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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
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
RADIANCE MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 68-0328265
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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13700 ALTON PARKWAY, SUITE 160, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 457-9546
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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<CAPTION>
TITLE OF EACH CLASS
------------------- NAME OF EACH EXCHANGE ON WHICH REGISTERED
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NONE NONE
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON
STOCK, $.001 PAR VALUE.
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 15, 2000, was approximately $87,669,000 (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 15, 2000, approximately 12,021,000 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 2000 Annual Meeting of
Stockholders to be held on June 6, 2000 are incorporated by reference into Part
III.
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FORWARD-LOOKING STATEMENTS
Radiance cautions stockholders that, in addition to the historical
financial information included herein, this Annual Report on Form 10-K includes
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are
based on management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Annual Report of Form 10-K, including without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and statements
located elsewhere herein regarding Radiance's financial position and business
strategy, may constitute forward-looking statements. In addition, you generally
can identify forward-looking statements by the use of forward-looking
terminology such as "believes," "may," "will," "expects," "intends,"
"estimates," "anticipates," "plans," "seeks," or "continues," or the negative
thereof or variations thereon or similar terminology. Such forward-looking
statements involve known and unknown risks, including, but not limited to,
economic and market conditions, the regulatory environment in which Radiance
operates, competitive activities or other business conditions. We cannot assure
you that our actual results, performance or achievements will not differ
materially from any future results, performance or achievements expressed or
implied from such forward-looking statements. Important factors that could cause
actual results to differ materially from Radiance's expectations ("Cautionary
Statements") are disclosed in this Annual Report on Form 10-K, including, but
not limited to, those discussed in "Item 7 -- Risk Factors." All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by these Cautionary
Statements.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops,
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance currently is primarily engaged in conducting
research and development on radiation therapy, and its primary product under
development is the RDX Catheter, a balloon catheter-based delivery system
designed to allow the temporary delivery of radioactive materials to the area of
an artery that has been treated with conventional interventional therapy such as
Percutaneous Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or
stent deployment. See "Item 1 -- Products."
The Company is the result of an acquisition effected by the merger of the
(former) Radiance Medical Systems, Inc. ("RMS") with and into CVD/RMS
Acquisition Corporation, a wholly-owned subsidiary of CardioVascular Dynamics,
Inc. (now named Radiance Medical Systems, Inc.). RMS originally was formed by
the Company as a separate entity to focus on the development of radiation
therapy technology for the treatment of cardiovascular disease, and to obtain
financing for such development from sources other than the Company. As a result
of the merger, the Company reacquired all of the shares of RMS which it did not
own. The Company was incorporated on March 16, 1992.
INDUSTRY BACKGROUND
Coronary Artery Disease
Coronary artery disease is the leading cause of death in the United States.
More than 13 million people in the United States currently have been diagnosed
with coronary artery disease, which is generally characterized by the
progressive accumulation of plaque as a result of the deposit of cholesterol and
other fatty materials on the walls of arteries. The accumulation of plaque leads
to a narrowing of the interior passage, or lumen, of the arteries, reducing
blood flow to the heart. When blood flow to the heart becomes insufficient, the
oxygen supply is restricted, resulting in heart attack and/or death. Each year
more than 900,000 revascularization procedures are performed in the United
States, and approximately 1.5 million such procedures are performed worldwide,
to treat coronary artery disease and increase blood flow to the heart.
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Types of Treatment
The two most common forms or treatment for coronary artery disease are: (i)
the coronary artery bypass graft ("CABG"); and (ii) percutaneous transluminal
coronary angioplasty ("PTCA") and other catheter-based technologies. CABG is a
highly invasive, open surgical procedure in which blood vessel grafts are used
to bypass the site of a blocked artery, thereby restoring blood flow. CABG,
still considered the most effective and long-lasting treatment for coronary
artery disease, is generally the primary treatment for severe coronary artery
disease involving multiple vessels. In addition, CABG is often a treatment of
last resort for patients who have undergone other less invasive procedures but
require reintervention. CABG, however, has significant limitations, including
medical complications, such as stroke, multiple organ dysfunction, inflammatory
response, respiratory failure and post-operative bleeding, each of which may
result in death. In addition, CABG is a very expensive procedure and requires a
long recovery period. In the United States, the cost of undergoing CABG is
approximately $32,000 to $36,000, and the average post-operative recovery period
following CABG is approximately six to eight weeks. Approximately 400,000 CABG
procedures are performed annually in the United States. Currently, several
minimally invasive surgical techniques are being developed to lessen the cost
and trauma of CABG procedures.
PTCA is the principal, less invasive alternative to CABG. PTCA is a
procedure performed in a cath lab by an interventional cardiologist. During
PTCA, a guidewire is inserted into a blood vessel through a puncture in the leg
(or arm in some cases) and guided through the vasculature to a diseased site in
the coronary artery. A balloon-tipped catheter is then guided over the wire to
the deposit of plaque ("lesion") occluding the artery. Once the balloon is
positioned across the lesion inside the vessel, the balloon is inflated and
deflated several times. Frequently, successively larger balloons are inflated at
the lesion site, requiring the use of multiple balloon catheters. The inflation
of the balloon cracks or reshapes the plaque and the arterial wall, thereby
expanding the arterial lumen. Though injury to the arterial wall often occurs
under balloon pressure, PTCA typically results in increased blood flow without
the actual removal of any plaque. In 1997, more than 600,000 PTCA procedures
were performed in the United States. The average cost of each PTCA procedure is
approximately $15,000, or less than one half of the average cost of CABG, and
the length of stay and recuperation period are substantially less than required
for CABG.
