UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 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 0-27802
ARTERIAL VASCULAR ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3144218
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5355 Skylane Boulevard, Santa Rosa, California 95403
(Address of principal executive offices) (Zip code)
(707) 525-0111
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 Par Value
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 periods as the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy of information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of September 16, 1996, there were 30,862,262 shares of Common Stock
outstanding. The aggregate market value of voting stock held by non-affiliates
of the Registrant was approximately $324,750,000 based upon the closing price of
the Common Stock on September 16, 1996 on the NASDAQ National Market System.
Shares of Common Stock held by each officer, director and holder of five percent
or more of the Common Stock outstanding as of September 16, 1996 have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Registrant for the 1996 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
The following trademarks of Arterial Vascular Engineering, Inc. are
used in this Form 10-K: Arterial Vascular Engineering(TM), Micro Stent(TM),
Micro Stent II(TM), Micro Stent II XL(TM), Micro Stent 2.5(TM), Micro Stent II
LP(TM), Micro Stent II HP(TM), AVE gfx Stent(TM), Nike(TM), Elite(TM) and
Peak(TM).
ITEM 1. BUSINESS
The statements contained in this Form 10-K that are not historical are
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, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements in this Item 1
include, without limitation, statements regarding the Company's industry,
products and strategy under "Company Strategy", "AVE Technology" and "Certain
Business Risks", statements regarding the extent and timing of product
development, future revenues, customer demand, competitive products and the
intellectual property positions of competitors, reimbursement and future
technological change under "Product Development," "Distribution, Sales and
Marketing," "Competition," "Third-Party Reimbursement and "Patents and
Proprietary Rights," statements regarding expected clinical trial results and
regulatory approvals and compliance under "Clinical Trial Activities" and
"Government Regulation" and statements regarding actual and potential legal
proceedings under "Item 3. Legal Proceedings." All forward-looking information
included in this document are based on information available to the Company as
of the date hereof, and the Company assumes no obligation to update any such
forward-looking statements. It is important to note that the Company's actual
results could differ materially from those in such forward-looking statements.
Additional risk factors include those discussed in the section entitled "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as those that may be set forth in the reports filed by the
Company from time to time on Forms 10-Q and 8-K.
General
Arterial Vascular Engineering, Inc. ("AVE" or the "Company") designs,
develops, manufactures and markets a variety of highly specialized stent systems
and balloon angioplasty catheters for the treatment of coronary artery disease.
The Company's stents are used as arterial support devices in connection with
balloon angioplasty or other minimally invasive treatments of atherosclerosis
(the formation of deposits in the arteries) and to prevent abrupt closure of
vessels in higher-risk angioplasty procedures. The Company commenced operations
in 1991 and began marketing its balloon angioplasty catheters in October 1993
and its coronary stent systems in October 1994. To date, the Company has sold
over 75,000 coronary stent systems and over 27,000 balloon angioplasty catheters
in more than 30 countries outside the United States, including Germany, France
and the United Kingdom. The Company expects international sales to account for
substantially all of its revenues for at least the next 18 months. In November
1995, the Company received United States Food and Drug Administration ("FDA")
clearance to conduct a 700 patient, multi-center, randomized clinical study with
its Micro Stent and Micro Stent II devices in the United States under an
Investigational Device Exemption ("IDE"), and the Company has commenced clinical
testing in 40 medical centers. In April 1996, the Company began its first direct
sales operation and in September 1996, the Company released on a limited basis
it's AVE gfx Stent device, a next generation coronary stent system. The Company
does not expect to receive FDA approval to commence commercial sales of its
stent products in the United States prior to late 1998, and there can be no
assurance when or if such approval will be obtained.
AVE Technology
AVE believes that its line of stent systems incorporates a number of
unique and proprietary design features that enable the Company to address
effectively a variety of lesion and vessel types. The Company's stents are
constructed of seamless, medical grade stainless steel rings that are precision
formed into sinusoidal shaped elements. These elements are polished and
connected in a helical pattern utilizing a proprietary manufacturing process in
order to form a fully connected, yet flexible, stent device. The Company
believes its patented stent design provides more consistent vessel support and
radial force than coiled stent designs as well as more flexibility and easier
delivery than mesh stent designs. The Company's stent products are available in
a variety of diameters and lengths and are provided pre-mounted on both
over-the-wire and rapid exchange delivery systems (available only outside the
United States) with the same advanced technology as the Company's balloon
angioplasty catheters. The Company's stents have been used in a variety of
coronary applications, including vessels in which other stent procedures have
failed, as well as in the treatment of lesions in curved or tortuous vessels.
The Company believes the following technical features of its proprietary stent
systems provide the Company with a number of competitive advantages:
Smooth Edge Design and Sheathless Deployment System. The Company's
stent products consist of highly polished, rounded, sinusoidal shaped elements
at either end of the stent (unlike mesh stents, which have flat edges at each
end). The Company believes that the smooth edges of its stent products optimize
their ability to be moved through a vessel without causing tears or dissections
or halting movement of the delivery catheter, thereby minimizing trauma to
treated vessels. The smooth edges of the stent also permit the stent to be
delivered without the protective sheath necessary for use of certain other stent
products. The Company believes that eliminating the need to monitor and remove a
protective sheath enhances the ease of use of its products.
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High Stent Flexibility and System Trackability. The Company's products
consist of sinusoidal shaped elements that are connected in a helical pattern
designed to provide a highly flexible stent. Increased stent flexibility allows
the Company's stent products to be more easily maneuvered and placed at the site
of a lesion, particularly through curved or tortuous vessels or around other
deployed stents. In addition, flexible stent design allows the use of a single
stent in the treatment of a lesion in a curved vessel, as compared to more
inflexible designs that may require the use of multiple stents to treat a long,
curved lesion. The Company believes that the ease of use and enhanced handling
characteristics of its stent delivery systems, coupled with stent flexibility
and smooth edge design, allow it to provide a stent system with high
trackability. The ability to access or "track" a lesion easily is an important
stent system characteristic in the treatment of a distant site or tortuous
vessel. The Company currently offers stents in lengths as long as 39mm for use
in the treatment of long, diffuse legions.
Stent Strength and Stability. The advanced design of the Company's
Micro Stent II family of products combines high radial strength, which minimizes
vessel recoil, and axial stability, which provides consistent vessel support
along the entire length of the stent. The Company believes these features allow
a physician to better control and optimize final minimal lumen diameter
("MLD"). Studies have indicated that optimizing the MLD of a vessel following
use of a stent product generally reduces the likelihood of subsequent
restenosis.
Moderate Radiopacity. The Company believes that the moderate
radiopacity of its devices optimizes angiographic identification of stent
position and enhances post procedure stent assessment. Physicians commonly use
low level x rays to accurately monitor the placement and deployment of a stent,
including final expansion using a high pressure balloon, as well as to conduct
post operative assessment of MLD. As a result, a lack of radiopacity, which may
prevent illumination of a stent, or an excess of radiopacity, which may
overilluminate the stent and impede its visual identification, may affect the
outcome of stent procedures and subsequent diagnosis of treated vessels.
Proprietary, Pre-Mounted Delivery Systems. Unlike certain other stents,
which may require the physician to hand crimp the stent on a third-party balloon
delivery device, the Company's stents are pre-mounted onto its proprietary
delivery systems. The Company believes that pre-mounting its stents on balloon
delivery systems helps ensure more consistent and accurate stent delivery and
deployment, particularly as stents are used by a broader group of physicians
with varying levels of experience with stents. In addition, the Company believes
that the ease of use of its product has promoted physician acceptance.
Adaptable Design Characteristics. The Company believes that the core
design features of its stents allow it to modify one or more stent performance
characteristics, such as mass or flexibility, as necessary to produce an
effective device for a particular application. To date, the Company has utilized
its core stent technology to develop a family of seven distinct products. Each
product in the family also is offered in a variety of lengths and diameters,
allowing the physician to choose the device that best suits the needs of a
patient based on lesion characteristics. In September 1996, the Company released
on a limited basis its next generation coronary stent system called the "AVE gfx
Stent". The Company believes the adaptability of its stent design will allow its
use as a platform technology for the development of a variety of other coronary
and non coronary products. See "Products."
Despite such advantages, due to the number of clinical applications for
stent systems and the variety of available products, the Company's stent
products may not be superior to competitive products in all applications. In
addition, many of the Company's competitors have substantially greater capital
resources, name recognition and expertise in manufacturing, marketing and
product approval, which factors provide a competitive advantage to such
companies, in connection with the sale of these stent products. The medical
indications that can be treated by stents can also be treated by surgery, drugs
or other medical devices, including stand alone balloon catheters, atherectomy
catheters and lasers. Many of the alternative treatments are widely accepted in
the medical community and have a long history of use.
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Company Strategy
The Company's goal is to expand its position as one of the leading
worldwide providers of stent systems. The key elements of its strategy are as
follows:
Introducing New Products for Both Coronary and Non-Coronary
Applications. The Company intends to build on its core stent design to broaden
the coronary applications for its stents as well as expand into non-coronary
indications. The Company believes that the inherent adaptability and flexibility
of the Company's stent design will augment its ability to meet specialized
coronary needs, as well as to provide stents for use in peripheral arteries,
saphenous vein grafts and other applications.
Leveraging Vertically Integrated Research and Development and
Manufacturing Operations. The Company believes that the design of products for
manufacturability and the rapid manufacture of products to satisfy market demand
are key success factors in new product development in the medical device
industry. To support these capabilities, the Company has designed and developed
internally the technology necessary to perform a number of proprietary
production processes and has developed the expertise to fabricate the majority
of the components of its stent and balloon catheter products. The Company
intends to leverage its vertically integrated product development and
manufacturing approach to rapidly introduce innovative products.
Expanding Distribution Capabilities. The Company continually seeks to
optimize its distribution capabilities in each of its core target markets. The
Company has begun direct sales operations in Germany and the United Kingdom and
intends to begin direct sales operations in France, Switzerland, Belgium and The
Netherlands as of October 1, 1996. The Company expects that a direct sales
presence in these European countries will allow it to put a sharper focus on the
physician community there, which it anticipates will help to increase the
advocacy base for the Company's products in Europe and other countries as well
as facilitate more direct feedback to the Company on its products. The Company
believes that, in addition to building stronger relationships with its
customers, such a direct sales strategy will also enable more complete control
of the Company's product family and its future growth. The Company will continue
to implement direct sales operations in selected markets where it believes such
an approach will benefit its competitive position.
Broadening Product Offerings to Provide More Complete Therapy
Solutions. The Company believes that its ability to offer a more complete line
of therapeutic products will enhance the Company's ability to compete
effectively in the interventional marketplace. For example, the Company believes
its current line of balloon angioplasty catheters has provided the Company with
expertise in balloon delivery and deployment. The Company continually reviews
possible strategic acquisitions, third party technology licenses and marketing
or distribution relationships with companies that have medical products in
certain complementary product areas. However, there can be no assurance that the
Company will enter into any such arrangements.
Pursuing Regulatory Approval in the United States and Abroad;
Conducting Clinical Trials to Promote Market Acceptance of the Company's
Products. The Company is seeking FDA approval to allow sale of its products in
the United States, which represents one of the largest stent markets in the
world. In November 1995, the Company received FDA clearance to conduct a
clinical study with the Micro Stent and Micro Stent II in the United States
under an IDE, utilizing the Palmaz-Schatz stent of Johnson and Johnson
Interventional Systems ("JJIS") as a control, and has commenced clinical trials
thereunder. The Company does not expect to submit a pre-market approval
application ("PMA") for such products prior to late 1997 and does not expect to
receive FDA approval prior to late 1998, if at all. The Company submitted an
application for an IDE for its over-the-wire Peak balloon catheter in August
1996. There can be no assurance that regulatory approval for commercial sale of
any products in the United States will be obtained. In addition to its United
States clinical program, the Company is sponsoring seven ongoing clinical
studies in six countries outside the United States. The Company intends to use
data from these trials to obtain regulatory approvals in new markets, to promote
market acceptance of its products and to expand clinical applications of the
Company's products.
Developing and Maintaining Relationships with Leading Physicians. AVE
seeks to develop and maintain relationships with leading physicians worldwide.
Through these relationships, the Company seeks to work with opinion leaders who
can foster market awareness of the Company's products. The Company supports
these efforts through group training programs designed to increase physician
familiarity with the Company's products. The Company also has assembled a small
staff of clinical specialists to expand its physician training, service and
support activities. In addition, the Company maintains an active program of
collaborating with key physicians and medical centers to obtain feedback for new
product development.
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<TABLE>
Products
The Company currently markets its stent systems in most countries in
Europe, including Germany, France and the United Kingdom, and in other countries
outside of the United States in both over-the-wire and rapid exchange catheter
delivery forms. In addition, the Company offers internationally a line of
balloon angioplasty catheters. The following tables identify the Company's
products, their principal clinical application and their current development or
commercialization status:
CURRENT PRODUCTS
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STENT SYSTEMS
<CAPTION>
Initial Release
Product Description/Application Date Status
------- ----------------------- ---- ------
<S> <C> <C> <C>
Micro Stent First generation stent product, October 1994 Being replaced by the Micro Stent II. By end
designed for use in variety of of 1996 will only be distributed in countries
coronary applications. where pre-market approval for Micro Stent II
has not been obtained.
Micro Stent II Second generation product, featuring October 1995 Available for sale in over 30 countries
helical connections and enhanced outside the United States. IDE clinical
radial strength. Designed for use in studies in the United States commenced in
variety of coronary applications. November 1995.
Micro Stent 2.5 Coronary stent designed for use in December 1995 Available for sale in over 30 countries
vessels as small as 2.5mm in outside the United States. IDE application was
diameter. submitted in June 1996.
Micro Stent II XL Coronary stent designed for use in December 1995 Available for sale in over 30 countries
the treatment of long and diffuse outside the United States. The Company has
lesions. received FDA approval to include such product
in the existing IDE for the Micro Stent and
Micro Stent II.
Micro Stent II LP Similar configuration as the Micro June 1996 Available in markets outside the United States
Stent II product with the added which prefer 6 French guide catheters. Full
capability of being used in 6 international release expected in late 1996.
French guide catheters.
Micro Stent II HP Stent system incorporating July 1996 Product release has commenced in selected
high-pressure coronary angioplasty international markets.
balloon and 6 French catheter
compatibility.
AVE gfx Stent Coronary stent designed to provide September 1996 Limited release in Germany and the United
lower profile and greater Kingdom. Full release in Europe anticipated
flexibility than Micro Stent II. in January 1997.
BALLOON ANGIOPLASTY CATHETERS
Initial Release
Product Description/Application Date Status
------- ----------------------- ---- ------
Nike Rapid exchange, semi-compliant October 1994 Approved for use in Japan and available for
balloon angioplasty catheter, sale in over 30 other countries outside the
featuring a flexible proximal shaft. United States.
Elite Rapid exchange, semi-compliant November 1994 Approved for use in Japan and available for
balloon angioplasty catheter, sale in over 30 other countries outside the
incorporating stiffer proximal shaft. United States.
Peak Over-the-wire, semi-compliant July 1995 Approved for use in Japan and available for
balloon angioplasty catheter. sale in over 30 other countries outside the
United States. IDE application was submitted
in August 1996.
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</TABLE>
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<TABLE>
PRODUCTS UNDER DEVELOPMENT
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<CAPTION>
Product Description/Application Status
------- ----------------------- ------
<S> <C> <C>
Bridge Stent Stent designed for treating Initial clinical evaluation in renal arteries completed outside the
atherosclerotic disease in United States. Additional evaluations for both renal and iliac
peripheral arteries. vessels to be conducted outside the United States.
Micro Stent SVG Stent designed for use in Expected to be available for clinical evaluation outside the
connection with saphenous United States in 1997.
vein grafts.
Coated Stent Stent coated with heparin or other Heparin coated stent expected to be available for clinical
materials, designed to reduce evaluation outside the United States in 1997. In vivo and in vitro
restenosis and thrombosis. testing has commenced.
New Exchange Stent Stent system facilitating easy Initial in vitro and in vivo testing outside the United States
Delivery System balloon exchange. complete. Clinical evaluations outside the United States have
commenced.
High Pressure PTCA PTCA balloon with a noncompliant In vitro testing outside the United States has commenced. Initial
Balloon balloon that exhibits a rated burst clinical evaluations outside the United States are underway.
of 14 atmospheres.
Self-Expanding Self-expanding nitinol stents for Initial development focus will be on the coronary applications with
Stents use in treating coronary, carotid in vivo and in vitro testing outside the United States underway.
and peripheral vascular disease. IDE application expected to be submitted in 1997.
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</TABLE>
Coronary Stent Systems
The Company currently markets the following family of stent products,
all of which are pre-mounted on a catheter and balloon delivery system produced
by the Company:
Micro Stent. The Micro Stent is sold as a series of 4 and 8mm length
stainless steel segments mounted on a delivery system in a variety of
configurations. The Company currently produces the Micro Stent in 4, 8 and 16mm
total length configurations with diameters of 3.0, 3.5 and 4.0mm. The Micro
Stent has generally been replaced by the Micro Stent II and its future
distribution will be limited to those countries where required pre-market
approval for the Micro Stent II has not yet been obtained.
Micro Stent II. The Micro Stent II utilizes a stent component of 3mm in
length. The helical connection and reduced length of the stent elements allow
for increased flexibility, thereby enhancing the handling characteristics and
trackability of the stent system. The Micro Stent II also incorporates
engineering advances related to radial strength and materials processing
designed to allow greater control of MLD. The Company currently produces the
Micro Stent II in 6, 9, 12, 18 and 24mm total length configurations with
diameters of 3.0, 3.5 and 4.0mm. The Micro Stent II has generally replaced the
Micro Stent.
Micro Stent 2.5. The Micro Stent 2.5 incorporates the same design
features as the Micro Stent II, but is designed for application in vessels as
small as 2.5mm in diameter. The Micro Stent 2.5 is offered in 6, 9, 12 and 18mm
lengths with a diameter of 2.5mm.
Micro Stent II XL. The Micro Stent II XL is a longer stent designed to
be used in treating diffuse arterial disease and longer lesions with a single
stent. Because the Micro Stent II XL retains the flexibility of the Company's
core stent design, the Company believes it will enable physicians to treat
longer lesions with a single stent, thereby potentially reducing procedure time
and cost. The product incorporates the same design features as the Micro Stent
II. It is offered in lengths of 30 and 39mm with diameters of 3.0, 3.5 and
4.0mm.
Micro Stent II LP. The Company's Micro Stent II family of products are
generally designed for use within guiding catheters with an outer diameter of 7
French (approximately 2.3mm) or greater. In response to clinical demand in
certain international markets, the Company has developed the Micro Stent II LP
for use with guiding catheters with outer diameters as small as 6 French
(approximately 2.0mm). This product has been available in selected markets
outside the United States, subject to regulatory approval where applicable,
since June 1996. The Micro Stent II LP is offered in lengths of 12 and 18mm with
diameters of 3.0 and 3.5mm.
Micro Stent II HP. The Company's stents are generally delivered using
moderate pressure (8-10 atmospheres), semi- compliant balloon devices. The Micro
Stent II HP uses a non-compliant high pressure stent delivery balloon rated at
14 atmospheres. The Company believes that use of such a non-compliant high
pressure balloon to deliver and expand the stent may eliminate the need for
follow up post-dilatation treatment with a separate high pressure balloon due to
the ability of the balloon to withstand higher pressures which have shown to
more fully expand the stent, thereby reducing the total procedure time and cost.
This product has been available for clinical evaluations outside the United
States, subject to regulatory approval where applicable, since July 1996 and
limited release of the product is occurring in selected international markets.
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AVE gfx Stent. The AVE gfx Stent has a modified, six crown sinusoidal
configuration. The product is designed to allow improved stent flexibility and
trackability, vessel coverage and support while providing 6 French guide
catheter compatibility, which may be helpful in certain applications. The
product was made available in the United Kingdom and Germany in September 1996
and is expected to be made available outside the United States, subject to
regulatory approval, where applicable, in selected international markets in
January 1997.
Balloon Angioplasty Catheters
In addition to the balloon catheters sold as part of the Company's
stent systems, the Company also offers a broad line of balloon catheters for use
in balloon angioplasty procedures. All of such currently marketed balloon
catheter products are semi-compliant, with rated burst pressures of between 8
and 10 atmospheres. The Company offers catheters with balloons in lengths of 20,
30 and 40mm and diameters ranging from 1.5mm to 4.0mm as discussed below.
Nike. The Nike is a rapid exchange catheter with a flexible proximal
(nearer to the operator) shaft design coupled with a low profile distal (further
from the operator) shaft. It is designed to allow greater access to smaller or
more tortuous vessels.
Elite. The Elite is a rapid exchange catheter with a smaller proximal
shaft diameter. It incorporates the Nike distal shaft design with a stiffer
metallic type of proximal shaft construction designed to allow greater operator
control in maneuvering the balloon catheter while enhancing vessel imaging.
Peak. The over-the-wire Peak catheter incorporates a stiffer proximal
shaft for enhanced control and a flexible distal shaft for ease of access to
more tortuous vessels. It was designed for the Japanese market, which generally
favors over-the-wire catheters, although it is also sold in other countries.
Products Under Development
The Company maintains an active research and development program
designed to exploit its core technical expertise in stent systems, balloon
catheters and related medical technologies. The Company has made a significant
investment in developing its proprietary stent technology and believes its
research and development commitment in this area is critical to its competitive
position. Research and development expenses for fiscal 1996, 1995 and 1994 were
approximately $6,480,000 ($3,880,000 after excluding a one-time compensation
expense of $2,600,000 in connection with the termination of certain patent
royalty obligations), $987,000 and $594,000 respectively.
