<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 13, 1997.
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM S-1
REGISTRATION STATEMENT
UNDER THE
THE SECURITIES ACT OF 1933
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CARDIOVASCULAR DYNAMICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 3841 68-0328265
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
(714) 457-9546
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF THE REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
MICHAEL R. HENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CARDIOVASCULAR DYNAMICS, INC.
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
(714) 457-9546
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
------------------
COPIES TO:
EDWARD M. LEONARD, ESQ.
BROBECK, PHLEGER & HARRISON LLP
TWO EMBARCADERO PLACE
2200 GENG ROAD
PALO ALTO, CALIFORNIA 94303
(415) 424-0160
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
At effective time of the merger of a wholly-owned subsidiary of EndoSonics
Corporation with and into Cardiometrics, Inc., which shall occur as soon as
practicable after the effective date of this Registration Statement and the
satisfaction of all conditions to closing of such merger.
------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OFFERING AGGREGATE AMOUNT OF
OF SECURITIES TO AMOUNT TO PRICE PER OFFERING REGISTRATION
BE REGISTERED BE REGISTERED SHARE(1) PRICE FEE
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<S> <C> <C> <C> <C>
Common Stock, $.001 par value..... 1,488,528 shares $8.25 $12,280,356 $3,722
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee, based on the average of the high and low prices for the Common Stock as
reported on the Nasdaq National Market on June 11, 1997 in accordance with
the provisions of Rule 457(c) under the Securities Act of 1933, as amended.
================================================================================
<PAGE> 2
1,488,528 SHARES
CARDIOVASCULAR DYNAMICS, INC.
COMMON STOCK
------------------------
This Prospectus relates to the public offering, which is not being
underwritten, of 1,488,528 shares of Common Stock, $.001 par value per share
(the "Shares"), of CardioVascular Dynamics, Inc. ("CVD," the "Company" or the
"Registrant"). All of the Shares were originally issued by the Company to
Endosonics Corporation ("EndoSonics") in connection with the acquisition by
EndoSonics of all of the outstanding capital stock of the Company pursuant to an
Agreement and Plan of Reorganization between EndoSonics and the Company dated
June 9, 1993, and in connection with the acquisition by EndoSonics of 400,000
shares of the Company's Series B Preferred Stock on March 29, 1996, which
converted into 800,000 shares of Common Stock upon the consummation of the
Company's initial public offering. The Shares are being registered by the
Company pursuant to a registration rights agreement by and between the Company
and EndoSonics entered into in connection with the acquisition of Cardiometrics,
Inc. ("Cardiometrics") by EndoSonics pursuant to an Agreement and Plan of
Reorganization, dated as of January 26, 1997, as subsequently amended, among
EndoSonics, River Acquisition Corporation, a wholly-owned subsidiary of
EndoSonics, and Cardiometrics. All 1,488,528 of the Shares may be distributed by
Endosonics directly to the former stockholders, warrantholders and optionholders
of Cardiometrics in connection with the acquisition. The Shares were issued
pursuant to an exemption from the registration requirements of the Securities
Act of 1933, as amended (the "Securities Act"), provided by Section 4(2)
thereof. See "Prospectus Summary -- The Merger."
After the distribution hereunder, EndoSonics is expected to own
approximately 28% of the Company's outstanding Common Stock.
The Company will not receive any of the proceeds from the transfer or sale
of the Shares. The Company shall not bear any expenses in connection with the
registration of the Shares being distributed by EndoSonics; such expenses shall
be paid by EndoSonics.
As of the date of this Prospectus, stockholders holding approximately
4,686,000 shares have certain registration rights with respect to such shares.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CCVD." On June 11, 1997 the average of the high and low price for
the Common Stock was $8.25.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGES 7-14.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is June 13, 1997
<PAGE> 3
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus in connection with
the offering made hereby, and if given or made, such information or
representations must not be relied upon as having been authorized by the
Company, EndoSonics or by any other person. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that information herein is correct as of any time subsequent to
the date hereof. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any security other than the securities covered
by this Prospectus, nor does it constitute an offer to or solicitation of any
person in any jurisdiction in which such offer or solicitation may not lawfully
be made.
Bullett is a registered trademark of CardioVascular Dynamics, Inc.
Trademark applications are pending for the CVD logo, FACT, CAT, ARC, Focus, LYNX
and Periflow. All other trademarks and trade names referred to in this
Prospectus are the property of their respective owners.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, information statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 75 Park Place, New York, New York
10007 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
Copies of such material can be obtained by mail from the Public Reference Branch
of the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549
at prescribed rates. The Common Stock of the Company is quoted on the Nasdaq
National Market, and such material may also be inspected at the offices of
Nasdaq Operations, 1735 K Street N.W. Washington, D.C. 20006. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of the Commission's web site is
http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-1 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information regarding the Company and the Common Stock offered hereby, reference
is hereby made to the Registration Statement and to the exhibits and schedules
filed therewith. The Registration Statement, including the exhibits and
schedules thereto, may be inspected at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and copies of all or any part thereof may be obtained from such
office upon payment of the prescribed fees.
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from those described in the forward-looking statements. Investors
should carefully consider the information under the heading "Risk Factors" in
addition to the other information contained in this Prospectus before purchasing
the Common Stock offered hereby.
THE COMPANY
CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary Focus and Multiple Microporous Membrane ("M(3)")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a
multiple-purpose catheter enables physicians to effectively perform challenging
interventional procedures, resulting in improved treatment outcomes and lower
costs. The Company has eleven issued U.S. patents covering certain aspects of
its catheter technologies.
Cardiovascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque.
Treatments for atherosclerosis include drug therapy and open-heart bypass
surgery. In addition, cardiologists are increasingly utilizing minimally
invasive catheter-based treatments such as balloon angioplasty, atherectomy and
laser angioplasty to treat atherosclerosis.
Although catheter-based interventional therapies are generally successful
in initially increasing blood flow, studies indicate that after a traditional
coronary balloon angioplasty up to 50% of treated patients experience restenosis
(generally defined as a 50% or greater reduction in the lumen, or interior,
diameter of the treated vessel at the lesion site). In addition, studies show
that 5% to 8% of elective coronary balloon angioplasty patients may experience
acute reclosure of the treated vessel. Acute reclosure is an increase in the
severity of the vessel closure accompanied by a reduction in blood flow within
the vessel as a consequence of the intervention which occurs within 24 hours of
the procedure. A study has also indicated that angioplasty of chronic total
occlusions represents 10% to 20% of all coronary angioplasty procedures. A
chronic total occlusion is a complete blockage of the vessel preventing blood
flow beyond the lesion site. The Company believes that these challenges are
inadequately addressed with existing, single function, uniform diameter
angioplasty balloons. However, while the Company believes that its products
address certain disadvantages of existing catheter technology, limitations
remain in the use of balloon angioplasty to treat atherosclerosis. The Company's
products may not be suitable for the treatment of all forms of atherosclerosis.
For example, in many cases the existence of a total occlusion limits treatment
options to bypass surgery.
CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular diseases.
The Company's catheters are designed to address three principal challenges
facing cardiologists: restenosis of a treated vessel, chronic total occlusions
and acute reclosure of a vessel during or soon after a procedure. The Company's
patented Focus technology combines compliant and non-compliant balloon materials
on a single catheter, creating an angioplasty balloon that has an adjustable,
larger center diameter with fixed, smaller diameters at each end. These
characteristics allow a single balloon to expand to multiple diameters, enabling
the physician to perform interventional procedures in vessels of varying
diameters and anatomical locations. The Company's proprietary M(3) technology
combines multiple membranes of polymeric balloon material to form a single
balloon that enables the accurate delivery of drugs or contrast agents to the
lesion or thrombus site. The M(3) technology can also be utilized to provide
perfusion of blood during an interventional procedure. The Company believes that
the Focus and M(3) technologies may enable physicians to cost-effectively treat
vascular diseases by reducing the cost of those procedures which require more
than one catheter.
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<PAGE> 5
THE MERGER
On January 26, 1997, EndoSonics and Cardiometrics entered into an agreement
which would result in the acquisition of Cardiometrics by EndoSonics through the
merger (the "Merger") of River Acquisition Corporation ("Merger Sub"), a
wholly-owned subsidiary of EndoSonics, with and into Cardiometrics.
The Merger is subject to the terms and conditions of an Agreement and Plan
of Reorganization, dated as of January 26, 1997, as subsequently amended (the
"Reorganization Agreement"), among Endosonics, Merger Sub and Cardiometrics. In
the Merger, Merger Sub will be merged with and into Cardiometrics; Cardiometrics
will be the surviving corporation and will become a wholly-owned subsidiary of
EndoSonics. Pursuant to the Merger, each outstanding share of the Common Stock
of Cardiometrics ("Cardiometrics Common Stock") will be converted, without any
action on the part of the holder thereof, into the right to receive the
following (the "Merger Consideration"): (i) .35 shares of EndoSonics Common
Stock; (ii) $3.00 in cash; and (iii) at least .1364 but no more than .19 shares
of CVD Common Stock (adjusted as set forth in the following sentence, the "CVD
Exchange Ratio"). If, based on the average closing prices of EndoSonics Common
Stock and CVD Common Stock for the ten trading days immediately preceding (and
including) the third trading day prior to the special meeting of Cardiometrics'
stockholders to approve the Merger and using a CVD Exchange Ratio of .1364, the
Merger Consideration would be less than $8.00, the CVD Exchange Ratio will be
increased from .1364 such that the Merger Consideration shall equal $8.00, but
in no event shall the CVD Exchange Ratio exceed .19. Each outstanding option to
purchase shares of Cardiometrics Common Stock (a "Cardiometrics Option") will,
pursuant to its terms, accelerate immediately prior to the consummation of the
Merger and become fully exercisable for all the shares of Cardiometrics Common
Stock at the time subject to that option. Upon the consummation of the Merger,
each Cardiometrics Option and each outstanding warrant to purchase shares of
Cardiometrics Common Stock (a "Cardiometrics Warrant") will be assumed in part
by EndoSonics and converted into an option or warrant, as applicable, to
purchase 0.35 shares of EndoSonics Common Stock for each share of Cardiometrics
Common Stock subject to that option or warrant, as applicable, immediately prior
to the Merger, and the exercise price per share payable under the assumed option
or warrant, as applicable, will be appropriately adjusted to reflect such
conversion ratio. The balance of each Cardiometrics Option and Cardiometrics
Warrant will be converted into the right to receive a payment from EndoSonics,
to be made in cash and shares of CVD Common Stock, equal in value to (i) the
portion of the Merger Consideration paid in cash and shares of CVD Common Stock
per outstanding share of Cardiometrics Common Stock multiplied by the number of
shares of Cardiometrics Common Stock subject to the option or warrant, as
applicable, immediately prior to the Merger, less (ii) the difference between
the aggregate exercise price in effect for that option or warrant, as
applicable, immediately prior to the Merger and the aggregate exercise price in
effect for that option or warrant, as applicable, immediately after the partial
assumption by EndoSonics. Cardiometrics stockholders will receive cash in lieu
of fractional shares of EndoSonics Common Stock and CVD Common Stock.
RISK FACTORS
An investment in the Common Stock offered hereby is subject to numerous
risks. The Company has a history of operating losses, expects to continue to
incur operating losses and may require additional funding. The Company is
dependent upon the development, manufacture and introduction of new products in
an industry characterized by rapid technological change, and its products are
subject to the risk of obsolescence. CVD has limited sales to date and there can
be no assurance that the Company's products will achieve market acceptance. In
addition, CVD has experienced and expects to continue to experience significant
fluctuations in quarterly operating results. CVD's stock price has been volatile
and the distribution of CVD Common Stock by EndoSonics in connection with the
Merger could adversely affect the market price of the CVD Common Stock. There
can be no assurance that the Company's intellectual property will provide
competitive advantages or that the Company's products do not infringe the
intellectual property rights of others. The Company's products compete with or
will compete with products marketed by a number of other manufacturers, many of
whom have established market positions and significantly greater resources than
the Company. The Company has very limited experience manufacturing its products
and may experience difficulties in manufacturing scale-up. CVD has experienced a
period of significant expansion of its operations, and there can be no assurance
that it will be able to manage current and future growth. Products offered by
the
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Company are subject to approval by regulatory authorities and failure to obtain
or maintain such approvals may delay or prevent the introduction or marketing of
the Company's products. The Company also has limited marketing and sales
resources and depends upon the marketing capabilities of certain strategic
partners for the distribution of its products. Other factors to be considered
include: dependence upon international sales; limitations on third-party
reimbursement; control by existing stockholder and limitations on pooling-of-
interests accounting in merger transactions; dependence upon key personnel;
potential product liability and limited insurance; shares eligible for future
sale and potential adverse effect on market price; effect of certain charter
provisions and anti-takeover effects of Certificate of Incorporation, Bylaws and
Delaware Law; and absence of dividends. Cardiometrics stockholders should
carefully consider the information set forth under the heading "Risk Factors" in
addition to the other information contained in this Prospectus before acquiring
the Common Stock offered hereby.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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PERIOD FROM THREE MONTHS
MARCH 16, 1992 YEAR ENDED DECEMBER 31, ENDED MARCH 31,
(DATE OF INCEPTION) TO ------------------------------------- ----------------
DECEMBER 31, 1992(1) 1993(1) 1994 1995 1996 1996 1997
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CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Total revenue............ $ -- $ 126 $ 2,389 $ 4,103 $ 8,734 $2,033 $ 3,019
Charge for acquired in-
process research and
development(2)......... -- 2,001 -- 488 2,133 -- --
Loss from operations..... (323) (2,878) (1,022) (2,976) (5,998) (404) (1,183)
Net loss................. $ (313) $(2,849) $ (971) $(2,874) $(4,624) $ (377) $ (598)
Net loss per share (pro
forma through June
1996)(3)............... $ (0.25) $ (0.65) $ (0.65) $(0.08) $ (0.07)
Shares used in computing
net loss per share (pro
forma through June
1996)(3)............... 3,876 4,441 7,141 4,485 9,081
</TABLE>
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DECEMBER 31, MARCH 31,
1996 1997
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................................. $ 17,192 $ 16,971
Marketable securities available-for-sale............................... 25,733 23,808
Working capital........................................................ 46,142 45,555
Total assets........................................................... 50,084 49,791
Accumulated deficit.................................................... (11,049) (11,647)
Total stockholders' equity............................................. 47,623 47,280
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(1) The period from March 16, 1992 (inception) to December 31, 1992 and the
period from January 1, 1993 to June 9, 1993 reflect the operations of the
predecessor to the Company. See Note 1 to Consolidated Financial Statements.
(2) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company for
the years ended December 31, 1993 and 1995 and the excess of the purchase
price for Intraluminal Devices, Inc. and the associated acquisition expenses
over the fair market value of the assets acquired for the year ended
December 31, 1996. See Note 1 and 2 of Notes to Consolidated Financial
Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
regarding the calculation of net loss per share.
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RISK FACTORS
In evaluating the Company's business, prospective investors should consider
carefully the following risk factors in addition to the other information
presented in this Prospectus. This Prospectus contains forward looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those described in the forward-looking statements.
Investors should carefully consider the following risk factors in addition to
the other information contained in this Prospectus before purchasing the Common
Stock offered hereby.
History of Operating Losses; Anticipated Future Losses; Future Capital
Requirements. The Company was founded in 1992 and has experienced annual
operating losses since its inception. Its net loss was $1.0 million, $2.9
million and $4.6 million in 1994, 1995 and 1996, respectively. The Company's
accumulated deficit at March 31, 1997 was approximately $11.6 million. The
Company expects to continue to incur operating losses through at least 1997 and
there can be no assurance that the Company will ever be able to achieve or
sustain profitability in the future. The Company expects to incur substantially
increased costs related to, among other things, clinical testing, product
development, manufacturing scale-up and sales and marketing activities. The
Company anticipates that its existing capital resources will be sufficient to
fund its operations through 1997. The Company's future capital requirements will
depend on many factors, including its research and development programs, the
scope and results of clinical trials, the time and costs involved in obtaining
regulatory approvals, the costs involved in obtaining and enforcing patents or
any litigation by third parties regarding intellectual property, the status of
competitive products, the establishment and scale-up of manufacturing capacity,
the establishment of sales and marketing capabilities, the establishment of
collaborative relationships with other parties and costs related to the
acquisition of new technologies and product development. The Company may require
additional funds to finance these activities and for working capital
requirements. The Company may seek such funds through financings, including
private or public equity or debt offerings and collaborative arrangements with
corporate partners. There can be no assurance that funds will be raised on
favorable terms, if at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to relinquish rights to certain
technologies, product candidates or products that the Company would not
otherwise relinquish. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence Upon New Products; Rapid Technological Change; Risk of
Obsolescence. The medical device industry generally, and the interventional
catheter market in particular, are characterized by rapid technological change,
changing customer needs, and frequent new product introductions. As a result,
the useful lives of both the technology and products for the treatment of
cardiovascular and peripheral vascular diseases are limited, in some instances
to as little as twelve months. The Company's future success will depend upon its
ability to develop, manufacture and introduce new products that address the
needs of its customers. There can be no assurance that the Company will be
successful in developing and marketing new products that achieve market
acceptance or that the Company will not experience difficulties that could delay
or prevent the successful development, introduction and marketing of new
products. In addition, there can be no assurance that the Company's existing
products will not be rendered obsolete as a result of technological developments
or that the products that the Company has under development will not be rendered
obsolete prior to the introduction of such products. See "Business -- Products."
Limited Sales to Date; Uncertainty of Market Acceptance. The Company's
catheters are used in conjunction with angioplasty and other intravascular
procedures such as vascular stenting and drug delivery. Although the Company has
received regulatory clearance for a total of fifty-two products, only
twenty-nine of such products have been marketed. Of those products which have
been marketed, many have been marketed only in limited quantities or in certain
markets, or are allowed to be marketed only in certain countries. In addition,
while interventional catheters are widely used technologies, the Company's
catheter designs are relatively new. The commercial success of the Company's
products will depend upon their acceptance by the medical community as useful,
cost-effective components of interventional cardiovascular and peripheral
vascular procedures, including the acceptance by the medical community of stents
and the availability and acceptance of therapeutic drugs for use in
interventional procedures. The Company currently relies upon
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<PAGE> 9
relationships with certain prominent doctors and researchers in the medical
community to promote the uses and acceptance of its approved products. There can
be no assurance that the Company will be able to maintain such relationships or
establish additional relationships in the future. The erosion or loss of any
such relationship could detrimentally affect the market acceptance of the
Company's products. Failure of the Company's products to achieve such market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Products."
Fluctuations in Quarterly Operating Results. CVD's results of operations
have varied significantly from quarter to quarter. The Company has experienced
an operating loss for each of the last five years. Quarterly operating results
will depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the conduct of clinical
trials and the timing of regulatory approvals, new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing products, the mix between
domestic and export sales, variations in foreign exchange rates, changes in
third-party payors' reimbursement policies and healthcare reform. The Company
does not operate with a significant backlog of customer orders, and therefore
revenues in any quarter are significantly dependent on orders received within
that quarter. In addition, the Company cannot predict ordering rates by
distributors, some of whom place infrequent stocking orders. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in quarterly operating results,
and there can be no assurance that the Company will be able to achieve or
maintain profitability in the future. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Volatility of Stock Price; Effect of Distribution by EndoSonics. The
distribution of the Company's Common Stock hereunder by EndoSonics could
adversely affect the market price of the Common Stock. Since the Company's
initial public offering in June 1996, the price of the Company's Common Stock
has fluctuated significantly. The Company believes that factors such as the
distribution by Endosonics of a large number of shares of Common Stock,
variations in quarterly results of operations, announcements of technological
innovations or new products by the Company or its competitors, governmental
regulatory action, any future litigation involving the Company, other
developments or disputes with respect to proprietary rights, general trends in
the industry and overall market conditions, and other factors, could cause the
price of the Company's Common Stock to fluctuate, perhaps substantially. In
addition, in recent years the stock market in general, and the market for small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement. While the Company owns certain issued and allowed U.S. patents
and has additional U.S. and foreign patent applications pending, there can be no
assurance that the Company's patent applications will issue as patents or that
any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The interventional cardiovascular and peripheral vascular markets
in general and the market for balloon angioplasty catheters (including the type
of catheters offered by CVD) in particular has been characterized by substantial
litigation regarding patent and other intellectual property rights. There can be
no assurance that the Company's products do not infringe such patents or rights.
During 1996, the Company received a notice of potential trademark infringement
regarding the Company's use of the term "focal" in connection with the Company's
balloon angioplasty technology and entered into an agreement which prohibits the
Company from using this term. The Company has since ceased any use thereof. In
the event that any parties assert claims against the Company for patent
infringement and such patents are upheld as valid and enforceable, the Company
could be prevented from utilizing the subject matter claimed in such patents, or
would be required to obtain licenses from the owners of any such patents or
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be so on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. In
addition, foreign intellectual property laws may not provide protection
commensurate with that provided by U.S. intellectual property laws, and there
can be no assurance that foreign intellectual property laws will adequately
protect the Company's
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<PAGE> 10
intellectual property rights abroad. The Company also relies on trade secrets
and proprietary technology and enters into confidentiality and non-disclosure
agreements with its employees, consultants and advisors. There can be no
assurance that the confidentiality of such trade secrets or proprietary
information will be maintained by employees, consultants, advisors or others, or
that the Company's trade secrets or proprietary technology will not otherwise
become known or be independently developed by competitors in such a manner that
the Company has no practical recourse. Litigation may be necessary to defend
against claims of infringement or invalidity, to enforce patents issued to the
Company or to protect trade secrets, and there can be no assurance that any such
litigation would be successful. Any litigation could result in substantial costs
to, and diversion of resources by, the Company and its officers, which could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Patents and Proprietary
Information."
Significant Competition. Competition in the market for devices used in the
treatment of cardiovascular and peripheral vascular disease is intense, and is
expected to increase. The interventional cardiology market is characterized by
rapid technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters and
other products under development compete or will compete with products marketed
by a number of manufacturers, including Advanced Cardiovascular Systems, Inc., a
subsidiary of Guidant Corporation ("ACS"), SCIMED Life Systems, Inc., a
subsidiary of Boston Scientific Corporation ("SCIMED"), Johnson & Johnson
Interventional Systems ("JJIS") and Cordis Corporation, subsidiaries of Johnson
& Johnson, Medtronic, Inc., C.R. Bard, Inc. and Schneider USA, a subsidiary of
Pfizer, Inc. Such companies have significantly greater financial, management and
other resources, established market positions, and significantly larger sales
and marketing organizations than does the Company. The Company also faces
competition from manufacturers of other catheter-based devices, vascular stents
and pharmaceutical products intended to treat vascular disease. In addition, the
Company believes that many of the customers and potential customers of the
Company's products prefer to purchase catheter products from a single source.
Accordingly, many of the Company's competitors, because of their size and range
of product offerings, have a competitive advantage over the Company. There can
be no assurance that the Company's competitors will not succeed in developing or
marketing technologies or products that are more clinically effective or cost
effective than any that are being marketed or developed by the Company, or that
such competitors will not succeed in obtaining regulatory approval for
introducing or commercializing any such products prior to the Company. See
"Business -- Competition."
Limited Manufacturing Experience. The Company's success will depend in
part on its ability to manufacture its products in compliance with ISO 9001, the
FDA's Good Manufacturing Practices ("GMP") regulations, California Department of
Health Services ("CDHS") licensing and other regulatory requirements, in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. The Company began manufacturing certain of
its products at its facilities in July 1995. The Company also introduced a
significant number of new products in 1996. Accordingly, the Company has very
limited experience in manufacturing its products. In addition, on July 15, 1996,
the Company entered into co-distribution agreements with Medtronic, Inc.
