UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
Commission file number 0-27802
ARTERIAL VASCULAR ENGINEERING, INC.
(Exact name of Company 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
(Company'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 Company (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 Company 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 Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of July 31, 1998, there were 64,186,371 shares of Common Stock outstanding.
The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $2,056,140,000 based upon the closing price of the Common
Stock on July 31, 1998 on the Nasdaq National Market tier of The Nasdaq Stock
Market. Shares of Common Stock held by each officer, director and holder of five
percent or more of the Common Stock outstanding as of July 31, 1998 have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive.
--------------------
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Company for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 and risk factors 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 forward-looking statements
risk factors include those discussed in the sections entitled "Item 1.
Business," "Item 3. Legal Proceedings," "Item 5. Market for the Registrant's
Common Equity and Related Stockholders," and "Item 8. Financial Statements and
Supplementary Data" 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.
<PAGE>
Overview
The Company is engaged in the design, development, manufacturing and
marketing of stent systems and PTCA balloon catheters designed to be utilized in
connection with less invasive treatment of atherosclerosis. The Company believes
that it is currently one of the leading providers of coronary stent systems. The
Company began commercial sales of its PTCA catheters in October 1993, its
coronary stent systems in October 1994, and its peripheral stent systems in
December 1996. In June 1997, the Company's Japanese distributor received
regulatory approval for the sale in Japan of the Company's coronary stent
systems, and in January 1998 the Company received the related reimbursement
approval. In December 1997, the Company received a PMA from the FDA in
connection with its commencement of commercial sales of its coronary stent
systems in the United States. Prior to that time, international sales accounted
for substantially all of the Company's revenues.
The increase in the Company's sales to date has primarily been due to
greater demand for the Company's coronary stent 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
(including clinical study and regulatory costs), sales and marketing, and
administration, both in absolute dollars and as a percentage of net sales. The
Company also expects to incur significant legal expenses relating to ongoing
litigation, including patent litigation.
Generally, the Company manufactures and ships product shortly after the
receipt of orders, and anticipates that it will do so in the future. At various
times and to varying degrees throughout the third and fourth quarterly periods
of the fiscal year ended June 30, 1998, as a result of the significant demands
on the Company's production capabilities related to its entry into the U.S.
market, the Company delivered some customers' orders several weeks after
receiving the orders. The Company normally attempts to deliver products to its
customers within a few days after receiving an order. The Company does not
believe that any of its customer relationships were materially damaged by the
resulting temporary inconvenience and does not believe that the financial impact
on the Company of the backlog, if any, was material. The Company substantially
reduced the backlog during the fourth quarter of fiscal year 1998 as additional
production resources were developed, and has not, since such time, ever been in
significant backlog with respect to customer orders for its products. There can
be no assurance, however, that a backlog will not develop in the future and that
such backlog will not have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has recently
completed construction of a 130,000 square foot building at its corporate
headquarters campus in Santa Rosa, California, which is largely devoted to
manufacturing activities. However, there can be no assurance that such new
manufacturing facility is sufficient to allow the Company to adequately supply
the significant demands of the U.S. market on a long-term basis.
The Company has a limited history of operations. The increase in the
Company's sales to date has been due to greater demand for the Company's stent
systems and, to a much lesser degree, its PTCA balloon 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.
Since the commencement of sales of its coronary stent systems in the
United States, several of the Company's competitors have filed claims against
the Company alleging, among other things, that such stent systems infringe on
certain patents of such competitors. Although the Company continually reviews
the scope of relevant U.S. and foreign patents and related litigation, 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. If the Company's products are determined to infringe such patents and it
cannot obtain a license on commercially reasonable terms or modify its current
technology or develop new products to avoid infringement, the Company would be
required to cease its sales of the affected products in the United States, which
could have a material adverse affect on the Company's business, financial
condition and results of operations.
