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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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 19, 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
U.S. REGULATORY COMMERCIAL
PRODUCTS INTENDED APPLICATIONS STATUS SALE
- ---------------------------- -------------------------------- --------------------- ----------
<S> <C> <C> <C>
Focus Catheters
ARC
Over-the-wire design...... PTCA (i.e. balloon angioplasty PMA Supplement Q3 1996
Approved
in coronary arteries)
CAT/CAT 15
Rail design............... PTCA or Stent Delivery(2) N/A(1) Q1 1995
FACT/FACT 15
Over-the-wire design...... PTCA or Stent Delivery(2) Approved Q1 1996
Lynx F/X
Rail Design............... PTCA or Stent Delivery(2) N/A(1) Q1 1997
Focus
Over-the-wire design...... PTA (i.e. balloon angioplasty 510(k) Clearance Q3 1995
in peripheral arteries)
M3 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.
M3 Catheters. The Company's M(3) catheters offer cardiologists the ability
to deliver drugs or contrast media to the treatment site accurately and enable
the perfusion of blood during angioplasty procedures. These capabilities may be
combined on an interventional catheter to provide cardiologists the
functionality of multiple catheters, in a single, cost-effective device. The
accurate delivery of drugs to the treatment site may enhance the effectiveness
of these pharmacological agents and may reduce the quantity of drug required to
achieve an acceptable outcome. Drugs are utilized by cardiologists to reduce the
occurrence of restenosis and acute reclosure, and to dissolve blood clots.
Typically, therapeutic drug delivery is accomplished by means of an intravenous
injection, a method that requires larger amounts of drug than is clinically
required because the drug is diffused throughout the body. The Company's M(3)
technology enables cardiologists to deliver drugs directly to the treatment site
through a catheter's lumen, or interior channel. While CVD's M(3) site-specific
drug delivery catheters are currently marketed internationally, they can only be
used in the United States to
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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 M3 technology can be
utilized to provide perfusion of blood during an interventional procedure. This
perfusion capability allows the balloon to be inflated for longer durations and
reduces the number of inflations and deflations required in certain procedures,
and may increase the clinical effectiveness of the treatment.
Vascular Access Products
The Company's vascular access products utilize patented technology to
provide rapid, accurate access to the body's vascular system for guidewire and
catheter entry. The principal current product, called the SmartNeedle, was
acquired from ACS and is based on Doppler ultrasound technology. a miniaturized
ultrasound chip is placed at the tip of a disposable ultrasonic probe which is
then placed inside a conventional vascular access needle. The probe is then
connected to a separate reusable monitor. Once placed in the body as a part of
the access needle, the Doppler chip emits an audible signal which enables the
physician to more accurately determine whether or not the needle resides in the
proper location within the intended arterial or venous lumen. Once positioned
properly, the probe is removed, leaving the conventional access needle in place
within the artery or vein. Since introduction, the SmartNeedle's primary use has
been in interventional cardiology and radiology procedures.
NEW PRODUCT DEVELOPMENT
The Company focuses its research and development efforts on utilizing the
Company's proprietary processes and patented technologies to develop
cost-effective products that address existing and emerging clinical demands. The
Company's strategy is to refine its existing technologies and to enhance the
performance of its existing product offerings, including efforts to make its
Focus and M3 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 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
M3 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."
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The M3 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 M3 technology in its
MicroMembrane Radiation Therapy development program for restenosis prevention.
This program is evaluating CVD's M3 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 M3 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 M3 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 M3 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 M3
technology also enables it to combine PTCA and perfusion capabilities on a
single catheter with a lower profile than any currently marketed catheter with
similar capabilities.
The Company's IDI subsidiary, which was acquired in October 1996, utilizes
patented technology in the development of medical stents for the treatment of
patients with vascular disease caused by aneurysms or atherosclerosis. IDI is
developing a compact, self-expanding metallic stent with a micro-porous surface
for use as either a stent or a stent graft. By selecting metal foil of the
proper thickness and tensile strength, and heat-treating it in the proper shape,
the Company believes it will be able to form devices with low profiles, high
expansion ratios and excellent hoop strength, which are factors critical for
successful device placement. There can be no assurance that IDI will
successfully complete the development of any products or that any such products
will receive any required regulatory approvals.
MANUFACTURING
With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States, and the
manufacture of those products which the Company has licensed to third parties,
all of the Company's products are produced in its facilities in Irvine,
California. The Company fabricates certain proprietary components, then
assembles, inspects, tests and packages all components into finished products.
