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, 1998
Commission file number 0-27802
ARTERIAL VASCULAR ENGINEERING, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3144218
(State of incorporation) (I.R.S. Employer Identification No.)
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 63,842,280 as of April 20, 1998
<PAGE>
INDEX TO FORM 10-Q
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31,
1998 and June 30, 1997 3
Condensed Consolidated Statements of Operations for
the three and nine months ended March 31, 1998
and 1997 4
Condensed Consolidated Statements of Cash Flows for
the nine months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Change in Securities and Use of Proceeds 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
<CAPTION>
March 31, June 30,
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 49,653 $ 25,036
Short-term investments 80,399 62,192
Accounts receivable, net 83,358 22,850
Inventories 9,736 7,302
Deferred income tax 2,413 2,413
Prepaid expenses and other current assets 6,472 4,472
--------- ---------
Total current assets 232,031 124,265
Deferred income tax 1,598 1,598
Property, plant and equipment, net 52,465 21,759
Purchased technology, net 260 357
--------- ---------
Total assets $ 286,354 $ 147,979
========= =========
LIABILITIES
Current liabilities:
Short-term borrowings $ 17,471 $ --
Accounts payable 8,799 4,035
Accrued employee bonus 15,783 387
Accrued expenses 17,656 5,357
Income taxes payable 10,628 --
--------- ---------
Total current liabilities 70,337 9,779
--------- ---------
STOCKHOLDERS' EQUITY
Common stock 64 62
Additional paid-in capital 115,743 92,990
Treasury stock (390) (390)
Cumulative translation adjustment (2,007) (1,364)
Retained earnings 102,607 46,902
--------- ---------
Total stockholders' equity 216,017 138,200
--------- ---------
Total liabilities and stockholders' equity $ 286,354 $ 147,979
========= =========
<FN>
See accompanying notes
</FN>
</TABLE>
3
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<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $141,203 $ 20,402 $205,768 $ 57,197
Cost of sales 27,546 4,596 40,691 11,240
-------- -------- -------- --------
Gross profit 113,657 15,806 165,077 45,957
-------- -------- -------- --------
Operating expenses:
Research and development 11,212 3,186 24,611 7,300
Selling, general and administrative 35,656 6,363 55,070 15,698
-------- -------- -------- --------
Total operating expenses 46,868 9,549 79,681 22,998
-------- -------- -------- --------
Operating income 66,789 6,257 85,396 22,959
Interest and other income 1,343 871 3,449 3,200
-------- -------- -------- --------
Income before provision for income taxes 68,132 7,128 88,845 26,159
Provision for income taxes 25,890 2,495 33,140 9,155
-------- -------- -------- --------
Net income $ 42,242 $ 4,633 $ 55,705 $ 17,004
======== ======== ======== ========
Net income per share - basic $ 0.67 $ 0.07 $ 0.89 $ 0.27
Net income per share - diluted $ 0.64 $ 0.07 $ 0.86 $ 0.27
Shares used to calculate net income per share:
Basic 63,383 61,948 62,647 61,863
Diluted 65,684 63,176 65,055 63,207
<FN>
See accompanying notes
</FN>
</TABLE>
4
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<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
March 31,
-------------------------------
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 55,705 $ 17,004
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,492 1,149
Provision for doubtful accounts 5,929 427
Provision for obsolete inventory 407 (75)
Amortization of deferred compensation -- 40
Income tax reduction relating to stock plans 18,327 823
Changes in assets and liabilities:
Short-term investments (18,207) (29,335)
Accounts receivable (66,964) (9,979)
Inventories (3,020) (3,047)
Prepaid expenses and other current assets (2,352) (2,226)
Accounts payable 4,716 1,659
Accrued employee bonus 15,396 (171)
Other accrued expenses 12,392 3,084
Income taxes payable 10,927 (5,630)
-------- --------
Net cash provided by (used in) operating activities 35,748 (26,277)
-------- --------
Cash flows from investing activities:
Acquisition of property, plant and equipment (33,126) (10,700)
-------- --------
Net cash used in investing activities (33,126) (10,700)
-------- --------
Cash flows from financing activities:
Increase in short-term borrowings 17,471 --
Proceeds from issuance of common stock 4,428 51
Acquisition of treasury stock -- (390)
-------- --------
Net cash provided by (used in) financing activities 21,899 (339)
-------- --------
Effect of exchange rate changes on cash and cash equivalents 96 (298)
Net increase (decrease) in cash and cash equivalents 24,617 (37,614)
Cash and cash equivalents, at beginning of period 25,036 59,238
======== ========
Cash and cash equivalents, at end of period $ 49,653 $ 21,624
======== ========
<FN>
See accompanying notes
</FN>
</TABLE>
5
<PAGE>
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,
results of operations and cash flows 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, 1997.
