (57,156) -- --
Accounts payable 266,662 (67,532) 120,274
Accrued and other liabilities 1,627,294 (36,991) 322,911
------------ ----------- ------------
Total adjustments 2,033,740 52,546 268,899
------------ ----------- ------------
Net cash used in operating activities (24,637,046) (2,008,824) (2,397,045)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities available for sale (86,334,038) (7,368,293) (22,801,254)
Sale/maturity of securities available for sale 60,188,002 10,050,040 4,600,000
Capitalized patent and organization costs (385,925) -- --
Purchases of property and equipment (1,771,019) (34,752) (340,372)
------------ ----------- ------------
Net cash provided by (used in) investing activities (28,302,980) 2,646,995 (18,541,626)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of convertible notes 850,000 -- --
Repayment of capital lease obligations (54,735) (5,942) (15,131)
Proceeds from exercise of stock options 445,534 695 17,701
Repurchase of common stock options (6,865) -- --
Proceeds from sale of preferred stock, net of issuance costs 32,874,175 -- --
Proceeds from sale of common stock, net of issuance costs 21,718,935 -- 21,619,182
------------ ----------- ------------
Net cash provided by (used in) financing activities 55,827,044 (5,247) 21,621,752
------------ ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,887,018 632,924 683,081
CASH AND CASH EQUIVALENTS, beginning of period -- 2,154,817 2,203,937
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,887,018 $ 2,787,741 $ 2,887,018
============ =========== ============
SUPPLEMENTARY SCHEDULE OF NONCASH TRANSACTIONS:
Conversion of notes payable to preferred stock $ 850,000 $ -- $ --
Purchase of equipment under capital lease obligations 54,692 -- --
Deferred compensation recorded relating to stock option grants 109,242 -- --
Unrealized loss on securities 89,794 -- 89,794
</TABLE>
See accompanying notes to financial statements
Page 5 of 20
<PAGE> 6
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Unaudited Financial Information
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and have been prepared on substantially the same
basis as the year end audited financial statements. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 1996 are not
necessarily indicative of the results that may be expected for the year
ended December 31, 1996. For further information, refer to the financial
statements and footnotes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost which approximates market, and
consist of short-term, highly liquid investments with original maturities
of less than three months.
Available for sale Securities
Investments represent debt securities which are stated at fair value. The
difference between amortized cost (cost adjusted for amortization of
premiums and accretion of discounts which are recognized as adjustments to
interest income) and fair value representing unrealized holding gains or
losses are recorded as a separate component of stockholders' equity until
realized. Realized gains and losses on sales of all such securities, if
any, are reported in earnings and computed using the specific
identification method. Securities with original maturity dates of one year
or longer are classified as non-current on the balance sheet.
Public Offering
On February 7, 1996, the Company completed an initial public offering of
two million shares of its Common Stock at a purchase price of $12.00 per
share. Net proceeds to the Company were $21.6 million, after deducting
underwriting discounts, commissions, and offering expenses.
Net Loss Per Share
Net loss per share is computed using the weighted average number of common
shares outstanding. Common equivalent shares from stock options are
excluded from the computation as their effect is anti-dilutive, except
that, pursuant to the Commission's Staff Accounting Bulletins, common and
common equivalents (stock options and preferred stock) issued during the
12-month period prior to the initial public offering of the Company's
common stock at prices below the initial public offering price of $12.00
per share have been included in the calculation as if they were outstanding
for all periods presented (using the treasury stock method for stock
options).
Page 6 of 20
<PAGE> 7
2. RISK FACTORS
Early Stage of Clinical Trials; No Assurance of Safety and Efficacy
The Company's EGS systems for endovascular abdominal aortic aneurysm (AAA)
repair are at an early stage of clinical testing. There can be no assurance that
the Company's products will prove to be safe and effective in clinical trials or
will ultimately be cleared for marketing by United States or foreign regulatory
authorities. The Company does not expect to submit a PMA for any of its EGS
systems for at least the next two years, and there can be no assurance that the
Company will ever submit a PMA or that, if submitted, such PMA will be approved
by the FDA. If the Tube or Bifurcated EGS systems do not prove to be safe and
effective in clinical trials or if the Company is otherwise unable to
commercialize either system successfully, the Company's business, financial
condition and results of operations will be materially adversely effected and
cessation of the Company's business could occur.
In addition, the clinical trials may identify significant technical or other
obstacles to be overcome prior to obtaining necessary regulatory or
reimbursement approvals. For example, in 35 of 81 successful Tube Endograft
prosthesis implantations using a revised version of the original Tube EGS
system, blood flow outside of the implant ("Perigraft Flow") was observed
immediately following the procedure. Over time Perigraft Flow ceased in 17 of
these patients, but continued in the remaining 18 patients, or 22% of the 81
patients. The clinical significance of Perigraft Flow is unknown. There can be
no assurance that Perigraft Flow will not occur in future procedures using the
Company's EGS systems or that the existence of Perigraft Flow will not have a
material adverse effect on the safety and efficacy of the Tube or Bifurcated EGS
systems or any follow-on devices and thereby prevent the Company from obtaining
PMA approval from the FDA.