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. Such
competition has, in the past, caused the Company to reduce prices on its stent
systems. The Company expects that, as the stent industry develops, competition
and pricing pressures will increase. In particular, it is likely that in the
United States the FDA will begin to use a streamlined PMA process once a
sufficient number of similar coronary stent products have been cleared for
commercial sale in the United States, and will permit coronary stent
manufacturers to utilize a simplified clinical trial structure in obtaining
marketing approval here as sufficient stent performance data enters the public
domain. Thus, the regulatory barriers to entry in the United States coronary
stent market that currently exist may, in the future, be lowered significantly
with respect to both new market entrants and new products introduced by existing
U.S. competitors. If the Company is forced to effect further price reductions in
connection with such increased competition, such reductions would reduce net
sales in future periods if not offset by increased unit sales or other factors.
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, costs associated
with integration of acquisitions, the Company's ability to manufacture its
products efficiently, competition (including pricing pressures), the timing of
new product introductions or transitions to new products, the costs of
establishing direct sales operations, the timing of research and development
expenses (including clinical trial related expenditures),
<PAGE>
timing of regulatory and third party reimbursement approvals, the level of
third-party reimbursement, sales by distributors, the mix of sales among
distributors and the Company's direct sales force, the fluctuations in
international currency exchange rates, and seasonal factors impacting the number
of elective angioplasty or stent procedures. In addition, the Company's results
of operations could be affected by the timing of orders from its distributors,
changes in the Company's distributor network (including expenses in connection
with termination of former distributors), the ability of the Company's direct
sales force and independent 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. 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 and substantial growth in the most recent quarter, 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 that 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.
Many older computer software programs refer to years in terms of their
final two digits only. Such programs may interpret the year 2000 to mean the
year 1900 instead. If not corrected, those programs could cause date-related
transaction failures. AVE has an initiative in place to address certain year
2000 issues. AVE believes that its existing computer programs will not be
adversely affected by the year 2000 problem, but that some of the computer
programs acquired as part of the Bard Cath Lab Acquisition are not year 2000
compliant. As a result, AVE is considering installing the same computer programs
used by AVE for management of, among other things, inventory, customer orders
and financial and other operations, at certain of the Bard sites. The software
that will interface Bard's current systems with these AVE computer programs has
been already been developed by a consultant to Bard. The conversion of the Bard
sites to AVE's existing computer programs using the developed software or the
conversion to an alternative system is expected to be completed within the next
six to twelve months at a cost to AVE of approximately $1.2 million. AVE is also
considering adapting its operational computer systems to World Medical's systems
within the same time period and estimates that such conversion will cost
approximately $300,000. AVE is currently assessing its systems outside of
information systems and the year 2000 readiness of the suppliers and customers
of AVE, Bard and World Medical. AVE is also assessing the type of contingency
plans that may be required in the event that any of its systems, or those of its
customers, suppliers or other third parties are not ready by the year 2000.
AVE's initial assessments in these areas are completed, but AVE expects that
such assessments will continue through 1999 and thereafter. AVE currently
expects that the total cost of these programs, including the cost of converting
Bard's and World Medical's systems to AVE's systems, will be approximately $2
million. This total cost estimate does not include potential costs related to
any customer or other claims or the cost of internal software and hardware
replaced in the normal course of business. In the reasonable worst case
scenario, the installment of AVE's computer programs at certain Bard sites and
at World Medical would not be completed by the year 2000, or, if completed,
would not be effective in resolving all problems related to the year 2000 in
such case, AVE's computer systems would experience delays or other problems
related to the year 2000, and AVE's suppliers and customers would experience
delays in orders or payments or other year 2000 related problems. Management
does not currently believe that the year 2000 matters will have a material
adverse impact on AVE's financial condition or overall trends in results of
operations, but there can be no assurances of this and AVE is continuing to
investigate the year 2000 matters and evaluate the potential impact of the year
2000 problem. In addition, there can be no assurance that the failure to ensure
year 2000 capability by a supplier or another third party would not have a
material adverse effect on AVE.
