UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 Identification No.)
incorporation or organization)
3576 Unocal Place, Santa Rosa, California 95403
(Address of principal executive offices) (Zip code)
(707) 525-0111
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding
Common Stock, $0.001 par value 30,980,633 as of April 30, 1997
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INDEX TO FORM 10-Q
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1997 3
and June 30, 1996
Condensed Consolidated Statements of Operations for the three 4
months and nine months ended March 31, 1997 and 1996
Condensed Consolidated Statements of Cash Flows for the 5
nine months ended March 31, 1997 and 1996
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 18
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
March 31, June 30,
1997 1996
-------- --------
ASSETS
Current assets:
Cash and cash equivalents $ 21,624 $ 59,238
Short-term investments 61,689 32,354
Trade accounts receivable, net 22,200 13,213
Inventories 6,297 3,352
Deferred income tax 2,016 2,016
Prepaid expenses and other current assets 8,729 2,338
-------- --------
Total current assets 122,555 112,511
Deferred income tax 172 172
Property, plant and equipment, net 18,604 8,974
Purchased technology and other intangible assets, net 390 500
-------- --------
Total assets $141,721 $122,157
======== ========
LIABILITIES
Current liabilities:
Accounts payable $ 3,303 $ 1,671
Accrued expenses 5,333 2,479
Income taxes payable -- 1,436
-------- --------
Total current liabilities 8,636 5,586
-------- --------
STOCKHOLDERS' EQUITY
Common stock 31 31
Additional paid-in capital 92,650 91,776
Notes receivable for common stock (301) (301)
Deferred compensation (47) (87)
Treasury stock (390) --
Cumulative translation adjustment (1,014) --
Retained earnings 42,156 25,152
-------- --------
Total stockholders' equity 133,085 116,571
-------- --------
Total liabilities and stockholders' equity $141,721 $122,157
======== ========
See accompanying notes
3
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------- -----------------
1997 1996 1997 1996
------- ------- ------- -------
Net sales $20,402 $15,589 $57,197 $37,303
Cost of sales 4,596 2,896 11,240 7,814
------- ------- ------- -------
Gross profit 15,806 12,693 45,957 29,489
------- ------- ------- -------
Operating expenses:
Research and development 3,186 3,783 7,300 4,988
Selling, general and administrative 6,363 4,285 15,698 5,542
------- ------- ------- -------
Total operating expenses 9,549 8,068 22,998 10,530
------- ------- ------- -------
Operating income 6,257 4,625 22,959 18,959
Interest and other income 871 145 3,200 404
------- ------- ------- -------
Income before provision for income taxes 7,128 4,770 26,159 19,363
Provision for income taxes 2,495 1,669 9,155 6,635
------- ------- ------- -------
Net income $ 4,633 $ 3,101 $17,004 $12,728
======= ======= ======= =======
Net income per share $ 0.15 $ 0.11 $ 0.54 $ 0.46
Shares used in per share calculation 31,588 27,513 31,603 27,347
See accompanying notes
4
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
March 31,
-----------------------------
1997 1996
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 17,004 $ 12,728
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,141 572
Provision for doubtful accounts 417 146
Provision for obsolete inventory (75) 300
Amortization of deferred compensation 40 197
Income tax reduction relating to stock plans 823 2,148
Deferred income taxes - 316
Foreign currency translation (1,014) -
Changes in assets and liabilities:
Short-term investments (29,335) -
Accounts receivable (9,404) (4,816)
Inventories (2,870) (1,811)
Prepaids and other current assets (2,194) (2,222)
Accounts payable 1,632 513
Accrued liabilities 2,854 1,093
Customer deposits - (1,405)
Income taxes payable (5,633) (2,039)
----------- -----------
Net cash provided by (used in) operating activities (26,614) 5,720
----------- -----------
Cash flows from investing activities:
Proceeds from sale of investments - 100
Acquisition of property, plant and equipment (10,661) (2,313)
----------- -----------
Net cash used in investing activities (10,661) (2,213)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock 51 1,356
Acquisition of treasury stock (390) -
----------- -----------
Net cash provided by (used in) financing activities (339) 1,356
----------- -----------
Net increase (decrease) in cash and cash equivalents (37,614) 4,863
Cash and cash equivalents, at beginning of period 59,238 2,533
----------- -----------
Cash and cash equivalents, at end of period $ 21,624 $ 7,396
=========== ===========
<FN>
See accompanying notes
</FN>
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, in accordance with
generally accepted accounting principles for interim financial
information and pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments)
considered necessary to present fairly the financial position and
results of operations have been included. These consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements contained in the Company's Form
10-K for the fiscal year ended June 30, 1996.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. The year-end
balance sheet data was derived from audited financial statements, but
does not include disclosures required by generally accepted
accounting principles.