Attachment System Fractures; Suspension of Clinical Trials
In January 1995, the Company discovered fractures in the attachment system
component of the Tube EndoGraft prosthesis during routine follow-up tests. Based
on this discovery, the Company suspended its clinical trials worldwide. As of
March 31, 1996, a total of [34] patients, representing approximately [37%] of 91
patients with the Tube EndoGraft prosthesis in place for more than six weeks,
have experienced attachment system fractures. In five patients with fractures,
the Tube EndoGraft prosthesis was removed and the AAA was treated by open
surgery. Two patients with fractures have died for reasons unrelated to the
attachment system fractures. The remaining patients are closely monitored by
their physicians and the Company for fractures or the onset of adverse clinical
consequences. The Company expects additional fractures to occur in these
attachment systems. There can be no assurance that additional adverse clinical
consequences will not occur in the future, which could result in the suspension
of clinical trials or otherwise have a material adverse effect on the Company's
business, financial condition and results of operations.
Following suspension of clinical trials in January 1995, the Company determined
that the fractures were caused by metal fatigue resulting from higher than
anticipated forces acting on the attachment systems. As a result, the Company
has implemented a number of significant modifications to the attachment systems
and subjected the redesigned attachment systems to accelerated fatigue testing.
There can be no assurance, however, that the accelerated fatigue testing
accurately simulates the actual forces present in the human body. In addition,
there can be no assurance that fractures will not occur in the modified
attachment systems, which may not be apparent for a substantial period of time,
or that the Company will not experience additional problems with the modified
attachment systems. Any future attachment system fractures that might occur
could result in another suspension or termination of clinical trials, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Limited Operating History; History of Losses; Substantial Additional Losses;
Fluctuations in Operating Results
The Company has a limited history of operations. Since its inception in
June 1989, the Company has been primarily engaged in research and development of
the Tube and Bifurcated EGS systems. The Company has experienced significant
operating losses since inception, and as of March 31, 1996, the Company's
accumulated deficit was approximately $26.7 million. The Company will incur
substantial additional losses until it can achieve significant commercial sales
of its EGS systems which are dependent on a number of factors, including receipt
of marketing approval. There can be no assurance that the Tube or Bifurcated EGS
systems or any other products of the Company will be approved, can be
successfully commercialized or that the Company will achieve significant
revenues from either international or domestic sales of such products. In
addition, there can be no assurance that the Company will achieve or sustain
profitability in the future. Failure to achieve significant revenues or
profitability would have a material adverse effect on the Company's business,
financial condition and results of operations. Moreover, results of operations
have varied and are expected to fluctuate significantly from quarter to quarter
depending upon numerous factors, including the results of clinical trials, the
Page 7 of 20
<PAGE> 8
introduction and market acceptance of products by the Company or competitors,
the results of regulatory and reimbursement actions, the timing of orders by
distributors, the expenditures incurred in the research and development of new
products, competitive pricing and the expansion of manufacturing capacity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Government Regulation; Significant Time Before Submission of any PMA
The Company's EGS systems are subject to extensive regulation by the FDA and
most foreign governments. The Company does not anticipate filing a PMA for the
Tube or Bifurcated EGS systems until at least 1998 and does not anticipate
receiving approval for at least one or two years after a PMA is accepted for
filing, if at all. There can be no assurance as to when, or if, the Company will
complete clinical trials of any of its EGS systems or that data from such
trials, if completed, will be adequate to support approval of a PMA. See "-Early
Stage of Clinical Trials; No Assurance of Safety and Efficacy" and "-Attachment
System Fractures; Suspension of Clinical Trials." Furthermore, there can be no
assurance that the Company will be able to obtain PMA approval on a timely
basis, or at all, and delays in the receipt of or failure to receive such
approvals would have a material adverse effect on the Company's business,
financial condition and results of operations and could result in cessation of
the Company's business.
Sales of EGS systems outside of the United States are subject to regulatory
requirements that vary widely from country to country. The time required to
obtain approval for sale in foreign countries may be longer or shorter than that
required for FDA approval, and the requirements may differ. In addition, there
may be foreign regulatory barriers other than premarket approval, and the FDA
must approve exports of devices that require a PMA but are not yet approved
domestically. Countries in which the Company intends to market EGS systems may
adopt regulations in the future that could prevent the Company from marketing
its EGS systems in those countries. In addition, the Company may be required to
spend significant amounts of capital in order to respond to requests for
additional information by the FDA or foreign regulatory bodies or may otherwise
be required to spend significant amounts of capital in order to obtain FDA and
foreign regulatory approvals. Any such events could substantially delay or
preclude the Company from marketing its EGS systems in the United States or
foreign countries.
Any devices manufactured or distributed by the Company pursuant to FDA
clearances or approvals are subject to pervasive and continuing regulation by
the FDA and certain state agencies. Foreign and domestic regulatory approvals,
if granted, may include significant limitations on the indicated uses for which
the product may be marketed. In addition, the FDA and certain foreign regulatory
authorities impose numerous other requirements with which medical device
manufacturers must comply. Product approvals could be withdrawn for failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial marketing. The Company will also be required to adhere to
applicable FDA regulations setting forth current Good Manufacturing Practices
("GMP") requirements, which include testing, control and documentation
requirements. Ongoing compliance with GMP and other applicable regulatory
requirements are monitored through periodic inspections by state and federal
agencies, including the FDA, and by comparable agencies in other countries.
