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 I
The following trademarks of Arterial Vascular Engineering, Inc. are
used in this Form 10-K: Arterial Vascular Engineering(TM), Micro Stent(R), Micro
Stent(R) II, Micro Stent(R) II XL, Micro Stent(R) 2.5, GFX(R), GFX(R) 2.5,
GFX(R) XL, GFX(R) XP, GFX(R) 2, Bridge(TM), LTX(TM), Peak(TM), Elite(TM) and
Nike(TM).
ITEM 1. BUSINESS
The statements contained in this Form 10-K that are not historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
statements regarding the Company's expectations, beliefs, intentions or
strategies regarding the future. Forward-looking statements and risk factors in
this Item 1 include, without limitation, statements regarding the Company's
industry, products and strategy under "Company Strategy", "AVE Stent Technology"
and "Additional Business Risks", statements regarding the extent and timing of
product development, future revenues, customer demand, competitive products,
pricing pressure, the intellectual property positions of competitors,
reimbursement and future technological change under "Products," "Research and
Development Programs," "Distribution, Sales and Marketing," "Competition,"
"Third-Party Reimbursement and "Patents and Proprietary Rights," statements
regarding expected clinical trial results and regulatory approvals and
compliance under "Clinical Trial Activities" and "Government Regulation," and
statements regarding expected acquisitions under "Recent Acquisition
Agreements." All forward-looking information included in this document is based
on information available to the Company as of the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those in such forward-looking statements. Additional forward-looking statements
and risk factors include those discussed in the sections entitled "Item 3. Legal
Proceedings," "Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," 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.
General
Arterial Vascular Engineering, Inc. ("AVE" or the "Company") designs,
develops, manufactures and markets a variety of highly specialized stent systems
and percutaneous transluminal coronary angioplasty ("PTCA") balloon catheters.
The Company's stents are used as arterial support devices in connection with
balloon angioplasty or other minimally invasive treatments of atherosclerosis
(the formation of deposits in the arteries) and to prevent abrupt closure of
vessels in higher-risk angioplasty procedures. The Company believes that it is
currently one of the leading providers of coronary stent systems. The Company
commenced operations in 1991 and began marketing its PTCA balloon catheters in
October 1993, its coronary stent systems in October 1994, and its peripheral
stent systems in December 1996. To date, the Company has sold over 500,000
coronary stent systems and over 50,000 PTCA balloon catheters in more than 40
countries, including the United States with respect to the Company's coronary
stent systems. 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.
In April 1998, the Company entered into an agreement to acquire World
Medical Manufacturing Corporation ("World Medical"), a leading independent
developer, manufacturer and marketer of medical devices for the treatment of
abdominal aortic aneurysms, for stock and stock options of the Company valued at
approximately $62 million (the "World Medical Acquisition"). On October 1, 1998,
AVE consummated the acquisition of the coronary catheter lab business of C.R.
Bard, Inc. ("Bard"), as well as rights to the supply by Bard of certain
materials, for approximately $550 million in cash, subject to adjustment (the
"Bard Cath Lab Acquisition"). Bard's broad range of catheter-based technologies
includes PTCA balloon catheters (including perfusion rapid exchange catheters),
guidewires, guide catheters, coronary diagnostic catheters and guidewires,
introducers and vessel closure devices, coronary stents, and various other
components and accessories. These acquisitions are expected to substantially
increase the Company's personnel, facilities and product offerings and to enable
the Company to participate in new areas of interventional cardiology through a
wider product portfolio and access to new markets and customers. However, there
can be no assurance that these acquisitions will be successfully consummated or,
if consummated, that the Company will successfully offer such new products. The
Company entered into a bank credit agreement for $600 million in senior secured
credit facilities in order to, among other things, finance substantially all of
the Bard Cath Lab Acquisition. See "--Recent Acquisition Agreements" and "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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AVE Stent Technology
The Company believes that its line of coronary and peripheral stent
systems incorporates a number of unique and proprietary design features that
enable the Company to address effectively a variety of lesion and vessel types.
The Company's stents are constructed of seamless, medical grade stainless steel
rings that are precision-formed into sinusoidal shaped elements. In the
Company's coronary stents, these elements are polished and connected in a
helical pattern utilizing a proprietary manufacturing process in order to form a
fully connected, yet flexible, stent device. The Company believes that its stent
design provides more consistent vessel support and radial force than coiled
stent designs as well as more flexibility and easier delivery than tubular
slotted or mesh stent designs. The Company's stent products are available in a
variety of diameters and lengths and are provided pre-mounted on both
over-the-wire and rapid exchange delivery systems (currently available only
outside the United States) with the same advanced technology as the Company's
PTCA balloon catheters. The Company's coronary stents have been used in a
variety of applications, including vessels in which other stent procedures have
failed, as well as in the treatment of lesions in curved or tortuous vessels.
The Company also sells stent systems for use in the peripheral vessels. The
Company believes the following technical features of its proprietary stent
systems provide the Company with a number of competitive advantages:
Smooth Edge Design and Sheathless Deployment System. The Company's
stent products consist of highly polished, rounded, sinusoidal-shaped elements
at either end of the stent (unlike mesh stents, which have flat edges at each
end). The Company believes that the smooth edges of its stent products optimize
their ability to be moved through a vessel by minimizing resistance to and
friction of the stent and its delivery system, thereby minimizing trauma to
treated vessels. The smooth edges of the stent and the Company's proprietary
attachment method permit the stent to be delivered without the protective sheath
necessary for use of certain competing stent products. The Company believes that
eliminating the need to monitor and remove a protective sheath enhances the ease
of use of its products.
High Stent Flexibility and System Trackability. The Company's products
consist of sinusoidal-shaped elements that are connected in a helical pattern
designed to provide a highly flexible stent. Increased stent flexibility allows
the Company's stent products to be more easily maneuvered and placed at the site
of a lesion, particularly through curved or tortuous vessels or around other
deployed stents. In addition, flexible stent design allows the use of a single
stent in the treatment of a lesion in a curved vessel, as compared to more
inflexible designs that may require the use of multiple stents to treat a long,
curved lesion. The Company believes that the ease of use and enhanced handling
characteristics of its stent delivery systems, coupled with stent flexibility
and smooth edge design, allow it to provide a stent system with high
trackability. The ability to easily access or "track to" a lesion is an
important stent system characteristic in the treatment of a distant site or
tortuous vessel. The Company currently offers coronary stents in lengths as long
as 40mm for use in the treatment of long, diffuse lesions.
Improved Stent Strength and Stability. The advanced designs of the
Company's GFX 2, GFX and Micro Stent II families of stent products combines high
radial strength, which minimizes vessel recoil, and axial stability, which
provides consistent vessel support along the entire length of the stent. The
Company believes these features allow a physician to better control and optimize
final minimal lumen diameter ("MLD"). Studies have indicated that optimizing the
MLD of a vessel following use of a stent product generally reduces the
likelihood of subsequent restenosis.
Moderate Radiopacity. The Company believes that the moderate
radiopacity of its devices optimizes angiographic identification of stent
position and enhances post-procedure stent assessment. Physicians commonly use
low level x-rays to accurately monitor the placement and deployment of a stent,
including final expansion using a high pressure balloon, as well as to conduct
post-operative assessment of MLD. As a result, a lack of radiopacity, which may
prevent illumination of a stent, or an excess of radiopacity, which may
overilluminate the stent and impede its visual identification, may affect the
outcome of stent procedures and subsequent diagnosis of treated vessels.
Proprietary, Pre-Mounted Delivery Systems. Unlike certain other stents,
which may require the physician to hand-crimp the stent on a balloon delivery
device, the Company's stents are pre-mounted onto its proprietary delivery
systems. The Company believes that pre-mounting its stents on balloon delivery
systems helps ensure more consistent and accurate stent delivery and deployment,
particularly as stents are used by a broader group of physicians with varying
levels of experience with stents. In addition, the Company believes that the
ease of use of its product has promoted physician acceptance.
Adaptable Design Characteristics. The Company believes that the design
features of its stents allow it to modify one or more stent performance
characteristics, such as mass or flexibility, as necessary to produce an
effective device for a particular application. To date, the Company has utilized
its stent technologies to develop families of more than ten distinct stent
products. Each product also is offered in a variety of lengths and diameters,
allowing the physician to choose the device that best suits the needs of a
patient based on lesion characteristics. The Company believes the adaptability
of its stent designs will allow their use as platform technologies for the
development of a variety of other coronary and non-coronary products. For
example, the stents introduced by the Company in selected international markets
designed for use in the peripheral renal and iliac vessels are based on the same
platform technology used in the Company's coronary stents. See "-- Products."
2
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Despite such advantages, due to the number of clinical applications for
stent systems and the variety of available products, the Company's stent
products may not be superior to competitive products in all applications. In
addition, many of the Company's competitors have substantially greater capital
resources, name recognition and expertise in research and product development,
manufacturing, marketing and product approval, which factors provide a
competitive advantage to such companies, in connection with the sale of these
stent products. The medical indications that can be treated by stents can also
be treated by surgery, minimally invasive bypass procedures, drugs or other
medical devices, including stand-alone balloon catheters, atherectomy catheters,
irradiated devices and lasers. Many of the alternative treatments are widely
accepted in the medical community and have a long history of use.
Company Strategy
The Company's goal is to expand its position as one of the leading
worldwide providers of coronary stent systems toward becoming a major medical
device provider for less invasive treatment of cardiovascular disease. The key
elements of its strategy are as follows:
Introducing New Products for Both Coronary and Non-Coronary
Applications. The Company intends to build on its stent designs to broaden the
coronary and non-coronary applications for its stents. For example, the GFX 2
stent system released by the Company in selected international markets in May
1998 was designed to have a lower profile (outside diameter) to provide for
increased trackability, with a goal of increasing the types of medical
indications that may be treated with stents. The Company believes that the
inherent adaptability and flexibility of the Company's stent designs will
augment its ability to meet specialized coronary needs, as well as to provide
stents for use in peripheral vessels, saphenous vein grafts and other
applications.
Continuing Integration of Research and Development and Manufacturing
Operations. The Company believes that the design of products for
manufacturability and the rapid manufacture of products to satisfy market demand
are key success factors in new product development in the medical device
industry. To support these capabilities, the Company has designed and developed
internally the technology necessary to perform a number of proprietary
production processes and has developed the expertise to fabricate the majority
of the components of its stent and PTCA balloon catheter products. The Company
also completed in fiscal 1998 the construction of a 130,000 square foot building
in Santa Rosa, California which is largely devoted to manufacturing activities.
The design of the new facility is intended to allow continued integration of the
Company's research and development and manufacturing operations as well as a
significant expansion of the Company's production capabilities. The Company
intends to leverage its vertically integrated product development and
manufacturing approach to rapidly introduce innovative products and to similarly
take such an approach in connection with the facilities to be acquired in the
Bard Cath Lab Acquisition.
Continuing to Expand Sales and Marketing Efforts. The Company
continually seeks to increase its market share and build product awareness in
each of the over 40 countries in which its products are marketed. The Company
has direct sales operations in certain principal target markets -- Canada,
France, Germany, the Netherlands (to service the Benelux countries), Singapore,
Switzerland, the United Kingdom and the United States -- and expects to initiate
direct sales operations in certain other countries in fiscal 1999, primarily as
a result of the Bard Cath Lab Acquisition. In other countries internationally,
the Company operates through unaffiliated distributors. The Company believes
that its direct sales presence allows it to focus greater attention on such
countries' physician communities, which it believes helps to increase the
advocacy base for the Company's products in Europe and other countries as well
as facilitating more direct feedback to the Company on its products. The Company
also believes that, in addition to building stronger relationships with its
customers, this direct sales strategy provides the Company with more complete
control of the distribution and growth of the Company's full product line, as
well as allowing it to better manage the pricing and regulatory approval process
for its products. The Company may continue to establish direct sales operations
in selected markets where it believes that such an approach will benefit its
competitive position. The Company has also centralized its distribution services
by contracting with a provider in the Netherlands to support direct sales
operations and independent distributors throughout Europe.
Broadening Product Offerings to Provide More Complete Therapy
Solutions. The Company believes that an ability to offer a more complete line of
therapeutic products may enhance the Company's ability to compete effectively in
the interventional marketplace. For example, the Company believes its current
line of PTCA balloon catheters has provided the Company with expertise in
balloon delivery and deployment. The Company continually reviews possible
strategic acquisitions, third party technology licenses and marketing or
distribution relationships with companies that have medical products in certain
complementary product areas. The World Medical Acquisition and the Bard Cath Lab
Acquisition, for example, are expected to enable the Company to participate in
new areas of interventional cardiology through a wider product portfolio and
access to new markets and customers. However, there can be no assurance that
these acquisitions will be successfully consummated or, if consummated, that the
Company will successfully participate in such new product areas.
3
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Pursuing Regulatory Approval in the United States and Abroad;
Conducting Clinical Trials to Promote Market Acceptance of the Company's
Products. In December 1997, the Company received a PMA from the FDA in
connection with the commencement of commercial sales of certain of its coronary
stent systems in the United States. Some of the other coronary stent systems
that the Company currently markets internationally will require clinical trials
conducted under an investigational device exemption (an "IDE") or a PMA
supplement before such products can be marketed in the United States. The
clinical trials necessary to obtain such marketing clearances from the FDA are
currently being sponsored by the Company and are ongoing; however, there can be
no assurance that such clinical trials will result in FDA approvals or as to the
timing of any such approvals. In addition to its United States clinical program,
the Company is sponsoring several ongoing clinical studies in several countries
outside the United States. The Company intends to use data from these trials to
obtain regulatory approvals in various applicable markets, to promote market
acceptance of its products and to expand clinical applications of the Company's
products.
Developing and Maintaining Relationships with Leading Physicians. AVE
develops and maintains relationships with leading physicians worldwide. Through
these relationships, the Company seeks to work with opinion leaders who can
foster market awareness of the Company's products. The Company supports these
efforts through group training programs designed to increase physician
familiarity with the Company's products, and utilizes a staff of clinical
specialists to expand its physician training, service and support activities.
The Company also has an active marketing program that provides a significant
presence at industry trade shows and produces marketing materials targeted
toward physicians. In addition, the Company maintains an active program of
collaborating with key physicians and medical centers to obtain feedback for new
product development.
Products
<TABLE>
The Company currently markets its coronary stent systems in the United
States, in most countries in Europe, including Germany, France and the United
Kingdom, and in other countries. In addition, the Company offers a line of PTCA
balloon catheters and peripheral stent systems outside of the United States. The
following table identifies the Company's current products, their principal
clinical application and their current commercialization status:
<CAPTION>
CURRENT PRODUCTS
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CORONARY STENT SYSTEMS
Initial
Release
Product Description/Application Date Status
------- ----------------------- ---- ------
<S> <C> <C> <C>
GFX Stent Systems
GFX 2 Improved advanced coronary stent system June 1998 Available for sale in selected
designed to provide 15% lower profile, international markets. PMA supplement
and utilizing a delivery system capable expected to be submitted in autumn
of higher balloon pressures, than the 1998.
GFX.
GFX Advanced coronary stent system designed September 1996 Available for sale in over 40
to provide lower profile (most sizes countries, including the United States
capable of being used in 6 French guide since December 1997.
catheters) and greater radial strength
and flexibility than Micro Stent II.
GFX XP Coronary stent system being developed N/A PMA supplement expected to be submitted
for the U.S. market. Utilizes a in autumn 1998.
delivery system capable of higher
balloon pressures than the GFX.
GFX 2.5 Coronary stent designed for use in June 1997 Available for sale in over 40
vessels as small as 2.5mm in diameter. countries outside the United States. IDE
clinical studies commenced in April
1998. PMA application expected to be
submitted in autumn 1998.
GFX XL Coronary stent designed for use in the June 1997 Available for sale in over 40
treatment of long and diffuse lesions. countries outside the United States.
PMA supplement expected to be submitted
in autumn 1998.
Micro Stent II Systems
Micro Stent II Coronary stent system featuring helical October 1995 Being replaced by the GFX.
connections and enhanced radial strength.
Designed for use in a variety of coronary
applications.
Micro Stent 2.5 Coronary stent designed for use in December 1995 Being replaced by the GFX 2.5.
vessels as small as 2.5mm in diameter.
Micro Stent II Coronary stent designed for use in the December 1995 Being replaced by the GFX XL.
XL treatment of long and diffuse lesions.
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PERIPHERAL STENT SYSTEMS
Initial
Release
Product Description/Application Date Status
Bridge Renal Stent Peripheral stent designed for use in the December 1996 Limited release in selected
-- Extra renal arteries. international markets. IDE application
Support for new product version submitted in
June 1998.
Bridge Iliac Stent Peripheral stent designed for use in the December 1996 Being replaced by the iliac flexible
-- Extra Support iliac vessels. stent.
Bridge Iliac Stent Peripheral stent designed for use in July 1997 Limited release in selected
-- Flexible more tortuous iliac vessels. international markets.
Bridge Biliary Peripheral stent designed for use in the N/A 510(k) for new product version expected
Stent biliary tract. to be submitted to the FDA in autumn
1998.
PTCA BALLOON CATHETERS
Initial
Release
Product Description/Application Date Status
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LTX Lower profile, higher pressure, September 1997 Available for sale in over 40
minimally compliant PTCA balloon countries outside the United States.
catheter with hydrophilic coating for
improved performance, in both rapid
exchange and over-the-wire models.
Elite Rapid exchange, semi-compliant PTCA November 1994 Approved for use in Japan and
catheter, incorporating stiffer proximal available for sale in selected
shaft. international markets.
Peak Over-the-wire, semi-compliant PTCA July 1995 Approved for use in Japan and
catheter. available for sale in selected
international markets.
Nike Rapid exchange, semi-compliant PTCA October 1994 Approved for use in Japan and
catheter, featuring a flexible proximal available for sale in selected
shaft. international markets.
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</TABLE>
Coronary Stent Systems
The Company currently markets the following families of coronary stent
products, all of which are pre-mounted on a catheter and balloon delivery system
produced by the Company:
GFX Stent Systems
GFX 2. The GFX 2 coronary stent system improves on the basic design of
the GFX product to allow for improved stent trackability and deliverability.
Like the GFX, the GFX 2 utilizes a six-crown sinusoidal configuration with stent
components of 2mm in length. The GFX 2 is designed to improve on the GFX by
providing lower profile (outer diameter) and by utilizing a more advanced
delivery system that is capable of higher balloon pressures. The GFX 2 is
offered in lengths of 8, 12, 18, 24 and 30 mm with diameters of 3.0, 3.5 and 4.0
mm.
GFX. The GFX stent has a modified, six crown sinusoidal configuration
and utilizes a stent component of 2mm in length. The product is designed to
allow improved stent flexibility and trackability, vessel coverage and support
while providing the capability of using most sizes with guiding catheters with
outer diameters as small as 6 French (approximately 2.0mm), which may be helpful
in certain applications. The GFX is offered in lengths of 8, 12, 18, 24 and 30mm
with diameters of 3.0, 3.5 and 4.0 mm.
GFX XP. The GFX XP is a GFX coronary stent utilizing the more advanced
delivery system that is incorporated into the GFX 2. This product would be
marketed in the United States, if and when regulatory approvals are obtained,
and has not yet been released for commercial sale in any country. A PMA
supplement is expected to be submitted in autumn 1998.
GFX 2.5. The GFX 2.5 generally incorporates the same design features as
the GFX (although it utilizes a four-crown configuration), but is designed for
application in vessels as small as 2.5mm in diameter. The GFX 2.5 is offered in
8, 12, 18 and 24mm lengths with a diameter of 2.5mm.
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GFX XL. The GFX XL is a longer stent made up of multiple stent
components that is designed to be used in treating diffuse arterial disease and
longer lesions with a single stent. Because the GFX XL retains the flexibility
of the Company's GFX stent design, the Company believes it enables physicians to
treat longer lesions with a single stent, thereby potentially reducing procedure
time and cost. The product incorporates the same design features as the GFX. It
is offered in a length 40mm with diameters of 3.0, 3.5 and 4.0mm.
Micro Stent II Systems
Micro Stent II. The Micro Stent II utilizes a stent component of 3mm in
length. The helical connection and reduced length of the stent elements allow
for increased flexibility, thereby enhancing the handling characteristics and
trackability of the stent system. The Micro Stent II also incorporates
engineering advances related to radial strength and materials processing
designed to allow greater control of minimal lumen diameter. The Micro Stent II
is being replaced by the GFX.
Micro Stent 2.5. The Micro Stent 2.5 incorporates the same design
features as the Micro Stent II, but is designed for application in vessels as
small as 2.5mm in diameter. The Micro Stent 2.5 is being replaced by the GFX
2.5.
Micro Stent XL. The Micro Stent II XL is a longer stent designed to be
used in treating diffuse arterial disease and longer lesions with a single
stent. The Micro Stent II XL is being replaced by the GFX XL.
Peripheral Stent Systems
In addition to the Company's coronary stent systems, the Company also
offers a line of stent systems designed for the treatment of atherosclerosis in
peripheral vessels of the body.
Bridge Extra Support Renal Stent. The Bridge extra support renal stent
is designed to be used in the renal arteries and is offered in diameters of 5,
6, and 7mm and lengths of 16mm. Initial release of the product occurred in
December 1996. An IDE application for a new product version was submitted in
June 1998.
Bridge Extra Support Iliac Stent. The Bridge extra support iliac stent
is designed to be used in the iliac vessels and is offered in diameters of 6, 7,
8, 9 and 10mm and lengths of 40 and 60mm. Initial release of the product
occurred in December 1996. The Bridge extra support iliac stent is being
replaced by the Bridge flexible iliac stent.
Bridge Flexible Iliac Stent. The Bridge flexible iliac stent is a lower
profile, more flexible peripheral stent designed for use in more tortuous iliac
vessels and is offered in diameters of 6, 7, 8, 9 and 10mm and lengths of 20, 40
and 60mm. Initial release of the product occurred in May 1997.
Bridge Biliary Stent. The Bridge biliary stent is designed to be used
in the biliary tract. A 510(k) application for a redesigned Bridge biliary stent
is expected to be submitted with the FDA by autumn 1998, but the product has not
yet been released for commercial sale in any country.
PTCA Balloon Catheters
In addition to the balloon catheters sold as part of the Company's
stent systems, the Company also offers a broad line of balloon catheters for use
in PTCA balloon procedures. The Company offers PTCA catheters with balloons in
lengths of 20, 30 and 40mm and diameters ranging from 1.5mm to 4.0mm as
discussed below.
LTX. The LTX utilizes a lower profile, higher pressure, minimally
compliant PTCA balloon rated at 14 atmospheres. Among other things, higher
pressure PTCA balloons are useful in follow-up dilatation treatment, since
higher pressure balloons generally more fully expand implanted stents. Initial
release of the product occurred in selected markets in September 1997.
Peak. The over-the-wire Peak catheter incorporates a stiffer proximal
(nearer to the operator) shaft for enhanced control and a flexible distal
(further from the operator) shaft for ease of access to more tortuous vessels.
It was designed for the Japanese market, which at least in the past generally
favored over-the-wire catheters, although it is also sold in other countries.
Elite. The Elite is a rapid exchange catheter with a smaller proximal
shaft diameter. It incorporates the Nike distal shaft design with a stiffer
metallic type of proximal shaft construction designed to allow greater operator
control in maneuvering the balloon catheter while enhancing vessel imaging.