By designing and assembling its catheter products, the Company believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and manage manufacturing process enhancements and new
product introductions. In addition, the Company purchases many standard and
custom-built components from independent suppliers and subcontracts certain
processes from independent vendors. Most of these components and processes are
available from more than one vendor. However, certain manufacturing processes
are currently performed by single vendors. While the Company believes that there
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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 agreements for the U.S.
distribution of products incorporating its Focus and M3 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. 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 Medtronics accounted for 22% of total
product sales in 1996. The Company intends to expand its sales and marketing
capability and to distribute selected new products through strategic
partnerships. See "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
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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 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.
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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,
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. 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
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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 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,
8
<PAGE> 10
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 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."
9
<PAGE> 11
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 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
10
<PAGE> 12
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 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.
11
<PAGE> 13
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.
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
12
<PAGE> 14
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.
13
<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.
14
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 16, 1992 YEAR ENDED DECEMBER 31,
(DATE OF INCEPTION TO) -----------------------------------------
DECEMBER 31, 1992 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>
<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 year ended December 31, 1995 and the total of the purchase price for
Intraluminal Devices, Inc. and the associated acquisition expenses 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.
15
<PAGE> 17
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 19.
OVERVIEW
CVD designs, develops, manufactures and markets catheters used to treat
certain vascular diseases. The Company's patented catheters utilize its Focus
and M3 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.
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 M3 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."
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<PAGE> 18
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 from
increased sales of the Company's Focus catheters, and the introduction of new
products. 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."
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 in-process
research and development. The acquired inprocess 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
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Fukuda accounted for 18% of the Company's revenue in 1995. In addition, sales to
JJIS accounted for 12% of the Company's revenue in 1995.
License Fee and Other Revenue. License fee and other revenue decreased to
$0.0 million in 1995 from $1.0 million in 1994. License fee and other revenue
represents amounts earned under the aforementioned agreement with SCIMED. Future
revenue under this agreement will be derived primarily from royalties earned on
SCIMED's sales of the Transport.
Contract Revenue. Contract revenue was $0.6 million in 1995 and $0.2
million in 1994. Contract revenue was earned under the aforementioned agreement
with SCIMED.
Cost of Sales. Cost of sales increased to $2.1 million in 1995 from $0.8
million in 1994, representing an increase of 142%. This increase resulted
primarily from increased manufacturing volumes related to increased product
sales. In July 1995, the Company transferred its product manufacturing from
EndoSonics' facility to the Company's facility in Irvine, California.
Charge for Acquired In-process Research and Development. The Company
incurred a charge of $0.5 million in 1995 in connection with the 1995 payment by
EndoSonics of additional consideration related to the original acquisition by
EndoSonics of CVD stock. This portion of the excess of the purchase price of CVD
over the fair market value of the net assets acquired was recorded as in-process
research and development. The acquired in-process research and development was
immediately written off as CVD was in the development stage and had not yet
received regulatory approval for any of its products at the time of the
acquisition.
Research and Development. Research and development expenses increased to
$1.7 million in 1995 compared to $1.2 million in 1994, representing an increase
of 37%. This increase was due primarily to increased expenditures related to
development of the Company's Focus and M3 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 fullscale
manufacturing of existing products, the mix between domestic and export sales,
variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent on orders received within that quarter. In addition,
the Company cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. The Company's expenses are relatively fixed and
difficult to adjust in response to fluctuation revenues. As a result of these
and other factors, the Company expects to continue to experience significant
fluctuations
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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 through
1997. 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
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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 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
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<PAGE> 22
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 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,
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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."
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
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<PAGE> 24
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 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
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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. The Company expects that Fukuda will continue to distribute its
products at least through 1997. The Company is currently negotiating with
several distributors, including Fukuda, regarding a new distribution agreement
for the Japanese market. The Company's revenue from its distributor
relationships is dependent upon the efforts made by such parties and there can
be no assurance that such efforts will be successful. There can be no assurance
that the Company will be able to maintain or expand its relationships with its
strategic partners or to replace its strategic partners in the event any such
relationship were terminated. In the event of such a termination, the Company's
ability to distribute its products would be materially adversely affected, which
would have a material adverse effect on the Company's business, financial
condition and results of operations.
CVD currently has a limited marketing and sales staff. The Company intends
to expand its direct sales force to market the Company's products expansion.