Changes in existing regulations or adoption of new regulations or policies could
prevent the Company from obtaining, or affect the timing of, future regulatory
approvals or clearances.
Substantial Dependence on Limited Product Line
The Company anticipates that for the foreseeable future it will be substantially
dependent on the successful development and commercialization of endovascular
products for AAA repair. Failure of the Company to successfully develop and
commercialize these products would have a material adverse effect on the
Company's business, financial condition and results of operations.
No Assurance of Market Acceptance
There can be no assurance that the Tube or Bifurcated EGS systems will gain any
significant degree of market acceptance among physicians, patients or health
care payors, even if necessary regulatory and reimbursement approvals are
obtained. The Company believes that recommendations by physicians and health
care payors will be essential for market acceptance of the EGS systems, and
there can be no assurance that any such recommendations will be obtained.
Physicians will not recommend the Tube or Bifurcated EGS systems unless they
conclude, based on clinical data and other factors, that the Tube and Bifurcated
EGS systems represent an acceptable alternative to open AAA surgical repair. In
particular, physicians may elect not to recommend the Tube or Bifurcated EGS
procedure until such time, if ever, as successful resolution of the attachment
fractures is established and the clinical significance of unresolved Perigraft
Flow is better understood. Widespread use of the Company's EGS systems would
require the training of numerous physicians, and the time required to
Page 8 of 20
<PAGE> 9
complete such training could result in a delay or dampening of market
acceptance. Even if the safety and efficacy of the Company's EGS systems is
established, physicians may elect not to use them for a number of reasons
including unfavorable reimbursement from health care payors. Failure of the
Company's products to achieve any significant market acceptance would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Need for Substantial Additional Capital
The Company's development efforts have consumed substantial capital to date.
Although the Company believes that the net proceeds from the Company's initial
public offering in February 1996 will be sufficient to meet its capital
requirements for at least the next fifteen months, the Company will require
substantial additional financing. The Company's future liquidity and capital
requirements will depend upon numerous factors, including: the progress of
clinical trials; the timing and costs of filing future IDEs, PMAs and PMA
supplements; the timing and costs required to receive both domestic and
international governmental approvals; the extent to which the Company's products
gain market acceptance; the timing and costs of product introductions; the
extent of the Company's ongoing research and development programs; and the costs
of developing marketing and distribution capabilities, if regulatory approvals
are received. The Company will be required to seek substantial additional funds
through debt or equity financing. Issuance of additional equity securities could
result in substantial dilution to stockholders. There can be no assurance that
such financing will be available on terms acceptable to the Company, or at all.
The Company's inability to fund its capital requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Uncertainty Regarding Patents and Protection of Proprietary Technology
The Company holds a number of issued United States and foreign patents and has
filed a number of United States and counterpart patent applications in other
countries. There can be no assurance that the Company's United States and
foreign issued patents or pending applications will offer any protection or that
they will not be challenged, invalidated or circumvented. In addition, there can
be no assurance that competitors will not obtain patents that will prevent,
limit or interfere with the Company's ability to make, use or sell its products
either in the United States or in international markets.
The Company typically enters into confidentiality and assignment agreements in
connection with employment, consulting or advisory relationships. There can be
no assurance, however, that these agreements will not be breached or that the
Company will have adequate remedies for any breach. Furthermore, no assurance
can be given that competitors will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's proprietary technology, or that the Company can meaningfully
protect its rights in unpatented proprietary technology.
Patent applications in the United States are maintained in secrecy until patents
issue, and patent applications in foreign countries are maintained in secrecy
for a period after filing. In addition, patents issued and patent applications
filed relating to medical devices are voluminous. Accordingly, there can be no
assurance that current and potential competitors or other third parties have not
or will not file applications for, or have not or will not receive, patents and
will not obtain additional proprietary rights relating to materials or processes
used or proposed to be used by the Company.
The Company has received letters from two medical device companies, Cook, Inc.
("Cook") and InnerDyne Medical, Inc. ("InnerDyne"). The Cook letter, dated July
9, 1993, suggested potential infringement of a Cook-owned patent by future
commercial sale of the Company's attachment system component of the EndoGraft
prosthesis. The Company has reviewed the Cook matter and the Company believes
that no such infringement exists. The InnerDyne letter, dated November 2, 1994,
proposed that the Company discuss licensing an InnerDyne-owned patent that
InnerDyne believed to be pertinent to the Company's EVT Expandable Sheath. The
Company has reviewed the InnerDyne matter and the Company believes that it is
not necessary to enter into a licensing arrangement with InnerDyne. There can be
no assurance, however, that the Company's products do not infringe upon the
patent rights or other intellectual property rights of Cook, InnerDyne or other
companies, that the Company will not be required to seek licenses from these or
other companies or that these or other companies will not bring claims of
infringement against the Company. Although patent and intellectual property
disputes in the medical device industry have sometimes been settled through
licensing or similar arrangements, costs associated with such arrangements may
be substantial and could include ongoing royalties. There can be no assurance
that necessary licenses would be available to the Company on satisfactory terms
or at all. Furthermore, any litigation or administrative proceeding could result
in substantial costs to the Company and distraction of the Company's management,
even if the
Page 9 of 20
<PAGE> 10
Company ultimately prevails in such litigation. An adverse ruling in any
litigation or administrative proceeding could have a material adverse effect on
the Company's business, financial condition and results of operations.