("Medtronic") which granted Medtronic certain non-exclusive rights to distribute
the Company's FACT, CAT and ARC catheters. Under the terms of these agreements,
if the Company is unable to meet its delivery obligations with respect to the
purchased catheters, up to 60% of the Company's manufacturing capacity will be
devoted to manufacturing such catheters for Medtronic. The Company has undergone
and expects to continue to undergo regular GMP inspections in connection with
the manufacture of its products at the Company's facilities. The Company's
success will depend, among other things, on its ability to efficiently manage
the simultaneous manufacture of different products and to integrate the
manufacture of new products with existing products. There can be no assurance
that the Company will not encounter difficulties in scaling up production of new
products, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. The Company's
failure to successfully commence the manufacturing of these new products, or to
increase production volumes of new or existing products in a timely manner,
would materially adversely affect the Company's business, financial condition
and results of operations. Failure to increase production volumes in a timely or
cost-effective manner or to achieve or maintain compliance with ISO 9001, GMP
regulations, CDHS licensing or other regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
9
<PAGE> 11
The Company purchases many standard and custom built components from
independent suppliers and subcontracts certain manufacturing processes from
independent vendors. Most of these components and processes are available from
more than one vendor. However, certain manufacturing processes are currently
performed by single vendors. An interruption of performance by any of these
vendors could have a material adverse effect on the Company's ability to
manufacture its products until a new source of supply was qualified and, as a
result, could have an adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Manufacturing" and
"Business -- Government Regulation."
Potential Inability to Manage Growth. Prior to June 1996, the Company
relied on EndoSonics to perform certain activities on its behalf, including
manufacturing, financial, regulatory and administrative functions. Since July
1995, CVD has conducted its manufacturing operations at its facilities in Irvine
and also currently performs the financial, regulatory and administrative
functions previously performed by EndoSonics. Accordingly, the Company has
experienced a period of significant expansion of its operations that has placed
a significant strain upon its management systems and resources. The Company has
recently implemented a number of new financial and management controls,
reporting systems and procedures. In addition, the Company has recently hired a
significant number of employees and plans to further increase its total head
count. The Company also plans to expand the geographic scope of its customer
base and operations. This expansion has resulted and will continue to result in
substantial demands on the Company's management resources. The Company's ability
to manage future expansion of its operations will require the Company to
continue to improve its financial and management controls, reporting systems and
procedures on a timely basis and to expand, train and manage its employee work
force. There can be no assurance that the Company will be able to do so
successfully. The failure to do so would have a material adverse effect on the
Company's business, financial condition and results of operations.
Government Regulation. The manufacturing and marketing of the Company's
products are subject to extensive and rigorous government regulation in the
United States and in other countries. The Company believes that its success will
be significantly dependent upon commercial sales of improved versions of its
catheter products. The Company will not be able to market these new products in
the United States unless and until the Company obtains approval or clearance
from the FDA. Foreign and domestic regulatory approvals, if granted, may include
significant limitations on the indicated uses for which a product may be
marketed.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a premarket
approval ("PMA"), the manufacturer may seek clearance from the FDA to market the
device by filing a premarket notification with the FDA under Section 510(k) of
the Federal Food, Drug, and Cosmetic Act ("510(k)"). All of the 510(k)
clearances received for the Company's catheters were based on substantial
equivalence to legally marketed devices. There can be no assurance that 510(k)
clearance for any future product or significant modification of an existing
product will be granted or that the process will not be unduly lengthy. In
addition, if the FDA has concerns about the safety or effectiveness of any of
the Company's products, it could act to withdraw approval or clearances of those
products or request that the Company present additional data. Any such actions
would have a material adverse effect on the Company's business, financial
condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
that the device or the particular application for the device requires a more
rigorous review to assure safety and effectiveness, the FDA will require that
the manufacturer submit a PMA application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and always requires the submission of clinical data. It
is expected that certain of the Company's products under development will be
subject to this PMA process. The Company currently has a non-exclusive,
royalty-free right to submit PMA supplement applications utilizing an EndoSonics
PMA as a reference and to manufacture and distribute CVD products as a
supplement to the EndoSonics PMA. This agreement may be terminated in the event
of breach upon 60 days notice by the non-breaching party, subject to the
breaching party's right to cure. In the event of termination, the Company would
be prohibited from submitting new PMA supplements referencing the
10
<PAGE> 12
EndoSonics PMA and would be required to seek independent FDA approval for any
such products, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer
with the FDA and maintain a license with certain state agencies, such as the
CDHS. As such, the Company is inspected on a routine basis by both the FDA and
the CDHS for compliance with GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company has also undergone and expects to continue to undergo regular GMP
inspections in connection with the manufacture of its products at the Company's
facilities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting laws and regulations
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its 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. CVD has
received FDA approval to market the FACT and ARC catheters, which utilize the
Focus technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by the
Company in the United States for such use.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of the Company's products. Delays in receipt of clearances or
approvals, failure to receive clearances or approvals or the loss of previously
received clearances or approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products" and "Business -- Government Regulation."
International sales of the Company's products are subject to the
registration requirements of each country. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. The Company typically relies on its distributors in such foreign countries
to obtain the requisite regulatory approvals. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all. In
addition, the FDA must approve the export to certain countries of devices that
require a PMA but are not yet approved domestically. The European Union has
promulgated rules which require that medical products receive by mid-1998 the
right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. Failure to receive the right to affix the CE mark will prevent the
Company from selling its products in member countries of the European Union
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Limited Marketing and Sales Resources; Dependence Upon Strategic
Relationships. CVD intends to rely primarily on certain strategic
relationships, medical device distributors and its direct sales organization to
distribute its products. The Company's ability to distribute its products
successfully depends in part on the marketing capabilities of its strategic
partners. In recent years there has been significant consolidation among medical
device suppliers as the major suppliers have attempted to broaden their product
lines in order to respond to cost pressures from health care providers. This
consolidation has made it increasingly difficult for smaller suppliers, such as
the Company, to effectively distribute their products without a relationship
with one or more of the major suppliers. The Company is currently marketing
certain of its products through licensing agreements with SCIMED and ACS and
through co-distribution agreements with Medtronic. In addition,
11
<PAGE> 13
Fukuda Denshi Company, Ltd. ("Fukuda") is currently the Company's exclusive
distributor in Japan for certain of the Company's products. Fukuda is also
responsible for obtaining regulatory approval for the Company's products in
Japan. The Company recently informed Fukuda of its decision to terminate the
existing Fukuda agreement and does not expect that any obligations will arise as
a result of such termination. The Company expects that Fukuda will continue to
distribute its products at least through 1997. The Company is currently
negotiating with several distributors, including Fukuda, regarding a new
distribution agreement for the Japanese market. The Company's revenue from its
distributor relationships is dependent upon the efforts made by such parties and
there can be no assurance that such efforts will be successful. There can be no
assurance that the Company will be able to maintain or expand its relationships
with its strategic partners or to replace its strategic partners in the event
any such relationship were terminated. In the event of such a termination, the
Company's ability to distribute its products would be materially adversely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
CVD currently has a limited marketing and sales staff.The Company intends
to expand its direct sales force to market the Company's products expansion.
However, there can be no assurance that CVD will successfully expand its direct
sales and marketing organization, or that if expanded, such organization will be
able to effectively distribute CVD's products. If CVD is unable to achieve
distribution of its products through its direct sales organization, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company also has product development relationships with SCIMED and ACS.
SCIMED currently funds certain research and development efforts undertaken by
CVD in the area of combined drug delivery and coronary angioplasty. ACS conducts
development work on the Company's perfusion technology. If CVD is unable to
maintain its relationships with these or future strategic partners its product
development efforts could be materially adversely affected, which would
materially adversely affect the Company's business, financial condition and
results of operations. See "Business -- Marketing and Sales" and "Business --
Strategic Relationships."
Dependence Upon International Sales. The Company derives, and expects to
continue to derive, a significant portion of its revenue from international
sales. In 1994, 1995 and 1996, the Company's international sales were $1.0
million, $2.1 million and $3.5 million, respectively, or 83%, 59% and 42%,
respectively, of product sales. The Company expects to continue to derive
significant revenue from international sales and therefore a significant portion
of the Company's revenues will continue to be subject to the risks associated
with international sales, including economic or political instability, shipping
delays, changes in applicable regulatory policies, inadequate protection of
intellectual property, fluctuations in foreign currency exchange rates and
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. Future
imposition of, or significant increases in the level of, customs duties, import
quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operation. In foreign
countries, the Company's products are subject to governmental review and
certification. The regulation of medical devices, particularly in the European
Union, continues to expand and there can be no assurance that new laws or
regulations will not have an adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
Limitations on Third-Party Reimbursement. In the United States, the
Company's products are purchased primarily by medical institutions, which then
bill various third-party payors, such as Medicare, Medicaid, and other
government programs and private insurance plans, for the health care services
provided to patients. Government agencies, private insurers and other payors
determine whether to provide coverage for a particular procedure and reimburse
hospitals for medical treatment at a fixed rate based on the diagnosis-related
group ("DRG") established by the U.S. Health Care Financing Administration
("HCFA"). The fixed rate of reimbursement is based on the procedure performed,
and is unrelated to the specific devices used in that procedure. If a procedure
is not covered by a DRG, payors may deny reimbursement. In addition, some payors
may deny reimbursement if they determine that the device used in a treatment was
unnecessary, inappropriate or not cost-effective, experimental or used for a
non-approved indication. Reimbursement of
12
<PAGE> 14
interventional procedures utilizing the Company's products is currently covered
under a DRG. There can be no assurance that reimbursement for such procedures
will continue to be available, or that future reimbursement policies of payors
will not adversely affect the Company's ability to sell its products on a
profitable basis. In addition, reimbursement may be denied if the product use is
not in accordance with approved FDA labeling. Failure by hospitals and other
users of the Company's products to obtain reimbursement from third-party payors,
or changes in government and private third-party payors' policies toward
reimbursement for procedures employing the Company's products, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Third-Party Reimbursement."
Control by Existing Stockholder; Limitations on Pooling-of-Interests
Accounting in Merger Transactions. Immediately prior to the distribution of the
Shares by EndoSonics pursuant to this prospectus, EndoSonics owned approximately
44% of the Company's outstanding Common Stock. After such distribution,
EndoSonics is expected to own approximately 28.67% of the Company's outstanding
Common Stock. As a result, EndoSonics is able to elect at least one member to
the Company's five person board of directors and has the ability to influence
the Company and influence its affairs and the conduct of its business. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control of the Company. In accordance with applicable
accounting standards, the Company is prohibited from accounting for a merger
transaction, of or by the Company, as a pooling-of-interests for a period of two
years following June 25, 1996, the date on which EndoSonics ceased to control
50% of the outstanding voting Common Stock of the Company. As a result, any
business combination consummated prior to the expiration of such period would
have to be accounted for using the purchase method. Under the purchase method,
the excess of the purchase price over the net book value of the assets acquired
would be amortized to expense, which could result in a significant negative
impact on the acquiror's results of operations and, therefore, reduce the
attractiveness of, or the price paid in, a particular acquisition transaction.
On January 27, 1997, EndoSonics announced that the EndoSonics Board of
Directors had approved a dividend distribution of one CVD share for every 25
EndoSonics shares. The distribution is expected to take place in the second half
of 1997 to EndoSonics stockholders then of record. The exact record date and
date of distribution have not yet been determined.
Dependence Upon Key Personnel. The Company depends to a significant extent
upon key management and technical personnel. The Company's growth and future
success will depend in large part upon its ability to hire, motivate and retain
highly qualified personnel. Competition for such personnel is intense and there
can be no assurance that the Company will be successful in hiring, motivating or
retaining such qualified personnel. The loss of key personnel or the inability
to hire or retain qualified personnel could have a material adverse effect on
the Company's business, financial condition and results of operations. See
"Business -- Marketing and Sales," "Business -- Employees" and "Management."
Potential Product Liability; Limited Insurance. The Company faces the risk
of financial exposure to product liability claims. The Company's products are
often used in situations in which there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval for commercial sale.
The Company is currently covered under a product liability insurance policy with
coverage limits of $2.0 million per occurrence and $2.0 million per year in the
aggregate. There can be no assurance that the Company's product liability
insurance is adequate or that such insurance coverage will remain available at
acceptable costs. There can be no assurance that the Company will not incur
significant product liability claims in the future. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, adverse product liability actions could negatively
affect the reputation and sales of the Company's products and the Company's
ability to obtain and maintain regulatory approval for its products and
substantially divert the time and effort of management away from the Company's
operations.
Shares Eligible for Future Sale; Potential Adverse Effect on Market
Price. Sales of Common Stock in the public market during and after this
offering could adversely affect the market price of the Common Stock.
13
<PAGE> 15
As of April 15, 1997, the Company had 9,103,459 shares outstanding. Including
all of the Shares registered for sale hereby, 5,610,054 of the Company's
outstanding shares are freely tradable without restriction. Approximately
2,531,768 additional shares are eligible for sale, including 1,809,768 shares
held by EndoSonics, not registered for sale hereunder, and 646,000 shares held
by SCIMED. Sales of any such shares in the public market could adversely affect
the market price of the Common Stock. The Company has also registered 1,200,000
shares of Common Stock reserved for issuance under the Company's 1996 Stock
Option/Stock Issuance Plan and 200,000 shares under the Company's Employee Stock
Purchase Plan. As of April 15, 1997, there were outstanding options under the
Company's stock option plans to acquire approximately 1,188,000 shares. SCIMED
is entitled to certain demand piggyback registration rights with respect to its
shares. If SCIMED, by exercising its demand registration rights, causes a large
number of shares to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Common Stock. If the
Company were required to include in a Company-initiated registration shares held
by SCIMED pursuant to the exercise of its piggyback registration rights, such
sales may have an adverse effect on the Company's ability to raise needed
capital. See "Shares Eligible for Future Sale."
Effect of Certain Charter Provisions; Anti-takeover Effects of Certificate
of Incorporation, Bylaws and Delaware Law. The Company's Board of Directors has
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions, including
voting rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The issuance of Preferred Stock could have the
effect of making it more difficult for a third party to acquire a majority of
the outstanding voting stock of the Company. In addition, the Company is subject
to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. Further, certain provisions of
the Company's Certificate of Incorporation and Bylaws and of Delaware law could
delay or make more difficult a merger, tender offer or proxy contest involving
the Company, which could adversely affect the market price of the Company's
Common Stock. See "Description of Capital Stock."
Absence of Dividends. The Company has never paid any cash dividends on the
Common Stock and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. See "Dividend Policy."
14
<PAGE> 16
THE COMPANY
The Company was originally incorporated in California in March 1992 and
became a Delaware corporation in June 1993 after being acquired by EndoSonics.
The Company's principal executive offices are located at 13700 Alton Parkway,
Suite 160, Irvine, California 92618 and its telephone number is (714) 457-9546.
USE OF PROCEEDS
The Company will receive no proceeds from this offering. The Shares offered
hereby may be distributed by EndoSonics directly to the former stockholders,
warrantholders and optionholders of Cardiometrics in connection with the
acquisition of Cardiometrics by EndoSonics pursuant to an Agreement and Plan of
Reorganization dated as of January 26, 1997, as subsequently amended, among
EndoSonics, Merger Sub and Cardiometrics.
All of the Shares were originally issued by the Company to EndoSonics in
connection with the acquisition by EndoSonics of all of the outstanding capital
stock of the Company pursuant to an Agreement and Plan of Reorganization between
EndoSonics and the Company dated June 9, 1993, and in connection with the
acquisition by EndoSonics of 400,000 shares of the Company's Series B Preferred
Stock on March 29, 1996, which converted into 800,000 shares of Common Stock
upon the consummation of the Company's initial public offering. The Shares were
issued pursuant to an exemption from the registration requirements of the
Securities Act, provided by Section 4(2) thereof. The Shares are being
registered by the Company pursuant to a registration rights agreement by and
between the Company and EndoSonics entered into in connection with the
acquisition of Cardiometrics by EndoSonics. EndoSonics has agreed to pay all
reasonable fees and expenses incident to the filing of this Registration
Statement.
15
<PAGE> 17
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on June 20, 1996 and is traded under the symbol "CCVD." The following table sets
forth for the periods indicated the high and low sale prices for the Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
FISCAL 1996
Second Quarter................................................ $12 3/4 $10 1/2
Third Quarter................................................. 17 1/ 10 1/
Fourth Quarter................................................ 17 1/ 9 5/8
FISCAL 1997
First Quarter................................................. 13 1/4 7 1/2
Second Quarter (through June 11, 1997)........................ 10 1/4 6 5/8
</TABLE>
On June 11, 1997, the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $8.50 per share. As of June 11, 1997, there were
approximately 71 holders of record of the Common Stock.
DIVIDEND POLICY
The Company has not paid dividends since its inception. The Company
currently intends to retain all earnings, if any, for use in the expansion of
its business and therefore does not anticipate paying any dividends in the
foreseeable future.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Notes thereto and with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, which are included elsewhere in this Prospectus. The consolidated
statement of operations data for the years ended December 31, 1994, 1995 and
1996, and the consolidated balance sheet data at December 31, 1995 and 1996, are
derived from consolidated financial statements that have been audited by Ernst &
Young LLP, independent auditors, included elsewhere in this Prospectus. The
balance sheet data at December 31, 1992, 1993 and 1994 and the statement of
operations data for the period from March 16, 1992 (inception) to December 31,
1992 and the year ended December 31, 1993 are derived from audited financial
statements not included in this Prospectus. The statement of operations data for
the three month periods ended March 31, 1996 and 1997, and the balance sheet
data at March 31, 1997 are derived from unaudited financial statements included
elsewhere in this Prospectus and include, in the opinion of the Company, all
adjustments consisting of only normal recurring adjustments necessary for a fair
presentation of the Company's results of operations for those periods and
financial position at that date. The results for the three month period ended
March 31, 1997 are not necessarily indicative of the results to be obtained in
any future period. The Company has not paid dividends since its inception.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1992 THREE MONTHS ENDED
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, MARCH 31,
TO DECEMBER 31, -------------------------------------- -------------------
1992(1) 1993(1) 1994 1995 1996 1996 1997
------------------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenue:
Sales................................. $ -- $ 126 $ 1,169 $ 3,462 $ 8,384 $ 1,783 $ 3,019
License fee and other from related
party.............................. -- -- 1,000 -- 150 100 --
Contract.............................. -- -- 220 641 200 150 --
---- ------- ------- ------- --------
Total revenue................. -- 126 2,389 4,103 8,734 2,033 3,019
Costs and expenses:
Cost of sales......................... -- 79 848 2,051 4,111 942 1,416
Charge for acquired in-process
research and development(2)........ -- 2,001 -- 488 2,133 -- --
Research and development.............. 294 734 1,228 1,683 3,582 627 993
Marketing and sales................... -- 94 748 1,526 3,358 577 1,350
General and administrative............ 29 96 587 1,331 1,548 291 443
---- ------- ------- ------- --------
Total operating costs and
expenses.................... 323 3,004 3,411 7,079 14,732 2,437 4,202
---- ------- ------- ------- --------
Loss from operations.................... (323) (2,878) (1,022) (2,976) (5,998) (404) (1,183)
Other income............................ 10 29 51 102 1,374 27 585
---- ------- ------- ------- --------
Net loss................................ $(313) $(2,849) $ (971) $(2,874) $ (4,624) $ (377) $ (598)
==== ======= ======= ======= ========
Net loss per share (pro forma through
June 1996)(3)......................... $ (0.25) $ (0.65) $ (0.65) $ (0.08) $ (0.07)
======= ======= ========
Shares used in computing net loss per
share (pro forma through June
1996)(3).............................. 3,876 4,441 7,141 4,485 9,081
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
MARCH
DECEMBER 31, 31,
----------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
----- ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents....................... $ 650 $ 547 $ 3,379 $ 1,568 $17,192 $ 16,971
Marketable securities available-for-sale........ -- -- -- -- 25,733 23,808
Working capital (deficit)....................... 583 (75) 1,366 (774) 46,142 45,555
Total assets.................................... 678 690 4,340 4,002 50,084 49,791
Convertible obligation.......................... -- -- -- 750 -- --
Accumulated deficit............................. (313) (2,580) (3,551) (6,425) (11,049) (11,647)
Total stockholders' equity (net capital $(1,098) $47,623 $ 47,280
deficiency)................................... $ 607 $ (241) $ 1,288
</TABLE>
- ---------------
(1) The period from March 16, 1992 (inception) to December 31, 1992 and the
period from January 1, 1993 to June 9, 1993 reflect the operations of the
predecessor to the Company. See Note 1 of Notes to Consolidated Financial
Statements.
(2) The charge for acquired in-process research and development reflects a
change in the basis of the Company's assets and liabilities as a result of
the acquisition by EndoSonics which has been allocated to the Company for
the years ended December 31, 1993 and 1995 and the excess of the purchase
price for Intraluminal Devices, Inc. and the associated acquisition expenses
over the fair market value of the assets acquired for the year ended
December 31, 1996. See Notes 1 and 2 of Notes to Consolidated Financial
Statements.
(3) See Note 1 of Notes to Consolidated Financial Statements for information
regarding the calculation of net loss per share.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements. The Company's
actual results may differ materially from those described in the forward-looking
statements. Investors should carefully consider the information set forth under
the heading "Risk Factors" in addition to the other information contained in
this Prospectus before purchasing the Common Stock offered hereby.
OVERVIEW
CVD designs, develops, manufactures and markets catheters used to treat
certain vascular diseases. The Company's patented catheters utilize its Focus
and M(3) technologies to deliver therapeutic radial pressure, stents, drugs or
contrast media and improved blood flow during angioplasty and stent placement
procedures. To date, the majority of the Company's revenue has been derived from
sales of its angioplasty and angioplasty-related catheters.
From inception (March 16, 1992) through the first quarter of 1994, the
Company's operations were limited and consisted primarily of research and
development and other start-up activities. On June 15, 1992, EndoSonics acquired
a 40% interest in CVD in exchange for $0.5 million in cash. Pursuant to an
Agreement and Plan of Reorganization between EndoSonics and CVD signed on June
9, 1993, EndoSonics acquired all of the outstanding capital stock of CVD in
exchange for $0.3 million in cash and 250,000 shares of EndoSonics' Common Stock
with an aggregate market value of $1.6 million. The acquisition by EndoSonics
resulted in a new basis for CVD's assets and liabilities. Accordingly, the
purchase price paid by EndoSonics has been allocated to CVD's identifiable
assets and liabilities, including $2.0 million to acquired in-process research
and development, which was immediately expensed, as no CVD products had received
regulatory approval and the technology did not have alternative future uses.
Pursuant to the terms of the Agreement and Plan of Reorganization, in June 1995,
EndoSonics became obligated to issue 50,000 shares of its Common Stock with an
aggregate market value of $0.5 million, to the former shareholders of CVD
because the market price of EndoSonics' stock did not exceed a specified price
for a specified period during the two-year period following the acquisition. The
fair value of such shares was charged to acquired in-process technology. In
March 1996, EndoSonics purchased 400,000 shares of CVD's Series B Preferred
Stock for a purchase price of $8.0 million, which converted into 800,000 shares
of Common Stock upon the consummation of the initial public offering. See
"Certain Transactions -- Relationship with Endosonics Corporation."
In September 1994, CVD and SCIMED entered into a Stock Purchase and
Technology License Agreement to develop and license CVD's patented combination
balloon angioplasty/site-specific drug delivery technology (the Transport
product line) for use in the coronary vessels. Through December 31, 1996 the
Company had received in the aggregate approximately $2.2 million in license
fees, research and development funding and technical assistance from SCIMED
under this agreement. SCIMED also purchased a 19% equity position in the Company
for a purchase price of $2.5 million. See "Business -- Strategic Relationships."
In January 1995, the Company and ACS entered into an agreement pursuant to
which the Company acquired certain rights to ACS' SmartNeedle Technology,
subject to the payment of certain royalties. The parties subsequently confirmed
their understanding with respect to certain matters in a second agreement dated
March 4, 1996 (collectively, the "ACS Agreements"). Pursuant to the ACS
Agreements, ACS was granted the option to acquire the exclusive worldwide rights
to certain CVD perfusion technology, which ACS exercised on February 14, 1996.
In exchange for this perfusion technology, ACS is obligated to make milestone
and minimum annual royalty payments to CVD, and also has certain obligations to
develop and market the perfusion technology. Through December 31, 1996 the
Company had received approximately $0.35 million in milestone payments under the
ACS Agreements. See "Business -- Strategic Relationships."
The Company currently sells its products through a combination of medical
device distributors and a limited number of direct sales personnel. The Company
is a party to three agreements for the U.S. distribution of products
incorporating its Focus and M(3) technologies. CVD currently distributes certain
products in Japan through an exclusive distribution agreement with Fukuda. The
Company recently informed Fukuda of its decision to terminate the existing
Fukuda agreement. The Company expects that Fukuda will continue to
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<PAGE> 20
distribute its products at least through 1997. The Company is currently
negotiating with several distributors, including Fukuda, regarding a new
distribution agreement for the Japanese market. CVD also has distribution
agreements with 25 companies covering 41 countries outside the United States and
Japan. See "Business -- Strategic Relationships."