Nike. The Nike is a rapid exchange catheter with a flexible proximal
shaft design coupled with a low profile distal shaft. It is designed to allow
greater access to smaller or more tortuous vessels.
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Research and Development Program
The Company maintains an active research and development program
designed to exploit its core technical expertise in stent systems, PTCA balloon
catheters and related medical technologies. The Company has made a significant
investment in developing its proprietary stent technologies and believes its
research and development commitment in this area is critical to its competitive
position. During fiscal 1998, the Company significantly increased its research
and development expenditures and personnel. Research and development expenses
for fiscal 1998, 1997 and 1996 were approximately $37,208,000, $11,422,000, and
$6,480,000 ($3,880,000 after excluding a one-time charge of $2,600,000 in
connection with the termination of certain patent royalty obligations),
respectively.
The Company is reviewing potential products in several areas, including
stent use in carotid and neurological applications, radiation and the use of
alternative stent materials. There can be no assurance that any of the products
above will be successfully developed, commercially released or accepted by the
market or that regulatory clearance will be obtained from the necessary
international or United States regulatory agencies.
Clinical Trial Activities
Clinical trials have not been required in most European markets prior
to the initiation of commercial sales. By contrast, certain other countries,
including the United States and Japan, require government pre-market approval,
rigorous in vitro and/or pre-clinical data and the completion of clinical trials
prior to commercialization of new products. In Japan, following the submission
of the results of clinical trials to Japanese regulators in late 1996, the
Company's Japanese distributor received in June 1997 government approval for the
sale in Japan of the Company's coronary stent systems, and in January 1998
received the related reimbursement approval. In the United States, in December
1997 the Company received a PMA from the FDA in connection with its commencement
of commercial sales of certain of its coronary stent systems in the United
States. The PMA was based on a 661-patient, multi-center, randomized clinical
study in the United States with the Company's Micro Stent II and GFX stent
systems under an IDE. Some of the other coronary stent systems that the Company
currently markets internationally will require clinical trials conducted under
an IDE or a PMA supplement before such products can be marketed in the United
States. The clinical trials necessary to obtain such marketing clearances from
the FDA are currently being sponsored by the Company and are ongoing; however,
there can be no assurance that such clinical trials will result in FDA approvals
or as to the timing of any such approvals. The Company has incurred, and expects
to continue to incur, substantial clinical research and other costs in
connection with obtaining regulatory approvals for its stent systems in the
United States and other countries.
In addition to its United States clinical program, the Company is
sponsoring several ongoing clinical studies in several countries outside the
United States. In addition to fulfilling the regulatory requirements for the
sale of its products in certain countries, the Company intends to use data from
these trials to promote market acceptance of its products and to expand clinical
applications of the Company's products. In sponsoring clinical trials, the
Company generally is involved in the design of the protocol for such trials,
makes its stents available to the trials' investigators free of charge or at
discounted rates, and aids with the patient enrollment procedures and other
ministerial aspects of the trial as necessary, but otherwise does not
participate in the performance of the trials.
Clinical results are inherently unpredictable and are influenced by the
indications and endpoints chosen and the procedures used. Results from clinical
trials sponsored by the Company, its competitors or a third party could delay or
prevent regulatory approvals, reduce market demand and therefore have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, there can be no assurance that the Company's
interpretation of data from its clinical trials will be accepted by the FDA or
other regulatory authorities or the medical community at large.
Distribution, Sales and Marketing
The Company markets its GFX family of coronary stent systems in over 40
countries, including the United States and Japan. It also markets its PTCA
catheters and its GFX 2.5 and GFX XL stent systems in over 40 countries outside
the United States, and its peripheral stent systems and its next generation GFX
2 coronary stent system in selected international markets.
Until April 1996, substantially all of the Company's sales were to
international distributors who resell products to health care providers.
Beginning in April 1996, the Company from time to time has terminated its
relationship with distributors where it believes such an approach will benefit
its competitive position. In those countries where the Company has established
and maintained direct sales forces, the change has, over time, resulted in
increased revenues and market share in the applicable territories. The Company
believes that its direct sales operations have enabled it to build stronger
relationships with customers, more completely control the distribution and
growth of the Company's full product line, and to better manage the pricing and
regulatory approval process for its products. 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). Certain of the
Company's
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former distributors, including those in Belgium and France, have commenced legal
action against the Company in connection with the termination of the
distribution relationships in those countries. See "Item 3. Legal Proceedings."
The Company has also centralized its distribution services by contracting with a
provider in the Netherlands to support direct sales operations and independent
distributors throughout Europe.
In all other countries, the Company currently sells its products
through independent distributors. Such distributors generally are granted the
right to sell the Company's products within a defined territory and are
typically permitted to sell other non-competing medical products. All sales to
distributors are denominated in U.S. dollars, while sales effected through the
Company's direct sales operations are denominated in the local currency. The
Company's distributors purchase the Company's products at discounts that vary by
product and market. The distributors resell the products to health care
providers such as hospitals at prices that are determined by the distributor.
The Company's use of distributors in certain countries does not allow the
Company to control end-market prices charged for its products in those markets
and may not result in the same level of sales and marketing efforts as would the
use of a direct sales force by the Company in those markets. The Company has
written agreements with most of its more significant distributors, including the
Company's Japanese distributor. Approximately 20% of the Company's fiscal 1998
revenues were derived from export sales to independent international
distributors. The Company's Japanese distributor, Japan Lifeline Co., Ltd.,
accounted for approximately 11% of the Company's net sales in fiscal 1998.
International sales are subject to certain risks, including foreign medical
regulations, export/import licenses, foreign currency fluctuations, economic or
political instability, shipping delays and tariffs and other various trade
restrictions, all of which could have a significant impact on the Company's
ability to deliver products on a competitive and timely basis. As the Company
continues to develop an international sales force it expects to be more directly
subject to foreign currency fluctuations to the extent such direct sales may be
denominated in foreign currency. Since the third fiscal quarter of fiscal 1997,
when the Company incurred losses of approximately $550,000 due to foreign
currency fluctuations, the Company has from time to time entered into certain
currency hedging transactions in the form of forward exchange contracts that the
Company believes should limit its exposure to such currency fluctuations. There
can be no assurance, however, that the Company will not incur losses due to
foreign currency fluctuations in the future. As of June 30, 1998, no such
currency hedging transactions were outstanding.
The Company has implemented a marketing and development program to
support its sales as well as to increase its visibility with leading physicians.
The Company has implemented a series of marketing programs to help coordinate
clinical trials, work directly in the training of physicians and certain aspects
of patient care, provide an increased presence at industry tradeshows and
produce marketing material targeted toward physicians. The Company anticipates
that, because of the diverse needs of the market for peripheral stents and some
of the other markets for which the Company is developing products, it will
develop separate clinical support and sales forces to take advantage of clinical
and technical expertise specific to those markets.
The Company has entered into agreements with certain hospital groups in
the United States qualifying the Company as a qualified supplier for those
groups. The Company anticipates that its various sales forces, particularly its
U.S. sales force, will need to actively pursue additional approvals of the
Company as a qualified supplier for similar affiliated groups, as well as
independent hospital group purchasing organizations, each of which negotiate
contracts with suppliers of medical products. Qualification with such group
purchasing organizations, which exist on both a national and regional level, has
become increasingly important in recent years in response to cost containment
pressures and health care reform, and there can be no assurance that the Company
will continue to be successful in obtaining such qualifications.
Manufacturing
The Company performs most of the steps for fabrication of its stents
internally, including machining, forming, connecting through proprietary
attachment processes and electropolishing high quality medical grade stainless
steel. To support this capability, the Company has designed manufacturing and
testing equipment that has enabled the development and execution of proprietary
processes not currently available from outside suppliers. For example, the
Company has its own balloon and catheter extrusion equipment, which allows for
rapid prototyping and adherence to strict design specifications and quality
standards in manufacturing.
In addition to the technological advantages of its stent designs, the
Company believes that its vertically integrated manufacturing and research and
development operations provide a competitive advantage in quickly developing and
bringing to market sophisticated stent and catheter products. This integration
allowed the Company to develop and bring to market several new products in
fiscal 1998, including its LTX PTCA balloon catheter and its GFX 2 coronary
stent system. The Company's manufacturing engineers participate in the product
design process so as to insure the Company's ability to achieve rapid and cost
effective manufacturing capabilities for its products. The Company is committed
to manufacturing internally as many of its products and components as
practicable and believes that such a process better enables it to set, achieve
and control high standards for the quality of its devices, reduce time
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to market, manage costs, maintain control over proprietary information, and
execute improvements in design and manufacturing processes. In spring 1998, the
Company moved a significant portion of its United States manufacturing
operations to a new 130,000 square foot facility that is now part of its
headquarters in Santa Rosa, California.
The design, manufacture and assembly of certain proprietary components
and materials used in the Company's PTCA balloon catheters and stent delivery
systems take place in the Company's facilities in Santa Rosa, California and
those of Arterial Vascular Engineering Canada, Inc. ("AVEC"), a subsidiary of
the Company located in Richmond, British Columbia. Prior to the Company's
receipt of FDA approval for certain of its coronary stent systems in December
1997, all of the Company's products sold commercially were finished and packaged
in the Canadian facility, with the Company's finished medical devices then being
shipped from Canada to distributors or direct sales operations outside of the
United States. However, once such FDA approval was obtained, the Company began
supplying the United States market directly from its manufacturing facilities in
Santa Rosa, and the Canadian facility has since been used to supply the
Company's international markets. The Company executes all critical assembly
operations in controlled environment rooms in which bacterial and airborne
particulate levels are monitored.
The Company has obtained the right to affix CE (Conformite Europeene)
marking to all of its coronary stent systems and certain of its peripheral stent
systems and PTCA balloon catheters sold in all countries of the European
Economic Area and Switzerland. CE marking is a European symbol of conformance to
strict product manufacturing and quality system standards. As part of the CE
marking process, the Company also received ISO 9001/EN46001 certification with
respect to the manufacturing of all of its coronary stent products. With respect
to the United States, in autumn 1997 the FDA inspected the Company's Santa Rosa
manufacturing facilities and processes for compliance with the FDA's quality
system regulation, at which time the Company demonstrated the compliance of its
facilities and processes with such regulation. Additional manufacturing sites
(such as those that may be acquired in the World Medical Acquisition or the Bard
Cath Lab Acquisition) and changes in manufacturing processes will also be
subject to regulatory inspection for compliance with United States and
international regulations. There can be no assurance that the Company will be
able to demonstrate or continue to demonstrate the compliance of its existing or
future facilities with any such regulations. See "-- Government Regulation."
The Company relies on some outside sources for catheter components and
from time to time the Company has experienced shortages of certain supplied
materials that have significantly affected its ability to produce enough product
to satisfy market demand. The Company currently relies upon a single supplier of
the medical grade stainless steel from which the Company's stents are machined.
The Company is continually reviewing its own capabilities and the capabilities
of other potential suppliers of medical grade stainless steel, although to date
no such other suppliers have been able to produce materials meeting the
Company's quality standards. The Company has also agreed to indemnify certain
suppliers against certain potential product liability exposure. The
establishment of additional or replacement suppliers for certain components or
materials cannot be accomplished quickly, largely due to the FDA approval system
and the complex nature of manufacturing processes employed by many suppliers.
The failure to obtain sufficient quantities of component materials on
commercially reasonable terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
From time to time, particularly since the Company's entry into the U.S.
coronary stent market, the Company has encountered difficulties in increasing
production to a level sufficient to satisfy demand, including problems involving
production yields, adequate supplies of components, quality control and
assurance and shortages of qualified personnel. The commencement of commercial
sales of the Company's coronary stent systems in the United States increased
production requirements to a level not previously experienced by the Company,
and consequent difficulties resulted in a significant back log during the second
half of fiscal 1998. In addition, in May 1998 the Company experienced a quality
control issue that resulted in a voluntary recall of two production lots (170
units) of its GFX coronary stent systems that had been distributed in the United
States. There can be no assurance that the Company will be successful in scaling
up its manufacturing operations or that it will not experience manufacturing
difficulties or recalls or safety alerts in the future. Difficulties experienced
by the Company in manufacturing scale-up, including recalls or safety alerts,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The Company believes that, with the addition of its recently completed
130,000 square foot facility at its Santa Rosa headquarters, its current
manufacturing space will be sufficient to serve its needs through at least
mid-1999. Additional manufacturing sites (such as those that may be acquired in
the potential acquisitions of World Medical or the Bard coronary catheter lab
business) may require facility work-outs or redevelopment in manufacturing
processes. There can be no assurance that such re-worked or redeveloped
manufacturing facilities will be timely completed or will pass regulatory
inspection for compliance with United States and international regulations.
Competition
Competition in the market for the treatment of cardiovascular disease
is intense and is expected to increase. The Company competes primarily with
Boston Scientific Corporation, C.R. Bard, Inc., Cook, Inc., Guidant Corporation,
Cordis Corporation (Johnson & Johnson), Medtronic, Inc. and Pfizer, Inc., among
others, in the
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development, production and marketing of stents and PTCA/stent technology. The
Company believes that, as of the fourth quarter of fiscal 1998, it was the
worldwide market leader in sales of coronary stent systems, although Boston
Scientific had at that time not yet received FDA approval for the commercial
sale of its coronary stent systems in the United States. As of the date of this
report, Boston Scientific, Cordis, Cook, Medtronic, Guidant and the Company have
the only coronary stent systems that have been approved by the FDA for sale in
the United States. The Company believes that its principal competitors are
Guidant and Boston Scientific. The Company expects that other potentially
significant competitors will receive marketing clearance from the FDA in the
near future. Many of the Company's competitors and potential competitors have
substantially greater name recognition and financial and other resources with
which to improve and aggressively market their products.
The Company believes that the primary competitive factors in the market
for stent technology include product safety, quality, ease of use, clinical
performance (radial strength, flexibility, radiopacity, low thrombosis risk and
long term efficacy), delivery system characteristics (flexibility, reliability,
ease of use), price, customer service and availability of third party
reimbursement. In addition, the length of time required for products to be
developed and to receive regulatory approval is an important competitive factor.
The Company believes it competes favorably with respect to these factors,
although there can be no assurance that it will be able to continue to do so.
An additional competitive factor is the current healthcare environment.
Particularly in the United States, this environment has increasingly centered
around managed care organizations, group purchasing organizations, hospital
consolidations and other factors resulting in increased cost containment
pressures for medical procedures generally, including the less invasive
procedures for which the Company markets its products. Many of the Company's
competitors have a greater strategic mass and offer broader product lines in
minimally invasive procedures generally than does the Company, allowing them to
market their stent systems and PTCA balloon catheters to medical specialists as
part of a broad package of other needed minimally invasive medical devices.
Although the acquisition of Bard's coronary catheter lab business, when closed,
is expected to allow the Company to participate in competitive situations
requiring such packaging arrangements, there can be no assurance that the
Company's competitors will not succeed in developing more effective marketing
programs than the Company in such an environment.
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, which has caused the Company from to time to reduce prices on its
stent systems. The Company expects that, as the stent industry develops,
competition and pricing pressures will increase, and that similar conditions
will exist in the United States as more competitors receive marketing clearance
from the FDA. Moreover, 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. Price reductions by the Company in response to
competitive pressure could have a material adverse affect on the Company's
business, financial condition and results of operations.
In addition, the ability to use patents or other proprietary rights to
prevent sales by competitors is an important competitive tool in the medical
device industry. 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. See "-- Patents and Proprietary
Rights."
The stent market is characterized by rapid technical innovation. In
many countries in which the Company markets its products, neither pre-market
approval nor clinical studies are required prior to marketing a product, and
accordingly competitive products have been and continue to be quickly introduced
in these markets. Moreover, earlier entrants in a particular therapeutic market
often obtain and maintain significant market share relative to later entrants.
Although the use of stents is increasingly supported by the professional
community, there is no assurance that clinical research will continue to support
the use of stents. The medical indications that can be treated by stents can
also be treated by surgery, minimally invasive bypass procedures, drugs, or
other medical devices including stand-alone balloon catheters, atherectomy
catheters and lasers, many of which are widely accepted in the medical
community. Additionally, new surgical procedures and medications could be
developed that replace or reduce the importance of current procedures that use
the Company's products. There can be no assurance that the Company's competitors
and potential competitors will not succeed in developing and marketing stents or
stent systems, competing technologies, therapeutic drugs or other products that
are more effective or more effectively marketed than products marketed by the
Company or that would render the Company's technology and products obsolete or
noncompetitive.
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Patents and Proprietary Rights
The Company has filed U.S. and foreign patent applications to protect
its proprietary position in stents and stent delivery systems. The Company also
relies on trade secrets, technical know-how and technological innovation to
maintain its competitive position. The Company's policy is to protect and
enforce its patent and other intellectual property rights by appropriate action.
The Company holds two issued United States patents, has received
notices of allowance on five of its United States patent applications and has
numerous United States patent applications pending. It also holds two Australian
patents, one European patent and has numerous additional foreign patent
applications filed. The Company's issued United States patents relate to stent
technology used in the Company's current stent systems. The Company also has a
license to make and sell stent delivery systems and balloon angioplasty
catheters using technology covered by patents and patent applications of a third
party. The application for a stent patent that resulted in one of the Company's
issued United States patents was acquired from Endothelial Support Systems, Inc.
(subsequently known as Endovascular Support Systems, Inc.) ("ESS"). In June
1996, two former shareholders of ESS, each of whom currently holds shares of
Common Stock of the Company, filed an action against the Company seeking, among
other things, to rescind the transfer of such technology from ESS and to
transfer such patent to ESS. No assurance can be given as to the outcome of any
such litigation. Loss or impairment of the right to produce products based on
such patents could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 3. Legal Proceedings."
A number of medical device and other companies, universities and
research institutions have filed patent applications or have been issued patents
relating to catheters, stents and delivery systems and there has been
substantial litigation in this area. The Company's success will depend on its
products not infringing patents issued to competitors. Portions of the
technology used in the Company's current stent systems are currently being
challenged by each of Cordis Corporation (a subsidiary of Johnson & Johnson) and
Advanced Cardiovascular Systems, Inc. (a subsidiary of Guidant Corporation) as
being in conflict with certain United States patents held by those competitors.
These competitors are larger and have more substantial resources than the
Company, and can be expected to expend significant resources to attempt to
enforce and/or defend the validity of their patents. See "Item 3. Legal
Proceedings." In the event that such litigation is resolved unfavorably from the
Company's perspective, the Company may be precluded from selling its current
stent products in the United States for the life of the applicable patent if it
cannot obtain a license on commercially reasonable terms. Modification of the
Company's products or development of new products to avoid infringement, the
success of which there can be no assurance, may require the Company to conduct
additional clinical trials for such new or modified products in connection with
United States regulatory approval and to revise its filings with the FDA or
other regulatory agencies. Therefore, if the Company is determined to have
infringed a patent held by one of its competitors, such event could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is continually reviewing the scope of United States and
foreign patents and the status of any litigation with respect to patents of
interest of which it is aware. The question of infringement and of the validity
and breadth of patent claims involves complex legal and factual issues and is
highly uncertain. There can be no assurance that any conclusion reached by the
Company regarding infringement will be consistent with the resolution of such
issue by a court. In any event, there can be no assurance that the Company will
not be obliged to defend itself in court against allegations of infringement of
third party patents. Patent litigation is very expensive and could subject the
Company to significant liabilities, require disputed rights to be licensed from
third parties or require the Company to cease selling its products.
No assurance can be given that any patents based on pending patent
applications or any future patent applications of the Company will be issued,
that the scope of any patent protection will exclude competitors or provide
competitive advantages to the Company, that any of the Company's patents or
patents to which it has licensed rights will be held valid if subsequently
challenged or that others will not claim rights in or ownership of the patents
and other proprietary rights held or licensed by the Company. Furthermore, there
can be no assurance that others have not developed or will not develop similar
products, duplicate any of the Company's products or design around any patents
issued to or licensed by the Company or that may be issued in the future to the
Company. Since patent applications in the United States are maintained in
secrecy until patent issue, the Company also cannot be certain that others did
not first file applications for inventions covered by the Company's pending
patent applications, nor can the Company be certain that it will not infringe
any patents that may be issued to others on such applications.
The Company relies upon trade secret protection for certain aspects of
its proprietary technology. The Company's policy is to have each employee and
consultant enter into a confidentiality agreement containing provisions
prohibiting the disclosure of confidential information to anyone outside the
Company and requiring disclosure to the Company of ideas, developments,
discoveries or inventions conceived during employment or service as a
consultant, and assignment to the Company of proprietary rights to such matters
related to the business and technology of the Company. There can be no
assurance, however, that these agreements will provide meaningful protection or
adequate remedies for the Company's trade secrets in the event of unauthorized
use or disclosure of such information or that
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others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets and proprietary know-how.
Government Regulation
International sales of medical devices are subject to regulatory
requirements in many countries. The regulatory review process required for
commercial sales varies from country to country. In certain countries, the
Company may also be subject to regulations governing clinical trials of its
products. The Company or its distributors have received pre-market approvals in
those countries that require them and in which the Company currently has
commercial sales. Currently, pre-market approvals from particular countries
within the European Economic Area (the 15 countries of the European Union and
Norway and Iceland) and Switzerland are no longer required for those products
with respect to which the Company has achieved compliance with the requirements
of the Medical Devices Directive (the "MDD") discussed below. However,
legislation has been proposed in France that would require manufacturers to
declare their intent to market certain devices in France three months prior to
launching such devices, even though the manufacturer may have achieved
compliance with the MDD requirements.
The Company takes an active role in the receipt of pre-market approvals
and compliance with clinical trial requirements in those countries that require
them, particularly in those countries where it has direct sales operations.
However, to some extent the Company continues to rely on distributors in those
countries where it continues to use distributors. The Company has in the past
discovered instances of regulatory noncompliance by its distributors, and has,
in response, caused the applicable distributor to file revised governmental
notifications, ceased to sell commercially its products in the applicable
countries or otherwise acted so as to halt any ongoing noncompliance in such
countries. While the Company is not aware of any pending or threatened
governmental action against it in any country in which it has done business, any
enforcement action by regulatory authorities with respect to past or any future
regulatory noncompliance could have a material adverse effect on the Company's
business, financial condition and results of operations.
Generally, in order to continue selling its products within the
European Economic Area and Switzerland, the Company is required to achieve
compliance with the requirements of the MDD and affix CE marking on its products
to attest to such compliance. Products that have already been delivered to
distributors will be able to continue to be sold by such distributors during a
subsequent three-year transition period. To achieve compliance, the Company's
products must meet the "essential requirements" of the MDD relating to safety
and performance and the Company must successfully undergo verification of its
regulatory compliance ("conformity assessment") by a qualified third party (a
"Notified Body") selected by the Company. The Company currently utilizes TUV
Product Service of Munich, Germany as its Notified Body. The nature of a
Notified Body's assessment depends on the regulatory class of the product. The
Company's coronary stent systems are currently in Class III, the highest risk
class, and therefore subject to the most rigorous controls, while its peripheral
stent systems are currently in Class IIb and are subject to somewhat lesser
controls.