Results of Operations - Years Ended June 30, 1998 and 1997
Net sales. For the fiscal year ended June 30, 1998, net sales were
$387.6 million, an increase of 388% from $79.4 million in fiscal 1997. The
increase in net sales was primarily due to significant increases in net sales of
the Company's Micro Stent II and GFX coronary stent systems in the United States
and of GFX coronary stent systems in Japan. The Company first began sales of its
Micro Stent II coronary stent systems in the United States in late December 1997
and of its GFX coronary stent systems in late March 1998. The Company first
began sales of its GFX coronary stent systems in Japan in July 1997. Sales in
the United States comprised 65% of total net sales for fiscal 1998. There were
no United States sales in fiscal 1997. Sales to Japan increased from 4% of net
sales in fiscal 1997 to 11% in fiscal 1998. Outside of the United States, the
GFX family of coronary stent systems was responsible for a substantial majority
of the Company's net sales. The GFX was released in certain countries
internationally in September 1996, and the GFX 2.5 and the GFX XL were released
in certain countries internationally in June 1997. The Company expects that
coronary stent system sales, particularly of the Company's GFX(TM) family of
products, will constitute the vast majority of total net sales in the near
future, and that the United States will continue to produce a significant
portion of the Company's total net sales.
The Company experienced sales growth during the fiscal year in all of
its major markets, including the United States, Europe, and Japan. Sales in the
United States, Europe and Asia represented approximately 65%, 19% and 12%,
respectively, of the Company's total net sales during fiscal 1998. Japan
Lifeline Co., Ltd., the Company's Japanese distributor, accounted for
approximately 11% of the Company's total net sales for the year ended June 30,
1998.
In certain international territories, including Europe, the Company
suffered price reductions during the fiscal year. These price reductions were
attributable both to competitive pressures and, in those countries outside of
the United States where the Company has direct sales operations, exchange rate
fluctuations. 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 $72.7 million in the year
ended June 30, 1998 from $16.2 million in fiscal 1997, and decreased as a
percentage of net sales to 18.8% in fiscal 1998 from 20.4% in fiscal 1997. The
increase in absolute dollars during the fiscal year 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 and $20.9 million in special general employee bonuses paid or
accrued during the period. The decrease as a percentage of net sales during
fiscal 1998 was primarily the result of increased aggregate average selling
prices (primarily due to U.S. sales), leveraging certain fixed overhead expenses
across a higher base of sales and, to a lesser extent, decreased average unit
manufacturing costs (excluding the effect of the special general employee
bonuses).
The allowance for obsolete inventory increased by $2,621,000, from
$635,000 in fiscal 1997 to $3,256,000 in fiscal 1998. The increase in the
allowance for obsolete inventory was primarily a result of the significant scale
down in production of the Micro Stent II product. In connection with the scale
down, the Company wrote off in fiscal 1998 all remaining unsold inventory and
materials used exclusively in the production of the Micro Stent II product.
The Company expects cost of sales (excluding the effect of the special
general employee bonuses) to continue to increase in absolute dollars as the
Company increases the volume of products sold and adds additional manufacturing
capacity and personnel. If the Company is successful in continuing to leverage
certain fixed overhead expenses across a higher base of sales and to reduce
average unit manufacturing costs, the Company expects cost of sales as a
percentage of net sales to remain at a level generally similar to that
experienced in fiscal 1998.
<PAGE>
Research and Development. Research and development expenses, which
include clinical study and regulatory costs, increased to $37.2 million in the
year ended June 30, 1998 from $11.4 million in fiscal 1997, and decreased as a
percentage of net sales to 9.6% in fiscal 1998 from 14.4% in fiscal 1997. The
increase in absolute dollars during the fiscal year was primarily due to the
addition of research and development personnel, increased levels of spending in
connection with clinical studies relating to the GFX, GFX 2.5, and GFX XL
coronary stent systems and costs incurred in connection with the development of
additional products. In addition, during the fiscal year the Company incurred
approximately $4.6 million in legal expenses relating to ongoing patent
litigation and $4.5 million in special general employee bonuses paid or accrued
during the period. The decrease as a percentage of net sales during the fiscal
year was primarily the result of leveraging research and development expenses
across a higher base of sales.