On July 15, 1996, CVD and Medtronic, Inc. entered into agreements providing
for the co-distribution by Medtronic of the Company's balloon angioplasty
catheters. These catheters employ the Company's patented Focus Technology. Under
the agreements, Medtronic will purchase a minimum number of angioplasty
catheters manufactured by the Company for distribution worldwide for a period of
up to three years. If the Company is unable to meet its delivery obligations
with respect to the purchased catheters, up to 60% of the Company's
manufacturing capacity will be devoted to manufacturing such catheters for
Medtronic. Specific products to be distributed by Medtronic will differ in
individual country markets. The Company will continue to sell Focus Technology
products through its own direct and indirect sales force network. These products
are currently sold under the names, FACT, CAT and ARC. See
"Business -- Strategic Relationships."
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1996
Sales Revenue. Sales revenue increased to $8.4 million in 1996 from $3.5
million in 1995, representing an increase of 140%. The increase resulted
primarily from increased sales volume of the Company's existing and new Focus
catheters (112%), and, to a lesser extent, the introduction of other new
products (13%). Sales of products through Medtronic under the Company's
co-exclusive distribution agreement and sales of products in Japan through the
Company's exclusive distribution relationship with Fukuda accounted for 22% and
15%, respectively, of total product sales in 1996.
License Fee and Other Revenue. License fee and other revenue increased to
$0.2 million in 1996 from $0.0 million in 1995. This increase resulted from
revenues from a license agreement with ACS. See "Business -- Strategic
Relationships."
Contract Revenue. Contract Revenue was $0.2 million in 1996 and $0.6
million in 1995. This decrease stemmed from reduced technology development and
other support from SCIMED. See "Business -- Strategic Relationships."
Cost of Sales. Cost of sales increased to $4.1 million in 1996 from $2.1
million in 1995. This increase resulted primarily from increased manufacturing
volumes related to increased product sales. In July 1995, the Company
transferred its product manufacturing from EndoSonics' facility to the Company's
facility in Irvine, California.
Charge for Acquired In-process Research and Development. The Company
incurred a charge of $2.1 million in 1996 in connection with the acquisition of
Intraluminal Devices, Inc. ("IDI"). The excess of the purchase price of IDI over
the fair market value of the net assets acquired was recorded as acquired in-
process research and development. The acquired in-process research and
development was immediately written off as IDI was in the development stage and
had not yet received regulatory approval for any of its products at the time of
the acquisition.
Research and Development. Research and development increased to $3.6
million in 1996 compared to $1.7 million in 1995, representing an increase of
112%. This increase resulted primarily from expenditures on the development of
vascular access and Focus technology products. The Company believes it must
maintain a substantial commitment to research and development to remain
competitive and expects expenditures related to research and development to
increase.
Marketing and Sales. Marketing and sales expenses increased to $3.4 million
in 1996 from $1.5 million in 1995, representing an increase of 127%. This
increase resulted mainly from the expansion of the Company's direct sales force
in the United States and marketing expenses related to the product launch of the
FACT and ARC catheters. The Company expects to expand and expects expenses
associated with these activities to increase in the future as it expands.
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<PAGE> 21
General and administrative. General and administrative expenses increased
to $1.5 million in 1996 from $1.3 million in 1995, representing an increase of
15%. The added costs were primarily due to additions in administrative staff and
the added costs of operating as a public company.
Other Income. Other income, principally interest income, increased to $1.3
million in 1996 from $0.1 million in 1995. The increase resulted from the
investment of the net proceeds of the Company's initial public offering which
amounted to approximately $42.8 million.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1995
Sales Revenue. Sales revenue increased to $3.5 million in 1995 from $1.2
million in 1994, representing an increase of 196%. Sales revenue in 1994
resulted primarily from sales of the Company's Transport products, which were
subsequently licensed to SCIMED in 1995. The Company no longer receives sales
revenue for the Transport. Sales revenue in 1995 was due to sales of the
Company's CAT catheter, which was introduced in the first quarter of 1995, and
sales of the SmartNeedle vascular access products beginning in the second
quarter of 1995. Sales of products in Japan through the Company's exclusive
distribution relationship with Fukuda accounted for 18% of the Company's revenue
in 1995. In addition, sales to JJIS accounted for 12% of the Company's revenue
in 1995.
License Fee and Other Revenue. License fee and other revenue decreased to
$0.0 million in 1995 from $1.0 million in 1994. License fee and other revenue
represents amounts earned under the aforementioned agreement with SCIMED. Future
revenue under this agreement will be derived primarily from royalties earned on
SCIMED's sales of the Transport.
Contract Revenue. Contract revenue was $0.6 million in 1995 and $0.2
million in 1994. Contract revenue was earned under the aforementioned agreement
with SCIMED.
Cost of Sales. Cost of sales increased to $2.1 million in 1995 from $0.8
million in 1994, representing an increase of 142%. This increase resulted
primarily from increased manufacturing volumes related to increased product
sales. In July 1995, the Company transferred its product manufacturing from
EndoSonics' facility to the Company's facility in Irvine, California.
Charge for Acquired In-process Research and Development. The Company
incurred a charge of $0.5 million in 1995 in connection with the 1995 payment by
EndoSonics of additional consideration related to the original acquisition by
EndoSonics of CVD stock. This portion of the excess of the purchase price of CVD
over the fair market value of the net assets acquired was recorded as in-process
research and development. The acquired in-process research and development was
immediately written off as CVD was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition.
Research and Development. Research and development expenses increased to
$1.7 million in 1995 compared to $1.2 million in 1994, representing an increase
of 37%. This increase was due primarily to increased expenditures related to
development of the Company's Focus and M(3) technology products. These expenses
also increased due to clinical trials and studies related to the Focus
technology products. The Company believes that it must maintain a substantial
commitment to research and development to remain competitive and expects
expenditures related to research and development to increase.
Marketing and Sales. Marketing and sales expenses increased to $1.5 million
in 1995 from $0.7 million in 1994, representing an increase of 104%. This
increase resulted from the development and expansion of the Company's U.S. sales
organization and marketing expenses related to the product launch of the
SmartNeedle products. The Company expects to expand its marketing and sales
force and expects expenses associated with marketing and sales to increase in
the future.
General and Administrative. General and administrative expenses increased
to $1.3 million in 1995 from $0.6 million in 1994, representing an increase of
127%. This increase resulted from expenses incurred as the Company commenced
operations as an independent entity, rather than as a division of EndoSonics,
and
20
<PAGE> 22
included the addition of a full-time Chief Executive Officer, increased legal
and accounting expenses, increased support staff and increased travel expenses.
Other Income. Total other income remained relatively constant in 1995 from
1994.
FIRST QUARTER OF 1997 COMPARED TO THE SAME PERIOD IN 1996
Sales Revenues. Revenue for the first quarter of 1997 increased 48% to
$3.0 million compared to $2.0 million for the first quarter of 1996. The
increase resulted primarily from increased sales volume of the Company's
existing and new Focus catheters (42%), and, to a lesser extent, the
introduction of other new products (22%).
Gross Profit. The gross profit percentage for the first quarter of 1997
decreased to 53% compared to 54% for the same period of 1996. In the first
quarter of 1996, total revenues included approximately $0.3 million of contract
revenues and license fee income that had no associated cost of sales. These
revenues and fees represented 12% of total revenues for that quarter. In the
first quarter of 1997, the Company had no contract revenues or licensing fee
income.
Research and Development. Research, development and clinical expenses
increased by 58% to $1.0 million in the quarter ended March 31, 1997 from $0.6
million in the quarter ended March 31, 1996. The primary reason for this
increase was additional spending on development of the Company's line of
coronary stent products and FOCUS technology angioplasty catheters.
Marketing and Sales. Marketing and sales expenses rose 134% to $1.4
million, up $0.8 million in the quarter ended March 31, 1997, compared to $0.6
million in the same period of 1996. This increase reflects the investment the
Company is making to build its sales and marketing infrastructure by adding
additional personnel and developing additional distributor relationships.
General and Administrative. General and administrative expenses increased
by 52% to $0.4 million for the quarter ended March 31, 1997 from $0.3 million
for the same quarter in 1996. The increase was due primarily to the addition of
additional administrative staff and the added costs of operating as a public
company.
Other Income. Interest income rose to $0.6 million in the first quarter of
1997 compared with $0.0 million in the same period of 1996. The increase was due
to the investment of funds received from the initial public offering in June
1996.
The Company has experienced an operating loss for each of the last three
years and expects to continue to incur operating losses through at least 1997.
CVD's results of operations have varied significantly from quarter to quarter.
Quarterly operating results will depend upon several factors, including the
timing and amount of expenses associated with expanding the Company's
operations, the conduct of clinical trials and the timing of regulatory
approvals, new product introductions both in the United States and
internationally, the mix between pilot production of new products and fullscale
manufacturing of existing products, the mix between domestic and export sales,
variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent on orders received within that quarter. In addition,
the Company cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. The Company's expenses are relatively fixed and
difficult to adjust in response to fluctuation revenues. As a result of these
and other factors, the Company expects to continue to experience significant
fluctuations in quarterly operating results, and there can be no assurance that
the Company will be able to achieve or maintain profitability in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
sale of its equity securities, advances from EndoSonics, licensing its
technologies and through international product distribution agreements. Prior to
the Company's initial public offering, the Company had raised an aggregate of
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<PAGE> 23
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital from EndoSonics, which was repaid to
EndoSonics during the third quarter of 1996. In the third quarter of 1996, the
Company closed its initial public offering of common stock, resulting in net
proceeds of $42.8 million after deducting underwriting discounts and commissions
and other expenses of the offering. For the years ended December 31, 1996, 1995
and 1994, and the three month periods ended March 31, 1997 and 1996, the
Company's net cash used in operating activities was $6.2 million, $2.1 million,
$1.5 million, $2.2 million and $0.8 million, respectively. These increases were
primarily due to funding of operating losses and the charges for acquired
in-process research and development.
On March 31, 1997, CVD had cash, cash equivalents and marketable securities
available for sale of $40.8 million. The Company expects to incur substantial
costs related to, among other things, clinical testing, product development,
marketing and sales expenses, and to utilize increased levels of working capital
to finance its accounts receivable and inventories, prior to achieving positive
cash flow from operations. The Company anticipates that its existing capital
resources will be sufficient to fund its operations at least through June 30,
1998. CVD's future capital requirements will depend on many factors, including
its research and development programs, the scope and results of clinical trials,
the regulatory approval process, the costs involved in intellectual property
rights enforcement or litigation, competitive products, the establishment of
manufacturing capacity, the establishment of sales and marketing capabilities,
and the establishment of collaborative relationships with other parties. The
Company may need to raise funds through additional financings, including private
or public equity offerings and collaborative arrangements with existing or new
corporate partners. There can be no assurance that funds will be raised on
favorable terms, or at all. If adequate funds are not available, the Company may
be required to delay, scale back or eliminate one or more of its development
programs or obtain funds through arrangements with collaborative partners or
others that may require the Company to grant rights to certain technologies or
products that the Company would not otherwise grant.
Trade accounts receivable, net, increased 21% to $2.7 million as of March
31, 1997, compared with $2.3 million at December 31, 1996. The increase stemmed
from an increase in the sales level compared to the prior quarter. Specifically,
sales for the first quarter of 1997 were $3.0 million, while sales for the
fourth quarter of 1996 were $2.5 million.
Inventories rose 34% to $3.9 million as of March 31, 1997, compared with
$2.9 million at December 31, 1996, to meet current sales demand. Accounts
payable increased 21% to $0.9 million at March 31, 1997, compared with $0.8
million at the end of 1996, due to an increase in expenditures to support higher
sales.
Property and equipment, net, increased 11% from $1.2 million at December
31, 1996 to $1.3 million at March 31, 1997. The Company increased its investment
in capital assets during the first three months of 1997 to support rising
production and research and development efforts.
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BUSINESS
OVERVIEW
CardioVascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
Company's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. The
Company's proprietary Focus and Multiple Microporous Membrane ("M(3)")
technologies enable physicians to deliver therapeutic radial force, stents,
drugs or contrast media accurately and effectively to the treatment site, and
also allow the perfusion of blood during an interventional procedure. The
Company believes that the combination of these technologies on a multiple
purpose catheter enables physicians to more effectively perform challenging
interventional procedures, which may result in improved treatment outcomes and
lower costs. The Company's catheters are designed to address three principal
challenges facing cardiologists: restenosis of a treated vessel, chronic total
occlusions and acute reclosure of a vessel during or soon after a procedure. The
Company has eleven issued U.S. patents covering certain aspects of its catheter
technologies.
INDUSTRY BACKGROUND
Cardiovascular disease, the leading cause of death in the United States, is
caused principally by atherosclerosis. Atherosclerosis is a progressive and
degenerative vascular disease in which cholesterol and other fatty materials are
deposited on the walls of blood vessels, forming a build-up known as plaque. The
accumulation of plaque narrows the interior of the blood vessels, thereby
reducing blood flow. Atherosclerosis in the coronary arteries can lead to heart
attack and death. In peripheral vessels, atherosclerosis can lead to decreased
mobility, loss of function and other complications of the affected limb.
Traditional treatments for atherosclerosis include drug therapy and
open-heart bypass surgery. Currently available drug therapies may alleviate some
of the symptoms of atherosclerosis but may be ineffective with severe disease
and may cause adverse side effects. Traditional open-heart bypass surgery
involves opening a patient's chest, cutting through the sternum, connecting the
patient to a heart/lung machine and grafting a blood vessel to redirect blood
flow around the occluded portion of an artery. Such a procedure is costly and
generally requires up to a week of hospitalization and an extensive recovery
period. In addition, certain companies are developing methods and devices for
performing bypass surgery using minimally invasive techniques.
The need for less invasive and less costly treatments for atherosclerosis
has led to the development of minimally invasive catheter-based treatments such
as balloon angioplasty ("PTCA" in the coronary arteries and "PTA" in the
peripheral arteries), atherectomy and laser angioplasty. These treatments
involve making a small incision in a patient's leg to access an artery and
inserting a catheter. Balloon angioplasty is a procedure in which a
balloon-tipped catheter is guided to the lesion (the site of the plaque) and
then inflated and deflated several times, delivering therapeutic radial force,
which cracks or reshapes the plaque and increases blood flow. Balloons used to
perform such procedures are characterized by their response to pressure as
either compliant (balloon diameter increases with increased pressure) or
non-compliant (balloon diameter remains relatively constant with increasing
pressure). Conventional balloon technology only allows the balloon to expand to
a single, uniform diameter along the length of the balloon. Because of
variations in vessel diameters at the lesion site, multiple catheters are often
required to treat a single lesion. In addition, conventional catheter
technologies often are unable to limit the delivery of therapeutic radial force
specifically to the lesion site and may damage the adjacent vessel wall.
Conventional catheter technology also interrupts blood flow when the balloon is
inflated, which may cause tissue damage, heart attack or death, particularly if
the balloon inflation required is of significant duration. Existing catheters
that do not perfuse blood require cardiologists to inflate and deflate the
balloon multiple times which may reduce the clinical effectiveness of the
treatment. Other treatments include the use of atherectomy catheters, which cut
or grind away the plaque, and laser angioplasty catheters, which deliver laser
energy to break down the plaque.
Although catheter-based interventional therapies are generally successful
in initially increasing blood flow, studies indicate that after a traditional
coronary balloon angioplasty up to 50% of treated patients
23
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experience restenosis (generally defined as a 50% or greater reduction in the
lumen, or interior, diameter of the treated vessel at the lesion site). In
addition, studies show that 5% to 8% of elective coronary balloon angioplasty
patients may experience acute reclosure of the treated vessel. Acute reclosure
is an increase in the severity of the vessel closure accompanied by a reduction
in blood flow within the vessel as a consequence of the intervention which
occurs within 24 hours of the procedure. A study has also indicated that
angioplasty of chronic total occlusions represents 10% to 20% of all coronary
angioplasty procedures. A chronic total occlusion is a complete blockage of the
vessel preventing blood flow beyond the lesion site. The Company believes that
these challenges are inadequately addressed with existing, single function,
uniform diameter angioplasty balloons. However, while the Company believes that
its products address certain disadvantages of existing catheter technology,
limitations remain in the use of balloon angioplasty to treat atherosclerosis.
The Company's products may not be suitable for the treatment of all forms of
atherosclerosis. For example, in many cases the existence of a total occlusion
limits treatment options to bypass surgery.
Coronary stents have recently emerged as an additional minimally invasive
device for the treatment of atherosclerosis. Stents were used initially for
treating failed angioplasty procedures and acute or threatened vessel closures.
However, improved techniques for the deployment and assessment of stents,
changes in accompanying drug therapy and advancements in stent technology have
led to the increased use of stents to treat restenosis. After an angioplasty,
atherectomy or other catheter-based treatment, a stent, which is a small metal
prostheses, is then advanced along a guidewire to the desired position, expanded
against the inside of the vessel wall and left in place. While certain stents
are self-expanding, most are deployed through the expansion of a compliant or
semi-compliant balloon. Following this deployment, physicians have increasingly
adopted the technique of using a second, high pressure non-compliant balloon to
further expand the stent. Despite advancements in stent technology, existing
compliant or semi-compliant balloons used for stent delivery are designed to
achieve a uniform diameter along the length of the balloon, and their use may
result in sub-optimal stent deployment or damage of the vessel adjacent to the
lesion.
Although there continue to be significant technological and clinical
advances in the treatment of cardiovascular disease, challenges remain in
cost-effectively treating certain conditions, including restenosis of a treated
vessel, chronic total occlusions and acute reclosure of a vessel during or soon
after a procedure. The Company believes that these challenges are inadequately
addressed with existing, single function, uniform diameter angioplasty balloons.
THE CARDIOVASCULAR DYNAMICS SOLUTION
CVD has utilized its core proprietary technologies to develop catheters
that provide clinical and cost benefits in the treatment of vascular disease.
The Company's proprietary Focus and M(3) technologies, which may be utilized
alone or in combinations on a single catheter, enable physicians to deliver
therapeutic radial force, stents, drugs or contrast media accurately to the
treatment site, and also allow the perfusion of blood during an interventional
procedure. The Company believes that the combination of these technologies on a
single catheter enables physicians to cost-effectively treat vascular diseases
by reducing the cost of those procedures that require more than one catheter.
The Company's patented Focus technology combines compliant and
non-compliant balloon materials on a single catheter, creating a balloon that
has an adjustable, larger center diameter with fixed, smaller diameters at each
end. These characteristics allow a single balloon to expand to multiple
diameters, enabling the physician to perform interventional procedures in
vessels of varying diameters and anatomical locations. In particular, the Focus
technology enables cardiologists to incrementally increase the angioplasty
balloon's center diameter during a procedure to enhance the effectiveness of the
treatment in vessels that have uncertain or varying diameters or irregular
plaque deposits. Use of conventional catheter technology in these situations may
require multiple catheters to achieve a similar outcome. The Focus technology
may also reduce the incidental damage to the artery wall adjacent to the lesion,
as the therapeutic radial force is applied more accurately to the treatment
site.
The Company's proprietary M(3) technology combines multiple membranes of
polymeric balloon material to form a single balloon that enables the accurate
delivery of drugs or contrast agents to the lesion or thrombus
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site. Drugs are utilized by cardiologists to reduce the occurrence of restenosis
and acute reclosure, and to dissolve blood clots. Typically, therapeutic drug
delivery is accomplished by means of an intravenous injection, a method that
requires larger amounts of drug than is clinically required because the drug is
diffused throughout the body. The accurate delivery of drugs to the treatment
site may enhance the effectiveness of these pharmacological agents, thereby
reducing the quantity of drug required to achieve an acceptable clinical outcome
and potentially reducing the incidence of acute reclosure and restenosis. In
addition, the Company has developed M(3) catheters with multiple inner lumens,
providing the cardiologist with flexibility in drug treatment regimens. The
multiple lumens of the catheter may also be used to deliver contrast media for
angiographic viewing when advancing a catheter along a totally occluded vessel.
Traditional catheters must be removed to inject contrast media into a total
occlusion. Finally, the M(3) technology can be utilized to provide perfusion of
blood during an interventional procedure. The interruption in blood flow caused
by a conventional angioplasty balloon may cause tissue damage, heart attack or
death, particularly if the balloon inflation required is of significant
duration. Existing catheters that do not perfuse blood require cardiologists to
inflate and deflate the balloon multiple times for shorter periods which may
reduce the clinical effectiveness of the treatment.
STRATEGY
The Company's objective is to be a leader in the design, development and
commercialization of clinically effective solutions for certain vascular
diseases. While there can be no assurance that the Company will achieve this
objective, following are the key elements of CVD's strategy.
Maintain Technological Leadership and Product Technology
Advantages. CVD's strategy is to be a technological leader in the
treatment of vascular diseases through product innovation. The Company
believes that its products have significant performance advantages over
alternative catheter technologies. The Company intends to maintain and
advance its position of technology leadership through aggressive research,
development and clinical testing programs. The Company owns eleven issued
U.S. patents related to key aspects of its catheter technologies and has
applied for additional U.S. patents as well as foreign patent protection.
Market Products through Independent Distributors and a Direct
Salesforce. The Company currently markets its products through a
combination of independent distributors and a dedicated salesforce. The
Company currently employs eighteen direct sales people, fourteen of whom
operate in the United States, and four of whom operate internationally. The
Company plans to significantly expand its direct sales force over the next
eighteen months. CVD utilizes independent distributors internationally and
in selected U.S. markets. In addition, the Company entered into
co-distribution agreements with Medtronic, under which Medtronic will
purchase a minimum number of the Company's angioplasty catheters for
distribution worldwide for a period of up to three years.
Establish Relationships with Clinical Opinion Leaders. The Company
believes that establishing relationships with clinical opinion leaders in
the field of interventional cardiology may raise the awareness of the
clinical and cost benefits of the Company's products. CVD is currently
conducting or planning two post-marketing clinical studies with certain of
such leaders. In addition, the Company consults with certain cardiologists
who assist the Company in ongoing product and technology development.
Target International Markets. CVD seeks to commercialize its products
in those international markets where regulatory approval can be obtained
more quickly than in the United States. This enables CVD to generate
revenue more quickly from its product development efforts, to fund its
operations and increase awareness of its products within the international
interventional cardiology community.
Establish Strategic Partnerships. The Company attempts to identify
and evaluate potential strategic relationships where such relationships may
complement and expand the Company's research, development, sales and
marketing capabilities. The Company believes that such strategic
relationships may facilitate the market acceptance of the Company's
products.
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PRODUCTS
Catheter Products
The Company has utilized its Focus and M(3) technologies to develop
catheter products that address the challenges physicians experience in treating
vascular diseases. These technologies are available in various combinations on a
multiple-purpose catheter, thereby enabling physicians to cost-effectively treat
vascular disease. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, and flexible and trackable, enabling cardiologists to advance and
control them accurately within the vasculature.
The following table lists CVD's currently marketed products:
<TABLE>
<CAPTION>
FIRST
COMMERCIAL
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS SALE
- -------------------------- ----------------------- ------------------------ ----------
<S> <C> <C> <C>
Focus Catheters
ARC
Over-the-wire design PTCA PMA Supplement Approved Q3 1996
CAT/CAT 15
Rail design PTCA or Stent N/A(1) Q1 1995
Delivery(2)
FACT/FACT 15
Over-the-wire design PTCA or Stent Approved Q1 1996
Delivery(2)
Lynx F/X
Rail Design PTCA or Stent N/A(1) Q1 1997
Deliver(2)
Focus
Over-the-wire design PTA 510(k) Clearance Q3 1995
M(3) Catheters
Bullett Hi-Flo
Over-the-wire design Total Occlusion 510(k) Clearance Q2 1996
Drug Delivery
(coronary)
Bullett F/X
Rail design Total Occlusion 510(k) Clearance Q2 1996
Drug Delivery
(coronary)
Periflow Small Vessel
Over-the-wire design PTA/Drug Delivery 510(k) Clearance Q1 1996
DART Stent Coronary Stenting N/A(1) Q1 1997
Enforcer Stent Coronary Stenting N/A(1) Q1 1997
</TABLE>
- ---------------
(1) Available only outside the United States due to patent restrictions.
(2) Not approved in the United States for stent delivery. The marketing of this
product in the United States for such use will require the Company to obtain
a PMA supplement approval. The Company is not currently seeking such
approval.