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-month periods
ended March 31, 1998 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,
1998 1997
------ ------
Raw materials $2,681 $ 925
Work in process 2,555 3,044
Finished goods 4,500 3,333
------ ------
$9,736 $7,302
====== ======
3. Computation of Net Income Per Share
In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 replaced the previously reported primary and
fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
6
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Stock Split
On February 4, 1998, the Company's Board of Directors declared
a two-for-one stock split to be effected in the form of a 100% stock
dividend payable to stockholders of record at the close of business
February 17, 1998. Distribution of the additional shares resulting
from the stock split occurred on March 2, 1998. The stock split
resulted in the issuance of approximately 32 million additional
shares. All references in the accompanying consolidated financial
statements to common shares and per-share amounts for the current and
prior periods have been restated to reflect the stock split.
5. Contingencies
Legal proceedings to which the Company is a party are
discussed in Part I, Item 3 ("Legal Proceedings") in the Annual
Report on Form 10-K and in the Company's quarterly reports on Form
10-Q for the periods ending September 30, 1997 and December 31, 1997.
Material developments in such matters and certain other legal
proceedings are discussed in Part II of this filing.
7
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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 manufacturing scale-up, the
intellectual property positions of competitors, the anticipated
outcome of litigation, the extent and timing of new product
introductions, future revenues, customer demand, competition, pricing
pressure, barriers to market entry, expansion of operations, risks of
business combinations, 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.
The Company is engaged in the design, development,
manufacturing and marketing of stent systems and percutaneous
transluminal coronary angioplasty ("PTCA") catheters designed to be
utilized in connection with less invasive treatment of cardiovascular
disease. 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
pre-market approval ("PMA") from the United States Food and Drug
Administration (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. From time to time, however, the Company develops
short-term backlogs in connection with the scale-up of manufacturing
of its stent products. There can be no assurance that the Company
will
8
<PAGE>
be successful in scaling up production of new or modified products or
that it will not experience manufacturing difficulties or develop
backlogs in the future, particularly with respect to the significant
demands of the U.S. market. The Company is completing construction of
a 130,000 square foot building at its corporate headquarters campus
in Santa Rosa, California, which will be largely devoted to
manufacturing activities. However, there can be no assurance that
such new manufacturing facility will be sufficient to allow the
Company to adequately supply the significant demands of the U.S.
market on a long-term basis.
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. See Part II,
Item 1.
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 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 intends to expand its operations by promoting new
or complementary products and by expanding the breadth and depth of
its product offerings. Expansion of the Company's operations in this
manner would require significant additional expense as well as
substantial managerial, financial and operational resources.
Furthermore, gross margins attributable to new business areas may be
lower than those associated with the Company's existing business
activities. There can be no assurance that the Company will be able
to expand its operations in a cost-effective or timely manner.
Furthermore, any new product or business launched by the Company that
is not favorably received by customers may damage the Company's
reputation or the AVE brand. The lack of market acceptance of such
efforts
9
<PAGE>
or the Company's inability to generate satisfactory revenues from
such expanded product offerings to offset its costs could have a
material adverse effect on the Company's business, financial
condition and results of operations.
The Company may choose to expand its operations or market
presence by entering into business combinations, acquisitions,
investments, joint ventures or other strategic alliances with third
parties. Any such transaction would be accompanied by the risks
commonly associated with such transactions, such as the difficulty of
assimilating the operations, technology and personnel of the combined
companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial
personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration
of acquired businesses, additional expenses associated with
amortization of acquired intangible assets, the maintenance of
uniform standards, controls and policies and the impairment of
relationships with existing employees and customers. There can be no
assurance that the Company would be successful in overcoming these
risks or any other potential problems encountered in connection with
such business combinations, acquisitions, investments, joint ventures
or other strategic alliances, or that such transactions would not
have a material adverse effect on the Company's business, financial
condition and results of operations.