The principal limitation of PTCA is the high rate of restenosis, a
re-narrowing of a treated artery, which generally requires reintervention. Due
to the effects of restenosis, the long-term cost-effectiveness of PTCA has not
proven greater than that of CABG. Studies have indicated that within six months
after PTCA, between 25% and 45% of PTCA patients experience restenosis. In
addition, 60% of patients with multi-vessel coronary artery disease who received
PTCA have been shown to require reintervention within three years of treatment.
Although the average cost of PTCA initially is less than one-half of the cost of
CABG, a recent study indicated that three years after the procedure, PTCA has no
cost advantage over CABG due to the need for subsequent interventional
treatment.
A variety of other catheter-based, minimally invasive, interventional
devices for coronary artery disease have been developed in an attempt to reduce
the frequency of restenosis following PTCA. These devices include atherectomy
devices (catheter devices that cut and remove plaque from the arterial wall),
rotational ablation devices (catheter devices which use a rotating burr to
remove plaque), and laser catheter devices (devices that use laser energy to
reduce plaque in arteries). Although these new approaches to coronary artery
disease have been found to be effective in certain lesion types and in certain
locations in the coronary arteries, they still exhibit high rates of restenosis.
RESTENOSIS
Clinical restenosis is typically defined as a renarrowing of a coronary
artery within six months of a revascularization treatment to less than 50% of
its original size. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure, which stretches coronary
arteries or otherwise damages the treated segment of the artery. Due to multiple
mechanisms controlling vascular repair, restenosis may occur within a short
period after a revascularization procedure or may develop over the course of
months
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or years. Restenosis that occurs shortly after a revascularization procedure is
usually attributed to elastic recoil (acute loss of lumen diameter) of the
artery.
Restenosis occurring a longer period of time after a revascularization
procedure may result from excessive proliferation of cells at the treatment site
("hyperplasia") or from a generalized geometric remodeling of the arterial
segment, the causes of which are not well understood. Hyperplasia is a
physiological response to injury, similar to scarring which occurs in wound
healing. In response to an arterial injury from revascularization, the body
initiates a biochemical response to repair the injury site and protect it from
further harm. This response will include a signal to adjacent cells of the
arterial wall to multiply. Often this cell proliferation goes unchecked,
resulting in a much thicker and inelastic arterial wall and in reduced blood
flow. Radiance believes that hyperplasia and vascular remodeling may be
responsible for a large portion of the overall effect of restenosis.
Coronary Stenting
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased lumen diameter by
mechanically supporting the diseased site in a coronary artery. Of all the
non-surgical treatments which have sought to improve upon PTCA, stents have
demonstrated the best results in reducing the rate of restenosis. In a typical
stent procedure, the artery is pre-dilated at the lesion site with a balloon
catheter and the stent is delivered to the site of the lesion and deployed with
the use of a second balloon catheter, which expands the stent and firmly
positions it in place. This positioning is often followed by a third dilatation
using a high pressure balloon to fully expand and secure the stent. Once placed,
stents exert radial force against the walls of the coronary artery to enable the
artery to remain open and functional.
Recent studies have concluded that the rate of restenosis in patients who
receive coronary stents following PTCA is approximately 30% lower than in
patients treated only by PTCA. Additional clinical studies with stents which
incorporate a specialized coating may show a greater reduction in the rate of
restenosis. Stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, but may increase, rather than decrease, hyperplasia.
The use of stents has grown rapidly since commercial introduction in the
United States in 1994. Approximately 300,000 of the approximately 600,000 PTCA
procedures performed in the United States in 1997 utilized stents. Despite their
rapid adoption, stents have certain disadvantages. Not only are they permanent
implants which may result in unforeseen long-term adverse effects, but they
cannot be used in cases where the coronary arteries are too tortuous or too
narrow. In addition, the use of stents approximately doubles the cost of a PTCA
procedure and restenosis still may occur, often requiring reintervention.
Radiotherapy
For more than 50 years, radiotherapy has been used routinely to treat
proliferative cellular disorders in humans. While externally applied radiation
has shown little beneficial effect on treated arteries, the application of beta
and gamma radiation at the site of arterial injury has proven more useful in
treating restenosis.
Gamma radiation has been demonstrated in a number of models to inhibit the
cellular proliferation associated with the restenosis mechanism. Gamma is
compatible with vessels of all sizes but is more complicated to use in the cath
lab because of its activity.
Beta radiation has been demonstrated to inhibit intimal hyperplasia. Since
beta radiation travels only a short distance (2-4 mm) before loosing its
therapeutic value, it is imperative that the source be placed as close as
possible to the arterial wall. This relatively short distance of travel makes
its compatible with current cath lab practices. Dosage is calculated by knowing
the energy level of the source and the distance from the treatment target.
Uniform dosage to the intended area is dependent upon maintaining a consistent
energy field.
The placement of guidewire based systems of radiation transport in the
curved coronary anatomy has been shown to produce inconsistent dosages to actual
tissue because of the different distances the guidewire lays from the vessel
wall over the length of the active wire. When guidewire centering balloons are
used, the
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beneficial effect of the radiation is lost over the distance from the wire to
the arterial wall. As the vessel diameter increases, the therapeutic effect also
diminishes. The Company believes that if any benefit is to be realized with
guidewire based techniques it would be limited to small diameter, straight
arteries. The extended inflation times of the centering balloon required to
insure adequate dosage also may result in ischemia and unacceptable discomfort
or hazard to the patient.