Bridge Stent. The Company is currently developing stents in lengths and
diameters applicable to the treatment of atherosclerosis in peripheral vessels
of the body. Pre-clinical studies have been completed for a renal artery stent
system and initial clinical evaluations of the system have been conducted
outside the United States, subject to regulatory approval where applicable,
since August 1996. Additional evaluations for both the renal artery stent system
and a stent system for use in iliac vessels will continue to be conducted
outside the United States, subject to regulatory approval where applicable, and
initial release of the product is expected in selected markets in late 1996.
Micro Stent SVG. The Company is evaluating the application of stent and
stent graft combination products to be utilized in coronary saphenous vein
grafts. Stent and graft combinations are beginning to be recognized as an
effective and less invasive alternative to the more traditional surgical
approaches to the treatment of diffuse vascular disease and arterial aneurysms.
A product in this area is expected to be available for pre-clinical studies and
clinical evaluation outside the United States, subject to regulatory approval,
where applicable, in 1997.
Coated Stent. In September 1995, the Company obtained a royalty-bearing
license to manufacture and sell stents bearing a coating or surface treatment
derived from a mixture of heparin and certain photo-derivative binding
compounds. The Company currently is cooperating with its licensor in the
development of a heparin-coated stent. Pre-clinical studies of this product are
currently being conducted and the Company expects to commence clinical trials
outside the United States, subject to regulatory approvals, where applicable, in
1997.
New Exchange Stent Delivery System. The Company is developing a new
exchange stent delivery system designed to easily allow the physician to
exchange catheters during a procedure. Initial in vitro and in vivo testing is
complete. International clinical evaluations have provided positive feedback.
The Company is in the process of completing additional in vitro testing which it
intends to submit to the FDA. The Company will seek to include such product in
the existing IDE for the Micro Stent, Micro Stent II and Micro Stent II XL.
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High Pressure PTCA Balloon. The Company intends to offer the high
pressure balloon developed for the Micro Stent II HP as a stand-alone balloon
angioplasty catheter. The Company intends to commence clinical evaluations
outside the United States, subject to regulatory approval where applicable, in
1996.
Self-Expanding Stents. The Company is involved in the development of a
self-expanding stent for atherosclerotic disease in coronary arteries. The
Company intends to utilize this device in order to offer an alternative to its
balloon expandable stents. The self-expanding technology may also have
applications in carotid or peripheral artery disease. The Company expects to
submit an IDE application for the self-expanding stent in 1997.
The Company also is reviewing potential products in other areas,
including stent use in carotid and neurological applications and the use of
alternative stent materials. There can be no assurance that any of the products
above will be successfully developed, commercially released or accepted by the
market or that regulatory clearance will be obtained from the necessary
international or United States regulatory agencies.
Clinical Trial Activities
The regulatory review process required for commercial sales of the
Company's products varies from country to country. Most European countries do
not require pre-market approval, with the exception of Spain, Italy, Belgium,
Norway and Sweden. Additionally, clinical trials have not been required in most
European markets prior to the initiation of commercial sales.
By contrast, the United States and Japan both require government
pre-market approval, rigorous in vitro and/or preclinical data and the
completion of clinical trials prior to commercialization of new products. In
Japan, the Company's distributors have received government approval for the sale
of its Nike, Peak and Elite coronary balloon catheters systems. The required
Japanese clinical trials for the Micro Stent have been completed. The results of
these trials currently are being submitted to the Japanese government for
approval. In the United States, the Company currently is conducting a clinical
trial for the Micro Stent and Micro Stent II products under an IDE granted by
the FDA.
French law requires prior governmental notification and compliance with
certain other requirements of certain experimental trials in France that are
performed on humans for the purposes of developing biological or medical
knowledge. There is some difference of opinion in the French medical community
as to whether such requirements are applicable to clinical trials such as those
involving the Company's products in France. To date, no such notification or
compliance has been made with respect to the current clinical trials involving
the Company's products in France. While the Company's French distributor has
accepted responsibility for compliance with any applicable requirements, the
Company's relationship with such distributor will be terminated as of September
30, 1996. There can be no assurance that the interpretation that such
requirements are not applicable to the current clinical trials involving the
Company's products in France will be accepted by French government authorities
or, if such requirements were deemed applicable, that the Company will be able
to comply with such requirements. Any enforcement action against the Company
with respect to clinical trials in France could have a material adverse effect
on the Company's business, financial condition and results of operations.
In addition to fulfilling the regulatory requirements for the sale of
its products, the Company believes that clinical trials are an important method
of demonstrating performance and expanding potential applications of the
Company's products to physicians at leading medical centers participating in
such trials. Accordingly, the Company believes that the results of such trials
are also an important part of the Company's marketing programs and competitive
positioning of the Company. Clinical results are inherently unpredictable and
are influenced by the indications and endpoints chosen and the procedures used.
Results from clinical trials sponsored by the Company, its competitors or a
third party could delay or prevent regulatory approvals, reduce market demand
and therefore have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the Company's interpretation of data from its clinical trials
will be accepted by the FDA or other regulatory authorities or the medical
community at large. In sponsoring clinical trials, the Company generally is
involved in the design of the protocol for such trials, makes its stents
available to the trials' investigators free of charge or at discounted rates,
and aids with the patient enrollment procedures and other ministerial aspects of
the trial as necessary, but otherwise does not participate in the performance of
the trials. To date, the Company has sponsored the following completed and
ongoing clinical trials (although the Company's French distributor is acting as
the sponsor of all clinical trials in France until September 30, 1996).
The Netherlands. The Company has received results from its first
completed non-randomized, single-center trial of the Micro Stent, which study
commenced in November 1994. The study was performed at the University Hospital
in Leiden, The Netherlands on 85 patients. Indications for use of the stent
included elective indications, suboptimal balloon angioplasty results and
bailout (treatment of abrupt or threatened closure). In addition, 27% of
patients treated in the study had previously suffered from acute myocardial
infarction. Implantation was successful in 98% of cases. Procedural success
(defined in this study as a diameter stenosis of less than 30% after stent
implantation without the occurrence of clinical events within three weeks) was
85%. The six month follow up angiograms of 79 patients showed restenosis
(defined as a 50% or greater reduction of the treated vessel diameter) in 13% of
the stented segments.
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A single-center, 50-patient, non-randomized study of the Micro Stent
II, with an elective indication for use, has been initiated at University
Hospital in Leiden. Clinical endpoints will include acute and six-month safety
endpoints and six-month angiographic restenosis. Angiographic analysis will be
performed at Leiden with restenosis as the primary study endpoint. Patient
enrollment has been completed and final results are expected in 1997.
United States. FDA requirements for coronary stents mandate clinical
trials utilizing randomized, concurrent control groups. In connection with the
FDA approval process for the Micro Stent and the Micro Stent II, the Company has
completed pre-clinical animal testing at Stanford University Medical Center, and
has also completed biocompatibility testing and in vitro functional testing. In
November 1995 the Company received approval from the FDA for a 700-patient,
multi-center, prospective, randomized IDE study with the Micro Stent and Micro
Stent II systems. Subsequently, the Company received FDA approval to include the
Micro Stent II XL in the same study. The Company will also seek to include its
New Exchange Stent Delivery System in the study. Patient enrollment is currently
in progress.
The study, entitled SMART (Study of Micro stent's Ability to limit
Restenosis Trial), evaluates the treatment of untreated lesions in native
coronary arteries, utilizing the JJIS Palmaz-Schatz stent as a concurrent
control. SMART has an elective indication for use and will require follow up,
utilizing a primary endpoint of clinically driven target site revascularization
at nine months and various secondary endpoints (including angiographic
restenosis). The Company worked with clinical consulting groups at the
Washington Hospital Center (Washington, D.C.) and Beth Israel Hospital
(Cambridge, MA) with respect to the study's design and continues to work with
these groups in trial and data coordination and angiographic core laboratory
analysis. 40 medical centers are being utilized as investigation sites for the
study.
France. A two center, 100-patient study evaluating the Micro Stent II
is currently being conducted by physicians at L'Institut Cardiovasculaire Paris
Sud in Paris and at Unite Cardio Vasculaire in Marseilles. Optimal deployment
pressures will be evaluated with intravascular ultrasound and angiographic and
clinical restenosis will be measured. Six-month follow up will be conducted,
with angiographic and intravascular ultrasound core lab analyses being performed
by Washington Hospital Center. Final results are expected in mid-1997.
Additionally, the same centers in Paris and Marseilles are conducting a
50-patient feasibility study evaluating the Micro Stent 2.5. Six-month follow-up
will be conducted.
Japan. The Company sponsored a multi-center, 124-patient,
government-approved clinical study with six month follow up angiograms for the
Micro Stent in Japan. The indications for use in the study were broad and
included both abrupt and threatened closure following balloon angioplasty and
elective indications. Preliminary analysis at three months indicates an average
restenosis rate of approximately 26%, with large restenosis rate variability
among the sites. At least one site (64 patients) only implanted Micro Stents in
patients following JJIS stent deployment failure or when the investigator deemed
the vessel morphology would be unsuitable for use of the JJIS stent. More than
50% of the stents in this study were implanted in vessels with diameters of less
than 3.0 mm. The study has been completed and final results are expected in late
1996. Final submission to the Japanese authorities of the results of the
clinical trial is expected in late 1996. The Company is currently in discussions
with such authorities as to whether a second clinical study will be required for
the Micro Stent II, Micro Stent II XL, Micro Stent 2.5 and AVE gfx Stent.
Saudi Arabia. A 100-patient, randomized study of the Micro Stent II,
with an elective stent implantation indication for use, has been initiated in
Saudi Arabia that compares stenting to the combined use of a rotational
atherectomy device with stenting. Clinical endpoints include acute and six-month
safety endpoints and restenosis determined by six-month angiographic follow-up.
Patient enrollment is currently in progress and final results are expected in
late-1997.
Spain. As part of the Spanish regulatory approval process, a clinical
trial has been initiated for the Micro Stent, Micro Stent II and the Micro Stent
II XL. The study is expected to be of approximately 300 patients and will be a
nonrandomized, multi-center trial. Clinical endpoints are expected to include
acute and six-month safety endpoints and restenosis determined by six-month
angiographic follow-up. Patient enrollment is currently in progress with final
results expected in late-1997.
Switzerland and France. A 150-patient, randomized, multi-center trial
of the Micro Stent has been initiated at the University of Lausanne Hospital in
Switzerland and at Besencon, France utilizing the JJIS Palmaz-Schatz stent as a
control. The study endpoints are deployment success and angiographic restenosis.
Patient enrollment is underway, and final results are expected by mid-1997.
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Distribution, Sales and Marketing
The Company markets its Micro Stent systems and balloon angioplasty
catheters internationally in over 30 countries. The Company currently sells its
products directly in Germany and the United Kingdom and primarily through
independent distributors elsewhere. Such distributors generally are granted the
right to sell the Company's products within a defined territory and are
typically permitted to sell other non competing medical products. All sales to
distributors are denominated in U.S. dollars. The Company's distributors
purchase the Company's products at discounts that vary by product and market.
The distributors resell the products to health care providers such as hospitals
at prices that are determined by the distributor. The Company's use of
distributors does not allow the Company to control end-market prices charged for
its products and may not result in the same level of sales and marketing efforts
as would the use of a direct sales force by the Company. The Company currently
does not have written agreements with most of its distributors.
The Company continually reviews its existing distributor arrangements.
The Company has notified its distributors in France, Switzerland, Belgium and
The Netherlands that it will terminate its relationship with those distributors
as of September 30, 1996. Thereafter, the Company expects to establish a direct
sales force in those countries. Establishing a direct sales force in these
countries will require significant time, management resources and expenditures
and may result in substantial additional costs to eliminate existing
distribution relationships or legal actions by former distributors. The
Company's distributors in France and Switzerland have commenced legal action
against the Company in connection with the termination of the distribution
relationship and its distributors in Germany, Belgium and The Netherlands have
threatened legal action. See "Item 3. Legal Proceedings." Failure by the Company
to quickly and cost-effectively establish effective sales forces in such
countries, particularly in France, could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
expects to establish a direct sales force in one or more additional countries in
the future where it believes such an approach will benefit its competitive
position.
The Company has implemented a marketing and development program to
support its sales in foreign markets as well as to increase its visibility with
leading physicians. The Company has commenced a series of physician group
training sessions in Europe designed to increase exposure to the Company's
products and allow hands on demonstration and training. In addition, the Company
is developing a small staff of clinical specialists to help coordinate clinical
trials, work directly in the training of physicians and certain aspects of
patient care, and otherwise support the Company's marketing and sales efforts.
Substantially all of the Company's fiscal 1996 revenues were derived
from export sales to non-affiliated international distributors, primarily in
Europe and Japan. Cardiologic GmbH, Medi Service and Century Medical, Inc.,
distributors for the Company in Germany, France, and Japan, accounted for
approximately 20%, 16% and 10%, respectively, of the Company's net sales in
fiscal 1996. The Company terminated its distribution relationship with
Cardiologic GmbH and Medi Service effective as of April 30, 1996 and September
30, 1996 respectively. The Company anticipates that substantially all of its
revenues from product sales for at least the next 18 months will be derived from
sales in foreign countries. International sales are subject to certain risks,
including foreign medical regulations, export/import licenses, foreign currency
fluctuations, economic or political instability, shipping delays and tariffs and
other various trade restrictions, all of which could have a significant impact
on the Company's ability to deliver products on a competitive and timely basis.
As the Company develops an international sales force it expects to be more
directly subject to foreign currency fluctuations to the extent such direct
sales may be denominated in foreign currency.
Manufacturing
The Company performs most of the steps for fabrication of its stents
internally, including cutting, forming, connecting through proprietary
attachment processes and electropolishing high quality medical grade stainless
steel. To support this capability, the Company has designed manufacturing and
testing equipment that has enabled the development and execution of proprietary
processes not currently available from outside suppliers. For example, the
Company has its own balloon and catheter extrusion equipment which allows for
rapid prototyping and adherence to strict design specifications and quality
standards in manufacturing.
The Company's manufacturing engineers participate in the product design
process so as to insure the Company's ability to achieve rapid and cost
effective manufacturing capabilities for its products. The Company is committed
to manufacturing internally as many of its products and components as
practicable and believes that such a process better enables it to set, achieve
and control high standards for the quality of its devices, reduce time to
market, manage costs, maintain control over proprietary information, and execute
improvements in design and manufacturing processes.
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The design, manufacture and assembly of certain proprietary components
and materials used in the Company's balloon angioplasty and stent delivery
catheters take place in the Company's facilities in Santa Rosa, California and
those of Arterial Vascular Engineering Canada, Inc. ("AVEC"), a subsidiary of
the Company located in Richmond, British Columbia. Though catheter components
are fabricated in both facilities, all of the Company's products are finished
and packaged in the Canadian facility. The Company's finished medical devices
are shipped from AVEC's manufacturing facility to distributors outside of the
United States.
The Company currently executes all critical assembly operations in
controlled environment rooms in which bacterial and airborne particulate levels
are monitored. The Company believes that its current space, together with the
space obtained by the recent purchase of an additional building in Santa Rosa,
California, will be sufficient to serve its needs through at least fiscal 1997.
The Company relies on some outside sources for catheter components and
from time to time the Company has experienced shortages of certain supplied
materials that have significantly affected its ability to produce enough product
to satisfy market demand. The Company currently relies upon a single supplier of
the medical grade stainless steel from which the Company's stents are machined.
In fiscal 1995, the Company experienced a shortage in acceptable medical-grade
stainless steel and was unable to supply products for a period of time. The
Company is continually reviewing the capabilities of other potential suppliers
of medical grade stainless steel, although to date none have been able to
produce materials meeting the Company's quality standards. The failure to obtain
sufficient quantities of component materials could have a material adverse
effect on the Company's business, financial condition and results of operations.
As the Company grows, it will be required to scale-up its production of
new products and to increase its manufacturing capacity. In 1995, the Company
experienced difficulties in producing sufficient volumes of products to satisfy
demand, due in part to lower production yields associated with the commencement
of large scale manufacturing of new products. In addition, due to manufacturing
quality concerns, in 1994 the Company's Canadian subsidiary voluntarily recalled
certain balloon dilatation catheters that were sold in international markets.
The Company no longer sells such systems. Manufacturers often encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. Difficulties experienced by the Company in
manufacturing scale-up could have a material adverse effect on its business,
financial condition and results of operations. There can be no assurance that
the Company will be successful in scaling up or that it will not experience
manufacturing difficulties or product recalls in the future.
Competition
Competition in the market for the treatment of cardiovascular disease
is intense and is expected to increase. The Company competes primarily with
other producers of stent products. Boston Scientific Corporation, C.R. Bard,
Inc., Cook, Inc., Guidant Corporation, JJIS, Medtronic, Inc. and Pfizer, Inc.,
among others, currently compete against the Company in the development,
production and marketing of stents and stent technology. The Company believes
that JJIS is currently the worldwide market leader with a majority of the market
for stent devices. Currently JJIS and Cook have the only stents which have been
approved by the FDA for sale in the United States. Earlier entrants in the
market in a therapeutic area often obtain and maintain significant market share
relative to later entrants. Many of the Company's competitors and potential
competitors have substantially greater name recognition and capital resources
than does the Company and also have greater resources and expertise in the areas
of research and development, obtaining regulatory approvals, manufacturing and
marketing. There can be no assurance that the Company's competitors will not
succeed in developing stents or stent systems, competing technologies or
therapeutic drugs that are more effective or more effectively marketed than
products marketed by the Company or that render the Company's technology
obsolete.
The Company believes that the primary competitive factors in the market
for stent technology include product safety, quality, ease of use, clinical
performance (radial strength, flexibility, radiopacity, low thrombosis risk and
long term efficacy), delivery system characteristics (flexibility, reliability,
ease of use), price, customer service and availability of third party
reimbursement. In addition, the length of time required for products to be
developed and to receive regulatory approval is an important competitive factor.
The Company believes it competes favorably with respect to these factors,
although there can be no assurance that it will be able to continue to do so.
The Company believes that the increasing number of devices in the stent
market and the desire of companies to obtain market share will result in
increased price competition. Price reductions by the Company in response to
competitive pressure could have a material adverse affect on the Company's
business, financial condition and results of operations.
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In addition, the ability to use patents or other proprietary rights to
prevent sales by competitors is an important competitive tool in the medical
device industry. The Company believes that patents held by competitors may
restrict its ability to market its current products in the United States. See
"Patents and Proprietary Rights."
The stent market is characterized by rapid technical innovation.
Product development involves a high degree of risk and there can be no assurance
that the Company's competitors and potential competitors will not succeed in
developing and marketing technologies and products that are more effective than
those developed and marketed by the Company or that would render the Company's
technology and products obsolete or noncompetitive. The medical indications that
can be treated by stents can also be treated by surgery, drugs, or other medical
devices including stand alone balloon catheters, atherectomy catheters and
lasers, many of which are widely accepted in the medical community. There is no
assurance that a procedure using stent technology will be able to replace such
established treatments or that clinical research will support the use of stents.
Additionally, new surgical procedures and medications could be developed that
replace or reduce the importance of current procedures that use the Company's
products.
Patents and Proprietary Rights
The Company has filed U.S. and foreign patent applications to protect
its proprietary position in stents. The Company also relies on trade secrets,
technical know-how and technological innovation to maintain its competitive
position. The Company's policy is to protect and enforce its patent and other
intellectual property rights by appropriate action.
The Company holds one issued United States patent and has several
United States patent applications pending, and holds one Australian patent and
has additional foreign patent applications filed. The Company's issued United
States patent relates to the stent technology used in the Company's current
stent systems. The Company also has a license to make and sell stents using
technology covered by patents and patent applications of a third party. The
technology which resulted in the Company's only issued patent was acquired from
Endothelial Support Systems, Inc. (subsequently known as Endovascular Support
Systems, Inc.) ("ESS"). In June 1996, certain former shareholders of ESS, each
of whom currently holds shares of Common Stock of the Company, filed an action
against the Company seeking, among other things, to rescind the transfer of such
technology from ESS and to transfer such patent to ESS. No assurance can be
given as to the outcome of any such litigation. Loss or impairment of the right
to produce products based on such patents could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Item 3. Legal Proceedings."
A number of medical device and other companies, universities and
research institutions have filed patent applications or have been issued patents
relating to catheters, stents and delivery systems and there has been
substantial litigation in this area. The Company's success will depend on its
products not infringing patents issued to competitors. The Company is aware that
the technology used in its current stent systems may be in conflict with certain
United States patents held by competitors of the Company, which competitors are
larger and have more substantial resources than the Company. These competitors
can be expected to expend significant resources to attempt to enforce and/or
defend the validity of their patents. The validity, scope and enforceability of
one such patent held by a competitor is currently being challenged in litigation
not involving the Company. In the event that such litigation is resolved
unfavorably from the Company's perspective, the Company may be precluded from
selling its current stent products in the United States.
In anticipation of receiving approval for sale of its products in the
United States, the Company is reviewing whether it may be necessary to modify
its current technology or develop new products to avoid infringement under such
United States patents. If the Company's products are determined to infringe and
it cannot obtain a license on commercially reasonable terms or modify its
current technology or develop new products to avoid infringement, such outcome
could require the Company to cease its commercial activities and sales of the
affected products and could have a material adverse effect on the Company's
business, financial condition and results of operations. Modification of the
Company's products or development of new products to avoid infringement may
require the Company to conduct additional clinical trials for such new or
modified products in connection with United States regulatory approval and to
revise its filings with the FDA or other regulatory agencies.