Operating results for the three and nine months ended March 31, 1997
are not necessarily indicative of the results to be expected for any
other interim period or for the full fiscal year.
2. Inventories (in thousands):
March 31, June 30,
1997 1996
------------ -----------
Raw materials $ 984 $ 456
Work in process 1,848 1,211
Finished goods 3,465 1,685
------------ -----------
$ 6,297 $ 3,352
============ ===========
3. Computation of Net Income Per Share
Net income per share is computed using the weighted average number of
common and common equivalent shares, when dilutive, outstanding
during the period. Common equivalent shares comprise stock options
using the treasury stock method. Pursuant to 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).
6
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4. Stock Repurchase Program
During the first quarter of fiscal 1997, the Board of Directors
authorized a stock repurchase program pursuant to which the Company
may repurchase shares of its common stock with an aggregate value of
up to $10 million. The repurchases may be made from time to time on
the open market at prevailing market prices or in negotiated
transactions off the market. Although the Company does not currently
intend to repurchase a significant number of additional shares under
the repurchase program, the program will continue until discontinued
by the Board of Directors. The Company has used, and plans to use,
existing cash balances to finance any repurchases. The Company may
use the repurchased shares to offset grants under its employee equity
incentive plan. As of March 31, 1997, the Company had repurchased
30,000 shares of its common stock at an aggregate cost of $390,000.
5. Contingencies
ESS Litigation. Effective as of October 1992, a subsidiary of the
Company purchased substantially all the assets of Endothelial Support
Systems, Inc. (subsequently known as Endovascular Support Systems,
Inc.) ("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 Company was informed that the shareholders of ESS
ratified the transaction on May 27, 1993. The purchased assets
included an application for a stent patent which resulted in a patent
owned by the Company. Following such asset purchase, the Company
between June 1993 and March 1995 purchased in several transactions
100% of the shares of capital stock of ESS from its shareholders in
consideration of shares of common stock of the Company and, in
certain instances, other consideration, 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, each of whom is a former
shareholder of ESS (who together held approximately 48% of ESS's
outstanding shares of common stock) and each of whom currently holds
shares of common stock of the Company, 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. In January 1997, the
plaintiffs filed an amended petition alleging common law fraud,
negligent misrepresentation, securities fraud pursuant to the Texas
Securities Act, fraud pursuant to the Texas Business and Commercial
Code, control person liability, aider and abetter liability of the
individual defendants, civil conspiracy, breach of fiduciary duty,
and constructive fraud in connection with the Company's acquisition
of ESS and the Company's acquisition of shares of ESS capital stock
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,
punitive damages, interest and attorneys' fees and other relief. On
February 10 and 12, 1997, the court overruled defendants' special
appearances and denied motions objecting to jurisdiction, motions to
dismiss based on forum non conveniens, and motions to abate or stay
the Texas proceedings. The
7
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Company believes it has meritorious defenses to the claims in the
Texas action and intends to vigorously defend itself. However, no
assurance can be given as to the outcome of the action. The inability
of the Company to prevail in the action, 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.
The Company also received notice in August 1996 of a lawsuit filed by
Messrs. Anwar and Hidalgo in the Superior Court of Sonoma County,
California, which names the same defendants as in 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, reconstitution of ESS and other relief.