A stent activated to emit beta radiation would overcome the proximity
issues inherent in a guidewire delivery system by placing the beta source
directly opposed to the vessel. This approach also assumes a one dose for all
patients, removing control of dose from the clinician. This approach also
assumes a vessel of fixed size and that the energy level of the implanted stent
will be adequate to deliver the required radiation dosage after implant. Vessel
diameter is often difficult to quantify. As a stent expands, the space between
its active elements increases. Since the radioactive stent cannot be removed
after placement, the patient continues to receive the ionizing effects until the
radiation dissipated over five half lives of the isotope used. In the case of
beta p32, this is approximately 70 days.
PRODUCTS
In addition to research and development of radiotherapy products, Radiance
also manufactures and markets catheters and coronary stent systems used in
conjunction with angioplasty and vascular stenting. The Company's proprietary
Focus catheter technology enables physicians to deliver therapeutic radial force
and stents accurately and effectively to the treatment site. The Company's
proprietary stent designs offer characteristics enabling physicians to access
varying coronary anatomy. RMS believes that these products enable physicians to
perform challenging interventional procedures effectively, resulting in improved
treatment outcomes and lower costs. RMS owns the rights to 26 issued U.S.
patents, one issued European patent and two Japanese patents covering certain
aspects of its catheter and stent technologies.
Radiation Products Technology
Radiance believes that its radiation source technology, combined with its
existing catheter and stent delivery systems, can deliver radioactive materials
to the localized site safely and effectively. The Company's radiation technology
enables solid form radioactive material of virtually any isotope to be
integrated into the wall of the balloon material itself, which creates a
balloon/source angioplasty catheter. The Radiance approach combines the
demonstrated benefits of beta radiation with the utility of direct vessel wall
apposition associated with balloon dilatation.
Radiance currently is focusing on the development of the RDX catheter, a
radiation delivery balloon catheter system. The RDX Catheter consists of an
expandable dual balloon system which enables the radiation dosage to be
delivered precisely to the vessel wall. Because the balloon is in contact with
the wall, this method of delivering Radiotherapy is appropriate for vessels of
any diameter with proper balloon size selection.
Because the beta source is positioned relatively close to the vessel wall
and the exact radiation strength is known prior to delivery, accurate dose
calculations can be made to customize patient treatment. This device may also
incorporate a perfusion system to maintain blood flow distal to the inflated
balloon to permit longer inflation times, if required, to optimize radiation
dosage delivery effectively.
Radiance believes that the RDX Catheter has several technical and clinical
advantages for the treatment of restenosis.
- The RDX Catheter provides complete apposition to the arterial wall,
reducing the problems of distance determination and closing with current
vascular radiotherapy devices.
- The RDX Catheter can deliver equal or higher radioisotope activity with
less total radiation dose than other technologies since it delivers the
activity directly against the artery wall to be treated, as opposed to
products using an irradiated source in the center of the artery.
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- The RDX catheter requires no expensive capital equipment, such as a
radiation shielding afterloader system or a system to compute dosimetry,
like competing radiotherapy products.
- The fully-deployable radiation source is independent of vessel size.
Coronary arteries range from 1.5-6.0 millimeters. With other devices, a
different dose of radiation has to be calculated and/or delivered for
each vessel size. With the RDX Catheter, the dose is the same regardless
of the vessel dimensions because the dose is delivered to the vessel
wall. This also makes the RDX Catheter system useful in other vascular
applications such as coronary, peripheral vascular leg arteries, renal,
carotid and kidney dialysis grafts. This potentially broadens the
clinical utility and market potential for the RDX system.
- The RDX Catheter is simple and easy-to-use. Use of the RDX Catheter is
consistent with the use of other types of catheters by interventional
cardiologists.
- The solid film substrate is protected by the double balloon construction.
The use of the beta isotope within the system increases the safety of the
RDX Catheter as a vascular radiotherapy delivery device.
The Company currently is focusing on developing products for the treatment
of restenosis following the interventional treatment of atherosclerosis. The
Company believes, however, that its Radiotherapy technology may eventually be
utilized to prevent and treat restenosis in all vascular segments of the body,
including coronary, peripheral vascular, carotid, neurovascular and renal
arteries. However, there is no assurance that Radiance will develop and market
the RDX Catheter technology or any other radiation therapy technology
successfully, that such products or radiation therapy in general will receive
market acceptance or that such products, whether under development or
commercialized, will not be rendered obsolete as a result of other technology.
Clinical Trials
In September 1999, the Company began European human clinical trials of its
RDX Coronary Radiation Delivery System. The BETTER (Beta Radiation Trial To
Eliminate Restenosis) clinical trial is designed to provide the data for the
Company to obtain CE Mark approval and commercialize the RDX catheter in Europe
and other international countries. The Company expects to complete the BETTER
trial enrollment of approximately 150 patients during 2000. After completion of
patient follow-up studies, the Company will apply for CE Mark approval to begin
marketing the RDX Catheter in Europe. As of March 1, 2000, the Company had
enrolled 62 patients in the study. As the first patients were enrolled in the
late third quarter of 1999, six month follow-up had not yet been performed on
any patients.
In February 2000, the Company received approval of the U.S. Food
Administration for the Company's Investigational Device Exemption ("IDE") to
commence human clinical trials for its RDX catheter radiation delivery system.
The BRITE (Beta Radiation to Reduce Instent Restenosis) clinical trials will
evaluate the RDX System in patients who previously have had a coronary stent
implanted and have returned with restenosis at the site of the stent implant
("in-stent restenosis"). The initial phase of the study will include enrollment
of approximately 45 patients and is expected to be completed prior to the end of
2000. As of March 1, 2000 the Company had enrolled 3 patients in the study.
Radiance will be required to seek FDA approval for any new product and
expects that some of these products will be subject to the PMA process. The
Company also will be subject to federal, state and/or local laws and regulations
governing the use and handling of radioactive materials. See "Item
1 -- Government Regulation." There can be no assurance that Radiance will
complete the development of any products successfully or that any such products
will receive any required regulatory approvals. The failure of Radiance to
develop new products successfully or to obtain regulatory approvals could have a
material adverse effect on the business and results of operations of the
Company.