If any relevant claims of third-party patents are upheld as valid and
enforceable, the Company could be prevented from practicing the subject matter
claimed in such patents, or would be required to obtain licenses or to redesign
its products or processes to avoid infringement. There can be no assurance that
such licenses would be available at all or on terms acceptable to the Company or
that the Company could redesign its products or processes to avoid infringement.
Litigation may be necessary to defend against claims of infringement, to enforce
patents issued to the Company or to protect trade secrets and could result in
substantial cost to, and diversion of effort by, the Company.
Volatility of Stock Price
The market price for the Company's Common Stock has been subject to significant
fluctuations and may be volatile in the future. The Company believes that
factors such as announcements of developments related to the Company's business,
announcements of technological innovations or new products or enhancements by
the Company or its competitors, developments in the Company's relationships with
its customers, partners, distributors, and suppliers, changes in analysts'
estimates, regulatory developments, political and economic instability,
fluctuations in results of operations and general conditions in the Company's
market or the markets served by the Company's customers or the economy could
cause the price of the Company's Common Stock to fluctuate, perhaps
substantially. The Company may be particularly vulnerable to fluctuations in the
market price of its Common Stock given the substantial amount of time before it
may achieve significant revenues from commercial sales of its products. In
addition, in recent years the stock market in general, and the market for shares
of small capitalization health care stocks in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect the
market price of the Company's Common Stock. There can be no assurance that the
market price of the Company's Common Stock will not continue to experience
significant fluctuations in the future, including fluctuations that are
unrelated to the Company's performance.
Dependence on Key Suppliers; Limited Manufacturing Experience
The Company uses or relies on sole source suppliers for certain components and
services used to manufacture its EGS systems. The Company utilizes materials
supplied by third parties, including raw material manufactured by Dow Chemical
Co. ("Dow Chemical") and DuPont, in its products. In recent years, in the wake
of litigation surrounding silicone breast implants, both Dow Chemical and DuPont
have ceased supplying chemical raw materials for use in implantable medical
devices, including DuPont raw material used to produce the graft material
utilized in the Company's EndoGraft prostheses. There can be no assurance that
use of such graft material by the Company will not be restricted or that the
Company will be able to obtain additional quantities of such graft material in
the future. Moreover, the continued use by the Company of graft material based
on chemical raw materials manufactured by DuPont could subject the Company to
additional liability exposure. The Company believes that the cessation of the
supply of components and materials for implantable medical devices may be
addressed through legislative action. There can be no assurance that such
legislative action will occur on a timely basis, if at all. The establishment of
additional or replacement suppliers for certain of these components of raw
materials cannot be accomplished quickly, particularly because of the time and
effort required to obtain FDA approval to use materials from alternative
suppliers. Although the Company routinely attempts to identify primary and
alternative vendors, the qualification of additional or replacement vendors for
certain components or services is a lengthy process. Any significant supply
interruption would have a material adverse effect on the Company's ability to
manufacture its products and, therefore, a material adverse effect on its
business, financial condition and results of operations.
The Company manufactures its products at its Menlo Park, California facility.
The Company believes that this facility has sufficient capacity to meet the
Company's anticipated manufacturing needs for at least the next 18 months. To
date, the Company's manufacturing activities have consisted primarily of
manufacturing limited quantities of products for use in clinical trials. The
manufacture of the Company's products is a complex and costly operation
involving a number of separate processes and components. Certain manufacturing
processes of the EGS systems are labor intensive and achieving significant cost
reductions will depend in part upon reducing the time required to complete these
processes. There can be no assurance that the Company will be able to achieve
cost reductions in the manufacture of its products. The Company does not have
experience in manufacturing its products in the commercial quantities that might
be required if the Company receives PMA approval. Manufacturers often encounter
difficulties in scaling up manufacturing of new products, including problems
involving product yields, quality control and assurance, component and service
availability, adequacy of control policies and procedures and lack of qualified
personnel. The Company has and will continue to consider as appropriate the
internal manufacture of components currently provided by third parties, as well
as the implementation of new production
Page 10 of 20
<PAGE> 11
processes. There can be no assurance that manufacturing yields or costs will not
be adversely affected by the transition to in-house production or to new
production processes when and if such efforts are undertaken, and thereby
materially and adversely affect the Company's business, financial condition and
results of operations.