Focus Catheters. The Company's Focus products have a catheter balloon that
has an adjustable, larger center diameter and smaller, fixed, distal and
proximal diameters. This characteristic provides increased utility in a variety
of therapeutic treatments and anatomical locations. Existing uniform diameter
catheters require cardiologists to use multiple balloons to treat vessels of
varying diameters, resulting in unnecessary costs. In
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<PAGE> 28
addition, the Focus catheters may deliver stents more effectively by focusing
the radial deployment force on the stented section, rather than along the entire
balloon, which may reduce the damage to the adjacent vessel.
M(3) Catheters. The Company's M(3) catheters offer cardiologists the
ability to deliver drugs or contrast media to the treatment site accurately and
enable the perfusion of blood during angioplasty procedures. These capabilities
may be combined on an interventional catheter to provide cardiologists the
functionality of multiple catheters, in a single, cost-effective device. The
accurate delivery of drugs to the treatment site may enhance the effectiveness
of these pharmacological agents and may reduce the quantity of drug required to
achieve an acceptable outcome. Drugs are utilized by cardiologists to reduce the
occurrence of restenosis and acute reclosure, and to dissolve blood clots.
Typically, therapeutic drug delivery is accomplished by means of an intravenous
injection, a method that requires larger amounts of drug than is clinically
required because the drug is diffused throughout the body. The Company's M(3)
technology enables cardiologists to deliver drugs directly to the treatment site
through a catheter's lumen, or interior channel. While CVD's M(3) site-specific
drug delivery catheters are currently marketed internationally, they can only be
used in the United States to administer drugs specifically approved by the FDA
for administration by such catheters. The multiple lumens of the catheter may
also be used to deliver contrast media for angiographic viewing when advancing
the catheter along a totally occluded vessel. Traditional catheters must be
removed to inject contrast media into a total occlusion. Finally, the M(3)
technology can be utilized to provide perfusion of blood during an
interventional procedure. This perfusion capability allows the balloon to be
inflated for longer durations and reduces the number of inflations and
deflations required in certain procedures, and may increase the clinical
effectiveness of the treatment.
Vascular Access Products
The Company's vascular access products utilize patented technology to
provide rapid, accurate access to the body's vascular system for guidewire and
catheter entry. The principal current product, called the SmartNeedle, was
acquired from ACS and is based on Doppler ultrasound technology. A miniaturized
ultrasound chip is placed at the tip of a disposable ultrasonic probe which is
then placed inside a conventional vascular access needle. The probe is then
connected to a separate reusable monitor. Once placed in the body as a part of
the access needle, the Doppler chip emits an audible signal which enables the
physician to more accurately determine whether or not the needle resides in the
proper location within the intended arterial or venous lumen. Once positioned
properly, the probe is removed, leaving the conventional access needle in place
within the artery or vein. Since introduction, the SmartNeedle's primary use has
been in interventional cardiology and radiology procedures.
NEW PRODUCT DEVELOPMENT
The Company focuses its research and development efforts on utilizing the
Company's proprietary processes and patented technologies to develop
cost-effective products that address existing and emerging clinical demands. The
Company's strategy is to refine its existing technologies and to enhance the
performance of its existing product offerings, including efforts to make its
Focus and M(3) products lower profile, more flexible and trackable, and operable
at a broader range of inflation pressures. In addition, the Company is
developing additional products utilizing combinations of its technologies that
may provide cardiologists greater therapeutic applicability in a single device.
The Company is also in the process of developing unique catheter designs
intended to provide enhanced delivery of therapeutic radial force and
pharmacological agents. The Company will be required to seek FDA approval for
any new product and it is
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<PAGE> 29
expected that some of these products will be subject to the PMA process. The
Company's current new product development efforts are summarized in the table
below.
<TABLE>
<CAPTION>
U.S. REGULATORY
PRODUCTS INTENDED APPLICATIONS STATUS
- -------------------------- ------------------------------------ ---------------------
<S> <C> <C>
Focus Catheters
Lynx
Over-the-wire design PTCA or Stent Delivery PMA Supplement Filed
Facilitated Force Controlled Plaque Incision and PTCA Development Stage
Vascular Stent
IDI Stent Peripheral Vascular Stent Development Stage
M(3) Catheters
Transport(1) PTCA/Drug Delivery Development Stage
Periflow Large-Vessel PTA/Drug Delivery 510(k) Clearance
MicroMembrane Radiation Delivery of Radioactive Materials Development Stage
for Restenosis Prevention
MAC I(2) Perfusion/PTCA Development Stage
MAC II Perfusion/Drug Delivery Development Stage
MAC III Perfusion/PTCA/Drug Delivery Development Stage
PD Access Vascular Access 510(k) Filed
</TABLE>
- ---------------
(1) Licensed to SCIMED. See " -- Strategic Relationships."
(2) Licensed to ACS. See " -- Strategic Relationships."
The M(3) technology is being utilized in various experimental clinical
programs to administer the site-specific delivery of therapeutic agents
following angioplasty or stent delivery for the purpose of reducing or
eliminating restenosis. The Company is also using M(3) technology in its
MicroMembrane Radiation Therapy development program for restenosis prevention.
This program is evaluating CVD's M(3) technology to more accurately deliver
radioactive substances specifically to the treatment site.
TECHNOLOGY
The Company has developed proprietary material manufacturing processes that
it has utilized to develop patented interventional catheters. Traditional
balloon extrusion technology does not enable the combination of compliant and
non-compliant materials, resulting in a catheter that can be inflated only to a
uniform diameter. The Company's Focus technology bonds a membrane between
compliant and non-compliant materials, resulting in a balloon with a large
center diameter and smaller, fixed diameters at each end. The center compliant
section of the Focus catheter enlarges predictably at a rate of 0.1mm per
atmosphere of pressure when inflation pressures exceed six atmospheres. The ends
of the balloon remain at their nominal diameters and do not expand with
increased pressure. The Focus capability enables cardiologists to deliver stents
or therapeutic radial force accurately to the treatment site, while minimizing
the force applied to adjacent tissue. Conventional uniform diameter catheters
may damage healthy vessel sections, as these sections receive as much radial
force as do the diseased sites. It is widely believed that vessel wall damage
may lead to acute reclosure of the vessel or restenosis.
The Company's M(3) technology creates a membrane by applying mechanical and
radiation treatment to standard polymeric balloon material during the extrusion
process. Microporous holes are then drilled in the resulting material by
proprietary mechanical or laser drilling processes. CVD's M(3) technology
enables blood to flow through a coil lumen or inner shaft of the catheter,
allowing perfusion to the distal vessels (those beyond the treatment site)
during angioplasty or drug delivery. Prior to inflation, the balloon acts as a
shaft for the distal portion of the catheter. Once the balloon is inflated, the
cardiologist advances a coil into and through the inner lumen of the inflated
balloon. The coil supports the balloon during balloon angioplasty or drug
delivery and facilitates the perfusion of the distal vessels. The M(3)
technology enables the Company to combine balloon angioplasty and perfusion
capabilities on a single catheter in a profile comparable to standard balloon
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<PAGE> 30
angioplasty catheters without perfusion capability. The Company believes that
the M(3) technology also enables it to combine PTCA and perfusion capabilities
on a single catheter with a lower profile than any currently marketed catheter
with similar capabilities.
The Company's IDI subsidiary, which was acquired in October 1996, utilizes
patented technology in the development of medical stents for the treatment of
patients with vascular disease caused by aneurysms or atherosclerosis. IDI is
developing a compact, self-expanding metallic stent with a micro-porous surface
for use as either a stent or a stent graft. By selecting metal foil of the
proper thickness and tensile strength, and heat-treating it in the proper shape,
the Company believes it will be able to form devices with low profiles, high
expansion ratios and excellent hoop strength, which are factors critical for
successful device placement. There can be no assurance that IDI will
successfully complete the development of any products or that any such products
will receive any required regulatory approvals.
MANUFACTURING
With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States, and the
manufacture of those products which the Company has licensed to third parties,
all of the Company's products are produced in its facilities in Irvine,
California. The Company fabricates certain proprietary components, then
assembles, inspects, tests and packages all components into finished products.
By designing and assembling its catheter products, the Company believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and manage manufacturing process enhancements and new
product introductions. In addition, the Company purchases many standard and
custom-built components from independent suppliers and subcontracts certain
processes from independent vendors. Most of these components and processes are
available from more than one vendor. However, certain manufacturing processes
are currently performed by single vendors. While the Company believes that there
are other vendors available to perform these processes, an interruption of
performance by any of these vendors could have a material adverse effect on the
Company's ability to manufacture its products until a new source of supply were
qualified and, as a result, could have an adverse effect on the Company's
business, financial condition and results of operations.
The Company's success will depend in part upon its ability to manufacture
its products in compliance with ISO 9001, the FDA's GMP regulations, CDHS
licensing and other regulatory requirements, in sufficient quantities and on a
timely basis, while maintaining product quality and acceptable manufacturing
costs. The Company began manufacturing certain of its products at its facilities
in July 1995. The Company also introduced a significant number of new products
in 1996. Accordingly, the Company has very limited experience in manufacturing
its products. In addition, on July 15, 1996, the Company entered into co-
distribution agreements with Medtronic which granted Medtronic certain
non-exclusive rights to distribute the Company's FACT, CAT and ARC catheters.
Under the terms of these agreements, if the Company is unable to meet its
delivery obligations with respect to the purchased catheters, up to 60% of the
Company's manufacturing capacity will be devoted to manufacturing such catheters
for Medtronic. The Company has undergone and expects to continue to undergo
regular GMP inspections in connection with the manufacture of its products at
the Company's facilities. The Company's success will depend, among other things,
upon its ability to efficiently manage the simultaneous manufacture of different
products and to integrate the manufacture of new products with existing
products. There can be no assurance that the Company will not encounter
difficulties in scaling up production of new products, including problems
involving production yields, quality control and assurance, component supply and
shortages of qualified personnel. The Company's failure to successfully commence
the manufacturing of these new products, or to increase production volumes of
new and existing products in a timely manner, would materially adversely affect
the Company's business, financial condition and results of operations. Failure
to increase production volumes in a timely or cost-effective manner or to
maintain compliance with ISO 9001, GMP regulations, CDHS or other regulatory
requirements could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Risk Factors -- Limited
Manufacturing Experience."
29
<PAGE> 31
MARKETING AND SALES
The Company's products are sold in the United States and international
markets, principally Europe and Japan. However, certain of the Company's
products are not available in each market due to regulatory and intellectual
property restrictions. The Company currently sells its products through a
combination of strategic partners, medical device distributors and eighteen
direct sales personnel. The Company is a party to three agreements for the U.S.
distribution of products incorporating its Focus and M(3) technologies. CVD also
has distribution agreements with 25 companies covering 41 countries outside the
United States and Japan. CVD currently distributes certain products in Japan
through an exclusive distribution agreement with Fukuda. Sales of the Company's
products through Fukuda accounted for 18% and 15% of the Company's total product
sales in 1995 and 1996, respectively. The Company recently informed Fukuda of
its decision to terminate the existing Fukuda agreement and does not expect that
any obligations will arise as a result of such termination. The Company expects
that Fukuda will continue to distribute its products at least through 1997. The
Company is currently negotiating with several distributors, including Fukuda,
regarding a new distribution agreement for the Japanese market. In addition,
sales to JJIS accounted for 12% of total product sales in 1995 and sales to
Medtronics accounted for 22% of total product sales in 1996. The Company intends
to expand its sales and marketing capability and to distribute selected new
products through strategic partnerships. See "Risk Factors -- Limited Marketing
and Sales Resources; Dependence Upon Strategic Relationships."
In 1994, 1995 and 1996, total export sales were $970,000, $2,054,000 and
$3,514,000, respectively, or approximately 83%, 59% and 42% respectively, of
total product sales. In 1994, 1995 and 1996 sales to Europe accounted for
$255,000, $1,179,000 and $1,614,000, respectively; sales to Japan represented
$715,000, $744,000 and $1,240,000, respectively; and sales to Latin America
represented $0, $131,000 and $243,000, respectively. The Company expects to
continue to derive significant revenue from international sales and therefore a
significant portion of the Company's revenues will continue to be subject to the
risks associated with international sales, including economic or political
instability, shipping delays, changes in applicable regulatory policies,
inadequate protection of intellectual property, fluctuations in foreign currency
exchange rates and 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. Future imposition of, or significant increases in the level
of, customs duties, export quotas or other trade restrictions, could have an
adverse effect on the Company's business, financial condition and results of
operations. In foreign countries, the Company's products are subject to a wide
variety of governmental review and certification. The regulation of medical
devices, particularly in the European Community, continues to expand and there
can be no assurance that new laws or regulations will not have an adverse effect
on the Company. See Note 1 of Notes to Consolidated Financial Statements. See
"Risk Factors -- Dependence Upon International Sales."
POST-MARKETING CLINICAL STUDIES
The Company has completed the clinical trials required for FDA approval of
those products which are marketed in the United States. In addition to those
trials, the Company is also sponsoring a controlled, randomized, multicenter
clinical study in the United States to continue to evaluate the clinical and
economic value of its core technologies. Data from this study is being
accumulated and analyzed to support the marketing of the Company's current
products.
In a Comparative Performance and Pathological Study conducted by the
Division of Cardiology at the University of Texas Department of Medicine, the
Company's FACT catheter was compared with conventional PTCA catheters from other
leading manufacturers in an animal study. The investigators concluded that the
use of the FACT catheter resulted in reduced arterial damage without reduction
in catheter performance as determined by catheter preparation, trackability,
pushability, inflation/deflation and angiographic visualization.
A second study is comparing the Focus PTCA catheter with conventional PTCA
catheters. The Focus Lesion Expansion Optimizes Results Study ("FLEXOR Study")
will evaluate the efficacy of Focus technology in improving clinical results
following angioplasty procedures. Success will be measured based on the ability
of Focus technology to improve the minimal lumen diameter ("MLD") of the
arterial opening, to
30
<PAGE> 32
increase safety and to reduce the number of catheters necessary for PTCA
procedures. Results will be interpreted in light of any procedure-related
vascular complications, restenosis and occurrences of other major clinical
adverse cardiac events. MLD is a commonly-used measurement of the ability of a
therapeutic tool to open a blocked artery and reestablish required blood flow.
The FLEXOR Study was commenced in the fourth quarter of 1996. Completion is
expected in 1997.
Certain of the Company's products which utilize Focus technology have
received FDA approval for PTCA and PTA indications. However, none of these
products has received FDA approval for use in stent delivery. An
investigator-controlled study is currently testing the Company's Focus
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") is evaluating the ability of stent delivery with Focus
technology compared with conventional delivery techniques to reduce acute
outcomes and restenosis rates. The study is being conducted using two patient
subgroups of approximately 100 patients each divided according to vessel size.
In the first group, stent delivery is being evaluated in vessels greater than
three millimeters in diameter; in the second group stent delivery is being
evaluated in vessels less than three millimeters in diameter. Each subgroup
presents different clinical issues related to stent delivery and the OSTI-2
Study protocol is evaluating the efficacy of Focus technology in each subgroup.
The OSTI-2 Study began in February 1996 and is expected to be completed in 1997.
The Company also intends to sponsor additional studies from time to time to
assess the value of, and to expand clinical indications of, its existing and new
technologies. The Company is planning a clinical study to expand the clinical
uses of its Focus technology catheters to include balloon dilatation of
previously deployed stents in order to properly implant the stent in the
arterial wall of small coronary vessels. This study will include approximately
100 patients and is expected to be completed in 1997.
STRATEGIC RELATIONSHIPS
The Company evaluates on an ongoing basis potential strategic relationships
with corporate and other partners where such relationships may complement and
expand CVD's research, development, sales and marketing capabilities. The
Company is currently a party to four such agreements, described below.
Advanced CardioVascular Systems, Inc. In January 1995, the Company entered
into a license agreement with ACS. The parties subsequently confirmed their
understanding with respect to certain matters in a second agreement dated March
4, 1996 (collectively, the "ACS Agreements"). Under the ACS Agreements, the
Company acquired certain rights to ACS' SmartNeedle technology, subject to the
payment of certain royalties. ACS was granted the option to acquire the
exclusive worldwide rights to certain CVD perfusion technology, which ACS
exercised on February 14, 1996. As a result, ACS has an exclusive worldwide
right to develop, manufacture and market the Company's MAC I product line. In
exchange for this technology, ACS is obligated to make milestone and minimum
annual royalty payments to CVD, and also has certain obligations to develop and
market the technology. In addition, in the event that CVD develops a product
which combines coronary balloon angioplasty, perfusion and drug delivery
technology on the same catheter, ACS will have certain rights to license such
product. The ACS Agreements may be terminated upon 60 days notice in the event
of a breach by the other party, subject to the breaching party's right to cure,
or by ACS upon 30 days notice without cause.
SCIMED Life Systems, Inc. The Company has entered into a Stock Purchase
and Technology License Agreement, dated September 10, 1994, with SCIMED (the
"SCIMED Agreement"). Pursuant to the SCIMED Agreement, SCIMED purchased a 19%
equity position in the Company. SCIMED was also granted an exclusive worldwide
license to certain combined site-specific drug delivery and coronary angioplasty
technology, including the Company's Transport products, for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses. In the event that CVD's
SCIMED-funded research and development efforts result in improvements to the
licensed technology, SCIMED will have an exclusive worldwide license to the
technology in the cardiovascular field and a non-exclusive license outside the
cardiovascular field, both of which are subject to the payment of royalties. The
SCIMED Agreement may be
31
<PAGE> 33
terminated in the event of breach on 90 days notice by the non-breaching party
(or on 30 days notice in certain limited circumstances) or by SCIMED upon 180
days notice.
Fukuda Denshi Co., Ltd. The Company entered into a Distribution Agreement,
dated May 28, 1993, with Fukuda Denshi Co., Ltd. (the "Fukuda Agreement"),
whereby Fukuda served as CVD's exclusive distributor for certain of the
Company's products in Japan. In exchange for this exclusive distributorship,
Fukuda paid a fee to CVD in addition to payments owing upon the purchase of the
products. Fukuda also agreed to undertake all necessary clinical trials to
obtain approval from Japanese regulatory authorities for the sale of the
products in Japan. Fukuda's purchases under the Fukuda Agreement are subject to
certain minimum requirements. The initial term of the Fukuda Agreement expires
on May 31, 1998, subject to a five-year extension. The Fukuda Agreement may also
be terminated in the event of breach upon 90 days notice by the non-breaching
party. In July 1995 and May 1996, the distribution agreement with Fukuda was
amended to grant Fukuda exclusive distribution rights to additional CVD
products. Under these amendments, the Company received $750,000 which converted
into the right to receive 62,500 shares of Common Stock upon the consummation of
the Company's initial public offering on June 19, 1996. Fukuda received these
shares on November 29, 1996. The Company recently informed Fukuda of its
decision to terminate the existing Fukuda Agreement and does not expect that any
obligations will arise as a result of such termination. The Company expects that
Fukuda will continue to distribute its products at least through 1997. The
Company is currently negotiating with several distributors, including Fukuda,
regarding a new distribution agreement for the Japanese market.
EndoSonics Corporation. The Company has entered into a license agreement
with EndoSonics, dated December 22, 1995 (the "EndoSonics Agreement"), pursuant
to which CVD granted EndoSonics the non-exclusive, royalty-free right to CVD's
Focus technology for the development and sale of a combined Focus/Ultrasound
product. In exchange, CVD received the non-exclusive, royalty-free right to
submit PMA supplement applications utilizing an EndoSonics PMA as a reference
and to manufacture and distribute CVD products as a supplement to the EndoSonics
PMA. The EndoSonics Agreement may be terminated in the event of breach upon 60
days notice by the nonbreaching party, subject to the breaching party's right to
cure. In the event of termination, the Company would be prohibited from
submitting new PMA supplements referencing the EndoSonics PMA and would be
required to seek independent FDA approval for such products, which would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, in March of 1996, EndoSonics purchased
400,000 shares of CVD's Series B Preferred Stock for a purchase price of
$8,000,000, that converted into 800,000 shares of Common Stock upon the
consummation of the Company's initial public offering on June 19, 1996. See
"Certain Transactions -- Relationship with EndoSonics Corporation."
Medtronic, Inc. On July 15, 1996, the Company entered into co-distribution
agreements with Medtronic, providing for the co-distribution of the Company's
FACT, CAT and ARC balloon angioplasty catheters. Under the terms of these
agreements, Medtronic will purchase a minimum number of angioplasty catheters
manufactured by the Company for distribution worldwide for a period of up to
three years. If the Company is unable to meet its delivery obligations regarding
the purchased catheters, up to 60% of the Company's manufacturing capacity will
be devoted to manufacturing such catheters for Medtronic. Specific products to
be distributed by Medtronic will differ in individual country markets. The
initial term of the Medtronic agreements is for a period of three years from the
date of first delivery of a product. The agreements may be terminated in the
event of breach upon notice by the nonbreaching party, subject to the breaching
party's right to cure.
PATENTS AND PROPRIETARY INFORMATION
The Company's policy is to protect its proprietary position by, among other
methods, filing U.S. and foreign patent applications to protect technology,
inventions and improvements that are important to the development of its
business. The Company has eleven issued U.S. patents covering certain aspects of
its catheter technology and licenses, and additional patents relating to the
vascular access and IDI stent technology. No assurance can be given that any
issued patents will provide competitive advantages for the Company's products,
or that they will not be challenged or circumvented by competitors.
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The interventional cardiovascular market in general and the balloon
angioplasty catheter market (including the type of catheters offered by CVD) in
particular have been characterized by substantial litigation regarding patent
and other intellectual property rights. There can be no assurance that the
Company's products do not infringe such patents or rights. During 1996, the
Company received a notice of potential trademark infringement regarding the
Company's use of the term "focal" in connection with the Company's balloon
angioplasty catheter. CVD entered into an agreement which prohibits the Company
from using this term. The Company has since ceased any use thereof. In the event
that any such third-parties assert claims against the Company for patent
infringement and such patents are upheld as valid and enforceable, the Company
could be prevented from utilizing the subject matter claimed in such patents, or
would be required to obtain licenses from the owners of any such patents or
redesign its products or processes to avoid infringement. There can be no
assurance that such licenses would be available or, if available, would be so on
terms acceptable to the Company or that the Company would be successful in any
attempt to redesign its products or processes to avoid infringement. In
addition, foreign intellectual property laws may not provide protection
commensurate with that provided by U.S. intellectual property laws, and there
can be no assurance that foreign intellectual property laws will adequately
protect the Company's intellectual property rights abroad. The Company also
relies on trade secrets and proprietary technology and enters into
confidentiality and non-disclosure agreements with its employees, consultants
and advisors. There can be no assurance that the confidentiality of such trade
secrets or proprietary information will be maintained by employees, consultants,
advisors or others, or that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors in such a manner that the Company has no practical recourse.
Litigation may be necessary to defend against claims of infringement or
invalidity, to enforce patents issued to the Company or to protect trade
secrets. There can be no assurance that any such litigation would be successful.
Any litigation could result in substantial costs to, and diversion of resources
by, the Company and its officers, which would have a material adverse effect on
its business, financial condition and results of operations. See "Risk
Factors -- Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement."
COMPETITION
The Company believes that the primary competitive factors in the market for
interventional cardiology devices are: clinical effectiveness, product safety,
catheter size, flexibility and trackability, ease of use, reliability, price and
availability of third party reimbursement. In addition, a company's distribution
capability and the time in which products can be developed and receive
regulatory approval are important competitive factors. The Company believes it
competes favorably with respect to the foregoing factors. The Company also
believes that its competitive position is dependent upon its ability to continue
to develop innovative new catheter technologies and obtain rapid regulatory
approval.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. The interventional cardiology market is characterized by rapid
technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's catheters and
other products under development compete or will compete with catheters marketed
by a number of manufacturers, including ACS, SCIMED, JJIS and Cordis
Corporation, subsidiaries of Johnson & Johnson, Medtronic, Inc., C.R. Bard, Inc.
and Schneider USA, a subsidiary of Pfizer, Inc. Such companies have
significantly greater financial, management and other resources, established
market positions, and significantly larger sales and marketing organizations
than does the Company. The Company also faces competition from manufacturers of
other catheter-based atherectomy devices, vascular stents and pharmaceutical
products intended to treat vascular disease. In addition, the Company believes
that many of the purchasers and potential purchasers of the Company's products
prefer to purchase catheter products from a single source. Accordingly, many of
the Company's competitors, because of their size and range of product offerings,
have a competitive advantage over the Company. There can be no assurance that
the Company's competitors will not succeed in developing or marketing
technologies and products that are more clinically effective or cost effective
than any that are being marketed or developed by the Company, or that such
competitors will not succeed in obtaining regulatory approval for introducing or
commercializing any such products prior to the Company. See "Risk
Factors -- Significant Competition."
