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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28440
CARDIOVASCULAR DYNAMICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OF INCORPORATION)
68-0328265
(I.R.S. EMPLOYER IDENTIFICATION NO.)
13700 ALTON PARKWAY,
SUITE 160,
IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 457-9546
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
None None
</TABLE>
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE.
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, as of March 7, 1997, was approximately $52,715,000 (based upon
the closing price for shares of the Registrant's Common Stock as reported by the
Nasdaq National Market for the last trading date prior to that date). Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
On March 7, 1997, approximately 9,080,902 shares of the Registrant's Common
Stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of
Stockholders to be held on May 16, 1997 are incorporated by reference into Part
III.
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PART I
ITEM 1. BUSINESS
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.
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.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K, including,
without limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained or incorporated by reference herein to reflect any events
or developments.
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.
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The following table lists CVD's currently marketed products:
<TABLE>
<CAPTION>
FIRST
COMMERCIAL
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS SALE
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<S> <C> <C> <C>
Focus Catheters
ARC
Over-the-wire design PTCA (i.e., balloon PMA Supplement Approved Q3 1996
angioplasty in coronary
arteries)
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 (i.e., balloon 510(k) Clearance Q3 1995
angioplasty in
peripheral
arteries)
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>
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(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 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
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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 Advanced CardioVascular Systems, Inc. ("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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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>
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(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 0.1 mm 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
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.
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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 "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors -- Limited Manufacturing Experience."
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
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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
Johnson & Johnson International Systems, Inc. accounted for 12% of total product
sales in 1995 and sales to Medtronic 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- 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
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- 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 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
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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 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,
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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 Corporation ("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.
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.
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
9
<PAGE> 10
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 "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- 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 "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Risk Factors--Significant Competition."
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
10
<PAGE> 11
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 "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- 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.
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
11
<PAGE> 12
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 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 December 31, 1996, the Company had 160 employees, including 106 in
manufacturing, 19 in research, development and regulatory affairs, 26 in sales
and marketing and 9 in administration. The Company
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<PAGE> 13
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.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and key employees of the Company, and their ages as
of February 14, 1997, 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
Bart R. Navarro.............. 51 Director of Research and Development
Claire K. Walker............. 50 Director of Clinical Affairs
George F. Kick............... 51 Business Manager, Peripheral Products
Blair W. Breyne.............. 38 Director of International Market Development
Robert J. Imdieke............ 43 Manager, Quality Assurance
</TABLE>
BACKGROUND
The principal occupations of each executive officer and key employee of the
Company for at least the last five years are as follows:
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.
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.
13
<PAGE> 14
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 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.
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.
Claire K. Walker has served as Director of Clinical Affairs of the Company
since November 1994. 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.
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.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
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 1/2 10 1/4
Fourth Quarter............................................................ 17 1/2 9 5/8
</TABLE>
On March 6, 1997, the closing sale price of the Common Stock as reported on
the Nasdaq National Market was $10.63 per share. As of February 14, 1997, there
were approximately 98 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.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1992 YEAR ENDED DECEMBER 31,
(DATE OF INCEPTION) TO -------------------------------------------
DECEMBER 31, 1992(1) 1993(1) 1994 1995 1996
----------------------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue:
Sales........................... $ -- $ 126 $ 1,169 $ 3,462 $ 8,384
License fee and other from
related party................ -- -- 1,000 -- 150
Contract........................ -- -- 220 641 200
---- ------- ------- ------- -------
Total revenue........... -- 126 2,389 4,103 8,734
Costs and expenses:
Cost of sales................... -- 79 848 2,051 4,111
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
Marketing and sales............. -- 94 748 1,526 3,358
General and administrative...... 29 96 587 1,331 1,548
---- ------- ------- ------- -------
Total operating costs
and expenses.......... 323 3,004 3,411 7,079 14,732
---- ------- ------- ------- -------
Loss from operations.............. (323) (2,878) (1,022) (2,976) (5,998)
Other income...................... 10 29 51 102 1,374
---- ------- ------- ------- -------
Net loss.......................... $(313) $(2,849) $ (971) $(2,874) $(4,624)
==== ======= ======= ======= =======
Net loss per share (pro forma
through June 1996)(3)........... $ (0.25) $ (0.65) $ (0.65)
======= ======= =======
Shares used in computing net loss
per share (pro forma through
June 1996)(3)................... 3,876 4,441 7,141
======= ======= =======
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
----- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash and cash equivalents................. $ 650 $ 547 $ 3,379 $ 1,568 $ 17,192
Marketable securities available for
sale.................................... -- -- -- -- 25,733
Working capital (deficit)................. 583 (75) 1,366 (774) 46,142
Total assets.............................. 678 690 4,340 4,002 50,084
Convertible obligation.................... -- -- -- 750 --
Accumulated (deficit)..................... (313) (2,580) (3,551) (6,425) (11,049)
Total stockholders' equity (net capital
deficiency)............................. $ 607 $ (241) $ 1,288 $(1,098) $ 47,623
</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 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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Annual Report on Form 10-K contains forward-looking statements which
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" beginning on page 20.
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.
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<PAGE> 17
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 "Item 1. 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 "Item 1. 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 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 "Item 1.
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 "Item 1.
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 "Item 1. 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 "Item 1. Business--Strategic Relationships."
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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.
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.
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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 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.
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 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 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
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, the Company's net cash used in operating activities was $6.2 million,
$2.1 million and $1.5 million, respectively. These increases were primarily due
to funding of operating losses and the charges for acquired in-process research
and development.
On December 31, 1996, CVD had cash, cash equivalents and marketable
securities available for sale of $42.9 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
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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.