The Company has received ISO 9001/EN46001 certification from its
Notified Body with respect to the manufacturing of all of its coronary stent
systems and certain of its peripheral stent systems. This certification applies
to the manufacturing operations in each of the Company's Santa Rosa facilities
and AVEC's facility in Canada. The Company obtained the right to affix CE
marking to all of its coronary stent systems and certain of its peripheral stent
systems and PTCA balloon catheters sold in all countries of the European
Economic Area and Switzerland. The Company is subject to continued supervision
by its Notified Body and will be required to report any serious adverse
incidents to the appropriate authorities. The Company also will be required to
comply with additional national requirements that are beyond the scope of the
MDD. With respect to any products not already cleared for CE marking, the
Company will in the future need to comply with the CE marking requirements or
else it will be unable to sell such products in the European Economic Area or
Switzerland unless and until compliance is achieved. There can be no assurance
that the Company will be able to achieve or maintain compliance required for CE
marking on all or any of its products or that it will be able to timely and
profitably produce its products while complying with the requirements of the MDD
and other regulatory requirements. Failure to achieve such compliance could have
a material adverse effect upon the Company's business, financial condition and
results of operations.
In the United States, the Company is subject to extensive regulation of
medical devices by the FDA as well as state and local authorities, including the
California Department of Health Services. Generally, unless a medical device
manufacturer can establish to the FDA's satisfaction that a newly developed
device is "substantially equivalent" to a legally marketed device that does not
itself require pre-market approval, the Federal Food, Drug and Cosmetic requires
that the manufacturer submit a PMA for the device and obtain the FDA's approval
of the PMA prior to marketing the device in the United States. It is expected
that all of the Company's coronary stent systems and certain of its peripheral
stent systems will be subject to the PMA process. The first step in the PMA
approval process is usually the submission to the FDA of the results of
laboratory and pre-clinical studies, which typically must be conducted in
compliance with the FDA's regulations governing good laboratory practices, and a
request for permission to clinically evaluate the device in humans under an IDE.
Initiation of the study requires the approval of the FDA and of the
institutional review
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board of the hospital or clinic participating in the clinical trial and written
informed consent from all participating patients. Furthermore, FDA regulations
subject sponsors of IDEs to certain requirements including proper monitoring of
clinical investigations, selection of qualified investigators, recordkeeping,
reporting of unanticipated adverse device events and submission of periodic
progress reports. In addition, a sponsor is prohibited from promoting or
commercializing a device prior to PMA approval. The PMA must contain, among
other things, the results of the clinical trials, the results of all relevant
bench tests, laboratory and pre clinical studies, a complete description of the
device and its components, and a detailed description of the methods, facilities
and controls used for manufacture, including the method of sterilization. In
addition, the submission must include the proposed labeling, advertising
literature and physician training methods (if required). In general, data from
adequate and well-controlled independent, statistically significant clinical
trials must demonstrate the safety and effectiveness of the device in order to
obtain approval of the PMA.
After completion of the FDA's preliminary review, the submission is
ordinarily sent to an FDA-selected scientific advisory panel composed of
physicians and scientists with expertise in the particular field which (after
holding any public hearings it deems necessary) then issues a recommendation to
the FDA that may include conditions for approval. The FDA is not bound by the
recommendations of the advisory panel. Toward the end of the PMA review process,
the FDA will conduct an inspection of the manufacturer's facilities to ensure
that the facilities are in compliance with applicable quality system regulation
("QSR") requirements. If the FDA evaluations of both the PMA application and the
manufacturing facilities are favorable, the FDA will issue an approvable letter,
which usually contains a number of conditions which must be met in order to
secure final approval of the PMA. When those conditions have been fulfilled to
the satisfaction of the FDA, the agency will issue a PMA approval order,
authorizing commercial marketing of the device for certain indications. The
sponsor may not promote the device for uses not approved by the FDA. The FDA
also has the authority to impose certain post-approval requirements in a PMA
approval order, including post-approval surveillance studies further evaluating
the safety, efficacy and reliability of the device. Additional post-approval FDA
requirements include Medical Device Reporting ("MDR") requirements, device
tracking requirements and long-term data study requirements. Failure to comply
with - any post-approval requirements may lead to withdrawal of FDA approval.
The PMA review and approval process generally takes more than a year to complete
from the date of acceptance by the FDA for filing, and may take substantially
longer. In response to public concerns, the FDA has recently made efforts to
reduce the time required to clear PMAs and PMA supplements, but review times for
products such as the Company's remain long and there can be no assurance that
the Company's PMA will receive any kind of expedited review. The FDA may also
determine that additional clinical trials are necessary, in which case the PMA
may be delayed for several years while additional clinical trials are conducted
and submitted in an amendment to the PMA. Certain modifications to medical
devices require FDA clearance, either under the IDE or in a PMA supplement. Such
IDE and PMA supplements relating to product modifications require the submission
of the same type of information required for an initial application, but because
such subsequent filings need only contain sufficient information to support the
change, they are generally more brief. The FDA generally does not use an
advisory panel review for PMA supplements.
The Company has incurred, and expects to continue to incur, substantial
clinical research and other costs in connection with obtaining regulatory
approvals for its stent systems in the United States and other countries.
The Company supplies the United States market directly from its
manufacturing facilities in Santa Rosa, California. Under current law, as long
as the Company manufactures finished devices in the United States or imports or
offers finished devices for import into the United States (except as may be
covered by an IDE), the QSR requirements will apply and the Company expects that
the FDA will inspect the Company's manufacturing facilities on a regular basis
for compliance with applicable FDA regulations, including the QSR requirements.
The QSR requirements mandate that the Company manufacture its products and
maintain its documents in a prescribed manner with respect to manufacturing,
testing and control activities. The Company is also required to comply with
various FDA requirements for labeling. Furthermore, in accordance with the FDA's
MDR requirements the Company is required to provide information to the FDA on
death or serious injuries alleged to have been associated with the use of its
medical devices, as well as product malfunctions that would likely cause or
contribute to death or serious injury if the malfunction were to recur. In
addition, the FDA prohibits an approved device from being marketed for
unapproved applications. If the FDA believes that a company is not in compliance
with the law, it can institute proceedings to detain or seize products, issue a
recall, enjoin future violations, assess civil and criminal penalties against
the Company, its officers and its employees or require the Company to make
substantial changes to its manufacturing operations. Any of such actions could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company is also subject to environmental laws and regulations both
in the United States and abroad. The operations of the Company, like those of
other medical device companies, involve the use of substances regulated under
environmental laws, primarily in manufacturing and sterilization processes.
There can be no assurance that a violation of such laws will not occur, or that
any such violations will not have a material adverse effect on the Company's
business, financial condition or results of operations.
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Third-Party Reimbursement
Sales volumes and prices of the Company's products are heavily
dependent on the availability of reimbursement from third party payors, such as
government and private insurance plans, health maintenance organizations and
other sources of reimbursement for health care costs ("Third-Party Payors").
Individuals are seldom, if ever, willing or able to pay directly for the costs
associated with the use of the Company's products. In foreign markets,
reimbursement is obtained from a variety of sources, including governmental
authorities, private health insurance plans and labor unions. The market in the
United States is moving rapidly in the direction of managed care, in which
Third-Party Payors attempt to shift financial risk to providers of health care
through mechanisms that, among other things, involve fixed payments for a
defined treatment or episode of care. In addition, Third-Party Payors attempt to
contain health care costs by influencing the clinical decision making of health
care providers in the direction of what is deemed to be "cost effective care."
Some Third-Party Payors may also contract on an exclusive basis with a single
provider of an ancillary service or product to obtain the lowest possible price
and then induce providers or insured individuals to deal only with the
contracted source by limiting routine insurance coverage to services or supplies
obtained from that source.
The federal Medicare program and other major Third-Party Payors in the
United States generally reimburse most acute, general care hospitals for
inpatient medical treatment, including all operating costs and all furnished
items or services, including devices such as the Company's, at a prospectively
fixed rate based on the diagnosis-related group ("DRG") that covers such
treatment, as established by the federal Health Care Financing Administration
("HCFA"). For interventional procedures, the fixed rate of reimbursement is
based on the procedure or procedures performed and is unrelated to the specific
devices used in that procedure. In addition, each interventional DRG payment is
calculated to reflect the costs of a specific procedure or type of procedure.
Effective October 1, 1997, HCFA assigned the procedure code associated with the
implantation of a coronary stent to DRG 116 (a code which includes cardiac
pacemaker implants). The Company believes that the reimbursement rate
established in connection with such new DRG code generally reflects the current
costs associated with the use of the Company's coronary stent systems. There can
be no assurance, however, that any new reimbursement rates will sufficiently
reflect the current or future costs associated with the use of the Company's
stent systems.
Third-Party Payors that do not use prospectively fixed payments
increasingly use other cost containment devices, such as having exclusive
suppliers or approved lists of devices deemed to be "cost effective," and
requiring discretionary, prior authorization for exceptions. In addition,
Third-Party Payors may deny reimbursement if they determine that the device used
in a treatment was not a covered device or was unnecessary, inappropriate,
experimental, used for a nonapproved indication or not cost effective. In other
situations, Third-Party Payor cost containment efforts may pose barriers to the
use of the Company's products if, for example, the products are not on a
Third-Party Payor's approved list of devices. Accordingly, providers must
determine that the clinical benefits of stents justify the additional cost or
the additional effort required to obtain prior authorization or coverage and the
uncertainty of actually obtaining such authorization or coverage.
While the Company believes that the use of stents may continue to be
cost effective for many medical indications, the Company believes that
reimbursement in the future is becoming subject to increased restrictions such
as those described above, both in the United States and in foreign markets. The
Company believes that the overall escalating cost of medical products and
services has led to and will continue to lead to increased pressures on the
health care industry, both foreign and domestic, to reduce the cost of products
and services, including products offered by the Company. There can be no
assurance as to either United States or foreign markets that third party
reimbursement and coverage will be available and adequate, that current
reimbursement amounts will not be decreased in the future or that future
legislation, regulation or reimbursement policies of Third-Party Payors will not
otherwise adversely affect the demand for the Company's products or its ability
to sell its products on a profitable basis, particularly if the Company's stents
are more expensive than competing stents. The unavailability of Third-Party
Payor coverage or the inadequacy of reimbursement could have a material adverse
effect on the Company's business, financial condition and results of operations.
Recent Acquisition Agreements
On April 10, 1998, the Company entered into a definitive agreement to
acquire World Medical Manufacturing Corporation. 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, in a transaction to be accounted for as a
purchase. 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 in autumn 1998 and is subject to the
approval of shareholders of World Medical and certain other conditions.
On October 1, 1998, AVE consummated the acquisition of the Bard
Coronary Cath Lab business. The transaction is structured as an acquisition of
the assets and certain liabilities of Bard related to, and
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the acquisition of stock of certain subsidiaries of Bard (the "Bard
Subsidiaries") engaged in the coronary catheter lab business of Bard (the
"Business"), and is accounted for as a purchase. Pursuant to the agreement, the
Company did not acquire any cash or accounts receivable of the Business in
consideration of the $550 million purchase price, but purchased the trade
accounts receivable of the Bard Subsidiaries for an amount equal to 95% of the
book value of such receivables as of the closing of the transaction after
deducting reserves for doubtful accounts. The product offerings of the Business
include coronary PTCA balloon catheters (including perfusion rapid exchange
catheters), guidewires, guide catheters, coronary diagnostic catheters and
guidewires; introducers and vessel closure devices; coronary stents; and various
other coronary components and accessories. For the year ended December 31, 1997,
Bard's coronary catheter lab business reported revenues of approximately $215
million. The Company is incurring a significant one-time charge related to the
acquisition, largely in connection with the write-off of in-process research and
development. These acquisitions are expected to substantially increase the
Company's personnel, facilities and product offerings and to enable the Company
to participate in new areas of interventional cardiology through a wider product
portfolio and access to new markets and customers. However, there can be no
assurance that these acquisitions will be successfully consummated or, if
consummated, that the Company will successfully offer new products subject to
obtaining antitrust clearance in Ireland and certain other closing conditions.
The Company entered into a bank credit agreement for $600 million in
senior secured credit facilities in order, among other things, to finance
substantially all of the Bard Cath Lab Acquisition. The financing is expected to
be subject to conditions customary for transactions of this nature. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company's high degree of
leverage could have important and materially adverse 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 current and expected
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 exposes
the Company to the risk of increased interest rates; (iv) the indebtedness
outstanding under the senior secured credit facilities is secured, which, among
other effects, restricts AVE's ability to dispose of assets; (v) the Company is
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 economic conditions or in its businesses.
The Company may continue to choose to expand its operations or market
presence through business combinations, acquisitions, investments, joint
ventures or other strategic alliances with third parties. The World Medical and
Bard transactions, and any similar transactions, are and will 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 diversion of the
attention of management, 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.
The Company intends to expand its operations by promoting new or
complementary products and by expanding the breadth and depth of its product
offerings, through the World Medical and Bard transactions and otherwise.
Expansion of the Company's operations in this manner will 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 utilize the Bard Cath
Lab Acquisition or other transactions 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 or, in particular, the Company's inability to generate revenues from the
additional products acquired in the Bard Cath Lab Acquisition necessary to
satisfactorily offset the costs, including acquisition indebtedness, of such
efforts, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Product Liability and Insurance
The design, manufacture and marketing of medical devices of the types
produced by the Company entail an inherent risk of product liability and other
liability claims in the event that the use of the Company's products results in
personal injury claims. The Company's products are designed to be implanted in
the human body indefinitely, and are used in life-threatening situations where
there is a high risk of serious injury or death. From time to time the Company
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has received inquiries regarding particular medical procedures in which its
products were used, but to date the Company has not experienced any product
liability claims. Any such claims could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company
maintains liability insurance with coverage of $20 million both per occurrence
and in the aggregate. There can be no assurance that product liability or other
claims will not exceed such insurance coverage limits, or that such insurance
will continue to be available on commercially acceptable terms or at all.
Environmental Matters
The Company is subject to federal, state and local laws, rules,
regulations and policies governing the use, generation, manufacture, storage,
air emission, effluent discharge, handling and disposal of certain hazardous and
potentially hazardous substances used in connection with the Company's
operations. Although the Company believes that it has complied with these laws
and regulations in all material respects and to date has not been required to
take any action to correct any noncompliance, there can be no assurance that the
Company will not be required to incur significant costs to comply with
environmental regulations in the future.
Additional Business Risks
The Company has recently experienced rapid growth in its facilities and
the number of its employees, the number of products under development, the
number and amount of products manufactured and sold and the geographic scope of
its sales. This situation is compounded by the expected acquisitions of World
Medical and Bard's coronary catheter lab business. While the Company has
commenced the implementation of improved financial and management systems, is
increasing personnel and expects to increase substantially its efforts in these
areas, there can be no assurance that such systems and personnel will be
efficiently integrated or will be adequate for the management of the Company's
current or future operations, or that the Company will be able to manage such
growth effectively.
The Company has recently experienced an unsustainable level of growth,
and there can be no assurance that the Company's future financial results will
be comparable to its recent results. Future operating results will depend on
many factors, including the demand for the Company's products, the level of
product and price competition, the levels of third-party reimbursement, the
Company's success in integrating acquisitions and expanding its direct sales
force and distribution channels, and whether the Company can develop and market
new products and control costs. In addition, the Company's future prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered in the medical device industry, which is characterized by intense
competition, rapid technological change and significant regulation.
Substantially all of the Company's revenues are derived from sales of
its coronary stent systems. The success of these products depends, among other
things, on the nature of the technological advances inherent in the products'
design, clinical trial results, market acceptance of the products, and the
Company's receipt of regulatory approvals for the products. The life cycle of
the Company's products is difficult to predict. To the extent that unit sales or
pricing for any of the Company's products declines or the Company's newly
introduced products are not commercially accepted, in each case whether as a
result of technological change, competition or any other factors, such declines
or lack of acceptance could have a material adverse effect upon the Company's
business, financial condition and results of operations.
The medical device industry is characterized by rapid and significant
technological change. The Company's future success will depend in large part on
whether the Company can continue to respond to such changes, and whether it can
expand the indications and applications for which its products are used, through
the timely development and successful introduction of enhanced and new versions
of its stents systems and balloon catheters. Product research and development
will require substantial expenditures and has inherent risks, and there can be
no assurance that the Company will be successful in identifying products for
which demand exists, in developing products that have the characteristics
necessary to treat particular applications, or that any new product introduced
will receive regulatory approval or be commercially successful.
The Company is dependent upon a limited number of key management and
technical personnel. The loss of the services of one or more of such key
employees could have a material adverse effect on the Company's business. In
addition, the Company's success will be dependent on whether the Company can
attract and retain additional highly qualified sales, management, manufacturing
and research and development personnel. The Company faces intense competition in
its recruiting activities and there can be no assurance that the Company will be
able to attract and/or retain qualified personnel.
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's information technology ("IT") staff has assessed and 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. In response, AVE is
considering installing the same computer programs used at 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 for the certain 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's IT staff is currently assessing the non-IT
(embedded) 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 its IT or non-IT 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 is incurring
various costs in connection with such assessments and plans and it is
anticipated that these expenditures 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, AVE's
embedded 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. Based on currently available
information, management does not believe that the year 2000 matters discussed
above related to IT or non-IT systems will have a material adverse impact on
AVE's financial condition or overall trends in results of operations; however,
it is uncertain to what extent AVE may be affected by such matters. AVE is
continuing to investigate the year 2000 matters and evaluate the potential
impact. 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.
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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 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, the ability of the Company to quickly and cost-effectively establish
an effective direct sales force in targeted countries and the ability of the
Company to successfully integrate acquisitions and to realize expected benefits
from such acquisitions. 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 or earnings growth on a quarterly or annual basis or that
its growth will be consistent with predictions made by securities analysts,
paticularly in light of the significant expansion of its product lines and
operations resulting from the Bard Cath Lab Acquisition. 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.
The Company's Amended and Restated Certificate of Incorporation and the
Delaware General Corporation Law contain certain provisions, including the
requirements of Section 203 of the Delaware General Corporation Law, that may
delay or prevent an attempt by a third party to acquire control of the Company.
In addition, the Company's Board of Directors has adopted a stockholder rights
plan, commonly referred to as a "poison pill," that is intended to deter hostile
or coercive attempts to acquire the Company and which was amended in May 1998 to
account for the recent increase in the market price of the Company's common
stock. The stockholder rights plan enables stockholders to acquire shares of the
Company's common stock, or the common stock of an acquiror, at a substantial
discount to the public market price should any person or group acquire more than
15% of the Company's common stock without the approval of the Board of Directors
under certain circumstances. The Company has reserved 1,000,000 shares of Series
A Junior Participating Preferred Stock for issuance in connection with the
stockholder rights plan. The Company is authorized to issue an additional
4,000,000 shares of preferred stock in one or more series with terms to be fixed
by the Board of Directors without a stockholder vote. While the Board of
Directors has no current intentions or plans to issue any preferred stock,
issuance of these shares could also be used as an anti-takeover device.
Employees
At June 30, 1998, the Company and its subsidiaries had 2,177 regular
and temporary employees worldwide of which 181 were involved in research and
development, 1,569 in manufacturing and manufacturing support, 167 in sales and
marketing, 180 in quality assurance and regulatory and clinical affairs and 80
in finance and administration. None of the Company's employees is currently
covered by a collective bargaining agreement, but certain employees of Bard in
Japan and Ireland who the Company would acquire upon the closing of the Bard
Cath Lab Acquisition are covered by such an agreement. The Company believes that
its relationship with its employees is good.
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Executive Officers of the Company
The executive officers of the Company and their ages and positions as
of June 30, 1998 are as follows:
Name Age Position
Scott J. Solano 41 President, Chief Executive Officer and
Chairman of the Board of Directors
John D. Miller 41 Chief Financial Officer, Treasurer and Director
W. Kevin Bedsole 38 Vice President of International Sales
Gregory M. French 37 Vice President of Manufacturing
John A. Schiek 43 Vice President of Compliance
Creg W. Dance 44 Vice President of International Operations
Lawrence J. Fassler 38 Vice President of Legal Affairs, General
Counsel and Secretary
Mark C. Brister 36 Vice President of Research and Development
Glenn S. Foley 41 Vice President of Sales, North America
Azin Parhizgar 38 Vice President of Quality, Clinical and
Regulatory Affairs
Andrew P. Rasdal 40 Vice President of Marketing
Robert L. Harris 33 Vice President of Finance and Controller
W. Scott Wade 41 Vice President of Operations
Richard L. Klein 38 Vice President and Chief Patent Counsel
Scott J. Solano has served as President, Chief Executive Officer and a
Director of the Company since August 1997, after serving as the Company's Chief
Operating Officer since February 1997, and became the Chairman of the Company's
Board of Directors in January 1998. Prior to joining the Company, Mr. Solano
served as Vice President of Research and Development at the Ohmeda medical
device division of The BOC Group from February 1995 to February 1997. Mr. Solano
also served as Vice President of New Product Development and Operations at the
interventional vascular division of Medtronic, Inc., a medical device
manufacturer, from September 1994 to February 1995, and as Director of New
Product Development there from March 1991 to September 1994. Mr. Solano holds a
B.S. degree from the State University of New York at Albany and a M.S. degree
from Rensselaer Polytechnic Institute.
John D. Miller is a founder of the Company and has served as Chief
Financial Officer, Treasurer and a Director since the Company's inception. Mr.
Miller also served as Vice President of Finance from January 1996 to March 1998,
as Secretary from May 1995 to December 1996 and as Director of Finance from the
Company's inception to January 1996. Mr. Miller performed his duties to the
Company as a consultant from the Company's inception until January 1995, when he
began devoting his full working time to the Company. Mr. Miller was a partner in
a New York accounting firm until 1990, when he went into private practice. Mr.
Miller holds a B.B.A. from Hofstra University.
W. Kevin Bedsole has served as Vice President of International Sales
and Marketing since March 1998 and previously served as Vice President of
Worldwide Sales and Marketing from January 1996 to March 1998 and Director of
Worldwide Sales and Marketing from March 1993 to January 1996. Prior to joining
the Company, Mr. Bedsole spent seven years in interventional cardiology device
sales with Cordis Corporation, a medical device manufacturer. Mr. Bedsole holds
a B.S. degree from Florida State University.
Gregory M. French has served as Vice President of Manufacturing since
January 1996 and previously served as Director of Manufacturing from October
1992 to January 1996. From January 1989 to October 1992, Mr. French managed
Northern California manufacturing operations for Peripheral Systems Group, a
medical device manufacturing division of Eli Lilly ("PSG"), and also managed
PSG's Advanced Development Group. Mr. French has also served with Advanced
Cardiovascular Systems, Inc., a medical device manufacturer that is now a
subsidiary of Guidant Corporation ("ACS"). Mr. French holds a B.S. degree from
California Polytechnic State University, San Luis Obispo.
John A. Schiek has served as Vice President of Compliance of the
Company since March 1998, and previously served as Vice President of Quality,
Regulatory and Clinical Affairs of the Company from January 1996 to March 1998.
Mr. Schiek also served as Director of Regulatory Affairs and Quality Assurance
of the Company from February 1993 to January 1996. Mr. Schiek had previously
served as the Quality and Reliability Engineering Department head of PSG from
January 1989 to February 1993 and from 1992 to 1993 was a member of the
executive staff in charge of Quality Assurance and Regulatory Affairs at PSG.
Mr. Schiek has also worked for ACS as a Quality Engineering Specialist and has
worked in the fields of quality assurance, product development and program
evaluation since 1979. Mr. Schiek holds a B.A. degree from the University of
Wisconsin -- Milwaukee and an M.S. degree from San Jose State University.