Until April 1996, substantially all of the Company's sales
were to international distributors who resell products to health care
providers. Since then, however, the Company has established direct
sales forces in Canada, France, Germany, the Netherlands (servicing
the Benelux countries), Singapore, Switzerland, the United Kingdom
and the United States (with respect to its coronary stent systems).
The Company continually reviews its existing distributor arrangements
and expects from time to time to establish direct sales forces in
other countries. The Company believes that the establishment and
maintenance of direct sales forces has required and will continue to
require significant ongoing expenditures and additional management
resources and has resulted, and may continue to result, in additional
costs to eliminate existing distributor relationships (including
costs relating to litigation with former distributors).
The Company believes that its computer programs will not be
adversely affected by the "Year 2000" problem, but it has not made an
assessment of whether any of its customers, suppliers or service
providers will be so affected. Failure of the Company's software or
that of its customers, suppliers or service providers could have a
material adverse effect on the Company's business, financial
condition and results of operations.
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, 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),
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
10
<PAGE>
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.
Recent Developments
On April 10, 1998, the Company entered into an agreement to
acquire the shares of outstanding common stock of World Medical
Manufacturing Corporation, a Florida Corporation ("World Medical").
Under the terms of the agreement, World Medical's outstanding stock
will be exchanged for, and its outstanding stock options converted
into, stock and stock options of the Company valued at approximately
$62 million. The exchange ratio will be determined in accordance with
a formula based on the average price of Company common stock during a
period prior to the closing of the acquisition, subject to certain
adjustments. The Company expects to incur a significant one-time
charge related to the acquisition, largely in connection with the
write-off of in-process research and development. The acquisition is
expected to be completed by July 1998 and is subject to the approval
of shareholders of World Medical and certain other conditions.
For the three months ended March 31, 1998, the Company
incurred an expense of $17.0 million in connection with a special
general employee bonus. This special bonus was awarded because of the
achievement of overall growth and performance goals by the Company,
including the receipt in late December 1997 of a PMA from the FDA in
connection with commercial sales by the Company of its coronary stent
systems in the United States as well as the successful commencement
of such domestic commercial sales. Of the total $17.0 million amount,
$5.8 million was paid to employees in April, 1998, and the remainder
is expected to be paid out in the near future. Although the Company
may elect from time to time to pay additional quarterly employee
bonuses in the future, the $17.0 million special general employee
bonus is a non-recurring expense.
Results of Operations - Three and Nine Months Ended March 31, 1998
and 1997
Net sales. For the three months ended March 31, 1998, net
sales were $141.2 million, an increase of 592% from $20.4 million in
the comparable period in fiscal 1997. For the nine months ended March
31, 1998, net sales were $205.8 million,
11
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an increase of 260% from $57.2 million in the comparable period in
fiscal 1997. The increase in net sales for the three- and nine-month
periods was primarily due to significant increases in net sales of
the Company's Micro Stent II coronary stent systems in the United
States and of GFX coronary stent systems in Japan. The Company first
began sales of its coronary stent systems in the United States in
late December 1997 and in Japan in June 1997. Outside of the United
States, the GFX(TM) family of coronary stent systems was responsible
for a substantial majority of the Company's net sales. The GFX(TM)
was released in certain countries internationally in September 1996,
and the GFX 2.5(TM) and the GFX XL(TM) were released in certain
countries internationally in June 1997. In late March 1998, the
Company released its GFX(TM) coronary stent systems in the United
States. 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.
The Company experienced sales growth in all of its major
markets, including the United States, Europe, and Japan. Net sales in
the United States for the three months ended March 31, 1998 were
$105.9 million, an increase of $103.0 million, or 3,578%, from $2.9
million for the three months ended December 31, 1997. The Company
received in late December 1997 a PMA from the FDA in connection with
its commencement of commercial sales of its coronary stent systems in
the United States. The Company expects that, in the future, the
United States will continue to produce a significant portion of the
Company's total net sales. Net sales in Europe (including both direct
operations and independent distributors) for the three months ended
March 31, 1998 were $19.6 million, an increase of $870,000, or 4.7%,
from $18.7 million for the three months ended December 31, 1997. Net
sales in Japan for the three months ended March 31, 1998 were $11.8
million, an increase of $474,000, or 4.2%, from $11.3 million for the
three months ended December 31, 1997. No single customer (either in
the United States or internationally) accounted for more than 10% of
the Company's total net sales for the three months ended March 31,
1998.