RISK FACTORS
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 December 31, 1996 was $11.0 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 scaleup 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.
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 "Item 1.
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
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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 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 "Item 1.
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.
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 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
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business, financial condition and results of operations. See "Item 1.
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 "Item
1. 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.
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 "Item 1. Business -- Manufacturing" and
"Item 1. Business -- Government Regulation."
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Potential Inability to Manage Growth. Prior to June 1996, the Company
historically 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 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
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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 "Item 1. Business -- Products" and "Item 1.
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, 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
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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 "Item 1. Business -- Marketing and Sales" and "Item
1. 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 "Item 7. 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 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 "Item 1. Business -- Third-Party Reimbursement."
25
<PAGE> 26
Control by Existing Stockholder; Limitations on Pooling-of-Interests
Accounting in Merger Transactions, prior to the anticipated distribution
discussed below. EndoSonics currently owns approximately 45% of the Company's
outstanding Common Stock. As a result, EndoSonics is able to elect at least two
members to the Company's five person board of directors and has the ability to
effectively control 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 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, among
EndoSonics, River Acquisition Corporation, a wholly-owned subsidiary of
EndoSonics, and Cardiometrics, shares of the Company's Common Stock held by
EndoSonics would be distributed to the former stockholders, warrantholders and
optionholders of Cardiometrics. After such distribution, EndoSonics is expected
to own approximately 22% of the Company's outstanding Common Stock. On the same
date, EndoSonics also 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.
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.
Volatility of Stock Price. 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 variations in quarterly results of
operations, any future litigation involving the Company, announcements of
technological innovations or new products by the Company or its competitors,
governmental regulatory action, 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.
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
26
<PAGE> 27
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.
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.
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-1
Financial Statements
Consolidated Balance Sheets......................................................... F-2
Consolidated Statements of Operations............................................... F-3
Consolidated Statement of Stockholders' Equity (Net Capital Deficiency)............. F-4
Consolidated Statements of Cash Flows............................................... F-5
Notes to Consolidated Financial Statements.......................................... F-6
</TABLE>
The financial statement schedule listed under Part IV, Item 14, is filed as
part of this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting
to be held on or about May 16, 1997. The information concerning the Company's
executive officers required by this item is incorporated by reference to the
section of Part I hereof entitled "Executive Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting
to be held on or about May 16, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting
to be held on or about May 16, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to shareholders for the Annual Meeting
to be held on or about May 16, 1997.
27
<PAGE> 28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Financial Statements.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended December
31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements
2. Financial Statement Schedule.
II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are not
applicable or are not required to be set forth herein as such
information is included in the Consolidated Financial Statements or
the notes thereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year covered by this Annual Report on Form 10-K.
(c) Exhibits.
<TABLE>
<S> <C>
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.
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").
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C>
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.
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
10.20 License Agreement dated May 16, 1997 by and between CVD and EndoSonics.
10.21 Registration Rights Agreement dated May 14, 1997 by and between CVD and
EndoSonics.
11.1 Computation of Net Loss Per Share
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 31 of this Report on Form
10-K/A.)
27.1** Financial Data Schedule.
</TABLE>
- ---------------
* Confidential treatment granted.
** Previously filed.
(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
filed with the Securities and Exchange Commission on March 26, 1997.
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
CARDIOVASCULAR DYNAMICS, INC.
Date: June 13, 1997
By: /s/ MICHAEL R. HENSON
------------------------------------
Michael R. Henson
President, Chief Executive Officer
(Principal Executive Officer) and
Chairman
By: /s/ DANA P. NICKELL
------------------------------------
Dana P. Nickell
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
(Principal Financial and Accounting
Officer)
30
<PAGE> 31
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K/A has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- ---------------
<S> <C> <C>
MICHAEL R. HENSON* President, Chief Executive Officer June 13, 1997
- ------------------------------------------ (Principal Executive Officer)
Michael R. Henson and Chairman
/s/ DANA P. NICKELL Vice President, Finance and June 13, 1997
- ------------------------------------------ Administration, Chief Financial
Dana P. Nickell Officer and Secretary (Principal
Financial and Accounting Officer)
WILLIAM G. DAVIS* Director June 13, 1997
- ------------------------------------------
William G. Davis
MITCHELL DANN* Director June 13, 1997
- ------------------------------------------
Mitchell Dann
GERARD VON HOFFMAN* Director June 13, 1997
- ------------------------------------------
Gerard von Hoffman
EDWARD M. LEONARD* Director and Assistant Secretary June 13, 1997
- ------------------------------------------
Edward M. Leonard
*By: /s/ DANA P. NICKELL
- ------------------------------------------
(Dana P. Nickell -- Attorney-in-Fact)
</TABLE>
31
<PAGE> 32
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 14(a)2. 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-1
<PAGE> 33
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
------- --------
<S> <C> <C>
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-2
<PAGE> 34
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-3
<PAGE> 35
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-4
<PAGE> 36
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 disclosure 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-5
<PAGE> 37
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
F-6
<PAGE> 38
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
formation of IDI Acquisition, Inc., a wholly-owned subsidiary of CVD, and the
merging of IDI into IDI Acquisition, Inc. (See Note 2).
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.
F-7
<PAGE> 39
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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
F-8
<PAGE> 40
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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-9
<PAGE> 41
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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-10
<PAGE> 42
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
- 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
F-11
<PAGE> 43
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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 nonexclusive, 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
------- ---------- -------
<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-12
<PAGE> 44
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 longterm, 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-13
<PAGE> 45
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 WEIGHTED-
NUMBER REMAINING WEIGHTED- NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/96 LIFE EXERCISE PRICE AT 12/31/96 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.