The defendants, including the Company, have filed an answer denying
plaintiff's claims, and also filed a cross-complaint against the
plaintiffs. The cross-complaint alleges claims against Mr. Hidalgo
for specific performance, breach of contract, breach of the implied
covenant of good faith and fair dealing, and declaratory relief based
on comparative indemnity, contribution and absence of fraud. The
cross-complaint alleges claims against Dr. Anwar for intentional and
negligent interference with contract, equitable estoppel and
declaratory relief based on absence of fraud. Mr. Hidalgo and Dr.
Anwar have filed an answer generally denying the claims contained in
the cross-complaint.
On July 11, 1996, the Company, along with the individual defendants
named in the Texas and Sonoma County 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.
On December 6, 1996, the Superior Court of Sonoma County, California,
pursuant to the stipulation of the parties, transferred the Sonoma
County action to the Superior Court of San Mateo County. On December
11, 1996, the Superior Court of San Mateo County, pursuant to the
stipulation of the parties, consolidated all three pending California
actions into a single action (the "Consolidated Action"), and ordered
that the pleadings from the Sonoma County action shall be the
operative pleadings in the Consolidated Action. A motion by the
Company and the individual defendants for summary judgment against
Mr. Hidalgo in the Consolidated Action was denied by the Superior
Court of San Mateo County on May 5, 1997 with respect to each of the
plaintiffs' claims. The Company believes that it has meritorious
defenses to the claims alleged by the plaintiffs, and that it has
meritorious claims against the plaintiffs, in the Consolidated
Action. However, no assurance can be given as to the outcome of the
8
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Consolidated Action. The inability of the Company to prevail in the
Consolidated Action, 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.
The Company has agreed to indemnify each of the individuals named as
defendants in the lawsuits against the Company relating to the ESS
transaction.
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 November 1996, in connection with the Company's termination of its
distribution relationship with Alfatec-Medicor N.V.
("Alfatec-Medicor") and Medicor Nederland B.V. ("Medicor Nederland")
in Belgium and The Netherlands, respectively, effective September 30,
1996, the Company received notice of a lawsuit filed by
Alfatec-Medicor in the Second Chamber of the Commercial Court of
Brussels, Belgium, alleging insufficient notice of termination of a
distribution agreement between the parties, promotion costs,
personnel restructuring claims and additional compensation.
Alfatec-Medicor seeks compensation of BF189,389,135 (approximately
$5.3 million using current exchange rates), of which BF30,000,000
(approximately $843,000) is sought as a provisional payment. The
Company has entered counterclaims for $257,000 in unpaid accounts
receivable and has requested from Alfatec-Medicor information that
would support its claims for indemnification, but has not yet
received such information. Following a hearing on April 18, 1997, the
court postponed further consideration of the matter until the parties
have conducted an appropriate exchange of information and prepared
written pleadings. On February 20, 1997, the Company commenced an
action against Medicor Nederland before the Amsterdam District Court
for payment of $269,000 in unpaid accounts receivable. A statement of
defense from Medicor Nederland is due by May 14, 1997.
On August 19, 1996, in connection with the Company's termination of
its distribution relationship in Switzerland with Medicor 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. On
October 11, 1996, the court denied the distributor's request for
preliminary and temporary injunctive relief. On January 30, 1997, the
court entered an order dismissing the entire action on forum non
conveniens grounds. As part of the dismissal, AVE has agreed to
submit to the jurisdiction of the appropriate forum in Switzerland,
waive any defense of statute of limitations to any substantially
similar claims made there, make available witnesses and documents
there and satisfy any judgment entered against it there. On January
27, 1997, the Company filed an action in the debt collection office
of Cham, Switzerland against the distributor for $93,000 plus accrued
interest in connection with unpaid accounts receivable from the
distributor relationship. The distributor obtained a preliminary stay
on the debt
9
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ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
collection proceedings and a hearing with respect to the Company's
motion to lift such stay was held on March 11, 1997.