Creg W. Dance has served as Vice President of International Operations
since December 1996 and previously served as Director of Canadian Operations at
AVEC since joining the Company in January 1995. From 1989 to January 1995, Mr.
Dance was Director of Research and Development and Clinical Research at Lake
Region Manufacturing Co., Inc., a medical device manufacturer. Mr. Dance has
also served as Manager of Research and
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Development and Manufacturing -- Catheter Division with Medtronic, Inc., a
medical device manufacturer, and as Manufacturing Engineering Manager of ACS.
Mr. Dance holds a B.S. degree from Southern Illinois University.
Lawrence J. Fassler has served as Vice President of Legal Affairs,
General Counsel and Secretary since March 1998 and previously served as General
Counsel since October 1996 and Secretary since December 1996. Prior to joining
the Company, Mr. Fassler served as an attorney with Cooley Godward LLP from
August 1995 to October 1996 and with Shearman & Sterling from March 1991 to June
1995. Mr. Fassler holds a B.S. degree from the University of California at
Berkeley and a J.D./M.B.A. degree from Columbia University.
Mark C. Brister has served as Vice President of Research and
Development of the Company since January 1998 and previously served as a Senior
Manufacturing Engineer since November 1993. Prior to joining the Company, Mr.
Brister served as an engineer with PSG. Mr. Brister studied at the University of
California at Riverside.
Glenn S. Foley has served as Vice President of Sales, North America of
the Company since March 1998 and previously served as Director of Sales, North
America of the Company since February 1997. Prior to joining the Company, Mr.
Foley served as Price Strategist of Managed Care and National Accounts at the
Vascular Intervention division of Guidant Corporation, a medical device
manufacturer, from November 1996 to February 1997. Prior to that time, Mr. Foley
served as a sales representative at ACS from January 1992 to November 1996. From
March 1989 to January 1992, Mr. Foley served as the Western Area Sales Manager
at Baxter Healthcare Corp. and held various other positions at Baxter Healthcare
Corp. from 1982 through March 1989. Mr. Foley holds a B.A. degree from East
Stroudsburg University.
Azin Parhizgar has served as Vice President of Clinical Research,
Regulatory Affairs and Quality Assurance of the Company since March 1998 and
previously served as Director of Clinical Research and Regulatory Affairs from
November 1996 to March 1998. Prior to joining the Company, Ms. Parhizgar served
as the Director of Corporate Regulatory and Clinical Affairs at Summit
Technology, Inc., a medical device manufacturer, from August 1995 to November
1996. Ms. Parhizgar also served as the Regulatory Affairs Program Manager in the
Vascular Systems division of C.R. Bard, Inc. from February 1994 to July 1995 and
as a senior regulatory affairs specialist at Johnson & Johnson Professional,
Inc. from December 1992 to January 1994. Ms. Parhizgar holds a B.S. degree from
Boston College and Sc.M. and Ph.D. degrees from Brown University.
Andrew P. Rasdal has served as Vice President of Marketing of the
Company since March 1998 and previously served as Director of Marketing of the
Company since February 1997. Prior to joining the Company, Mr. Rasdal held sales
and marketing positions for EP Technologies, a division of Boston Scientific
Corporation, from March 1993 to February 1997. From May 1992 through February
1993, Mr. Rasdal served as a sales representative for SCIMED Lifesystems, Inc.
Mr. Rasdal also served as a sales representative and as a business analyst with
ACS from June 1990 to May 1992. Mr. Rasdal holds a B.S. degree from San Jose
State University and an M.M. degree from the Kellogg Graduate School of Business
at Northwestern University.
Robert L. Harris has served as Vice President of Finance and Controller
of the Company since March 1998 and as Controller from November 1995 to March
1998. Prior to joining the Company, Mr. Harris spent six years in public
accounting with Coopers & Lybrand.
W. Scott Wade has served as Vice President of Operations of the Company
since May 1998 and previously served as Director of Operations of the Company
since January 1998. Prior to joining the Company, Mr. Wade served as Director of
Operations at the Ohmeda Medical Device Division of the BOC Group from February
1994 to December 1997. From July 1992 to January 1994, Mr. Wade served as a
Texas Instruments' Loaned Executive to the Agile Manufacturing Enterprise Forum
at Lehigh University, and prior to that was an Operations Manager at Texas
Instruments' Defense Systems and Electronics Group. Mr. Wade holds a B.S. degree
from Virginia Polytechnic and State University.
Richard L. Klein has served as Vice President and Chief Patent Counsel
of the Company since June 1998 and Patent Counsel of the Company since June
1996. Prior to joining the Company, Mr. Klein served as an attorney with the law
firm of Fischbach, Perlstein, Lieberman & Yanny from May 1994 to May 1996. Mr.
Klein also served as Assistant Patent Counsel at the California Institute of
Technology and Jet Propulsion Laboratory from January 1989 through April 1994.
Prior to that, Mr. Klein served as an examiner with the United States Patent
Trademark Office from June 1982 to September 1988. Mr. Klein holds a B.S. degree
from the State University of New York at Buffalo and a J.D. degree from
Southwestern University School of Law.
ITEM 2. PROPERTIES
The Company owns two buildings aggregating 195,000 square feet in Santa
Rosa, California that serve as the Company's corporate headquarters and house
most of its administrative offices, research laboratories and manufacturing
facilities. The Company also leases or subleases approximately 59,000 square
feet in Santa Rosa, California, or nearby communities which house additional
administrative offices and manufacturing and warehouse
19
<PAGE>
facilities, as well as a sales office in Atlanta, Georgia. Such leases and
subleases expire at various times from February 1999 to July 2002. The Company's
wholly owned subsidiary, AVEC, leases approximately 45,000 square feet in
Richmond, British Columbia, which house AVEC's offices and assembly facility.
The lease for such facility expires in August 2001. The Company's international
subsidiaries maintain international sales offices in France, Germany, the
Netherlands (to service the Benelux countries), Switzerland, and the United
Kingdom. The Company's European subsidiaries collectively lease administrative
offices and warehouse space of approximately 6,500 square feet under leases that
expire at various times between September 1997 and May 2006. The Company
believes that its facilities are adequate to meet its space requirements through
at least mid-1999. As part of the Bard Cath Lab Acquisition, the Company expects
to obtain an aggregate of over 275,000 additional square feet of manufacturing
and administrative office space in Billerica, Massachusetts and Galway, Ireland,
as well as significant office and warehouse space in Japan.
ITEM 3. LEGAL PROCEEDINGS
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 3 include, without limitation, statements regarding the anticipated
outcome of litigation. 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
and risk factors include those discussed in the sections entitled "Item 1.
Business," "Item 5. Market for the Registrant's Common Equity and Related
Stockholders," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," 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.
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.
On or about May 28, 1996, 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, filed a lawsuit in the District Court of
Dallas County, Texas. The suit names as defendants the Company, John D. Miller,
a director, officer and principal stockholder of the Company, Bradly A.
Jendersee, a principal stockholder and a former director and officer of the
Company, Dr. Simon H. Stertzer, a stockholder and former director of the
Company, and Dr. Gerald Dorros, a stockholder of the Company. The plaintiffs
allege multiple claims for relief, including (but not limited to) 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 $395 million in 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.
The defendants, including the Company, have filed counterclaims against
the plaintiffs. The defendants allege claims against Mr. Hidalgo for, among
other things, 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 defendants allege
claims against Dr. Anwar for intentional and negligent interference with
contract, breach of contract, defamation and business disparagement, fraud,
equitable estoppel and declaratory relief based on comparative indemnity,
contribution, and absence of fraud. The defendants also added Mrs. Anwar and
Mrs. Hidalgo as involuntary plaintiffs, seeking a declaration of Mrs. Anwar's
ownership interest in Dr. Anwar's shares and Mrs. Hidalgo's interest in Mr.
Hidalgo's shares. A trial date has been set for October 19, 1998.
The Company believes it has meritorious defenses to the claims alleged
by the plaintiffs, and that it has meritorious claims against 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.
20
<PAGE>
The Company has agreed to indemnify each of the individuals named as
defendants in the lawsuits against the Company relating to the ESS transaction.
U.S. Patent Litigation. Two of the Company's competitors have filed
claims against the Company with respect to their alleged intellectual property
rights. The Company has filed for declaratory and injunctive relief in
connection with one of the competitors' claims and for damages and declaratory
and injunctive relief in connection with the other competitor's claim.
On October 21, 1997, the Company received notice that it had been named
as an additional defendant, along with Boston Scientific Corporation and SCIMED
Life Systems, Inc., in a lawsuit originally filed by Cordis Corporation
("Cordis") against Guidant Corporation and Advanced Cardiovascular Systems, Inc.
in federal district court in Delaware. Cordis alleges, among other things, that
the sale by the Company of its stents in the United States would infringe on
certain patents licensed by Cordis. The complaint seeks declaratory and
injunctive relief, unspecified damages, attorneys' fees and other relief. On
November 6, 1997, the Company filed a motion to dismiss Cordis' complaint. On
December 29, 1997, Cordis filed a motion for preliminary injunctive relief, but
on July 20, 1998, Cordis withdrew such motion.
On December 24, 1997, the Company received notice that Advanced
Cardiovascular Systems, Inc. ("ACS"), a subsidiary of Guidant Corporation, had
filed a lawsuit against the Company in federal district court in San Jose,
California. ACS alleges, among other things, that the Company is selling in the
United States stents that infringe on certain patents of ACS. 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. 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. Each of the complaints seeks injunctive relief, unspecified
damages, attorneys' fees and other relief. On June 1, 1998, the federal district
court in San Jose granted the Company's motion to transfer each of the lawsuits
to the federal district court in Delaware.
On December 26, 1997, the Company filed an action against Johnson &
Johnson, Cordis and Expandable Grafts Partnership in federal district court in
Delaware. The action seeks (i) a declaration that certain patents are invalid,
void, unenforceable and not infringed by the Company's activities with respect
to its stent systems in the United States, (ii) an injunction prohibiting the
defendants from asserting infringement of such patents against the Company and
(iii) a declaration that the defendants have violated certain antitrust laws.
On February 18, 1998, the Company filed a lawsuit against ACS in
federal district court in Delaware, alleging infringement of two patents of the
Company, breach of contract, misappropriation of trade secrets, unfair
competition, and conversion. The complaint seeks unspecified damages, attorney's
fees and other relief, as well as a declaration that certain patents of ACS are
invalid, void and unenforceable.
On April 24, 1998, Johnson & Johnson and Expandable Grafts Partnership
filed an action against the Company in the Federal Court of Canada, Trial
Division in Toronto. The claim alleges that the Company is selling certain
stents in Canada that infringe a Canadian patent of the plaintiffs. The claim
seeks declaratory and injunctive relief, unspecified damages, attorney's fees
and other relief.
On June 15, 1998, C.R. Bard, Inc. ("Bard") filed a writ of summons
against the Company in the District Court of The Hague, the Netherlands. The
writ alleges that the Company is selling in the Netherlands certain PTCA
catheters that infringe a European patent of Bard. The writ seeks injunctive
relief, civil fines, unspecified damages and costs. The patent in question will
be transferred to the Company if the Bard Cath Lab Acquisition is consummated.
On August 13, 1998, the Company filed a lawsuit against Boston
Scientific Corporation and its subsidiary SCIMED Life Systems, Inc. in federal
district court in Delaware, alleging infringement of two patents of the Company.
The complaint seeks injunctive relief, unspecified damages, attorneys' fees and
other relief.
The Company believes that it has meritorious defenses to the claims
alleged by the plaintiffs, and meritorious claims against the defendants, in the
aforementioned actions. However, no assurance can be given as to the outcome of
the actions. The inability of the Company to prevail in the actions, 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. In the patent suits that have been and from
time to time will be filed by the Company against its competitors, counterclaims
by the defendants with respect to the validity and enforceability of the
Company's patents are likely and, if successful, such counterclaims could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Claims of Terminated Distributors. In connection with the Company's
termination of certain distributor relationships, several of such distributors
have filed 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-
21
<PAGE>
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
$5.2 million using current exchange rates), of which BF30,000,000 (approximately
$825,000) is sought as a provisional payment. A pleadings hearing is scheduled
for October 5, 1998.
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
action included a claim for compensation equal to the total value of such
distributor's business, which the distributor valued at FF400,000,000
(approximately $67 million using current exchange rates). 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. On February 2,
1998, the Tribunal ordered the distributor to pay the accounts receivable sought
by the Company and also ordered the Company to repurchase the distributor's
remaining inventory, tentatively valued at $921,500. On February 10, 1997, the
distributor filed an appeal of the Tribunal's decision of September 23, 1996
with the Court of Appeals of Colmar, and the parties have exchanged briefs in
the appellate proceeding. A final procedural hearing is scheduled for September
18, 1998.
The Company has consulted with local counsel in Belgium and France and
believes that the termination of each of the distributor relationships was
lawful. The Company understands that under the laws of Belgium, under certain
circumstances, certain indemnities may be claimed by distributors for
insufficient notice of termination and/or goodwill compensation. No assurance
can be given as to the outcome of any pending or threatened litigation.
From time to time, the Company is involved in other legal proceedings
arising in the ordinary course of its business. As of the date hereof, the
Company is not a party to any other legal proceedings with respect to which an
adverse outcome would, in management's opinion, have a material adverse effect
on the Company's business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 5 include, without limitation, statements regarding factors that may
affect the market price of the Company's common stock. 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 and risk factors include those discussed
in the sections entitled "Item 1. Business," "Item 3. Legal Proceedings," "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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.
Market Information
The Company's common stock trades on the Nasdaq National Market tier of
The Nasdaq Stock Market ("Nasdaq") under the symbol "AVEI." The following table
sets forth the high and low closing sales prices for the Company's common stock
since public trading commenced on April 3, 1996, as furnished by Nasdaq and as
adjusted for the Company's two-for-one stock split, effected in the form of a
100% stock dividend, that occurred in the third quarter of fiscal 1998. These
prices reflect prices between dealers, without retail markups, markdowns or
commissions, and may not represent actual transactions.
High Low
Year ended June 30, 1998
Fourth Quarter $39.500 $28.250
Third Quarter $44.063 $25.625
Second Quarter $32.500 $22.938
First Quarter $28.313 $15.375
Year ended June 30, 1997
Fourth Quarter $16.125 $ 6.125
Third Quarter $ 9.625 $ 5.750
Second Quarter $14.563 $ 4.500
First Quarter $18.125 $ 9.125
Year ended June 30, 1996
Fourth Quarter (beginning April 3) $24.750 $14.750
As of July 31, 1998, there were approximately 289 stockholders of
record (which number does not include the number of stockholders whose shares
are held of record by a brokerage house or clearing agency but does include such
brokerage house or clearing agency as one record holder). The Company believes
it has in excess of 25,000 beneficial holders of the Company's Common Stock. The
Company's stock price has been and may continue to be subject to significant
volatility, particularly on a quarterly basis. Any shortfall in revenue or
earnings from levels expected by securities analysts could have an immediate and
significant adverse effect on the trading price of the Company's Common Stock in
any given period. Additionally, the Company participates in a highly dynamic
industry, which has and may continue to result in significant volatility of the
price of the Company's common stock. Announcements of technological innovations
or new products by the Company or its competitors (including future competitors
with alternative technologies), release of reports by securities analysts,
developments or disputes concerning patents or proprietary rights, regulatory
developments, changes in regulatory or medical reimbursement policies, economic
and other external factors, as well as period-to-period fluctuations in the
Company's financial results, may have a significant impact on the market price
of the Common Stock. In addition, the securities markets have from time to time
experienced significant price and volume fluctuations that are unrelated to the
operating performance of particular companies or industries.
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Dividend Policy
<TABLE>
The Company has not historically paid cash dividends and currently
intends to retain any future earnings for use in its business for the
foreseeable future. The bank credit agreement to be entered into by the Company
in connection with the Bard Cath Lab Acquisition is expected to impose
restrictions on the ability of the Company to pay cash dividends.
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended June 30,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales $387,645 $79,420 $55,228 $17,141 $2,897
Cost of sales 72,690 16,217 10,565 4,515 1,631
-------- ------- ------- ------- ------
Gross profit 314,955 63,203 44,663 12,626 1,266
Operating expenses:
Research and development 37,208 11,422 6,480 987 594
Selling, general and administrative 96,964 22,510 8,437 1,807 870
Settlement costs -- -- -- 425 358
-------- ------- ------- ------- ------
Operating income (loss) 180,783 29,271 29,746 9,407 (556)
Interest and other income 5,463 4,190 1,460 237 21
-------- ------- ------- ------- ------
Income (loss) before provision for income taxes 186,246 33,461 31,206 9,644 (535)
Provision for income taxes 71,126 11,711 10,766 3,004 3
-------- ------- ------- ------- ------
Net income (loss) $115,120 $21,750 $20,440 $ 6,640 $ (538)
======== ======= ======= ======= ======
Net income (loss) per share - basic $ 1.86 $ 0.37 $ 0.44 $ 0.18 $(0.02)
Net income (loss) per share - diluted $ 1.76 $ 0.34 $ 0.36 $ 0.13 $(0.02)
Shares used in per share calculation - basic 61,989 58,447 46,926 36,081 35,317
Shares used in per share calculation - diluted 65,228 63,289 56,617 49,300 35,317
June 30,
------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 48,282 $ 25,036 $ 59,238 $ 2,533 $ 1,882
Working capital 204,510 114,486 106,925 4,413 415
Total assets 387,469 147,979 122,157 13,089 3,086
Retained earnings (accumulated deficit) 162,022 46,902 25,152 4,712 (1,928)
Total stockholders' equity 276,978 138,200 116,571 8,129 1,004
</TABLE>
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.
24
<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. 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 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 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),
25
<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's information technology ("IT") staff has assessed and 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. In response, AVE is
considering installing the same computer programs used at 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 for the certain 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's IT staff is currently assessing the non-IT
(embedded) 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 its IT or non-IT 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 is incurring
various costs in connection with such assessments and plans and it is
anticipated that these expenditures 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, AVE's
embedded 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. Based on currently available
information, management does not believe that the year 2000 matters discussed
above related to IT or non-IT systems will have a material adverse impact on
AVE's financial condition or overall trends in results of operations; however,
it is uncertain to what extent AVE may be affected by such matters. AVE is
continuing to investigate the year 2000 matters and evaluate the potential
impact. 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 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.
26
<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.
27
<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.
28
<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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition --Liquidity and Financial Condition" for
information related to quantitative and qualitative disclosures about market
risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a) for an index to the Company's consolidated financial
statements as of June 30, 1998 and 1997 and for each of the three years in the
period ended June 30, 1998.
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 8 include, without limitation, statements regarding factors that may
affect the Company's results of operations. 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
29
<PAGE>
forward-looking statements. Additional forward-looking statements and 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 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," as well as those that may be set
forth in the reports filed by the Company from time to time on Forms 10-Q and
8-K.
Quarterly Results of Operations
<TABLE>
The following table sets forth certain unaudited consolidated results
of operations for the fiscal years ended June 30, 1998 and 1997. This
information has been derived from unaudited consolidated financial statements
that, in the opinion of management, reflect all adjustments (consisting only of
normally recurring adjustments) necessary to fairly present this information.
The results of operations for any quarter are not necessarily indicative of the
results to be expected for any future period.
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Year ended June 30, 1998
Net sales $26,263 $38,303 $141,203 $181,877
Gross profit 20,774 30,647 113,657 149,878
Operating income 7,779 10,830 66,789 95,387
Net income 5,710 7,754 42,242 59,415
Net income per share - basic 0.10 0.12 0.67 0.95
Net income per share - diluted 0.09 0.12 0.64 0.90
Year ended June 30, 1997
Net sales $18,568 $18,228 $ 20,402 $ 22,222
Gross profit 15,657 14,495 15,806 17,245
Operating income 10,670 6,032 6,257 6,311
Net income 7,765 4,606 4,633 4,746
Net income per share - basic 0.13 0.08 0.07 0.08
Net income per share - diluted 0.12 0.07 0.07 0.07
</TABLE>
Results of the Company's operations may fluctuate significantly from
quarter to quarter and will depend on numerous factors, including (i) variations
in operating expenses, (ii) the costs and outcome of litigation, (iii)
competition (including pricing pressures), (iv) the timing of research and
development expenses (including clinical trial related expenditures), (vi) the
timing of new product introductions or transitions to new products, (vi) the
timing of regulatory and third party reimbursement approvals, (vii) the costs
and the timing of establishing direct sales operations, (viii) the mix of sales
among distributors and the Company's direct sales force, (ix) the level of third
party reimbursement, (x) the Company's ability to manufacture its products
efficiently, and (x) seasonal factors impacting the number of elective
angioplasty procedures. Announcements or expected announcements by the Company
or its competitors of new products or technologies could cause customers to
defer purchases of existing products of the Company and alter the mix of
products sold by the Company, which could materially adversely affect the
Company's business, financial condition and results of operations. There can be
no assurance that future products or product enhancements can be successfully
introduced or that such introductions will not adversely affect the demand for
existing products. Since the Company believes there are typically fewer elective
interventional procedures during the summer months due to vacation schedules of
patients and health care providers, especially in Europe, sales of the Company's
products may slow during the Company's first fiscal quarter of each year (the
quarter ending September 30). The Company expects that its quarterly operating
results will fluctuate in the future as a result of these and other factors. Due
to such quarterly fluctuations in operating results, quarter to quarter
comparisons of the Company's operating results are not necessarily meaningful
and should not be relied upon as indicators of likely future performance or
annual operating results.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and the compliance of
certain reporting persons with Section 16(a) of the Securities Exchange Act of
1934 will be set forth under the caption "Election of Directors" and "Compliance
with the Reporting Requirements of Section 16(a)" in the Company's proxy
statement for use in connection with the Annual Meeting of Stockholders to be
held on November 12, 1998 (the "1998 Proxy Statement") and is incorporated
herein by reference. The 1998 Proxy Statement will be filed with the Securities
and Exchange Commission within 120 days after the end of the Company's fiscal
year.
Information regarding Company's executive officers is set forth in this
Form 10-K in Part I, Item 1.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference from the information set forth under the caption " Executive
Compensation" in the Company's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by
reference from the information set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the Company's 1998 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by
reference from the information set forth under the caption "Certain
Transactions" in the Company's 1998 Proxy Statement.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
Page
----
(1) Consolidated Financial Statements
Report of Ernst & Young LLP, Independent Auditors 38
Consolidated Balance Sheets at June 30, 1998 and 1997 39
Consolidated Statements of Operations for the three
years ended June 30, 1998 40
Consolidated Statements of Stockholders' Equity for the
three years ended June 30, 1998 41
Consolidated Statements of Cash Flows for the three
years ended June 30, 1998 42
Notes to Consolidated Financial Statements 43
(2) Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts 59
All other schedules are omitted because they are not required,
they are not applicable or the information is already included in
the financial statements or notes thereto.
(3) Exhibits
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 No. 333-00824, filed February 1, 1996).
3.2 Amended By-laws of the Company (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement on Form S-1 No 333-00824,
filed February 1, 1996).
3.3 Certificate of Amendment of Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.3 to Amendment
No. 1 to the Company's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
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 Current Report on Form 8-K, filed February 27, 1997).
4.1 Specimen stock certificate (incorporated by reference to Exhibit 4.1 to
Amendment No. 1 to the Company's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
10.1 Company's 1996 Equity Incentive Plan, as amended (incorporated by
reference to Exhibit 10.1 to the Company's annual Report on Form 10-K
for the fiscal year ended June 30, 1997, filed September 16, 1997).