The Company is continually reviewing the scope of United States and
foreign patents and the status of any litigation with respect to patents of
interest of which it is aware. The question of infringement involves complex
legal and factual issues and is highly uncertain. There can be no assurance that
any conclusion reached by the Company regarding infringement will be consistent
with the resolution of such issue by a court. In the event the Company's
products are found to infringe patents held by competitors, there can be no
assurance that the Company will be able to successfully modify its products to
avoid infringement, or that any modified products will be commercially
successful. Failure in such event to either develop a commercially successful
alternative or to obtain a license to such patent on reasonable terms could have
a material adverse effect on the Company's business, financial condition and
results of operations. In any event, there can be no assurance that
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the Company will not be obliged to defend itself in court against allegations of
infringement of third party patents. Patent litigation is very expensive and
could subject the Company to significant liabilities, require disputed rights to
be licensed from third parties or require the Company to cease selling its
products.
The validity and breadth of claims in medical technology patents
involve complex legal and factual questions and, therefore, may be highly
uncertain. No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company will be issued,
that the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the Company's patents or
patents to which it has licensed rights will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company. Furthermore, there
can be no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
issued to or licensed by the Company or that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patent issue, the Company also cannot be certain that others did
not first file applications for inventions covered by the Company's pending
patent applications, nor can the Company be certain that it will not infringe
any patents that may be issued to others on such applications.
The Company relies upon trade secret protection for certain aspects of
its proprietary technology. The Company's policy is to have each employee and
consultant enter into a confidentiality agreement containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company and requiring disclosure to the Company of ideas, developments,
discoveries or inventions conceived during employment or service as a
consultant, and assignment to the Company of proprietary rights to such matters
related to the business and technology of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company's trade secrets in the event of unauthorized
use or disclosure of such information or that others will not independently
develop substantially equivalent proprietary information and techniques or
otherwise gain access to the Company's trade secrets and proprietary know-how.
Government Regulation
International sales of medical devices are subject to regulatory
requirements in many countries. The regulatory review process required for
commercial sales varies from country to country. The products currently sold by
the Company are subject to pre-market approval in Belgium, Italy, Norway, Spain
and Sweden as well as to other regulatory requirements in these and other
countries. Japan requires pre-market approval and the Company's Japanese
distributors have received such approval for sale of its Peak, Nike and Elite
coronary balloon catheter systems. With respect to its stent products, the
Company expects to submit the results of clinical trials to Japanese regulators
in late 1996 and such materials will undergo review. The Company is also
currently working with Canadian authorities regarding approval of its stent
products for sale in Canada. The Company may also be subject to regulations
governing certain clinical trials in France. See "Clinical Trial Activities."
The Company currently exports and sells the Micro Stent, the Micro Stent II,
Micro Stent II XL and Micro Stent 2.5 and its line of balloon catheters in over
30 countries internationally, with full or limited release of the Micro Stent II
LP, the Micro Stent II HP and the AVE gfx Stent currently in progress.
The Company currently relies on its distributors for the receipt of
pre-market approvals and compliance with clinical trial requirements in those
countries that require them, and it expects to continue to rely on distributors
in those countries where the Company continues to use distributors. The
Company's distributors have received pre-market approvals in those countries
that require them and in which the Company currently has commercial sales. There
can be no assurance that the Company will be able to quickly and
cost-effectively establish regulatory compliance operations with respect to
those countries where it will establish direct sales operations. The Company has
in the past discovered instances of regulatory noncompliance by its
distributors, and has, in response, caused the applicable distributor to file
revised governmental notifications, ceased to sell commercially its products in
the applicable countries or otherwise acted so as to halt any ongoing
noncompliance in such countries. While the Company is not aware of any pending
or threatened governmental action against it in any country in which it has done
business, any enforcement action by regulatory authorities with respect to past
or any future regulatory noncompliance could have a material adverse effect on
the Company's business, financial condition and results of operations.
Pre-market approvals from particular countries within the European Economic Area
(the 15 countries of the European Union and Norway and Iceland) will not be
required after the Company has achieved compliance with the requirements of the
Medical Devices Directive ("MDD") discussed below.
In order to continue selling its products within the European Economic
Area following June 14, 1998, the Company will be required to achieve compliance
with the requirements of the MDD and affix CE marking on its products to attest
such compliance. To achieve compliance, the Company's products must meet the
Essential Requirements of the MDD relating to safety and performance and the
Company must successfully undergo verification of its regulatory compliance
("conformity
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assessment") by a Notified Body selected by the Company. The Company has
selected TUV Product Service as its Notified Body. The nature of such assessment
will depend on the regulatory class of the product. Under European law, the
Company's products are likely to be in Class III, the highest risk class, and
therefore subject to the most rigorous controls. In the case of a Class III
product, the Company can choose between two options. Under the first option, the
Company must establish and maintain a complete quality system for design and
manufacture as described in the MDD. The Notified Body must audit this quality
system and determine if it meets the requirements of the MDD. In addition, the
Notified Body must approve individually the design of each device in Class III.
The second option involves a type examination and approval of the device by the
Notified Body and, at the Company's choice, either setting up a complete quality
system for manufacture, subject to assessment by the Notified Body or requesting
the Notified Body to carry out batch testing of the finished product to verify
its conformity. Irrespective of the conformity assessment route chosen, the
Notified Body must verify that the products comply with the Essential
Requirements of the MDD. In order to comply with these requirements, the Company
must, among other things, carry out a risk analysis and present sufficient
clinical data. The clinical data presented by the Company must provide evidence
that the products meet the performance specifications claimed by the Company,
provide sufficient evidence of adequate assessment of unwanted side effects and
demonstrate that the benefits to the patient outweigh the risks associated with
the device. If the Company elects to carry out clinical investigations in the
European Economic Area for the purpose of generating the data described above,
it must comply with the relevant requirements of the MDD as they have been
transposed into national law. This involves, at a minimum, securing an opinion
of an ethics committee and notifying the national authorities of the trial. In
addition to having to comply with the requirements of any particular country,
the authorities have the right to prohibit a particular investigation and impose
specific conditions. The Company will be subject to continued supervision by the
Notified Body and will be required to report any serious adverse incidents to
the appropriate authorities. The Company also will be required to comply with
additional national requirements that are beyond the scope of the MDD.
The Company believes that it will comply with the CE marking
requirements prior to June 14, 1998. Failure to do so would mean that the
Company would be unable to sell its products in the European Economic Area
unless and until compliance was achieved, which could have a material adverse
effect upon the Company's business, financial condition and results of
operations. There can be no assurance that the Company will be able to achieve
or maintain compliance required for CE marking on all or any of its products or
that it will be able to timely and profitably produce its products while
complying with the requirements of the MDD and other regulatory requirements.
In the United States, generally unless a medical device manufacturer
can establish to the FDA's satisfaction that a newly developed device is
"substantially equivalent" to a legally marketed device that does not itself
require pre-market approval, the Federal Food, Drug and Cosmetic Act ("FDA Act")
requires that the manufacturer submit a PMA for the device and obtain the FDA's
approval of the PMA prior to marketing the device in the United States. It is
expected that all of the Company's stent products will be subject to the PMA
process. The first step in the PMA approval process is usually the submission to
the FDA of the results of laboratory and pre-clinical studies, which typically
must be conducted in compliance with the FDA's regulations governing Good
Laboratory Practices, and a request for permission to clinically evaluate the
device in humans under an IDE. Initiation of the study requires the approval of
the FDA and of the institutional review board of the hospital or clinic
participating in the clinical trial and written informed consent from all
participating patients. Furthermore, FDA regulations subject sponsors of IDEs to
certain requirements including proper monitoring of clinical investigations,
selection of qualified investigators, recordkeeping, reporting of unanticipated
adverse device events and submission of periodic progress reports. In addition,
a sponsor is prohibited from promoting or commercializing a device prior to PMA
approval. The PMA must contain, among other things, the results of the clinical
trials, the results of all relevant bench tests, laboratory and pre clinical
studies, a complete description of the device and its components, and a detailed
description of the methods, facilities and controls used for manufacture,
including the method of sterilization. In addition, the submission must include
the proposed labeling, advertising literature and physician training methods (if
required). In general, data from adequate and well-controlled independent,
statistically significant clinical trials must demonstrate the safety and
effectiveness of the device in order to obtain approval of the PMA.
After completion of the FDA's preliminary review, the submission is
ordinarily sent to an FDA selected scientific advisory panel composed of
physicians and scientists with expertise in the particular field. The FDA
scientific advisory panel holds a public hearing concerning the PMA and then
issues a recommendation to the FDA that may include conditions for approval. The
FDA is not bound by the recommendations of the advisory panel. Toward the end of
the PMA review process, the FDA will conduct an inspection of the manufacturer's
facilities to ensure that the facilities are in compliance with applicable good
manufacturing practices ("GMP") requirements. If the FDA evaluations of both the
PMA application and the manufacturing facilities are favorable, the FDA will
issue an approvable letter, which usually contains a number of conditions which
must be met in order to secure final approval of the PMA. When those conditions
have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA
approval order, authorizing commercial marketing of the device for certain
indications. The sponsor may not promote the device for uses not approved by the
FDA. The FDA also has the authority to impose certain postapproval requirements
in a PMA approval order, including postapproval surveillance studies further
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evaluating the safety, efficacy and reliability of the device. Failure to comply
with any postapproval requirements may lead to withdrawal of FDA approval. The
PMA review and approval process generally takes more than a year to complete
from the date of acceptance by the FDA for filing, and may take substantially
longer. The FDA may also determine that additional clinical trials are
necessary, in which case the PMA may be delayed for several years while
additional clinical trials are conducted and submitted in an amendment to the
PMA. Certain modifications to medical devices require FDA clearance, either
under the IDE or in a PMA supplement. Such IDE and PMA supplements relating to
product modifications require the submission of the same type of information
required for an initial application, but because such subsequent filings need
only contain sufficient information to support the change, they are generally
more brief. The FDA generally does not use an advisory panel review for PMA
supplements.
In November 1995, the Company received FDA approval for an IDE to
conduct clinical trials of its Micro Stent and Micro Stent II products. The
Company has supplemented such IDE to include the Micro Stent II XL product, and
will also seek to include its New Exchange Stent Delivery System in such IDE.
The Company does not expect to receive PMA approval for any of these products
prior to 1998, and there can be no assurance that such approval will be received
at all.
The Company's Santa Rosa facility manufactures only components (not
finished devices) and the finished devices are assembled in the AVEC facility
and are not marketed in the United States. Under current law, at such time as
the Company manufactures finished devices in the United States or imports or
offers finished devices for import into the United States, the GMP regulation
will apply and the FDA will inspect the Company's manufacturing facilities on a
regular basis for compliance with applicable FDA regulations including GMP.
Under a 1993 proposal to revise the GMP regulation, manufacturers of device
components made specifically for human use would be subject to its requirements.
A final rule is expected to be promulgated later this year, and may or may not
apply GMP requirements to components. In any event, the GMP regulations require
that the Company manufacture its products and maintain its documents in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company will also be required to comply with various FDA requirements for
labeling. Furthermore, the Company will be required to provide information to
the FDA on death or serious injuries alleged to have been associated with the
use of its medical devices, as well as product malfunctions that would likely
cause or contribute to death or serious injury if the malfunction were to recur.
In addition, the FDA prohibits an approved device from being marketed for
unapproved applications. If the FDA believes that a company is not in compliance
with the law, it can institute proceedings to detain or seize products, issue a
recall, enjoin future violations and assess civil and criminal penalties against
the Company, its officers and its employees.
The Company exports to its Canadian subsidiary its stent components,
stent delivery system components and balloon angioplasty catheter components for
final assembly, distribution and sale. The Company believes that its export of
these components does not subject the Company to export approval requirements
under the FDA Act. However, the FDA could determine in the future that the
Company's export of components is not in compliance with the FDA Act or the
FDA's regulations or policies, or that such exports will be prohibited in the
future. Failure to comply with applicable FDA or other applicable regulatory
requirements can result in fines, injunction, civil penalties, recall or seizure
of products, total or partial suspension of production and criminal prosecution.
In addition, the manufacturing operations at the facilities of AVEC are subject
to Canadian medical device regulations. In February 1996, a medical device
inspector with the Canadian government inspected AVEC's facility and determined
that AVEC's operations were in compliance with such regulations. However,
Canadian authorities could determine in the future that AVEC's operations are no
longer in compliance with such regulations, and a restriction or prohibition
against the export by the Company of components for final assembly in Canada or
another country could require the Company to make substantial changes to its
manufacturing operations and have a material adverse effect on the Company's
business, financial condition and results of operations.
The AVEC facility was inspected in March 1996, by the Australian
Government Therapeutic Goods Administration ("TGA"). The TGA found the AVE/AVEC
quality system to be in compliance with the applicable Australian standard,
European quality systems standard EN 46001.
Third-Party Reimbursement
Sales volumes and prices of the Company's products are heavily
dependent on the availability of reimbursement from third party payors, such as
government and private insurance plans, health maintenance organizations and
other sources of reimbursement for health care costs ("Third-Party Payors").
Individuals are seldom, if ever, willing or able to pay directly for the costs
associated with the use of the Company's products. In foreign markets,
reimbursement is obtained from a variety of sources, including governmental
authorities, private health insurance plans and labor unions. The market in the
United States is moving rapidly in the direction of managed care, in which
Third-Party Payors attempt to shift financial risk to providers of health care
through mechanisms that, among other things, involve fixed payments for a
defined treatment or episode of care. In addition, Third-Party Payors attempt to
contain health care costs by influencing the clinical decision
14
<PAGE>
making of health care providers in the direction of what is deemed to be "cost
effective care." Some Third-Party Payors may also contract on an exclusive basis
with a single provider of an ancillary service or product to obtain the lowest
possible price and then induce providers or insured individuals to deal only
with the contracted source by limiting routine insurance coverage to services or
supplies obtained from that source.
The federal Medicare program and other major Third-Party Payors in the
United States generally reimburse most acute, general care hospitals for
inpatient medical treatment, including all operating costs and all furnished
items or services, including devices such as the Company's, at a prospectively
fixed rate based on the diagnosis-related group ("DRG") that covers such
treatment, as established by the federal Health Care Financing Administration.
For interventional procedures, the fixed rate of reimbursement is based on the
procedure or procedures performed and is unrelated to the specific devices used
in that procedure. In addition, each interventional DRG payment is calculated to
reflect the costs of a specific procedure or type of procedure. At present,
there is uncertainty as to which DRG applies to procedures using the Company's
stents. If a procedure is not covered by a DRG, other Third-Party Payors may in
many cases deny reimbursement. Alternatively, a DRG may be assigned that does
not reflect the costs associated with the use of the Company's stent, resulting
in underreimbursement.
Third-Party Payors that do not use prospectively fixed payments
increasingly use other cost containment devices, such as having exclusive
suppliers or approved lists of devices deemed to be "cost effective," and
requiring discretionary, prior authorization for exceptions. In addition,
Third-Party Payors may deny reimbursement if they determine that the device used
in a treatment was not a covered device or was unnecessary, inappropriate,
experimental, used for a nonapproved indication or not cost effective. In other
situations, Third-Party Payor cost containment efforts may pose barriers to the
use of the Company's products if, for example, the products are not on a
Third-Party Payor's approved list of devices. Accordingly, providers must
determine that the clinical benefits of stents justify the additional cost or
the additional effort required to obtain prior authorization or coverage and the
uncertainty of actually obtaining such authorization or coverage. Reimbursement
of angioplasty procedures is covered under a DRG, but because the amount of
reimbursement is fixed by Medicare and some other Third-Party Payors, the amount
of potential profit relating to the procedure may be reduced by the additional
use of the Company's stent systems.
While the Company believes that the use of stents may continue to be
cost effective for many medical indications, the Company believes that
reimbursement in the future are becoming subject to increased restrictions such
as those described above, both in the United States and in foreign markets. The
Company believes that the overall escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance as to either United States or foreign markets that third party
reimbursement and coverage will be available and adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of Third-Party Payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis, particularly if the Company's stents
are more expensive than competing stents. The unavailability of Third-Party
Payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
Product Liability and Insurance
Medical device companies are subject to a risk of product liability and
other liability claims in the event that the use of their products results in
personal injury claims. Although the Company has not experienced any product
liability claims to date, any such claims could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company maintains liability insurance with coverage of $20 million per
occurrence. There can be no assurance that product liability or other claims
will not exceed such insurance coverage limits or that such insurance will
continue to be available on commercially acceptable terms, or at all.
Environmental Matters
The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain hazardous and
potentially hazardous substances used in connection with the Company's
operations. Although the Company believes that it has complied with these laws
and regulations in all material respects and to date has not been required to
take any action to correct any noncompliance, there can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental regulations in the future.
15
<PAGE>
Certain Business Risks
The Company only began commercial sales of its balloon angioplasty
catheters in October 1993 and its stent systems in October 1994. The Company has
limited experience in manufacturing, marketing and selling its products
commercially. The Company has recently experienced rapid growth in its
facilities and the number of its employees, the number of products under
development, the number and amount of products manufactured and sold and the
geographic scope of its sales. In order to support increased levels of sales in
the future and to augment its long-term competitive position, the Company
anticipates that it will be required to make significant additional expenditures
in manufacturing, research and development, sales and marketing and
administration, both in absolute dollars and as a percentage of sales. While the
Company has commenced the implementation of improved financial and management
systems, is increasing personnel and expects to increase substantially its
efforts in these areas, there can be no assurance that such systems and
personnel will be efficiently integrated or will be adequate for the management
of the Company's current or future operations, or that the Company will be able
to manage such growth effectively.
The Company has a limited operating history upon which an evaluation of
its prospects can be made. There can be no assurance that the Company will grow
or that the Company's future financial results will be comparable to its recent
results. Future operating results will depend on many factors, including the
demand for the Company's products, the level of product and price competition,
the levels of third-party reimbursement, the Company's success in expanding its
direct sales force and distribution channels and whether the Company can develop
and market new products and control costs. In addition, the Company's future
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in establishing a new business in the medical device
industry, which is characterized by intense competition, rapid technological
change and significant regulation.
The Company's success is dependent upon acceptance of its stent systems
and balloon angioplasty catheters by the medical community as reliable, safe and
cost effective. The Company has only limited clinical data regarding the
efficacy of the stent systems it currently sells. The Company and other
producers of stents are engaged in clinical studies of stent systems, including
in some cases comparison of the Company's stents to those of competitors.
Clinical results are inherently unpredictable and are influenced by the
indications and endpoints chosen and the procedures used. There can be no
assurance that results from clinical trials sponsored by the Company, its
competitors, or a third party will not delay or prevent regulatory approvals,
reduce market demand for the Company's products or that the Company's
interpretation of data from its clinical trials will be accepted by the FDA or
other regulatory authorities or the medical community at large.
In fiscal 1996, the vast majority of the Company's total sales were
derived from sales of its stent systems. The success of these products depends,
among other things, on the nature of the technological advances inherent in the
products' design, clinical trial results, market acceptance of the products, and
the Company's receipt of regulatory approvals for the products. There can be no
assurance that clinical trial results will be favorable, that required
regulatory approvals will be obtained, or that recently introduced products or
future products will gain market acceptance. Unfavorable clinical trial results,
failure to obtain regulatory approvals or failure to gain market acceptance for
the Company's recently introduced products or future products could have a
material adverse effect on the Company's business, financial condition and
results of operations. The life cycle of the Company's products is difficult to
predict. To the extent demand for any of the Company's products declines and the
Company's newly introduced products are not commercially accepted, there could
be a material adverse effect on the Company's business, financial condition and
results of operations.
The medical device industry is characterized by rapid and significant
technological change. The Company's future success will depend in large part on
whether the Company can continue to respond to such changes, and whether it can
expand the indications and applications for which its products are used, through
the timely development and successful introduction of enhanced and new versions
of its stents systems and balloon catheters. Product research and development
will require substantial expenditures and has inherent risks, and there can be
no assurance that the Company will be successful in identifying products for
which demand exists, in developing products that have the characteristics
necessary to treat particular applications, or that any new product introduced
will receive regulatory approval or be commercially successful.
16
<PAGE>
Employees
At August 31, 1996, the Company had approximately 434 regular and
temporary employees worldwide of which 52 were involved in research and
development, 285 in manufacturing and manufacturing support, 32 in sales and
marketing, 49 in quality assurance and regulatory and clinical affairs and 16 in
finance and administration. None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relationship with
its employees is good.
Executive Officers of the Company
The executive officers of the Company and their ages and positions as
of September 16, 1996 are as follows:
Name Age Position
---- --- --------
Bradly A. Jendersee 35 Chairman of the Board of Directors, Chief
Executive Officer and President
Robert D. Lashinski 35 Vice President, Research and Development
and Director
John D. Miller 39 Vice President, Finance, Chief Financial Officer,
Secretary, Treasurer
and Director
W. Kevin Bedsole 36 Vice President, Worldwide Sales and Marketing
Gregory M. French 35 Vice President, Manufacturing
John A. Schiek 41 Vice President, Regulatory Affairs &
Quality Assurance
Creg W. Dance 43 Director of Canadian Operations, AVEC
Bradly A. Jendersee is a founder of the Company and has served as
Chairman of the Board of Directors, Chief Executive Officer and President since
August 1993, as Director of Research and Development from October 1991 to June
1992 and as Vice President of Operations from June 1992 to August 1993. Prior to
joining the Company, Mr. Jendersee served as a Principal Research and
Development Engineer at Schneider (USA) Inc., a medical device manufacturer and
subsidiary of Pfizer Inc. ("Schneider") from February 1991 to October 1991, and
as the Research and Development Engineering Manager of Angioplasty Products with
Mallinckrodt Medical, Inc., Cardiology Division, a medical device manufacturer
from September 1989 to February 1991. Mr. Jendersee also served with Advanced
Cardiovascular Systems, Inc., a subsidiary of Eli Lilly & Company ("ACS"), for
over three years. Mr. Jendersee holds a B.S. degree from the University of
Minnesota.