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THIRD-PARTY REIMBURSEMENT
In the United States, the Company's products are purchased primarily by
medical institutions, which then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the health care services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the U.S. HCFA. The fixed rate
of reimbursement is based on the procedure performed, and is unrelated to the
specific devices used in that procedure. If a procedure is not covered by a DRG,
payors may deny reimbursement. In addition, some payors may deny reimbursement
if they determine that the device used in a treatment was unnecessary,
inappropriate or not cost-effective, experimental or used for a non-approved
indication. Reimbursement of interventional procedures utilizing the Company's
products is currently covered under a DRG. There can be no assurance that
reimbursement for such procedures will continue to be available, or that future
reimbursement policies of payors will not adversely affect the Company's ability
to sell its products on a profitable basis. Failure by hospitals and other users
of the Company's products to obtain reimbursement from third-party payors, or
changes in government and private third-party payors' policies toward
reimbursement for procedures employing the Company's products, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors -- Limitations on Third-Party
Reimbursement."
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. The Company believes that its success will be significantly dependent
upon commercial sales of improved versions of its catheter products. The Company
will not be able to market these new products in the United States unless and
until the Company obtains approval or clearance from the FDA. Foreign and
domestic regulatory approvals, if granted, may include significant limitations
on the indicated uses for which a product may be marketed.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a legally marketed Class I or Class II
device, or to a Class III device that the FDA has not called for a PMA, the
manufacturer may seek clearance from the FDA to market the device by filing a
premarket notification with the FDA under Section 510(k) of the Federal Food,
Drug, and Cosmetic Act. All of the 510(k) clearances received for the Company's
catheters were based on substantial equivalence to legally marketed devices.
There can be no assurance that 510(k) clearance for any future product or
significant modification of an existing product will be granted or that the
process will not be unduly lengthy. In addition, if the FDA has concerns about
the safety or effectiveness of any of the Company's products, it could act to
withdraw approval or clearances of those products or request that the Company
present additional data. Any such actions would have a material adverse effect
on the Company's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
that the device or the particular application for the device requires a more
rigorous review to assure safety and effectiveness, the FDA will require that
the manufacturer submit a PMA application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and always requires the submission of clinical data. It
is expected that certain of the Company's products under development will be
subject to this PMA process. The Company currently has a non-exclusive,
royalty-free right to submit PMA supplement applications utilizing an EndoSonics
PMA as a reference and to manufacture and distribute CVD products as a
supplement to the EndoSonics PMA. This agreement may be terminated in the event
of breach upon 60 days notice by the non-breaching party, subject to the
breaching party's right to cure. In the event of termination, the Company would
be prohibited from submitting new PMA supplements referencing the EndoSonics PMA
and would be required to seek independent FDA approval for any such products,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
34
<PAGE> 36
The Company is also required to register as a medical device manufacturer
with the FDA and maintain a license with certain state agencies, such as the
CDHS. As such, the Company is inspected on a routine basis by both the FDA and
the CDHS for compliance with GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
The Company has also undergone and expects to continue to undergo regular GMP
inspections in connection with the manufacture of its products at the Company's
facilities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting laws and regulations
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its 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. CVD has
received FDA approval to market the FACT and ARC catheters, which utilize the
FOCUS technology, for coronary balloon angioplasty. These catheters are marketed
outside the United States for use in stent deployment. However, without specific
FDA approval for stent deployment, these catheters may not be marketed by the
Company in the United States for such use.
Failure to comply with applicable regulatory requirements can, among other
consequences, result in fines, injunctions, civil penalties, suspensions or loss
of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, government regulations may
be established in the future that could prevent or delay regulatory clearance or
approval of the Company's products. Delays in receipt of clearances or
approvals, failure to receive clearances or approvals or the loss of previously
received clearances or approvals would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations.
International sales of the Company's products are subject to the
registration requirements of each country. The regulatory review process varies
from country to country and may in some cases require the submission of clinical
data. The Company typically relies on its distributors in such foreign countries
to obtain the requisite regulatory approvals. There can be no assurance,
however, that such approvals will be obtained on a timely basis or at all. In
addition, the FDA must approve the export to certain countries of devices that
require a PMA but are not yet approved domestically. The European Union has
promulgated rules which require that medical products receive by mid-1998 the
right to affix the CE mark, an international symbol of adherence to quality
assurance standards and compliance with applicable European medical device
directives. Failure to receive the right to affix the CE mark will prevent the
Company from selling its products in member countries of the European Union,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
PRODUCT LIABILITY
The Company faces the risk of financial exposure to product liability
claims. The Company's products are often used in situations in which there is a
high risk of serious injury or death. Such risks will exist even with respect to
those products that have received, or in the future may receive, regulatory
approval for commercial sale. The Company is currently covered under a product
liability insurance policy with coverage limits of $2.0 million per occurrence
and $2.0 million per year in the aggregate. There can be no assurance that the
Company's product liability insurance is adequate or that such insurance
coverage will remain available at acceptable costs. There can be no assurance
that the Company will not incur significant product liability claims in the
future. A successful claim brought against the Company in excess of its
insurance coverage could have a material adverse effect on the Company's
business, financial condition and results of operations. Additionally, adverse
product liability actions could negatively affect the reputation and sales of
the
35
<PAGE> 37
Company's products and the Company's ability to obtain and maintain regulatory
approval for its products and substantially divert the time and effort of
management away from the Company's operations.
EMPLOYEES
As of April 15, 1997, the Company had 161 employees, including 94 in
manufacturing, 32 in research, development and regulatory affairs, 28 in sales
and marketing and 7 in administration. The Company believes that the success of
its business will depend, in part, on its ability to attract and retain
qualified personnel. The Company believes it has good relations with its
employees.
PROPERTIES
Currently, the Company leases facilities aggregating approximately 33,000
square feet in Irvine, California under lease agreements which expire beginning
in 1998. The Company believes that its facilities are adequate to meet its
requirements through mid-1998.
36
<PAGE> 38
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company, and
their ages as of May 30, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ---- ------------------------------------------
<S> <C> <C>
Michael R. Henson......................... 51 President, Chief Executive Officer and
Chairman of the Board of Directors
Dana P. Nickell........................... 47 Vice President, Finance and
Administration, Chief Financial Officer
and Secretary
Harold A. Heitzmann....................... 49 Vice President, Research, Development and
Engineering
Jeffrey F. O'Donnell...................... 37 Vice President, Sales and Marketing
Jeffrey H. Thiel.......................... 41 Vice President, Operations
Claire K. Walker.......................... 50 Vice President, Clinical Affairs
Bart R. Navarro........................... 51 Director of Research and Development
George F. Kick............................ 51 Business Manager, Peripheral Products
Blair W. Breyne........................... 38 Director of International Market
Development
Robert J. Imdieke......................... 43 Manager, Quality Assurance
Mitchell Dann(1).......................... 36 Director
William G. Davis(1)....................... 65 Director
Gerard von Hoffmann(2).................... 41 Director
Edward M. Leonard(2)...................... 55 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Michael R. Henson joined the Company as President and Chief Executive
Officer in February 1995. Prior to joining CVD, Mr. Henson served as the Chief
Executive Officer of EndoSonics from 1988 to February 1995. He was appointed
Chairman of the Board of Directors of EndoSonics in February 1993. Between April
1983 and February 1988, Mr. Henson served as President and Chief Executive
Officer of Trimedyne, Inc., a manufacturer of medical lasers and catheters.
Prior to joining Trimedyne in 1983, Mr. Henson held positions as Vice President
for G.D. Searle & Company, Director of Marketing for the Hospital Products
Division of Abbott Laboratories, and Marketing Manager for Bristol Myers and
Company. Mr. Henson is also a director of Urologix, Inc.
Dana P. Nickell joined the Company as Vice President, Finance and
Administration and Chief Financial Officer in December 1995 and was appointed
Secretary in May 1996. Prior to joining CVD he was Chief Financial Officer of
Innerspace Inc., a medical device manufacturer which filed for bankruptcy
protection in 1995, from May 1994 to April 1995. From August 1993 until April
1994, Mr. Nickell served as Chief Financial Officer of Masimo Corporation, a
developer of pulse oximeter technology. Between November 1988 and June 1993, Mr.
Nickell was Chief Financial Officer and Vice President, Finance, Administration
and Business Development of EndoSonics. He also served as Secretary of
EndoSonics from January 1990 to August 1992. Mr. Nickell is a Certified Public
Accountant.
Harold A. Heitzmann, Ph.D., joined the Company as Vice President, Research,
Development and Engineering in March 1997. From September 1995 to February 1997,
Dr. Heitzmann was Vice President, Catheter Development for Cardiac Pathways.
From September 1991 to April 1995, Dr. Heitzmann was Director of Engineering at
Innerspace, Inc., a medical device company. From 1983 to September 1991, Dr.
Heitzmann held various engineering management positions with Baxter Healthcare
Corporation, most recently as Director of Advanced Cardiology Projects.
Jeffrey F. O'Donnell has served as Vice President, Sales & Marketing at the
Company since November 1995. Prior to joining CVD, Mr. O'Donnell served as
President and Vice President of Marketing
37
<PAGE> 39
and Business Development of Kensey Nash Corporation, a medical device
manufacturer, from January 1994 to May 1995. From 1988 to 1994 Mr. O'Donnell
held various sales and regional management positions at ACS. Prior to working at
ACS, Mr. O'Donnell held senior sales and marketing positions with Boston
Scientific and Johnson & Johnson.
Jeffrey H. Thiel has served as Vice President, Operations since October
1996. Prior to joining CVD, Mr. Thiel served as Director of Operations of BEI
Medical Systems from May 1995 to October 1996. From July 1989 to November 1994,
Mr. Thiel held various Manufacturing and Operation Management positions with St.
Jude Medical.
Claire K. Walker joined the Company in November 1994 as Director of
Clinical Affairs of the Company. In April 1997, she became Vice President,
Clinical Affairs. From May 1992 to November 1994, Ms. Walker provided clinical
marketing consulting services to CVD. From September 1990 to November 1992, Ms.
Walker served as a principal of CKW and Associates providing project specific
consulting services to InterVentional Technologies, Inc., a medical device
company. From July 1981 to August 1988, Ms. Walker was employed by ACS as a
clinical specialist and from 1984 through 1988 worked as a direct sales
representative. Ms. Walker also worked as a cardiovascular catheterization
laboratory nurse.
Bart R. Navarro joined the Company in February 1995 as Director of
Manufacturing. In January 1997, he became Director of Research and Development.
From September 1989 to February 1995, Mr. Navarro served as Director of
Manufacturing for Eclipse Surgical Technologies, Inc. From March 1985 to
September 1989, Mr. Navarro served as Manager of Manufacturing for MCM
Laboratories, Inc., a medical device manufacturer. From June 1981 to March 1985,
Mr. Navarro served as a Process Engineer for Manufacturing for ACS.
George F. Kick joined the Company in March 1995 and served as Director of
U.S. Marketing until December 1995 when he became the Business Manager,
Peripheral Products. From January 1992 to March 1995, Mr. Kick worked as a
consultant and project manager at NeuroNavigational, a medical device
manufacturer, developing minimally invasive vascular surgical systems for
arterial bypass in the leg. From February 1979 to December 1991, he served as
President of Dynamic Concepts, a cardiovascular distribution company,
representing Trimedyne, Telectronics, CryoLife and other high tech start-up
companies.
Blair W. Breyne joined the Company in January 1994 and has served as
Director of International Market Development for the Company since January 1995.
From January 1994 through December 1994, Ms. Breyne served as Manager of
International Market Development. Prior to joining the Company, Ms. Breyne was
employed by EndoSonics from May 1990 through December 1993 as Manager and
National Manager of Sales and Clinical Applications.
Robert J. Imdieke joined the Company as Manager of Quality Assurance in
January 1995. Prior to joining CVD, Mr. Imdieke served as Manager, Quality
Assurance at Imagyn Medical, Inc. from June 1991 to January 1995. From December
1989 until February 1991, he served as Quality Control Supervisor at Advanced
Interventional Systems. Mr. Imdieke also served as Quality Assurance Manager at
Trimedyne, Inc. from November 1984 through May 1989.
Mitchell Dann joined the Company as a director in April 1996. Since April
1991, Mr. Dann has been President of M. Dann & Co., Inc., a venture capital
advisory firm. From October 1982 to April 1991, he co-founded and held the
position of Managing Partner at IAI Venture Capital Group, the venture capital
division of Investment Advisors, Inc. Mr. Dann is Chairman of the Board of
Urologix, Inc.
William G. Davis joined the Company as a director in January 1995. Mr.
Davis is an independent business consultant. From 1957 to 1984, Mr. Davis was
associated with Eli Lilly and Company. He served as Executive Vice President,
Eli Lilly International Corporation, from 1972 to 1975, Executive Vice
President, Pharmaceutical Division, from 1975 to 1982, and President, Medical
Instrument Systems Division, from 1982 until his retirement in 1984. Mr. Davis
is also a director of ALZA Corporation, Collagen Corporation, EndoSonics and
Target Therapeutics, Inc.
38
<PAGE> 40
Gerard von Hoffmann joined the Company as a director in April 1996. He has
been with the law firm of Knobbe, Martens, Olson & Bear LLP since 1986 and has
been a partner since 1989.
Edward M. Leonard was appointed as a director in April 1996. He has been a
partner in the law firm of Brobeck, Phleger & Harrison LLP since 1977. Mr.
Leonard is also a director of EndoSonics.
The Company currently has authorized five directors. Each director holds
office until the next annual meeting of stockholders or until his successor is
duly elected and qualified. The officers serve at the discretion of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee and an
Audit Committee. The Compensation Committee establishes salaries, incentives and
other forms of compensation for directors, officers and other employees of CVD,
administers the various incentive compensation and benefit plans (including the
Company's stock plans) of CVD and recommends policies relating to such incentive
compensation and benefit plans. The Audit Committee reviews the need for
internal auditing procedures and the adequacy of internal controls and meets
periodically with management and the independent auditors. The Board of
Directors may establish additional committees from time to time.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation earned
by the Company's Chief Executive Officer, and the two other executive officers
whose compensation for the 1996 fiscal year was in excess of $100,000 (the
"Named Officers"), for services rendered in all capacities to the Company for
each of the last two fiscal years. No other executive officers received
compensation in excess of $100,000 for each of the last two fiscal years. No
executive officer who would have otherwise been includable in such table on the
basis of salary and bonus earned for the 1996 fiscal year resigned or terminated
employment during that year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SHARES
----------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS OPTIONS
- -------------------------------------------------- ---- -------- ------- ------------
<S> <C> <C> <C> <C>
Michael R. Henson................................. 1996 $200,000 $60,000 130,000
President and Chief Executive Officer 1995 189,850 70,000 250,000
Dana P. Nickell................................... 1996 108,000 19,440 --
Vice President, Finance and Administration 1995 5,934 -- --
Jeffrey F. O'Donnell.............................. 1996 179,200 15,000 --
Vice President, Sales and Marketing 1995 8,585 4,000 --
</TABLE>
- ---------------
(1) Includes amounts contributed by the Named Officers to the Company's 401(K)
Plan.
39
<PAGE> 41
OPTION GRANTS IN LAST FISCAL YEAR
The following table provides information with respect to the stock option
grants made during the 1996 fiscal year under the Company's 1996 Stock
Option/Stock Issuance Plan to the Named Officers. No stock appreciation rights
were granted during such fiscal year to the Named Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------------- VALUE
% OF TOTAL AT ASSUMED ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES IN OR BASE OPTION TERM
OPTIONS FISCAL PRICE EXPIRATION -------------------------
NAME GRANTED(1) YEAR(2) ($/SH)(3) DATE 5%($)(4) 10%($)(4)
- ------------------------ ---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson....... 130,000 40.75% $ 12.50 11/03/2006 $1,021,954 $2,589,831
Dana P. Nickell......... -- -- -- -- -- --
Jeffrey F. O'Donnell.... -- -- -- -- -- --
</TABLE>
- ---------------
(1) The option listed in the table was granted under the Company's 1996 Stock
Option/Stock Issuance Plan. The option was granted on November 4, 1996, and
has a maximum term of ten years measured from the grant date, subject to
earlier termination upon the optionee's termination of service with the
Company. Twenty-five percent (25%) of the options are exercisable upon the
optionee's completion of one year of service measured from November 4, 1996,
and as to the balance of the option shares in a series of successive equal
monthly installments upon the optionee's completion of each additional month
of service over the next 36 months thereafter.
(2) Based upon options granted for an aggregate of 319,000 shares to employees
in 1996, including the Named Officers.
(3) The exercise price may be paid in cash, in shares of the Company's Common
Stock valued at fair market value on the exercise date or through a cashless
exercise procedure involving a same-day sale of the purchased shares. The
Company may also finance the option exercise by loaning the optionee
sufficient funds to pay the exercise price for the purchased shares,
together with any federal and state income tax liability incurred by the
optionee in connection with such exercise. The Compensation Committee of the
Board of Directors, as the Plan Administrator of the Company's 1996 Stock
Option/Stock Issuance Plan, has the discretionary authority to reprice the
options through the cancellation of those options and the grant of
replacement options with an exercise price based on the fair market value of
the option shares on the grant date.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission. There can
be no assurance provided to any executive officer or any other holder of the
Company's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other defined
level. Unless the market price of the Common Stock appreciates over the
option term, no value will be realized from the option grants made to the
executive officers.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The table below sets forth information concerning the exercise of options
during the 1996 fiscal year and unexercised options held by the Named Officers
as of the end of such year. No stock appreciation rights were exercised by the
Named Officers during such fiscal year or were outstanding at the end of that
year.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED AGGREGATE OPTIONS AT FY-END OPTIONS AT FY-END($)(2)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- -------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael R. Henson.......... 66,000 $438,900 50,667 263,333 $ 602,000 $ 1,646,000
Dana P. Nickell............ 0 0 14,000 42,000 161,000 483,000
Jeffrey F. O'Donnell....... 0 0 25,000 75,000 288,000 863,000
</TABLE>
- ---------------
(1) Based on the deemed fair value (as determined by the Board) for options
exercised prior to the initial public offering, less the exercise price
payable for such shares.
(2) Based on the fair market value of the Company's Common Stock at year-end,
$13.00 per share, less the exercise price payable for such shares.
40
<PAGE> 42
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Company's Board was formed in May 1996,
and the members of the Compensation Committee are Messrs. Davis and Dann.
Neither of these individuals was at any time during the fiscal year ended
December 31, 1996, or at any other time, an officer or employee of the Company.
No member of the Compensation Committee of the Company serves as a member of the
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
1996 STOCK OPTION/STOCK ISSUANCE PLAN
The Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan")
serves as the successor equity incentive program to the Company's 1995 Stock
Option Plan (the "Predecessor Plan"). The 1996 Plan was adopted by the Board of
Directors and approved by the stockholders on May 1, 1996, (the "Effective
Date"). On April 8, 1997 the Board of Directors amended the 1996 Plan to (i)
increase the number of shares authorized for issuance thereunder, (ii) render
non-employee Board members eligible to participate in the Discretionary Option
Grant and Stock Issuance Programs and (iii) make certain other changes to take
advantage of amendments made in 1996 to Rule 16b-3 of the Securities and
Exchange Commission which exempts certain officer and director transactions
under the 1996 Plan from the short-swing profit liability provisions of the
Federal securities laws. The amendments to the 1996 Plan were approved by the
Company's stockholders at the 1997 Annual Meeting. Under the 1996 Plan,
1,900,000 shares of Common Stock have been authorized for issuance. This share
reserve is comprised of (i) the 1,200,000 shares which remained available for
issuance under the Predecessor Plan as of the Effective Date, including the
shares subject to outstanding options thereunder and (ii) the 700,000-share
increase adopted by the Board of Directors in April 1997 and approved by the
stockholders at the 1997 Annual Meeting. The outstanding options under the
Predecessor Plan were incorporated into the 1996 Plan on the Effective Date, and
no further option grants will be made under the Predecessor Plan after such
date. The incorporated options will continue to be governed by their original
terms, unless the Plan Administrator elects to extend one or more features of
the 1996 Plan to those options. However, except as otherwise noted below, the
outstanding options under the Predecessor Plan contain substantially the same
terms and conditions specified below for the Discretionary Option Grant Program
in effect under the 1996 Plan. In no event may any one participant in the 1996
Plan receive option grants or direct stock issuances for more than 800,000
shares in the aggregate over the term of the Plan.
The 1996 Plan is divided into three separate components: (i) the
Discretionary Option Grant Program under which eligible individuals may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
Common Stock at an exercise price not less than 85% of their fair market value
on the grant date, (ii) the Stock Issuance Program under which such individuals
may, in the Plan Administrator's discretion, be issued shares of Common Stock
directly, through the purchase of such shares at a price not less than 85% of
their fair market value at the time of issuance or as a bonus tied to the
performance of services and (iii) the Automatic Option Grant Program under which
option grants will automatically be made at periodic intervals to eligible
non-employee Board members to purchase shares of Common Stock at an exercise
price equal to 100% of their fair market value on the grant date.
The Discretionary Option Grant and Stock Issuance Programs are administered
by the Compensation Committee. The Compensation Committee as Plan Administrator
has complete discretion to determine which eligible individuals are to receive
option grants or stock issuances, the time or times when such option grants or
stock issuances are to be made, the number of shares subject to each such grant
or issuance, the status of any granted option as either an incentive stock
option or a non-statutory stock option under the Federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding.
Under the 1996 Plan, upon an acquisition of the Company by merger or asset
sale or a hostile take-over of the Company, each outstanding option and unvested
stock issuance will be subject to accelerated vesting under certain
circumstances. The options granted under the Predecessor Plan will be assumed or
replaced in a merger
41
<PAGE> 43
or asset sale but do not include any acceleration provisions in connection with
such a merger or asset sale or upon a hostile take-over, although such options
may be accelerated at the discretion of the Plan Administrator.
Stock appreciation rights are authorized for issuance under the
Discretionary Option Grant Program which provide the holders with the election
to surrender their outstanding options for an appreciation distribution from the
Company equal to the excess of (i) the fair market value of the vested shares of
Common Stock subject to the surrendered option over (ii) the aggregate exercise
price payable for such shares. Such appreciation distribution may be made in
cash or in shares of Common Stock. No stock appreciation rights exist with
respect to options currently outstanding under the Predecessor Plan.
42
<PAGE> 44
The Plan Administrator has the authority to effect the cancellation of
outstanding options under the Discretionary Option Grant Program (including
options incorporated from the Predecessor Plan) in return for the grant of new
options for the same or different number of option shares with an exercise price
per share based upon the fair market value of the Common Stock on the new grant
date.
Under the Automatic Option Grant Program, each non-employee Board member
serving on June 19, 1996, the date the Underwriting Agreement for the initial
public offering was executed, received an option grant on such date for 5,000
shares of Common Stock. Each individual who first becomes a non-employee Board
member thereafter will receive a 5,000-share option grant on the date such
individual joins the Board provided such individual has not been in the prior
employ of the Company. In addition, at each Annual Stockholders Meeting, each
individual who is to continue to serve as a non-employee Board after the meeting
will receive an additional option grant to purchase 5,000 shares of Common Stock
whether or not such individual has been in the prior employ of the Company.
Each automatic grant will have a term of 10 years, subject to earlier
termination following the optionee's cessation of Board service. Each automatic
option will be immediately exercisable; however, any shares purchased upon
exercise of the option will be subject to repurchase should the optionee's
service as a non-employee Board member cease prior to vesting in the shares. The
initial 5,000-share grant will vest in four equal and successive annual
installments over the optionee's period of Board service. Each additional annual
5,000-share grant will vest upon the optionee's completion of one year of Board
service measured from the grant date. However, each outstanding option will
immediately vest upon (i) certain changes in the ownership or control of the
Company or (ii) the death or disability of the optionee while serving as a Board
member.
The Board may amend or modify the 1996 Plan at any time. The 1996 Plan will
terminate on April 30, 2006, unless sooner terminated by the Board.