10.2 Company's 1996 Non-Employee Directors' Stock Option Plan (incorporated
by reference to Exhibit 10.2 of the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1996, filed September 26,
1996).
10.3 Company's 1997 Employee Stock Purchase Plan (incorporated by reference
to Exhibit 10.3 to the Company's annual Report on Form 10-K for the
fiscal year ended June 30, 1997, filed September 16, 1997).
10.4 Distribution Agreement dated July 17, 1993 between the Company and
Century Medical, Inc. (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.5 Importing and Distribution Agreement dated December 2, 1993 between the
Company and Japan Lifeline Co., Ltd (incorporated by reference to
Exhibit 10.4 to the Company's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.6 Termination Agreement dated August 11, 1995 between the Company and
Century Medical, Inc. (incorporated by reference to Exhibit 10. 5 to
the Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.7 International Distribution Agreement, dated as of January 22, 1997,
between Japan Lifeline Co., Ltd. and the Company (incorporated by
reference to Exhibit 10.26 to the Company's Quarterly Report on Form
10-Q for the period ended December 31, 1996, filed February 14, 1997).
(Confidential treatment applies to certain information contained in
this document pursuant to an order of the Securities and Exchange
Commission. Such information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended.)
32
<PAGE>
10.8 Amendment, dated as of July 9, 1997, to the International Distribution
Agreement dated as of January 22, 1997 between Japan Lifeline Co., Ltd.
and the Company (incorporated by reference to Exhibit 10.8 to the
Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1997, filed September 16, 1997). (Confidential treatment has been
requested for certain information contained in this document. Such
information has been omitted and filed separately with the Securities
and Exchange Commission pursuant to Rule 24b-2 of the Securities
Exchange Act of 1934, as amended).
10.9 Amendment No. 2, dated as of August 22, 1997, to the International
Distribution Agreement dated as of January 22, 1997 between Japan
Lifeline Co., Ltd. and the Company (incorporated by reference to
Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal
year ended June 30, 1997, filed September 16, 1997). (Confidential
treatment has been requested for certain information contained in this
document. Such information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended).
10.10 Amendment No. 3, dated as of December 22, 1997, to the International
Distribution Agreement dated as of January 22, 1997 between Japan
Lifeline Co., Ltd. and the Company (incorporated by reference to
Exhibit 10.33 to the Company's Quarterly Report on Form 10-Q for the
period ended December 31, 1997, filed January 16, 1998). (Confidential
treatment has been requested for certain information contained in this
document. Such information has been omitted and filed separately with
the Securities and Exchange Commission pursuant to Rule 24b-2 of the
Securities Exchange Act of 1934, as amended).
10.11 Employment Agreement, dated as of March 17, 1995, between the Company
and Bradly A. Jendersee (incorporated by reference to Exhibit 10.6 to
the Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.12 Employment Agreement Amendment between the Company and Bradly A.
Jendersee (incorporated by reference to Exhibit 10.7 to Amendment No. 1
to the Company's Registration Statement on Form S-1 No. 333-00824,
filed March 7, 1996).
10.13 Employment Agreement, dated as of March 17, 1995, between the Company
and Robert D. Lashinski (incorporated by reference to Exhibit 10.8 to
the Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.14 Employment Agreement Amendment between the Company and Robert D.
Lashinski (incorporated by reference to Exhibit 10.9 to Amendment No. 1
to the Company's Registration Statement on Form S-1 No. 333-00824,
filed March 7, 1996).
10.15 Employment Agreement, dated as of March 17, 1995, between the Company
and John D. Miller (incorporated by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.16 Employment Agreement, dated as of March 17, 1995, between the Company
and W. Kevin Bedsole (incorporated by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.17 Employment Agreement, dated as of March 17, 1995, between the Company
and Gregory M. French. (incorporated by reference to Exhibit 10.12 to
the Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.18 Employment Agreement, dated as of March 17, 1995, between the Company
and John A. Schiek (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 No. 333-00824, filed
February 1, 1996).
10.19 Employment Agreement, dated as of February 3, 1997, between the Company
and Scott J. Solano (incorporated by reference to Exhibit 10.28 to the
Company's Quarterly Report on Form 10-Q for the period ended December
31, 1996, filed February 14, 1997).
10.20 Form of Change in Control Option Vesting Acceleration Agreement between
the Company and Lawrence J. Fassler, Glenn S. Foley, Andrew P. Rasdal,
and certain other employees (incorporated by reference to Exhibit 10.27
to the Company's Quarterly Report on Form 10-Q for the period ended
December 31, 1996, filed February 14, 1997).
10.21 Form of Indemnification Agreement between the Company and each of its
executive officers and directors (incorporated by reference to Exhibit
10.25 to the Company's Quarterly Report on Form 10-Q for the period
ended September 30, 1996, filed November 13, 1996).
10.22 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 Current Report on Form 8-K, filed February
27, 1997).
10.23 Amendment to Rights Agreement, effective May 28, 1998, between the
Company and BankBoston, N.A. (formerly known as The First National Bank
of Boston) (incorporated by reference to Exhibit 1 to the Company's
Current Report on Form 8-K, filed June 9, 1998).
10.24 Stock Exchange Agreement, dated as of December 22, 1994, between the
Company and Benito Hidalgo (incorporated by reference to Exhibit 10.14
to the Company's Registration Statement on Form S-1 No. 333-00824,
filed February 1, 1996).
33
<PAGE>
10.25 Stock Exchange Agreement, dated as of March 27, 1995, between the
Company and Michael D. Bonneau (incorporated by reference to Exhibit
10.15 to the Company's Registration Statement on Form S-1 No.
333-00824, filed February 1, 1996).
10.26 Lease, dated August 5, 1996, and First Amendment thereto, between Ruth
Waltenspiel, Dixie Walker and the Company, concerning the facilities at
5341, 5343, 5345 and 5347 Skylane Boulevard, Santa Rosa, California
(incorporated by reference to Exhibit 10.24 to the Company's Quarterly
Report on Form 10-Q for the period ended September 30, 1996, filed
November 13, 1996).
10.27 Second Amendment to Lease, dated May 5, 1997, to that certain Lease
dated August 5, 1996 between Dixie Walker, Ruth Waltenspiel and the
Company, as amended (incorporated by reference to Exhibit 10.30 to the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1997, filed May 15, 1997).
10.28 Lease, dated as of April 28, 1997, between Bruce and Sandra Rocco and
the Company concerning the facility at 5355 Skylane Boulevard, Santa
Rosa, California (incorporated by reference to Exhibit 10.26 to the
Company's 1997 Annual Report on Form 10-K, filed September 16, 1997).
10.29* Sublease, dated as of June 30, 1997, between the Company and Verticom,
Inc. concerning the facility at 1201 Corporate Center Parkway, Santa
Rosa, California.
10.30 Lease, dated as of May 19, 1997, between the Company and SBR
Development concerning the facility at 7975 Cameron Center Drive,
Buildings 100 and 300, Santa Rosa, California (incorporated by
reference to Exhibit 10.28 to the Company's 1997 Annual Report on Form
10-K, filed September 16, 1997).
10.31 Lease, dated August 10, 1994, between Bentall Properties Ltd,
Westminster Management Corporation and Arterial Vascular Engineering
Canada, Inc., concerning the facility at 13155 Delf Place, Richmond,
British Columbia (incorporated by reference to Exhibit 10.29 to the
Company's 1997 Annual Report on Form 10-K, filed September 16, 1997).
10.32 Addendum to Lease and Lease Amending Agreement, dated as of July 21,
1997, between Arterial Vascular Engineering Canada, Inc. and Bentall
Properties Ltd. concerning 13140 Delf Place Richmond, British Columbia
(incorporated by reference to Exhibit 10.30 to the Company's 1997
Annual Report on Form 10-K, filed September 16, 1997).
10.33 Lease, dated as of October 29, 1997, between the Company and SBR
Development concerning the facility at 7975 Cameron Center Drive,
Building 200, Windsor, California (incorporated by reference to Exhibit
10.31 to the Company's 1997 Annual Report on Form 10-K, filed September
16, 1997).
16.1 Letter, dated March 5, 1996, from Anthony Capeci regarding change in
certifying accountant (incorporated by reference to Exhibit 16.1 to
Amendment No. 1 to the Company's Registration Statement on Form S-1 No.
333-00824, filed March 7, 1996).
16.2 Letter, dated May 10, 1996, from Coopers & Lybrand L.L.P. regarding
change in certifying accountant (incorporated by reference to Exhibit
16.2 to the Company's Form 8-K, filed May 10, 1996).
21.1* Subsidiaries of the Company.
23.1* Consent of Ernst & Young LLP, Independent Auditors.
24.1* Power of Attorney (reference is made to the signature page of this Form
10-K). 27* Financial Data Schedule.
- -------------
* Filed herewith.
34
<PAGE>
(b) Reports on Form 8-K
On May 22, 1998, the Company filed a Form 8-K with respect to
its restatement of earnings per share information pursuant to the
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 128, which replaced the previously reported
primary and fully diluted earnings per share with basic and diluted
earnings per share.
Report Date: May 21, 1998
Filing Date: May 22, 1998
Item 5 -- Other Events
Item 7 -- Exhibits
On June 9, 1998, the Company filed a Form 8-K with respect to
an amendment to the Rights Agreement dated as of February 26, 1997
between the Company and BankBoston, N.A. (formerly known as The First
National Bank of Boston). The amendment provides that the purchase
price under the Rights Agreement for one one-hundredth of a share of
the Company's Series A Junior Participating Preferred Stock, par value
$.001 per share, is changed from $75.00 to $175.00 (taking into account
the stock dividend previously distributed by the Company).
Report Date: May 28, 1998
Filing Date: June 9, 1998
Item 5 -- Other Events
Item 7 -- Exhibits
(c) See Exhibits listed under Item 14(a)(3).
(d) The financial statement schedules required by this Item are listed
under Item 14(a)(2).
35
<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: October 13, 1998 /s/ Scott J. Solano
-------------------------------------
Scott J. Solano
President, Chief Executive Officer and
Chairman of the Board of Directors
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Scott J. Solano and John D. Miller, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place, and
stead, in any and all capacities, to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming that
all said attorneys-in-fact and agents, or any of them or their or his substitute
or substituted, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date: October 13, 1998 /s/ Scott J. Solano
-------------------------------------------
Scott J. Solano
President, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)
Date: October 13, 1998 /s/ John D. Miller
-------------------------------------------
John D. Miller
Chief Financial Officer, Treasurer
and Director
(Principal Financial and Accounting Officer)
Date: October 13, 1998 /s/ Craig E. Dauchy*
-------------------------------------------
Craig E. Dauchy
Director
Date: October 13, 1998 /s/ George B. Borkow*
-------------------------------------------
George B. Borkow
Director
*By: /s/ John D. Miller
------------------------
John D. Miller
Attorney-in-Fact
36
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996
with
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
37
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Arterial Vascular Engineering, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Arterial
Vascular Engineering, Inc. and Subsidiaries as of June 30, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Arterial Vascular Engineering, Inc. and Subsidiaries at June 30, 1998 and 1997,
and the consolidated statements of its operations and its cash flows for each of
the three years in the period ended June 30, 1998 in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
July 17, 1998
38
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
<CAPTION>
June 30,
---------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 48,282 $ 25,036
Short-term investments 126,843 62,192
Accounts receivable, net of allowance for doubtful accounts of 109,851 22,850
$9,687 and $1,080 at June 30, 1998 and 1997
Inventories 9,524 7,302
Deferred income tax 14,687 2,413
Prepaid expenses and other current assets 5,814 4,472
--------------- --------------
Total current assets 315,001 124,265
Property, plant and equipment, net 71,095 21,759
Deferred income tax 896 1,598
Other assets 477 357
--------------- --------------
Total assets $387,469 $147,979
=============== ==============
LIABILITIES
Current liabilities:
Accounts payable $ 13,894 $ 4,035
Accrued employee bonus 25,585 387
Accrued expenses 27,530 5,357
Income taxes payable 43,482 -
--------------- --------------
Total current liabilities 110,491 9,779
--------------- --------------
Commitments and contingencies (Note 7)
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value
Authorized: 5,000 shares
Issued and outstanding: None - -
Common Stock, $0.001 par value
Authorized: 100,000 shares
Issued and outstanding, including shares in treasury:
63,974 and 62,094 shares at June 30, 1998 and 1997 64 62
Additional paid-in capital 117,281 92,990
Deferred compensation (268) -
Treasury Stock, at cost; 60 shares at June 30, 1998 and 1997 (390) (390)
Cumulative translation adjustment (1,731) (1,364)
Retained earnings 162,022 46,902
--------------- --------------
Total stockholders' equity 276,978 138,200
--------------- --------------
Total liabilities and stockholders' equity $387,469 $147,979
=============== ==============
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
39
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
Year Ended June 30,
---------------------------------------------
1998 1997 1996
------------ ------------- ------------
<S> <C> <C> <C>
Net sales $387,645 $79,420 $55,228
Cost of sales 72,690 16,217 10,565
------------ ------------- ------------
Gross profit 314,955 63,203 44,663
------------ ------------- ------------
Operating expenses:
Research and development 37,208 11,422 6,480
Selling, general and administrative 96,964 22,510 8,437
------------ ------------- ------------
Total operating expenses 134,172 33,932 14,917
------------ ------------- ------------
Operating income 180,783 29,271 29,746
Interest and other income 5,463 4,190 1,460
------------ ------------- ------------
Income before provision for income taxes 186,246 33,461 31,206
Provision for income taxes 71,126 11,711 10,766
------------ ------------- ------------
Net income $115,120 $21,750 $20,440
============ ============= ============
Net income per share - basic $ 1.86 $ 0.37 $ 0.44
Net income per share - diluted $ 1.76 $ 0.34 $ 0.36
Shares used to calculate net income per share:
Basic 61,989 58,447 46,926
Diluted 65,228 63,289 56,617
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
40
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
Notes Retained
Common Stock Additional Receivable For Cumulative Earnings
---------------- Paid-in Common Deferred Treasury Translation (Accumulated
Shares Amount Capital Stock Compensation Stock Adjustment Deficit) Total
-------- ----- ---------- --------- -------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995 43,362 $ 43 $ 6,799 $ (3,126) $ (299) $ - $ - $ 4,712 $ 8,129
Issuance of common stock 220 - 1,321 - - - - - 1,321
Issuance of common stock 9,643 10 25 - - - - - 35
upon exercise of stock
options
Common stock offering 8,500 9 81,306 - - - - - 81,315
(Note 8)
Amortization of deferred - - - - 212 - - - 212
compensation
Income tax reduction - - 2,294 - - - - - 2,294
relating to stock
plans
Repayment of notes - - - 2,825 - - - - 2,825
receivable
Net income - - - - - - - 20,440 20,440
-------- ----- ---------- --------- -------- ------- --------- ---------- ----------
Balances, June 30, 1996 61,725 62 91,745 (301) (87) - - 25,152 116,571
Issuance of common stock 369 - 204 - - - - - 204
upon exercise of stock
options
Treasury stock purchased - - - - - (390) - - (390)
Amortization of deferred - - - - 87 - - - 87
compensation
Income tax reduction - - 1,041 - - - - - 1,041
relating to stock
plans
Repayment of notes - - - 301 - - - - 301
receivable
Translation adjustment - - - - - - (1,364) - (1,364)
Net income - - - - - - - 21,750 21,750
-------- ----- ---------- --------- -------- ------- --------- ---------- ----------
Balances, June 30, 1997 62,094 62 92,990 - - (390) (1,364) 46,902 138,200
Issuance of common stock 1,880 2 4,764 - - - - - 4,766
upon exercise of stock
options and Employee
Stock Purchase Plan
Deferred compensation - - 302 - (302) - - - -
Amortization of deferred - - - - 34 - - - 34
compensation
Income tax reduction - - 19,225 - - - - - 19,225
relating to stock
plans
Translation adjustment - - - - - - (367) - (367)
Net income - - - - - - - 115,120 115,120
======== ===== ========== ========= ======== ======= ========= ========== ==========
Balances, June 30, 1998 63,974 $ 64 $117,281 $ - $ (268) $ (390) $ (1,731) $ 162,022 $ 276,978
======== ===== ========== ========= ======== ======= ========= ========== ==========
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
41
<PAGE>
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Year Ended June 30,
------------------------------------
1998 1997 1996
-------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 115,120 $ 21,750 $ 20,440
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,650 1,706 817
Provision for doubtful accounts 8,618 804 186
Provision for obsolete inventory 2,429 317 261
Amortization of deferred compensation 34 87 212
Income tax reduction relating to stock plans 19,225 1,041 2,294
Deferred income taxes (11,572) (1,823) (1,100)
Changes in assets and liabilities:
Short-term investments (64,651) (29,838) (31,054)
Accounts receivable (95,927) (11,348) (8,422)
Inventories (5,111) (4,912) (2,693)
Prepaid expenses and other current assets (1,671) (1,904) (2,068)
Accounts payable 9,884 2,405 1,319
Accrued employee bonus 25,280 56 183
Accrued expenses 22,254 3,336 1,132
Customer deposits -- -- (1,405)
Income taxes payable 44,141 (1,633) (603)
--------- --------- ---------
Net cash provided by (used in) operating 71,703 (19,956) (20,501)
activities
--------- --------- ---------
Cash flows from investing activities:
Proceeds of investments -- -- 100
Acquisition of property, plant and equipment (53,177) (14,379) (8,390)
--------- --------- ---------
Net cash used in investing activities (53,177) (14,379) (8,290)
--------- --------- ---------
Cash flows from financing activities:
Increase in short-term borrowings 17,471 -- --
Repayment of short-term borrowings (17,471) -- --
Proceeds from issuance of common stock 4,766 204 82,671
Treasury stock purchased -- (390) --
Repayment of notes receivable -- 301 2,825
--------- --------- ---------
Net cash provided by financing activities 4,766 115 85,496
--------- --------- ---------
Effect of exchange rate changes on cash and cash (46) 18 --
equivalents
Net increase (decrease) in cash and cash equivalents 23,246 (34,202) 56,705
Cash and cash equivalents, at beginning of period 25,036 59,238 2,533
--------- --------- ---------
Cash and cash equivalents, at end of period $ 48,282 $ 25,036 $ 59,238
========= ========= =========
Supplemental cash flow information:
Income taxes paid $ 19,701 $ 14,206 $ 10,175
Supplemental disclosures of non-cash investing and
financing activities:
Transfer of available-for-sale investments to $ -- $ -- $ 1,300
trading
<FN>
The accompanying notes are an integral part of these consolidated financial statements
</FN>
</TABLE>
42
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Formation and Business of the Company
Arterial Vascular Engineering, Inc., (the "Company") was incorporated in
Delaware in July 1991 to address the rapidly expanding market for
angioplasty products. The Company designs, develops, manufactures and
markets a variety of highly specialized stent systems and percutaneous
transluminal coronary angioplasty ("PTCA") balloon catheters. The Company's
stents are used as arterial support devices in connection with balloon
angioplasty or other minimally invasive treatments of atherosclerosis (the
formation of deposits in the arteries) and to prevent abrupt closure of
vessels in higher-risk angioplasty procedures. The Company commenced
operations in 1991 and began marketing its PTCA balloon catheters in
October 1993, its coronary stent systems in October 1994, and its
peripheral stent systems in December 1996. In April 1996, the Company began
its first direct sales operation in Europe and in December 1997 began
selling directly in the United States. Currently, the Company has direct
operations in each of France, Germany, the Netherlands (to service the
Benelux countries), Switzerland, the United Kingdom and Singapore. 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash and
cash equivalents are maintained with financial institutions in the United
States, Canada and Europe. Deposits in these banks may exceed the amount of
insurance provided on such deposits. These deposits may be redeemed upon
demand and, therefore, bear minimal risk. The Company has not experienced
any losses on its deposits of cash and cash equivalents.
Investments
The Company classifies all investments as trading securities in accordance
with Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities (SFAS No. 115)." Such
investments are recorded at market value and unrealized holding gains and
losses are reflected in earnings. Market value is determined by the most
recent traded price of the security at the balance sheet date. Net realized
gains or losses are determined on the specific identification cost method.
During the year ended June 30, 1996, the Company re-evaluated its
investment policies and reclassified all investments previously held as
available-for-sale to trading securities. The reclassification did not
result in any unrealized gains or losses being included in net income.
Accounts Receivable
Accounts receivable consists of trade receivables arising from sales of
product to customers. The Company does not require collateral for its
receivables. Reserves are maintained for potential credit losses. Actual
losses may differ from the Company's estimates which could have a material
impact on the Company's future results of operations.
Inventories
Inventories are stated at the lower of cost (using the first-in, first-out
method) or market value. Provisions are made in each year for the estimated
effects of excess and obsolete inventories. Actual excess and obsolete
inventories may differ from the Company's estimates and such differences
could be material to the consolidated financial statements.
43
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization of property,
plant and equipment is computed using the straight-line method over the
estimated useful lives of the respective assets (three to forty years), or
over the shorter of the lease term or the estimated useful life of
leasehold improvements.
Construction in progress consists of expenditures incurred for the
expansion of the Company's existing facilities. Depreciation commences as
these assets are placed in service.
Purchased Technology
Purchased technology is capitalized at cost and amortized on a
straight-line basis over its useful life.
Research and Development
Research and development costs are expensed as incurred.
Revenue Recognition
The Company recognizes revenue upon shipment of product to customers
provided there is no conditional payment upon sale by the customer to other
third parties and provided there is no right of return on unsold
merchandise.
Income Taxes
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes (SFAS No. 109)." Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates in effect for the year
in which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred tax assets to
the amounts expected to be realized.
Foreign Currency Translation
The assets and liabilities, capital accounts and revenue and expense
accounts of the Company's foreign subsidiaries have been translated using
the exchange rates at the balance sheet date, historical exchange rates,
and the weighted average exchange rates for the period, respectively.
Adjustments arising from the translation of assets and liabilities held
outside the United States are recorded as a component of stockholders'
equity.
Key Suppliers
The Company relies on some outside sources for catheter components and from
time to time the Company has experienced shortages of certain supplied
materials that have significantly affected its ability to produce enough
product to satisfy market demand. The Company currently relies upon a
single supplier of the medical grade stainless steel from which the
Company's stents are machined. The Company is continually reviewing its own
capabilities and the capabilities of other potential suppliers of medical
grade stainless steel, although to date no such other suppliers have been
able to produce materials meeting the Company's quality standards. The
Company has also agreed to indemnify certain suppliers against certain
potential product liability exposure. The establishment of additional or
replacement suppliers for certain components or materials cannot be
accomplished quickly, largely due to the FDA approval system and the
complex nature of manufacturing processes employed by many suppliers. The
failure to obtain sufficient quantities of component materials on
commercially reasonable terms could have a material adverse effect on the
Company's business, financial condition and results of operations.
Net Income Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share (SFAS No.
128)". SFAS No. 128 replaced the calculation of 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 and warrants. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. Net income per
share - diluted, as reported, includes the effect of dilutive stock options
(using the treasury stock method). All net income per share amounts
presented have been restated to conform to SFAS No. 128 requirements, where
appropriate.