Robert D. Lashinski has served as Vice President of Research and
Development since January 1995 after joining the Company in July 1992 as
Director of Research and Development. Mr. Lashinski has served as a director of
the Company since August 1993. Mr. Lashinski was employed with Schneider from
October 1990 to June 1992 in both manufacturing and research and development
capacities. In 1989, Mr. Lashinski was a founder of Danforth Biomedical Inc.,
which focuses on the research and development of vascular therapeutic devices.
Prior to 1989 Mr. Lashinski served with ACS in the capacities of Advanced
Development Engineer and Manager of Equipment Design and Development for its
pilot and manufacturing facilities. Mr. Lashinski holds a B.S. degree from the
University of Minnesota.
John D. Miller, C.P.A. is a founder of the Company and has served as
Vice President, Finance since January 1996, Secretary since May 1995 and Chief
Financial Officer, a Director and Treasurer since the Company's inception in
July 1991. Prior to his position as Vice President, Finance, Mr. Miller served
as Director of Finance from July 1991 to January 1996. Mr. Miller performed his
duties to the Company as a consultant from July 1991 to January 1995 when he
began devoting his full working time to the Company. A graduate of Hofstra
University, Mr. Miller was a partner in a New York accounting firm until 1990,
when he went into private practice. Mr. Miller is a member of the American
Institute of Certified Public Accountants and the New York State Society of
Certified Public Accountants.
W. Kevin Bedsole has served as Vice President, Worldwide Sales and
Marketing since January 1996 and served as Director of Worldwide Sales and
Marketing from March 1993 to January 1996. Prior to joining the Company, Mr.
Bedsole spent seven years in interventional cardiology device sales with Cordis
Corporation, a medical device manufacturer. Mr. Bedsole also was employed for
two years as Territory Sales and Product Manager for a Florida based distributor
of Spacelabs critical care monitoring systems. Mr. Bedsole holds a B.S. degree
from Florida State University.
Gregory M. French has served as Vice President of Manufacturing since
January 1996 and served as Director of Manufacturing from October 1992 to
January 1996. From January 1989 to October 1992, Mr. French managed Northern
California manufacturing operations for Peripheral Systems Group, a medical
device manufacturer and a division of Eli Lilly ("PSG"), and also managed PSG's
Advanced Development Group. From June 1985 to January 1989, Mr. French was
employed by ACS, where he managed the development of many new products. Mr.
French holds a B.S. degree from the California Polytechnic State University, San
Luis Obispo.
17
<PAGE>
John A. Schiek has served as Vice President of Regulatory Affairs and
Quality Assurance since January 1996 and served as Director of Regulatory
Affairs and Quality Assurance from February 1993 to January 1996. From January
1989 to 1992, Mr. Schiek was the quality and reliability engineering department
head and from 1992 to 1993 was a member of the executive staff in charge of
Quality Assurance and Regulatory Affairs at PSG. From November 1986 to January
1989, Mr. Schiek worked for ACS as a Quality Engineering Specialist. Mr. Schiek
has worked in the fields of quality assurance, product development and program
evaluation since 1979 and is an ASQC Certified Quality Engineer, Certified
Reliability Engineer and Certified Quality Auditor. Mr. Schiek holds a B.A.
degree from the University of Wisconsin Milwaukee and an M.S. degree in Quality
Assurance from San Jose State University.
Creg W. Dance has served as Director of Canadian Operations at AVEC
since joining the Company in January 1995. From 1989 to January 1995, Mr. Dance
was Director of Research and Development and Clinical Research at Lake Region
Manufacturing Co., Inc., a medical device manufacturer. From 1986 to 1989, Mr.
Dance served as Manager of Research and Development and Manufacturing --
Catheter Division with Medtronic, Inc., a medical device manufacturer and from
1983 to 1986, served as Manufacturing Engineering Manager of ACS. Mr. Dance
holds a B.S. degree from Southern Illinois University.
ITEM 2. PROPERTIES
The Company leases or subleases approximately 42,000 square feet in
Santa Rosa, California, which house the Company's headquarters, administrative
offices, research laboratories, and component manufacturing and warehousing
facilities. All of such leases and subleases were originally due to expire on
November 30, 1996, however, leases on approximately 27,000 square feet have now
been extended until November 30, 1997. The Company's wholly owned subsidiary,
AVEC, leases approximately 14,000 square feet in Richmond, British Columbia,
which house AVEC's offices and assembly facilities. The leases for such
facilities expire at various times between December 1996 and June 1999. The
Company's international subsidiaries maintain international sales offices in
Germany and the United Kingdom and are establishing offices in France,
Switzerland and The Netherlands. The Company's European subsidiaries
collectively lease administrative offices and warehouse space of approximately
6,500 square feet under leases that expire at various times between June 1998
and May 2006.
In May 1996, the Company purchased a 65,000 square foot building in
Santa Rosa, California which will serve as its corporate headquarters. The
transfer of operations from its currently leased facilities will be phased in
over a period of approximately one year commencing September, 1996.
The Company believes that its facilities are adequate to meet its space
requirements through at least fiscal 1997.
ITEM 3. LEGAL PROCEEDINGS
ESS Litigation. In October 1992, a subsidiary of the Company purchased
substantially all the assets ESS in consideration of certain royalty payments
payable by the Company based on the net sales of products using or adapted from
such assets. The purchased assets included the technology which resulted in the
Company's only issued patents. Following such asset purchase, the Company
between June 1993 and March 1995 purchased 100% of the shares of capital stock
of ESS from its shareholders in consideration of shares of Common Stock of the
Company and ESS was merged into the Company. In June 1996, the Company received
notice of a lawsuit filed by Dr. Azam Anwar and Benito Hidalgo in the District
Court of Dallas County, Texas. The suit names as defendants the Company, Bradly
A. Jendersee and John D. Miller, each a director, officer and principal
stockholder of the Company, Dr. Simon H. Stertzer, a director and principal
stockholder of the Company, and Dr. Gerald Dorros, a principal stockholder of
the Company. The suit alleges common law fraud, misrepresentation, securities
fraud, breach of fiduciary duty and constructive fraud by the defendants in
connection with the Company's acquisition of ESS and the Company's acquisition
of shares of ESS from the plaintiffs. The plaintiffs seek unspecified damages,
rescission of the Company's acquisition of the ESS assets and its subsequent
acquisition of the ESS stock, reconstitution of ESS, interest and attorneys'
fees and other costs. The defendants, including the Company, have filed special
appearances and motions objecting to jurisdiction and, subject thereto, motions
to dismiss based on forum non conveniens and, subject thereto, original answers.
The Company has also received notice of a lawsuit filed by Messrs. Anwar and
Hidalgo in the Superior Court of Sonoma County, California, which names the same
defendants as the Texas action and alleges claims for securities fraud and
unregistered securities under the California securities laws, breach of
fiduciary duty and fraud. The plaintiffs seek unspecified damages, rescission of
the Company's acquisition of the ESS assets and its subsequent acquisition of
the ESS stock, and reconstitution of ESS. The Company believes it has
meritorious defenses to the claims in both the Texas and California actions and
intends to vigorously defend itself. However, no assurance can be given as to
the outcome of either action. The inability of the Company to prevail in these
actions, including the loss or impairment of the right to produce products based
on the Company's issued patents, could have a material adverse effect on the
Company's business, financial condition and results of operations.
18
<PAGE>
On July 11, 1996, the Company, along with the individual defendants
named in the Texas and California actions, filed two actions against Mr. Hidalgo
in the Superior Court of San Mateo County, California. The first action alleges
claims for specific performance, breach of contract, breach of the implied
covenant of good faith and fair dealing, and declaratory relief based on
indemnity. These claims arise out of a stock exchange agreement entered into
between Mr. Hidalgo and the Company, and out of Mr. Hidalgo's actions as a
director of ESS. The second action alleges claims for specific performance,
breach of contract, and breach of the implied covenant of good faith and fair
dealing. These claims arise out of a separation and release agreement entered
into between Mr. Hidalgo and the Company. The Company believes it has
meritorious claims in both actions. However, no assurance can be given as to the
outcome of either action.
Claims of Terminated Distributors. In connection with the Company's
termination of certain distributor relationships, several of such distributors
have filed, or have threatened to file, claims against the Company with respect
to such terminations.
In early 1996, in connection with the Company's termination of its
distribution relationship with Cardiologic GmbH effective April 1996, the
Company received notice from such distributor alleging an exclusive distribution
agreement between the parties with a term expiring in December 1998. The
distributor threatened to file an action for breach of the alleged agreement,
including making a claim for compensation equal to one year's average commission
and seeking to enjoin distribution of the Company's products in Germany.
On July 3, 1996, in connection with the Company's termination of its
distribution relationship with Alfatec-Medicor N.V. and Medicor Nederland B.V.
in Belgium and The Netherlands, respectively, effective September 30, 1996, the
Company received notice from such distributors alleging insufficient notice of
termination of a distribution agreement between the parties. The distributor
sought compensation of BF168,509,312 (approximately US$5,500,000 using current
exchange rates). In early September 1996, such distributors delivered to the
Company a settlement proposal that the Company repurchase the Company-related
inventory held by such distributors and pay termination indemnities of an
aggregate of BF105 million (approximately US$3,434,000 using current exchange
rates). The Company has requested from such distributors information that would
support their claims for indemnification, but has not yet received such
information. Such settlement proposal expired on September 20, 1996, and the
distributors have threatened litigation with respect to their claims.
On August 19, 1996, in connection with the Company's termination of its
distribution relationship with Medicor AG and Medicor Zug AG, effective
September 30, 1996, such distributor filed an action against the Company in the
United States District Court for the Northern District of California alleging
breach of written, oral and implied-in-fact contracts, inducement to breach an
employment contract with one of such distributor's employees, intentional
interference with contractual relations, intentional and negligent interference
with prospective economic advantage, misappropriation of trade secrets, and
intentional and negligent misrepresentation. The distributor seeks damages of in
excess of $5,000,000, incidental and consequential damages, injunctions
restraining the Company from hiring the employee for one year from his last date
of employment with such distributor and from using purported trade secrets of
such distributor in connection with the Company's sales efforts, unjust
enrichment damages, punitive damages, interest and attorneys' fees and other
costs. On September 20, 1996, the court handed down an interim order temporarily
limiting the contact that such employee could have with customers of such
distributor pending a further hearing regarding possible injunctive remedies on
October 11, 1996. The court refused to enjoin the Company's hiring of such
employee or the marketing by the Company of its products to the customers of
such distributor.
On August 28, 1996, in connection with the Company's termination of its
distribution relationship with Medi Service, S.A.R.L./Fournitures Hospitalieres
S.A. effective September 30, 1996, the Company received notice from such
distributor that it had filed an action before the Tribunal de Grande Instance
of Mulhouse in France for breach of alleged exclusive distribution agreement for
an indeterminate period between the parties. The action included a claim for
compensation equal to the total value of such distributor's business, which the
distributor valued at FF400,000,000 (approximately US$8,000,000 using current
exchange rates). The Company counterclaimed for unpaid accounts receivable of
US$1,574,697 and for damages for abusive legal proceedings. The parties filed
their briefs and made their oral arguments on September 9, 1996. On September
23, 1996, the Tribunal orally announced that it had rejected nearly all of the
distributor's claims as well as the Company's counterclaim for abusive legal
proceedings. The Tribunal reserved judgement with respect to the repurchase of
Company-related inventory sought by such distributor and the payment of unpaid
accounts receivable sought by the Company. It is expected that such issues will
be placed on the Tribunal's procedural calendar for resolution on or about
October 18, 1996.
19
<PAGE>
With respect to each of the aforementioned distributors, the Company
has consulted with local counsel in the applicable country and believes that the
termination of each of the distributor relationships was lawful. The Company
understands that under the laws of certain countries, including Belgium and The
Netherlands, under certain circumstances, certain indemnities may be claimed by
distributors for insufficient notice of termination and/or goodwill
compensation. The Company intends to vigorously defend itself against pending
claims and any other claims that may be brought by such distributors. However,
no assurance can be given as to the outcome of any pending or threatened
litigation, and any successful claim for damages or injunctive relief by one or
more of such distributors could have a material adverse effect on the Company's
business, financial condition and results of operations.
From time to time, the Company is involved in other legal proceedings
arising in the ordinary course of its business. As of the date hereof, the
Company is not a party to any other legal proceedings with respect to which an
adverse outcome would, in management's opinion, have a material adverse effect
on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Market Information
The Company's common stock trades on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbol
"AVEI". The following table sets forth the high and low closing sales prices for
the Company's Common Stock since public trading commenced on April 3, 1996, as
furnished by NASDAQ. These prices reflect prices between dealers, without retail
markups, markdowns or commissions, and may not represent actual transactions.
High Low
---- ---
Year ended June 30, 1996
Fourth Quarter (beginning April 3) $49.50 $29.50
As of September 16, 1996, there were approximately 109 stockholders of
record (which number does not include the number of stockholders whose shares
are held of record by a brokerage house or clearing agency but does include such
brokerage house or clearing agency as one record holder). The Company believes
it has in excess of 2,000 beneficial holders of the Company's Common Stock. The
Company's stock price has been and may continue to subject to significant
volatility, particularly on a quarterly basis. Any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
significant adverse effect on the trading price of the Company's Common Stock in
any given period. Additionally, the Company participates in a highly dynamic
industry, which has and may continue to result in significant volatility of the
price of the Company's Common Stock. Announcements of technological innovations
or new products by the Company or its competitors, release of reports by
securities analysts, developments or disputes concerning patents or proprietary
rights, regulatory developments, changes in regulatory or medical reimbursement
policies, economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Common Stock. In addition, the securities markets
have from time to time experienced significant price and volume fluctuations
that are unrelated to the operating performance of particular companies or
industries.
Dividend Policy
The Company has not historically paid cash dividends and currently
intends to retain any future earnings for use in its business for the
foreseeable future.
20
<PAGE>
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
<CAPTION>
July 30, 1991
(Inception)
Fiscal Year Ended June 30, Through
---------------------------------------------------------- June 30,
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Sales $ 55,228 $ 17,141 $ 2,897 $ 15 $ 7
Cost of sales 10,565 4,515 1,631 5 1
-------- -------- -------- -------- --------
Gross margin 44,663 12,626 1,266 10 6
Operating expenses:
Research and development 6,480 987 594 398 365
Selling, general and 8,437 1,807 870 973 233
administrative
Settlement costs -- 425 358 -- --
-------- -------- -------- -------- --------
Operating income (loss) 29,746 9,407 (556) (1,361) (592)
Interest and other income 1,460 237 21 549 17
-------- -------- -------- -------- --------
Income (loss) before provision for 31,206 9,644 (535) (812) (575)
income taxes
Provision for income taxes 10,766 3,004 3 2 1
-------- -------- -------- -------- --------
Net income (loss) $ 20,440 $ 6,640 $ (538) $ (814) $ (576)
======== ======== ======== ======== ========
Net income (loss) per share $ 0.71 $ 0.24 $ (0.03) $ (0.04) $ (0.05)
Shares used in per share calculation 28,260 27,194 21,290 20,045 11,002
</TABLE>
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------------
(in thousands) 1996 1995 1994 1993 1992
---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 59,238 $ 2,533 $ 1,882 $ 82 $ 635
Working capital 106,925 4,413 415 161 735
Total assets 122,157 13,089 3,086 706 1,188
Retained earnings (accumulated deficit) 25,152 4,712 (1,928) (1,390) (576)
Total stockholders' equity 116,571 8,129 1,004 607 1,163
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The statements contained in this Form 10-K that are not historical are
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, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements in this Item 7.
include, without limitation, statements regarding the extent and timing of new
product introductions, competition, regulatory approvals, expenditures and
margin levels, and the establishment of direct sales forces in targeted
countries. All forward-looking statements in this document are based on
information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statement. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements. Additional risk factors include those
discussed in the section entitled "Item 1. Business", as well as those that may
be set forth in the reports filed by the Company from time to time on Forms 10-Q
and 8-K.
Since its inception in 1991, the Company has been engaged in the
design, development, manufacturing and marketing of stent systems and balloon
angioplasty catheters designed to be utilized in connection with the treatment
of atherosclerosis. The Company began commercial sales of its balloon
angioplasty catheters in October 1993 and its coronary stents in October 1994.
The Company's products are currently commercially sold only outside of the
United States, primarily in Europe and Japan. In Japan, the Company currently
sells only balloon catheters. The Company is seeking regulatory approval for
sale of certain of its stent systems in Japan and Spain. In November 1995, the
Company received FDA clearance to conduct clinical trials with the Micro Stent
and Micro Stent II in the United States under an IDE. Subsequently, the Company
received FDA approval to include the Micro Stent II XL in the same study. The
Company does not expect FDA approval of its stent products for sale in the
United States prior to 1998, and there can be no assurance when or if such
approval will be obtained. As a result, the Company expects international sales
to account for substantially all of its revenues for at least the next 18
months. The Company expects to incur substantial clinical research and other
costs in connection with obtaining regulatory approvals for its stents in the
United States and other countries.
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The Company has a limited history of operations and only began to
generate positive net income in fiscal 1995. The increase in the Company's sales
to date has been due to greater demand for the Company's stent systems and, to a
lesser degree, its coronary balloon catheter systems. In order to support
increased levels of sales in the future and to augment its long term competitive
position, the Company anticipates that it will be required to make continuing
significant additional expenditures in manufacturing, research and development,
sales and marketing and administration, both in absolute dollars and as a
percentage of sales. In addition, the Company has experienced higher
administrative expenses resulting from its obligations as a public reporting
company.
To date, substantially all of the Company's sales have been to
international distributors who resell products to health care providers. The
Company continually reviews its existing distributor arrangements. The Company
terminated its relationship with distributors in Germany and the United Kingdom
in April and May 1996, respectively, and has now established a direct sales
force in those countries. In addition, the Company has notified its distributors
in France, Switzerland, Belgium and The Netherlands that it will terminate its
relationship with those distributors effective October 1, 1996. Thereafter, the
Company expects to establish a direct sales force in those countries. The
establishment and maintenance of direct sales forces will require significant
ongoing expenditures, additional management resources and may result in
additional costs to eliminate existing distributor relationships (including
litigation by former distributors), and there can be no assurance that any such
direct sales force will be successful. See "Item 3. Legal Proceedings."
The Company currently manufactures and ships product shortly after the
receipt of orders, and anticipates that it will do so in the future.
Accordingly, the Company has not developed a significant backlog and does not
anticipate it will develop a material backlog in the future.
The Company anticipates that its results of operations may fluctuate
for the foreseeable future due to several factors, including the timing of new
product introductions or transitions to new products, competition (including
pricing pressures), actions related to regulatory and third party reimbursement
matters, the Company's ability to manufacture its products efficiently, the
timing of research and development expenses (including clinical trial related
expenditures), and seasonal factors impacting the number of elective angioplasty
procedures. In addition, the Company's results of operations could be affected
by the timing of orders from distributors, expansion of the Company's
distributor network (including expenses in connection with termination of former
distributors), the ability of the Company's distributors to effectively promote
the Company's products and the ability of the Company to quickly and
cost-effectively establish a direct sales force in targeted countries. The
Company's limited operating history makes accurate prediction of future
operating results difficult or impossible. Although the Company has experienced
growth in recent years, there can be no assurance that, in the future, the
Company will sustain revenue growth or remain profitable on a quarterly or
annual basis or that its growth will be consistent with predictions made by
securities analysts. The Company has previously experienced, and it is likely to
re-experience in one or more future quarters, operating results which are below
the expectations of public market analysts and investors. In such event, the
price of the Company's Common Stock has been and would likely be materially and
adversely affected.
Results of Operations - Years Ended June 30, 1996 and 1995
Net sales. The Company's net sales for fiscal 1996 were $55.2 million,
an increase of $38.1 million or 223% from $17.1 million in fiscal 1995. The
increase in net sales principally reflected additional unit sales of the Micro
Stent family of products, particularly the Micro Stent II that was released in
certain countries internationally in October 1995. The Company anticipates that
stent sales will continue to increase as a percentage of total net sales. In the
fourth quarter of fiscal 1996, the Company commenced direct sales operations in
the United Kingdom and Germany. All other sales made by the Company are at
present through unaffiliated distributors; however, the Company plans to begin
selling directly in France, Switzerland, Belgium and The Netherlands in the
second quarter of fiscal 1997.
Cost of sales. Cost of sales increased in absolute dollars to $10.6
million in fiscal 1996 from $4.5 million in fiscal 1995, and decreased as a
percentage of net sales to 19% in fiscal 1996 from 26% in fiscal 1995. The
increase in absolute dollars was primarily a result of the increase in the
volume of products sold and, to a lesser extent, the costs of additional
manufacturing capacity and personnel necessary to support increased sales
volume. The decrease as a percentage of net sales resulted primarily from the
leveraging of certain fixed overhead expenses across a higher base of sales and
as a result of the change in sales mix towards higher margin stent systems. The
direct sales operations that commenced in the fourth quarter of fiscal 1996 in
the United Kingdom and Germany did not significantly affect the gross margin.