However, there can be no assurance that CVD will successfully expand its direct
sales and marketing organization, or that if expanded, such organization will be
able to effectively distribute CVD's products. If CVD is unable to achieve
distribution of its products through its direct sales organization, the
Company's business, financial condition and results of operations would be
materially adversely affected.
The Company also has product development relationships with SCIMED and ACS.
SCIMED currently funds certain research and development efforts undertaken by
CVD in the area of combined drug delivery and coronary angioplasty. ACS conducts
development work on the Company's perfusion technology. If CVD is unable to
maintain its relationships with these or future strategic partners its product
development efforts could be materially adversely affected, which would
materially adversely affect the Company's business, financial condition and
results of operations. See "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
24
<PAGE> 26
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."
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
25
<PAGE> 27
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 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.
26
<PAGE> 28
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 19, 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 19, 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 19, 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 19, 1997.
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.
27
<PAGE> 29
(c) Exhibits.
<TABLE>
<S> <C>
1.1(1) Form of Underwriting Agreement.
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among EndoSonics
Corporation ("EndoSonics"), EndoSonics Acquisition Corporation and CardioVascular
Dynamics, Inc. ("CVD").
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and CVD.
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular Dynamics, Inc.,
IDI Acquisition Corporation and Intraluminal Devices, Inc. ("IDI") dated as of
October 2, 1996.
3.1(3) Certificate of Incorporation.
3.2(3) Amended Bylaws.
4.1(1) Specimen Certificate of Common Stock.
10.1(3) Form of Indemnification Agreement to be entered into between the Registrant and
its directors and officers.
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements thereunder.
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement thereunder.
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and between
the Company and CVD.
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between EndoSonics and
CVD.
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on October 27, 1994
and July 17, 1995, (the "Japanese Distribution Agreements") by and between CVD and
Fukuda Denshi Co., Ltd. ("Fukuda")
10.7(3)* Stock Purchase and Technology License Agreement dated September 10, 1994, as
amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED Life
Systems, Inc. ("SCIMED").
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD and
Endosonics.
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and Advanced
CardioVascular Systems, Inc. ("ACS").
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS.
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD and
EndoSonics.
10.12(3) License Agreement dated December 22, 1995 by and between CVD and EndoSonics.
10.13(1) Form of Stockholder Agreement with EndoSonics.
10.14(1) Form of Tax Allocation Agreement with EndoSonics.
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine Company and
CVD.
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD and
EndoSonics.
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and between
CVD and Fukuda.
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc.
10.20 License Agreement dated February 6, 1997 by and between CVD and EndoSonics.
</TABLE>
28
<PAGE> 30
<TABLE>
<S> <C>
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 requested.
(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.
29
<PAGE> 31
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 to be signed on
its behalf by the undersigned, thereunto duly authorized.
CARDIOVASCULAR DYNAMICS, INC.
Date: March 21, 1997 /S/ MICHAEL R. HENSON
By:
----------------------------------
Michael R. Henson
President, Chief Executive Officer
(Principal Executive Officer) and
Chairman
/S/ DANA P. NICKELL
By:
-----------------------------------
Dana P. Nickell
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
30
<PAGE> 32
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Michael R. Henson
and Dana P. Nickell, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report 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
- ------------------------------------- ------------------------------------ -------------------
<C> <S> <C>
/S/ MICHAEL R. HENSON President, Chief Executive March 21, 1997
- ------------------------------------- Officer (Principal Executive
(Michael R. Henson) Officer) and Chairman
/S/ DANA P. NICKELL Vice President, Finance and March 21, 1997
- ------------------------------------- Administration, Chief Financial
(Dana P. Nickell) Officer and Secretary (Principal
Financial and Accounting Officer)
/s/ William G. Davis Director March 21, 1997
- -------------------------------------
(William G. Davis)
/s/ Mitchell Dann Director March 21, 1997
- -------------------------------------
(Mitchell Dann)
/S/ GERARD VON HOFFMAN Director March 21, 1997
- -------------------------------------
(Gerard von Hoffman)
/S/ EDWARD M. LEONARD Director and Assistant Secretary March 21, 1997
- -------------------------------------
(Edward M. Leonard)
</TABLE>
31
<PAGE> 33
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> 34
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
-------- --------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.............................................. $ 1,568 $ 17,192
Marketable securities available-for-sale............................... -- 25,733
Accounts receivable, net of allowance for doubtful accounts of $180 and