F-14
<PAGE> 46
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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 1995 and 1996.
F-15
<PAGE> 47
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 COSTS 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>
II-1
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
--------- --------------------------------------------------------------------------------
<S> <C> <C>
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................................
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..................................................
</TABLE>
II-2
<PAGE> 49
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
EXHIBIT DESCRIPTION PAGE
--------- --------------------------------------------------------------------------------
<S> <C> <C>
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......................................................
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic,
Inc.................................................................
10.20 License Agreement dated May 16, 1997 by and between CVD and
EndoSonics..........................................................
10.21 Registration Rights Agreement dated May 14, 1997 by and between CVD
and EndoSonics......................................................
11.1 Computation of Net Loss Per Share...................................
23.1 Consent of Ernst & Young LLP, Independent Auditors..................
24.1 Power of Attorney (Reference is made to page 31 of this Annual
Report on Form 10-K)................................................
27.1** Financial Data Schedule.............................................
</TABLE>
- ---------------
* Confidential treatment granted.
**Previously filed.
(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
filed with the Securities and Exchange Commission on March 26, 1997.
II-3
<PAGE> 1
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is effective as of
this 16th day of May, 1997 (the "Effective Date"), by and between Endosonics
Corporation, a corporation organized and existing under the laws of the State of
Delaware and having a principal place of business at 2870 Kilgore Road, Rancho
Cordova, California 95670 ("Endosonics") and Cardiovascular Dynamics, Inc., a
corporation organized and existing under the laws of the State of Delaware and
having a principal place of business at 13844 Alton Parkway, Suite 140, Irvine,
California 92718 ("CVD").
WHEREAS, CVD is the owner of the entire right, title and
interest in and to the Licensed Patents set forth in Exhibit A;
WHEREAS, CVD has developed various catheter products using
proprietary technology covered by the Licensed Patents;
WHEREAS, ENDOSONICS is desirous of acquiring a non-exclusive
license to the Licensed Materials (as defined below) which shall include a
limited exclusive license to make, have made, use, sell and have sold catheter
products developed by Endosonics using the Licensed Materials;
WHEREAS, CVD is desirous of acquiring a non-exclusive license
to use Endosonics PMA Number P910031 (the "Endosonics PMA"), to reference, use
and rely upon information in the Endosonics PMA in order to enable CVD to file
for and obtain PMA approval for the Focus Catheters from the U.S. Food and Drug
Administration ("FDA"); and
WHEREAS, the parties are willing to grant such licenses upon
the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and other
mutual covenants, terms and conditions hereinafter expressed, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 "LICENSED PATENTS" shall mean the patents set forth in
Exhibit A attached hereto and incorporated herein by this reference, and any and
all divisions, continuations-in-part, reissues, renewals, or extensions thereof.
<PAGE> 2
1.2 "FOCUS CATHETERS" shall mean all catheter products
combining CVD Focus Technology on the same catheter with an Endosonics
transducer developed by Endosonics pursuant to this Agreement using the Licensed
Patents and/or CVD Focus Technology for use in coronary applications.
1.3 "CVD FOCUS TECHNOLOGY" shall mean all CVD inventions
(whether or not patentable), ideas, know-how, trade secrets, processes and other
technical information necessary or useful in manufacturing the Focus Catheters
(including without limitation the Specifications (as defined below)) that CVD
(i) owns or controls as of the Effective Date or (ii) acquires or develops
during the term of this Agreement.
1.4 "LICENSED MATERIALS" shall mean the Licensed Patents
associated with CVD Focus Technology.
1.5 "ENDOSONICS TRANSDUCER" shall mean the Endosonics
ultrasound transducer product(s) set forth in Exhibit B attached hereto and
incorporated herein by this reference.
1.6 "SPECIFICATIONS" shall mean the specifications for Focus
Catheter products developed by CVD using or incorporating the Licensed
Materials.
ARTICLE II
LICENSE GRANT
2.1 Subject to the terms and conditions of this Agreement, CVD
hereby grants to Endosonics (i) a non-exclusive, worldwide, fully paid-up,
royalty-free right and license to practice under the Licensed Patents and to use
the CVD Focus Technology to make, have made and use the Focus Catheters, (ii) an
exclusive, worldwide, fully paid-up, royalty-free right and license to market,
sell or otherwise distribute the Focus Catheters for coronary applications only
as bundled on the same catheter device with an Endosonics Transducer. Upon
execution of this Agreement, CVD shall transfer a copy of all existing Licensed
Materials to Endosonics.
2.2 Subject to the terms and conditions of this Agreement,
Endosonics hereby grants to CVD a non-exclusive, worldwide, fully paid-up,
royalty-free right and license to reference, use, and rely upon information in
the Endosonics PMA in order to enable CVD to file for and obtain PMA approval,
as evidenced by a separate CVD PMA number on file at the FDA, for the coronary
balloon dilatation catheters from the FDA. CVD shall use, reference, or rely
upon the Endosonics PMA for the limited purpose of obtaining FDA approval of a
unique PMA which will be in CVD's name and shall not be a PMA supplement to
Endosonics' PMA.
2.
<PAGE> 3
2.3 Subject to the terms and conditions of this Agreement,
Endosonics shall furnish to CVD a complete copy of all manufacturing information
in the Endosonics PMA applicable to CVD's manufacture of CVD coronary balloon
dilatation products.