In connection with the Company's termination of its distribution
relationship in France 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 seeking
compensation for breach of an alleged exclusive distribution
agreement for an indeterminate period between the parties. The
Company counterclaimed for unpaid accounts receivable of
approximately $1.8 million and for damages for abusive legal
proceedings. On September 23, 1996, the Tribunal rejected the
distributor's claims for damages for unlawful termination as well as
the Company's counterclaim for abusive legal proceedings. The
Tribunal reserved judgement with respect to the repurchase of the
distributor's inventory of AVE products and the payment of unpaid
accounts receivable sought by the Company. The parties have submitted
briefs on these issues and a procedural hearing was held on March 10,
1997, at which time the distributor filed a revised brief. A
scheduling hearing is set for May 9, 1997. On February 10, 1997, the
distributor filed an appeal of the Tribunal's decision of September
23, 1996 with the Court of Appeal of Colmar.
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 and to pursue claims for unpaid accounts receivable
against 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, or the failure by the Company to succeed on its
claims against its former French distributor, 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.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
The statements contained in this Form 10-Q 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 made herein 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 reports filed by the Company from time to time on
Forms 10-K, 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 and is seeking regulatory approval for sale there of
certain of its stent systems. In November 1995, the Company received
United States Food and Drug Administration ("FDA") clearance to
conduct clinical trials with the Company's Micro Stent and Micro
Stent II systems in the United States under an Investigational Device
Exemption ("IDE"). Subsequently, the Company received FDA approval to
include in these trials patients afflicted with restenotic lesions,
patients with long lesions that can be treated with the Micro Stent
II XL, and patients with abrupt or threatened vessel closure. The
Company has also received approval to include in the trials its
single-operator stent delivery system. In addition, in December 1996,
the Company received clearance from the FDA to conduct clinical
trials with the Company's Peak balloon angioplasty catheter. 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 until at least 1998. 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.
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 balloon
angioplasty catheter systems. The Company believes that it is
currently one of the leading providers of stent systems
internationally. 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
(including clinical study and regulatory costs), sales and marketing
and administration, both in absolute dollars and as a percentage of
net sales.
11
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The Company has also experienced higher administrative expenses
resulting from its obligations as a public reporting company.
Until April 1996, substantially all of the Company's sales were to
international distributors who resell products to health care
providers. The Company terminated its relationship with distributors
in Germany and the United Kingdom in April and May 1996,
respectively, and in France, Switzerland, Belgium and The Netherlands
effective September 30, 1996. The Company has established a direct
sales force in each of those countries. The establishment and
maintenance of direct sales forces has required and will continue to
require significant ongoing expenditures, additional management
resources and has resulted, and may continue to result, in additional
costs to eliminate existing distributor relationships (including
litigation by former distributors). Sales in Belgium and The
Netherlands continue to be significantly below levels originally
anticipated for the three months ended March 31, 1997, due in part to
the Company's conversion to direct sales forces there, and there can
be no assurance that any such direct sales force will be successful
in the future. See Note 5 to the unaudited Condensed Consolidated
Financial Statements in Item 1.
Generally, the Company manufactures and ships product shortly after
the receipt of orders, and anticipates that it will do so in the
future. The Company developed a significant short-term backlog during
January 1997 in connection with the scale-up of manufacturing of its
AVE gfx Stent product. This backlog was significantly reduced during
the quarter ending March 31, 1997. There can be no assurance,
however, that the Company will be successful in scaling up production
of new products or that it will not experience manufacturing
difficulties in the future.