Existing Catheter Products Technology
Radiance has utilized its Focus technology to develop catheter products
that address the principal challenges physicians experience in treating vascular
diseases: restenosis of a treated vessel, chronic total
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occlusions and acute reclosure of a vessel during or soon after a procedure.
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. Therefore, existing uniform diameter
catheters require cardiologists to use multiple balloons to treat vessels of
varying diameters, resulting in unnecessary costs. 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. 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. These characteristics allow a single balloon to expand to multiple
diameters, enabling the physician to deliver stents and perform interventional
procedures in vessels of varying diameters and anatomical locations.
Radiance believes the Focus catheters 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. The
technology also is available in various combinations on a multiple-purpose
catheter, thereby enabling physicians to treat vascular disease
cost-effectively. The Company's products are designed to be low profile (small,
uninflated diameter), enabling cardiologists to advance them along narrow
vessels, as well as flexible and trackable, enabling cardiologists to advance
and control them accurately within the vasculature.
In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive
marketing rights in the United States. In exchange for those rights Radiance has
received, and will receive, certain milestone payments based upon the transfer
of the technological knowledge to Guidant, and royalty payments based upon the
sale of products by Guidant using Focus technology.
The following table lists the Company's catheter products which currently
are marketed:
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COMMERCIAL
PRODUCTS INTENDED APPLICATIONS U.S. REGULATORY STATUS SALE
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FOCUS CATHETERS
Guardian PTCA (i.e., balloon PMA Supplement Approved Q2 1998
Over-the-wire design angioplasty in coronary
arteries)
Lynx F/X PTCA or Stent Delivery(2) N/A(1) Q1 1997
Rail Design
ARC PTCA PMA Supplement Approved Q3 1996
Over-the-wire design
FACT Catheter PTCA PMA Supplement Approved Q1 1996
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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 Radiance to obtain a
PMA supplement approval. Radiance is not currently seeking such approval.
Existing Stent Products Technology
Radiance's line of coronary integrated stent delivery systems provide
physicians with unique products of varying measures of strength and flexibility
to allow optimal placement and stenting characteristics to aid in the
minimization of restenosis.
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The following table lists Radiance's currently marketed stent products
which are not available in the United States due to Radiance's decision not to
apply for regulatory approval.
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FIRST
PRODUCTS INTENDED APPLICATIONS COMMERCIAL SALE
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Synthesis Stent Coronary Stenting Q1 1998
Synthesis Star System (1) Coronary Stenting Q1 1998
Enforcer Stent Coronary Stenting Q3 1997
Enforcer Stent System Coronary Stenting Q4 1997
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(1) Pre-mounted stent on a Star balloon catheter delivery system.
Vascular Access Products
Radiance's vascular access products utilized patented technology to provide
rapid, accurate access to the body's vascular system for guidewire and catheter
entry. In January 1999, Radiance sold its vascular access product line and
related assets to Escalon Medical Corp. The Company believes that the sale of
its vascular access product line and related assets, combined with the CVD/RMS
merger, focuses the Company's business on developing its proprietary
technologies for the interventional cardiology market.
MANUFACTURING
With the exception of certain final assembly and sterilization procedures
for those products designed to be sold only outside the United States and for
radiation devices, and the manufacture of those products which Radiance has
licensed to third parties, all of Radiance's current products are produced in
its facilities in Irvine, California. However, we have contracted for a third
party manufacturer for the final assembly and irradiation of our radiotherapy
catheter (See "Item 7, Management's Discussion and Analysis of Financial
Conditions and Results of Operations", under the subheading "Overview" for a
discussion of third party manufacturer Bebig GmbH.). Radiance fabricates certain
proprietary components, then assembles, inspects, tests and packages all
components into finished products. By designing and assembling its catheter
products, Radiance believes it is better able to control quality and costs,
limit third-party access to its proprietary technology, and better manage
manufacturing process enhancements and new product introductions. In addition,
Radiance 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 currently are performed by single vendors,
especially for final assembly and radioactive source manufacturing. While
Radiance believes that there are other vendors available to perform these
processes, an interruption of performance by any of these vendors could have a
material adverse effect on Radiance's ability to manufacture its products until
a new source of supply were qualified and, as a result, could have a material
adverse effect on Radiance's business, financial condition and results of
operations.
Due to the relatively short half-life (i.e., shelf life) of the Company's
radiotherapy products, unlike its existing products, it is critical to ship the
products as close to the date of use as possible. Moreover, coordination between
the Company, a contract manufacturer, the distributor and the end user is
necessary in order to reduce waste and returned products. To help reduce the
shipping time for the product and improve the Company's response time, the
Company has contracted with a third party manufacturer, Bebig, in Europe to
perform the final assembly and radioactive source manufacturing of the devices
for international use and anticipates the use of a similar facility in the
United States. If the Company fails to establish the aforementioned capability,
it could have a material adverse effect on Radiance's business, financial
condition and results of operations.
Radiance has obtained the right to affix the CE (Conformite Europeene)
marking to all of its products currently sold in the countries of the European
Economic Area and Switzerland. CE marking is a European symbol of conformance to
strict product manufacturing and quality system standards. As part of the CE
marking process, Radiance also received ISO 9001/EN46001 certification with
respect to the manufacturing of all of its currently marketed products.