NON-EMPLOYEE BOARD MEMBER REMUNERATION
The Company has adopted a policy under which each non-employee board member
receives a cash payment in the amount of $1,500 per quarter.
EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the stockholders on May 1,
1996. The Purchase Plan is designed to allow eligible employees of the Company
and participating subsidiaries to purchase shares of Common Stock, at semi-
annual intervals, through their periodic payroll deductions under the Purchase
Plan, and a reserve of 200,000 shares of Common Stock has been established for
this purpose.
The Purchase Plan will be implemented in a series of successive offering
periods, each with a maximum duration of twenty-four months. The initial
offering period began on June 19, 1996, the day the Underwriting Agreement for
the initial public offering was executed, based on the initial public offering
price and will end on the last business day in July 1998. Each offering period
will be comprised of successive purchase intervals, each having a duration of
six months. However, the first purchase interval under the initial offering
period began on June 19, 1996 and ended in January 31, 1997. Shares of Common
Stock will be purchased for each participant at the end of each purchase
interval during the offering period. If the fair market value of the Common
Stock on any purchase date in the offering period is less than the fair market
value of the Common Stock at the start of the offering period, then that
offering period will terminate and a new offering period will automatically
commence on the next business day following that purchase date.
Payroll deductions may not exceed 10% of base salary for each purchase
interval. The purchase price per share will be 85% of the lower of (i) the fair
market value of the Common Stock on the participant's entry date into the
offering period or (ii) the fair market value on the semi-annual purchase date.
In no event may any participant purchase more than 950 shares of Common Stock on
any purchase date.
The Board may terminate the Purchase Plan at any time. The Purchase Plan
will terminate in all events on the last business day in July 2006.
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<PAGE> 45
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of
directors to the maximum extent permitted by Delaware law. Delaware law provides
that a director of a corporation will not be personally liable for monetary
damages for breach of such individual's fiduciary duties as a director except
for liability (i) for any breach of such director's duty of loyalty to the
corporation, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions as provided
in Section 174 of the Delaware General Corporation Law, or (iv) for any
transaction from which a director derives an improper personal benefit.
The Company's Bylaws provide that the Company will indemnify its directors
and may indemnify its officers, employees and other agents to the fullest extent
permitted by law. The Company believes that indemnification under its Bylaws
covers at least negligence and gross negligence on the part of an indemnified
party and permits the Company to advance expenses incurred by an indemnified
party in connection with the defense of any action or proceeding arising out of
such party's status or service as a director, officer, employee or other agent
of the Company upon an undertaking by such party to repay such advances if it is
ultimately determined that such party is not entitled to indemnification.
The Company has entered into separate indemnification agreements with each
of its directors. These agreements require the Company, among other things, to
indemnify such director against expenses (including attorneys' fees), judgments,
fines and settlements (collectively, "Liabilities") paid by such individual in
connection with any action, suit or proceeding arising out of such individual's
status or service as a director of the Company (other than Liabilities arising
from willful misconduct or conduct that is knowingly fraudulent or deliberately
dishonest) and to advance expenses incurred by such individual in connection
with any proceeding against such individual with respect to which such
individual may be entitled to indemnification by the Company.
The Company believes that its Certificate of Incorporation and Bylaw
provisions and indemnification agreements are necessary to attract and retain
qualified persons as directors and officers. At present the Company is not aware
of any pending litigation or proceeding involving any director, officer,
employee or agent of the Company where indemnification will be required or
permitted. The Company is not aware of any threatened litigation or proceeding
that might result in a claim for such indemnification.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company does not presently have any employment contracts in effect with
any of its executive officers.
The Compensation Committee as Plan Administrator of the 1996 Plan has the
authority to provide for the accelerated vesting of the shares of Common Stock
subject to outstanding options held by the Chief Executive Officer and any other
executive officers or the shares of Common Stock subject to direct issuances
held by such individual, in connection with certain changes in control of the
Company or the subsequent termination of the officer's employment following the
change in control event.
CERTAIN TRANSACTIONS
RELATIONSHIP WITH ENDOSONICS CORPORATION
On June 15, 1992, EndoSonics acquired a 40% interest in CVD in exchange for
$568,000 in cash. Upon completion of this investment, EndoSonics' President and
Chief Executive Officer owned a 19% equity interest in CVD and served as
Chairman of the Board. Pursuant to an Agreement and Plan of Reorganization
between EndoSonics and CVD signed on June 9, 1993, EndoSonics acquired all of
the outstanding capital stock of CVD in exchange for $335,000 in cash and
250,000 shares of EndoSonics' Common Stock with an aggregate market value of
$1,563,000. Pursuant to the terms of the Agreement and Plan of Reorganization,
in June 1995, EndoSonics became obligated to issue 50,000 shares of its Common
Stock with an aggregate market value of $488,000, to the former shareholders of
CVD because the market price of EndoSonics' stock
44
<PAGE> 46
did not exceed a specified price for a specified period during the two-year
period following the acquisition. On March 29, 1996, EndoSonics acquired 400,000
shares of Series B Preferred Stock for a purchase price of $8,000,000, which
converted into 800,000 shares of Common Stock upon the consummation of the
initial public offering.
During 1994 and 1995, EndoSonics manufactured certain of the Company's
catheter products. Total purchases from EndoSonics during 1994 and 1995 amounted
to $0.8 million and $0.2 million, respectively. In addition, during 1994
EndoSonics performed certain billing and collection services for the Company in
return for a fee per invoice which amounted to $10,000. In addition, since
August 1993, certain of the Company's corporate expenses, including Mr. Henson's
salary, were paid by EndoSonics and accounting, cash management and other
administrative services were performed by EndoSonics. Pursuant to this
arrangement, the Company paid EndoSonics an aggregate of $227,000, $340,000 and
$156,000 for 1994, 1995 and 1996, respectively. In addition, EndoSonics paid Mr.
Henson's bonus for 1995. See "Management -- Executive Compensation."
The Company entered into a license agreement with EndoSonics, dated
December 22, 1995 (the "EndoSonics Agreement"), pursuant to which CVD granted
EndoSonics the non-exclusive, royalty-free right to CVD's Focus technology for
the development and sale of a combined Focus/Ultrasound product. In exchange,
CVD received the non-exclusive, royalty-free right to submit PMA supplement
applications utilizing an EndoSonics PMA as a reference and to manufacture and
distribute CVD products as a supplement to the EndoSonics PMA. The EndoSonics
Agreement may be terminated in the event of breach upon 60 days notice by the
non-breaching party, subject to the breaching party's right to cure.
CVD and EndoSonics have entered into certain agreements for the purpose of
defining the ongoing relationship between the two companies. EndoSonics owned
approximately 84% of the outstanding voting capital stock of CVD prior to the
initial public offering and currently owns approximately 44% of CVD's Common
Stock. Accordingly, these agreements are not the result of arm's-length
negotiations between independent parties.
CVD and EndoSonics have entered into a Tax Allocation Agreement that
provides, among other things, for (i) the allocation of tax liabilities and
adjustments thereto as between the business of the Company and other businesses
conducted by EndoSonics and its affiliates related to periods in which the
Company is includable in consolidated federal income tax returns filed by
EndoSonics, (ii) the allocation of responsibility for filing tax returns and
(iii) the conduct of and responsibility for taxes owed in connection with tax
audits and various related matters, as described below.
EndoSonics has agreed to indemnify CVD for any federal and state income tax
liability arising out of any audit with respect to periods ending prior to the
closing of the Company's initial public offering and for which CVD was included
in EndoSonics' consolidated federal income tax return or a state unitary or
combined return. In addition, with respect to periods for which CVD is included
in EndoSonics' federal consolidated or state unitary tax return, EndoSonics
shall control the filing of such returns and the conduct of any audits thereof.
With respect to periods following the closing of the initial public offering,
the Company will file its own federal income tax return and will not be included
in EndoSonics' federal return. The Company will initially be included in certain
unitary or combined returns for state tax purposes. To the extent this occurs,
this agreement generally treats the Company as a separate taxpayer and charges
the Company with its separate tax return liability.
EndoSonics and CVD have entered into a Stockholder Agreement providing that
all transactions between the Company and EndoSonics or any affiliate of
EndoSonics must be approved by a special committee of CVD's Board of Directors
comprised of two directors who are not officers, directors, employees or
affiliates of EndoSonics. The members of this committee are Mitchell Dann and
Gerard von Hoffmann. No transactions between the Company and EndoSonics are
currently contemplated. During the effective term of the Agreement, EndoSonics
may not vote to eliminate from the Company's Certificate of Incorporation
provisions requiring cumulative voting for the election of directors. The
provisions of the Agreement became effective upon the consummation of the
initial public offering and terminate on the earlier of seven years from the
date of the Agreement or on the date EndoSonics beneficially owns less than 25%
of CVD's Common Stock.
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<PAGE> 47
On January 27, 1997, EndoSonics announced that the EndoSonics Board of
Directors had approved a dividend distribution of one CVD share for every 25
EndoSonics shares. The distribution is expected to take place in the second half
of 1997 to EndoSonics Stockholders then of record. The exact record date and
date of distribution have not yet been determined.
EndoSonics and CVD have entered into a Registration Rights Agreement in
connection with the acquisition of Cardiometrics by EndoSonics which provides
that CVD will use its best efforts to register under the Securities Act, the CVD
shares held by EndoSonics for distribution to Cardiometrics' stockholders in the
Merger. EndoSonics has agreed to bear all expenses incurred in connection with
such registration.
OTHER TRANSACTIONS
On September 10, 1994, the Company entered into a Stock Purchase and
Technology License Agreement with SCIMED (the "SCIMED Agreement"). Pursuant to
the SCIMED Agreement, SCIMED purchased a 19% equity position in the Company for
a purchase price of $2,500,000. SCIMED was also granted an exclusive worldwide
license to certain site-specific drug delivery/PTCA technology for use in the
cardiovascular field in exchange for license and royalty fees. The SCIMED
Agreement also requires CVD to provide certain technical assistance and to
perform additional research and development relating to the licensed technology
in exchange for fees and reimbursement of expenses, respectively. In the event
that CVD's SCIMED-funded research and development efforts result in improvements
to the licensed technology, SCIMED will have an exclusive worldwide license to
the technology in the cardiovascular field and a non-exclusive license outside
the cardiovascular field, both of which are subject to the payment of royalties.
The SCIMED Agreement may be terminated in the event of breach on 90 days notice
by the non-breaching party (or on 30 days notice in certain limited
circumstances) or by SCIMED upon 180 days notice.
In connection with the adoption of the Predecessor Plan, the Company issued
a warrant to SCIMED in June 1995 to purchase 40,000 shares of Series A Preferred
Stock at an exercise price of $6.58 per share in exchange for a waiver of
SCIMED's anti-dilution rights under the SCIMED Agreement. The Company
subsequently issued a warrant for an additional 20,000 shares of Series A
Preferred at $6.58 per share in connection with an increase in the number of
shares reserved for issuance under the Predecessor Plan. Following the
consummation of the initial public offering, these warrants became exercisable
for 80,000 shares of Common Stock and 40,000 shares of Common Stock,
respectively, at an exercise price of $3.29 per share.
On June 15, 1996, CVD extended a loan in the amount of $150,000, to Jeffrey
F. O'Donnell, the Company's Vice President of Sales and Marketing. The note was
secured by a second deed of trust on Mr. O'Donnell's home and has a five-year
term with interest compounding semi-annually at 6%. The principal and interest
will be due five years from the date of the note.
On September 16, 1996, the Company extended an interest free loan to
Michael Henson in the amount of $175,000. The principal amount of the loan will
be due in full on September 19, 1998. The Company secured the note by a deed of
trust on certain real property owned by Mr. Henson.
On January 24, 1997, the Company extended a loan in the amount of $100,000
to Jeffrey H. Thiel, the Company's Vice President of Operations. The note was
secured by a second deed of trust on Mr. Thiel's home and has a five-year term
with interest compounding semi-annually at 6%. The principal and interest will
be due five years from the date of the note.
Edward M. Leonard and Gerard von Hoffmann, directors of the Company, are
members of the law firms of Brobeck, Phleger & Harrison LLP and Knobbe Martens,
Olson & Bear LLP, respectively. Both of these firms render legal services to the
Company.
It is the Company's policy that all interested-party transactions,
including loans, between the Company and its officers, directors, principal
stockholders and their affiliates be approved by a majority of the Board of
Directors, including a majority of the independent and disinterested outside
directors on the Board of Directors.
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<PAGE> 48
PRINCIPAL AND SELLING STOCKHOLDERS
The following tables set forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 15, 1997 and as of the
consummation of the Merger, by (i) each person who is known by the Company to
own beneficially more than five percent of the Company's Common Stock, (ii) each
of the Company's directors, (iii) the Named Officer and (iv) all current
officers and directors as a group.
<TABLE>
<CAPTION>
NUMBER NUMBER PERCENT OF
OF SHARES PERCENT OF OF SHARES OUTSTANDING
BENEFICIALLY OUTSTANDING REGISTERED SHARES AFTER
NAME OF PRINCIPAL STOCKHOLDER OWNED(1)(2) SHARES FOR SALE DISTRIBUTION
- ------------------------------------------------- ----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
EndoSonics Corporation........................... 4,040,000 44.38% 1,488,528 28.03%
6616 Owens Drive
Pleasanton, CA 94588
Boston Scientific Corporation(3)................. 766,000 8.41 -- 8.41
One Boston Scientific Place
Natick, MA 01760
Wells Fargo Bank, N.A.(4)........................ 642,500 7.06 -- 7.06
464 California Street
San Francisco, CA 94163
Scudder, Stevens & Clark, Inc.(5)................ 584,300 6.42 -- 6.42
345 Park Avenue
New York, New York 10154
Michael R. Henson(6)............................. 142,708 1.56 -- 1.56
Mitchell Dann(7)................................. 7,500 * -- *
William G. Davis(8).............................. 9,125 * -- *
Gerard von Hoffmann(9)........................... 6,150 * -- *
Edward M. Leonard(10)............................ 6,807 * -- *
Dana P. Nickell(11).............................. 18,033 * -- *
Jeffrey F. O'Donnell(12)......................... 35,416 * -- *
All directors and officers as a group (13
persons)(13)................................... 316,835 3.29 -- 3.29
</TABLE>
- ---------------
* Represents beneficial ownership of less than 1%.
(1) The number of shares of Common Stock beneficially owned includes any shares
issuable pursuant to stock options that may be exercised within 60 days
after April 15, 1997. Shares issuable pursuant to such options are deemed
outstanding for computing the percentage of the person holding such options
but are not deemed to be outstanding for computing the percentage of any
other person.
(2) The number of shares of Common Stock outstanding includes the 2,074,064
shares of Common Stock being registered by the Company hereunder.
(3) Pursuant to a Schedule 13G filed with the Commission on February 14, 1997,
Boston Scientific Corporation reported that as of December 31, 1996 it had
sole voting and investment power over 880,000 shares. Boston Scientific
Corporation provided further information to the Company that it sold
114,000 shares on March 7, 1997. Includes warrants to purchase 120,000
shares of the Company's Common Stock.
(4) Pursuant to a Schedule 13G filed with the Commission on February 14, 1997,
Wells Fargo Bank, N.A. reported that as of December 31, 1996 it had shared
investment power over such 642,500 shares, sole voting power over 561,600
of such shares and shared voting power over 1,500 of such shares.
(5) Pursuant to a Schedule 13G filed with the Commission on February 10, 1997,
Scudder Stevens & Clark, Inc. reported that as of December 31, 1996 it had
sole investment power over such 584,300 shares, sole voting power over
181,900 of such shares and shared voting power over 290,300 of such shares.
(6) Includes 26,208 shares subject to options exercisable within 60 days after
April 15, 1997.
(7) Includes 5,000 shares subject to options exercisable within 60 days after
April 15, 1997.
(8) Includes 7,125 shares subject to options exercisable within 60 days after
April 15, 1997.
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<PAGE> 49
(9) Includes 5,000 shares subject to options exercisable within 60 days after
April 15, 1997.
(10) Includes 5,000 shares subject to options exercisable within 60 days after
April 15, 1997.
(11) Includes 17,833 shares subject to options exercisable within 60 days after
April 15, 1997.
(12) Includes 35,416 shares subject to options exercisable within 60 days after
April 15, 1997.
(13) Includes 196,497 shares subject to options exercisable within 60 days after
April 15, 1997.
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<PAGE> 50
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares
of Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value.
COMMON STOCK
As of April 15, 1997, there were 9,103,459 shares of Common Stock
outstanding that were held of record by 75 stockholders. The holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. Subject to preferences that may be applicable to any outstanding
Preferred Stock, the holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefore. See "Dividend Policy." In
the event of the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities, subject to prior distribution rights of Preferred
Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock. All outstanding shares
of Common Stock are fully paid and nonassessable, and the shares of Common Stock
to be issued are fully paid and nonassessable.
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Preferred Stock. The Board of Directors has the authority to issue the Preferred
Stock in one or more series and to fix the rights, preferences, privileges and
restrictions thereof, including dividend rights, dividend rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the designation
of such series, without further vote or action by the stockholders. The issuance
of Preferred Stock may have the effect of delaying, deferring or preventing a
change in control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common Stock.
The issuance of Preferred Stock with voting and conversion rights may adversely
affect the voting power of the holders of Common Stock, including the loss of
voting control to others. At present, the Company has no plans to issue any of
the Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION, BYLAWS
AND DELAWARE LAW
Certificate of Incorporation and Bylaws
The Certificate of Incorporation provides that all stockholder actions must
be effected at a duly called meeting and not by a consent in writing. The Bylaws
provide that the Company's stockholders may call a special meeting of
stockholders only upon a request of stockholders owning at least 50% of the
Company's capital stock. These provisions of the Certificate of Incorporation
and Bylaws could discourage potential acquisition proposals and could delay or
prevent a change in control of the Company. These provisions are intended to
enhance the likelihood of continuity and stability in the composition of the
Board of Directors and in the policies formulated by the Board of Directors and
to discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal.
The provisions also are intended to discourage certain tactics that may be used
in proxy fights. However, such provisions could have the effect of discouraging
others from making tender offers for the Company's shares and, as a consequence,
they also may inhibit fluctuations in the market price of the Company's shares
that could result from actual or rumored takeover attempts. Such provisions also
may have the effect of preventing changes in the management of the Company. See
"Risk Factors -- Effect of Certain Charter Provisions; Antitakeover Effects of
Certificate of Incorporation, Bylaws and Delaware Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business
49
<PAGE> 51
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder; (ii) upon consummation of the
transaction that resulted in the stockholder becoming an interested stockholder,
the interested stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned (x)
by persons who are directors and also officers and (y) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date, the business combination is
approved by the board of directors and authorized at an annual or special
meeting of stockholders, and not by written consent, by the affirmative vote of
at least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any transaction that results in the issuance or transfer by the
corporation of any stock of the corporation to the interested stockholder; (iv)
any transaction involving the corporation that has the effect of increasing the
proportionate share of the stock of any class or series of the corporation
beneficially owned by the interested stockholder; or (v) the receipt by the
interested stockholder of the benefit of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation. In
general, Section 203 defines an interested stockholder as any entity or person
beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is ChaseMellon
Shareholder Services. Its address is 400 South Hope Street, Fourth Floor, Los
Angeles, CA 90071, and its telephone number is (213) 553-9700.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of Common Stock in the public market during and after this offering
could adversely affect the market price of the Common Stock. As of April 15,
1997, the Company had 9,103,459 shares outstanding. Including all of the Shares
registered for sale hereby, 5,610,054 of the Company's outstanding shares are
freely tradable without restriction. Approximately 2,531,768 additional shares
are eligible for sale, including 1,809,768 shares held by EndoSonics, not
registered for sale hereunder, and 646,000 shares held by SCIMED. Sales of any
such shares in the public market could adversely affect the market price of the
Common Stock. The Company has also registered 1,200,000 shares of Common Stock
reserved for issuance under the Company's 1996 Stock Option/Stock Issuance Plan
and 200,000 shares under the Company's Employee Stock Purchase Plan. As of April
15, 1997, there were outstanding options under the Company's stock option plan
to acquire approximately 1,188,000 shares. SCIMED is entitled to certain demand
and piggyback registration rights with respect to its shares. If SCIMED, by
exercising its demand registration rights, causes a large number of shares to be
registered and sold in the public market, such sales could have an adverse
effect on the market price for the Common Stock. If the Company were required to
include in a Company-initiated registration shares held by SCIMED pursuant to
the exercise of its piggyback registration rights, such sales may have an
adverse effect on the Company's ability to raise needed capital.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after the consummation of the initial public offering, a
person (or persons whose shares are aggregated) who has beneficially owned
"restricted" shares for at least two years, including a person who may be deemed
an Affiliate of the Company, is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock of the Company and the average weekly
trading volume of the Common Stock on the Nasdaq National Market
50
<PAGE> 52
during the four calendar weeks preceding such sale. Sales under Rule 144 of the
Securities Act are subject to certain restrictions relating to manner of sale,
notice and the availability of current public information about the Company. A
person who is not an Affiliate of the Company at any time during the ninety days
preceding a sale, and who has beneficially owned shares for at least three
years, would be entitled to sell such shares immediately following the initial
public offering without regard to the volume limitations, manner of sale
provisions or notice or other requirements of Rule 144 of the Securities Act.
However, the transfer agent may require an opinion of counsel that a proposed
sale of shares comes within the terms of Rule 144 of the Securities Act prior to
effecting a transfer of such shares.
OPTIONS
As of April 15, 1997, options to purchase a total of approximately 229,000
shares of Common Stock pursuant to the 1996 Stock Option Plan were outstanding
and exercisable and no additional shares of Common Stock were available for
future option grants or direct issuances under the 1996 Stock Option/Stock
Issuance Plan. See "Management -- 1996 Stock Option/Stock Issuance Plan," and
Notes 11 and 13 of Notes to Financial Statements.
Rule 701 under the Securities Act provides that shares of Common Stock
acquired on the exercise of outstanding options may be resold by persons other
than Affiliates, beginning 90 days after the consummation of the initial public
offering, subject to the manner of sale provisions of Rule 144, and by
Affiliates, beginning 90 days after the date of this Prospectus, subject to all
provisions of Rule 144 except its two-year minimum holding period. On July 11,
1996, the Company filed a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock subject to outstanding
stock options and Common Stock issued or issuable pursuant to the Company's 1996
Stock Option/Stock Issuance Plan and Common Stock issuable pursuant to the
Company's Employee Stock Purchase Plan. Shares covered by this registration
statement are eligible for sale in the public markets, subject to the Lock-up
Agreements, if applicable.
REGISTRATION RIGHTS
SCIMED, the holder of 646,000 shares of Common Stock is entitled to certain
rights with respect to the registration of such shares under the Securities Act.
Under the terms of the agreement between the Company and SCIMED, if the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of other security holders exercising
registration rights, SCIMED is entitled to notice of such registration and is
entitled to include shares of such Common Stock therein. SCIMED may also require
the Company to file a registration statement under the Securities Act at the
Company's expense with respect to its shares of Common Stock, and the Company is
required to use its diligent reasonable efforts to effect such registration.
Further, SCIMED may require the Company to file additional registration
statements on Form S-3 at the Company's expense. These rights are subject to
certain conditions and limitations, among them the right of the underwriters of
an offering to limit the number of shares included in such registration in
certain circumstances.
EndoSonics and CVD have entered into a Registration Rights Agreement in
connection with the acquisition of Cardiometrics by EndoSonics which provides
that CVD will use its best efforts to register under the Securities Act, the CVD
shares held by EndoSonics for distribution to Cardiometrics' stockholders in the
Merger. EndoSonics has agreed to bear all expenses incurred in connection with
such registration.
PLAN OF DISTRIBUTION
The Company will receive no proceeds from this offering. The Shares offered
hereby may be distributed by EndoSonics directly to the former stockholders,
warrantholders and optionholders of Cardiometrics in connection with the
acquisition of Cardiometrics by EndoSonics, pursuant to an Agreement and Plan of
Reorganization, dated as of January 26, 1997, as subsequently amended, among
EndoSonics, MergerSub and Cardiometrics.
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<PAGE> 53
In order to comply with certain state securities laws the Shares may not be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Shares may not simultaneously engage in
market making activities with respect to the Common Stock of the Company for a
period of two business days prior to the commencement of such distribution. In
addition and without limiting the foregoing, EndoSonics will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of shares of the Company's Common Stock
by EndoSonics.