The Company anticipates that its results of operations may fluctuate
for the foreseeable future due to several factors, including
variations in operating expenses, the costs and the outcome of
litigation, competition (including pricing pressures), costs and the
timing of establishing direct sales operations, the timing of
research and development expenses (including clinical trial related
expenditures), the timing of new product introductions or transitions
to new products, sales by distributors, the mix of sales among
distributors and the Company's direct sales force, timing of
regulatory and third party reimbursement approvals, the level of
third-party reimbursement, the Company's ability to manufacture its
products efficiently, 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, changes in 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 an effective direct sales force in
targeted countries. Failure to quickly or cost-effectively establish
or maintain and manage effective sales forces in such countries,
particularly in France and Germany, could have a material adverse
effect on the Company's business, financial condition and results of
operations. 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 experienced, and may experience
in one or more future quarters, operating results which are below the
12
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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 - Three and Nine Months Ended March 31, 1997
and 1996
Net sales. For the three months ended March 31, 1997, net sales
increased to $20.4 million from $15.6 million in the comparable
period in fiscal 1996. For the first nine months of fiscal 1997, net
sales increased to $57.2 million from $37.3 million in the first nine
months of fiscal 1996. The increase in net sales was due to
significant increases in sales of the Company's stent systems,
particularly the AVE gfx and the Micro Stent II family of products.
The AVE gfx was released in certain countries internationally in
September 1996, and the Micro Stent II was released in certain
countries internationally in October 1995.
The Company anticipates that stent system sales will continue to
constitute the vast majority of total net sales. In the fourth
quarter of fiscal 1996, the Company commenced direct sales operations
in the United Kingdom and Germany, and in the second quarter of
fiscal 1997 the Company began selling directly in France,
Switzerland, Belgium and The Netherlands. All other commercial sales
made by the Company were through unaffiliated distributors. The
Company believes that the increasing number of devices in the
international stent market and the desire of companies to obtain
market share has resulted in increased price competition,
particularly in the second and third quarters of fiscal 1997, which
has caused the Company to reduce prices on its stent systems. Price
reductions in response to competitive pressure reduced net sales in
the second quarter of fiscal 1997, but were offset by increased unit
sales in the third quarter of fiscal 1997. The Company expects such
price competition to continue. If the Company is forced to effect
further price reductions, such reductions would reduce net sales in
future periods if not offset by increased unit sales or other
factors.
Cost of Sales. Cost of sales increased to $4.6 million in the three
months ended March 31, 1997 from $2.9 million in the comparable
period in fiscal 1996, and increased as a percentage of net sales to
23% in the fiscal 1997 period from 19% in the fiscal 1996 period.
Cost of sales increased to $11.2 million in the first nine months of
fiscal 1997 from $7.8 million in the first nine months of fiscal
1996, and decreased as a percentage of net sales to 20% in the 1997
period from 21% in the 1996 period. The increase in absolute dollars
during the three- and nine-month periods was primarily a result of
the increased volume of products sold and to a lesser extent, the
costs of additional manufacturing capacity and personnel necessary to
support increased sales volume. The increase as a percentage of net
sales during the three-month period was primarily the result of lower
unit pricing compared to the prior period. The decrease as a
percentage of net sales during the nine-month period was primarily
the result of leveraging certain fixed overhead expenses across a
higher base of sales and an increase in stent system sales as a
percentage of total sales.
The Company expects cost of sales to continue to increase in absolute
dollars as the Company increases the volume of products sold and adds
additional manufacturing capacity and personnel.
Research and Development. Research and development expenses, which
include clinical study and regulatory costs, decreased to $3.2
million in the three months ended March 31, 1997 from $3.8 million in
the comparable period in fiscal 1996, and decreased as a percentage
of net sales to 16% in the fiscal 1997 period from 24% in the
13
<PAGE>
fiscal 1996 period. A one-time charge of $2.6 million was included in
the comparable period in fiscal 1996 in connection with the
termination of certain patent royalty obligations. Excluding this
charge, research and development expenses increased from $1.1 million
in the fiscal 1996 period and increased as a percentage of net sales
from 7% in the fiscal 1996 period. Research and development expenses
increased to $7.3 million in the first nine months of fiscal 1997
from $5.0 million in the first nine months of fiscal 1996 ($2.3
million if the one-time charge is excluded), and constituted 13% of
net sales in the 1997 period, a decrease from 14% in the 1996 period
(but an increase from 6% if the one-time charge in the prior period
is excluded). The increase in absolute dollars and as a percentage of
net sales during the three- and nine-month periods (after excluding
the one-time charge in the fiscal 1996 period) was primarily due to
the addition of research and development personnel, increased levels
of spending in connection with clinical studies relating to the AVE
gfx Stent, the Micro Stent II and Micro Stent II XL systems and costs
incurred in connection with the development of additional products.