2.4 Subject to the provisions of this Agreement, Endosonics is
authorized to improve, modify, correct and enhance the technology of the
Licensed Materials as it may deem appropriate, and Endosonics shall exclusively
control, and own all right, title and interest in and to, the resulting
improvement, modification, correction or enhancement including, without
limitation, any patent rights available with respect thereto, any trade secrets
pertaining thereto and any copyrights subsisting therein as derivative works,
but only to the extent that the same shall be separate and clearly
distinguishable from the underlying work. Nothing in this Section 2.4 is
intended to modify Endosonics' limited rights to market, sell or otherwise
distribute Focus Catheters only as bundled on the same catheter with an
Endosonics Transducer, as defined in Section 2.1 of this Agreement.
ARTICLE III
REPORTS AND EXPENSE REIMBURSEMENT
3.1 Should Endosonics incur any out-of-pocket expenses to
assist CVD in executing Sections 2.2 or 2.3 of this Agreement, CVD shall
reimburse Endosonics for such out-of-pocket expenses up to a maximum of One
Thousand Dollars ($1,000.00). If such out-of-pocket expenses exceed One Thousand
Dollars ($1,000.00), Endosonics shall request CVD's prior written approval prior
to incurring such expenses.
3.2 Should CVD incur any out-of-pocket expenses to assist
Endosonics in executing Section 2.1 of this Agreement, Endosonics shall
reimburse CVD for such out-of-pocket expenses up to a maximum of One Thousand
Dollars ($1,000.00). If such expenses exceed One Thousand Dollars ($1,000.00),
CVD shall request Endosonics' prior written approval prior to incurring such
expenses.
ARTICLE IV
OWNERSHIP
4.1 CVD Rights. As between the parties and subject to the
rights granted to Endosonics under this Agreement, all right, title and interest
in and to the Licensed Materials (including, without limitation, all patent
rights, copyrights, trade secret rights and other proprietary rights) is and
shall remain in CVD.
3.
<PAGE> 4
4.2 Endosonics' Rights to Endosonics' PMA. Subject to the
rights granted to CVD under Section 2.2 of this Agreement, all right, title and
interest in and to the information contained in the Endosonics PMA (including,
without limitation, all patent rights, copyrights, trade secret rights and other
proprietary rights shall remain in Endosonics).
ARTICLE V
PATENT AND REGULATORY MATTERS
5.1 Patent Enforcement. During the term of this Agreement, CVD
shall diligently maintain, protect and enforce the Licensed Patents, which shall
include taking all reasonably necessary action to prevent and terminate any
third party infringement of the Licensed Patents. CVD shall have no
responsibility to maintain, protect and enforce any technology or patents
resulting from any modifications to the Licensed Materials.
5.2 Domestic Regulatory Matters; CVD PMA Submission.
Endosonics shall cooperate fully with CVD in preparing regulatory filings
associated with CVD's submission of a PMA for all current Focus Catheter
products and shall prepare and execute promptly all documents or instruments
necessary to enable CVD to make such regulatory filings and to obtain FDA
approval of the PMA, including, without limitation:
(a) a signed, written statement from Endosonics to the FDA
that authorizes CVD and the FDA to reference, use, and reply upon the Endosonics
PMA in seeking approval for a PMA for CVD's Focus Catheter products; and
(b) a statement signed by both CVD and Endosonics confirming
that Endosonics has furnished CVD with a complete copy of all manufacturing
information in the Endosonics PMA applicable to CVD's manufacture of the Focus
Catheter products.
5.3 Domestic Regulatory Matters; Annual Reporting
Requirements. CVD shall cooperate fully with Endosonics in preparing regulatory
filings associated with Endosonics submission of PMA reports required by the
FDA, including but not limited to Annual Reports. CVD shall disclose to
Endosonics all changes to any product distributed under the Endosonics PMA,
whether considered significant or not, and whether undertaken before or after
initial product introduction, no later than August 15 of each calendar year.
CVD's obligations under this Section shall terminate upon abandonment of
Endosonics' PMA approvals for CVD distributed products. A final report of all
changes as described above shall be submitted to Endosonics fifteen (15) days
following such abandonment.
4.
<PAGE> 5
5.4 Domestic Regulatory Matters; Distribution of CVD Product
under Endosonics' PMA. CVD agrees to file one or more submissions to the U.S.
FDA within ninety (90) days following the date of execution of this agreement
and use its best efforts to have such submission approved as promptly as
practicable. This submission will include all CVD products currently approved or
pending under the Endosonics PMA. No new applications shall be made under
Endosonics PMA following approval of the first CVD PMA by the FDA, and no CVD
product will be marketed under Endosonics' PMA after six months following
approval of the CVD PMA.
5.5 Foreign Regulatory Matters. Endosonics shall obtain and
maintain all applicable approvals and registrations for the Catheters in any
country into which Endosonics shall distribute the Focus Catheters and CVD shall
render all necessary assistance to enable Endosonics to accomplish the
foregoing.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CVD
6.1 Title. CVD represents and warrants that, to the best of
its knowledge, it has complete title to the Licensed Materials, free from any
liens or encumbrances, and that, to the best of its knowledge, the use of, or
practice under, the Licensed Materials in the United States and its territories
will not infringe the patent apparatus claims of any third party.
6.2 Validity. CVD represents and warrants that, to the best of
its knowledge, the Licensed Patents are valid and enforceable and that, to the
best of its knowledge, there are no third party infringers of the Licensed
Materials.
ARTICLE VII
CONFIDENTIALITY
Each party agrees that all inventions, processes, materials,
chemicals, reagents, know-how and ideas and all other business, technical and
financial information it obtains from the other are the confidential property of
the disclosing party ("Proprietary Information" of the disclosing party). Except
as expressly allowed in this Agreement, the receiving party will hold in
confidence and not use or disclose any Proprietary Information of the disclosing
party and shall similarly bind its employees in writing. The receiving party
shall not be obligated under this Article VII with respect to information that:
5.