The Company expects that the present and anticipated direct sales operations in
Europe, coupled with an expected continuing shift in sales mix towards higher
margin stent systems, will generally support the margin levels of fiscal 1996.
These positive effects on the gross margin are likely to be offset by increased
pressure on sales prices from competition and increased manufacturing and
facility costs as the Company's operations continue to expand. Thus, there can
be no assurance that cost of sales as a percentage of total net sales will
continue to decrease.
22
<PAGE>
Research and development. Research and development expenses increased
to $6.5 million in fiscal 1996 from $1.0 million in fiscal 1995. A one-time
compensation expense of $2.6 million was recognized in fiscal 1996 in connection
with the termination of certain patent royalty obligations discussed below.
Excluding the effect of this charge, research and development expenses increased
to $3.9 million or 7% of net sales for fiscal 1996 from $1.0 million or 6% of
sales for fiscal 1995. The increase was primarily due to the addition of
research and development personnel and the commencement of clinical trials with
the Micro Stent and Micro Stent II following FDA clearance in November 1995. The
Company expects research and development expenditures to continue to increase
both in absolute terms and as a percentage of net sales as United States and
international clinical trial activities increase in size and scope and as new
product development activities increase.
Selling, general and administrative. Selling, general and
administrative expenses increased to $8.4 million in fiscal 1996 from $1.8
million in fiscal 1995. A one-time compensation expense of $2.6 million was
recognized in fiscal 1996 in connection with the termination of certain patent
royalty obligations discussed below. Excluding the effect of this charge,
selling, general and administrative expenses increased in absolute dollars to
$5.8 million or 11% of net sales for fiscal 1996 from $1.8 million or 11% of net
sales for fiscal 1995. The increase in absolute dollars primarily reflected
additional costs of marketing and other personnel necessary to support the
Company's increased level of operations and, to a lesser extent, expenses
resulting from the Company's status as a public company. The Company expects
selling, general and administrative expenses to increase both in absolute
dollars and as a percentage of sales in the future primarily due to the recent
and anticipated commencement of direct sales operations in certain European
countries, as well as increases in sales and support staff necessary to
introduce, market and support new products and increased finance and
administrative costs in connection with public company obligations.
Interest and other income. Interest and other income increased to $1.5
million in fiscal 1996 from $0.2 million in fiscal 1995. The increase
principally reflects additional interest on increased cash balances and
short-term investments arising from the utilization of proceeds from the
Company's initial public offering in April 1996.
Provision for income taxes. The Company's effective tax rate for fiscal
1996 was 34.5% resulting in a provision for income taxes of $10.8 million,
compared to 31% resulting in a provision for income taxes of $3.0 million for
fiscal 1995. The rates reflect the benefits derived from the Company's foreign
sales corporation and appropriate research credits. The increase in the rate in
fiscal 1996 was primarily as a result of the Company's higher earnings in that
year and due to the utilization of net operating loss carryforwards in fiscal
1995. The Company expects that its effective tax rate will increase from 34.5%
in fiscal 1996 to an effective rate that is higher in the future.
Net income. The Company had net income of $20.4 million for fiscal 1996
compared to $6.6 million for fiscal 1995. Earnings per share increased to $0.71
in fiscal 1996 from $0.24 in fiscal 1995. Net income excluding the one-time
compensation expense of $5.2 million discussed below, together with the
associated income tax benefits of $1.7 million, would have been $23.9 million
for fiscal 1996, resulting in earnings per share of $0.84.
In February 1996, the Company entered into certain amendments to the
employment agreements of Bradly A. Jendersee and Robert D. Lashinski, executive
officers and directors of the Company. Pursuant to such amendments, each of
Messrs. Jendersee and Lashinski agreed to the elimination of provisions
entitling them to certain royalties from the sale or license by the Company of
products covered by patents for which such persons were named as inventors. In
connection with such amendments, the Company agreed to pay to Messrs. Jendersee
and Lashinski an aggregate of approximately $3.9 million in cash (less an
estimated amount of approximately $2,600,000 required to be withheld by the
Company on behalf of Messrs. Jendersee and Lashinski with respect to the
delivery of the cash and shares under applicable federal and state law) and
issue to them an aggregate of 110,000 shares of Common Stock (55,000 shares
each) at an attributed value of $12 per share. Such payments to Messrs.
Jendersee and Lashinski resulted in the recognition by the Company in the
quarter ending March 31, 1996, of a one-time compensation expense of $5.2
million.
Results of Operations -- Years Ended June 30, 1995 and 1994
Net sales. Sales increased to $17.1 million in fiscal 1995 from $2.9
million in fiscal 1994. During fiscal 1995, sales of stent systems represented
$13.0 million or 76% of sales compared to no sales in fiscal 1994, and sales of
coronary balloon catheter systems represented $4.1 million or 24% of sales,
compared to $2.9 million or 100% of sales in fiscal 1994. The increase in total
sales was due primarily to significant increases in unit sales of the Micro
Stent product released in October 1994.
Cost of sales. Cost of sales increased in absolute dollars to $4.5
million in fiscal 1995 from $1.6 million in fiscal 1994, and decreased as a
percentage of net sales to 26% in fiscal 1995 from 55% in fiscal 1994. The
increase in absolute dollars was primarily a result of the increase in the
volume of products sold. The increased volume of products sold also
23
<PAGE>
resulted in the decrease in cost of sales as a percentage of net sales, as
certain fixed overhead costs were leveraged across a significantly higher sales
base.
Research and development expenses. Research and development expenses
increased to $987,000 in fiscal 1995 from $594,000 in fiscal 1994, and decreased
as a percentage of sales to 6% in fiscal 1995 from 21% in fiscal 1994. The
increase in absolute dollars was primarily due to increased expenses related to
the development of the Micro Stent II system, additional expenditures in
connection with clinical trials and increases in research and development
personnel and facilities. The decrease as a percentage of sales was the result
of significantly higher sales in fiscal 1995.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to $1.8 million in fiscal 1995 from $870,000
in fiscal 1994, and decreased as a percentage of sales to 11% in fiscal 1995
from 30% in fiscal 1994. The increase in absolute dollars primarily reflected
additional costs of marketing and other personnel necessary to support the
higher level of operations. The decrease as a percentage of sales was primarily
the result of leveraging certain fixed selling, general and administrative
expenses across a significantly higher sales base in fiscal 1995.
Other expenses. The Company incurred settlement costs of $425,000 in
fiscal 1995 in connection with a legal proceeding settled in July 1995, in which
the plaintiff alleged that the Company breached a joint venture agreement,
compared to settlement costs in fiscal 1994 of $358,000 in connection with the
termination of a distributorship agreement and a separation agreement with a
former officer of the Company.
Interest and other income. The Company had other income of $237,000 in
fiscal 1995, compared to $21,000 in fiscal 1994. The increase was primarily due
to interest income received on the Company's increased cash balances as well as
fees received from distributors.
Provision for income taxes. The Company's provision for income taxes
was $3.0 million in fiscal 1995, compared to $3,000 in fiscal 1994. The increase
in this provision was a result of the Company's significantly higher earnings in
fiscal 1995. The Company utilized $1,072,000 of net operating loss carryforwards
in fiscal 1995.
Net income. The Company had net income of $6.6 million for fiscal 1995
compared to a net loss of $538,000 for fiscal 1994.
Liquidity and Capital Resources
Net cash used in operating activities was $20.5 million for fiscal
1996. Net cash provided by operating activities was $3.3 million and $1.3
million during fiscal 1995 and 1994, respectively. The net cash used in
operating activities for fiscal 1996 include the Company's purchase of
short-term investments totaling $31.1 million. Excluding these investments, the
Company had net cash provided by operating activities of $10.6 million,
principally arising as a result of positive net income for fiscal 1996. The net
cash provided by operating activities for fiscal 1995 was a result of positive
net income from operations during such period, while those for fiscal 1994 were
primarily due to advances from a distributor. As a result of significantly
higher sales in fiscal 1996, the Company experienced significant increases in
accounts receivable and inventory levels as of June 30, 1996 compared to June
30, 1995 and 1994. The Company expects accounts receivable and inventories to
increase in absolute dollar amounts as sales increase. The net increase in cash
and cash equivalents for fiscal 1996 was $56.7 million. This included net
proceeds of approximately $81 million received in connection with the Company's
initial public offering in April 1996.
As of June 30, 1996, the Company's principal sources of liquidity
included an aggregate of $91.6 million in cash, cash equivalents and short-term
investments. As of the date of this report, the Company has no outstanding debt.
The Company expects to incur substantial additional costs, including
costs related to increased sales and marketing activities (including the
establishment of direct sales forces internationally), increased research and
development, expenditures in connection with seeking regulatory approvals and
conducting additional clinical trials, capital equipment and other costs
associated with expansion of the Company's manufacturing capabilities. The
Company believes its existing funds and funds expected to be generated from
operations, will be sufficient to meet its projected working capital and other
cash requirements through at least 1997. Thereafter, the Company may require
additional equity or debt financing to address its working capital needs or to
provide funding for capital expenditures. However, there can be no assurance
that events in the future will not require the Company to seek additional
capital sooner or, if so required, that it will be available on terms acceptable
to the Company.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the Company's consolidated financial
statements as of June 30, 1996 and 1995 and for each of the three years in the
period ended June 30, 1996.
Quarterly Results of Operations
The following table sets forth certain unaudited consolidated results
of operations for the fiscal years ended June 30, 1996 and 1995. This
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normally recurring adjustments) necessary to fairly present this information.
The results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
Year ended June 30, 1996
Net sales $10,572 $11,142 $15,589 $17,926
Gross profit 8,081 8,715 12,693 15,174
Operating income 7,087 7,246 4,625 10,787
Net income 4,756 4,871 3,101 7,712
Net income per share 0.17 0.18 0.11 0.25
Year ended June 30, 1995
Net sales $ 2,343 $ 2,457 $ 5,516 $ 6,825
Gross profit 1,747 1,807 4,159 4,913
Operating income 1,376 1,265 3,246 3,520
Net income 954 873 2,323 2,490
Net income per share 0.04 0.03 0.09 0.09
Results of the Company's operations may fluctuate significantly from
quarter to quarter and will depend on numerous factors, including (i) new
product introductions or transitions to new products, (ii) costs and the timing
of establishing direct sales operations, (iii) sales by distributors, (iv) mix
of sales among distributors and the Company's direct sales force, (v)
competition (including pricing pressures), (vi) timing of regulatory and third
party reimbursement approvals, (vii) the level of third party reimbursement,
(viii) the Company's ability to manufacture its products efficiently, (ix)
timing of research and development expenses, including clinical trial related
expenditures, and (x) seasonal factors impacting the number of elective
angioplasty procedures. Announcements or expected announcements by the Company
or its competitors of new products or technologies could cause customers to
defer purchases of existing products of the Company and alter the mix of
products sold by the Company, which could materially adversely affect the
Company's business, financial condition and results of operations. There can be
no assurance that future products or product enhancements can be successfully
introduced or that such introductions will not adversely affect the demand for
existing products. Since the Company believes there are typically fewer elective
interventional procedures during the summer months due to vacation schedules of
patients and health care providers, especially in Europe, sales of the Company's
products may slow during the Company's first fiscal quarter of each year. The
Company expects that its quarterly operating results will fluctuate in the
future as a result of these and other factors. Due to such quarterly
fluctuations in operating results, quarter to quarter comparisons of the
Company's operating results are not necessarily meaningful and should not be
relied upon as indicators of likely future performance or annual operating
results.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The information required by this item was previously reported on the
Registrant's Current Report on Form 8-K dated May 10, 1996.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Registrant's directors will be set forth under
the caption "Election of Directors Nominees" in Registrant's proxy statement for
use in connection with the Annual Meeting of Stockholders to be December 4, 1996
(the "1996 Proxy Statement") and is incorporated herein by reference. The 1996
Proxy Statement will be filed with the Securities and Exchange Commission within
120 days after the end of the Registrant's fiscal year.
Information regarding Registrant's executive officers is set forth in
this Form 10-K in Part I, Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference from the information set forth under the caption "Compensation of
Executive Officers" in the Company's 1996 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference into
this Form 10-K from the information set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's 1996
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference from the information set forth under the caption "Certain
Transactions" in the Company's 1996 Proxy Statement.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
Page
----
(1)Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets at June 30, 1996 and 1995 33
Consolidated Statements of Operations for the three years ended
June 30, 1996 34
Consolidated Statements of Stockholders' Equity for the three years
ended June 30, 1996 35
Consolidated Statements of Cash Flows for the three years ended
June 30, 1996 36
Notes to Consolidated Financial Statements 37
(2)Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts 48
All other schedules are omitted because they are not required, they are
not applicable or the information is already included in the financial
statements or notes thereto.
(3)Exhibits
Exhibit
Number Description of Document
------ ------------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-1 No. 333-00824, filed February 1,
1996).
3.2 Amended By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
4.1 Specimen stock certificate (incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registrant's Registration Statement on
Form S-1 No. 333-00824, filed March 7, 1996).
10.1* Registrant's 1996 Equity Incentive Plan.
10.2* Registrant's 1996 Non-Employee Directors' Stock Option Plan.
10.3 Distribution Agreement dated July 17, 1993 between the Company and
Century Medical, Inc (incorporated by reference to Exhibit 10.3 to
the Registrant's Registration Statement on Form S-1 No. 333-00824,
filed February 1, 1996).
10.4 Importing and Distribution Agreement dated December 2, 1993 between
the Company and Japan Lifeline Co., Ltd (incorporated by reference
to Exhibit 10.4 to the Registrant's Registration Statement on Form
S-1 No. 333-00824, filed February 1, 1996).
10.5 Termination Agreement dated August 11, 1995 between the Company and
Century Medical, Inc. (incorporated by reference to Exhibit 10.5 to
the Registrant's Registration Statement on Form S-1 No. 333-00824,
filed February 1, 1996).
10.6 Employment Agreement, dated as of March 17, 1995, between the
Company and Bradly A. Jendersee (incorporated by reference to
Exhibit 10.6 to the Registrant's Registration Statement on Form S-1
No. 333-00824, filed February 1, 1996).
10.7 Employment Agreement Amendment between the Company and Bradly A.
Jendersee (incorporated by reference to Exhibit 10.7 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
10.8 Employment Agreement, dated as of March 17, 1995, between the
Company and Robert D. Lashinski (incorporated by reference to
Exhibit 10.8 to the Registrant's Registration Statement on Form S-1
No. 333-00824, filed February 1, 1996).
10.9 Employment Agreement Amendment between the Company and Robert D.
Lashinski (incorporated by reference to Exhibit 10.9 to Amendment
No. 1 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
27
<PAGE>
10.10 Employment Agreement, dated as of March 17, 1995, between the
Company and John D. Miller (incorporated by reference to Exhibit
10.10 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.11 Employment Agreement, dated as of March 17, 1995, between the
Company and W. Kevin Bedsole (incorporated by reference to Exhibit
10.11 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.12 Employment Agreement, dated as of March 17, 1995, between the
Company and Gregory M. French. (incorporated by reference to Exhibit
10.12 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.13 Employment Agreement, dated as of March 17, 1995, between the
Company and John A. Schiek (incorporated by reference to Exhibit
10.13 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.14 Stock Exchange Agreement, dated as of December 22, 1994, between the
Company and Benito Hidalgo (incorporated by reference to Exhibit
10.14 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.15 Stock Exchange Agreement, dated as of March 27, 1995, between the
Company and Michael D. Bonneau (incorporated by reference to Exhibit
10.15 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.16 Sublease dated October 24, 1991, between Custodis-Ecodyne, Inc. and
the Company, as amended on October 24, 1991 and May 24, 1993,
concerning the facilities at 5345 and 5349 Skylane Boulevard, Santa
Rosa, California (incorporated by reference to Exhibit 10.16 to the
Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.17 Lease, dated July 22, 1994, between 5250 Aero Drive Partners and the
Company, concerning the facility at 3621 Westwind Boulevard, Santa
Rosa, California (incorporated by reference to Exhibit 10.17 to the
Registrant's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.18 Lease Assignment Agreement, dated May 17, 1995, between U.S.
Electricar, Inc. and the Company, assuming the lease dated March 11,
1994, concerning the facility at 5341 Skylane Boulevard, Santa Rosa,
California (incorporated by reference to Exhibit 10.18 to the
Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.19 Lease, dated August 10, 1994, between Bentall Properties Ltd,
Westminster Management Corporation and the Company, concerning the
facility at 13155 Delf Place, Richmond, British Columbia
(incorporated by reference to Exhibit 10.19 to the Registrant's
Registration Statement on Form S-1 No. 333-00824, filed February 1,
1996).
10.20 Sublease Assignment, dated August 30, 1995, between U.S. Electricar,
Inc. and the Company, assuming the sublease dated March 16, 1994,
concerning the facility at 5355 Skylane Boulevard, Santa Rosa,
California (incorporated by reference to Exhibit 10.20 to the
Registrant's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.21 Lease, dated July 31, 1995, between Bentall Properties Ltd,
Westminster Management Corporation and the Company, concerning the
facility at 13140 Delf Place, Richmond, British Columbia
(incorporated by reference to Exhibit 10.21 to the Registrant's
Registration Statement on Form S-1 No. 333-00824, filed February 1,
1996).
10.22 Lease, dated September 1, 1993, between Morguard Investments Limited
and the Company, concerning the facility at 13-3691 Viking Way,
Richmond, British Columbia (incorporated by reference to Exhibit
10.22 to the Registrant's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.23 Agreement for Sale of Real Property and Escrow Instructions, dated
April 17, 1996 between the Company and Union Oil Company of
California (incorporated by reference to Exhibit 10.23 to the
Registrant's Form 10-Q for the quarterly period ended March 31,
1996, filed May 10, 1996).
11.1* Statement regarding calculation of net income (loss) per share.
16.1 Letter, dated March 5, 1996, from Anthony Capeci regarding change in
certifying accountant (incorporated by reference to Exhibit 16.1 to
Amendment No. 1 to the Registrant's Registration Statement on Form
S-1 No. 333-00824, filed March 7, 1996).
16.2 Letter, dated May 10, 1996, from Coopers & Lybrand L.L.P. regarding
change in certifying accountant (incorporated by reference to
Exhibit 16.2 to the Registrant's Form 8-K, filed May 10, 1996).
21.1* Subsidiaries of Registrant.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (references made to the signature page of this
Form 10-K).
27* Financial Data Schedule
- -----------
* Filed herewith.
28
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(b) Reports on Form 8-K
The following Reports on Form 8-K were filed during the quarter ended June
30, 1996:
Current Report on Form 8-K dated May 10, 1996 announcing the Company's
change in certifying accountants.
Current Report on Form 8-K dated June 28, 1996 announcing the filing of
a lawsuit against the Company by former stockholders of Endovascular
Support Systems, Inc.
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed under
Item 14(a)(2).
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ARTERIAL VASCULAR ENGINEERING, INC.