All of the Shares were originally issued by the Company to EndoSonics in
connection with the acquisition by EndoSonics of all of the outstanding capital
stock of the Company pursuant to an Agreement and Plan of Reorganization between
EndoSonics and the Company dated June 9, 1993, and in connection with the
acquisition by EndoSonics of 400,000 shares of the Company's Series B Preferred
Stock on March 29, 1996, which converted into 800,000 shares of Common Stock
upon the consummation of the Company's initial public offering. The Shares were
issued pursuant to an exemption from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act"), provided by Section
4(2) thereof. The Shares are being registered by the Company pursuant to a
registration rights agreement by and between the Company and Endosonics entered
into in connection with the acquisition of Cardiometrics by EndoSonics.
EndoSonics has agreed to pay all reasonable fees and expenses incident to the
filing of this Registration Statement.
LEGAL MATTERS
The legality of the securities being offered hereby will be passed upon for
the Company by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and financial statement schedule of
CardioVascular Dynamics, Inc. at December 31, 1995 and 1996, and for each of the
three years in the period ended December 31, 1996, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such report given upon the authority of such firm
as experts in accounting and auditing.
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<PAGE> 54
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996................................................................................ F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the years
ended December 31, 1994, 1995 and 1996.............................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996................................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Condensed Consolidated Balance Sheets as of December 31, 1996 and March 31, 1997
(unaudited)......................................................................... F-17
Condensed Consolidated Statements of Operations for the three month periods ended
March 31, 1996 and 1997 (unaudited)................................................. F-18
Condensed Consolidated Statements of Cash Flows for the three month periods ended
March 31, 1996 and 1997 (unaudited)................................................. F-19
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-20
</TABLE>
F-1
<PAGE> 55
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CardioVascular Dynamics, Inc.
We have audited the accompanying consolidated balance sheets of
CardioVascular Dynamics, Inc. and subsidiary as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity (net
capital deficiency) and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 16(b). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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
CardioVascular Dynamics, Inc. and subsidiary at December 31, 1995 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
January 30, 1997
F-2
<PAGE> 56
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $1,568 $17,192
Marketable securities available-for-sale................................ -- 25,733
Accounts receivable, net of allowance for doubtful accounts of $180 and
$377, respectively................................................... 1,117 2,268
Other accounts receivable............................................... -- 320
Inventories............................................................. 754 2,899
Other current assets.................................................... 58 162
------ -------
Total current assets............................................ 3,497 48,574
Property and equipment:
Furniture and equipment................................................. 357 1,161
Leasehold improvements.................................................. 174 310
------ -------
531 1,471
Less accumulated depreciation and amortization.......................... (107) (289)
------ -------
Net property and equipment...................................... 424 1,182
Notes receivable from officers............................................ -- 325
Other assets.............................................................. 81 3
------ -------
Total assets.................................................... $4,002 $50,084
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses................................... $1,684 $ 2,382
Payable to Parent....................................................... 2,537 --
Deferred distributorship fee revenue, current portion................... 50 50
------ -------
Total current liabilities....................................... 4,271 2,432
Deferred distributorship fee revenue...................................... 79 29
Convertible obligation.................................................... 750 --
Commitments
Stockholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value; aggregate liquidation
preference of $13,160,000 as of December 31, 1995; 7,560,000 shares
authorized, 2,000,000 and no shares issued and outstanding as of
December 31, 1995 and 1996, respectively............................. 2 --
Common Stock, $.001 par value; 30,000,000 shares authorized, no shares
and 9,004,000 shares issued or outstanding at December 31, 1995 and
1996, respectively................................................... -- 9
Additional paid-in capital.............................................. 5,670 58,869
Deferred compensation................................................... (345) (376)
Accumulated deficit..................................................... (6,425) (11,049)
Unrealized gain on available-for-sale securities........................ -- 170
------ -------
Total stockholders' equity (net capital deficiency)............. (1,098) 47,623
------ -------
Total liabilities and stockholders' equity (net capital
deficiency).................................................... $4,002 $50,084
====== =======
</TABLE>
See accompanying notes.
F-3
<PAGE> 57
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Sales (including $43 to a related party in 1994).......... $ 1,169 $ 3,462 $ 8,384
License fee and other from related party.................. 1,000 -- 150
Contract.................................................. 220 641 200
------ ------- -------
Total revenue.......................................... 2,389 4,103 8,734
Operating costs and expenses:
Cost of sales............................................. 848 2,051 4,111
Charge for acquired in-process research and development... -- 488 2,133
Research and development (including $73 in 1994 paid to
EndoSonics)............................................ 1,228 1,683 3,582
Marketing and sales....................................... 748 1,526 3,358
General and administrative (including $227, $340 and $156
for the years ended December 31, 1994, 1995 and 1996,
respectively, paid to EndoSonics)...................... 587 1,331 1,548
------ ------- -------
Total operating costs and expenses..................... 3,411 7,079 14,732
------ ------- -------
Loss from operations........................................ (1,022) (2,976) (5,998)
Other income:
Interest income........................................... -- 42 1,324
Distributorship fees and other income..................... 51 60 50
------ ------- -------
Total other income................................ 51 102 1,374
------ ------- -------
Net loss.................................................... $ (971) $(2,874) $(4,624)
====== ======= =======
Net loss per share (pro forma through June 1996)............ $ (0.25) $ (0.65) $ (0.65)
====== ======= =======
Shares used in computing net loss per share (pro forma
through June 1996)........................................ 3,876 4,441 7,141
====== ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 58
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL UNREALIZED EQUITY
------------------ ------------------ PAID-IN DEFERRED ACCUMULATED GAIN ON (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INVESTMENTS DEFICIENCY)
---------- ------ ---------- ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................. -- $ -- 3,240,000 $ 3 $ 2,336 $ -- $ (2,580) $ -- $ (241)
Sale of Common Stock to
corporate investor... -- -- 760,000 1 2,499 -- -- -- 2,500
Net loss............... -- -- -- -- -- -- (971) (971)
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1994................. -- -- 4,000,000 4 4,835 -- (3,551) -- 1,288
Additional effects of
merger with
EndoSonics
Acquisition Corp..... -- -- -- -- 488 -- -- -- 488
Issuance of Preferred
Stock in exchange for
Common Stock......... 2,000,000 2 (4,000,000) (4) 2 -- -- -- --
Deferred compensation
resulting from grant
of options........... -- -- -- -- 345 (345) -- -- --
Net loss............... -- -- -- -- -- -- (2,874) (2,874)
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1995................. 2,000,000 2 -- -- 5,670 (345) (6,425) -- (1,098)
Sale of Preferred Stock
to EndoSonics........ 400,000 -- -- -- 8,000 -- -- -- 8,000
Conversion of Preferred
Stock................ (2,400,000) (2) 4,800,000 5 (3) -- -- -- --
Exercise of Common
Stock Options........ -- -- 139,000 -- 138 -- -- -- 138
Initial Public Offering
of Common Stock...... -- -- 3,910,000 4 42,764 -- -- -- 42,768
Deferred compensation
resulting from grant
of options........... -- -- -- -- 150 (150) -- -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 119 -- -- 119
Acquisition of
Intraluminal Devices,
Inc.................. -- -- 93,000 -- 1,400 -- -- -- 1,400
Conversion of $750,000
debt by Fukuda
Denshi............... -- -- 62,000 -- 750 -- -- -- 750
Net loss............... -- -- -- -- -- -- (4,624) -- (4,624)
Unrealized gain on
investments.......... -- -- -- -- -- -- -- 170 170
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1996................. -- $ -- 9,004,000 $ 9 $ 58,869 $ (376) $ (11,049) $ 170 $47,623
========== ===== ========== === ======= ===== ======== ==== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 59
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss......................................................... $ (971) $(2,874) $ (4,624)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 18 74 182
Amortization of deferred compensation.......................... -- -- 119
Bad debt expense............................................... -- 249 221
Charge for acquired in-process research and development........ -- 488 1,400
Net changes in:
Trade accounts receivable, net................................. (662) (639) (1,372)
Receivable from related parties................................ (125) 125 --
Inventories.................................................... (14) (704) (2,145)
Other assets................................................... -- (135) (671)
Accounts payable and accrued expenses.......................... 273 1,369 698
Deferred distributor fee revenue............................... (50) (54) (50)
----- ------- -------
Net cash used in operating activities............................ (1,531) (2,101) (6,242)
Investing activities:
Purchase of available-for-sale securities...................... -- -- (25,563)
Capital expenditures for furniture, fixtures and equipment..... (35) (443) (940)
----- ------- -------
Net cash used in investing activities............................ (35) (443) (26,503)
Financing activities:
Proceeds from issuance of convertible obligation............... -- 750 --
Proceeds from sale of Common Stock............................. 2,500 -- 42,768
Proceeds from exercise of stock options........................ -- -- 138
Proceeds from sale of Preferred Stock to Parent................ -- -- 8,000
Payable to Parent, net......................................... 1,898 (17) (2,537)
----- ------- -------
Net cash provided by financing activities........................ 4,398 733 48,369
----- ------- -------
Net increase (decrease) in cash.................................. 2,832 (1,811) 15,624
Cash and cash equivalents, beginning of period................... 547 3,379 1,568
----- ------- -------
Cash and cash equivalents, end of period......................... $ 3,379 $ 1,568 $ 17,192
===== ======= =======
Supplemental disclosures of non-cash financing activities:
Common stock issued upon the acquisition of Intraluminal
Devices, Inc., Note 2....................................... -- -- $ 1,400
Conversion of Debentures to Common Stock, Note 5............... -- -- 750
</TABLE>
See accompanying notes.
F-6
<PAGE> 60
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Basis of Presentation
CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March
16, 1992 in the State of California. The Predecessor, and its successor
corporation discussed below, develops, manufactures and markets proprietary
therapeutic catheters used to treat certain vascular diseases.
In June 1992, EndoSonics Corporation ("EndoSonics") acquired a 40%
preferred interest in the Predecessor. EndoSonics, a Delaware corporation,
develops, manufactures, and markets intravascular ultrasound imaging systems and
diagnostic, therapeutic and imaging catheters for the treatment of coronary and
peripheral vascular disease.
In June 1993, EndoSonics acquired all of the remaining Preferred and Common
Stock of the Predecessor. The acquisition was accomplished through a merger
between the Predecessor and EndoSonics Acquisition Corp., a wholly owned
subsidiary of EndoSonics (which then changed its name to CardioVascular
Dynamics, Inc.) (hereinafter referred to as "CVD" or the "Company").
The acquisition by EndoSonics resulted in a new basis for the CVD assets
and liabilities. Accordingly, the purchase price paid by EndoSonics has been
allocated to the identifiable assets and liabilities, including in-process
research and development, which was immediately expensed as no CVD products had
received regulatory approval and the technology did not have identifiable
alternative uses. The amount by which the purchase price exceeded the
Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements. Pursuant to the terms of the original merger
agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its
Common Stock to the former shareholders of the Predecessor. The fair market
value of such shares of $488 has been reflected in the accompanying financial
statements as an additional charge for acquired in-process technology.
Subsequent to the acquisition, EndoSonics began performing certain services
for CVD (see Note 4), including general management, accounting, cash management,
and other administrative and engineering services. The amounts charged to CVD
for such services have been determined based on proportional cost allocations
and have been agreed to by the management of CVD and EndoSonics. In the opinion
of CVD's management, the allocation methods used are reasonable. Such
allocations, however, are not necessarily indicative of costs that would have
been incurred had CVD continued to operate independent of EndoSonics. No formal
agreement currently exists which specifies the nature of services to be provided
by EndoSonics to CVD, or the charges for such services. Therefore, amounts are
not necessarily indicative of the future charges to be incurred by CVD.
In 1994 and 1996, the Board of Directors of CVD approved a 16,200-for-1 and
a 2-for-1 Common Stock split, respectively, which have been reflected
retroactively for all periods in the accompanying financial statements.
On June 19, 1996, the Company closed its initial public offering (the
"Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per
share. On July 17, 1996, the Company's underwriters exercised their
overallotment option to purchase an additional 510,000 shares of Common Stock at
$12.00 per share. CVD received net offering proceeds from the sale of Common
Stock of approximately $42.8 million after deducting underwriting discounts and
commissions and other expenses of the Offering.
In October 1996, CVD acquired 100% of the common stock of Intraluminal
Device, Inc. ("IDI") in exchange for CVD common stock valued at $1.4 million.
The acquisition was accomplished through the formation of IDI Acquisition, Inc.,
a wholly-owned subsidiary of CVD, and the merging of IDI into IDI Acquisition,
Inc. (See Note 2).
F-7
<PAGE> 61
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements for December 31, 1996 include the
accounts of the Company and its subsidiary. Intercompany transactions have been
eliminated.
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 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
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in shareholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.
Inventories
Inventories are comprised of raw materials, work-in-process and finished
goods and are stated at the lower of cost, determined on an average cost basis,
or market value.
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to seven years.
Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed of," was
issued. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During 1996, the Company
adopted this statement and determined that no impairment loss need be recognized
for the applicable assets.
Concentrations of Credit Risk and Significant Customers
The Company maintains its cash and cash equivalents in deposit accounts and
in pooled investment accounts administered by a major financial institution.
The Company sells its products primarily to medical institutions and
medical device distributors worldwide. The Company performs ongoing credit
evaluations of its customers' financial condition and
F-8
<PAGE> 62
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally does not require collateral from customers. Management believes that
an adequate allowance for doubtful accounts has been provided.
During 1994, 1995, and 1996 product sales to Fukuda Denshi Co., Ltd.,
("Fukuda"), the Company's Japanese distributor (see Note 5), comprised 61%, 18%
and 14% of total revenue. Accounts receivable from Fukuda represented 15% and 1%
of net accounts receivable at December 31, 1995 and 1996, respectively.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% of total
revenues during 1996. At December 31, 1996, 27% of accounts receivable were due
from Medtronic. One other customer comprised 12% of revenues for the year ended
December 31, 1995 and 14% of accounts receivable at December 31, 1995.
Export Sales
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Europe..................................................... $255 $1,179 $1,614
Japan...................................................... 715 744 1,240
Latin America.............................................. -- 131 243
Other...................................................... -- -- 417
---- ------ ------
$970 $2,054 $3,514
==== ====== ======
</TABLE>
Revenue Recognition and Warranty
The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment. License fees are
recognized on a contract with SCIMED Life Systems, Inc. ("SCIMED") when
distribution rights to certain markets are made available to SCIMED for the sale
of products based upon certain limited catheter technology. Contract revenues
are recognized on contracts with SCIMED and Advanced Cardiovascular Systems,
Inc. ("ACS") for transferring certain limited catheter technology based upon the
Company's completion of (1) technical assistance to aid SCIMED in manufacturing
the related products, and (2) research and development to develop the related
products for ACS and SCIMED (See Note 3).
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes 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
F-9
<PAGE> 63
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In calculating pro forma information regarding net income and net income
per share the fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the options on the Company's common stock: risk-free interest
rate of 6.0%; a dividend yield of 0%; volatility of the expected market price of
the Company's common stock of 0.475; and a weighted-average expected life of the
options of 3.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1995 and 1996 follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Pro forma net loss..................................... $(2,905) $(5,170)
Pro forma net loss per share........................... (0.65) (0.72)
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
Income Taxes
From June 1993 until June 1996, the Company's results of operations have
been included in consolidated tax returns filed by EndoSonics. There was no
income tax provision for the consolidated tax group during the periods covered
by these financial statements. All net operating loss and credit carryforwards
and deferred tax assets and liabilities have been disclosed herein on a separate
company basis for CVD.
Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock, convertible Preferred Stock (using the
as-if-converted method) and Common Stock issuable upon conversion of the
Convertible Obligation, outstanding. Common equivalent shares from stock options
and warrants are not included as the effect is anti-dilutive, except that in
accordance with Securities and Exchange Commission Staff Accounting Bulletins,
common equivalents shares issued by the Company at prices substantially below
the anticipated initial public offering price during the period beginning one
year prior to the proposed public offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price).
For periods subsequent to the Company's initial public offering in June
1996, the Company's net loss per share has been calculated based on the weighted
average number of common and dilutive common equivalent shares outstanding.
Common Stock equivalents that are anti-dilutive are excluded from the
calculation.
Reclassifications
To conform with the 1996 financial statement presentation, certain
reclassifications have been made to the 1995 and 1994 financial statements.
F-10
<PAGE> 64
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. ACQUISITION OF INTRALUMINAL DEVICES, INC.
On October 16, 1996, the Company acquired all of the outstanding shares of
IDI in exchange for approximately 93,000 shares of CVD common stock valued at
$1.4 million. The acquisition was accounted for using the purchase method of
accounting. As the assets of IDI were patents for products still in their
development stage, the purchase price and the associated costs of acquisition
$0.7 million were expensed as acquired in-process research and development.
The following table reflects unaudited pro forma combined results of
operations of the Company and IDI on the basis that the acquisition had taken
place and the related charge, noted above, was recorded at the beginning of 1996
as IDI operations were not material to the Company's operations prior to 1996:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Revenues................................................. $ 8,734
Net loss................................................. (4,820)
Net loss per common share................................ (0.67)
Shares used in computation............................... 7,214
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1996 or of future
operations of the combined companies under the ownership and management of the
Company.
3. SCIMED LIFE SYSTEMS, INC.
In September 1994, CVD and EndoSonics entered into a Stock Purchase and
Technology License Agreement with SCIMED. SCIMED acquired a 19% interest in CVD
in exchange for $2,500 in cash.
CVD also granted SCIMED an exclusive license to certain patents in the
cardiovascular field of use, which allows SCIMED to manufacture the Transport
PTCA infusion catheter (the "Transport") developed by CVD in exchange for a
$1,000 license fee that was paid in 1994. SCIMED will pay royalties to CVD on
sales of the Transport and other products which use this patented technology.
CVD retains rights to this technology and the associated patents for use outside
of the cardiovascular field.
During June 1995, the Company issued a warrant to SCIMED to purchase up to
80,000 shares of Series A Preferred Stock at an exercise price of $3.29 per
share in exchange for a waiver of SCIMED's anti-dilution right. The warrant
expires in September 1997.
During May 1996, the Company agreed to issue an additional warrant to
SCIMED to purchase up to 40,000 shares of Series A Preferred Stock at an
exercise price of $3.29 per share in exchange for a waiver of SCIMED's
anti-dilution right related to the shares to be issued under the 1996 Plan.
SCIMED also paid CVD $220, $641 and $200 in 1994, 1995 and 1996,
respectively, on a cost reimbursement basis to fund continuing development of
the technology and for other support. Additionally, the Company recorded $43 in
product sales to SCIMED during 1994 (none in 1995 or 1996).
4. RELATED PARTY TRANSACTIONS
The following is a summary of significant transactions between CVD and
EndoSonics:
- During 1994 and a portion of 1995, EndoSonics manufactured certain of the
Company's catheter products at cost plus a mark-up of 30%. Total
purchases from EndoSonics during 1994 and 1995 amounted to $843 and $172,
respectively. In addition, during 1994 EndoSonics performed certain
billing and collection services for CVD in return for a fee per invoice
which aggregated to $10.
F-11
<PAGE> 65
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Prior to the Company's initial public offering in June 1996, certain
EndoSonics corporate expenses, primarily related to executive management
time, accounting, cash management, and other administrative and
engineering services, have been allocated to the Company. Total expenses
allocated were $290, $340, and $156 for the years ended December 31,
1994, 1995 and 1996, respectively.
No interest expense has been charged on the net payable due to EndoSonics.
The following is an analysis of the payable to EndoSonics:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
------------ ------ ------
<S> <C> <C> <C>
Beginning balance.................................... $ 656 $2,554 $2,537
Inventory purchases.................................. 843 172 --
Corporate cost allocations........................... 300 340 156
Cash disbursements made by EndoSonics on behalf of
CVD................................................ 1,730 312 --
Cash collections made by EndoSonics on behalf of
CVD................................................ (318) (700) --
Cash payments to EndoSonics.......................... (549) -- (2,693)
Cash disbursements made by CVD on behalf of
EndoSonics and other............................... (108) (141) --
----- ------ ------
Ending balance....................................... $2,554 $2,537 $ --
===== ====== ======
Average balance during period........................ $1,750 $2,551 $1,974
===== ====== ======
</TABLE>
In connection with the initial public offering, CVD and EndoSonics entered
into a Tax Allocation Agreement that provides, among other things, for (i) the
allocation of tax liabilities and adjustments thereto as between the business of
the Company and other businesses conducted by EndoSonics and its affiliates
related to periods in which the Company is includable in consolidated federal
income tax returns filed by EndoSonics, (ii) the allocation of responsibility
for filing tax returns and (iii) the conduct of and responsibility for taxes
owed in connection with tax audits and various related matters.
EndoSonics and CVD entered into a Stockholder Agreement providing that all
transactions between the Company and EndoSonics or any affiliate of EndoSonics
must be approved by a special committee of CVD's Board of Directors comprised of
two directors who are not officers, directors, employees or affiliates of
EndoSonics. The provisions of this agreement became effective upon the
consummation of the initial public offering and will terminate on the earlier of
seven years from the date of the agreement or on the date EndoSonics
beneficially owns less than 25% of CVD's Common Stock.
(See Notes 5 and 11)
5. AGREEMENTS WITH FUKUDA
The Company has executed a distribution agreement with Fukuda. The
agreement provides Fukuda with exclusive distribution rights relative to certain
of the Company's products in Japan for periods extending through May 1999, which
may be extended at the option of the parties. Distribution fee revenue received
from Fukuda are deferred and are being recognized as revenue over the initial
periods covered by the respective agreements.
In July 1995 and May 1996, the distribution agreement with Fukuda was
amended. In exchange for the exclusive distribution rights to additional CVD
products, the Company received $750 which converted into the right to receive
62,500 shares of Common Stock upon the consummation of the initial public
offering. The Company has accounted for this as a convertible obligation payable
as of December 31, 1995. In November, 1996, Fukuda exercised the conversion
feature of said obligation. The Company recently informed Fukuda of its decision
to terminate the existing distribution agreement and does not expect that any
obligations will arise as a result of such termination. The Company expects that
Fukuda will continue to distribute its products at
F-12
<PAGE> 66
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
least through 1997. The Company is currently negotiating with several
distributors, including Fukuda, regarding a new distribution agreement for the
Japanese market.
6. LICENSE AGREEMENTS
In January 1995 the Company entered into a license agreement with ACS under
which the Company acquired the exclusive worldwide rights to ACS' SmartNeedle
technology. The Company assumed responsibility for manufacturing the product in
1996, subject to the payment of royalties. ACS was granted an option, which was
exercised in February 1996, to obtain exclusive worldwide rights to certain CVD
perfusion technology. In exchange for the perfusion technology, ACS is obligated
to make milestone and minimum royalty payments to CVD, and also has certain
obligations to develop and market the perfusion technology. An initial milestone
of $150 was earned in the year ended December 31, 1996.
The Company entered into a license agreement with EndoSonics pursuant to
which CVD granted EndoSonics the non-exclusive, royalty-free right to certain
technology for use in the development and sale of certain products. In exchange,
CVD received the non-exclusive, royalty-free right to utilize certain of
EndoSonics' product regulatory filings to obtain regulatory approval of CVD
products.
7. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The Company's investments in debt securities are diversified among high
credit quality securities in accordance with the Company's investment policy.
The Company's investment portfolio is managed by a major financial institution.
The following is a summary of investments in debt securities classified as
current assets and available-for-sale at December 31, 1996:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
HOLDING
(LOSSES)
COST GAINS FAIR VALUE
------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasury and other agencies debt securities...... $10,000 $(19) $ 9,981
Corporate debt securities............................. $15,563 189 15,752
------- ----- -------
$25,563 $170 $ 25,733
======= ===== =======
</TABLE>
All short-term investments at December 31, 1996 were due within one year.
8. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------------ ------
<S> <C> <C>
Raw materials.................................................. $162 $1,015
Work in process................................................ 330 510
Finished goods................................................. 262 1,374
--- ----
$754 $2,899
=== ====
</TABLE>
F-13
<PAGE> 67
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------------ ------
<S> <C> <C>
Accounts payable............................................... $ 962 $ 750
Accrued payroll and related expenses........................... 352 1,040
Accrued warranty............................................... 113 29
Other accrued expenses......................................... 257 563
---- ----
$1,684 $2,382
==== ====
</TABLE>
10. COMMITMENTS
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancelable lease agreements
that have been accounted for as operating leases. Certain of these leases
include scheduled rent increases and renewal options as prescribed by the
agreements.