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Radiance's success will depend in part upon its ability to manufacture its
products in compliance with ISO 9001, the FDA's quality system regulations
("QSR") requirements, and 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. Radiance began manufacturing certain of its products at its facilities in
July 1995. Accordingly, Radiance has limited experience in manufacturing its
products. Radiance has undergone and expects to continue to undergo regular
"QSR" inspections in connection with the manufacture of its products at
Radiance's facilities. Radiance's success will depend upon, among other things,
its ability to manage the simultaneous manufacture of different products
efficiently and to integrate the manufacture of new products with existing
products. There can be no assurance that Radiance 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. Radiance's failure to commence the
manufacturing of these new products successfully, or to increase production
volumes of new and existing products in a timely manner, would materially and
adversely affect Radiance'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, QSR requirements, CDHS or other
regulatory requirements could have a material adverse effect on Radiance's
business, financial condition and results of operations.
MARKETING AND SALES
Radiance is trying to develop but does not have any products based on
radiation therapy currently available for commercial marketing and sale to the
public. Due to the licensing of the technology upon which the Company's
currently-marketed products are based in June 1998, and the sale of its Vascular
Access product line and related assets in January 1999, product sales were
substantially lower in 1999, compared with 1998, and are expected to decrease
further in 2000. Radiance's existing catheter and coronary stent system products
are sold in the United States and international markets, principally Europe and
Japan. However, certain of Radiance's products are not available in each market
due to regulatory and intellectual property restrictions. Radiance currently
sells its products through a combination of strategic partners, medical device
distributors and direct sales personnel. Radiance also has distribution
agreements with companies covering countries outside the United States and
Japan. Radiance entered into an exclusive distribution agreement in Japan with
Cathex in May 1997 which terminates in January 2001. Sales to Cathex accounted
for 16%, 28% and 10% of Radiance's total product sales in 1997, 1998 and 1999,
respectively. See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview." Radiance intends to expand its
sales and marketing capability and to distribute selected new products through
strategic partnerships.
In 1998 and 1999, the Company reduced its domestic sales force and does not
actively promote its products here in the U.S. due to patent restrictions, the
competitive environment and its decision to focus its efforts on the development
of the RDX catheter technology. Moreover, the U.S. market for the Company's
existing products is dominated by a few competitors with substantially greater
assets and much more extensive sales and distribution networks. Additionally,
because of hospital buying preferences, the competitive environment is conducive
to companies with wide product portfolios. Thus, we believe that the Company
will only be able to compete in the near term in the U.S. market if it is
successful in developing unique, proprietary, cost-saving technology.
In 1997, 1998 and 1999, total export sales were $4.7 million, $5.9 million
and $3.1 million, respectively, or approximately 50%, 63% and 82% respectively,
of total product sales. In 1997, 1998 and 1999, sales to Europe accounted for
$1.1 million, $2.5 million and $2.1 million, respectively; sales to Japan
represented $2.4 million, $2.6 million and $0.4 million, respectively; and sales
to other regions represented $1.2 million, $0.8 million and $0.6 million,
respectively. Radiance expects to continue to derive revenue from international
sales and therefore a significant portion of Radiance'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 Radiance's ability to deliver
products
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on a competitive and timely basis. However, all of the Company's foreign sales
are denominated in dollars, except for sales in Germany which totaled $1.4
million, or 15% of total product sales in 1998 and $1.2 million or 31% of total
product sales in 1999. Future imposition of, or significant increases in the
level of, customs duties, export quotas or other trade restrictions, could have
an adverse effect on Radiance's business, financial condition and results of
operation. In foreign countries, Radiance'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 Radiance. See "Item 1 -- Government Regulation," and "Note 1 of Notes to
Consolidated Financial Statements."
POST-MARKETING CLINICAL STUDIES
In a Comparative Performance and Pathological Study conducted at the
University of Texas Department of Medicine, Radiance's FACT Focus catheter was
compared with conventional percutaneous transluminal coronary angioplasty
("PTCA") catheters from other leading manufacturers in an animal study. The
investigators concluded that the use of the Focus catheter resulted in reduced
arterial damage without reduction in catheter performance as determined by
catheter preparation, trackability, pushability, inflation/deflation and
angiographic visualization.
The Focus Lesion Expansion Optimizes Results Study ("FLEXOR Study")
compared Focus PTCA catheter with conventional PTCA catheters. The FLEXOR Study
evaluated the efficacy of Focus technology in improving clinical results
following angioplasty procedures. Success was evaluated based on the ability of
Focus technology to improve the minimal lumen diameter ("MLD") of the arterial
opening, and to reduce the number of catheters necessary for PTCA procedures.
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 commenced
in the fourth quarter of 1996 and was completed in the first quarter of 1997.
Results of the study were presented at the 1997 Transcatheter Therapeutics
symposium in Washington D.C. Data from this study of 80 patients demonstrated a
trend toward fewer balloons used per procedure with Focus technology, especially
when stent implantation was required, without any increase in complications.
Additionally, the Focus technology group of patients had a lower residual
stenosis than the conventional angioplasty group.
Certain of Radiance's products that utilize Focus technology have received
FDA approval for PTCA and percutaneous transluminal angioplasty ("PTA")
indications. However, none of these products has received FDA approval for use
in stent delivery. An investigator-controlled study was testing Radiance's Focus
technology with respect to stent implantation. The Optimal Stent Implantation
Study ("OSTI-2 Study") was evaluating the ability of stent delivery with Focus
technology compared with conventional delivery techniques to reduce acute
outcomes and restenosis rates. The study was being conducted using two patient
subgroups of approximately 100 patients each divided according to vessel size.