44
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. Summary of Significant Accounting Policies (continued)
<TABLE>
The table below sets forth the computation of basic and diluted net income
per share (in thousands, except per share data):
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income $115,120 $21,750 $20,440
----------- ----------- -----------
Denominator for net income per share - basic:
Weighted average common shares outstanding 61,989 58,447 46,926
Denominator for net income per share - diluted:
Effect of dilutive securities:
Employee stock options 2,270 1,395 4,582
Other dilutive securities 969 3,447 5,109
Weighted average common shares and dilutive
----------- ----------- -----------
securities outstanding 65,228 63,289 56,617
----------- ----------- -----------
Net income per share - basic $ 1.86 $ 0.37 $ 0.44
Net income per share - diluted $ 1.76 $ 0.34 $ 0.36
</TABLE>
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 on 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.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation (SFAS No. 123)," encourages but does not require
companies to record compensation cost for stock-based compensation plans at
fair value. The Company elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees
(APB No. 25)" and related Interpretations.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income
(SFAS No. 130)", and Statement No. 131, "Disclosure about Segments of an
Enterprise and Related Information (SFAS No. 131)." The Company is required
to adopt these statements in fiscal year 1999. SFAS No. 130 establishes new
standards for reporting and displaying comprehensive income and its
components. SFAS No. 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is expected to
have no impact on the Company's consolidated financial position, results of
operations or cash flows.
3. Financial Instruments
Revolving Credit Agreement
In August 1997, the Company signed a revolving credit agreement with a
financial institution under which the Company could borrow up to $20
million for the construction of new manufacturing facilities at its
headquarters in Santa Rosa, California, with an interest rate of LIBOR plus
one-half of one percent. In April 1998, the entire outstanding balance was
repaid, and the credit agreement was terminated. The credit facility was
secured by certain of the Company's short-term investments.
45
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. Financial Instruments (continued)
Foreign Currency Instruments
A substantial element 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 exposed to fluctuations in currencies in western Europe.
During the year ended June 30, 1997, the Company began a program of
entering into derivative financial instruments in the form of forward
exchange contracts ("forwards") 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. The Company has established a
control environment that includes policies and procedures for risk
assessment and the approval, reporting and monitoring of foreign currency
hedging activities. Forwards 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, the Company had no such
currency hedging and instruments outstanding.
4. Inventories
Inventories comprise (in thousands):
June 30,
------------------------
1998 1997
----------- ----------
Raw materials $3,346 $ 925
Work in process 2,554 3,044
Finished goods 3,624 3,333
----------- ----------
$9,524 $7,302
=========== ==========
5. Property, Plant and Equipment
Property, plant and equipment comprise (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Land $11,232 $ 2,891
Buildings and improvements 34,104 8,590
Manufacturing equipment 15,425 5,486
Computers and equipment 4,582 2,218
Furniture and fixtures 3,146 1,737
Leasehold improvements 3,342 872
----------- ----------
71,831 21,794
Less accumulated depreciation and amortization (6,311) (2,575)
----------- ----------
65,520 19,219
Construction in progress 5,575 2,540
----------- ----------
$71,095 $21,759
=========== ==========
</TABLE>
46
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. Accrued Expenses
Accrued expenses comprise (in thousands):
June 30,
------------------------
1998 1997
----------- -----------
Payroll and related benefits $14,451 $1,874
Professional and other fees 5,377 1,089
Clinical trial costs 3,792 432
Sales taxes 2,463 1,160
Other accrued expenses 1,447 802
----------- -----------
$27,530 $5,357
=========== ===========
7. Commitments and Contingencies
Commitments
The Company leases its facilities under operating lease agreements expiring
in 1998 through 2007. Total rent expense under all operating leases was
$369,000, $898,000 and $1,345,000 for the years ended June 30, 1996, 1997
and 1998, respectively. In addition, the Company leases vehicles for
certain of its European staff.
The future minimum annual lease payments as of June 30, 1998 under
operating leases are as follows:
Year Ending June 30, (In thousands)
--------------------
1999 $1,385
2000 1,086
2001 733
2002 363
2003 194
Thereafter 254
==========
$4,015
==========
The Company has commitments under various construction contracts totaling
approximately $19.6 million.
47
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Commitments and Contingencies (continued)
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.
On or about May 28, 1996, 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, filed a lawsuit in the District
Court of Dallas County, Texas. The suit names as defendants the Company,
John D. Miller, a director, officer and principal stockholder of the
Company, Bradly A. Jendersee, a principal stockholder and a former director
and officer of the Company, Dr. Simon H. Stertzer, a stockholder and former
director of the Company, and Dr. Gerald Dorros, a stockholder of the
Company. The plaintiffs allege multiple claims for relief, including (but
not limited to) 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 $395 million in 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.
The defendants, including the Company, have filed counterclaims against the
plaintiffs. The defendants allege claims against Mr. Hidalgo for, among
other things, 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
defendants allege claims against Dr. Anwar for intentional and negligent
interference with contract, breach of contract, defamation and business
disparagement, fraud, equitable estoppel and declaratory relief based on
comparative indemnity, contribution, and absence of fraud. The defendants
also added Mrs. Anwar and Mrs. Hidalgo as involuntary plaintiffs, seeking a
declaration of Mrs. Anwar's ownership interest in Dr. Anwar's shares and
Mrs. Hidalgo's interest in Mr. Hidalgo's shares. A trial date has been set
for October 19, 1998.
The Company believes it has meritorious defenses to the claims alleged by
the plaintiffs, and that it has meritorious claims against 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.
The Company has agreed to indemnify each of the individuals named as
defendants in the lawsuits against the Company relating to the ESS
transaction.
U.S. Patent Litigation. Two of the Company's competitors have filed claims
against the Company with respect to their alleged intellectual property
rights. The Company has filed for declaratory and injunctive relief in
connection with one of the competitors' claims and for damages and
declaratory and injunctive relief in connection with the other competitor's
claim.
On October 21, 1997, the Company received notice that it had been named as
an additional defendant, along with Boston Scientific Corporation and
SCIMED Life Systems, Inc., in a lawsuit originally filed by Cordis
Corporation ("Cordis") against Guidant Corporation and Advanced
Cardiovascular Systems, Inc. in federal district court in Delaware. Cordis
alleges, among other things, that the sale by the Company of its stents in
the United States would infringe on certain patents licensed by Cordis. The
complaint seeks declaratory and injunctive relief, unspecified damages,
attorneys' fees and other relief. On November 6, 1997, the Company filed a
motion to dismiss Cordis' complaint. On December 29, 1997, Cordis filed a
motion for preliminary injunctive relief, but on July 20, 1998, Cordis
withdrew such motion.
48
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Commitments and Contingencies (continued)
On December 24, 1997, the Company received notice that Advanced
Cardiovascular Systems, Inc. ("ACS"), a subsidiary of Guidant Corporation,
had filed a lawsuit against the Company in federal district court in San
Jose, California. ACS alleges, among other things, that the Company is
selling in the United States stents that infringe on certain patents of
ACS. 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. 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. Each of the
complaints seeks injunctive relief, unspecified damages, attorneys' fees
and other relief. On June 1, 1998, the federal district court in San Jose
granted the Company's motion to transfer each of the lawsuits to the
federal district court in Delaware.
On December 26, 1997, the Company filed an action against Johnson &
Johnson, Cordis and Expandable Grafts Partnership in federal district court
in Delaware. The action seeks (i) a declaration that certain patents are
invalid, void, unenforceable and not infringed by the Company's activities
with respect to its stent systems in the United States, (ii) an injunction
prohibiting the defendants from asserting infringement of such patents
against the Company and (iii) a declaration that the defendants have
violated certain antitrust laws.
On February 18, 1998, the Company filed a lawsuit against ACS in federal
district court in Delaware, alleging infringement of two patents of the
Company, breach of contract, misappropriation of trade secrets, unfair
competition, and conversion. The complaint seeks unspecified damages,
attorney's fees and other relief, as well as a declaration that certain
patents of ACS are invalid, void and unenforceable.
On April 24, 1998, Johnson & Johnson Inc. and Expandable Grafts Partnership
filed an action against the Company in the Federal Court of Canada, Trial
Division in Toronto. The claim alleges that the Company is selling certain
stents in Canada that infringe a Canadian patent of the plaintiffs. The
claim seeks declaratory and injunctive relief, unspecified damages,
attorney's fees and other relief.
On June 15, 1998, C.R. Bard, Inc. ("Bard") filed a writ of summons against
the Company in the District Court of The Hague, the Netherlands. The writ
alleges that the Company is selling in the Netherlands certain PTCA
catheters that infringe a European patent of Bard. The writ seeks
injunctive relief, civil fines, unspecified damages and costs. The patent
in question will be transferred to the Company if the Bard Cath Lab
Acquisition is consummated.
On August 13, 1998, the Company filed a lawsuit against Boston Scientific
Corporation and its subsidiary SCIMED Life Systems, Inc. in federal
district court in Delaware, alleging infringement of two patents of the
Company. The complaint seeks injunctive relief, unspecified damages,
attorneys' fees and other relief.
The Company believes that it has meritorious defenses to the claims alleged
by the plaintiffs, and meritorious claims against the defendants, in the
aforementioned actions. However, no assurance can be given as to the
outcome of the actions. The inability of the Company to prevail in the
actions, 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. In the patent
suits that have been and from time to time will be filed by the Company
against its competitors, counterclaims by the defendants with respect to
the validity and enforceability of the Company's patents are likely and, if
successful, such counterclaims could have a material adverse effect on the
Company's business, financial condition and results of operations.
Claims of Terminated Distributors. In connection with the Company's
termination of certain distributor relationships, several of such
distributors have filed 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 $5.2
million using current exchange rates), of which BF30,000,000 (approximately
$825,000) is sought as a provisional payment. A pleadings hearing is
scheduled for October 5, 1998.
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
49
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Commitments and Contingencies (continued)
compensation for breach of an alleged exclusive distribution agreement for
an indeterminate period between the parties. The action included a claim
for compensation equal to the total value of such distributor's business,
which the distributor valued at FF400,000,000 (approximately $67 million
using current exchange rates). 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. On February 2, 1998,
the Tribunal ordered the distributor to pay the accounts receivable sought
by the Company and also ordered the Company to repurchase the distributor's
remaining inventory, tentatively valued at $921,500. On February 10, 1997,
the distributor filed an appeal of the Tribunal's decision of September 23,
1996 with the Court of Appeals of Colmar, and the parties have exchanged
briefs in the appellate proceeding. A final procedural hearing is scheduled
for September 18, 1998.
The Company has consulted with local counsel in Belgium and France and
believes that the termination of each of the distributor relationships was
lawful. The Company understands that under the laws of Belgium, under
certain circumstances, certain indemnities may be claimed by distributors
for insufficient notice of termination and/or goodwill compensation. No
assurance can be given as to the outcome of any pending or threatened
litigation.
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.
8. Stockholders' Equity
Common and Preferred Stock
During the year ended June 30, 1995, the Company entered into a Restricted
Stock Purchase Agreement with certain directors and other individuals. A
total of 6,877,000 shares were issued at fair market value under this
agreement at $0.4545 per share. All purchases of stock were financed by
issuance of notes accumulating interest at 8% per annum until repaid. The
notes were fully repaid at June 30, 1997. All shares are subject to
repurchase by the Company pursuant to vesting over periods ranging from one
to five years or upon termination of employment. At June 30, 1998,
1,183,000 shares were subject to repurchase.
In January 1996, the Board of Directors approved the Company's Amended and
Restated Certificate of Incorporation increasing the authorized capital
stock of the Company to 50,500,000 and reducing the par value of the
capital stock to $0.001 from $0.01.
In February 1996, the Company amended its Certificate of Incorporation to
increase the authorized capital stock of the Company to 105,000,000 shares.
One hundred million (100,000,000) shares are designated common stock with a
par value of $0.001, and five million (5,000,000) shares are designated
preferred stock with a par value of $0.001.
In April 1996, the Company completed an initial public offering and issued
8,500,000 shares of common stock, raising net proceeds of approximately $81
million.
In February 1997 the Company's Board of Directors adopted a stockholder
rights plan, commonly referred to as a "poison pill," that is intended to
deter hostile or coercive attempts to acquire the Company. In May 1998 the
stockholder rights plan was amended to account for the recent increase in
the market price of the Company's common stock. The stockholder rights plan
enables stockholders to acquire shares of the Company's common stock, or
the common stock of an acquiror, at a substantial discount to the public
market price should any person or group acquire more than 15% of the
Company's common stock without the approval of the Board of Directors under
certain circumstances. The Company has reserved 1,000,000 shares of Series
A Junior Participating Preferred Stock for issuance in connection with the
stockholder rights plan. The Company is authorized to issue an additional
4,000,000 shares of preferred stock in one or more series with terms to be
fixed by the Board of Directors without a stockholder vote.
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.
50
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Stockholders' Equity (continued)
The repurchases were made from time to time on the open market at
prevailing market prices. In November 1997 the program was discontinued by
the Board of Directors. As of the termination of the program, the Company
had repurchased 60,000 shares of its common stock at an aggregate cost of
$390,000.
Employee Stock Purchase Plan
In July 1997, the Board of Directors adopted the 1997 Employee Stock
Purchase Plan (the "ESPP") under which 3,000,000 shares of common stock are
reserved for issuance under the terms of the ESPP. The ESPP permits
eligible employees to purchase common stock through payroll deductions
(which cannot exceed 20% of the employees eligible compensation) at 85% of
its fair market value on specified dates. Each offering under the ESPP is
for a period of twenty-four months, and each offering period consists of
four purchase periods. Approximately 70% of eligible employees currently
participate in the ESPP. At June 30, 1998, a total of 73,000 shares had
been issued at an aggregate purchase price of $1,222,000 and 2,927,000
shares remain reserved for future issuance under the ESPP.
Stock Option Plans
From 1991 to 1996, the Board of Directors granted non-statutory stock
options allowing employees, directors, and consultants of the Company to
purchase shares of the Company's common stock. Stock option grants were
awarded at the discretion of the Board of Directors and generally vest over
a period of three years from the date of the grant, and unexercised options
expire upon termination of employment with the Company or after the
expiration of five years from the date of the grant. No shares of common
stock under stock options granted from 1991 to 1996 are subject to
repurchase. The difference between the exercise price and fair market value
of the Company's common stock at the date of issue of certain of these
non-statutory stock options, totaling $902,000 has been recorded as
deferred compensation and a component of stockholders' equity. The entire
compensation of $902,000 has been recognized as an expense through June 30,
1997.
In January 1996, the Company adopted the 1996 Equity Incentive Plan (the
"Incentive Plan") under which 1,600,000 shares of common stock are reserved
for issuance upon exercise of options granted to employees, officers and
consultants of the Company. In December 1996, the Company's stockholders
approved an increase in the number of shares of common stock reserved for
issue under the Incentive Plan from 1,600,000 to 3,000,000. In October
1997, the Company's stockholders approved an increase in the number of
shares of common stock reserved for issue under the Incentive Plan from
3,000,000 to 5,000,000. If any stock award granted under the Incentive Plan
or any stock option granted pursuant to the Company's previous stock option
program shall for any reason expire or otherwise terminate, in whole or in
part, without having been exercised in full, the stock not acquired shall
revert to and again become issuable under the Incentive Plan. Options
granted to employees and consultants after January 1996 are made under the
terms of the Incentive Plan. The Incentive Plan is administered by the
Board of Directors or a committee appointed by the Board, which determines
recipients and types of awards to be granted, including the exercise price,
number of shares subject to the award and the exercisability thereof. The
terms of stock options granted under the Incentive Plan generally may not
exceed 10 years. Restricted stock purchase awards granted under the
Incentive Plan may be granted pursuant to a repurchase option in favor of
the Company in accordance with a service vesting schedule determined by the
Board. Stock bonuses may be awarded in consideration for past services
without a purchase payment. Stock appreciation rights authorized for
issuance under the Incentive Plan may be tandem stock appreciation rights,
concurrent stock appreciation rights or independent stock appreciation
rights. To date, no restricted stock awards, stock bonuses or stock
appreciation rights have been granted under the Incentive Plan. The
Incentive Plan will terminate in January 2006, unless terminated sooner by
the Board of Directors.
In January 1996, the Board adopted the 1996 Non-Employee Directors' Stock
Option Plan (the "Directors' Plan") to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of the
Company. The Directors' Plan is administered by the Board, unless the Board
delegates administration to a committee of disinterested directors. The
maximum number of shares of common stock that may be issued pursuant to
options granted under the Directors' Plan is 200,000. Pursuant to the terms
of the Directors' Plan, each person serving as a director of the Company
and who is not an employee of the Company (a "Non-Employee Director"), on
the effective date of the initial public offering of the Company's common
stock, or the date such person first becomes a Non-Employee Director will
then automatically be granted an option to purchase 12,000 shares of common
stock. Each person elected to be a Non-Employee Director and who is not
elected for the first time, on the date of the annual meeting of
stockholders each year following the first registration of any equity
securities under Section 12 of the Securities Exchange Act of 1934, will
automatically
51
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Stockholders' Equity (continued)
be granted an option to purchase 4,000 shares of common stock. Options
under the Directors' Plan will vest in 4 annual installments commencing on
the date one year after the grant date. The exercise price of options
granted under the Directors' Plan must equal or exceed the fair market
value of the common stock granted on the date of grant. No option granted
under the Directors' Plan may be exercised after the expiration of ten
years from the date it was granted.
<TABLE>
A summary of the activity under the stock option plans is as follows (in
thousands, except per share data):
<CAPTION>
Reserved Optioned Shares
but --------------------------------------------------------
Unoptioned Number of Price Weighted Average
Shares Shares Per Share Exercise Price
---------- ---------- ---------------------- ----------------
<S> <C> <C> <C> <C>
Balances, June 30, 1995 4,338 11,644 $ 0.0009-$ 0.4545 $ 0.0152
Shares reserved - 1996 plans 1,800 - - -
1991 option plan termination (4,016) - - -
Options exercised - (9,642) $ 0.0009-$ 0.0331 $ 0.0037
Options granted (982) 982 $ 4.7728-$17.5625 $ 8.5740
Options canceled 80 (80) $ 0.0009-$17.5625 $ 4.5808
---------- ----------
Balances, June 30, 1996 1,220 2,904 $ 0.0009-$17.5625 $ 2.8265
Shares reserved - 1996 plan 1,400 - - -
Options exercised - (370) $ 0.0009-$10.5000 $ 0.5375
Options granted (1,796) 1,796 $ 6.5000-$12.4375 $ 7.5935
Options canceled 148 (148) $ 6.5000-$11.3750 $ 8.2575
---------- ----------
Balances, June 30, 1997 972 4,182 $ 0.0009-$17.5625 $ 4.8220
Shares reserved - 1996 plan 2,000 - - -
Options exercised - (1,808) $ 0.0009-$29.2500 $ 1.9609
Options granted (1,859) 1,859 $12.0000-$41.5000 $27.3692
Options canceled 229 (229) $ 0.4545-$29.2500 $ 7.3151
1991 options canceled & terminated (66) - $ 0.4545 $ 0.4545
---------- ----------
Balances, June 30, 1998 1,276 4,004 $ 0.0009-$41.5000 $16.5026
---------- ----------
</TABLE>
<TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 1998 (in thousands, except per share
data):
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of of Remaining Exercise of Exercise
Exercise Prices Shares Contractual Price Shares Price
--------------------- --------- ------------ ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.0009 -$ 4.7728 378 4.9 $ 2.705 224 $ 2.132
$ 6.0000 -$ 6.5000 887 8.6 $ 6.480 149 $ 6.460
$ 6.6250 -$12.4375 896 8.3 $ 9.816 233 $ 9.965
$15.7500 -$27.1250 998 9.2 $ 22.351 31 $ 22.660
$27.6875 -$41.5000 845 9.6 $ 33.375 12 $ 29.267
--------------------- --------- ------------ ------------ --------- -----------
$ 0.0009 -$41.5000 4,004 8.5 $ 16.503 649 $ 7.428
===================== ========= ============ ============ ========= ===========
</TABLE>
At June 30, 1996, 1997 and 1998, options to purchase 1,489,000, 1,631,000
and 649,000 shares of common stock were exercisable at weighted average
exercise prices of $0.02, $1.41 and $7.43, respectively.
The Company has elected to continue to follow Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees (APB No. 25)" and
related interpretations in accounting for its employee stock options
because the alternative fair value accounting prescribed under Statement of
Financial Accounting Standards
52
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Stockholders' Equity (continued)
No. 123, "Accounting for Stock-Based Compensation (SFAS No. 123)" requires
the use of option valuation models that were not developed for use in
valuing employee stock options. Under APB No. 25, no compensation expense
is recognized because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant.
Pro forma information regarding net income and net income per share has
been determined as if the Company had accounted for its employee stock
options granted subsequent to June 30, 1995 under the fair value method
prescribed by SFAS No. 123. The fair value for these options was estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions for the years ended June 30, 1996,
1997 and 1998: expected dividend yield of 0%, expected stock price
volatility of 55% risk free interest rates ranging from 3.50 percent to
7.75 percent, and the expected life of options of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
The weighted average fair value of options granted in the years ended June
30, 1996, 1997 and 1998 was $1.78, $2.74 and $9.99 per share respectively.
The pro forma effect on net income for the years ended June 30, 1996, 1997
and 1998 is not representative of the pro forma effect on net income in
future periods because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996 and the
compensation expense that will be recognized in future years as the options
become exercisable.
Pro forma information regarding net income and net income per share has
been determined as if the Company had accounted for its Employee Stock
Purchase Plan under the fair value method prescribed by SFAS No. 123. The
fair value for the ESPP was estimated using a Black-Scholes option pricing
model with the following assumptions for the year ended June 30, 1998:
expected dividend yield of 0%, expected stock price volatility of 55%, an
expected term of 1.4 years, and risk free interest rates ranging from 5.49
percent to 6.00 percent. The weighted-average fair value of the purchase
rights granted in the year ended June 30, 1998 was $9.59.
For the purpose of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period and the
estimated fair value of employee stock purchase shares is amortized to
expense over the twenty-four months in each offering period. The Company's
pro forma information follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Net income - as reported $ 115,120 $ 21,750 $ 20,440
Net income - pro forma $ 108,523 $ 20,698 $ 20,424
Net income per share - basic - as reported $ 1.86 $ 0.37 $ 0.44
Net income per share - diluted - as reported $ 1.76 $ 0.34 $ 0.36
Net income per share - basic - pro forma $ 1.75 $ 0.35 $ 0.44
Net income per share - diluted - pro forma $ 1.66 $ 0.33 $ 0.36
</TABLE>
53
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes
<TABLE>
The components of income before provision for income taxes are as follows
(in thousands):
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
United States $184,640 $31,522 $31,352
Foreign 1,606 1,939 (146)
------------- ------------ ------------
Income before provision for $186,246 $33,461 $31,206
income taxes
============= ============ ============
</TABLE>
<TABLE>
The provision for income taxes is as follows (in thousands):
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Federal $69,148 $11,611 $10,756
State 12,892 1,000 1,006
Foreign 658 923 104
------------- ------------ ------------
82,698 13,534 11,866
Deferred taxes (11,572) (1,823) (1,100)
------------- ------------ ------------
$71,126 $11,711 $10,766
============= ============ ============
</TABLE>
<TABLE>
The Company's effective tax rate differs from the U.S. federal statutory rate as follows:
<CAPTION>
Year Ended June 30,
----------------------------------------------
1998 1997 1996
------------- ------------ ------------
<S> <C> <C> <C>
Federal tax at statutory rate 35.0% 35.0% 35.0%
State tax, net of federal benefit 4.2 1.7 2.2
FSC benefit (1.0) (3.6) (4.6)
Other - 1.9 1.9
------------- ------------ ------------
38.2% 35.0% 34.5%
============= ============ ============
</TABLE>
54
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. Income Taxes (continued)
Significant components of the Company's deferred tax assets, which are
related primarily to federal temporary differences, are as follows (in
thousands):
June 30,
--------------------------
1998 1997
------------ ------------
Foreign deferred profits and losses $ 113 $ 594
Depreciation and amortization 896 1,598
State taxes, net of federal benefit 4,579 300
Reserves and accruals 8,215 718
Deferred compensation 262 218
Inventories 1,463 517
Other 55 66
------------ ------------
$ 15,583 $ 4,011
============ ============
10. Employee Agreements
In March 1995 and February 1996, the Company entered into employee
agreements with certain key officers and directors over terms of four to
five years. Employees currently under contract have an aggregate annual
compensation of $980,000 and have been granted 4,805,000 options to
purchase common stock of the Company at exercise prices of between $0.0009
and $6.625 per share of which 4,470,000 options had been exercised at June
30, 1998. The Company may terminate any agreement for cause, and the
compensation and benefits under the employee agreements shall cease
effective upon date of termination. If an agreement is terminated by reason
of disability, the employee's compensation and benefits shall continue for
the first twelve weeks of the incapacity.