The Company expects research and development expenses (excluding the
effect of the special general employee bonuses) to continue to increase in
absolute dollars as the Company increases clinical trial activities, pursues the
development of new products and incurs increased legal costs related to patent
litigation. If the Company is successful in continuing to leverage research and
development expenses across a higher base of sales, the Company expects such
expenses as a percentage of net sales to remain at a level generally similar to
that experienced in fiscal 1998.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $97.0 million in the
year ended June 30, 1998 from $22.5 million in the comparable period in fiscal
1997, and decreased as a percentage of net sales to 25.0% in fiscal 1998 from
28.3% in fiscal 1997. The increase during the fiscal year in absolute dollars
primarily reflected additional costs of sales, marketing and other personnel
necessary to support the Company's higher level of operations, including the
commencement of direct sales operations in the United States in late December
1997, as well as sales and marketing assistance to the Company's Japanese
distributor and increased reserves. The reserves for bad debts has increased by
$8.6 million, of which $2.2 million relates to unpaid accounts receivable
balances attributable to former European distributors of the Company, and the
remainder relates to the increase in sales volume, primarily related to the U.S.
launch of the Company's products in late December 1997. Additionally, during
fiscal 1998, the Company incurred a $9.8 million special general employee bonus
expense and 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 $7.4 million
for the period. The decrease in percentage of sales for the fiscal year was
primarily the result of leveraging selling, general and administrative expenses
across a higher base of sales.
The Company expects selling, general and administrative costs
(excluding the effect of the special general employee bonuses) to continue to
increase in absolute dollars in the future primarily due to increased levels of
sales, product support and manufacturing operations, as well as increases in
finance, legal and administrative costs. If the Company is successful in
continuing to leverage selling, general and administrative expenses across a
higher base of sales, the Company expects such expenses as a percentage of net
sales to remain at a level generally similar to that experienced in fiscal 1998.
Interest and Other Income. The Company had interest and other income of
$5.5 million in the year ended June 30, 1998, compared to $4.2 million in fiscal
1997. The increase during the fiscal year was primarily due to higher cash, cash
equivalents and short-term investments balances.
Provision for Income Taxes. The Company's provision for income taxes
was $71.1 million in the year ended June 30, 1998, compared to $11.7 million in
fiscal 1997. The increase in this provision was a result of the Company's higher
earnings during fiscal 1998.
The income tax rate on sales in the United States has been and will
likely continue to be higher than that related to the Company's international
sales, which receive a benefit from the Company's foreign sales corporation.
Net Income. The Company had net income of $115.1 million, or 29.7% of
net sales, in the year ended June 30, 1998 compared to net income of $21.7
million, or 27.4% of net sales, in fiscal 1997.
Results of Operations - Years Ended June 30, 1997 and 1996
Net sales. For the year ended June 30, 1997, net sales increased to
$79.4 million, an increase of 43.8% from $55.2 million for fiscal 1996. The
increase in net sales was due to significant increases in sales of the Company's
stent systems, particularly the GFX and the Micro Stent II family of products.
The GFX was released in certain countries internationally in September 1996, and
the Micro Stent II was released in certain countries internationally in October
1995.
Cost of Sales. Cost of sales increased to $16.2 million in fiscal 1997
from $10.6 million in fiscal 1996, and increased as a percentage of net sales to
20% in fiscal 1997 from 19% in fiscal 1996. The increase in absolute dollars
during fiscal 1997 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 fiscal 1997 was primarily the result of lower
unit pricing compared to fiscal 1996.
<PAGE>
Research and Development. Research and development expenses, which
include clinical study and regulatory costs increased to $11.4 million in fiscal
1997 from $6.5 million in fiscal 1996 and increased as a percentage of net sales
to 14% in fiscal 1997 from 12% in fiscal 1996. A one-time charge of $2.6 million
was included in fiscal 1996 in connection with the termination of certain patent
royalty obligations. Excluding the effect of this charge, research and
development expenses increased from $3.9 million or 7% of net sales for fiscal
1996. The increase in absolute dollars and as a percentage of net sales during
fiscal 1997 was primarily due to the addition of research and development
personnel, increased levels of spending in connection with clinical studies
relating to the GFX, Micro Stent II and Micro Stent II XL systems and costs
incurred in connection with the development of additional products.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $22.5 million in fiscal
1997 from $8.4 million in fiscal 1996, and increased as a percentage of net
sales to 28% in fiscal 1997 from 15% in fiscal 1996. A one-time charge of $2.6
million was included in fiscal 1996 in connection with the termination of
certain patent royalty obligations. Excluding the effect of this charge,
selling, general and administrative expenses increased from $5.8 million or 11%
of net sales for fiscal 1996. The increase during fiscal 1997 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 commencement of direct sales operations in France,
Germany, the Netherlands (to service the Benelux countries), Switzerland and the
United Kingdom. Additionally, the increase reflects increased legal costs
relating primarily to litigation with former shareholders of ESS, which resulted
in related legal expenses of $3.4 million during fiscal 1997.