In the first group, stent delivery was being evaluated in vessels greater than
three millimeters in diameter; in the second group stent delivery was 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 was evaluating the efficacy of Focus technology in each subgroup.
The OSTI-2 Study began in February 1996 and completed enrollment of patients in
the first quarter of 1998. Preliminary results of the study were reported at the
American Heart Association Scientific Sessions in November 1997 and additional
results were reported at the American College of Cardiology meeting in March
1998 and at American Heart Association Scientific Sessions in November 1998.
Early results demonstrated that Focus technology facilitates achieving a larger
in stent MLD following conventional stent expansion techniques and also
following optimal PTCA. These increased MLDs were achieved without increased
complication rates. In June 1998, Radiance signed a technology license agreement
with Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents. In the fourth quarter of
1999, the OSTI-2 Study was terminated before conclusion due to a lack of
funding. Because the technology being tested had been licensed to Guidant, the
Company did not consider funding a similar study. See the discussion below in
this section "Strategic Relationships."
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Radiance completed a clinical study in Europe in 1998 of its proprietary
Synthesis(TM) coronary stent. The multicenter study enrolled 85 patients at four
centers in Germany. Procedural and 30 day follow-up results demonstrated a high
technical success rate with low complication and low major adverse event rates.
STRATEGIC RELATIONSHIPS
Radiance evaluates on an ongoing basis potential strategic relationships
with corporate and other partners where such relationships may complement and
expand Radiance's manufacturing, research, development, sales and marketing
capabilities. Radiance currently is a party to six such agreements, described
below.
Bebig GmbH. In July 1999, the Company entered into a two year contract
manufacturing agreement with Bebig GmbH ("Bebig") to manufacture its radiation
therapy catheter in Europe. According to the agreement, during 1999 and 2000,
Radiance will pay certain facility set-up fees, totaling approximately $0.8
million, and all material and third party costs associated with production
validation. Radiance will prepare the manufacturing equipment used to perform
the final assembly of the RDX catheter, estimated to cost approximately $0.6
million, and Bebig will purchase the equipment from Radiance for $0.5 million.
Radiance will also pay Bebig an agreed amount for each unit produced. For a
nominal charge, the Company can renew the agreement for three successive,
two-year terms. In conjunction with the contract manufacturing agreement, the
Bebig granted the Company a three year sub-license agreement for certain
radiation technology that the Company believes may be useful in the development
of its radiation therapy products. There is a minimum annual license fee to
Bebig of $0.2 million payable beginning in July 2000, subject to offset by
certain amounts paid under the manufacturing agreement. Royalty fees are payable
to Bebig for any products sold worldwide that incorporate the licensed
technology. The sub-license is subject to renewal, without cost, until the
underlying patents' expiration dates.
Cosmotec Co., Ltd. In June 1999, the Company granted Cosmotec Co., Ltd.
("Cosmotec") of Japan distribution rights to market its vascular radiation
therapy products in Japan. Radiance received $1.0 million as an upfront cash
payment and will recognize the income over the seven-year term of the
distribution agreement. Radiance will also receive $1.0 million from Cosmotec
for a debenture issuable in June 2000 and convertible into Radiance common stock
over the subsequent three-year period at an initial conversion price of $7 per
share.
Guidant Corporation. In June 1998, Radiance entered into a Technology
License Agreement with Guidant Corporation, an international interventional
cardiology products company, to grant them a 10 year license to manufacture and
distribute products using Radiance's Focus Technology. Under the Agreement,
Radiance has received certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products using Focus technology by Guidant. During 1999, the Company received
$2.0 million of milestone payments and recorded the minimum annual royalty of
$0.3 million. No more milestone payments are due under the agreement but
royalties are due as long as the agreement is in effect.
SCIMED Life Systems, Inc. Radiance entered into a Stock Purchase and
Technology License Agreement, dated September 10, 1994, with SCIMED, now a unit
of Boston Scientific Corporation (the "SCIMED Agreement"). Pursuant to the
SCIMED Agreement, SCIMED purchased a 19% equity position in Radiance, which is
now diluted to below 5%. SCIMED also was granted an exclusive worldwide license
to certain combined site-specific solution delivery and coronary angioplasty
technology in exchange for license and royalty fees. The term of the SCIMED
Agreement is for the life of the patents; however, it may be terminated (i) in
the event of breach on 90 days notice by the non-breaching party; or (ii) on 30
days notice in certain limited circumstances or (iii) by SCIMED upon 180 days
notice.
Cathex Co., Ltd. Radiance entered into a distribution agreement dated May
1, 1997 with Cathex Co., Ltd. ("Cathex"), whereby Cathex serves as Radiance's
exclusive distributor for certain of Radiance's products in Japan. In exchange
for this exclusive distributorship, certain Cathex shareholders agreed to
purchase $200,000 of Radiance Common Stock (approximately 25,000 shares) and
Cathex agreed to purchase predetermined minimum quantities of Radiance's
products. The initial term of the agreement
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expires on January 1, 2001 and is subject to a five-year extension. The
agreement may be terminated in the event of breach upon 90 days notice by the
non-breaching party, subject to cure within the notice period.
EndoSonics Corporation. Radiance entered into license agreements with
EndoSonics Corporation ("EndoSonics"), dated December 22, 1995 and May 16, 1997
(the "EndoSonics Agreements"), in which Radiance granted EndoSonics the
non-exclusive, royalty-free right to Radiance's Focus technology for the
development and sale of a device with a Radiance Focus technology balloon when
it is combined only on the same catheter with an EndoSonics' ultrasound product.