Limitations on Third-Party Reimbursement
In the United States, the Company's products will be purchased primarily by
medical institutions which then bill various third-party payors, such as
Medicare, Medicaid and other government programs and private insurance plans,
for the health care services provided to their patients. Medicare traditionally
has considered items or services involving devices that have not been approved
or cleared for marketing by the FDA to be precluded from Medicare coverage.
However, under a new policy effective November 1, 1995, Medicare reimbursement
is potentially available for the Tube and Bifurcated EGS systems and related
services. There can be no assurance, however, that these devices and related
services will be covered when they are used in clinical trials and, if covered,
whether the payment amounts for their use will be considered to be adequate by
hospitals and physicians. If the devices are not covered or the payments are
considered to be inadequate, the Company may need to bear additional costs to
sponsor such trials, and such costs could have a material adverse effect on the
Company's business, financial condition and results of operations. Even if a
device has received approval or clearance for marketing by the FDA, there can be
no assurance that Medicare will cover the device and related services.
Furthermore, Medicare may place certain restrictions on the circumstances in
which coverage will be available. Limited or no coverage of the Company's
products would have a material adverse effect on the Company's business,
financial condition and results of operations.
Acute care hospitals are now generally reimbursed by Medicare for inpatient
operating costs under a prospective payment system ("PPS"). Under PPS, acute
care hospitals receive a prospectively determined payment amount for each
covered inpatient based upon the Diagnosis-Related Group ("DRG") to which the
patient is assigned, regardless of the actual cost of the services provided. The
Health Care Financing Administration ("HCFA") has not made any decision
concerning which DRG will be generally assigned to patients who undergo AAA
diagnosis and endovascular repair procedures in which the Company's products are
used, and there can be no assurance that the DRG to which such patients will be
assigned will result in Medicare payment levels that are considered by hospitals
to be adequate. Because the DRG system is also used by other government and
private payors, HCFA's decision concerning the DRG assignment for these patients
also may affect the amount of payment made by other payors.
Physician services are reimbursed by Medicare based on a physician fee schedule
which has not been determined for AAA diagnosis and endovascular repair
procedures in which the Company's products are used. There can be no assurance
that the physicians fee schedule for endovascular AAA procedures using the
Company's products will result in Medicare payment levels that physicians
consider to be adequate. In addition, Medicare payment levels are used by many
other third-party payors in addition to Medicare. Failure by hospitals and
physicians to receive what they consider to be adequate reimbursement for AAA
diagnosis and repair procedures in which the Company's products are used would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business-Government Regulation."
Competition
The Company expects that significant competition in the endovascular graft
market will develop. There are many large companies with significantly greater
financial, manufacturing, marketing, distribution and technical resources and
experience than the Company focusing on the development of endovascular
technology. Many of these companies have vascular stents, as well as vascular
graft and catheter technologies that may be applicable to endovascular repair.
The Company may compete against a number of these companies including: Boston
Scientific Corporation which recently announced the acquisition of MinTec;
[Aneurex recently acquired by Medtronic; Corvita Corporation recently acquired
by Pfizer Inc.; Johnson & Johnson; C.R. Bard, Inc.; and Cook, Inc. One or more
of these or other companies could design and develop products that compete
directly with the Company's products, in which case the Company would face
intense competition. There can be no assurance that one or more of these or
other companies will not develop technologies that are more effective or less
costly than the Company's products, or that would otherwise render the Company's
products and technology non-competitive or obsolete. Such competition could have
a material, adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company's products could be rendered
obsolete as a result of future innovations in AAA surgical techniques, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Page 11 of 20
<PAGE> 12
Any product developed by the Company that gains regulatory approval will have to
compete for market acceptance and market share. An important factor in such
competition may be the timing of market introduction of competitive products.
Accordingly, the relative speeds with which the Company can develop products,
complete clinical testing and regulatory approval processes, gain reimbursement
acceptance and supply commercial quantities of the product to the market are
expected to be important competitive factors. In addition, the Company believes
that the primary competitive factors in the market for endovascular grafting
products are safety, efficacy, ease of delivery, reliability, innovation and
price. The Company also believes that physician relationships and customer
support are important competitive factors. There can be no assurance that the
Company's competitive position will be maintained or that the Company will be
first to market endovascular products for the treatment of AAA's in the United
States.
Risk of Technological Obsolescence
The medical device industry is characterized by rapid and significant
technological change. There can be no assurance that third parties will not
succeed in developing or marketing technologies and products that are more
effective than those developed or marketed by the Company or that would render
the Company's technology and products obsolete or noncompetitive. Additionally,
new surgical procedures and medications could be developed that replace or
reduce the importance of current procedures that use the Company's products.
Accordingly, the Company's success will depend in part on its ability to respond
quickly to medical and technological changes through the development and
introduction of new products. Product development involves a high degree of risk
and there can be no assurance that the Company's new product development efforts
will result in any commercially successful products.