Date: September 25, 1996 /s/ Bradly A. Jendersee
-------------------------------------------------
Bradly A. Jendersee
Chairman of the Board, CEO and President
KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bradly A. Jendersee, and John D. Miller, and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming that all said
attorneys-in-fact and agents, or any of them or their or his substitute or
substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: September 25, 1996 /s/ Bradly A. Jendersee
-------------------------------------------------
Bradly A. Jendersee
Chairman of the Board, CEO and President
(Principal Executive Officer)
Date: September 25, 1996 /s/ John D. Miller
-------------------------------------------------
John D. Miller
Vice President Finance, CFO, Secretary, Treasurer
and Director
(Principal Financial and Accounting Officer)
Date: September 25, 1996 /s/ Robert D. Lashinski
-------------------------------------------------
Robert D. Lashinski
Vice President Research and Development
and Director
Date: September 25, 1996 /s/ Simon Stertzer
-------------------------------------------------
Dr. Simon Stertzer
Director
Date: September 25, 1996 /s/ J. Irawan Sugeng
-------------------------------------------------
Dr. J. Irawan Sugeng
Director
30
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1996, 1995 AND 1994
with
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
31
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders of
Arterial Vascular Engineering, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Arterial
Vascular Engineering, Inc. and Subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Arterial Vascular Engineering, Inc. and Subsidiaries at June 30, 1996 and 1995,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended June 30, 1996, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
September 19, 1996
32
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30,
----------------------
1996 1995
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 59,238 $ 2,533
Short-term investments 32,354 --
Accounts receivable, net of allowance for doubtful
accounts of $290 and $104 at June 30, 1996 and 1995 13,213 4,977
Inventories 3,352 920
Deferred income tax 2,016 673
Prepaid expenses and other current assets 2,338 270
--------- ---------
Total current assets 112,511 9,373
Investments -- 1,400
Deferred income tax 172 415
Property, plant and equipment, net 8,974 1,252
Purchased technology and other intangible assets, net 500 649
--------- ---------
Total assets $ 122,157 $ 13,089
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 1,671 $ 352
Accrued expenses 2,479 1,164
Customer deposits -- 1,405
Income taxes payable 1,436 2,039
--------- ---------
Total current liabilities 5,586 4,960
--------- ---------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value
Authorized: 5,000 shares
Issued and outstanding: None -- --
Common Stock, $0.001 par value
Authorized: 100,000 shares
Issued and outstanding: 30,862 and 21,681 shares
at June 30, 1996 and 1995 31 22
Additional paid-in capital 91,776 6,820
Notes receivable for common stock (301) (3,126)
Deferred compensation (87) (299)
Retained earnings 25,152 4,712
--------- ---------
Total stockholders' equity 116,571 8,129
--------- ---------
Total liabilities and stockholders' equity $ 122,157 $ 13,089
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
33
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Year Ended June 30,
------------------------------
1996 1995 1994
------- ------- -------
Net sales $55,228 $17,141 $ 2,897
Cost of sales 10,565 4,515 1,631
------- ------- -------
Gross profit 44,663 12,626 1,266
------- ------- -------
Operating expenses:
Research and development 6,480 987 594
Selling, general and administrative 8,437 1,807 870
Settlement costs -- 425 358
------- ------- -------
Total operating expenses 14,917 3,219 1,822
------- ------- -------
Operating income (loss) 29,746 9,407 (556)
Interest and other income 1,460 237 21
------- ------- -------
Income (loss) before provision for income taxes 31,206 9,644 (535)
Provision for income taxes 10,766 3,004 3
------- ------- -------
Net income (loss) $20,440 $ 6,640 $ (538)
======= ======= =======
Net income (loss) per share $ 0.71 $ 0.24 $ (0.03)
Shares used in per share calculation 28,260 27,194 21,290
The accompanying notes are an integral part of these
consolidated financial statements
34
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Notes Retained
Common Stock Additional Receivable Earnings
--------------- Paid-in for Common Deferred (Accumulated
Shares Amount Capital Stock Compensation Deficit) Total
------ ------ ------- ---------- ------------ ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1993 16,881 $ 17 $ 2,228 $ - $ (247) $(1,390) $ 608
Issuance of common stock 1,016 1 713 - - - 714
Deferred compensation - - 452 - (452) - -
Amortization of deferred
compensation - - - - 220 - 220
Net loss - - - - - (538) (538)
------ ---- ------- ------ ------ ------- --------
Balances, June 30, 1994 17,897 18 3,393 - (479) (1,928) 1,004
Issuance of common stock 110 - 100 - - - 100
Common stock repurchased and
canceled (275) - (300) - - - (300)
Issuance of common stock for stock
in Endovascular Support
Systems, Inc. 511 1 463 - - - 464
Issuance of common stock for notes
receivable 3,438 3 3,123 (3,126) - - -
Deferred compensation - - 91 - (91) - -
Cancellation of deferred
compensation - - (50) - 50 - -
Amortization of deferred
compensation - - - - 221 - 221
Net income - - - - - 6,640 6,640
------ ---- ------- ------ ------ ------- --------
Balances, June 30, 1995 21,681 22 6,820 (3,126) (299) 4,712 8,129
Issuance of common stock 110 - 1,321 - - - 1,321
Issuance of common stock upon
exercise of stock options 4,821 4 31 - - - 35
Common stock offering (Note 9) 4,250 5 81,310 - - - 81,315
Amortization of deferred
compensation - - - - 212 - 212
Income tax reduction relating to
stock plans - - 2,294 - - - 2,294
Repayment of notes receivable - - - 2,825 - - 2,825
Net income - - - - - 20,440 20,440
------ ---- ------- ------ ------ ------- --------
Balances, June 30, 1996 30,862 $31 $91,776 $ (301) $ (87) $25,152 $116,571
====== === ======= ======= ====== ======= ========
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
35
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,440 $ 6,640 $ (538)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization 817 274 82
Provision for doubtful accounts 186 100 4
Provision for obsolete inventory 261 60 --
Amortization of deferred compensation 212 221 220
Income tax reduction relating to stock plans 2,294 -- --
Deferred income taxes (1,100) (1,088) --
Changes in assets and liabilities:
Short-term investments (31,054) -- --
Accounts receivable (8,422) (4,713) (365)
Inventories (2,693) (795) (130)
Prepaids and other current assets (2,068) (204) 53
Accounts payable 1,319 13 285
Accrued liabilities 1,315 778 304
Customer deposits (1,405) 11 1,394
Income taxes payable (603) 2,039 --
-------- ------- -------
Net cash provided by (used in) operating
activities (20,501) 3,336 1,309
-------- ------- -------
Cash flows from investing activities:
Proceeds (purchase) of investments 100 (1,400) --
Acquisition of property, plant and equipment (8,390) (977) (223)
Acquisition of stock in Endovascular Support
Systems, Inc. -- (108) --
-------- ------- -------
Net cash used in investing activities (8,290) (2,485) (223)
-------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 82,671 100 714
Repurchase of common stock -- (300) --
Repayment of notes receivable 2,825 -- --
-------- ------- -------
Net cash provided by (used in) financing
activities 85,496 (200) 714
-------- ------- -------
Net increase in cash and cash equivalents 56,705 651 1,800
Cash and cash equivalents, at beginning of period 2,533 1,882 82
-------- ------- -------
Cash and cash equivalents, at end of period $ 59,238 $ 2,533 $1,882
======== ======= ======
Supplemental cash flow information:
Income taxes paid $ 10,175 $ 2,075 $ 3
Supplemental disclosures of noncash investing
and financing activities:
Issuance of common stock for stock in
Endovascular Support Systems, Inc. -- $ 464 --
Issuance of common stock for notes receivable -- $ 3,126 --
Transfer of available-for-sale investments to
trading $ 1,300 -- --
<FN>
The accompanying notes are an integral part of these
consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Arterial Vascular Engineering, Inc., formerly Applied Vascular Engineering,
Inc., (the "Company") was incorporated in Delaware in July 1991 to address
the rapidly expanding market for angioplasty products. The Company's
strategy is to manufacture high quality, strategically priced angioplasty
products, targeted at first to international markets and ultimately to the
U.S. market.
Arterial Vascular Engineering Canada, Inc. is a wholly owned subsidiary,
incorporated in Canada, to perform certain assembly and distribution
functions. Proprietary Extrusion Technologies, Inc. is a wholly owned
subsidiary, formed to offer custom extrusion services to others. AVE
Manufacturing, Inc. is a wholly owned subsidiary that currently has no
material assets or activities. AVE International Sales, Inc. is a wholly
owned subsidiary, incorporated in Barbados as a Foreign Sales Corporation,
to perform certain international sales functions. Arterial Vascular
Engineering UK Limited and "David" Neunzehnte Beteiligungs- und
Verwaltungsgesellschaft mbH are wholly owned subsidiaries incorporated in
the United Kingdom and Germany, respectively, to perform certain sales and
distribution functions.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalents are maintained with financial institutions in the United
States, Canada and Europe. Deposits in these banks may exceed the amount of
insurance provided on such deposits. These deposits may be redeemed upon
demand and, therefore, bear minimal risk. The Company has not experienced
any losses on its deposits of cash and cash equivalents.
Concentration of Credit Risk
The Company currently markets and sells substantially all of its products
internationally in Europe and Asia. At June 30, 1996, one customer
represented 15% of the accounts receivable balance. The Company performs
ongoing credit evaluations of its customers and provides an allowance for
expected losses but has not experienced any losses to date.
One customer represented 81% of the Company's sales for the year ended June
30, 1994. For the years ended June 30, 1995 and 1996, the Company had sales
to three customers representing 26%, 16% and 14% and 20%, 16% and 10% of
sales, respectively.
Investments
The Company classifies all investments as trading securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities (SFAS No. 115)." Such
investments are recorded at market value and unrealized holding gains and
losses are reflected in earnings. Market value is determined by the most
recent traded price of the security at the balance sheet date. Net realized
gains or losses are determined on the specific identification cost method.
37
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies, continued
During the year ended June 30, 1996, the Company re-evaluated its
investment policies and reclassified all investments previously held as
available-for-sale to trading securities. The reclassification did not
result in any unrealized gains or losses being included in net income.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. Provisions are made in each year for the estimated
effects of excess and obsolete inventories. Actual excess and obsolete
inventories may differ from the Company's estimates and such differences
could be material to the consolidated financial statements.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of property,
plant and equipment is computed using the straight-line method over the
estimated useful lives of the respective assets (three to forty years), or
over the shorter of the lease term or the estimated useful life of
leasehold improvements.
Construction in progress consists of expenditures incurred for the
expansion of the Company's existing facilities. Depreciation commences as
these assets are placed in service.
Purchased Technology and Other Intangible Assets
Purchased technology is capitalized at cost and amortized on a
straight-line basis over its useful life estimated of five years.
Other intangible assets consist primarily of organization costs, and are
carried at cost less accumulated amortization. Costs are amortized over the
estimated useful lives of the related assets.
Research and Development
Research and development costs are expensed as incurred.
Revenue Recognition
The Company recognizes revenue upon shipment of product to distributors
provided there is no conditional payment upon sale by the distributor to
other third parties and provided there is no right of return on unsold
merchandise.
Income Taxes
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes (SFAS No. 109)." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
Foreign Currency Translation
The assets and liabilities, capital accounts and revenue and expense
accounts of the Company's foreign subsidiaries have been translated using
the exchange rates at the balance sheet date, historical exchange rates,
and the weighted average exchange rates for the period, respectively. The
functional currency of the Company's foreign subsidiaries is the U.S.
dollar.
The net effect of the translation of the accounts of the Company's
subsidiaries is immaterial and has been included in the determination of
net income. Gains and losses that arise from exchange rate changes on
transactions denominated in a currency other than the U.S. dollar have not
been material and are included in net income or loss as incurred.
38
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies, continued
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number
of common and common stock equivalent shares, when dilutive, outstanding
during the period. Common equivalent shares comprise stock options using
the treasury stock method. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletins, common and common equivalent shares
issued by the Company at prices below the initial public offering price
during the twelve-month period prior to the offering have been included in
the calculation as if they were outstanding for all periods presented prior
to the offering date (using the treasury stock method and the initial
public offering price).
Stock Split
On January 26, 1996 the Company effected a 5.5 for 1 common stock split in
connection with the public offering of its stock. All common stock data in
the accompanying consolidated financial statements has been retroactively
adjusted to reflect the stock split.
Recent Pronouncements
In March 1995, the Financial Accounting Standards Board issued Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of (SFAS No. 121)," which requires the
Company to review for impairment long-lived assets and intangibles whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In certain situations, an impairment loss
would be recognized. SFAS No. 121 will become effective for the Company's
1997 fiscal year. The Company has studied the implications of the
Statement, and based on its initial evaluation, does not expect it to have
a material impact on the Company's financial condition or results of
operations.
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation (SFAS No. 123)." The
statement is effective for fiscal years beginning after December 15, 1995.
Under Statement No. 123, stock-based compensation expense is measured using
either the intrinsic-value method as prescribed by Accounting Principle
Board Opinion No. 25 or the fair-value method described in SFAS No. 123.
Companies choosing the intrinsic-value method will be required to disclose
the pro forma impact of the fair-value method on net income and earnings
per share. The Company plans to continue using the intrinsic-value method
to account for stock-based compensation; there will be no effect of
adopting the standard on the Company's financial position and results of
operations.
3. Acquisition of Endovascular Support Systems, Inc.
In October 1992, Proprietary Extrusion Technologies, Inc. (PET) acquired
the patent rights to Endovascular Support Systems, Inc.'s (ESS) stent
products in exchange for royalties between 5% and 12% of PET's worldwide
stent sales for the remaining life of the ESS stent patent.
In June 1993, the Company acquired a 15% interest in ESS in exchange for
110,000 shares of the Company's common stock valued at $40,000. In March
1995, in a series of transactions, the Company acquired all of the
remaining shares of ESS for $108,000 and an additional 511,000 shares of
the Company's common stock at a fair market value of $464,000. The
acquisition was accounted for as a purchase transaction and the results of
the operations of ESS were included with those of the Company after March
1995, the date the acquisition was consummated. At the acquisition date,
ESS had net liabilities of $38,000. The acquisition terminated PET's
obligations to ESS under a royalty agreement on stent sales. ESS's shares
were canceled in April 1995 and the remaining assets and liabilities of ESS
were transferred to the Company.
Purchased completed technology of $650,000 was recorded at March 1995, and
is being amortized over a period of five years. At June 30, 1996,
accumulated amortization totaled $162,000.
39
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. Settlement of Litigation
In December 1993, the Company entered into a separation agreement with an
officer of the Company. Under the terms of the agreement, the Company paid
the officer $175,000 of severance in exchange for a release from the
employment agreement and in lieu of any other compensation or benefits in
connection with his employment.
In August 1994, the Company settled a dispute with a foreign distributor
arising from the termination of a distributor agreement. Under the terms of
the settlement agreement, the Company paid $190,000 in cash in exchange for
inventory and a full release from the terms of the agreement.
In July 1995, the Company settled a legal proceeding in which the plaintiff
alleged the Company breached a joint venture agreement. Under the terms of
the settlement agreement, the Company paid the plaintiff $425,000 in full
and final settlement. The Company had established a provision for $425,000
at June 30, 1995, which is included in the accompanying balance sheet
within accrued liabilities.
5. Inventories
Inventories comprise (in thousands):
June 30,
---------------------------
1996 1995
------------- ------------
Raw materials $ 456 $ 221
Work in process 1,211 269
Finished goods 1,685 430
------------- ------------
$ 3,352 $ 920
============= ============
6. Property, Plant and Equipment
Property, plant and equipment comprise (in thousands):
June 30,
--------------------------
1996 1995
------------ -----------
Land $ 1,909 $ -
Buildings 3,616 -
Manufacturing equipment 2,226 702
Computers and equipment 824 210
Furniture and fixtures 490 179
Leasehold improvements 768 410
------------ -----------
9,833 1,501
Less accumulated depreciation
and amortization
(1,053) (385)
------------ -----------
8,780 1,116
Construction in progress 194 136
------------ -----------
$ 8,974 $ 1,252
============ ===========
40
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Accrued Expenses
Accrued expenses comprise (in thousands):
June 30,
--------------------------
1996 1995
------------ -----------
Accrued payroll and related benefits $ 861 $ 348
Accrued professional and other fees 617 165
Accrued settlement costs - 425
Accrued clinical trial costs 213 -
Value added tax 393 -
Other accrued expenses 395 226
------------ -----------
$ 2,479 $ 1,164
============ ===========
8. Commitments and Contingencies
Commitments
The Company leases its facilities under operating lease agreements expiring
in 1996 through 2006. Total rent expense under all operating leases was
$89,000, $139,000 and $369,000 for the years ended June 30, 1994, 1995 and
1996, respectively.
The future minimum annual lease payments as of June 30, 1996 under the
leases are as follows:
Year Ending June 30, (In thousands)
--------------------
1997 $ 557
1998 329
1999 163
2000 65
2001 62
Thereafter 290
---------------
$ 1,466
===============
41
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Commitments and Contingencies, continued
Contingencies
ESS Litigation. In October 1992, a subsidiary of the Company purchased
substantially all the assets ESS in consideration of certain royalty
payments payable by the Company based on the net sales of products using or
adapted from such assets. The purchased assets included the technology
which resulted in the Company's only issued patents. Following such asset
purchase, the Company between June 1993 and March 1995 purchased 100% of
the shares of capital stock of ESS from its shareholders in consideration
of shares of Common Stock of the Company and ESS was merged into the
Company. In June 1996, the Company received notice of a lawsuit filed by
Dr. Azam Anwar and Benito Hidalgo in the District Court of Dallas County,
Texas. The suit names as defendants the Company, Bradly A. Jendersee and
John D. Miller, each a director, officer and principal stockholder of the
Company, Dr. Simon H. Stertzer, a director and principal stockholder of the
Company, and Dr. Gerald Dorros, a principal stockholder of the Company. The
suit alleges common law fraud, misrepresentation, securities fraud, breach
of fiduciary duty and constructive fraud by the defendants in connection
with the Company's acquisition of ESS and the Company's acquisition of
shares of ESS from the plaintiffs. The plaintiffs seek unspecified damages,
rescission of the Company's acquisition of the ESS assets and its
subsequent acquisition of the ESS stock, reconstitution of ESS, interest
and attorneys' fees and other costs. The defendants, including the Company,
have filed special appearances and motions objecting to jurisdiction and,
subject thereto, motions to dismiss based on forum non conveniens and,
subject thereto, original answers. The Company has also received notice of
a lawsuit filed by Messrs. Anwar and Hidalgo in the Superior Court of
Sonoma County, California, which names the same defendants as the Texas
action and alleges claims for securities fraud and unregistered securities
under the California securities laws, breach of fiduciary duty and fraud.
The plaintiffs seek unspecified damages, rescission of the Company's
acquisition of the ESS assets and its subsequent acquisition of the ESS
stock, and reconstitution of ESS. The Company believes it has meritorious
defenses to the claims in both the Texas and California actions and intends
to vigorously defend itself. However, no assurance can be given as to the
outcome of either action. The inability of the Company to prevail in these
actions, including the loss or impairment of the right to produce products
based on the Company's issued patents, could have a material adverse effect
on the Company's business, financial condition and results of operations.
On July 11, 1996, the Company, along with the individual defendants named
in the Texas and California actions, filed two actions against Mr. Hidalgo
in the Superior Court of San Mateo County, California. The first action
alleges claims for specific performance, breach of contract, breach of the
implied covenant of good faith and fair dealing, and declaratory relief
based on indemnity. These claims arise out of a stock exchange agreement
entered into between Mr. Hidalgo and the Company, and out of Mr. Hidalgo's
actions as a director of ESS. The second action alleges claims for specific
performance, breach of contract, and breach of the implied covenant of good
faith and fair dealing. These claims arise out of a separation and release
agreement entered into between Mr. Hidalgo and the Company. The Company
believes it has meritorious claims in both actions. However, no assurance
can be given as to the outcome of either action.
Claims of Terminated Distributors. In connection with the Company's
termination of certain distributor relationships, several of such
distributors have filed, or have threatened to file, claims against the
Company with respect to such terminations.
In early 1996, in connection with the Company's termination of its
distribution relationship with Cardiologic GmbH effective April 1996, the
Company received notice from such distributor alleging an exclusive
distribution agreement between the parties with a term expiring in December
1998. The distributor threatened to file an action for breach of the
alleged agreement, including making a claim for compensation equal to one
year's average commission and seeking to enjoin distribution of the
Company's products in Germany.
On July 3, 1996, in connection with the Company's termination of its
distribution relationship with Alfatec-Medicor N.V. and Medicor Nederland
B.V. in Belgium and The Netherlands, respectively, effective September 30,
1996, the Company received notice from such distributors alleging
insufficient notice of termination of a distribution agreement between the
parties. The distributor sought compensation of BF168,509,312
(approximately US$5,500,000 using current exchange rates). In early
September 1996, such distributors delivered to the Company a settlement
proposal that the Company repurchase the Company-related inventory held by
such distributors and pay termination indemnities of an aggregate of BF105
million (approximately US$3,434,000 using current exchange rates). The
Company has requested from such distributors information that would support
their claims for indemnification, but has not yet received such
information. Such settlement proposal expired on September 20, 1996, and
the distributors have threatened litigation with respect to their claims.
42
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 19, 1996, in connection with the Company's termination of its
distribution relationship with Medicor AG and Medicor Zug AG, effective
September 30, 1996, such distributor filed an action against the Company in
the United States District Court for the Northern District of California
alleging breach of written, oral and implied-in-fact contracts, inducement
to breach an employment contract with one of such distributor's employees,
intentional interference with contractual relations, intentional and
negligent interference with prospective economic advantage,
misappropriation of trade secrets, and intentional and negligent
misrepresentation. The distributor seeks damages of in excess of
$5,000,000, incidental and consequential damages, injunctions restraining
the Company from hiring the employee for one year from his last date of
employment with such distributor and from using purported trade secrets of
such distributor in connection with the Company's sales efforts, unjust
enrichment damages, punitive damages, interest and attorneys' fees and
other costs. On September 20, 1996, the court handed down an interim order
temporarily limiting the contact that such employee could have with
customers of such distributor pending a further hearing regarding possible
injunctive remedies on October 11, 1996. The court refused to enjoin the
Company's hiring of such employee or the marketing by the Company of its
products to the customers of such distributor.
On August 28, 1996, in connection with the Company's termination of its
distribution relationship with Medi Service, S.A.R.L./Fournitures
Hospitalieres S.A. effective September 30, 1996, the Company received
notice from such distributor that it had filed an action before the
Tribunal de Grande Instance of Mulhouse in France for breach of alleged
exclusive distribution agreement for an indeterminate period between the
parties. The action included a claim for compensation equal to the total
value of such distributor's business, which the distributor valued at
FF400,000,000 (approximately US$8,000,000 using current exchange rates).
The Company counterclaimed for unpaid accounts receivable of US$1,574,697
and for damages for abusive legal proceedings. The parties filed their
briefs and made their oral arguments on September 9, 1996. On September 23,
1996, the Tribunal orally announced that it had rejected nearly all of the
distributor's claims as well as the Company's counterclaim for abusive
legal proceedings. The Tribunal reserved judgement with respect to the
repurchase of Company-related inventory sought by such distributor and the
payment of unpaid accounts receivable sought by the Company. It is expected
that such issues will be placed on the Tribunal's procedural calendar for
resolution on or about October 18, 1996.
With respect to each of the aforementioned distributors, the Company has
consulted with local counsel in the applicable country and believes that
the termination of each of the distributor relationships was lawful. The
Company understands that under the laws of certain countries, including
Belgium and The Netherlands, under certain circumstances, certain
indemnities may be claimed by distributors for insufficient notice of
termination and/or goodwill compensation. The Company intends to vigorously
defend itself against pending claims and any other claims that may be
brought by such distributors. However, no assurance can be given as to the
outcome of any pending or threatened litigation, and any successful claim
for damages or injunctive relief by one or more of such distributors could
have a material adverse effect on the Company's business, financial
condition and results of operations.
From time to time, the Company is involved in other legal proceedings
arising in the ordinary course of its business. As of the date hereof, the
Company is not a party to any other legal proceedings with respect to which
an adverse outcome would, in management's opinion, have a material adverse
effect on the Company's business, financial condition or results of
operations.