In exchange, Radiance received the non-exclusive, royalty-free right to submit
PMA supplement applications utilizing an EndoSonics PMA as a reference and to
manufacture and distribute Radiance products as a supplement to the EndoSonics
PMA. In February 1998, the FDA approved Radiance's PMA application and, as a
result, Radiance can obtain independent FDA supplemental approvals on its
products. The EndoSonics Agreements 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 addition, in March of 1996, EndoSonics purchased 400,000
shares of Radiance's Series B Preferred Stock for a purchase price of
$8,000,000, which converted into 800,000 shares of Common Stock upon the
consummation of Radiance's initial public offering on June 19, 1996. In February
1998, Radiance repurchased 300,000 shares of its own common stock from
EndoSonics for an aggregate price of $1,275,000.
On September 15, 1999, EndoSonics Corporation filed a complaint for
declaratory relief in the Superior Court in Orange County, California, relating
to the EndoSonics Agreements. EndoSonics is seeking a declaratory judgment that
the EndoSonics Agreement entitles EndoSonics to place a stent on the licensed
catheters, when used in a procedure with an ultrasound transducer. The Company
believes that EndoSonics is authorized only to use the Focus technology with the
EndoSonics ultrasound transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position or operating results.
PATENTS AND PROPRIETARY INFORMATION
Radiance'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. Radiance owns or has the rights 26 issued U.S. patents, one issued
European patent and two Japanese patents covering certain aspects of its
technologies. We cannot assure you any issued patents will provide competitive
advantages for Radiance's products, or that they will not be challenged or
circumvented by competitors.
The interventional cardiovascular market in general and the stent and
balloon angioplasty catheter market (including the type of catheters offered by
Radiance) in particular have been characterized by substantial litigation
regarding patent and other intellectual property rights. We cannot assure you
that Radiance's products do not infringe such patents or rights. During 1997,
Radiance was sued for trademark infringement regarding Radiance's use of the
product name "Lynx" in connection with one of Radiance's balloon angioplasty
catheter product lines. Radiance paid no monetary damages but agreed to a
consent judgment which prohibits Radiance from using this name in the United
States. In the event that any such third-parties assert claims against Radiance
for patent infringement and such patents are upheld as valid and enforceable,
Radiance 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. We cannot
assure you that such licenses would be available or, if available, would be so
on terms acceptable to Radiance or that Radiance 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 we
cannot assure you that foreign intellectual property laws will protect
Radiance's foreign intellectual property rights adequately. Radiance also relies
on trade secrets and proprietary technology and enters into confidentiality and
non-disclosure agreements with its employees, consultants and advisors. We
cannot assure you that employees, consultants,
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advisors or others will maintain the confidentiality of such trade secrets or
proprietary information, or that Radiance's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors in such a manner that Radiance has no practical recourse. Litigation
may be necessary to defend against claims of infringement or invalidity, to
enforce patents issued to Radiance 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, Radiance and its
officers, which would have a material adverse effect on its business, financial
condition and results of operations.
COMPETITION
There are more than ten competing development programs in the area of
vascular radiotherapy. The major competitors include Novoste Corporation,
Johnson & Johnson, Guidant Corporation and Boston Scientific Corporation,
Schneider Division. The radiation sources being developed by these competitors
vary between gamma, beta and x-ray.
The most common competitive approach is represented by radioactive source
wires or seed trains. Three companies are in the pivotal clinical trial stage in
the United States, all addressing the in-stent restenosis indication. Johnson &
Johnson has completed patient enrollment into its trial, Gamma I. The purpose of
the Gamma I trial is to assess the use of Best Medical International's manually
advanced gamma wire. Guidant currently is evaluating its beta wire/afterloader
system in the INHIBIT Trial and Novoste has completed follow up in its START
Trial. Still in the pilot study stage in the United States, Boston Scientific,
through its Schneider AG subsidiary, is also developing a beta wire/afterloader
system that is under investigation in Europe.
Most of the radioactive source wires are used in conjunction with an
afterloader, a specialized piece of equipment that is typically computer
controlled. It is used to automatically calculate treatment times, control
movement of the source wire, and to store and shield the source wire when not in
use. This equipment is large, complex, and expensive. Source wires with
gamma-emitting radioactive tips have been used for some time in cancer therapy.
Gamma radiation is significantly more penetrating and therefore more hazardous
to use than beta radiation. For example, health care workers must leave the
catheterization lab during administration of gamma radiation to ensure their
safety by limiting their ongoing exposure to gamma radiation. In addition, gamma
radiation impacts patient tissue beyond the treatment site.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense and characterized by
extensive research and development and rapidly advancing technology. The
interventional cardiology market is characterized by rapid technological
innovation and change, and Radiance's products could be rendered obsolete as a
result of future innovations. Radiance's catheters, stents and other products
under development compete or will compete with catheters and stents marketed by
a number of manufacturers, including Guidant Corporation, Boston Scientific
Corporation, Johnson & Johnson, Medtronic, Inc., and Arterial Vascular
Engineering (a subsidiary of Medtronic, Inc.). Such companies have significantly
greater financial, management and other resources, established market positions,
and significantly larger sales and marketing organizations than does Radiance.
Radiance also faces competition from manufacturers of other catheter-based
atherectomy devices, vascular stents and pharmaceutical products intended to
treat vascular disease. In addition, Radiance believes that many of the
purchasers and potential purchasers of Radiance's current products prefer to
purchase catheter and stent products from a single source. Accordingly, many of
Radiance's competitors, because of their size and range of product offerings,
have a competitive advantage over Radiance.