The Company expects research and development expenses to continue to
increase in absolute dollars as the Company increases clinical trial
activities and pursues development of next generation products.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $6.4 million
in the three months ended March 31, 1997 from $4.3 million in the
comparable period in fiscal 1996, and increased as a percentage of
net sales to 31% in the 1997 period from 27% in the 1996 period. A
one-time charge of $2.6 million was included in the comparable period
in fiscal 1996 in connection with the termination of certain patent
royalty obligations. Excluding this charge, selling, general and
administrative expenses increased from $1.6 million in the fiscal
1996 period and increased as a percentage of net sales from 11% in
the fiscal 1996 period. Selling, general and administrative expenses
increased in absolute dollars to $15.7 million in the first nine
months of fiscal 1997 from $5.5 million in the first nine months of
fiscal 1996 (from $2.9 million if the one-time charge is excluded),
and increased as a percentage of net sales to 27% in the 1997 period
from 15% in the 1996 period (from 8% if the one-time charge is
excluded). The increase during the three- and nine-month periods in
absolute dollars and as a percentage of sales primarily reflected
additional costs of marketing and other personnel necessary to
support the Company's higher level of operations, including the
recent commencement of direct sales operations in Belgium, France,
Germany, The Netherlands, Switzerland and the United Kingdom.
Additionally, the increase reflects increased legal costs relating
primarily to litigation with former shareholders of Endothelial
Support Systems, Inc., subsequently known as Endovascular Support
Systems, Inc. ("ESS"), and certain distributor terminations, which
together resulted in related legal expenses of $1.2 million during
the quarter.
The Company expects selling, general and administrative costs to
continue to increase in absolute dollars in the future primarily due
to direct sales operations in certain European countries, the
increased level of sales, product support and manufacturing
operations, and increases in finance, legal and administrative costs
in connection with public company obligations and ESS and other
ongoing litigation.
Interest and Other Income. The Company had interest and other income
of $871,000 in the three months ended March 31, 1997, compared to
$145,000 in the comparable period in fiscal 1996. The Company had
interest and other income of $3.2 million in the
14
<PAGE>
first nine months of fiscal 1997, compared to $404,000 in the first
nine months of fiscal 1996. The increase during such periods was
primarily due to interest income earned from the Company's increased
cash and cash equivalents and short-term investment balances.
Provision for Income Taxes. The Company's provision for income taxes
was $2.5 million in the three months ended March 31, 1997, compared
to $1.7 million in the comparable period in fiscal 1996. The
Company's provision for income taxes was $9.2 million in the first
six months of fiscal 1997, compared to $6.6 million in the first nine
months of fiscal 1996. The increase in this provision during such
periods was a result of the Company's higher earnings during the
fiscal 1997 period.
Net Income. The Company had net income of $4.6 million for the three
months ended March 31, 1997 compared to net income of $3.1 million
for the comparable period in fiscal 1996 ($6.5 million if the
one-time charge is excluded). Earnings per share increased to $0.15
in the three months ended March 31, 1997 from $0.11 in the comparable
period in fiscal 1996 (but decreased from $0.24 if the one-time
charge is excluded).
The Company had net income of $17.0 million for the first nine months
of fiscal 1997 compared to net income of $12.7 million for the first
nine months of fiscal 1996 ($16.2 million if the one-time charge is
excluded). Earnings per share increased to $0.54 in the first nine
months of fiscal 1997 from $0.46 in the first nine months of fiscal
1996 (but decreased from $0.59 if the one-time charge is excluded).