<PAGE> 6
(i) is or has become readily publicly available through
no fault of the receiving party or its employees or agents; or
(ii) is received from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information and provided the receiving party abides by all restrictions imposed
by such third party; or
(iii) was rightfully in the possession of the receiving
party prior to its disclosure by the other party provided the receiving party
abides by all restrictions imposed on its possession of such information; or
(iv) was independently developed by employees or
consultants of the receiving party without access to such Proprietary
Information; or
(v) is required by order of a government agency or
court of competent jurisdiction to be disclosed.
ARTICLE VIII
INDEMNIFICATION
CVD agrees to indemnify Endosonics from, for, and against any
loss, cost, damages, liability or expense (including reasonable attorney's fees)
arising out of any claim ("Claim") brought by third parties (i) alleging that
the manufacture, use or sale of a Focus Catheter infringes any third party
apparatus patent or (ii) relating to any breach of the warranties set forth in
Article VI above (collectively, "Damages"); provided, however, that CVD's
indemnification obligations hereunder shall not apply to the extent (and only to
the extent) that such Damages result from (i) Endosonics's use or distribution
of technology and materials other than the Licensed Materials or (ii)
modifications, improvements, corrections or enhancements made by Endosonics to
the Licensed Materials. Endosonics agrees to indemnify CVD from, for, and
against Damages incurred by CVD that are excluded from CVD's indemnification
obligations pursuant to the foregoing sentence. In the event of a Claim, the
party seeking indemnification hereunder shall promptly notify the indemnifying
party of such Claim, shall allow the indemnifying party to have sole defense of
such Claim and shall cooperate and render reasonable assistance upon the
request, and at the expense, of the indemnifying party.
6.
<PAGE> 7
ARTICLE IX
DISCLAIMERS AND LIMITATION OF LIABILITY
9.1 EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY WARRANTIES WITH RESPECT TO THE TECHNOLOGY OR
MATERIALS THAT IT PROVIDES TO THE OTHER PARTY UNDER THIS AGREEMENT AND EACH
PARTY HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ALL WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9.2 NEITHER PARTY WILL BE LIABLE TO THE OTHER (I)
WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER
ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR (II)
FOR LOST PROFITS OR DATA.
ARTICLE X
TERM AND TERMINATION
10.1 This Agreement shall commence as of the Effective Date,
and shall continue in force (unless terminated earlier in accordance with this
Article X) until the last of the Licensed Patents expires and any PMA or
regulatory approvals obtained through the use of Endosonics' PMA are abandoned,
or the last of the Licensed Patents is ruled invalid or unenforceable in a final
decision by a court of competent jurisdiction or by the United States Patent and
Trademark Office.
10.2 This Agreement and all licenses granted hereunder may be
terminated by either party immediately if the other party breaches a material
term or provision of this Agreement and fails to cure such breach within sixty
(60) days after written notice from the non-breaching party.
10.3 This Agreement also may be terminated by either party, at
its option, upon written notice to the other party, (i) upon the institution by
the other party of insolvency, receivership or bankruptcy proceedings or any
similar proceedings for the settlement of its debts, or (ii) upon the
institution of such proceedings against the other party, which are not dismissed
or otherwise resolved in such party's favor within sixty (60) days thereafter.
10.4 The following Articles shall survive termination of this
Agreement: I, II, IV, VI, VII, VIII, IX and XI, along with Sections 5.3, 5.4 and
this Section 10.4.
7.
<PAGE> 8
ARTICLE XI
MISCELLANEOUS
11.1 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their respective subsidiaries,
successors and permitted assigns. Either party may freely assign this Agreement
to an acquiror of all or substantially all of its stock, business or assets
relating to this Agreement (whether by merger, acquisition or otherwise).
11.2 Notices. All notices given by either party under the
terms of this Agreement shall be in writing and personally delivered, sent by
certified mail (return receipt requested) or by commercial overnight courier
service to a party's address as set forth in the initial paragraph of this
Agreement. Notices shall be effective five (5) days after mailing or upon actual
receipt, whichever is sooner. Either party may change the person to whom, or
address to which, notice should be directed by giving written notice thereof.
11.3 Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties and supersedes the December 22,
1995 License Agreement between the parties in its entirety, and all other
previous or contemporaneous communications, memoranda, understandings or
agreements, either oral or written, between the parties with respect to the
subject matter hereof.
11.4 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California without
regard to the conflicts of laws provisions thereof. The sole jurisdiction and
venue for actions related to the subject matter hereof shall be the California
state and U.S. federal courts having within their jurisdiction the location of
Endosonics's principal place of business. Both parties consent to the
jurisdiction of such courts and agree that process may be served in the manner
provided herein for giving of notices or otherwise as allowed by California
state or U.S. federal law. In any action or proceeding to enforce rights under
this Agreement, the prevailing party shall be entitled to recover costs and
attorneys' fees.
11.5 Headings. Headings and captions are for convenience only
and are not to be used in the interpretation of this Agreement.
11.6 Severability. If any provision of this Agreement is held
by a court of competent jurisdiction to be illegal, invalid or unenforceable,
that provision shall be limited or eliminated to the minimum extent necessary so
that this Agreement shall otherwise remain in full force and effect and
enforceable.
11.7 Relationship of Parties. The parties hereto expressly
understand and agree that for the purposes of this Agreement the other is an
independent contractor
8.