Interest and Other Income. The Company had interest and other income of
$4.2 million in fiscal 1997 compared to $1.5 million in fiscal 1996. The
increase was primarily due to additional interest income earned on the Company's
increased cash and cash equivalents and short-term investment balances arising
from the utilization of proceeds from the Company's initial public offering in
April 1996.
Provision for Income Taxes. The Company's provision for income taxes
was $11.7 million in fiscal 1997, compared to $10.8 million in fiscal 1996. The
increase in this provision during fiscal 1997 was a result of the Company's
higher earnings during fiscal 1997.
Net Income. The Company had net income of $21.8 million for fiscal
1997, compared to $20.4 million for fiscal 1996 ($23.9 million if the one-time
charge is excluded).
Liquidity and Capital Resources
Net cash provided by operating activities was $71.7 million for fiscal
1998. Net cash used in operating activities in fiscal 1997 was $20.0 million,
and net cash used by operating activities in fiscal 1996 was $20.5 million.
Excluding the effect of transactions in short-term investments, the Company had
net cash provided by operating activities of $136.4 million for fiscal 1998 and
$9.9 million in fiscal 1997, principally arising as a result of positive net
income for the period. Cash, cash equivalents and short-term investments totaled
$175.1 million at June 30, 1998 as compared to $87.2 million at June 30, 1997.
Working capital increased to $204.5 million at June 30, 1998 as compared to
$114.5 million at June 30, 1997. Inventories increased to $9.5 million at June
30, 1998 from $7.3 million at June 30, 1997, primarily due to increased sales
activity. The Company expects accounts receivable and inventories to increase in
absolute dollar amounts as sales increase.
In connection with the construction of a new manufacturing facility, in
August 1997 the Company entered into a bank credit agreement for a revolving
credit facility of $20 million. The interest rate on such facility was LIBOR
plus one-half of one percent. Such facility was secured by certain of the
Company's short-term investments and was due and payable on August 31, 1998. The
bank credit agreement contained no material restrictive covenants and was repaid
in full during the fourth quarter of fiscal 1998. The Company incurred $53.2
million in capital expenditures during fiscal 1998, primarily relating to the
construction of such new manufacturing facility and the purchase of related
manufacturing equipment.
During the third quarter of fiscal 1998, the Company's Board of
Directors declared a two-for-one stock split that was effected in the form of a
100% stock dividend. The stock split resulted in the issuance of approximately
32 million additional shares of common stock.
A significant portion of the Company's revenues are currently derived
from sales outside of the United States. As a result, the Company's financial
results will be affected by changes in foreign currency exchange rates to the
extent that such sales may be denominated in foreign currency. The Company is
currently exposed to fluctuations in currencies in western Europe and in
Singapore. During fiscal 1997, the Company began a program of from time to time
entering into derivative financial instruments in the form of forward exchange
contracts in order to reduce the uncertainty of foreign exchange rate movement
on inter-Company sales denominated in foreign currencies. These contracts are
designed to specifically hedge against gains or losses incurred from foreign
currency transactions and are not used for trading or speculative purposes.
Forward exchange contracts are used to hedge material foreign
currency-denominated receivables and payables. They are generally settled
between three to six months with gains or losses recorded in "Selling, general
and administrative" expenses to offset gains or losses on foreign currency
receivables and payables. As of June 30, 1998, however, the Company had no such
currency hedging instruments outstanding.
<PAGE>
In connection with the Bard Cath Lab Acquisition, the Company expects
to enter into a bank credit agreement for $600 million in senior secured credit
facilities, of which $200 million would be five-year term loans (the "Term A
Loans"), $350 million would be six-year term loans (the "Term B Loans") and $50
million would be a five-year revolving credit facility (the "Revolving Loans").