$377, respectively.................................................. 1,117 2,268
Other accounts receivable.............................................. -- 320
Inventories............................................................ 754 2,899
Other current assets................................................... 58 162
-------- --------
Total current assets................................................ 3,497 48,574
Property and Equipment:
Furniture and equipment................................................ 357 1,161
Leasehold improvements................................................. 174 310
-------- --------
531 1,471
Less accumulated depreciation and amortization......................... (107) (289)
-------- --------
Net property and equipment.......................................... 424 1,182
Notes receivable from officers......................................... -- 325
Other assets........................................................... 81 3
-------- --------
Total assets........................................................ $ 4,002 $ 50,084
======== ========
Liabilities and Stockholders' Equity (net capital deficiency)
Current liabilities:
Accounts payable and accrued expenses.................................. $ 1,684 $ 2,382
Payable to Parent...................................................... 2,537 --
Deferred distributorship fee revenue, current portion.................. 50 50
-------- --------
Total current liabilities........................................... 4,271 2,432
Deferred distributorship fee revenue..................................... 79 29
Convertible obligation................................................... 750 --
Commitments
Stockholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value; aggregate liquidation
preference of $13,160,000 as of December 31, 1995; 7,560,000 shares
authorized, 2,000,000 and no shares issued and outstanding as of
December 31, 1995 and 1996, respectively............................ 2 --
Common Stock, $.001 par value; 30,000,000 shares authorized, no shares
and 9,004,000 shares issued or outstanding at December 31, 1995 and
1996, respectively.................................................. -- 9
Additional paid-in capital............................................. 5,670 58,869
Deferred compensation.................................................. (345) (376)
Accumulated deficit.................................................... (6,425) (11,049)
Unrealized gain on available-for-sale securities....................... -- 170
-------- --------
Total stockholders' equity (net capital deficiency)................. (1,098) 47,623
-------- --------
Total liabilities and stockholders' equity (net capital
deficiency)........................................................ $ 4,002 $ 50,084
======== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 35
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> 36
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> 37
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> 38
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Basis of Presentation
CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March
16, 1992 in the State of California. The Predecessor, and its successor
corporation discussed below, develops, manufactures and markets proprietary
therapeutic catheters used to treat certain vascular diseases.
In June 1992, EndoSonics Corporation ("EndoSonics") acquired a 40%
preferred interest in the Predecessor. EndoSonics, a Delaware corporation,
develops, manufactures, and markets intravascular ultrasound imaging systems and
diagnostic, therapeutic and imaging catheters for the treatment of coronary and
peripheral vascular disease.
In June 1993, EndoSonics acquired all of the remaining Preferred and Common
Stock of the Predecessor. The acquisition was accomplished through a merger
between the Predecessor and EndoSonics Acquisition Corp., a wholly owned
subsidiary of EndoSonics (which then changed its name to CardioVascular
Dynamics, Inc.) (hereinafter referred to as "CVD" or the "Company").
The acquisition by EndoSonics resulted in a new basis for the CVD assets
and liabilities. Accordingly, the purchase price paid by EndoSonics has been
allocated to the identifiable assets and liabilities, including in-process
research and development, which was immediately expensed as no CVD products had
received regulatory approval and the technology did not have identifiable
alternative uses. The amount by which the purchase price exceeded the
Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements. Pursuant to the terms of the original merger
agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its
Common Stock to the former shareholders of the Predecessor. The fair market
value of such shares of $488 has been reflected in the accompanying financial
statements as an additional charge for acquired in-process technology.
Subsequent to the acquisition, EndoSonics began performing certain services
for CVD (see Note 4), including general management, accounting, cash management,
and other administrative and engineering services. The amounts charged to CVD
for such services have been determined based on proportional cost allocations
and have been agreed to by the management of CVD and EndoSonics. In the opinion
of CVD's management, the allocation methods used are reasonable. Such
allocations, however, are not necessarily indicative of costs that would have
been incurred had CVD continued to operate independent of EndoSonics. No formal
agreement currently exists which specifies the nature of services to be provided
by EndoSonics to CVD, or the charges for such services. Therefore, amounts are
not necessarily indicative of the future charges to be incurred by CVD.
In 1994 and 1996, the Board of Directors of CVD approved a 16,200-for-1 and
a 2-for-1 Common Stock split, respectively, which have been reflected
retroactively for all periods in the accompanying financial statements.