Risk of Federal Reform of Health Care
There are widespread efforts to control health care costs in the United States
on the federal, state and local levels. For example, the U.S. Congress is
currently considering various legislative proposals to reform the Medicare and
Medicaid programs. Current proposals call for reductions in the annual updates
for hospital PPS rates and physician reimbursement rates, reductions in the
amount of added payments made to teaching hospitals and hospitals that serve a
disproportionate share of low-income persons, increased incentives and
opportunities for Medicare beneficiaries to obtain their benefits through
managed care plans, and the establishment of a "block grant" program that would
give states greater discretion in designing and administering state Medicaid
programs. If enacted into law, any of these proposals could affect the amount of
Medicare and Medicaid payment that is made to hospitals and physicians and, in
turn, demand for the Company's products. Lower demand for the Company's products
resulting from federal healthcare reform could have a material adverse effect on
the Company's business, financial condition and results of operations.
Lack of Sales and Marketing Experience; Planned Dependence on International
Distributors
The Company currently has a small sales and marketing force and has no
experience in marketing and selling its EGS systems. There can be no assurance
that the Company will be able to recruit and train adequate sales and marketing
personnel. The Company plans to rely on distributors for substantially all of
its international sales. Any foreign sales by the Company may be subject to
certain risks, including exchange rate fluctuations, international monetary
conditions, tariffs, import licenses, trade policies, domestic and foreign tax
policies and foreign medical regulations. The loss of major international
distributors could have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Liability and Availability of Insurance
The clinical use and sale of the Company's products involve significant risk of
product liability claims. There can be no assurance that the coverage limits of
the Company's insurance policies will be adequate. Product liability insurance
is expensive and in the future may not be available to the Company on acceptable
terms or at all. There can be no assurance that a product liability claim will
not be brought against the Company either for injuries occurring in the past or
in the future, including, but not limited to, injuries due to fractures in the
attachment system of the Tube EndoGraft prosthesis. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-Attachment System Fractures."
Dependence on Key Personnel
The Company's future business and operating results depend in significant part
upon the continued contributions of its key technical personnel and senior
management, many of whom would be difficult to replace. None of such persons is
subject to a noncompetition agreement. The Company's business and future
operating results also depend in significant part upon its ability to attract
and retain qualified management, manufacturing, technical, marketing and sales
and support personnel for
Page 12 of 20
<PAGE> 13
its operations. Competition for such personnel is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel. The loss of key employees, the failure of any key employee to perform
or the Company's inability to attract and retain skilled employees, as needed,
could materially adversely affect the Company's business, financial condition
and results of operations.
Control by Officers, Directors and Principal Stockholders; Rights Held by
Corporate Partner
The Company's officers, directors and principal stockholders beneficially own
approximately 64% of the Company's Common Stock (assuming exercise of
immediately exercisable options held by such directors and officers). As a
result, such persons may have the ability effectively to control the Company and
direct its affairs and business. Such concentration of ownership may also have
the effect of delaying, deferring or preventing a change in control of the
Company. By mutual agreement between the Company and St. Jude Medical, Inc.
("St. Jude") in connection with a $12 million equity investment by St. Jude in
the Company, until August 15, 1996 unless earlier terminated (the "Standstill
Period"), the Company may not solicit, engage in discussions with or furnish
materials to any third party other than St. Jude regarding certain fundamental
corporate transactions, including those involving a merger, sale of the Company
or other change in control. During the Standstill Period, the Company must
negotiate in good faith with St. Jude if St. Jude submits a bona fide offer to
acquire the Company. If St. Jude submits a bona fide offer before the expiration
of the Standstill Period, then, during the following twelve months, the Company
must notify St. Jude if it negotiates with any third party to acquire the
Company and consider in good faith a bona fide offer from St. Jude. The rights
held by St. Jude will effectively preclude any such corporate transaction during
the Standstill Period unless St. Jude agrees to waive such rights.
Anti-takeover Effects of Certain Charter Provisions and Delaware Law
Under the Company's Certificate of Incorporation, the Board of Directors has the
power to authorize the issuance of up to 5,000,000 shares of Preferred Stock and
to determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, may have the effect of delaying, deferring or
preventing a change in control of the Company, may discourage bids for the
Common Stock at a premium over the market price of the Common Stock and may
adversely affect the market price of and the voting or other rights of the
holders of the Common Stock. The Company has no present plans to issue shares of
Preferred Stock. In addition, the Company's Certificate of Incorporation
provides for a classified Board of Directors such that approximately only
one-third of the members of the Board are elected at each annual meeting of
stockholders. Classified Boards may have the effect of delaying, deferring or
discouraging changes in control of the Company. Further, certain provisions of
the Company's Bylaws and of Delaware law could discourage, delay or prevent a
merger, tender offer or proxy contest involving the Company.
Absence of Dividends
The Company has never paid cash dividends and does not anticipate paying cash
dividends on the Common Stock in the foreseeable future.
Page 13 of 20
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-Q contains forward-looking statements that involve risks
and uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors".
OVERVIEW
Since its inception in June 1989, the Company has been engaged in the research
and development of the Tube and Bifurcated EGS systems and related technology
for the endovascular repair of abdominal aortic aneurysms (AAA's). To date, the
Company has generated no significant revenues and has been unprofitable since
inception. For the period from incorporation to March 31, 1996, the Company has
an accumulated deficit of approximately $26.7 million. The Company does not
expect to generate significant revenues from sales of its products for the
foreseeable future and will continue to incur substantial losses for the next
several years. Furthermore, the Company expects its expenses in all categories
to increase as its clinical trials and other business activities expand.