Liquidity and Capital Resources
Net cash used in operating activities was $26.6 million for the nine
months ended March 31, 1997, which included the Company's purchase of
short-term investments totaling $29.3 million. Excluding these
investments, the Company had net cash provided by operating
activities of $2.7 million for the nine-month period, principally
arising as a result of positive net income for the period. Cash, cash
equivalents and short-term investments totaled $83.3 million at March
31, 1997 as compared to $91.6 million at June 30, 1996. Working
capital increased to $113.9 million at March 31, 1997 as compared to
$106.9 million at June 30, 1996. Inventories increased to $6.3
million at March 31, 1997 from $3.4 million at June 30, 1996,
primarily due to the commencement of direct sales operations in
France, Switzerland, Belgium and The Netherlands in the second
quarter of fiscal 1997. Of the $22.2 million in accounts receivable
at March 31, 1997, approximately $2.4 million was due from former
distributors of the Company that have threatened or commenced
litigation in connection with the termination of distribution
relationships. The Company has commenced litigation against such
terminated distributors to collect such amounts. See Note 5 to the
Condensed Consolidated Financial Statements in Item 1. The Company
expects accounts receivable and inventories to increase in absolute
dollar amounts as sales increase. As of the date of this report, the
Company had no outstanding debt.
The Company expects to incur substantial additional costs, including
costs relating to capital equipment and other costs associated with
expansion of the Company's manufacturing capabilities, increased
sales and marketing activities (including the establishment of direct
sales forces internationally), and increased research and development
expenditures in connection with seeking regulatory approvals and
conducting additional clinical trials. The Company may require
additional equity or debt financing to address its working capital
needs or to provide funding for capital
15
<PAGE>
expenditures in the future. 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 5 to the Condensed
Consolidated Financial Statements in this Form
10-Q.
Item 2. Changes in Securities
The company has adopted a shareholder rights plan
that is described in the Form 8-K set forth in Item
6.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.4 Certificate of Designation of Series A
Junior Participating Preferred Stock of
the Company (incorporated by reference to
Exhibit 2 to the Company's report on Form
8-K filed February 27, 1997).
10.29 Rights Agreement, dated as of February 26,
1997, between the Company and The First
National Bank of Boston (incorporated by
reference to Exhibit 1 to the Company's
report on Form 8-K filed February 27,
1997).
10.30 Second Amendment to Lease, dated May 5,
1997, to that certain industrial Real
Estate Lease, dated August 5, 1996, by and
between Dixie Walker and Ruth Waltenspiel
and Arterial Vascular Engineering, Inc.,
as amended.
11.1 Statement regarding calculation of net
income per share.
27 Financial Data Schedule.
16
<PAGE>
(b) Reports on Form 8-K
The Company filed the following report on Form 8-K
relating to the adoption of a share purchase rights
plan:
Form 8-K
Report Date: February 25, 1997
Filing Date: February 27, 1997
Item 5 - Other Events
Item 7 - Exhibits
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARTERIAL VASCULAR ENGINEERING, INC.
Date: May 13, 1997 /s/ John D. Miller
------------------------------------------
John D. Miller
Vice President of Finance, Chief Financial
Officer (Principal Financial and
Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
3.4 Certificate of Designation of Series A Junior Participating
Preferred Stock of the Company (incorporated by reference to
Exhibit 2 to the Company's report on Form 8-K filed February
27, 1997).
10.29 Rights Agreement, dated as of February 26, 1997, between the
Company and The First National Bank of Boston (incorporated by
reference to Exhibit 1 to the Company's report on Form 8-K
filed February 27, 1997).
10.30 Second Amendment to Lease, dated May 5, 1997, to that certain
Industrial Real Estate Lease, dated August 5, 1996, by and
between Dixie Walker and Ruth Waltenspiel and Arterial
Vascular Engineering, Inc., as amended.
11.1 Statement regarding computation of net income per share.
27 Financial Data Schedule
EXHIBIT 10.30
SECOND
AMENDMENT TO LEASE
This Second Amendment ("Amendment") to that certain Industrial Real
Estate Lease dated the 5th day of August 1996, by and between Dixie Walker and
Ruth Waltenspiel (herein called "Landlord") and Arterial Vascular Engineering,
Inc., a Delaware corporation (herein called "Tenant") by and between Landlord
and Tenant. All terms used herein with their initial letter capitalized shall
have the same meaning as ascribed to such terms in the Lease.