On June 19, 1996, the Company closed its initial public offering (the
"Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per
share. On July 17, 1996, the Company's underwriters exercised their
overallotment option to purchase an additional 510,000 shares of Common Stock at
$12.00 per share. CVD received net offering proceeds from the sale of Common
Stock of approximately $42.8 million after deducting underwriting discounts and
commissions and other expenses of the Offering.
In October 1996, CVD acquired 100% of the common stock of Intraluminal
Device, Inc. ("IDI") in exchange for CVD common stock valued at $1.4 million.
The acquisition was accomplished through the formation of IDI Acquisition, Inc.,
a wholly-owned subsidiary of CVD, and the merging of IDI into IDI Acquisition,
Inc. (See Note 2).
F-6
<PAGE> 39
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The consolidated financial statements for December 31, 1996 include the
accounts of the Company and its subsidiary. Intercompany transactions have been
eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The Company accounts for its investments pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in shareholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.
INVENTORIES
Inventories are comprised of raw materials, work-in-process and finished
goods and are stated at the lower of cost, determined on an average cost basis,
or market value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to seven years.
LONG-LIVED ASSETS
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of," was
issued. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During 1996, the Company
adopted this statement and determined that no impairment loss need be recognized
for the applicable assets.
CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Company maintains its cash and cash equivalents in deposit accounts and
in pooled investment accounts administered by a major financial institution.
The Company sells its products primarily to medical institutions and
medical device distributors worldwide. The Company performs ongoing credit
evaluations of its customers' financial condition and
F-7
<PAGE> 40
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
generally does not require collateral from customers. Management believes that
an adequate allowance for doubtful accounts has been provided.
During 1994, 1995, and 1996 product sales to Fukuda Denshi Co., Ltd.,
("Fukuda"), the Company's Japanese distributor (see Note 5), comprised 61%, 18%
and 14% of total revenue. Accounts receivable from Fukuda represented 15% and 1%
of net accounts receivable at December 31, 1995 and 1996, respectively.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% of total
revenues during 1996. At December 31, 1996, 27% of accounts receivable were due
from Medtronic. One other customer comprised 12% of revenues for the year ended
December 31, 1995 and 14% of accounts receivable at December 31, 1995.
EXPORT SALES
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Europe................................................... $255 $1,179 $1,614
Japan.................................................... 715 744 1,240
Latin America............................................ -- 131 243
Other.................................................... -- -- 417
---- ------ ------
$970 $2,054 $3,514
==== ====== ======
</TABLE>
REVENUE RECOGNITION AND WARRANTY
The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly 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.
F-8
<PAGE> 41
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-9
<PAGE> 42
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Life Systems, Inc. ("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.
- 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.
F-10
<PAGE> 43
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. 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.
F-11
<PAGE> 44
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LICENSE AGREEMENTS
In January 1995 the Company entered into a license agreement with Advanced
CardioVascular Systems, Inc. ("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> 45
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1996
------ ------
<S> <C> <C>
Accounts payable........................................ $ 962 $ 750
Accrued payroll and related expenses.................... 352 1,040
Accrued warranty........................................ 113 29
Other accrued expenses.................................. 257 563
------ ------
$1,684 $2,382
====== ======
</TABLE>
10. COMMITMENTS
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under 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
F-13
<PAGE> 46
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Plan are exercisable over a maximum term of ten years from the date of grant and
generally vest over a four 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>
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.
During 1995, the Company recorded deferred compensation of approximately
$345 for financial reporting purposes to reflect the difference between the
exercise price of certain options and the deemed fair value, for financial
statement presentation purposes, of the Company's shares of Common Stock. An
additional $150 of deferred compensation was recorded during the year ended
December 31, 1996. Deferred compensation is being amortized over the vesting
period of the related options. $119 of deferred compensation was amortized in
the year ended December 31, 1996.
Stock Purchase Plan
Under the terms of the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), eligible employees can purchase Common Stock through payroll
deductions at a price equal to the lower of 85% of the fair market value of the
Company's Common Stock at the beginning or end of the applicable offering
period. a total of 200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan.