9. Stockholders' Equity
Common Stock
During the year ended June 30, 1995, the Company entered into a Restricted
Stock Purchase Agreement with certain directors and other individuals. A
total of 3,438,000 shares were issued at fair market value under this
agreement at $0.9091 per share. All purchases of stock were financed by
issuance of notes accumulating interest at 8 % per annum until repaid.
Accumulated interest on the notes outstanding at June 30, 1996 of $31,000
is included in the accompanying balance sheet within prepaid and other
expenses. All shares are subject to repurchase by the Company pursuant to
vesting over periods ranging from one to five years or upon termination of
employment. At June 30, 1996, 2,101,000 shares were subject to repurchase.
In January 1996, the Board of Directors approved the Company's Amended and
Restated Certificate of Incorporation increasing the authorized capital
stock of the Company to 50,500,000 and reducing the par value of the
capital stock to $0.001 from $0.01.
43
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Stockholders' Equity, continued
In February 1996, the Company amended its Certificate of Incorporation to
increase the authorized capital stock of the Company to 105,000,000 shares.
One hundred million (100,000,000) shares are designated common stock with a
par value of $0.001, and five million (5,000,000) shares are designated
preferred stock with a par value of $0.001.
In April 1996, the Company completed an initial public offering and issued
4,250,000 shares of common stock, raising net proceeds of approximately $81
million.
Stock Option Plans
From 1991 to 1996, the Board of Directors granted non-statutory stock
options allowing employees, directors, and consultants of the Company to
purchase shares of the Company's common stock. Stock option grants were
awarded at the discretion of the Board of Directors and generally vest over
a period of three years from the date of the grant, and unexercised options
expire upon termination of employment with the Company or after the
expiration of five years from the date of the grant. No shares of common
stock under stock options granted from 1991 to 1996 are subject to
repurchase.
In January 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Incentive Plan") under which 800,000 shares of common stock are reserved
for issuance upon exercise of options granted to employees, officers and
consultants of the Company. If any stock award granted under the Incentive
Plan or any stock option granted pursuant to the Company's previous stock
option program shall for any reason expire or otherwise terminate, in whole
or in part, without having been exercised in full, the stock not acquired
shall revert to and again become issuable under the Incentive Plan. Options
granted to employees and consultants after January 1996 are made under the
terms of the Incentive Plan. The Incentive Plan is administered by the
Board of Directors or a committee appointed by the Board, which determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof. The
terms of stock options granted under the Incentive Plan generally may not
exceed 10 years. Restricted stock purchase awards granted under the
Incentive Plan may be granted pursuant to a repurchase option in favor of
the Company in accordance with a service vesting schedule determined by the
Board. Stock bonuses may be awarded in consideration for past services
without a purchase payment. Stock appreciation rights authorized for
issuance under the Incentive Plan may be tandem stock appreciation rights,
concurrent stock appreciation rights or independent stock appreciation
rights. To date, no restricted stock awards, stock bonuses or stock
appreciation rights have been granted under the Incentive Plan. The
Incentive Plan will terminate in January 2006, unless terminated sooner by
the Board of Directors.
In January 1996, the Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of disinterested directors. The
maximum number of shares of common stock that may be issued pursuant to
options granted under the Directors' Plan is 100,000. Pursuant to the terms
of the Directors' Plan, each person serving as a director of the Company
and who is not an employee of the Company (a "Non-Employee Director"), on
the effective date of the initial public offering of the Company's common
stock, or the date such person first becomes a Non-Employee Director will
then automatically be granted an option to purchase 12,000 shares of common
stock. Each person elected to be a Non-Employee Director and who is not
elected for the first time, on the date of the annual meeting of
stockholders each year following the first registration of any equity
securities under Section 12 of the Securities Exchange Act of 1934, will
automatically be granted an option to purchase 4,000 shares of common
stock. Options under the Directors' Plan will vest in 4 annual installments
commencing on the date one year after the grant date. The exercise price of
options granted under the Directors' Plan must equal or exceed the fair
market value of the common stock granted on the date of grant. No option
granted under the Directors' Plan may be exercised after the expiration of
ten years from the date it was granted.
44
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Stockholders' Equity, continued
<TABLE>
A summary of the activity under the stock option plans is as follows (in
thousands, except per share data): Optioned Shares
<CAPTION>
Optioned Shares
Reserved but ---------------
Unoptioned Number
Shares of Shares Price Per Share
------------ ------------- -------------------
<S> <C> <C> <C>
Balances, June 30, 1993 923 7,068 $0.0018-$0.0661
Options granted (552) 552 $0.0018
Options canceled 1,925 (1,925) $0.0018
------------ -------------
Balances, June 30, 1994 2,296 5,695 $0.0018-$0.0661
Options granted (182) 182 $0.0018-$0.9091
Options canceled 55 (55) $0.0018
------------ -------------
Balances, June 30, 1995 2,169 5,822 $0.0018-$0.9091
Shares reserved - 1996 plans 900 - -
1991 option plan termination (2,008) - $0.0018-$12.000
Options exercised - (4,821) $0.0018-$0.0661
Options granted (491) 491 $9.5455-$35.125
Options canceled 40 (40) $0.0018-$35.125
------------ -------------
Balances, June 30, 1996 610 1,452 $0.0018-$35.125
============ =============
</TABLE>
At June 30, 1996, options to purchase 745,000 shares of common stock were
exercisable.
The difference between the exercise price and fair market value of the
Company's common stock at the date of issue of the stock options, totaling
$902,000 has been recorded as deferred compensation and a component of
stockholders' equity. Of this amount, $815,000 of compensation expense has
been recognized as an expense through June 30, 1996. The remaining $87,000
will be recognized as an expense as the shares and options vest over a
period of up to four years.
10. Income Taxes
The provision for income taxes is as follows (in thousands):
June 30,
----------------------------------------
1996 1995 1994
------------- ------------ ------------
Federal $ 10,756 $ 3,108 $ -
State 1,006 977 3
Foreign 104 8 -
------------- ------------ ------------
11,866 4,093 3
Deferred taxes (1,100) (1,089) -
------------- ------------ ------------
$ 10,766 $ 3,004 $ 3
============= ============ ============
The Company's effective tax rate differs from the U.S. federal statutory
rate as follows:
June 30,
-----------------------------
1996 1995 1994
-------- --------- ---------
Federal tax at statuatory rate 35.0% 34.0% 34.0%
State tax, net of federal benefit 2.2 5.9 -
Utilization of net operating loss - (3.8) (34.0)
FSC benefit (4.6) (5.0) -
Other 1.9 (0.1) -
-------- --------- ---------
34.5% 31.0% - %
======== ========= =========
45
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Income Taxes, continued
Significant components of the Company's deferred tax assets and liabilities
are as follows (in thousands):
June 30,
----------------------
1996 1995
---------- -----------
Deferred tax assets:
Foreign deferred profits and losses $ 1,039 $ -
Depreciation / amortization 171 102
State taxes, net of federal benefit 297 298
Net operating losses 31 53
Reserves and accruals 407 375
Deferred compensation 186 260
Other 57 -
========== ===========
Total deferred tax assets $ 2,188 $ 1,088
========== ===========
11. Employee Agreements
In March 1995, the Company entered into employee agreements with certain
key officers and directors over terms of four to five years. Employees
under contract have an aggregate yearly compensation of $1,195,000, and
have been granted 4,757,500 options to purchase common stock of the Company
at exercise prices of between $0.0018 and $9.5455 per share of which
4,400,000 options had been exercised at June 30, 1996. The Company may
terminate any agreement for cause, and the compensation and benefits under
the employee agreements shall cease effective upon date of termination. If
an agreement is terminated by reason of disability, the employee's
compensation and benefits shall continue for the first twelve weeks of the
incapacity.
In February 1996, the Company entered into certain amendments to the
employee agreements of Bradly A. Jendersee and Robert D. Lashinski,
executive officers and directors of the Company. Pursuant to such
amendments, each of Messrs. Jendersee and Lashinski agreed to the
elimination of provisions entitling them to certain royalties from the sale
of license by the Company of products covered by patents for which such
persons were named as inventors. In connection with such amendments, the
Company agreed to pay Messrs. Jendersee and Lashinski an aggregate of
approximately $3.9 million in cash and issue to them an aggregate of
110,000 shares of Common stock. Such payments to Messrs. Jendersee and
Lashinski resulted in the recognition by the Company, in the year ended
June 30, 1996, a one-time compensation expense of $5.2 million.
12. Employee Benefit Plan
During 1994, the Company established a Retirement Savings and Investment
Plan (the "Plan") under which employees may defer a portion of their salary
up to the maximum allowed under IRS rules. The Company has the discretion
to make contributions to the Plan. To date, the Company has contributed
$76,000 to the Plan.
46
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Arterial
Vascular Engineering, Inc. and Subsidiaries as of June 30, 1996 and 1995, and
for each of the three years in the period ended June 30, 1996, and have issued
our report thereon dated September 19, 1996 (included elsewhere in this Annual
Report on Form 10-K. Our audits also included the financial statement schedule
listed in Item 14(a) of this Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
September 19, 1996
47
<PAGE>
SCHEDULE II
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
<CAPTION>
Description Balance at Charged to Balance at
----------- Beginning of Costs and End of the
the Period Expenses Period
--------------- --------------- ---------------
<S> <C> <C> <C>
Balances for the year ended June 30, 1994:
Allowance for doubtful accounts receivable $_ $ 4 $ 4
Allowance for obsolete inventory _ _ _
Balances for the year ended June 30, 1995:
Allowance for doubtful accounts receivable 4 100 104
Allowance for obsolete inventory _ 60 60
Balances for the year ended June 30, 1996:
Allowance for doubtful accounts receivable 104 186 290
Allowance for obsolete inventory 60 261 321
</TABLE>
48
<PAGE>
INDEX TO EXHIBITS
Exhibit Sequential
Number Description Page Number
- ------- ----------- -----------
10.1 Registrant's 1996 Equity Incentive Plan 50
10.2 Registrant's 1996 Non-Employee Directors' Stock Option Plan 60
11.1 Statement regarding calculation of net income (loss) per share. 65
21.1 Subsidiaries of Registrant. 66
23.1 Consent of Ernst & Young LLP, Independent Auditors. 67
27 Financial Data Schedule 68
49
EXHIBIT 10.1
ARTERIAL VASCULAR ENGINEERING, INC.
1996 EQUITY INCENTIVE PLAN
Adopted by the Board of Directors on January 26, 1996
Approved by the Stockholders February 28, 1996
Amended by the Board of Directors on September 20, 1996
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company, and its Affiliates,
may be given an opportunity to benefit from increases in value of the stock of
the Company through the granting of (i) Incentive Stock Options, (ii)
Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights to purchase
restricted stock, and (v) stock appreciation rights, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees or Directors of or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof, or (iii) Stock
Appreciation Rights granted pursuant to section 8 hereof. All Options shall be
separately designated Incentive Stock Options or Nonstatutory Stock Options at
the time of grant, and in such form as issued pursuant to Section 6, and a
separate certificate or certificates will be issued for shares purchased on
exercise of each type of Option.
2. DEFINITIONS.
(a) "Affiliate" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "Company" means Arterial Vascular Engineering, a Delaware
corporation.
(f) "Concurrent Stock Appreciation Right" or "Concurrent Right" means a
right granted pursuant to subsection 8(b)(2) of the Plan.
(g) "Consultant" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(h) "Continuous Status as an Employee, Director or Consultant" means
that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board or the chief
executive officer of the Company may determine, in that party's sole discretion,
in its sole discretion, may determine whether Continuous Status as an Employee,
Director or Consultant shall be considered interrupted in the case of: (i) any
leave of
50
<PAGE>
absence approved by the Board or the chief executive officer, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
the Company, Affiliates or their successors.
(i) "Covered Employee" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "Director" means a member of the Board.
(k) "Employee" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of the common
stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq Small Cap Market,
the Fair Market Value of a share of common stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Company's common stock) on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable.
(ii) In the absence of such markets for the common stock, the
Fair Market Value shall be determined in good faith by the Board.
(n) "Incentive Stock Option" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(o) "Independent Stock Appreciation Right" or "Independent Right" means
a right granted pursuant to subsection 8(b)(3) of the Plan.
(p) "Non-Employee Director" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(q) "Nonstatutory Stock Option" means an Option not intended to qualify
as an Incentive Stock Option.
(r) "Officer" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(s) "Option" means a stock option granted pursuant to the Plan.
(t) "Option Agreement" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(u) "Optionee" means an Employee, Director or Consultant who holds an
outstanding Option.
(v) "Outside Director" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not
51
<PAGE>
currently receiving direct or indirect remuneration from the Company or an
"affiliated corporation" for services in any capacity other than as a Director,
or (ii) is otherwise considered an "outside director" for purposes of Section
162(m) of the Code.
(w) "Plan" means this Arterial Vascular Engineering 1996 Equity
Incentive Plan.
(x) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(y) "Securities Act" means the Securities Act of 1933, as amended.
(z) "Stock Appreciation Right" means any of the various types of rights
which may be granted under Section 8 of the Plan.
(aa) "Stock Award" means any right granted under the Plan, including
any Option, any stock bonus, any right to purchase restricted stock, and any
Stock Appreciation Right.
(bb) "Stock Award Agreement" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(cc) "Tandem Stock Appreciation Right" or "Tandem Right" means a right
granted pursuant to subsection 8(b)(1) of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; whether a Stock Award will be an Incentive Stock Option,
a Nonstatutory Stock Option, a stock bonus, a right to purchase restricted
stock, a Stock Appreciation Right, or a combination of the foregoing; the
provisions of each Stock Award granted (which need not be identical), including
the time or times when a person shall be permitted to receive stock pursuant to
a Stock Award; whether a person shall be permitted to receive stock upon
exercise of an Independent Stock Appreciation Right; and the number of shares
with respect to which a Stock Award shall be granted to each such person.
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in
Section 14.
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient which are not inconsistent with
the terms of the Plan to promote the best interests of the Company.
(c) The Board may delegate administration of the Plan to a committee of
the Board composed of not fewer than two (2) members (the "Committee"), all of
the members of which Committee may be, in the discretion of the Board,
Non-Employee Directors and/or Outside Directors. If administration is delegated
to a Committee, the Committee shall have, in connection with the administration
of the Plan, the powers theretofore possessed by the Board, including the power
to delegate to a subcommittee of two (2) or more Outside Directors any of the
administrative powers the Committee is authorized to exercise (and references in
this Plan to the Board shall thereafter be to the Committee or such a
subcommittee), subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan. Notwithstanding anything in this Section 3 to the
contrary, the Board or the Committee may delegate to a committee of one or
52
<PAGE>
more members of the Board the authority to grant Stock Awards to eligible
persons who (1) are not then subject to Section 16 of the Exchange Act and/or
(2) are either (i) not then Covered Employees and are not expected to be Covered
Employees at the time of recognition of income resulting from such Stock Award,
or (ii) not persons with respect to whom the Company wishes to comply with
Section 162(m) of the Code.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
granted under the Plan shall not exceed in the aggregate One Million Five
Hundred Thousand (1,500,000) shares of the Company's common stock, as determined
immediately following any stock split or combination made in connection with the
first registration of any equity security of the Company under Section 12 of the
Exchange Act. If any Stock Award granted under the Plan or any stock option
granted pursuant to the Company's previous stock option program Plan shall for
any reason expire or otherwise terminate, in whole or in part, without having
been exercised in full, the stock not acquired under such Stock Award or stock
option pursuant to the Company's previous stock option program shall revert to
and again become available for issuance under the Plan. Shares subject to Stock
Appreciation Rights exercised in accordance with Section 8 of the Plan shall not
be available for subsequent issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights appurtenant
thereto may be granted only to Employees. Stock Awards other than Incentive
Stock Options and Stock Appreciation rights appurtenant thereto may be granted
only to Employees, Directors or Consultants.
(b) A Director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of the Director
as a person to whom Stock Awards may be granted, or in the determination of the
number of shares which may be covered by Stock Awards granted to the Director:
(i) the Board has delegated its discretionary authority over the Plan to a
Committee which consists solely of Disinterested Persons; or (ii) the Plan
otherwise complies with the requirements of Rule 16b 3. The Board shall
otherwise comply with the requirements of Rule 16b 3. This subsection 5(b) shall
not apply (i) prior to the date of the first registration of an equity security
of the Company under Section 12 of the Exchange Act, or (ii) if the Board or
Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant. Prior to the date of the first registration of an equity
security of the Company under Section 12 of the Exchange Act, the provisions of
this subsection 5(c) shall also apply to the grant of a Nonstatutory Stock
Option made to a ten percent (10%) stockholder as described in the preceding
sentence.
(d) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Options and
Stock Appreciation Rights covering more than Two Hundred Fifty Thousand
(250,000) shares of the Company's common stock in any calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms
and conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) Term. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) Price. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. The exercise price of
each Nonstatutory Stock Option shall be determined by the Board or the
Committee. Notwithstanding the foregoing, an Option (whether an Incentive Stock
Option or a Nonstatutory Stock Option) may be granted with an exercise price
lower than that set
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forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(c) Consideration. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment arrangement, except that payment of the common
stock's "par value" as defined in the Delaware General Corporation Law) shall
not be made by deferred payment, or other arrangement (which may include,
without limiting the generality of the foregoing, the use of other common stock
of the Company) with the person to whom the Option is granted or to whom the
Option is transferred pursuant to subsection 6(d), or (C) in any other form of
legal consideration that may be acceptable to the Board.
In the case of any deferred payment arrangement, interest
shall be payable at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(d) Transferability. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option shall
only be transferable by the Optionee upon such terms and conditions as are set
forth in the Option Agreement for such Nonstatutory Stock Option, as the Board
or the Committee shall determine in its discretion. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) Vesting. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual options may vary. The provisions of this subsection 6(e) are subject
to any Option provisions governing the minimum number of shares as to which an
Option may be exercised.
(f) Termination of Employment or Relationship as a Director or
Consultant. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date three (3) months after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement,
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(g) Disability of Optionee. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement, or (ii) the expiration of the
term of the Option as set forth in the Option Agreement. If, at the date of
termination, the Optionee is not entitled to exercise his or her entire Option,
the shares covered by the unexercisable portion of the Option shall revert to
and again become available for issuance under the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified
herein, the Option shall terminate, and the shares covered by such Option shall
revert to and again become available for issuance under the Plan.
(h) Death of Optionee. In the event of the death of an Optionee during,
or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the
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option upon the Optionee's death pursuant to subsection 6(d), but only within
the period ending on the earlier of (i) the date eighteen (18) months following
the date of death (or such longer or shorter period specified in the Option
Agreement, or (ii) the expiration of the term of such Option as set forth in the
Option Agreement. If, at the time of death, the Optionee was not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
(i) Early Exercise. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
(j) Re-Load Options. Without in any way limiting the authority of the
Board or Committee to make or not to make grants of Options hereunder, the Board
or Committee shall have the authority (but not an obligation) to include as part
of any Option Agreement a provision entitling the Optionee to a further Option
(a "Re-Load Option") in the event the Optionee exercises the Option evidenced by
the Option agreement, in whole or in part, by surrendering other shares of
Common Stock in accordance with this Plan and the terms and conditions of the
Option Agreement. Any such Re-Load Option (i) shall be for a number of shares
equal to the number of shares surrendered as part or all of the exercise price
of such Option; (ii) shall have an expiration date which is the same as the
expiration date of the Option the exercise of which gave rise to such Re-Load
Option; and (iii) shall have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the
Re-Load Option on the date of exercise of the original Option. Notwithstanding
the foregoing, a Re-Load Option which is an Incentive Stock Option and which is
granted to a 10% stockholder (as described in subsection 5(c)), shall have an
exercise price which is equal to one hundred ten percent (110%) of the Fair
Market Value of the stock subject to the Re-Load Option on the date of exercise
of the original Option and shall have a term which is no longer than five (5)
years.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board or Committee may designate at the time
of the grant of the original Option; provided, however, that the designation of
any Re-Load Option as an Incentive Stock Option shall be subject to the one
hundred thousand dollar ($100,000) annual limitation on exercisability of
Incentive Stock Options described in subsection 12(d) of the Plan and in Section
422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any
such Re-Load Option shall be subject to the availability of sufficient shares
under subsection 4(a) and the limits on the grants of Options under subsection
5(c) and shall be subject to such other terms and conditions as the Board or
Committee may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. TERMS OF STOCK
Each stock bonus or restricted stock purchase agreement shall
be in such form and shall contain such terms and conditions as the Board or the
Committee shall deem appropriate. The terms and conditions of stock bonus or
restricted stock purchase agreements may change from time to time, and the terms
and conditions of separate agreements need not be identical, but each stock
bonus or restricted stock purchase agreement shall include (through
incorporation of provisions hereof by reference in the agreement or otherwise)
the substance of each of the following provisions as appropriate:
(a) Purchase Price. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement. In any event, the Board or the
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(b) Transferability. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or otherwise only upon such terms and conditions as are set
forth in the applicable Stock Award Agreement, as the Board or the Committee
shall determine in its discretion, so long as stock awarded under such agreement
remains subject to the terms of the agreement.
(c) Consideration. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment arrangement, except that payment of the common stock's "par
value" (as defined in the Delaware General Corporation Law) shall not be made by
deferred payment), or other arrangement with the person to whom the stock is
sold; or
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(iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in their discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) Vesting. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
(e) Termination of Employment or Relationship as a Director or
Consultant. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire, subject to the limitations described in subsection 7(d), any or all
of the shares of stock held by that person which have not vested as of the date
of termination under the terms of the stock bonus or restricted stock purchase
agreement between the Company and such person.