<PAGE> 9
in the performance of each and every part of this Agreement and is solely
responsible for all of its employees and agents and its labor costs and expenses
arising in connection therewith. This Agreement in no way creates a partnership,
joint venture or agency relationship between the parties and neither party shall
have the right or authority to bind the other in any way as a result of this
Agreement.
11.8 Amendment and Waiver. Except as otherwise expressly
provided herein, any provision of this Agreement may be amended and the
observance of any provision of this Agreement may be waived (either generally or
in any particular instance and either retroactively or prospectively) only with
the written consent of the parties. The failure of either party to enforce its
rights under this Agreement at any time for any period shall not be construed as
a waiver of such rights.
IN WITNESS WHEREOF, each party has caused this Agreement to be
executed by its duly authorized representative as of the day and year first
above written.
ENDOSONICS CORPORATION
By: /s/ Reinhard J. Warnking
--------------------------------
Title: President and CEO
------------------------------
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ Michael R. Henson
--------------------------------
Title: Chairman/CEO
------------------------------
9.
<PAGE> 10
EXHIBIT A
LICENSED PATENTS
o U.S. Patent No. 5,470,313
o U.S. Patent App. No. 08/201935
o EPO Patent App. No. 94119841.8
<PAGE> 11
EXHIBIT B
ENDOSONICS TRANSDUCER
Any ultrasound transducer designed,
developed and manufactured by Endosonics, and using any
Art disclosed in the following patents:
US
5603327 Ultrasound catheter probe
5453575 Apparatus and method for detecting blood flow in intravascular
ultrasonic imaging
5368037 Ultrasound catheter
5183048 Methods and apparatus for removing artifacts from
ultrasonically generated image of a small cavity
5167233 Dilating and imaging Apparatus
5135486 Self-Venting balloon dilation catheter
4917097 Apparatus and method for imaging small cavities
EPO
0339087 B1 Device for imaging small cavities
0519060 B1 Dilating and imaging Apparatus
JPO
2020066 Apparatus for imaging
2552421 Dilating and imaging Apparatus
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of May 14, 1997, between Endosonics Corporation, a Delaware
corporation ("Endosonics"), and CardioVascular Dynamics, Inc., a Delaware
corporation ("CVD").
WHEREAS, pursuant to that certain Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of January 26, 1997, by
and among Endosonics, Cardiometrics, Inc., a Delaware corporation ("Target"),
and River Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Endosonics ("Merger Sub"), it is contemplated that the following
will occur at the Effective Time (as defined in the Reorganization Agreement):
Merger Sub will merge with and into Target (the "Merger"); Target will continue
as the surviving corporation and Target shall become a wholly owned subsidiary
of Endosonics (collectively, the "Transaction");
WHEREAS, Endosonics and Target will undertake to obtain approval
of the Transaction by the stockholders of Target at a special meeting of
stockholders, and in connection therewith will mail a proxy statement regarding
the Transaction (which together with the related Registration Statement is
herein referred to as the "Merger Proxy Statement") approximately 30 days in
advance of such stockholders meeting (the date the Merger Proxy Statement is
mailed being herein referred to as the "Proxy Mailing Date").
WHEREAS, a portion of the consideration to be provided to Target
stockholders in the Merger shall be shares of Common Stock of CVD held by
Endosonics immediately prior to the Merger (the "CVD Shares") which CVD Shares
shall be distributed to Target stockholders immediately following the Merger
(the "Distribution");
WHEREAS, pursuant to Section 5.1(b) of the Reorganization
Agreement, in order to induce Target to enter into the Reorganization Agreement,
Endosonics has agreed to use all reasonable efforts to cause CVD to prepare and
file a registration statement with the Securities and Exchange Commission
("SEC") with respect to the Distribution of the CVD Shares;
WHEREAS, an independent committee of the Board of Directors of
CVD
<PAGE> 2
("Independent Committee"), after consulting with independent legal counsel and
an independent financial advisor, has approved the terms and conditions
contained in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the foregoing, the covenants
and representations set forth below and for other good and valid consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Obligations of CVD Regarding Registration of CVD Shares.
(a) CVD will, as soon as practicable following the date
of this Agreement, (i) prepare and file with the SEC on such form as is then
available a registration statement under the Securities Act of 1933, as amended
(the "Act") with respect to the Distribution of the CVD Shares (the
"Registration Statement") and shall use its reasonable best efforts to cause the
Registration Statement to become and remain effective at and following the Proxy
Mailing Date in order that the CVD Shares will be freely tradeable by the former
stockholders, warrantholders and optionholders of Target, subject to compliance
with Rule 145 under the Act; and (ii) use its best efforts to register or
qualify the CVD Shares covered by such Registration Statement under state
securities or blue sky laws to the extent reasonably required to effectuate the
Transaction.
(b) Subject to the provisions of Section 4, paragraph
(b) below and the final clause of this paragraph (b), CVD will, as soon as
practicable following the date it receives notification from Endosonics with
respect to the proposed date of the Dividend Transaction (as defined in
paragraph 4(b) below): (i) prepare and file with the SEC a registration
statement with respect to the Dividend Transaction (the "Dividend Registration
Statement") and shall use its reasonable best efforts to cause the Dividend
Registration Statement to become and remain effective at and following the
record date established by the Endosonics Board of Directors for the Dividend
Transaction (the "Dividend Transaction Record Date") such that the CVD Shares
will be freely tradeable by the stockholders of Endosonics at and following the
Dividend Transaction Record Date; and (ii) use its best efforts, to the extent
required by applicable law, to register or qualify the CVD Shares covered by
such Dividend Registration Statement under state securities or blue sky laws to
the extent reasonably required to effectuate the Dividend Transaction; provided
that the obligation of CVD to cooperate to prepare and file the Dividend
Registration Statement shall be subject to Endosonics entering into a written
agreement which provides that (x) Endosonics shall bear all costs and expenses
related to the Dividend Transaction, including costs and expenses related to the
Dividend Registration Statement and other related filings by CVD, and (y) CVD
and Endosonics shall allocate indemnification and contribution obligations
related to the Dividend Transaction in substantially the same manner as such
obligations have been allocated herein with respect to the Transaction.