The term loans are expected to amortize and be prepayable at any time, subject
to customary breakage provisions. Initial interest rates are expected to be at
the higher of the London InterBank Offered Rate ("LIBOR") plus 2.00% or an
agreed pricing grid for the Term A Loans and the Revolving Facilities and at the
higher of LIBOR plus 2.25% or an agreed pricing grid for the Term B Loans. The
Term A Loans, the Term B Loans and the Revolving Loans outstanding would be
reduced by certain mandatory prepayments, including (i) 100% of the net proceeds
from debt issuances, subject to certain exceptions, (ii) 100% of the net
proceeds from extraordinary asset sales, subject to certain exceptions, (iii)
50% of the first $200 million of the net cash proceeds from any issuances of
equity securities of the Company and 50% of any further net cash proceeds from
issuances of equity securities of the Company if the Company's then current
leverage ratio exceeds 2.5, and (iv) 50% of the Company's consolidated annual
excess cash flow if the Company's then current leverage ratio exceeds 2.5. The
bank credit agreement is expected to contain restrictive financial covenants
relating to a maximum leverage ratio, a minimum fixed charge coverage ratio, and
a minimum net worth of the Company. The bank credit agreement would also contain
customary negative covenants, including restrictions on (i) the incurrence of
additional debt, (ii) payment of restricted payments, (iii) liens, (iv) sales of
assets, (v) acquisitions, mergers or similar combinations, (vii) transactions
with affiliates, and (viii) capital expenditures. The senior secured credit
facilities are expected to be secured by substantially all the operating assets
of the Company and its subsidiaries and a pledge of the capital stock of the
Company's material subsidiaries, including a subsidiary to be formed that will
hold a substantial portion of the assets acquired from Bard.
The Company's high degree of leverage could have important consequences
to the stockholders of the Company, including the following: (i) the Company's
ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of principal and interest on
its indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the Company's borrowings under such senior secured credit
facilities will be at variable rates of interest, which will expose the Company
to the risk of increased interest rates; (iv) the indebtedness outstanding under
the senior secured credit facilities will be secured; (v) the Company may be
substantially more leveraged than certain of its competitors, which may place
the Company at a competitive disadvantage; and (vi) the Company's substantial
degree of leverage may limit its flexibility to adjust to changing market
conditions, reduce its ability to withstand competitive pressures and make it
more vulnerable to a downturn in general economic conditions or businesses.
The Company is expected 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 also intends to expand its operations by promoting new or
complementary products and by expanding the breadth and depth of its product
offerings, and may do so by entering into business combinations, acquisitions,
investments, joint ventures or other strategic alliances with third parties. The
Company may require additional equity or debt financing to address its working
capital needs, to provide funding for capital expenditures in the future or to
finance any such acquisitions or strategic alliances. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may involve restrictive covenants and may increase the Company's
leverage. There can be no assurance that events in the future will not require
the Company to seek additional capital or, if so required, that it will be
available on terms acceptable to the Company.
<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/A:
(3) Exhibits
Exhibit
Number Description of Document
------ -----------------------
23.1* Consent of Ernst & Young LLP, Independent Auditors.
- -------------
* Filed herewith.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ARTERIAL VASCULAR ENGINEERING, INC.
Date: November 9, 1998 /s/ Scott J. Solano
-------------------------------------
Scott J. Solano
President, Chief Executive Officer and
Chairman of the Board of Directors
Date: November 9, 1998 /s/ Scott J. Solano
-------------------------------------------
Scott J. Solano
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 9, 1998 /s/ John D. Miller
-------------------------------------------
John D. Miller
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting Officer)
Date: November 9, 1998 /s/ Craig E. Dauchy*
-------------------------------------------
Craig E. Dauchy
Director
Date: November 9, 1998 /s/ George B. Borkow*
-------------------------------------------
George B. Borkow
Director
*By: /s/ John D. Miller
------------------------
John D. Miller
Attorney-in-Fact
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. 333-39777 and 333-39779) pertaining to the 1996 Equity Incentive
Plan and the 1997 Employee Stock Purchase Plan and in the Registration Statement
(Form S-4 No. 333-53421) and related Prospectus, of our report dated July 17,
1998 with respect to the consolidated financial statements and schedule of
Arterial Vascular Engineering, Inc., included in the Annual Report, as amended
for the year ended June 30, 1998.
ERNST & YOUNG LLP
Palo Alto, California
November 6, 1998