8. STOCK APPRECIATION RIGHTS.
(a) The Board or Committee shall have full power and authority,
exercisable in its sole discretion, to grant Stock Appreciation Rights under the
Plan to Employees or Directors of or Consultants to the Company or its
Affiliates. To exercise any outstanding Stock Appreciation Right, the holder
must provide written notice of exercise to the Company in compliance with the
terms of the Stock Award Agreement evidencing such right. Except as provided in
subsection 5(c), no limitation shall exist on the aggregate amount of cash
payments the Company may make under the Plan in connection with the exercise of
a Stock Appreciation Right.
(b) Three types of Stock Appreciation Rights shall be authorized for
issuance under the Plan:
(i) Tandem Stock Appreciation Rights. Tandem Stock
Appreciation Rights will be granted appurtenant to an Option, and shall, except
as specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which it pertains.
Tandem Stock Appreciation Rights will require the holder to elect between the
exercise of the underlying Option for shares of stock and the surrender, in
whole or in part, of such Option for an appreciation distribution. The
appreciation distribution payable on the exercised Tandem Right shall be in cash
(or, if so provided, in an equivalent number of shares of stock based on the
Fair Market Value (on the date of the Option surrender) in an amount up to the
excess of (A) the Fair Market Value (on the date of the Option surrender) of the
amount of shares of stock covered by that portion of the surrendered Option in
which the Optionee is vested over (B) the aggregate exercise price payable for
such vested shares.
(ii) Concurrent Stock Appreciation Rights. Concurrent Rights
will be granted appurtenant to an Option and may apply to all or any portion of
the shares of stock subject to the underlying Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to the particular Option grant to which the Concurrent
Right pertains. A Concurrent Right shall be exercised automatically at the same
time the underlying Option is exercised with respect to the particular shares of
stock to which the Concurrent Right pertains. The appreciation distribution
payable on an exercised Concurrent Right shall be in cash (or, if so provided,
in an equivalent number of shares of stock based on the Fair Market Value on the
date of exercise of the Concurrent Right) in an amount equal to such portion as
shall be determined by the Board or the Committee at the time of the grant of
the excess of (A) the aggregate Fair Market Value (on the date of the exercise
of the Concurrent Right) of the vested shares of stock purchased under the
underlying Option which have Concurrent Rights appurtenant to them over (B) the
aggregate exercise price paid for such shares.
(iii) Independent Stock Appreciation Rights. Independent
Rights will be granted independently of any Option and shall, except as
specifically set forth in this Section 8, be subject to the same terms and
conditions applicable to Nonstatutory Stock Options as set forth in Section 6.
They shall be denominated in share equivalents. The appreciation distribution
payable on the exercised Independent Right shall be not greater than an amount
equal to the excess of (A) the aggregate Fair Market Value (on the date of the
exercise of the Independent Right) of a number of shares of Company stock equal
to the number of share equivalents in which the holder is vested under such
Independent Right, and with respect to which the holder is exercising the
Independent Right on such date, over (B) the aggregate Fair Market Value (on the
date of the grant of the Independent Right) of such number of shares of Company
stock. The appreciation distribution payable on the exercised Independent Right
shall be in cash or, if so provided, in an equivalent number of shares of stock
based on the Fair Market Value on the date of the exercise of the Independent
Right.
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9. CANCELLATION AND RE-GRANT OF OPTIONS.
(a) The Board or the Committee shall have the authority to effect, at
any time and from time to time, (i) the repricing of any outstanding Options
and/or Stock Appreciation Rights under the Plan and/or (ii) with the consent of
the affected holders of Options and/or Stock Appreciation Rights, the
cancellation of any outstanding Options and/or Stock Appreciation Rights under
the Plan and the grant in substitution therefor of new Options and/or Stock
Appreciation Rights under the Plan covering the same or different numbers of
shares of stock, but having an exercise price per share not less than one
hundred percent (100%) of the Fair Market Value in the case of an Incentive
Stock Option or, in the case of a 10% stockholder (as described in subsection
5(c)) receiving a new grant of an Incentive Stock Option, not less than one
hundred ten percent (110%) of the Fair Market Value) per share of stock on the
new grant date. Notwithstanding the foregoing, the Board or the Committee may
grant an Option and/or Stock Appreciation Right with an exercise price lower
than that set forth above if such Option and/or Stock Appreciation Right is
granted as part of a transaction to which section 424(a) of the Code applies.
(b) Shares subject to an Option or Stock Appreciation Right canceled
under this Section 9 shall continue to be counted against the maximum award of
Options or Stock Appreciation Rights permitted to be granted pursuant to section
5 of the Plan, if any. The repricing of an Option or Stock Appreciation Right
under this Section 9, resulting in a reduction of the exercise price, shall be
deemed to be a cancellation of the original Option or Stock Appreciation Right
and the grant of a substitute Option and/or Stock Appreciation Right; in the
event of such repricing, both the original and the substituted Options shall be
counted against the maximum awards of Options and Stock Appreciation Rights
permitted to be granted pursuant to subsection 5(c) of the Plan, if any. The
provisions of this subsection 9(b) shall be applicable only to the extent
required by Section 162(m) of the Code.
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act, either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such Stock Awards
unless and until such authority is obtained.
11. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
12. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e), 7(d) or 8(b),
notwithstanding the provisions in the Stock Award stating the time at which it
may first be exercised or the time during which it will vest.
(b) Neither an Employee, Director or Consultant, nor any person to whom
a Stock Award is transferred under subsection 6(d), 7(b) or 8(b), shall be
deemed to be the holder of, or to have any of the rights of a holder with
respect to, any shares subject to such Stock Award unless and until such person
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) Nothing in the Plan, or any instrument executed or Stock Award
granted pursuant thereto, shall confer upon any Employee, Director or Consultant
or other holder of Stock Awards any right to continue in the employ of the
Company or any Affiliate (or to continue acting as a Director of or Consultant)
or shall affect the right of the Company or any Affiliate to terminate the
employment of any Employee with or without cause, the right of the Company's
Board and or the Company's stockholders to remove any Director pursuant to the
terms of the Company's By-Laws and the provisions of the Delaware
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General Corporation Law, or the right to terminate the relationship of any
Consultant pursuant to the terms of such Consultant's agreement with the Company
or Affiliate.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred pursuant to
subsection 6(d), 7(b) or 8(b), as a condition of exercising or acquiring stock
under any Stock Award, (1) to give written assurances satisfactory to the
Company as to such person's knowledge and experience in financial and business
matters and/or to employ a purchaser representative reasonably satisfactory to
the Company who is knowledgeable and experienced in financial and business
matters, and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Stock Award;
and (2) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the common stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the common stock
of the Company.
13. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Stock Award (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
type(s) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and any maximum number of securities subject to award to any
person during any calendar-year period pursuant to section 5, and the
outstanding Stock Awards will be appropriately adjusted in the type(s) and
number of securities and price per share of stock subject to such outstanding
Stock Awards. Such adjustments shall be made by the Board or the Committee, the
determination of which shall be final, binding and conclusive. (The conversion
of any convertible securities of the Company shall not be treated as a
"transaction not involving the receipt of consideration by the Company".)
(b) In the event of: (1) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then, to the extent permitted by applicable law, (i) any
surviving or acquiring corporation shall assume any such Stock Awards
outstanding under the Plan or shall substitute similar Stock Awards (including a
right to acquire the same consideration paid to the stockholders in the
transaction described in this subsection 13(b) for those outstanding under the
Plan, or (ii) such Stock Awards shall continue in full force and effect. In the
event any surviving or acquiring corporation refuses to assume or continue such
Stock Awards, or to substitute similar options for such Stock Awards outstanding
under the Plan, then, with respect to Stock Awards held by persons then
performing services as Employees, Directors or Consultants, the time during
which such Stock Awards may be exercised shall be accelerated and the Stock
Awards terminated if not exercised after such acceleration and at or prior to
such event.
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14. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 13 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment, where the amendment will:
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b 3.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on January 26, 2006, which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the consent of the person to whom the Stock Award was granted.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board,
but no Stock Awards granted under the Plan shall be exercised unless and until
the Plan has been approved by the stockholders of the Company, which approval
shall be within twelve (12) months before or after the date the Plan is adopted
by the Board, and, if required, an appropriate permit has been issued by the
Commissioner of Corporations of the State of California.
59
EXHIBIT 10.2
ARTERIAL VASCULAR ENGINEERING, INC.
1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
Adopted on January 26, 1996
Approved by the Stockholders February 28, 1996
Amended on September 20, 1996
17. PURPOSE.
(a) The purpose of the 1996 Non-Employee Directors' Stock Option Plan
(the "Plan") is to provide a means by which each director of Arterial Vascular
Engineering, Inc. (the "Company") who is not otherwise at the time of grant an
employee of or consultant to the Company or of any Affiliate of the Company
(each such person being hereafter referred to as a "Non-Employee Director") will
be given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended from time to time (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
persons now serving as Non-Employee Directors of the Company, to secure and
retain the services of persons capable of serving in such capacity, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
18. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors of the
Company (the "Board") unless and until the Board delegates administration to a
committee, as provided in subparagraph 2(b).
(b) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
19. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 10 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to options granted
under the Plan shall not exceed in the aggregate one hundred thousand (100,000)
shares of the Company's Common Stock, as determined immediately following any
stock split or combination made in connection with the first registration of any
equity securities under Section 12 of the Securities Exchange Act of 1934, as
amended. If any option granted under the Plan shall for any reason expire or
otherwise terminate without having been exercised in full, the stock not
purchased under such option shall again become available for the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
20. ELIGIBILITY.
Options shall be granted only to Non-Employee Directors of the Company.
21. NON-DISCRETIONARY GRANTS.
(a) Each person who is a Non-Employee Director of the Company shall,
upon the later of (1) the effective date of the initial public offering of the
Company's common stock (the "IPO Date") or (2) the date such person first
becomes a
60
<PAGE>
Non-Employee Director of the Company, be granted an option to purchase twelve
thousand (12,000) shares of common stock of the Company on the terms and
conditions set forth herein.
(b) On the date of the annual meeting of stockholders of the Company
each year following the first registration of any equity securities under
Section 12 of the Securities Exchange Act of 1934, as amended, each person
elected to be a Non-Employee Director and who is not elected a director for the
first time at such meeting, shall be granted an option to purchase four thousand
(4,000) shares of common stock of the Company on the terms and conditions set
forth herein.
22. OPTION PROVISIONS.
Each option shall be subject to the following terms and conditions:
(a) The term of each option commences on the date it is granted and,
unless sooner terminated as set forth herein, expires on the date ("Expiration
Date") ten (10) years from the date of grant. If the optionee's service as a
Non-Employee Director, employee or consultant of the Company or any Affiliate
terminates for any reason or for no reason, the option shall terminate on the
earlier of the Expiration Date or the date twelve (12) months following the date
of termination of all such service; provided, however, that if such termination
of service is due to the optionee's death, the option shall terminate on the
earlier of the Expiration Date or eighteen (18) months following the date of the
optionee's death. In any and all circumstances, an option may be exercised
following termination of the optionee's service as a Non-Employee Director,
employee or consultant of the Company or any Affiliate only as to that number of
shares as to which it was exercisable as of the date of termination of all such
service under the provisions of subparagraph 6(e).
(b) The exercise price of each option shall be one hundred percent
(100%) of the fair market value of the stock subject to such option on the date
such option is granted.
(c) Payment of the exercise price of each option is due in full in cash
(or by check) upon any exercise.
Notwithstanding the foregoing, this option may be exercised pursuant to
a program developed under Regulation T as promulgated by the Federal Reserve
Board which results in the receipt of cash (or check) by the Company either
prior to the issuance of shares of the Company's common stock or pursuant to the
terms of irrevocable instructions issued by the optionee prior to the issuance
of shares of the Company's common stock.
(d) Except as otherwise expressly provided in an optionholder's option
agreement, an option shall not be transferable except by will or by the laws of
descent and distribution, or pursuant to a qualified domestic relations order
satisfying the requirements of Rule 16b-3 under the Securities Exchange Act of
1934 ("Rule 16b-3") and shall be exercisable during the lifetime of the person
to whom the option is granted only by such person (or by his guardian or legal
representative) or transferee pursuant to such an order. Notwithstanding the
foregoing, the optionee may, by delivering written notice to the Company in a
form satisfactory to the Company, designate a third party who, in the event of
the death of the optionee, shall thereafter be entitled to exercise the option.
(e) Each option granted pursuant to 5(a) or 5(b) hereof, shall become
exercisable ("vest") with respect to such optionee in four equal annual
installments commencing on the date one year after the date of grant of the
option, provided that the optionee has, during the period beginning on the date
of grant for such option and ending on such vesting date, continuously served as
a Non-Employee Director or as an employee of or consultant to the Company or any
Affiliate of the Company, whereupon such option shall become fully exercisable
in accordance with its terms with respect to that portion of the shares
represented by that installment.
(f) The Company may require any optionee, or any person to whom an
option is transferred under subparagraph 6(d), as a condition of exercising any
such option: (i) to give written assurances satisfactory to the Company as to
the optionee's knowledge and experience in financial and business matters; and
(ii) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the option for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. These requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise of the option has been registered under a then-currently-effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii), as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may require
any optionee to provide such other representations, written assurances or
information which the Company shall determine is necessary, desirable or
appropriate to comply with applicable securities laws as a condition of granting
an option to the optionee or
61
<PAGE>
permitting the optionee to exercise the option. The Company may, upon advice of
counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.
(g) Notwithstanding anything to the contrary contained herein, an
option may not be exercised unless the shares issuable upon exercise of such
option are then registered under the Securities Act or, if such shares are not
then so registered, the Company has determined that such exercise and issuance
would be exempt from the registration requirements of the Securities Act.
(h) The Company (or a representative of the underwriters) may, in
connection with an underwritten registration of the offering of any securities
of the Company under the Securities Act, require that any optionee not sell or
otherwise transfer or dispose of any shares of common stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date of the registration statement of the Company filed
under the Securities Act as may be requested by the Company or the
representative of the underwriters. The Company shall have the authority to
issue a stop order to the Company's transfer agent in order to enforce this
requirement.
23. COVENANTS OF THE COMPANY.
(a) During the terms of the options granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such options.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the options granted under the
Plan; provided, however, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any option granted under the
Plan, or any stock issued or issuable pursuant to any such option. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such options.
24. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to options granted under the
Plan shall constitute general funds of the Company.
25. MISCELLANEOUS.
(a) Neither an optionee nor any person to whom an option is transferred
under subparagraph 6(d) shall be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to such option unless
and until such person has satisfied all requirements for exercise of the option
pursuant to its terms.
(b) Throughout the term of any option granted pursuant to the Plan, the
Company shall make available to the holder of such option such financial and
other information regarding the Company as comprises the annual report to the
stockholders of the Company provided for in the Bylaws of the Company and such
other information regarding the Company as the holder of such option may
reasonably request.
(c) Nothing in the Plan or in any instrument executed pursuant thereto
shall confer upon any Non-Employee Director any right to continue in the service
of the Company or any Affiliate in any capacity or shall affect any right of the
Company, its Board or stockholders or any Affiliate to remove any Non-Employee
Director pursuant to the Company's By-Laws and the provisions of the Delaware
General Corporation Law (or the applicable laws of the Company's state of
incorporation if the Company's state of incorporation should change in the
future).
(d) No Non-Employee Director, individually or as a member of a group,
and no beneficiary or other person claiming under or through him, shall have any
right, title or interest in or to any option reserved for the purposes of the
Plan except as to such shares of common stock, if any, as shall have been
reserved for him pursuant to an option granted to him.
(e) In connection with each option made pursuant to the Plan, it shall
be a condition precedent to the Company's obligation to issue or transfer shares
to a Non-Employee Director, or to evidence the removal of any restrictions on
transfer, that such Non-Employee Director make arrangements satisfactory to the
Company to insure that the amount of
62
<PAGE>
any federal or other withholding tax required to be withheld with respect to
such sale or transfer, or such removal or lapse, is made available to the
Company for timely payment of such tax.
(f) As used in this Plan, "fair market value" means, as of any date,
the value of the common stock of the Company determined as follows:
(i) If the common stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq Small Cap Market,
the Fair Market Value of a share of common stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Company's common stock) on the last market trading day prior
to the day of determination, as reported in the Wall Street Journal or such
other source as the Board deems reliable.
(ii) In the absence of an established market for the common
stock, the Fair Market Value shall be determined in good faith by the Board.
(iii) Notwithstanding the foregoing, for options granted on
the IPO Date, "fair market value" shall mean the price at which the Company
sells shares of its common stock to the public on that date.
26. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any option granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding options will
be appropriately adjusted in the type(s) and maximum number of securities
subject to the Plan and the type(s) and number of securities and price per share
of stock subject to outstanding options. Such adjustments shall be made by the
Board, the determination of which shall be final, binding and conclusive. (The
conversion of any convertible securities of the Company shall not be treated as
a "transaction not involving the receipt of consideration by the Company.")
(b) In the event of: (1) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
common stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then: to the extent not prohibited by applicable law, the
time during which options outstanding under the Plan may be exercised shall be
accelerated prior to such event and the options terminated if not exercised
after such acceleration and at or prior to such event.
27. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan
and/or some or all outstanding options granted under the Plan; provided,
however, that the Board shall not amend the Plan more than once every six (6)
months, with respect to the provisions of the Plan which relate to the amount,
price and timing of grants, other than to comport with changes in the Code, the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the
rules thereunder. Except as provided in paragraph 10 relating to adjustments
upon changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
(i) Increase the number of shares which may be issued under
the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to comply with the requirements of Rule 16b-3);
or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to comply with the
requirements of Rule 16b-3.
63
<PAGE>
(b) Rights and obligations under any option granted before any
amendment of the Plan shall not be impaired by such amendment unless (i) the
Company requests the consent of the person to whom the option was granted and
(ii) such person consents in writing.
28. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate at the time that all the shares of
the Company's common stock reserved for issuance under the Plan have been
issued. No options may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any option granted while the Plan is
in effect shall not be impaired by suspension or termination of the Plan, except
with the written consent of the person to whom the option was granted.
(c) The Plan shall terminate upon the occurrence of any of the events
described in Section 10(b) above.
29. EFFECTIVE DATE OF PLAN; CONDITIONS OF EXERCISE.
(a) The Plan shall become effective upon adoption by the Board of
Directors, subject to the condition subsequent that the Plan is approved by the
stockholders of the Company.
(b) No option granted under the Plan shall be exercised or exercisable
unless and until the condition of subparagraph 13(a) above has been met.
64
EXHIBIT 11.1
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(In thousands, except per share data)
<CAPTION>
Year Ended June 30,
--------------------------------------
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Primary
Weighted average common shares outstanding 23,851 17,916 17,659
Weighted average common equivalent shares assuming
conversion of stock options under the treasury stock
method 2,291 5,647 --
Common and common equivalent shares pursuant to Staff
Accounting Bulletin No. 83 2,118 3,631 3,631
----------- ----------- ------------
Shares used in per share calculation 28,260 27,194 21,290
----------- ----------- ------------
Net income (loss) $20,440 $6,640 $(538)
=========== =========== ============
Net income (loss) per share $0.71 $0.24 $(0.03)
=========== =========== ============
Net income (loss) per share is presented under the primary basis as the effect
of dilution under the fully diluted basis is less than 3%.
</TABLE>
65
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
(All Subsidiaries are Wholly Owned by the Registrant)
Proprietary Extrusion Technologies, Inc. (California)
Arterial Vascular Engineering Canada, Inc. (Canada)
AVE International Sales, Inc. (Barbados)
AVE Manufacturing, Inc. (California)
Arterial Vascular Engineering UK Limited (United Kingdom)
"David" Neunzehnte Beteiligungs- und Verwaltungsgesellschaft mbH (Germany)
Arterial Vascular Engineering SARL (France)
Arterial Vascular Engineering B.V. (The Netherlands)
AVE (Switzerland) AG
66
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-3254 and 333-3468) pertaining to the Stock Option Agreements,
the 1996 Equity Incentive Plan and the 1996 Non-Employee Directors' Stock Option
Plan of Arterial Vascular Engineering, Inc., of our report dated September 19,
1996, with respect to the consolidated financial statements and schedule of
Arterial Vascular Engineering, Inc., included in the Annual Report (Form 10-K)
for the year ended June 30, 1996.
ERNST & YOUNG LLP
Palo Alto, California
September 24, 1996
67
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM JUNE 30, 1996 FINANCIAL STATEMENTS
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<CIK> 0001007047
<NAME> Arterial Vascular Engineering, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 59,238
<SECURITIES> 32,354
<RECEIVABLES> 13,503
<ALLOWANCES> 290
<INVENTORY> 3,352
<CURRENT-ASSETS> 112,511
<PP&E> 10,027
<DEPRECIATION> 1,053
<TOTAL-ASSETS> 122,157
<CURRENT-LIABILITIES> 5,586
<BONDS> 0
<COMMON> 31
0
0
<OTHER-SE> 116,540
<TOTAL-LIABILITY-AND-EQUITY> 122,157
<SALES> 55,228
<TOTAL-REVENUES> 55,228
<CGS> 10,565
<TOTAL-COSTS> 10,565
<OTHER-EXPENSES> 14,917
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 31,206
<INCOME-TAX> 10,766
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,440
<EPS-PRIMARY> 0.71
<EPS-DILUTED> 0.71
</TABLE>