In February 1996, the Company entered into certain amendments to the
employee agreements of Bradly A. Jendersee and Robert D. Lashinski, former
executive officers and directors of the Company. Pursuant to such
amendments, each of Messrs. Jendersee and Lashinski agreed to the
elimination of provisions entitling them to certain royalties from the sale
or license by the Company of products covered by patents for which such
persons were named as inventors. In connection with such amendments, the
Company agreed to pay Messrs. Jendersee and Lashinski an aggregate of
approximately $3.9 million in cash and issue to them an aggregate of
110,000 shares of Common stock. Such payments to Messrs. Jendersee and
Lashinski resulted in the recognition by the Company, in the year ended
June 30, 1996, a one-time compensation expense of $5.2 million.
11. Employee Benefit Plan
The Company maintains a 401(k) retirement plan (the "Plan"). Employees may
defer a portion of their salary up to the maximum allowed under IRS rules.
The Company has the discretion to make contributions to the Plan. For the
years ended June 30, 1996, 1997, and 1998 the Company contributed $66,000,
$88,000 and $0 to the Plan, respectively.
55
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. Geographic Area Information and Concentration of Credit and Other Risks
The Company operates in the medical products industry sector and currently
markets and sells a significant proportion of its products internationally
in Europe and Asia. Approximately 6% of total consolidated assets are
located outside of the United States. Over 19% of the Company's revenues
for the year ended June 30, 1998 and over 45% of the fiscal 1997 revenues
were derived from export sales to non-affiliated international
distributors. For the year ended June 30, 1998, the Company had sales to
one customer representing 11% of net sales. The Company performs ongoing
credit evaluations of its customers and provides an allowance for expected
losses. Sales to both distributors and directly to hospitals and clinics as
a percentage of total net sales by geographical region are as follows:
Year Ended June 30,
------------------------------------------
1998 1997 1996
----------- ----------- -----------
USA 65% - -
Europe 19% 75% 76%
Asia 12% 9% 16%
Rest of World 4% 16% 8%
100% 100% 100%
=========== =========== ===========
13. Subsequent Events
On April 10, 1998, the Company entered into a definitive agreement to
acquire World Medical Manufacturing Corporation. 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, in a transaction to be
accounted for as a purchase. 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 in autumn 1998 and is subject to the approval of shareholders of
World Medical and certain other conditions.
On July 9, 1998, the Company entered into a definitive agreement with
respect to the Bard Coronary Cath Lab business. The transaction is
structured as an acquisition of the assets and certain liabilities of Bard
related to, and the acquisition of stock of certain subsidiaries of Bard
(the "Bard Subsidiaries") engaged in the coronary catheter lab business of
Bard (the "Business"), and is to be accounted for as a purchase. Pursuant
to the agreement, the Company will not acquire any cash or accounts
receivable of the Business in consideration of the $550 million purchase
price, but will purchase the trade accounts receivable of the Bard
Subsidiaries for an amount equal to 95% of the book value of such
receivables as of the closing of the transaction after deducting reserves
for doubtful accounts. The product offerings of the Business include
coronary PTCA balloon catheters (including perfusion rapid exchange
catheters), guidewires, guide catheters, coronary diagnostic catheters and
guidewires; introducers and vessel closure devices; coronary stents; and
various other coronary components and accessories. In 1997, Bard's coronary
catheter lab business reported revenues of approximately $215 million. 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 in
the autumn of 1998. When closed, these acquisitions are expected to
substantially increase the Company's personnel, facilities and product
offerings and to enable the Company to participate in new areas of
interventional cardiology through a wider product portfolio and access to
new markets and customers. However, there can be no assurance that these
acquisitions will be successfully consummated or, if consummated, that the
Company will successfully participate in new product areas subject to
obtaining antitrust clearance in Ireland and certain other closing
conditions.
The Company expects to enter into a bank credit agreement for $600 million
in senior secured credit facilities in order, among other things, to
finance substantially all of the Bard Cath Lab Acquisition. The financing
is expected to be subject to conditions customary for transactions of this
nature.
56
<PAGE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. Quarterly Financial Data (unaudited, in thousands except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ---------- ----------- ----------
Net sales
1998 $26,263 $38,303 $141,203 $181,877
1997 18,568 18,228 20,402 22,222
Gross profit
1998 20,774 30,647 113,657 149,878
1997 15,657 14,495 15,806 17,245
Net income
1998 5,710 7,754 42,242 59,415
1997 7,765 4,606 4,633 4,746
Net income per share
1998 - Basic 0.10 0.12 0.67 0.95
1998 - Diluted 0.09 0.12 0.64 0.90
1997 - Basic 0.13 0.08 0.07 0.08
1997 - Diluted 0.12 0.07 0.07 0.07
57
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
ON FINANCIAL STATEMENT SCHEDULE
We have audited the consolidated financial statements of Arterial
Vascular Engineering, Inc. and Subsidiaries as of June 30, 1998 and 1997, and
for each of the three years in the period ended June 30, 1998, and have issued
our report thereon dated July 17, 1998 (included elsewhere in this Annual Report
on Form 10-K/A). Our audits also included the financial statement schedule
listed in Item 14(a) of this Annual Report on Form 10-K/A. This schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits.
In our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Palo Alto, California
July 17, 1998
58
<PAGE>
SCHEDULE II
<TABLE>
ARTERIAL VASCULAR ENGINEERING, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and End of
Description the Period Expenses the Period
----------- ---------- ---------- ----------
<S> <C> <C> <C>
Balances for the year ended June 30, 1996:
Allowance for doubtful accounts receivable $ 104 $ 186 $ 290
Allowance for obsolete inventory 60 261 321
Balances for the year ended June 30, 1997:
Allowance for doubtful accounts receivable 290 790 1,080
Allowance for obsolete inventory 321 314 635
Balances for the year ended June 30, 1998:
Allowance for doubtful accounts receivable 1,080 8,607 9,687
Allowance for obsolete inventory 635 2,621 3,256
</TABLE>
59
<PAGE>
STANDARD SUBLEASE
American Industrial Real Estate Association
[LOGO]
1. Parties. This Sublease, dated, for reference purposes only, August 10, 1998,
is made by and between Verticom, Inc. ("Sublessor") and Arterial Vascular
Engineering, Inc. ("Sublessee").
2. Premises. Sublessor hereby subleases to Sublessee and Sublessee hereby
subleases from Sublessor for the term, at the rental, and upon all of the
conditions set forth herein, that certain real property, including all
improvements therein, and commonly known by the street address of 1201 Corporate
Center Parkway, Santa Rosa located in the County of Sonoma, State of California
and generally described as (describe briefly the nature of the property)
approximately 35,490 s.f. of a 47,938 s.f. building including both hazardous
material shed and tank farm known as building B in the complex A.P. #035-133-019
as shown on Exhibit A. Sublessor shall be allowed use and access to tank farm to
store nitrogen generator, bulk CO(2) storage tank, air compressor shared by
Sublessee and used and unused bottle gas and fluid storage bins.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
("Premises").
3. Term.
3.1 Term. The term of this Sublease shall be for forty-eight (48) months
commencing on November 1, 1998 and ending on October 31, 2002 unless sooner
terminated pursuant to any provision hereof.
3.21 [Paragraph omitted]
4. Rent.
4.1 Base Rent. Sublessee shall pay to Sublessor as base rent for the Premises
equal monthly payments of $28,392.00 in advance, on the first day of each month
of the term hereof. Sublessee shall pay Sublessor upon the execution hereof
$28,392.00 (Twenty Eight Thousand Three Hundred Ninety Two) as base rent for
November. See Addendum No. 1, Paragraph 7.
- --------------------------------------------------------------------------------
Base Rent for any period during the term hereof which is for less than one month
shall be a prorata portion of the monthly installment.
4.2 Rent Defined. All monetary obligations of Sublessee to Sublessor under
the terms of this Sublease (except for the Security Deposit) are deemed to be
rent ("Rent"). Rent shall be payable in lawful money of the United States to
Sublessor at the address stated herein or to such other persons or at such other
places as Sublessor may designate in writing.
5. Security Deposit. Sublessee has deposited with Sublessor $12,500 as security
for Sublessee's faithful performance of Sublessee's obligations hereunder. The
rights and obligations of Sublessor and Sublessee as to said Security Deposit
shall be as set forth in Paragraph 5 of the Master Lease (as modified by
Paragraph 7.3 of this Sublease).
6. Use.
6.1 Agreed Use. The Premises shall be used and occupied only for research
and development, manufacturing, general office and for no other purpose.
6.2 Compliance. Sublessor warrants that the improvements on the Premises
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances ("Applicable Requirements") in effect
on the commencement date. Said warranty does not apply to the use to which
Sublessee will put the Premises or to any alterations or utility installations
made or to be made by Sublessee. NOTE: Sublessee is responsible for determining
whether or not the zoning is appropriate for its intended use, and acknowledges
that past uses of the Premises may no longer be allowed. If the Premises do not
comply with said warranty, or in the event that the Applicable Requirements are
hereafter changed, the rights and obligations of Sublessor and Sublessee shall
be as provided in Paragraph 6.2 of the Master Lease (See Addendum #1 Paragraph
7.).
6.3 Acceptance of Premises and Lessee. Sublessee acknowledges that:
(a) it has been advised by Brokers to satisfy itself with respect to
the condition of the Premises (including but not limited to the electrical, HVAC
and fire sprinkler systems, security, environmental aspects, and compliance with
Applicable Requirements), and their suitability for Sublessee's intended use,
(b) Sublessee has made such investigation as it deems necessary with
reference to such matters and assumes all responsibility therefor as the same
relate to its occupancy of the Premises, and
(c) neither Sublessor, Sublessor's agents, nor any Broker has made any
oral or written representations or warranties with respect to said matters other
than as set forth in this Sublease.
7. Master Lease
7.1 Sublessor is the lessee of the Premises by virtue of a lease,
hereinafter the "Master Lease", a copy of which is attached hereto marked
Exhibit 1, wherein Santa Rosa Corporate Center Associates is the lessor,
hereinafter the "Master Lessor".
7.2 This Sublease is and shall be at all times subject and subordinate to
the Master Lease.
7.3 The terms, conditions and respective obligations of Sublessor and
Sublessee to each other under this Sublease shall be the terms and conditions of
the Master Lease except for those provisions of the Master Lease which are
directly contradicted by this Sublease in which event the terms of this Sublease
document shall control over the Master Lease. Therefore, for the purposes of
this Sublease, wherever in the Master Lease the word is used it shall be deemed
to mean the Sublessor herein all references to "this Lease" shall mean this
Sublease, and all references to the "Premises" shall mean the subleased
Premises, and wherever in the Master Lease the word "Tenant" is used it shall be
deemed to mean the Sublessee herein.
7.4 During the term of this Sublease and for all periods subsequent for
obligations which have arisen prior to the termination of this Sublease,
Sublessee does hereby expressly assume and agree to perform and comply with, for
the benefit of Sublessor and Master Lessor, each, and every obligation of
Sublessor under the Master Lease except for the following paragraphs which are
excluded therefrom: Paragraph 3.1 (Paragraph 4.1 rentable payment amount only is
deleted.*
<PAGE>
7.5 The obligations that Sublessee has assumed under paragraph 7.4 hereof
are hereinafter referred to as the "Sublessee's Assumed Obligations". The
obligations that Sublessee has not assumed under paragraph 7.4 hereof are
hereinafter referred to as the "Sublessor's Remaining Obligations".
7.6 Sublessee shall hold Sublessor free and harmless from all liability,
judgments, costs, damages, claims or demands, including reasonable attorneys
fees, arising out of Sublessee's failure to comply with or perform Sublessee's
Assumed Obligations.
7.7 Sublessor agrees to maintain the Master Lease during the entire term of
this Sublease, subject, however, to any earlier termination of the Master Lease
without the fault of the Sublessor, and to comply with or perform Sublessor's
Remaining Obligations and to hold Sublessee free and harmless of and from all
liability, judgments, costs, damages, claims or demands arising out of
Sublessor's failure to comply with or perform Sublessor's Remaining Obligations.
7.8 Sublessor represents to Sublessee that the Master Lease is in full
force and effect and that no default exists on the part of any party to the
Master Lease. See Addendum #1 Paragraph 20.
8. Assignment of Sublease and Default.
8.1 Sublessor hereby assigns and transfers to Master Lessor the Sublessor's
interest in this Sublease, subject however to the provisions of Paragraph 8.2
hereof. Sublessor hereby authorizes and directs Sublessee to pay to Master
Lessor the Rent due and to become due under the Sublease.
8.2 [Paragraph Omitted}
8.3 [Paragraph Omitted]
8.4 No changes or modifications shall be made to this Sublease without the
consent of Master Lessor.
9. Consent of Master Lessor.
9.1 In the event that the Master Lease requires that Sublessor obtain the
consent of Master Lessor to any subletting by Sublessor then, this Sublease
shall not be effective unless, within ten days of the date hereof, Master Lessor
signs this Sublease thereby giving its consent to this Subletting.
9.2 [Paragraph omitted]
9.3 In the event that Master Lessor does give such consent then:
(a) Such consent will not release Sublessor of its obligations or alter
the primary liability of Sublessor to pay the Rent and perform and comply with
all of the obligations of Sublessor to be performed under the Master Lease.
(b) The acceptance of Rent by Master Lessor from Sublessee or anyone
else liable under the Master Lease shall not be deemed a waiver by Master Lessor
of any provisions of the Master Lease.
(c) The consent to this Sublease shall not constitute a consent to any
subsequent subletting or assignment.
(d) In the event of any Default of Sublessor under the Master Lease,
Master Lessor may proceed directly against Sublessor, any guarantors or anyone
else liable under the Master Lease or this Sublease without first exhausting
Master Lessor's remedies against any other person or entity liable thereon to
Master Lessor.
(e) Master Lessor may consent to subsequent sublettings and assignments
of the Master Lease or this Sublease or any amendments or modifications thereto
without notifying Sublessor or any one else liable under the Master Lease and
without obtaining their consent and such action shall not relieve such persons
from liability.
(f) In the event that Sublessor shall default in its obligations under
the Master Lease, then Sublessee shall attorn to Master Lessor in which event
Master Lessor shall undertake the obligations of Sublessor under this Sublease
from the time of the exercise of said option to termination of this Sublease but
Master Lessor shall not be liable for any prepaid Rent nor any Security Deposit
paid by Sublessee, nor shall Master Lessor be liable for any other Defaults of
the Sublessor under the Sublease. See Exhibit G.
9.4 The signatures of the Master Lessor and any Guarantors of Sublessor at
the end of this document shall constitute their consent to the terms of this
Sublease.
9.5 Master Lessor acknowledges that, to the best of Master Lessor's
knowledge, no default presently exists under the Master Lease of obligations to
be performed by Sublessor and that the Master Lease is in full force and effect.
9.6 In the event that Sublessor defaults under its obligations to be
performed under the Master Lease by Sublessor, Master Lessor agrees to deliver
to Sublessee a copy of any such notice of default. Sublessee shall have the
right to cure any default of Sublessor described in any notice of default within
ten days after service of such notice of default on Sublessee. If such default
is cured by Sublessee then Sublessee shall have the right of reimbursement and
offset from and against Sublessor.
10. Brokers Fee.
10.1 Upon execution hereof by all parties, Sublessor shall pay to Keegan &
Coppin Company Inc., a licensed real estate broker, ("Broker"), a fee as set
forth in a separate agreement between Sublessor and Broker, or in the event
there is no separate agreement the sum of $_____ per listing agreement for
brokerage services rendered by Broker to Sublessor in this transaction.
10.2 [Paragraph omitted]
10.3 [Paragraph omitted]
10.4 Any fee due from Sublessor hereunder shall be due and payable upon the
execution of any new lease.
10.5 Any transferee of Sublessor's interest in this Sublease, by accepting
an assignment thereof, shall be deemed to have assumed the respective
obligations of Sublessor under this Paragraph 10. Broker shall be deemed to be a
third-party beneficiary of this paragraph 10.
11. Attorney's fees. If any party or the Broker named herein brings an action to
enforce the terms hereof or to declare rights hereunder, the prevailing party in
any such action, on trial and appeal, shall be entitled to his reasonable
attorney's fees to be paid by the losing party as fixed by the Court.
<PAGE>
l2. Additional Provisions. [If there are no additional provisions, draw a line
from this point to the next printed word after the space left here. If there are
additional provisions place the same here.]
Addendum #1
Exhibit A - Site Plan
Exhibit B - Floor Plan
Exhibit C - Standard Lease Disclosure
Exhibit D - Agency Disclosure
Exhibit E - Arbitration of Disputes
Exhibit F - Right of First Refusal
Exhibit G - Non-Disturbance and Attornment Agreement
Exhibit H - Option to Extend
Exhibit I -
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN
INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY REAL ESTATE BROKER AS TO THE LEGAL
SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS SUBLEASE OR THE
TRANSACTION TO WHICH IT RELATES. THE PARTIES ARE URGED TO:
1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS SUBLEASE.
2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE
PREMISES. SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE
PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PROPERTY, THE STRUCTURAL
INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY
OF THE PREMISES FOR SUBLESSEE'S INTENDED USE.
WARNING: IF THE SUBJECT PROPERTY IS LOCATED IN A STATE OTHER THAN CALIFORNIA,
CERTAIN PROVISIONS OF THE SUBLEASE MAY NEED TO BE REVISED TO COMPLY WITH THE
LAWS OF THE STATE IN WHICH THE PROPERTY IS LOCATED.
Executed at
--------------------------- ----------------------------------------
on August 20, 1998 By /s/ Stan Mead, V.P. Finance
------------------------------------ --------------------------------------
address By Verticom, Inc.
------------------------------- --------------------------------------
- -------------------------------------- "Sublessor" (Corporate Seal)
Executed at
--------------------------- ----------------------------------------
on August 21, 1998 By /s/ Scott Wade
------------------------------------ --------------------------------------
address By AVE
------------------------------- --------------------------------------
- -------------------------------------- "Sublessee" (Corporate Seal)
Executed at
--------------------------- ----------------------------------------
on August 24, 1998
------------------------------------ ----------------------------------------
address By /s/ John Hopkins
------------------------------- --------------------------------------
- -------------------------------------- "Master Lessor" (Corporate Seal)
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are
utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE
ASSOCIATION, 700 So. Flower St., Suite 600, Los Angeles, CA 90071. (213)
687-8777.
<PAGE>
ADDENDUM #1
To Lease dated August 10, 1998 by and between
Sublessor Verticom, Inc., and Sublessee Arterial Vascular Engineering, Inc.,
herein called AVE
1. Tenant Improvement Scope:
The plans and specifications for the tenant improvements to be constructed
in the Premises shall be subject to the prior approval of Master Lessor and
Sublessor, which approval shall not be unreasonably withheld. Master Lessor
and Sublessor to respond to Sublessee's request for approval of such plans
and specifications within ten (10) days after the date they are submitted
to them. Master Lessee and Sublessor approve items A & B below.
Sublessee shall complete the following tenant improvements at its sole
cost, with building permits.
A. Construct a full height demising wall as required to separate the
sublessee's premises from sublessor's. Said demising wall shall be
finished from floor to t-bar ceiling with sheetrock, texture and
painted on both sides with electrical service as shown on Exhibit B.
Sublessor shall reimburse Sublessee for 31'6" of full height demising
for storage area.
B. HVAC duct work modifications providing individual thermostatic zones
for Sublessee and Sublessor.
C. Any tenant improvements within the area to be occupied by Sublessee to
be installed by Sublessee. See Exhibit B Floor Plan.
Sublessee to use its best efforts to install Tenant Improvements in a
quality good workmanlike manner in accordance with approved plans and
specification within sixty (60) days of acceptance hereof, and in
accordance with all applicable laws, codes, regulations, statutes, and
ordinances (including, without limitation, the Americans with Disabilities
Act of 1990), free of defects and using new materials and equipment of good
quality. Except in the case of force majeure, Sublessee's failure to
complete the Tenant Improvements on or before November 1, 1998, shall not
delay the Commencement Date.
Sublessor shall inspect said premises within three (3) business days of
completion to ascertain that Tenant Improvements have been installed in
accordance with approved plans and specifications. Sublessor shall provide
a "punch list" of items not in accordance with plans and specifications or
not installed in a good workmanlike manner or not approved by the City.
Sublessee shall have thirty (30) days to correct said punch list items.
Sublessee shall remove all mechanic's liens, and will satisfy all claims
and meet all contract requirements with suppliers, contractors and
employees arising out of said installation of improvements. Sublessee to
have workers compensation and liability insurance with a minimum $1,000,000
per occurrence for said installation and to name Sublessor as an additional
insured on the liability policy. Sublessee shall indemnify and hold
harmless Sublessor for any claims, losses, damages, actions and causes of
action which may be incurred as a result of the work performed or materials
furnished in connection with the construction of the Tenant Improvements.
Sublessor shall complete at their sole cost the tenant improvements with
their own space, including double doors within storage area as shown on
Exhibit B.
2. Financial Information
Sublessor and Master Lessor has reviewed and approved financial statements
regarding Sublessee.
3. Permits
Sublessee will obtain a use permit and a wastewater discharge permit from
the appropriate municipality within thirty (30) days of acceptance hereof.
Sublessee shall use due diligence in pursuing such permits and pay all
costs associated with them. Sublessee shall have the responsibility to
maintain any use permits and to comply with all terms and conditions of
said use permits during the term of this Lease. If Sublessee's application
for a use permit is denied, Sublessor or Sublessee may declare this lease
void, in which event all deposits and prepaid rent shall be returned to
Sublessee. Throughout the sublease Term, Sublessee shall be responsible to
obtain and maintain any other permits, licenses or authorizations which may
be required by applicable laws, codes, regulations, statutes and ordinances
in order to operate Sublessee's business in the Premises.
<PAGE>
4. Hazardous Waste
Sublessee has provided Sublessor with its MSDS information. All Sublessee's
chemicals shall be stored on site. Sublessor has reviewed and approved the
use of these materials in the premises. The use of such materials and any
other hazardous materials or substances shall be subject to the prior
written consent of Master Lessor.