2.
<PAGE> 3
2. Access to Information.
(a) Obligations of CVD. CVD shall afford Endosonics
and Target and their respective accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to such information as Endosonics and Target may reasonably
request in connection with the preparation of the registration statements in
accordance with Section (1) hereof and the proxy statements related to the
Reorganization Agreement.
(b) Obligations of Endosonics. Endosonics (i) shall
keep CVD and its independent legal counsel and independent financial advisor
fully informed with respect to the status of the Merger Proxy Statement; (ii)
shall provide to the Independent Committee, and its financial advisor and
independent legal counsel, copies of all filings by Endosonics with the SEC
related to the Transaction as are reasonably requested by the Independent
Committee's legal counsel or independent financial advisor; and, (iii) shall use
its best efforts to provide at least 30 days advance oral or written notice with
respect to the earliest expected date of the Effective Time.
3. Expenses.
Endosonics shall bear and pay (or reimburse CVD for) all
out-of-pocket costs and expenses directly or indirectly incurred by CVD and the
Independent Committee in connection with the Independent Committee's approval of
this Agreement, CVD's fulfilling its obligations under this Agreement or in
connection with the Transaction, including, but not limited to, (i) all costs
and expenses reasonably incurred by the Independent Committee, including fees of
its independent legal counsel and independent financial advisor, (ii) all costs
and expenses related to the registration, filing or qualification of the CVD
Shares pursuant to this Agreement, including (without limitation) all
registration, filing and qualification fees, printers and accounting fees and
the reasonable fees and disbursements of counsel to CVD, and, (iii) all fees and
expenses of CVD up to a maximum of $7,500 for investor relations and
communications activities related to the substantial number of CVD shares which
will become tradeable in the over-the-counter market at the Effective Time.
4. Further Obligations of Endosonics.
(a) Cooperation with Financial Advisor. Endosonics
agrees that it shall use its reasonable best efforts to cause Target to
cooperate with the Independent Committee's financial advisor regarding efforts
by the financial advisor to communicate directly with Target stockholders with
respect to the Distribution and the business of CVD, as well as with respect to
whether such Target stockholders intend to maintain an investment in CVD
following the Effective Time and/or alternatives available to such Target
stockholders with regard to disposing of their CVD Shares following the
Effective Time, including participation in a block trade and/or conducting sales
through a
3.
<PAGE> 4
designated market maker.
(b) Further Reduction of Endosonics Ownership.
Endosonics hereby agrees that it shall, during the period beginning (but not
before) 90 days following the Effective Time and ending 12 months following the
Effective Time (the "Dividend Window"), at such time and in such manner as it
shall reasonably determine, further reduce its ownership of CVD common stock by
conducting a 1 for 25 distribution of its CVD common stock in the form of a
dividend to its shareholders (the "Dividend Transaction"); provided, that,
Endosonics agrees that it will not conduct the Dividend Transaction during any
period within the Dividend Window if the Independent Committee, after consulting
with its financial advisor, concludes in good faith (and so advises Endosonics
in writing) that conducting the Dividend Transaction during such period (i)
could materially and adversely affect the market price for CVD common shares,
(ii) could interfere with a material pending transaction to which CVD is a
party, or (iii) would require public disclosure of information regarding CVD in
advance of the time such disclosure is appropriate and in the best interest of
CVD.
(c) License Agreement Amendments. Concurrent with the
signing of this Agreement Endosonics and CVD enter into an amendment to that
certain License Agreement attached hereto as Exhibit 1.
5. Indemnification and Contribution Obligations of the
Parties.
(a) Definitions. The following terms shall have the
following meanings for purposes of this Section 5:
(i) "Registration Statement" shall mean the
Registration Statement described in Section
1 of this Registration Rights Agreement;
(ii) "Prospectus" shall mean the form of
prospectus contained in the Registration
Statement on file with the Securities and
Exchange Commission at the Effective Time
(as the same may from time to time be
amended and supplemented after the Effective
Time);
(iii) "Other Filing" shall mean any application or
other document or written communication
executed by CVD or based upon written
information furnished by CVD in any
jurisdiction in order to qualify the CVD
common shares for sale under the securities
law of such jurisdictions or filed with
Commission, or any state securities
commission or agency, the National
Association of Securities Dealers, Inc. or
the Nasdaq
4.
<PAGE> 5
National Market.
(iv) "Claims or Losses" shall mean losses,
claims, damages, expenses or liabilities,
joint or several (and actions in respect
thereof) as such are incurred, including any
and all legal fees and expenses and other
expenses reasonably incurred in
investigating, preparing or defending
against any litigation, commenced or
threatened.