F-14
<PAGE> 47
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows
at December 31:
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net operating loss carryforward.............................. $ 1,322 $ 60 $ 1,792 $ 44
Accrued expenses............................................. 20 3 456 78
Research and development credits............................. 97 25 256 144
Bad debt reserve............................................. 63 11 132 23
Depreciation................................................. -- -- 52 9
Inventory write-downs........................................ 73 13 51 9
Capitalized research and development......................... -- 150 -- 276
Deferred revenue............................................. 45 8 28 5
Other........................................................ -- -- 47 57
-------- ------ ------- ------
Gross deferred tax assets.................................... 1,620 270 2,814 645
Valuation allowance.......................................... (1,620) (270) (2,814) (645)
Total deferred tax assets.................................... -- -- -- --
-------- ------ ------- ------
Net deferred tax assets...................................... $ -- $ -- $ -- $ --
======== ====== ======= ======
</TABLE>
The valuation allowance increased by $1,569 and $1,072 in 1996 and 1995,
respectively.
The Company's effective tax rate differs from the statutory rate of 35% due
to federal and state losses which were recorded without tax benefit.
At December 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $5,120,000 and $740,000,
respectively, which expire in the years 1997 through 2010. In addition, the
Company has research and development tax credits for federal and state income
tax purposes of approximately $256,000 and $144,000, respectively, which expire
in the years 2008 through 2010.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research credit
carryforwards may be subject to an annual limitation against taxable income in
future periods. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
income tax liabilities.
13. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Plan for all employees 21 years of age or
older with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 1995 and 1996.
F-15
<PAGE> 48
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 ---------------------
--------
BALANCE ADDITIONS COLUMN E
AT --------------------- ----------
COLUMN A BEGINNING CHARGES TO CHARGED COLUMN D BALANCE AT
- ---------------------------------------------- OF COSTS AND TO OTHER ---------- END OF
DESCRIPTION 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> 49
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ---------- ---------------------------------------------------------------------------
<S> <C> <C>
1.1(1) Form of Underwriting Agreement.............................................
2.1(3) Agreement and Plan of Reorganization dated as of June 9, 1993 among
EndoSonics Corporation ("EndoSonics"), EndoSonics Acquisition Corporation
and CardioVascular Dynamics, Inc. ("CVD")..................................
2.2(3) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among EndoSonics, EndoSonics Acquisition Corporation and
CVD........................................................................
2.3(5) Agreement and Plan of Reorganization by and among CardioVascular Dynamics,
Inc., IDI Acquisition Corporation and Intraluminal Devices, Inc. ("IDI")
dated as of October 2, 1996................................................
3.1(3) Certificate of Incorporation...............................................
3.2(3) Amended Bylaws.............................................................
4.1(1) Specimen Certificate of Common Stock.......................................
10.1(3) Form of Indemnification Agreement to be entered into between the Registrant
and its directors and officers.............................................
10.2(3) The Registrant's 1996 Stock Option Plan and forms of agreements
thereunder.................................................................
10.3(3) The Registrant's Employee Stock Purchase Plan and forms of agreement
thereunder.................................................................
10.4(3) Series A Supplemental Stock Purchase Agreement dated June 5, 1992, by and
between the Company and CVD................................................
10.5(3) Stock Purchase Option Agreement dated June 5, 1992, by and between
EndoSonics and CVD.........................................................
10.6(3)* Japanese Distribution Agreement dated May 28, 1993, as amended on October
27, 1994 and July 17, 1995, (the "Japanese Distribution Agreements") by and
between CVD and Fukuda Denshi Co., Ltd. ("Fukuda").........................
10.7(3)* Stock Purchase and Technology License Agreement dated September 10, 1994,
as amended on September 29, 1995, by and among EndoSonics, CVD and SCIMED
Life Systems, Inc. ("SCIMED")..............................................
10.8(3) Waiver and Grant of Warrant dated June 30, 1995 by and between SCIMED, CVD
and Endosonics.............................................................
10.9(3)* License Agreement dated January 15, 1995 by and between CVD and Advanced
CardioVascular Systems, Inc. ("ACS").......................................
10.10(3)* License Agreement dated March 4, 1996 by and between CVD and ACS...........
10.11(3) Series B Stock Purchase Agreement dated March 29, 1996 by and between CVD
and EndoSonics.............................................................
10.12(3) License Agreement dated December 22, 1995 by and between CVD and
EndoSonics.................................................................
10.13(1) Form of Stockholder Agreement with EndoSonics..............................
10.14(1) Form of Tax Allocation Agreement with EndoSonics...........................
10.15(3) Industrial Lease dated February 23, 1995 by and between the Irvine Company
and CVD....................................................................
10.16(1) Waiver and Grant of Warrant dated May 2, 1996 by and between SCIMED, CVD
and Endosonics.............................................................