The Company's increase in net sales for the three months ended
March 31, 1998 reflected increases in unit volume and price stability
for the Company's coronary stent systems in each of the United States
and Japan. In other international territories, including Europe, the
Company suffered slight price reductions during the period. 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 $27.5 million in the
three months ended March 31, 1998 from $4.6 million in the comparable
period in fiscal 1997, and decreased as a percentage of net sales to
19.5% in the fiscal 1998 period from 22.5% in the fiscal 1997 period.
Cost of sales increased to $40.7 million in the nine months ended
March 31, 1998 from $11.2 million in the comparable period in fiscal
1997, and increased as a percentage of net sales to 19.8% in the
fiscal 1998 period from 19.7% in the fiscal 1997 period. The increase
in absolute dollars during the three- and nine-month periods, and the
increase as a percentage of sales during the nine-month period, 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
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increased sales volume and a $9.6 million special general employee
bonus accrued in March 1998. The decrease as a percentage of net
sales during the three-month period 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 bonus).
The Company expects cost of sales (excluding the effect of the
special general employee bonus) 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 the three months ended March 31, 1998.
Research and Development. Research and development expenses,
which include clinical study and regulatory costs, increased to $11.2
million in the three months ended March 31, 1998 from $3.2 million in
the comparable period in fiscal 1997, and decreased as a percentage
of net sales to 7.9% in the fiscal 1998 period from 15.6% in the
fiscal 1997 period. Research and development expenses increased to
$24.6 million in the nine months ended March 31, 1998 from $7.3
million in the comparable period in fiscal 1997, and decreased as a
percentage of net sales to 12.0% in the fiscal 1998 period from 12.8%
in the fiscal 1997 period. The increase in absolute dollars during
the three- and nine-month periods 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
three-month period ended March 31, 1998 the Company incurred
approximately $1.5 million in legal expenses relating to ongoing
patent litigation and a $2.5 million special general employee bonus.
The decrease as a percentage of net sales during the three- and
nine-month periods 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 bonus) 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 the three months ended
March 31, 1998.
Selling, General and Administrative. Selling, general and
administrative expenses increased in absolute dollars to $35.7
million in the three months ended March 31, 1998 from $6.4 million in
the comparable period in fiscal 1997, and decreased as a percentage
of net sales to 25.3% in the 1998 period from 31.2% in the 1997
period. Selling, general and administrative expenses increased in
absolute dollars to $55.1 million in the nine months ended March 31,
1998 from $15.7 million in the comparable period in fiscal 1997, and
decreased as a percentage of net sales to 26.8% in the 1998 period
from 27.4% in the 1997 period. The increase during the three- and
nine-month periods in absolute dollars primarily reflected additional
costs of sales,
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<PAGE>
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 against, among other things,
unpaid accounts receivable attributable to former European
distributors of the Company. Additionally, during the three-month
period ended March 31, 1998, the Company incurred a $4.9 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 $2.1 million for
the period. The decrease in percentage of sales for the three- and
nine-month periods was primarily the result of leveraging sales,
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 bonus) 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 sales,
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 the three
months ended March 31, 1998.
Interest and Other Income. The Company had interest and other
income of $1.3 million in the three months ended March 31, 1998,
compared to $0.9 million in the comparable period in fiscal 1997. The
Company had interest and other income of $3.4 million in the nine
months ended March 31, 1998, compared to $3.2 million in the
comparable period in fiscal 1997. The increases during the three- and
nine-month periods were primarily due to higher short-term investment
balances.
Provision for Income Taxes. The Company's provision for income
taxes was $25.9 million in the three months ended March 31, 1998,
compared to $2.5 million in the comparable period in fiscal 1997. The
Company's provision for income taxes was $33.1 million in the nine
months ended March 31, 1998, compared to $9.2 million in the
comparable period in fiscal 1997. The increase in this provision
during the three- and nine-month periods was a result of the
Company's higher earnings during the fiscal 1998 periods.