WITNESSETH
WHEREAS, Landlord and Tenant have entered into that certain Industrial Real
Estate Lease dated August 5, 1996 ("Lease") covering approximately 26,129 square
feet, more or less, ("Premises") commonly known as Building B located on lot 2
as numbered on the map of Airport Oaks Parcel Map #86-386 filed in the office of
the county recorder on 1/26/97 book 394 of maps pages 11 & 12, Sonoma County
Records,
WHEREAS, Tenant desires to extend the term of the Lease on the Premises and
Landlord desires to extend the Lease on the Premises; and
NOW THEREFORE, Landlord and Tenant hereby agree as follows:
1. Term: The term of the Lease as defined in Section 1.05 shall be Four
(4) years and Three (3) months commencing December 1, 1996 and end
February 28, 2001.
2. Rent: The monthly Base Rent shall remain the same at Nineteen Thousand
one Hundred Thirteen and 00/00 Dollars ($19,113.00) payable in
accordance with Section 1.12 of the Lease and Adjusted in accordance
with Section 3.02 on 1st day of December each year beginning December
1, 1998.
3. Right Of First Refusal: The Right of First Refusal described in the
First Amendment to Lease and Landlords Right To Show shall be continued
through out the term of this extension.
4. Parking: The allocated parking described under Section 1.11 shall be
increased to Fifty Nine (59) spaces (Subject to execution of a release
agreement from adjacent property owner for Nine (9) additional parking
stalls. Should Landlord not be able to obtain the additional Nine (9)
spaces, the parking shall remain at Fifty (50) spaces).
All other terms and conditions of the Lease shall remain the same.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date
specified adjacent to their signatures below and have initialed all Exhibits
attached hereto or incorporated by reference.
"LANDLORD"
/s/Dixie Walker Date: 5/5/97
- ------------------------------------------ ------------------------
Dixie Walker
/s/Ruth Waltenspiel Date: 5/6/97
- ------------------------------------------ ------------------------
Ruth Waltenspiel
"TENANT":
Arterial Vascular Engineering, Inc.
By: /s/John D. Miller Date: 5/5/97
--------------------------------------- ------------------------
John D. Miller, V.P. of Finance
2
<TABLE>
EXHIBIT 11.1
<CAPTION>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Primary
Weighted average common shares
outstanding 30,974 25,310 30,932 21,752
Weighted average common equivalent
shares assuming conversion of stock
options under the treasury stock method 614 992 671 2,771
Common and common equivalent shares
pursuant to Staff Accounting Bulletin No. 83 -- 1,211 -- 2,824
------- ------- ------- -------
Shares used in per share calculation 31,588 27,513 31,603 27,347
------- ------- ------- -------
Net income $ 4,633 $ 3,101 $17,004 $12,728
======= ======= ======= =======
Net income per share $ 0.15 $ 0.11 $ 0.54 $ 0.46
======= ======= ======= =======
Net income per share is presented under the primary basis as the effect of
dilution under the fully diluted basis is less than 3%.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 21,624
<SECURITIES> 61,689
<RECEIVABLES> 22,907
<ALLOWANCES> 707
<INVENTORY> 6,297
<CURRENT-ASSETS> 122,555
<PP&E> 20,657
<DEPRECIATION> 2,053
<TOTAL-ASSETS> 141,721
<CURRENT-LIABILITIES> 8,636
<BONDS> 0
<COMMON> 31
0
0
<OTHER-SE> 133,054
<TOTAL-LIABILITY-AND-EQUITY> 141,721
<SALES> 57,197
<TOTAL-REVENUES> 57,197
<CGS> 11,240
<TOTAL-COSTS> 11,240
<OTHER-EXPENSES> 22,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 26,159
<INCOME-TAX> 9,155
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,004
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