10.17(2) Amendment to Japanese Distribution Agreements dated May 13, 1996 by and
between CVD and Fukuda.....................................................
10.18(4)* Supply Agreement dated July 15, 1996 by and between CVD and Medtronic,
Inc........................................................................
10.19(4)* OEM Agreement dated July 15, 1996 by and between CVD and Medtronic, Inc....
10.20 License Agreement dated February 6, 1997 by and between CVD and
EndoSonics.................................................................
23.1 Consent of Ernst & Young LLP, Independent Auditors.........................
24.1 Power of Attorney (Reference is made to page 35 of this Annual Report on
Form 10-K).................................................................
27.1 Financial Data Schedule....................................................
</TABLE>
II-2
<PAGE> 50
- ---------------
* Confidential treatment requested.
(1) Previously filed as an exhibit to Amendment No. 2 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on June 10, 1996.
(2) Previously filed as an exhibit to Amendment No. 1 to the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission on May 17, 1996.
(3) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on May 3, 1996.
(4) Previously filed as an exhibit to the Company's report on Form 10-Q filed
with the Securities and Exchange Commission on August 14, 1996.
(5) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on November 12,
1996.
II-3
<PAGE> 1
EXHIBIT 10.20
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is effective as of this 6th day of
February, 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:
<PAGE> 2
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.
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.
1.3 "CVD FOCUS TECHNOLOGY" shall mean all CVD inventions (whether or not
patentable), ideas, knowhow, 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 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 nonexclusive, 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.
2.3 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 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.
2
<PAGE> 3
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.
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 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.
3
<PAGE> 4
5.4 Domestic Regulatory Matters; Distribution of CVD Product under
Endosonics' PMA. CVD will cease to distribute CVD Focus products which were
approved under Endosonics' PMA following approval by the FDA of CVD's original
PMA Application, or twelve (12) months after execution of this Agreement,
whichever occurs first. No new applications shall be made under Endosonics' PMA
following execution of this Agreement.
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 intellectual property rights 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:
(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.
4
<PAGE> 5
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 rights 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.
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, IV, VI, VII, VIII, IX and XI, along with this Section 10.4. Except in the
case of termination by CVD pursuant to Section 10.2 above, the licenses granted
to Endosonics under Section 2.1 of this Agreement shall also survive termination
of this Agreement. In the event this Agreement is terminated by CVD pursuant to
Section 10.2 above, Endosonics
5
<PAGE> 6
shall have the right thereafter to sell completed Focus Catheters then on hand,
in the process of being manufactured or as otherwise needed to meet its
then-existing supply obligations. Except in the case of termination by
Endosonics pursuant to Section 10.2 above, the licenses granted to CVD under
Sections 2.2 of this Agreement shall also survive termination of this Agreement.
In the event this Agreement is terminated by Endosonics pursuant to Section 10.2
above, the licenses granted to CVD under Sections 2.2 of this Agreement shall
continue thereafter only as necessary to sell completed CVD products then on
hand, in the process of being manufactured or to meet CVD's then-existing supply
obligations.
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 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.
6
<PAGE> 7
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:
Title:
CARDIOVASCULAR DYNAMICS, INC.
By:
Title:
7
<PAGE> 8
EXHIBIT A
LICENSED PATENTS
- - U.S. Patent No. 5,470,313
- - U.S. Patent App. No. 08/201935
- - EPO Patent App. No. 94119841.8
<PAGE> 9
EXHIBIT B
ENDOSONICS TRANSDUCER
<PAGE> 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) for the year ended
December 31, 1996.
/s/ ERNST & YOUNG LLP
Orange County, California
March 21, 1997
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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<CASH> 17,192
<SECURITIES> 25,733
<RECEIVABLES> 2,645
<ALLOWANCES> 377
<INVENTORY> 2,899
<CURRENT-ASSETS> 48,574
<PP&E> 1,471
<DEPRECIATION> 289
<TOTAL-ASSETS> 50,084
<CURRENT-LIABILITIES> 2,432
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<COMMON> 9
<OTHER-SE> 47,614
<TOTAL-LIABILITY-AND-EQUITY> 50,084
<SALES> 8,384
<TOTAL-REVENUES> 8,734
<CGS> 4,111
<TOTAL-COSTS> 4,111
<OTHER-EXPENSES> 10,400
<LOSS-PROVISION> 221
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,624)
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