Net Income. The Company had net income of $42.2 million, or
29.9% of net sales, in the three months ended March 31, 1998 compared
to net income of $4.6 million, or 22.7% of net sales, for the
comparable period in fiscal 1997. The Company had net income of $55.7
million, or 27.1% of net sales, in the nine months ended March 31,
1998 compared to net income of $17.0 million, or 29.7% of net sales,
for the comparable period in fiscal 1997.
Liquidity and Capital Resources
Net cash provided by operating activities was $35.7 million
for the nine months ended March 31, 1998. Excluding the effect of
transactions in short-term investments, the Company had net cash
provided by operating activities of $54.0 million for the nine-month
period, principally arising as a result of positive net income for
the period.
14
<PAGE>
Cash, cash equivalents and short-term investments totaled $130.1
million at March 31, 1998 as compared to $87.2 million at June 30,
1997. Working capital increased to $161.7 million at March 31, 1998
as compared to $114.5 million at June 30, 1997. Inventories increased
to $9.7 million at March 31, 1998 from $7.3 million at June 30, 1996,
primarily due to increased levels of sales activity. The Company
expects accounts receivable and inventories to increase in absolute
dollar amounts to the extent 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. Such
revolving credit facility is secured by certain of the Company's
short-term investments and is due and payable on August 31, 1998. The
bank credit agreement contains no material restrictive covenants. As
of March 31, 1998, the Company had drawn down approximately $17.5
million of such revolving credit facility. The interest rate on such
facility is LIBOR plus one-half of one percent. The Company expects
to repay the facility during the three-month period ending June 30,
1998. The Company incurred $33.1 million in capital expenditures for
the nine months ended March 31, 1998, primarily relating to the
construction of such new manufacturing facility.
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 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.
15
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Part II, Item 1 ("Legal Proceedings") of
the Company's previously filed Form 10-Qs for the quarterly periods
ended September 30, 1997 and December 31, 1997.
ESS Litigation. As previously disclosed, a number of claims
have been brought against the Company and certain of its officers,
directors and shareholders in Texas courts by Dr. Azam Anwar and
Benito Hidalgo concerning the Company's acquisition of Endothelial
Support Systems, Inc. (subsequently known as Endovascular Support
Systems, Inc.) ("ESS"), as more fully described in Note 5 to the
Consolidated Financial Statements in Item 1 of the Company's
previously filed Form 10-Q for the quarterly period ended December
31, 1997. At various times between December 1997 and March 1998, the
defendants, including the Company, filed motions for partial summary
judgment and special exemptions in connection with various claims in
the action. A trial date of June 1, 1998 has been scheduled for the
action and the Company's related counterclaim against Mr. Hidalgo.
The Company believes that it has meritorious defenses to the claims
alleged by the plaintiffs in the action. 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.
As previously disclosed, claims similar to those in the Texas
action were brought against the Company and certain of its officers,
directors and shareholders by Dr. Anwar and Mr. Hidalgo in California
courts, and the defendants brought certain other actions there
against Dr. Anwar and Mr. Hidalgo. After having all such actions
consolidated into a single action, the parties agreed to dismiss the
California action on the condition that the Texas action be allowed
to proceed.
U.S. Patent Litigation. As previously disclosed, the Company
has been named as an additional defendant in a lawsuit originally
filed by Cordis Corporation ("Cordis") against Guidant Corporation
and Advanced Cardiovascular Systems, Inc. A hearing on Cordis' claim
for preliminary injunctive relief against the Company is scheduled
for June 22, 1998. The Company believes that it has meritorious
defenses to the claims alleged by Cordis in the action. 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 in the United States,
could have a material adverse effect on the Company's business,
financial condition and results of operations.
As previously disclosed, Advanced Cardiovascular Systems, Inc.
("ACS"), a subsidiary of Guidant Corporation, has filed a lawsuit
against the Company in federal district court in San Jose, California
alleging, among other things, that the Company is selling in the
United States stents that infringe on certain patents of ACS. The
Company is aware that on April 10, 1998, ACS filed a second lawsuit
against the Company alleging infringement of a patent that was
granted subsequent to the filing of the initial lawsuit.