The research, manufacture, sale and distribution of medical devices such as the
EGS systems are subject to numerous regulations imposed by governmental
authorities, principally the FDA and corresponding state and foreign agencies.
The regulatory process is lengthy, expensive and uncertain. The Company believes
that FDA approval of a PMA application is required before any EGS system can be
marketed in the United States. Securing FDA approvals and clearances will
require submission to the FDA of extensive clinical data and technical
information. Many foreign governments and the European Union also have review
processes for medical devices.
The Company commenced clinical trials of its original Tube EGS system in
February 1993 and its Bifurcated EGS system in September 1994. Following
suspension of all clinical trials in January 1995 due to attachment system
fractures and after receiving FDA clearance to reinitiate clinical trials, the
Company re-initiated Phase II clinical trials of the Tube EGS system in November
1995 and re-initiated Phase I clinical trials of the Bifurcated EGS system in
December 1995. As of May 6, 1996, a total of 24 procedures have been performed
under the re-initiated Phase II trials and a total of 18 procedures have been
performed under the re-initiated Phase I trials.] Substantial additional
clinical testing of the Tube and Bifurcated EGS systems is required and the
Company does not believe it will be able to complete clinical trials of, obtain
regulatory approval for and begin commercial sales of its EGS systems in the
United States before mid-1999, if ever.
In June 1995, the Company became ISO9001/EN46001 certified and plans to seek a
CE mark to allow for marketing and distribution of its products in the European
Union. The Company anticipates that a substantial portion of its net product
sales over the next several years will be derived from international sales
through its distributor network. Any such international sales will be subject to
a number of risks, including exchange rate fluctuations, international monetary
conditions, tariffs, import licenses, trade policies, domestic and foreign tax
policies and foreign medical regulations.
There can be no assurance that the Company's research and development efforts
will be successfully completed. Given that clinical testing is at an early
stage, there can be no assurance the EGS systems will be shown to be safe and
effective. Accordingly, the Company is unable to predict the likelihood that its
products will be approved for marketing by the FDA or any foreign government
agency, and there can be no assurance that the Company will ever achieve either
significant revenues from sales of its EGS systems or ever achieve profitable
operations.
Results of operations will fluctuate significantly from quarter to quarter and
will depend upon, among other factors: actions relating to foreign and domestic
regulatory and reimbursement matters; the extent to which the Company's products
gain market acceptance; the rate at which the Company establishes its
international distributor network; the progress of clinical trials; and
introduction of competing products or alternative treatments for AAA.
Page 14 of 20
<PAGE> 15
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and March 31, 1995
In 1996, the Company began recognizing revenue on sales of devices used in
clinical trials. During the three month period ended March 31, 1996, the Company
recognized $103,000 in sales, comprised primarily of sales of the Tube EGS
System made to clinical centers in the United States.
Negative gross margin for the three month period ended March 31, 1996 was
approximately $14,000. Cost of goods sold currently exceeds sales due to the
early stage of manufacturing. The Company expects negative gross margin to
continue during 1996. Positive gross margin may be achieved if manufacturing
volume significantly increases in the future.
Research and development expenses include research, development, clinical and
regulatory expenses and certain manufacturing expenses. Research and development
for the three month period ended March 31, 1996 increased to approximately
$2,459,000 from approximately $2,015,000 for the comparable three month period
in 1995. The increase in spending was due primarily to an increase in personnel,
with the balance due to increases in materials and clinical costs related to the
re-initiation of clinical trials.
General and administrative expenses increased to approximately $432,000 during
the three month period ended March 31, 1996 from approximately $281,000 for the
comparable three month period in 1995. The increase in spending was due
primarily to an increase in personnel, as well as to increases in expenses
associated with being a public company.
Interest income for the three month period ended March 31, 1996 was
approximately $238,000 as compared to approximately $234,000 for the comparable
period in 1995. Interest income for the two periods remained relatively the same
due to lower yields on a modestly higher average cash balance during the three
months ended March 31, 1996, as compared to the same period in 1995.
The net loss of approximately $2,666,000 for the three months ended March 31,
1996 was greater than the loss of approximately $2,061,000 for the comparable
period in 1995 due primarily to the increase in research and development
spending.
The Company has not paid income taxes since inception due its cumulative
operating losses.
LIQUIDITY AND CAPITAL RESOURCES
In February 1996, the Company completed an initial public offering of two
million shares of Common Stock with net proceeds to the Company of approximately
$21.6 million after deducting the underwriters discount, commissions and
offering expenses. Cash, cash equivalents and available for sale securities were
approximately $28.9 million at March 31, 1996. Prior to its initial public
offering, the Company had financed its operations since inception through
private sales of capital stock and interest income on proceeds from such
financings.
Cash used to fund operating activities since inception was approximately $24.6
million through March 31, 1996. Cash used in operating activities for the three
months ended March 31, 1996 increased to approximately $2,397,000 from
approximately $2,009,000 for the comparable period in 1995, reflecting
increasing net losses principally related to increased research and development
expenditures offset, in part, by increases in liabilities.