(b) Indemnification Obligations of CVD. CVD agrees to
indemnify and hold harmless Endosonics and each of its directors and each of its
officers against any and all Claims or Losses to which Endosonics and/or such
officers and directors may become subject under the Act, the Securities Exchange
Act of 1934 (the "Exchange Act") or any other statute or at common law or
otherwise, to the extent such Claims or Losses arise out of or are based upon
any untrue statement of a material fact contained in the Registration Statement,
the Prospectus or Other Filing or the omission to state in the Registration
Statement, Prospectus or Other Filing a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made (such untrue statements or
omissions being hereinafter referred to as "CVD Misstatements or Omissions");
provided, however, CVD shall not be liable to provide any indemnification to the
extent that any such Claims or Losses arise out of or are based upon any untrue
statement made in or omission from the Registration Statement, Prospectus or
Other Filing in reliance upon, and in conformity with, information provided by
Endosonics.
(c) Indemnification Obligations of Endosonics.
Endosonics agrees to indemnify and hold harmless CVD and each of its directors
and each of its officers against any and all Claims or Losses to which CVD
and/or such officers and directors may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise, to the extent
such Claims or Losses relate to or arise out of the Transaction or the
Distribution, including, but not limited to litigation initiated by CVD
shareholders related to the registration rights granted by this Agreement or
litigation related to any untrue statement of a material fact contained in the
Merger Proxy Statement or the omission to state in the Merger Proxy Statement a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
provided, however, Endosonics shall not be liable to provide any indemnification
to the extent that any such Claims or Losses arise out of or are based upon any
CVD Misstatements or Omissions.
(d) Notice; Selection of Counsel. Promptly after
receipt by an indemnified party under this Section 5 notice of the commencement
of any action, suit or proceeding, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 5, notify each party against
5.
<PAGE> 6
whom indemnification is to be sought in writing of the commencement thereof (but
failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 5 except to the extent that it has
been prejudiced in any material respect by such failure or from any liability
that it may have otherwise). In case any such action is brought against any
indemnified party, and it notifies the indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be entitled to
participate therein, and to the extent it (or they) may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such actions within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to assume the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate, but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 5 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claims or action effected
without its written consent, provided, however, that such consent was not
unreasonably withheld.
(e) Contribution. In order to provide for just and
equitable contribution in any case in which (i) an indemnified party makes claim
for indemnification pursuant to this Section 5, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 5 provide for indemnification
in such case, or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
aggregate amount paid as a result of such losses, claims, damages, expenses or
liabilities (or action in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the Transaction or (B) if the allocation provided by clause (A)
above is not permitted by
6.
<PAGE> 7
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (A) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omission that
resulted in such losses, claims, damages, expenses or liabilities, as well as
any other relevant equitable considerations. In any case where Endosonics is the
contributing party and CVD is the indemnified party, the relative benefits
received by Endosonics on the one hand, and CVD on the other, shall be deemed to
be in the same proportion as the total value of the Transaction to Target
stockholders shall bear to the total economic benefit derived by CVD from the
Transaction. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to above in this section shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5, each officer of
CVD who has signed the Registration Statement, and each director of CVD shall
have the same rights to contribution as CVD, subject in each case to this
Section 5(e). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect to which a claim for contribution may be made against another party or
parties under this Section 5(e), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
Section 5(e), but only to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may have at
common law or otherwise.
(f) Nonexclusivity. The obligations of CVD and
Endosonics under this Section 5 shall be in addition to any liability that CVD
or Endosonics may have to the other at common law or otherwise.
6. Successors and Assigns.
This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but, except as otherwise specifically provided
herein, neither this Agreement nor any of the rights, interests, or obligations
of the parties hereto may be assigned by either of the parties without the prior
written consent of the other.
7. Survival.
The obligations of the parties set forth in Sections 4 and 5
hereof shall
7.
<PAGE> 8
survive the completion of the Distribution and the expiration of the
Registration Statement contemplated by this Agreement.
8. Counterparts.
This Agreement may be executed in several counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
9. Governing Law.
This Agreement is being executed and delivered and shall be
governed by and construed in accordance with the laws of the State of
California.
8.
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed on the day and year first above written.
ENDOSONICS CORPORATION
By: /s/ Reinhard J. Warnking
---------------------------------
Name: Reinhard J. Warnking
-------------------------------
Title: President and CEO
------------------------------
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ Michael R. Henson
---------------------------------
Name: Michael R. Henson
-------------------------------
Title: Chairman/CEO
------------------------------
9.
<PAGE> 1
EXHIBIT 11.1
CARDIOVASCULAR DYNAMICS, INC.
STATEMENT REGARDING THE COMPUTATION OF NET LOSS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- -------
<S> <C> <C> <C>
Net loss...................................................... $ (971) $(2,874) $(4,624)
======= ======= =======
Computations of weighted average Common and Common
equivalent shares outstanding:
Weighted average common shares outstanding.................. 3,487 385 4,715
Shares related to staff accounting bulletin topic 4D:
Stock options............................................ 308 308 305
Preferred Stock Warrants(1).............................. 81 81 81
Adjusted to reflect the effect of the assumed conversion of
Preferred Stock from the date of issuance (Series A and
B)....................................................... -- 3,667 2,040
------- ------- -------
Shares used in computing net loss per share(2)................ 3,876 4,441 7,141
======= ======= =======
Net loss per share(2)......................................... $ (0.25) $ (0.65) $ (0.65)
======= ======= =======
</TABLE>
- ---------------
(1) At an assumed conversion rate of two shares of Common Stock for each share
of Preferred Stock.
(2) Pro forma through June 30, 1996.
2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-1 No. 333-15901) of CardioVascular Dynamics, Inc. and in the related
Prospectus of our report dated January 30, 1997, with respect to the
consolidated financial statements and schedules of CardioVascular Dynamics, Inc.
and subsidiary included in this Annual Report (Form 10-K/A) for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
--------------------------------------
Orange County, California
June 12, 1997