Sublessor makes no representation or warranty regarding the physical
condition of the Premises, which Sublessee agrees it is subleasing in its
existing condition, "as is" except for the TRANE HVACC unit see Paragraph
18.
Sublessee shall indemnify, defend with counsel reasonably acceptable to
Sublessor and hold Sublessor harmless from and against any claim,
remediation obligation, investigation obligation, liability, cause of
action, penalty, attorneys' fees, consultant's costs, expense of damage
owing or alleged to be owing with respect to any hazardous materials or
substances present on or about the Premises or the soil, groundwater or
surface water thereof which are caused by Sublessee, its employees, agents,
contractors or invitees. Sublessee's representations, warranties and
indemnification under this Sublease shall survive the expiration or earlier
termination of this Sublease.
Sublessor shall indemnify, defend with counsel reasonably acceptable to
Sublessee and hold Sublessee harmless from and against any claim,
remediation obligation, investigation obligation, liability, cause of
action, penalty, attorneys' fees, counsultant's costs, expense of damage
owing or alleged to be owing with respect to any hazardous materials or
substances present on or about the Premises or the soil, groundwater or
surface water thereof which are caused by Sublessor, its employees, agents,
contractors or invitees. Sublessor's representations, warranties and
indemnification under this Sublease shall survive the expiration or earlier
termination of this Sublease.
Sublessor has provided Sublessee with its MSDS information. All Sublessor's
chemicals shall be stored within their space.
Sublessee shall have the exclusive use of both Hazardous Material Sheds as
identified in Exhibit A.
Sublessee and Sublessor are aware there is existing ground water
contamination in the vicinity.
5. Area Measurement:
Sublessee and Sublessor has reviewed and approved the systemn of
measurement, the useable and rentable square footage of the subject
premises.
6. Associations and Expenses:
Sublessee has reviewed and approved CC&R's, any common area association and
budget, rules, expenses, and use conditions pertaining thereto.
7. Rent:
Sublessee shall pay the monthly base rent for the Premises in advance upon
the Commencement Date and thereafter on the first day of each month of the
term hereof directly to Master Lessor. Base rent for any period which is
less than one month shall be a pro-rata portion of the monthly installment.
The monthly base rental amount shall be as follows:
Months 11/1/98 to 12/14/98 35,490 sf x $ .80 = $28,392
Months 12/15/98 to 12/14/2001 CPI adjustment per paragraph 4.3
of Master Lease
Months 12/15/2001 to 10/31/2002 CPI adjustment per paragraph 4.3
of Master Lease
Also, Sublessee shall pay for its prorata share of common area charges as
additional rent. Said payment shall be paid directly to Master Lessor.
Additional rent was $70,396.74 for the calendar year 1997, which is
estimated to be approximately 12 cents per square foot, payable on a
monthly basis. Aforementioned rental payments and additional rent payments
are subject to the terms stipulated in sections 4.1, 4.2, 4.3 and 4.4 of
the Master Lease.
8. Parking:
Sublessee shall be entitled to the use of one hundred forty four (144)
parking spaces on an unreserved basis free of charge in common.
<PAGE>
9. Signage:
Sublessee and Sublessor agree Sublessee shall be entitled to install its
lettering on the monument sign and main entrance door subject to any sign
program regulations in the business park CC&R's and the City of Santa Rosa.
10. Janitorial Services:
Sublessor and Sublessee shall contract directly for their own janitorial
service.
11. Utilities:
Sublessee shall contract for and pay directly the utility bill for gas and
electric service and sewer and water. Sublessor shall pay Sublessee for its
pro-rata share which shall be defined as 25% of the total amount. Sublessee
shall provide Sublessor with a copy of any prorated expenses when
submitting any invoice to Sublessor. If for any reason Sublessor's space is
not occupied that the contribution for electric and gas will be reduced to
5% of total amount.
12. Early Access:
Upon full execution of the Sublease Agreement, Sublessee shall have access
to portions of the sublet premises upon the schedule outlined on Exhibit I
for the purpose of designing, demolishing and constructing improvements as
well as for relocating existing operations. Accordingly, Sublessor shall
vacate said portions of the sublet premises on the same schedule.
In the event Sublessor fails to vacate portions of the sublet premises
within two weeks of the scheduled dates established in Exhibit I, Sublessor
shall pay Sublessee a penalty of $500.00 per day for each occurrence.
Nothwithstanding the above and in the event Sublessor fails to vacate the
entire sublet premises by October 31, 1998, then Sublessee's obligation to
pay rent shall remain at the current rental rate ($12,500/month) on a daily
basis until Sublessor vacates the sublet premises.
Sublessee shall endeavor to minimize the impact of the construction work on
Sublessor and shall install dust barriers around areas of demolition and
construction. Sublessee reserves the right to construct temporary demising
walls as indicated on Exhibit I.
13. Telephone Room:
Sublessee with reasonable notice shall allow Sublessor access and continued
use of the telephone equipment room for Sublessor's existing equipment and
alarm system.
14. Option to Expand:
With six (6) months prior written notice to Sublessor, Sublessee shall have
an option to expand its premises after the 36th month, for the balance of
the space presently occupied by Sublessor in the building at the same terms
and conditions of the Master Lease. Sublessee shall only have the option to
expand so long as Sublessee is not in default (beyond applicable cure
periods) either at the time of the exercise or at any time thereafter until
the commencement date with respect to the expansion space.
Included as part of exercising its right to expand, Sublessee would assume
the remaining term and conditions of the Master Lease. In addition,
Sublessee will pay Sublessor the cost of unamortized tenant improvements
that Sublessor has installed in the building at the start of this Sublease
dated August 10, 1998. However in no event shall the tenant improvement
cost exceed $150,000. Said costs shall be prorated over eighty six (86)
months at one eighty-sixth per month. For example, $150,000 for 86 months
is $1,744.19 each month. Sublessor will provide Sublessee with
documentation to support its representation of the costs expended for its
improvement work. The amount owing to Sublessor under this paragraph shall
be delivered to Sublessor in one lump sum by no later than 30 days prior to
the effective date of the expansion.
15. Assignment and Subletting:
Sublessee shall be allowed to sublease or assign this sublease without
Sublessor and/or Master Lessor's approval to any corporation which
controls, or is controlled by or is under common control with Sublessee, or
to any corporation resulting from the merger of or consolidation with
Sublessee. In this event Master Lessor will not have the option to
terminate the Master Lease under its paragraph 13.(d). In the event of a
sublease or assignment to a third party, Sublessee shall obtain Sublessor
and Master Lessor approval which shall not be unreasonably withheld. Master
Lessor agrees to the above provided that the substituted Sublessee has
equal or more net worth. By signing this Sublease, Master Lessor
specifically agrees as follows: In the event
<PAGE>
worth. By signing this Sublease, Master Lessor specifically agrees as
follows: In the event Sublessee requests the consent of the Master Lessor
to a further subletting or assignment of the Premises, and if Master Lessor
elects to terminate the Master Lease, such termination shall only apply to
Sublessee's Premises. In such event the Master Lease would be terminated as
to Sublessee's Premises but not as to Sublessor's remaining Premises.
16. Existing Lease Agreement:
Upon commencement of this Sublease dated August 10, 1998, the existing
Sublease between Verticom, Inc., and Arterial Vascular Engineering, Inc.,
dated June 20, 1997 shall be mutually rescinded and become null and void,
provided that any indemnities set forth in the existing Sublease relating
to the period prior to the effective date of this Sublease shall survive
the termination hereof.
17. Maintenance, Repairs and Alterations:
Section 7 of the Master Lease shall be modified to incorporate the
following language. "Master Lessor shall be responsible for the costs
associated with a) replacement of the roof membrane unless caused by
negligence of Lessee or Sublessee, b) The Master Lessor will be responsible
for the replacement of the base HVAC equipment if replacement is determined
by a licensed mechanical engineering firm, c) Master Lessor shall not be
responsible for any replacement of the HVAC equipment due to Sublessor or
Sublessee's negligence.
18. HVAC:
Sublessee shall maintain and repair the HVAC, electrical systems, air
compressors and the boiler after the sublease commencement date. Sublessor
to repair the exterior TRANE HVAC unit (chiller) i.e., replace compressor,
prior to sublease commencement. Sublessor shall pay up to $5,000 toward
said cost to repair this unit. If the total cost exceeds $5,000, then both
parties shall pay according to their prorata basis.
19. Prorations:
Sublessor shall pay to Sublessee for its pro rata share (25%) of any repair
or maintenance costs to the base building including roof membrane or common
area. Maintenance of HVAC shall be primarily conducted by Sublessee's
employees; however, major servicing i.e., equipment failure will be
conducted by third party vendors. Sublessor shall pay for its pro rata
share of the cost of the services provided by said third party vendors.
Repairs over $2,000.00 of base building, common area, HVAC or roof
maintenance shall be approved by both Sublessor and Sublessee prior to
work. Sublessee shall provide Sublessor with a copy of any prorated
expenses, when submitting any invoice to Sublessor.
20. Notwithstanding anything herein to the contrary, Sublessor shall not be
deemed to have assumed any obligations of Master Lessor under the Master
Lease (including work, services, repairs, restorations, provision of
insurance or the performance of any other obligation of Master Lessor under
the Master Lease), none of which shall be the obligation of Sublessor. Such
obligations of the Master Lessor shall include, without limitation, the
obligations of "Landord" under Articles 7.1, 8.2, 9.2, 9.2, 9.3, and 15.
Exhibit A: Site Plan
Exhibit B: Floor Plan
Exhibit C: Standard Lease Disclosure Addendum
Exhibit D: Agency Disclosure
Exhibit E: Arbitration for Lease
Exhibit F: Right of First Refusal
Exhibit G: Non-Disturbance and Attornment Agreement
Exhibit H: Option to Extend
Exhibit I:
Agreed by: Sublessee: /s/ Scott Wade Date: 8/21/88
-------------------------- --------------
Agreed by: Sublessor: /s/ Stan Mead Date: 8/20/98
-------------------------- --------------
Agreed by: Master Lessor: /s/ John Hopkins Date: 8/24/98
-------------------------- --------------
<PAGE>
EXHIBIT A
SITE PLAN
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT B
FLOOR PLAN
[GRAPHIC OMITTED]
<PAGE>
EXHIBIT C
STANDARD LEASE DISCLOSURE ADDENDUM
Notice to Owners, Buyers and Tenants Regarding Hazardous Waste or Substances
and Underground Storage Tanks
Comprehensive federal and state laws and regulations have been enacted in the
the last few years in an effort to develop controls over the use, storage,
handling, cleanup, removal and disposal of hazardous wastes or substances. Some
of these laws and regulations, such as, for example, the so-called "Super Fund
Act", provide for broad liability schemes wherein an owner, tenant or other user
of the property may be liable for cleanup costs and damages regardless of fault.
Other laws and regulations set standards for the handling of asbestos or
establish requirements for the use, modification, abandonment, or closing of
underground storage tanks.
It is not practical or possible to list all such laws and regulations in this
Notice. Therefore, lessors and lessees are urged to consult legal counsel to
determine their respective rights and liabilities with respect to the issues
described in this Notice as well as other aspects of the proposed transaction.
If various materials that have been or may be in the future determined to be
toxic, hazardous or undesirable, or are going to be used, stored, handled or
disposed of on the property, or if the property has or may have underground
storage tanks for storage of such hazardous materials, or that such materials
may be in the equipment, improvements or soil, it is essential that legal and
technical advice be obtained to determine, among other things, what permits and
approvals have been or may be required, if any, the estimated costs and expenses
associated with the use, storage, handling, cleanup, removal or disposal of the
hazardous wastes or substances and what contractual provisions and protection
are necessary or desirable. It may also be important to obtain expert assistance
for site investigations and building inspections. The past uses of the property
may provide valuable information as to the likelihood of hazardous wastes or
substances, or underground storage tanks being on the property.
The term "hazardous wastes or substances" is used in this Notice in its very
broadest sense and includes, but is not limited to, all those listed under
Proposition 65, petroleum base products, paints and solvents, lead, cyanide,
DDT, printing inks, acids, pesticides, ammmonium compounds, asbestos, PCBs and
other chemical products. Hazardous wastes or substances and underground storage
tanks may be present on all types of real property. This Notice is, therefore,
meant to apply to any transaction involving any type of real property, whether
improved or unimproved.
Although Keegan & Coppin Co., Inc. or its salespeople, will disclose any
knowledge it actually possesses with respect to the existence of hazardous
wastes or substances, or underground storage tanks on the property, Keegan &
Coppin Co., Inc. has not made investigations or obtained reports regarding the
subject matter of this Notice, except as may be described in a separate written
document, studies or investigation by experts. Therefore, unless there are
additional documents or studies attached to this notice, lease or contract, this
will serve as notification that Keegan & Coppin Co., Inc. or its salespeople
make no representation regarding the existence or non-existence of hazardous
wastes or substances, or underground storage tanks on the property. You should
contact a professional, such as a civil engineer, geologist, industrial
hygienist or other persons with experience in these matters to advise you
concerning the property.
Americans with Disabilities Act (ADA)
On July 26, 1991, the federal legislation known as the Americans with
Disabilities Act (ADA) was signed into law by President Bush. The purpose of the
ADA is to integrate persons with disabilities into the economic and social
mainstream of American life. Title III of the ADA applies to Lessors and Lessees
of "places of public accommodation" and "commercial facilities", and requires
that places of public accommodation undertake "readily achievable" removal of
communication and access barriers to the disabled. This requirement of Title III
of the ADA is effective January 26, 1992.
It is important that building owners identify and undertake "readily achievable"
removal of any such barriers in the common areas, sidewalks, parking lots and
other areas of the building under their control.
The lessor and lessee is responsible for compliance with ADA relating to removal
of barriers within the workplace i.e., arrangement of interior furnishings and
access within the premises, and any improvements installed by lessor and lessee.
Keegan & Coppin Company, Inc. recommends that both parties seek expert advice
regarding the implications of the Act as it affects this agreement.
Alquist-Priolo:
"The property which is the subject of this contract may be situated in a Special
Study Zone as designated under the Alquist-Priolo Geologic Hazard Act, Sections
2621-2625, inclusive, of the Caifornia Public Resources Code; and, as such, the
construction or development on this property of any structure for human
occupancy may be subject to the findings of geologic report prepared by a
geologist registered in the State of California, unless such report is waived by
the City or County under the terms of that act. No representations on the
subject are made by the lessor or agent, and the lessee should make his own
inquiry or investigation".
Flood Hazard Area Disclosure:
The subject property may be situated in a "Special Flood Hazard Area" as set
forth on a Federal Emergency Management Agency (FEMA) "Flood Insurance Rate Map"
(FIRM) or "Flood Hazard Boundary Map" (FHBM). The law provides that, as a
condition of obtaining financing on most structures located in a "Special Floods
Hazard Area", lender requires flood insurance where the property or its
attachments are security for a loan. Lessee should consult with experts
concerning the possible risk of flooding.
Acknowledgment:
Lessee: /s/ Scott Wade Date: 8/21/98
------------------------ ------------
Lessor: /s/ Stan Mead Date: 8/20/98
------------------------ ------------
<PAGE>
EXHIBIT D
LEASING DISCLOSURE REGARDING
REAL ESTATE AGENCY RELATIONSHIP
When you enter into a discussion with a real estate agent regarding a real
estate transaction, you should from the outset understand what type of agency
relationship or representation you wish to have with the agent in the
transaction.
SUBLESSOR'S AGENT
A Sublessor's agent under a listing agreement with the Sublessor acts as the
agent for the Sublessor. A Sublessor's agent or a subagent of that agent has the
following affirmative obligations:
To the Sublessor:
(a) A fiduciary duty of utmost care, integrity, honesty and loyalty in dealing
with the Sublessor.
To the Sublessee and the Sublessor:
(a) Diligent exercise of reasonable skill and care in performance of the agent's
duties.
{b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting the
value or desirability of the property that are not known to, or within the
diligent attention and observation of, the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
SUBLESSEE'S AGENT
A Sublessee's agent can, with a Sublessee's consent, agree to act as agent for
the Sublessee only. In these situations, the agent is not the Sublessor's agent,
even if by agreement the agent may receive compensation for services rendered,
either in full or in part from the Sublessor. An agent acting only for a
Sublessee has the following affirmative obligations.
To the Sublessee:
(a) A fiduciary duty of utmost care, integrity, honesty and loyalty in dealings
with the Sublessee.
To the Sublessee and the Sublessor:
(a) Diligent exercise of reasonable skill and care in performance of the agent's
duties.
(b) A duty of honest and fair dealing and good faith.
(c) A duty to disclose all facts known to the agent materially affecting the
value or desirability of the property that are not known to, or within the
diligent attention and observation of, the parties.
An agent is not obligated to reveal to either party any confidential information
obtained from the other party which does not involve the affirmative duties set
forth above.
AGENT REPRESENTING BOTH SUBLESSOR AND SUBLESSEE
A real estate agent, either acting directly or through one or more associate
licensees, can legally be the agent of both the Sublessor and the Sublessee in a
transaction, but only with the knowledge and consent of both the Sublessor and
the Sublessee.
In a dual agency situation, the agent has the following affirmative obligations
to both the Sublessor and the Sublessee.
(a) A fiduciary duty of utmost care, integrity, honest and loyalty in the
dealings with either Sublessor or Sublessee.
(b) Other duties to the Sublessor and the Sublessee as stated above in their
respective sections.
In representing both Sublessor and Sublessee, the agent may not, without the
express permission of the respective party, disclose to the other party that the
Sublessor will accept a rent less than the listed rent or that the Sublessee
will pay a rent greater than the rent offered.
The above duties of the agent in a real estate transaction do not relieve a
Sublessor or Sublessee from the responsibility to protect their own interests.
You should carefully read all agreements to assure that they adequately express
your understanding of the transaction. A real estate agent is a person qualified
to advise about real estate. If legal or tax advice is desired, consult a
competent professional.
You should read its contents each time it is presented to you, considering the
relationship between you and the real estate agent in your specific transaction.
We acknowledge receipt of a copy of this disclosure.
Sublessor /s/ Stan Mead Date 8/20/98
----------------------------- ---------------
Sublessee /s/ Scott Wade Date 8/21/98
----------------------------- ---------------
================================================================================
SIGN BELOW TO AUTHORIZE TYPE OF AGENCY
Keegan & Coppin Company, Inc., is the agent of (check one).
(Name of Listing Agent)
The Sublessor exclusively; or
- -----
X Both the Sublessee and Sublessor
- -----
CONFIRMED AND AUTHORIZED:
Sublessor /s/ Stan Mead Date 8/20/98
----------------------------- ---------------
Sublessor Date
----------------------------- ---------------
Agent By Date
----------------------------------------- -------- ---------------
- --------------------------------------------------------------------------------
Keegan & Coppin Company, Inc., is the agent of (check one):
(Name of Sublessee's agent)
The Sublessee exclusively; or
- -----
The Sublessor exclusively; or
- -----
X Both the Sublessee and Sublessor
- -----
CONFIRMED AND AUTHORIZED:
Sublessee /s/ Scott Wade Date 8/21/98
----------------------------- ---------------
Sublessee Date
----------------------------- ---------------
Agent By Date
----------------------------------------- -------- ---------------
<PAGE>
EXHIBIT E
ARBITRATION OF DISPUTES
FOR LEASE
Any dispute or claim in law or equity arising out of this contract or any
resulting transaction shall be decided by neutral binding arbitration in
accordance with the rules of the American Arbitration Association, and not by
court action except as provided by California law for judicial review of
arbitration proceedings. Judgment upon the award rendered by the arbitrator(s)
may be entered in any court having jurisdiction thereof. The parties shall have
the right to discovery in accordance with Code of Civil Procedure Section
1283.05. The following matters are excluded from arbitration hereunder: (a) a
judicial or non-judicial foreclosure or other action or proceeding to enforce a
deed of trust, mortgage, or real property sales contract as defined in Civil
Code Section 2985, (b) an unlawful detainer action, (c) the filing or
enforcement of a mechanic's lien, (d) any matter which is within the
jurisdiction of a probate court, or small claims court, or an action for bodily
injury or wrongful death, or for latent or patent defects to which Code of Civil
Procedure Section 337.1 or Section 337.15 applies. The filing of a judicial
action to enable the recording of a notice of pending action, for order of
attachment, receivership, injunction, or other provisional remedies, shall not
constitute a waiver of the right to arbitrate under this provision.
Any dispute or claim by or against broker(s) and/or associate licensee(s)
participating in this transaction shall be submitted to arbitration consistent
with the provision above only if the broker(s) and/or associate licensee(s)
making the claim or against whom the claim is made shall have agreed to submit
it to arbitration consistent with this provision.
"NOTICE: BY INITIALLING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY DISPUTE
ARISING OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION
DECIDED BY NEUTRAL ARBITRATION AS PROVIDED BY CALIFORNIA LAW, AND YOU ARE GIVING
UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE LITIGATED IN COURT OR JURY
TRIAL. BY INITIALLING IN THE SPACE BELOW, YOU ARE GIVING UP YOUR JUDICIAL RIGHTS
TO DISCOVERY AND APPEAL, UNLESS THOSE RIGHTS ARE SPECIFICALLY INCLUDED IN THE
'ARBITRATION OF DISPUTES' PROVISION. IF YOU REFUSE TO SUBMIT TO ARBITRATION
AFTER AGREEING TO THIS PROVISION, YOU MAY BE COMPELLED TO ARBITRATE UNDER THE
AUTHORITY OF THE CALIFORNIA CODE OF CIVIL PROCEDURE. YOUR AGREEMENT TO THIS
ARBITRATION PROVISION IS VOLUNTARY."
"WE HAVE READ AND UNDERSTAND THE FOREGOING AND AGREE TO SUBMIT DISPUTES ARISING
OUT OF THE MATTERS INCLUDED IN THE 'ARBITRATION OF DISPUTES' PROVISION TO
NEUTRAL ARBITRATION."
( ) (/s/ SW) Lessee agrees ( ) ( ) Lessee does not agrees
---- ------- ---- ----
( ) (/s/ SM) Lessor agrees ( ) ( ) Lessor does not agrees
---- ------- ---- ----
( ) ( ) Lessee's Broker agrees
---- -------
( ) ( ) Lessor's Broker agrees
---- -------
SUBSIDIARIES OF THE REGISTRANT
(All Subsidiaries are Wholly Owned by the Registrant)
Arterial Vascular Engineering B.V. (The Netherlands)
Arterial Vascular Engineering Canada, Inc. (Canada)
AVE Espana, S.L. (Spain)
Arterial Vascular Engineering GmbH (Germany)
AVE International Sales, Inc. (Barbados)
AVE Italia, S.r.l. (Italy)
AVE Manufacturing, Inc. (California)
Proprietary Extrusion Technologies, Inc. (California)
Arterial Vascular Engineering PTE. LTD. (Singapore)
Arterial Vascular Engineering SARL (France)
Arterial Vascular Engineering (Schweiz) AG (Switzerland)
Arterial Vascular Engineering UK Limited (United Kingdom)
AVE Portugal S.A. (Portugal)
AVE Massachusetts, Inc. (Delaware)
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 (Form 10-K/A)
for the year ended June 30, 1998.
ERNST & YOUNG LLP
Palo Alto, California
October 8, 1998
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<PERIOD-END> JUN-30-1998
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<SECURITIES> 126,843
<RECEIVABLES> 119,538
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