The Company's capital expenditures since incorporation totaled approximately
$1,771,000 through March 31, 1996. Cash used for purchases of property and
equipment in the three month period ended March 31, 1996 was approximately
$340,000, as compared to approximately $35,000 for the same period in 1995. The
increase was due primarily to a facilities expansion begun in the first quarter
of 1996.
The Company expects to continue to incur substantial expenses in support of
additional research and development activities, including costs of clinical
studies, manufacturing costs, the establishment of a sales and marketing
organization and ongoing administrative activities. The Company anticipates that
the proceeds of the initial public offering and interest thereon, together with
the pre-existing cash and cash equivalents and available for sale securities,
will be sufficient to fund
Page 15 of 20
<PAGE> 16
its operations and planned new product development, including increased working
capital expenditures, through at least the next 15 months.
The Company's cash requirements may vary materially from those now planned
because of results of research, development, and clinical testing, the
development of regulatory submissions and the FDA regulatory process, the
development of commercial-scale manufacturing capability, the development of
sales, distribution and marketing capabilities, and other factors. The Company
will be required to seek additional funds through debt or equity financing.
Issuance of additional equity securities could result in substantial dilution to
stockholders. There can be no assurance that such financing will be available on
terms acceptable to the Company, or at all. The Company's inability to fund its
capital requirements would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company may also
enter into collaborative arrangements with corporate partners that could provide
the Company with additional funding.
Page 16 of 20
<PAGE> 17
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Exhibits incorporated by reference on Page 19
See Exhibit 11 on Page 20
b) Reports on form 8-K
There were no reports filed of Form 8-K during the quarterly period
ended March 31, 1996.
Page 17 of 20
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOVASCULAR TECHNOLOGIES, INC.
(Registrant)
Date: May 13, 1996 /s/ W. James Fitzsimmons
------------------ -----------------------------
W. James Fitzsimmons
President and
Chief Executive Officer
(Principal Executive Officer)
Date: May 13, 1996 /s/ G. Bradley Cole
------------------ -----------------------------
G. Bradley Cole
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Page 18 of 20
<PAGE> 19
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
<S> <C> <C>
*3.1 - Form of Restated Certificate of Incorporation to be filed upon
the closing of the offering made pursuant to this Registration
Statement.
*3.2 - Bylaws of the Company to be effective upon the closing of the
offering made pursuant to this Registration Statement.
*4.1 - Reference is made to Exhibits 3.1 and 3.2.
*4.2 - Specimen Common Stock certificate.
*4.3 - Fourth Amended and Restated Investor Rights Agreement, dated
August 15, 1994, among the Company and the investors and the
founders named therein.
*10.1 - Form of Indemnification Agreement.
*10.2 - Series C Preferred Stock Purchase Agreement, dated July 16,
1993, as amended, among the Company and the investors named
therein.
*10.3 - Series D Preferred Stock Purchase Agreement, dated August 15,
1994, as amended, among the Company and the investors named
therein.
*10.4 - 1989 Stock Option Plan.
*10.5 - 1995 Stock Option Plan.
*10.6 - Employee Stock Purchase Plan.
*10.7 - 1996 Incentive Compensation Plan.
*10.8 - Employment agreement between the Company and W. James
Fitzsimmons.
*10.9 - Employment agreement between the Company and Victor M.
Bernhard.
*10.10 - Note Secured by Second Deed of Trust and Note Secured by Stock
Pledge Agreement between the Company and W. James Fitzsimmons
dated September 22, 1992.
*10.11 - Stock Pledge Agreements dated January 7, 1994, December 10,
1995 and December 13, 1995 between the Company and W. James
Fitzsimmons.
**10.12 - Lease by and between Menlo Business Park and Patrician
Associates, Inc. and the Company, as amended by First Amendment
to Lease Agreement, dated February 26, 1996.
**10.13 - Employment agreement between the Company and Ronald R.
Giannotti.
11.0 - Computation of Loss Per Share 20
</TABLE>
* Incorporated by reference from an exhibit to the Company's
Registration Statement on Form S-1, as amended, (File No. 33-80557)
declared effective by the Commission on February 6, 1996
** Incorporated by reference from an exhibit to the Company Annual
Report on Form 10-K filed with the Commission on March 29, 1996
Page 19 of 20
<PAGE> 1
EXHIBIT 11
ENDOVASCULAR TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS PER SHARE
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter Ended March 31,
-------------------------------
1995 1996
---- ----
<S> <C> <C>
Net Loss $(2,061,370) $(2,665,944)
----------- -----------
Weighted average common shares outstanding 6,088,831 7,473,421
Common shares and options granted (using the treasury
stock method assuming an initial public offering price
of $12.00) since December 15, 1994 included pursuant
to Securities and Exchange Commission Rules 187,256 187,256
----------- -----------
Weighted average common and equivalent shares 6,276,087 7,660,677
=========== ===========
Net loss per common and equivalent share $ (0.33) $ (0.35)
=========== ===========
</TABLE>
Page 20 of 20