Future minimum payments by year under long-term, noncancellable operating
leases were as follows as of December 31:
<TABLE>
<S> <C>
1997........................................................ $ 392
1998........................................................ 354
1999........................................................ 178
2000........................................................ 57
-----
$ 981
=====
</TABLE>
Rental expense charged to operations for all operating leases during the
years ended December 31, 1994, 1995 and 1996, was approximately $60, $171 and
$365, respectively.
11. STOCKHOLDERS' EQUITY
Preferred Stock
In February 1995, every two shares of the Company's outstanding Common
Stock was exchanged for one share of Series A Preferred Stock with a liquidation
preference of $6.58 per share. In March 1996, the Company issued 400,000 shares
of Series B Preferred Stock to EndoSonics at $20.00 per share for aggregate
proceeds of $8,000.
The preferred stockholders converted their shares to common shares upon the
consummation of the Company's initial public offering.
Stock Option Plan
In May 1996, the Company adopted the 1996, Stock Option/Stock Issuance Plan
(the "1996 Plan") which is the successor to the Company's 1995 Stock option
plan. Under the terms of the 1996 Plan eligible key employees, directors, and
consultants can receive options to purchase shares of the Company's Common Stock
at a price not less than 100% for incentive stock options and 85% for
nonqualified stock options of the fair value on the date of grant, as determined
by the Board of Directors. The Company has authorized 1,200,000 shares of Common
Stock for issuance under the 1996 Plan. The options granted under the 1996 Plan
are exercisable over a maximum term of ten years from the date of grant and
generally vest over a four
F-14
<PAGE> 68
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
year period. Shares underlying the exercise of unvested options are subject to
various restrictions as to resale and right of repurchase by the Company which
lapses over the vesting period.
<TABLE>
<CAPTION>
OPTION PRICE NUMBER
PER SHARE OF SHARES
---------------- ---------
<S> <C> <C>
Balanced at January 1, 1994.............................. --
Granted.................................................. $1.00 464,000
Exercised................................................ --
Forfeited................................................ --
Cancelled................................................ --
--------------- ---------
Balanced at December 31, 1994............................ $1.00 464,000
Granted.................................................. $1.00 to $ 1.50 493,000
Exercised................................................ --
Forfeited................................................ --
Cancelled................................................ --
--------------- ---------
Balanced at December 31, 1995............................ $1.00 to $ 1.50 957,000
Granted.................................................. $2.50 to $13.25 319,000
Exercised................................................ $1.00 to $ 1.50 (138,600)
Forfeited................................................ $1.00 to $13.25 (18,875)
Cancelled................................................ --
--------------- ---------
Balance at December 31, 1996............................. $1.00 to $13.25 1,118,525
=============== =========
</TABLE>
The following table summarizes information regarding stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
- --------------- ----------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.00 - $ 1.50 812,525 8.4 $ 1.21 253,525 $ 1.16
2.50 - 13.25 306,000 9.8 12.11 0 --
--- -----
1.00 - 13.25 1,118,525 8.8 4.19 253,525 1.16
=== =====
</TABLE>
No options had been exercised and 125,000 options were exercisable at
December 31, 1995. As of December 31, 1996, 253,525 options were exercisable.
The weighted-average grant-date fair value of options granted during 1995
and 1996, for options where the exercise price on the date of grant was equal to
the stock price on that date, was $0.40 and $5.12, respectively. The
weighted-average grant-date fair value of options granted during 1995 and 1996,
for options where the exercise price on the date of grant was less than the
stock price on that date, was $1.44 and $3.16, respectively.
During 1995, the Company recorded deferred compensation of approximately
$345 for financial reporting purposes to reflect the difference between the
exercise price of certain options and the deemed fair value, for financial
statement presentation purposes, of the Company's shares of Common Stock. An
additional $150 of deferred compensation was recorded during the year ended
December 31, 1996. Deferred compensation is being amortized over the vesting
period of the related options. $119 of deferred compensation was amortized in
the year ended December 31, 1996.
Stock Purchase Plan
Under the terms of the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), eligible employees can purchase Common Stock through payroll
deductions at a price equal to the lower of 85% of the fair market value of the
Company's Common Stock at the beginning or end of the applicable offering
period. A total of 200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan.
F-15
<PAGE> 69
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows at
December 31:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net operating loss carryforward................ $ 1,322 $ 60 $ 1,792 $ 44
Accrued expenses............................... 20 3 456 78
Research and development credits............... 97 25 256 144
Bad debt reserve............................... 63 11 132 23
Depreciation................................... -- -- 52 9
Inventory write-downs.......................... 73 13 51 9
Capitalized research and development........... -- 150 -- 276
Deferred revenue............................... 45 8 28 5
Other.......................................... -- -- 47 57
------- ----- ------- -----
Gross deferred tax assets...................... 1,620 270 2,814 645
Valuation allowance............................ (1,620) (270) (2,814) (645)
Total deferred tax assets...................... -- -- -- --
------- ----- ------- -----
Net deferred tax assets........................ $ -- $ -- $ -- $ --
======= ===== ======= =====
</TABLE>
The valuation allowance increased by $1,569 and $1,072 in 1996 and 1995,
respectively.
The Company's effective tax rate differs from the statutory rate of 35% due
to federal and state losses which were recorded without tax benefit.
At December 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $5,120,000 and $740,000,
respectively, which expire in the years 1997 through 2010. In addition, the
Company has research and development tax credits for federal and state income
tax purposes of approximately $256,000 and $144,000, respectively, which expire
in the years 2008 through 2010.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research credit
carryforwards may be subject to an annual limitation against taxable income in
future periods. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
income tax liabilities.
13. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Plan for all employees 21 years of age or
older with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 1996 and 1995.
F-16
<PAGE> 70
CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................................... $16,971 $ 17,192
Marketable securities.............................................. 23,808 25,733
Trade accounts receivable, net..................................... 2,734 2,268
Inventories........................................................ 3,899 2,899
Other receivables.................................................. 467 320
Other current assets............................................... 170 162
-------- --------
Total current assets............................................ 48,049 48,574
Property and equipment, net.......................................... 1,311 1,182
Notes receivable from officers....................................... 425 325
Other assets......................................................... 6 3
-------- --------
Total Assets......................................................... $49,791 $ 50,084
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.............................. $ 906 $ 750
Accrued payroll and related expenses............................... 961 1,040
Other accrued expenses............................................. 577 592
Deferred distributorship fee-current portion....................... 50 50
-------- --------
Total current liabilities....................................... 2,494 2,432
Deferred distributorship fee revenue................................. 17 29
STOCKHOLDER'S EQUITY
Convertible preferred stock, $.001 par value; 7,560,000 shares
authorized,
no shares issued and outstanding................................... -- --
Common stock, $.001 par value; 30,000,000 authorized, 9,103,000
shares and 9,004,000 shares outstanding as of March 31, 1997 and
December 31, 1996, respectively.................................... 9 9
Additional paid-in capital........................................... 59,099 58,869
Preferred compensation............................................... (345) (376)
Accumulated deficit.................................................. (11,647) (11,049)
Unrealized gains on investments...................................... 164 170
-------- --------
Total stockholders' equity...................................... 47,280 47,623
-------- --------
Total Liabilities and Stockholders' Equity........................... $49,791 $ 50,084
======== ========
</TABLE>
See accompanying notes.
F-17
<PAGE> 71
CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
------------------
1997 1996
------- ------
<S> <C> <C>
Revenue:
Sales................................................................... $ 3,019 $1,783
License fee and other from related party................................ -- 100
Contract................................................................ -- 150
------- ------
Total revenue............................................................. 3,019 2,033
Cost of sales............................................................. 1,416 942
------- ------
Gross profit.............................................................. 1,603 1,091
Operating expenses:
Research, development and clinical...................................... 993 627
Marketing and sales..................................................... 1,350 577
General and administrative.............................................. 443 291
------- ------
Total operating expenses.................................................. 2,786 1,495
------- ------
Loss from operations...................................................... (1,183) (404)
Other income:
Interest income......................................................... 572 11
Distributorship fees and other income................................... 13 16
------- ------
Total other income.............................................. 585 27
======= ======
Net loss.................................................................. $ (598) $ (377)
======= ======
Net loss per share (pro forma through June, 1996)......................... $ (0.07) $(0.08)
======= ======
Shares used in the calculation of net loss per share (pro forma through
June, 1996)............................................................. 9,081 4,485
======= ======
</TABLE>
See accompanying notes
F-18
<PAGE> 72
CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................... $ (598) $ (377)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 72 45
Amortization of deferred compensation............................... 31 26
Bad debt expense.................................................... 12 --
Net changes in:
Trade accounts receivable, net.................................... (478) (467)
Receivable from related parties................................... -- (100)
Inventories....................................................... (1,000) 2
Other assets...................................................... (256) (15)
Accounts payable and accrued expenses............................. 62 85
Deferred distributor fee revenue.................................. (12) (12)
-------- ------
Net cash used in operating activities.......................... (2,167) (813)
Cash flows used in investing activities:
Purchase of available-for-sale-securities.............................. (10,884) --
Proceeds from sales of available-for-sale securities................... 12,802 --
Capital expenditures for property and equipment and other assets....... (202) (146)
-------- ------
Net cash used in investing activities.......................... 1,716 (146)
Cash flows provided by financing activities:
Proceeds from sale of common stock..................................... 136 --
Proceeds from exercise of stock options................................ 94 --
Proceeds from sale of preferred stock to parent........................ -- 8,000
Payable to Parent, net................................................. -- 46
-------- ------
Net cash provided by financing activities...................... 230 8,046
-------- ------
Net increase (decrease) in cash and equivalents.......................... (221) 7,087
Cash and equivalents, beginning of period................................ 17,192 1,568
-------- ------
Cash and equivalents, end of period...................................... $ 16,971 $ 8,655
======== ======
</TABLE>
See accompanying notes.
F-19
<PAGE> 73
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
1. BASIS OF PRESENTATION
Cardiovascular Dynamics, Inc. ("CVD" or the "Company") designs, develops,
manufactures and markets catheters used to treat certain vascular diseases. The
accompanying condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three month period ended March 31, 1997 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 1996.
2. NET LOSS PER SHARE
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock, Preferred Stock (using the as-if-converted method)
and Common Stock Issuable upon conversion of the Convertible Obligation,
outstanding. Common equivalent shares from stock options and warrants are not
included as the effect is anti-dilutive, except that in accordance with
Securities and Exchange Commission Staff Accounting Bulletins, common equivalent
shares issued by the Company at prices substantially below the anticipated
initial public offering price during the period beginning one year prior to the
offering have been included in the calculation as if they were outstanding for
all periods presented (using the treasury stock method and the initial public
offering price).
For periods subsequent to the Company's initial public offering in June
1996, the Company's net loss per share has been calculated based on the weighted
average number of common and dilutive common equivalent shares outstanding.
Common stock equivalents that are anti-dilutive are excluded from the
calculation.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings per Share, which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method currently
used to compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The impact is not expected to result in a
change in earnings per share for the quarters ended March 31, 1997 and March 31,
1996 since the effect of stock options is anti-dilutive in the 1997 period and
the 1996 period includes the effect of stock options calculated pursuant to
requirements of the Securities and Exchange Commission for "cheap stock", which
are not changed as a result of the issuance of Statement No. 128. The impact of
Statement 128 on the calculation of fully diluted earnings per share for these
quarters is not expected to be material.
3. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, 1997 DECEMBER 31, 1996
--------------- ------------------
<S> <C> <C>
Raw materials......................................... $ 1,299,000 $1,015,000
Work-in-process....................................... 1,204,000 510,000
Finished goods........................................ 1,396,000 1,374,000
--------------- ------------------
$ 3,899,000 $2,899,000
============ ==============
</TABLE>
F-20
<PAGE> 74
4. ACQUISITION OF INTRALUMINAL DEVICES, INC.
On October 16, 1996, the Company acquired all of the outstanding shares of
Intraluminal Devices, Inc. (IDI) in a transaction accounted for as a purchase
for approximately 93,000 shares of the Company's common stock valued at $1.4
million. The entire purchase price was assigned to products in the development
stage and, together with acquisition costs of $0.7 million, were expensed as
acquired in-process research and development in the fourth quarter of 1996. Pro
forma combined results of the Company and IDI for the quarter ended March 31,
1996, on the basis that the acquisition had taken place at the beginning of
1996, would have reported a pro forma net loss of $463,000 and pro forma net
loss per share of $(0.10).
F-21
<PAGE> 75
=======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
The Company............................ 15
Use of Proceeds........................ 15
Price Range of Common Stock............ 16
Dividend Policy........................ 16
Selected Financial Data................ 17
Management's Discussion and Analysis of
Financial Condition and Results
of Operations........................ 18
Business............................... 23
Management............................. 37
Certain Transactions................... 44
Principal and Selling Stockholders..... 47
Description of Capital Stock........... 49
Shares Eligible for Future Sale........ 50
Plan of Distribution................... 51
Legal Matters.......................... 52
Experts................................ 52
Index to Financial Statements.......... F-1
</TABLE>
=======================================================
=======================================================
1,488,528 SHARES
CARDIOVASCULAR
DYNAMICS, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
JUNE 13, 1997
=======================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee.
<TABLE>
<S> <C>
SEC Registration fee...................................................... $ 3,722
Printing and engraving.................................................... 30,000
Legal fees and expenses................................................... 50,000
Accounting fees and expenses.............................................. 50,000
Blue sky fees and expenses................................................ 5,000
Miscellaneous............................................................. 5,000
--------
Total........................................................... $143,722*
========
</TABLE>
* Certain of these expenses will be reimbursed by Endosonics Corporation
pursuant to a Registration Rights Agreement.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VIII of the Registrant's Bylaws
provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Certificate
of Incorporation provides that, pursuant to Delaware law, its directors shall
not be liable for monetary damages for breach of the directors' fiduciary duty
as directors to the Company and its stockholders. This provision in the
Certificate of Incorporation does not eliminate the directors' fiduciary duty,
and in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Company for acts or omissions not in good
faith or involving intentional misconduct, for knowing violations of law, for
actions leading to improper personal benefit to the director, and for payment of
dividends or approval of stock repurchases or redemptions that are unlawful
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
Indemnification Agreements with its directors, a form of which is attached as
Exhibit 10.1, previously filed as an exhibit to the Company's Registration
Statement on Form S-1 filed with the Securities and Exchange Commission on May
3, 1996, and incorporated herein by reference. The Indemnification Agreements
provide the Registrant's directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since June 1993, the Registrant has issued and sold the following
securities:
1. On September 10, 1994, the Company issued and sold an aggregate of
380,000 shares of Common Stock (subsequently recapitalized into Series A
Preferred Stock) to SCIMED for an aggregate purchase price of $2,500,000.
2. On July 17, 1995, the Company issued a $750,000 convertible
obligation to Fukuda, which converted into 62,500 shares of Common Stock at
the consummation of the initial public offering.
II-1
<PAGE> 77
3. On June 30, 1995 and May 2, 1996, the Company issued warrants to
SCIMED to purchase 40,000 shares of Series A Preferred Stock and 20,000
shares of Series A Preferred Stock, respectively, each at an exercise price
of $6.58 per share. The warrants were issued in connection with the waiver
of certain rights by SCIMED under the Stock Purchase and Technology License
Agreement dated September 10, 1994, as amended on September 29, 1995.
4. On March 29, 1996, the Company issued and sold an aggregate of
400,000 shares of Series B Preferred Stock to EndoSonics Corporation for an
aggregate purchase price of $8,000,000.
5. On October 16, 1996 and November 26, 1996, the Company issued an
aggregate of 93,322 shares of Common Stock to the shareholders of
Intraluminal Devices, Inc. ("IDI") in connection of the merger of IDI with
and into a wholly owned subsidiary of the Company.
The issuances of the securities described above were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of such
Act as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant.
II-2
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
1.1(1) Form of Underwriting Agreement.
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among EndoSonics
Corporation ("EndoSonics"), EndoSonics Acquisition Corporation and CardioVascular
Dynamics, Inc. ("CVD").
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and CVD.
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular Dynamics, Inc.,
IDI Acquisition Corporation and Intraluminal Devices, Inc. ("IDI") dated as of
October 2, 1996.
3.1(3) Certificate of Incorporation.
3.2(3) Amended Bylaws.
4.1(1) Specimen Certificate of Common Stock.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1(3) Form of Indemnification Agreement to be entered into between the Registrant and
its directors and officers.
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements thereunder.
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement thereunder.
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and between
the Company and CVD.
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between EndoSonics and
CVD.
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on October 27,
1994 and July 17, 1995, (the "Japanese Distribution Agreements") by and between
CVD and Fukuda Denshi Co., Ltd. ("Fukuda")
10.7(3)* Stock Purchase and Technology License Agreement dated September 10, 1994, as
amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED Life
Systems, Inc. ("SCIMED").
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD and
Endosonics.
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and Advanced
CardioVascular Systems, Inc. ("ACS").
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS.
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD and
EndoSonics.
10.12(3) License Agreement dated December 22, 1995 by and between CVD and EndoSonics.
10.13(1) Form of Stockholder Agreement with EndoSonics.
10.14(1) Form of Tax Allocation Agreement with EndoSonics.
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine Company and
CVD.
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD and
EndoSonics.
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and between
CVD and Fukuda.
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
</TABLE>
II-3
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ---------------------------------------------------------------------------------
<S> <C>
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
10.20(7) License Agreement dated as of May 16, 1997 by and between CVD and EndoSonics.
10.21(7) Registration Rights Agreement dated May 14, 1997 by and between CVD and
EndoSonics.
11.1(1) Computation of Earnings Per Share.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Brobeck, Phleger & Harrison LLP (Reference is made to Exhibit 5.1).
24.1 Power of Attorney (Reference is made to page II-6).
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on March 26, 1997.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K/A
as filed with the Securities and Exchange Commission on June 13, 1997.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, Indemnification Agreements
entered into between the Registrant and its directors, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-4
<PAGE> 80
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 81
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on this 13th day of June, 1997.
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ DANA P. NICKELL
------------------------------------
Dana P. Nickell
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
(Principal Financial and Accounting
Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Michael R. Henson and Dana P. Nickell, and each
of them, with full power to act without the other, such person's true and lawful
attorney's-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 this Registration Statement and any and all amendments
thereto (including pre- and post-effective amendments) or any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and to file the same,
with exhibits and schedules thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney's-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing necessary or desirable to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------
<C> <S> <C>
/s/ MICHAEL R. HENSON President, Chief Executive June 13, 1997
- ------------------------------------------ Officer (Principal Executive
(Michael R. Henson) Officer) and Chairman
/s/ DANA P. NICKELL Vice President, Finance and June 13, 1997
- ------------------------------------------ Administration, Chief
(Dana P. Nickell) Financial Officer and
Secretary (Principal
Financial and Accounting
Officer)
Director
- ------------------------------------------
(William G. Davis)
/s/ MITCHELL DANN Director June 13, 1997
- ------------------------------------------
(Mitchell Dann)
Director
- ------------------------------------------
(Gerard von Hoffmann)
/s/ EDWARD M. LEONARD Director and Assistant June 13, 1997
- ------------------------------------------ Secretary
(Edward M. Leonard)
</TABLE>
II-6
<PAGE> 82
CARDIOVASCULAR DYNAMICS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
---------------------
COLUMN B ADDITIONS COLUMN E
---------- --------------------- ----------
COLUMN A BALANCE AT CHARGES TO CHARGED COLUMN D BALANCE AT
- ---------------------------------------------- BEGINNING COST AND TO OTHER ---------- END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ---------------------------------------------- ---------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts............. $180 $221 $ -- $(24) $377
Accrued warranty expenses................... $113 $ -- $ -- $(84) $ 29
Year ended December 31, 1995
Allowance for doubtful accounts............. $ 85 $ 95 $ -- $ -- $180
Accrued warranty expenses................... $ 20 $ 93 $ -- $ -- $113
Year ended December 31, 1994
Allowance for doubtful accounts............. $ -- $ 85 $ -- $ -- $ 85
Accrued warranty expenses................... $ -- $ 20 $ -- $ -- $ 20
</TABLE>
S-1
<PAGE> 83
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
1.1(1) Form of Underwriting Agreement........................................
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among
EndoSonics Corporation ("EndoSonics"), EndoSonics Acquisition
Corporation and CardioVascular Dynamics, Inc. ("CVD").................
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation
and CVD...............................................................
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular
Dynamics, Inc., IDI Acquisition Corporation and Intraluminal Devices,
Inc. ("IDI") dated as of October 2, 1996..............................
3.1(3) Certificate of Incorporation..........................................
3.2(3) Amended Bylaws........................................................
4.1(1) Specimen Certificate of Common Stock..................................
5.1 Opinion of Brobeck, Phleger & Harrison LLP............................
10.1(3) Form of Indemnification Agreement to be entered into between the
Registrant and its directors and officers.............................
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements
thereunder............................................................
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement
thereunder............................................................
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by
and between the Company and CVD.......................................
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between
EndoSonics and CVD....................................................
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on
October 27, 1994 and July 17, 1995, (the "Japanese Distribution
Agreements") by and between CVD and Fukuda Denshi Co., Ltd.
("Fukuda")............................................................
10.7(3)* Stock Purchase and Technology License Agreement dated September 10,
1994, as amended on September 29, 1995, by and among EndoSonics, CVD
and SCIMED Life Systems, Inc. ("SCIMED")..............................
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED,
CVD and EndoSonics....................................................
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and
Advanced CardioVascular Systems, Inc. ("ACS").........................
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS......
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between
CVD and EndoSonics....................................................
10.12(3) License Agreement dated December 22, 1995 by and between CVD and
EndoSonics............................................................
10.13(1) Form of Stockholder Agreement with EndoSonics.........................
10.14(1) Form of Tax Allocation Agreement with EndoSonics......................
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine
Company and CVD.......................................................
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED,
CVD and Endosonics....................................................
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by
and between CVD and Fukuda............................................
</TABLE>
<PAGE> 84
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBITS PAGE
- ----------- ---------------------------------------------------------------------- ------------
<S> <C> <C>
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic,
Inc...................................................................
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic,
Inc...................................................................
10.20(7) License Agreement dated as of May 16, 1997 by and between CVD and
EndoSonics............................................................
10.21(7) Registration Rights Agreement dated May 14, 1997 by and between CVD
and EndoSonics........................................................
11.1(1) Computation of Earnings Per Share.....................................
23.1 Consent of Ernst & Young LLP, Independent Auditors....................
23.2 Consent of Brobeck, Phleger & Harrison LLP (Reference is made to
Exhibit 5.1)..........................................................
24.1 Power of Attorney (Reference is made to page II-6)....................
</TABLE>
- ---------------
* Confidential treatment requested.
(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.
(6) Previously filed as an exhibit to the Company's Annual Report on Form 10-K
as filed with the Securities and Exchange Commission on March 26, 1997.
(7) Previously filed as an exhibit to the Company's Annual Report on Form 10-K/A
as filed with the Securities and Exchange Commission on June 13, 1997.
<PAGE> 1
EXHIBIT 5.1
June 12, 1997
CardioVascular Dynamics, Inc.
13700 Alton Parkway
Suite 160
Irvine, CA 92618
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 originally filed by
CardioVascular Dynamics, Inc. (the "Company") with the Securities and Exchange
Commission (the "Commission") on June 12, 1997, as thereafter amended or
supplemented (the "Registration Statement"), in connection with the registration
under the Securities Act of 1933, as amended, of 1,488,528 shares of the
Company's Common Stock (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings taken and are familiar with the
proceedings proposed to be taken by you in connection with the distribution of
the Shares.
It is our opinion that the Shares are duly authorized, validly issued,
fully paid and nonassessable.
We consent to the use of this Opinion as an exhibit to said Registration
Statement, and further consent to the use of our name wherever appearing in said
Registration Statement, including the prospectus constituting a part thereof,
and in any amendment thereto.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
/s/ BROBECK, PHLEGER & HARRISON
LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 30,
1997 in the Registration Statement (Form S-1) and the related Prospectus of
CardioVascular Dynamics, Inc. for the registration of 1,488,528 shares of its
Common Stock.
/s/ ERNST & YOUNG LLP
Orange County, California
June 12, 1997