16
<PAGE>
This second lawsuit, also filed in federal district court in San
Jose, involves a division application that is within the family of
patents that are the subject of the initial lawsuit. ACS seeks
injunctive relief, unspecified damages, attorneys' fees and other
relief. The Company believes that it has meritorious defenses to the
claims alleged by ACS in the action. 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 in the United States, 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, except as previously disclosed or discussed herein, the
Company is not a party to any 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 2. Change in Securities and Use of Proceeds
The effective date of the Company's registration statement
filed on Form S-1 under the Securities Act of 1933 (No. 333-00824)
was April 2, 1996 (the "Registration Statement"). The class of
securities registered was Common Stock. The offering commenced on
April 2, 1996 and all securities were sold in the offering. The
managing underwriters for the offering were Cowen & Company, Bear,
Stearns & Co. Inc. and J.P. Morgan & Co.
Pursuant to the Registration Statement, the Company sold
8,500,000 shares of Common Stock for its own account, for an
aggregate offering price of $89,250,000, and 3,000,000 shares of
Common Stock for the account of certain selling stockholders, for an
aggregate offering price of $31,500,000.
The Company incurred expenses of approximately $7,897,500 in
connection with the offering, of which $6,247,500 represented
underwriting discounts and commissions and $1,650,000 represented
estimated other expenses. All such expenses were direct or indirect
payments to others. The net offering proceeds to the Company after
total expenses was approximately $81,352,000.
The Company has used approximately $22,300,000 of the net
proceeds of the offering, of which $7,400,000 represents payments
relating to the construction of plant, building and facilities and
$14,900,000 represents payments relating to the purchase of real
estate. All such payments were direct or indirect payments to others.
All other net proceeds of the offering have been invested in various
short-term investments. The use of the proceeds of the offering does
not represent a material change in the use of proceeds described in
the prospectus that formed a part of the Registration Statement.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement regarding calculation of net income
per share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
18
<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: April 24, 1998 /s/ John D. Miller
-----------------------------------
John D. Miller
Chief Financial Officer
(Principal Financial and Accounting
Officer)
19
<PAGE>
INDEX TO EXHIBITS
Exhibit
- -------
11.1 Statement regarding computation of net income per share.
27 Financial Data Schedule
EXHIBIT 11.1
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER SHARE
(In thousands, except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
----------------------- -----------------------
1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Basic
Weighted average common shares outstanding 63,383 61,948 62,647 61,863
------- ------- ------- -------
Shares used in calculation of net income per share - basic 63,383 61,948 62,647 61,863
------- ------- ------- -------
Net income $42,242 $ 4,633 $55,705 $17,004
------- ------- ------- -------
Net income per share - basic $ 0.67 $ 0.07 $ 0.89 $ 0.27
------- ------- ------- -------
Diluted
Weighted average common shares outstanding 63,383 61,948 62,647 61,863
Weighted average common equivalent shares assuming
conversion of stock options under the treasury stock method 2,301 1,228 2,408 1,344
------- ------- ------- -------
Shares used in calculation of net income per share - diluted 65,684 63,176 65,055 63,207
------- ------- ------- -------
Net income $42,242 $ 4,633 $55,705 $17,004
------- ------- ------- -------
Net income per share - diluted $ 0.64 $ 0.07 $ 0.86 $ 0.27
------- ------- ------- -------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 49,653
<SECURITIES> 80,399
<RECEIVABLES> 90,342
<ALLOWANCES> 6,984
<INVENTORY> 9,736
<CURRENT-ASSETS> 232,031
<PP&E> 57,420
<DEPRECIATION> 4,955
<TOTAL-ASSETS> 286,354
<CURRENT-LIABILITIES> 70,337
<BONDS> 0
0
0
<COMMON> 64
<OTHER-SE> 215,953
<TOTAL-LIABILITY-AND-EQUITY> 286,354
<SALES> 205,768
<TOTAL-REVENUES> 205,768
<CGS> 40,691
<TOTAL-COSTS> 40,691
<OTHER-EXPENSES> 79,681
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 88,845
<INCOME-TAX> 33,140
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55,705
<EPS-PRIMARY> 0.86
<EPS-DILUTED> 0.86
</TABLE>