We believe 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. Although we believe we
compete favorably overall with respect to most of the foregoing factors, most of
our competitors and potential competitors have substantially greater capital
resources than we do and also have greater
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resources and expertise in the areas of research and development, obtaining
regulatory approvals, manufacturing and marketing.
We believe that our competitive position is dependent upon our ability to
continue to develop innovative new catheter technologies, including the RDX
Catheter, and to obtain rapid regulatory approval. However, we cannot provide
any assurance that competitors and potential competitors will not succeed in
developing, marketing and distributing technologies and products that are more
effective than those we will develop and market or that would render our
technology and products obsolete or noncompetitive. We may be unable to compete
effectively against such competitors and other potential competitors in terms of
manufacturing, marketing and sales. We cannot assure you that our competitors
will not succeed in developing or marketing technologies and products that are
more clinically or cost effective than any that are being marketed or developed
by us, or that such competitors will not succeed in obtaining regulatory
approval for introducing or commercializing any such products before we can.
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. Healthcare Finance
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 Radiance'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 Radiance's ability to sell its
products on a profitable basis. Failure by hospitals and other users of
Radiance's products to obtain reimbursement from third-party payors, or changes
in government and private third-party payors' policies toward reimbursement for
procedures employing Radiance's products, would have a material adverse effect
on Radiance's business, financial condition and results of operations.
GOVERNMENT REGULATION
The manufacturing and marketing of Radiance's products are subject to
extensive and rigorous government regulation in the United States and in other
countries. All new products will require regulatory approval by appropriate
governmental agencies prior to commercialization and will be subject to rigorous
pre-clinical and human clinical testing and patient follow-up. Federal
regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. Radiance
believes its success also will depend upon commercial sales of improved versions
of its catheter products. Radiance will not be able to market these new products
in the United States unless and until Radiance 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 application ("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 Radiance'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
Radiance's products, it could act to withdraw approval or clearances of those
products or request Radiance present
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additional data. Any such actions would have a material adverse effect on
Radiance's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA determines
the device or the particular application for the device requires a more rigorous
review to assure safety and effectiveness, the FDA will require the manufacturer
to submit a PMA which 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. The PMA
process may require as many as 1,000 patients depending on indications with at
least one year follow-up. Radiance expects that the RDX Catheter and certain
other products under development will be subject to this PMA process over the
next two to three years, depending upon many factors including the number of
patients and the follow up period required. In addition to the FDA, the Company
expects to file an application with the Ministry of Health and Welfare in Japan.
This procedure requires completion of 60-100 patients in two to three Japanese
clinical investigation sites. The Company expects the Japanese approval process
to take approximately 18-24 months.
Because the RDX Catheter utilizes radiation sources, its manufacture,
distribution, transportation import/export, use and disposal are subject to
federal, state and/or local laws and regulations relating to the use and
handling of radioactive materials. Specifically, after PMA approval is obtained,
approval by the U.S. Nuclear Regulatory Commission ("NRC"), or an equivalent
state agency, of Radiance's radiation sources for certain medical uses will be
required to distribute the radiation sources commercially to licensed recipients
in the U.S. In addition, Radiance and/or its supplier of radiation sources must
obtain a specific license from the NRC to distribute such radiation sources
commercially as well as comply with all applicable regulations. Radiance and/or
its supplier of radiation sources also must comply with NRC and U.S. Department
of Transportation regulations on the labeling and packaging requirements for
shipment of radiation sources to hospitals or other users of the RDX Catheter.
In addition, hospitals may be required to obtain or expand their licenses to use
and handle beta radiation prior to receiving radiation sources for use in the
RDX Catheter. The Company expects to comply with comparable radiation regulatory
requirements and/or approvals in markets outside the U.S.
Radiance is 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, Radiance is inspected on a routine basis by both the FDA and the CDHS for
compliance with QSR regulations. These regulations require that Radiance
manufacture its products and maintain related documentation in a prescribed
manner with respect to manufacturing, testing and control activities. Radiance
has undergone and expects to continue to undergo regular QSR inspections in
connection with the manufacture of its products at Radiance's facilities.
Further, Radiance is required to comply with various FDA requirements for
labeling. The Medical Device Reporting laws and regulations require Radiance to
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. Radiance has received FDA
approval to market the FACT, ARC and GUARDIAN 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
Radiance in the United States for such use. As the Company licensed the Focus
technology to Guidant in June 1998, it has no plans to seek said FDA approval
for stent deployment.
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 Radiance'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 Radiance's
business, financial condition and results of operations.
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Radiance also is 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 predicted
accurately. Failure to comply with regulatory requirements could have a material
adverse effect on Radiance's business, financial condition and results of
operations.
International sales of Radiance's products are subject to the regulatory
requirements in many countries. The regulatory review process varies from
country to country and may in some cases require the submission of clinical
data. Radiance 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 which require a
PMA but are not yet approved domestically.
In order to sell its products within the European Economic Area and
Switzerland, Radiance must achieve compliance with the requirements of the
Medical Devices Directive ("MDD") and affix CE marking on its products to attest
to such compliance. To achieve compliance, Radiance's products must meet the
"Essential Requirements" of the MDD relating to safety and performance and
Radiance must successfully undergo verification of its regulatory compliance
("conformity assessment") by a Notified Body selected by Radiance. Radiance has
selected TUV Product Service of Munich, Germany as its Notified Body. The level
of scrutiny of such assessment depends on the regulatory class of the product,
and many of Radiance's coronary products are currently in Class III, the highest
risk class, and therefore subject to the most rigorous controls.
In December 1996, Radiance received ISO 9001/EN46001 certification from its
Notified Body with respect to the manufacturing of all of its products in its
Irvine facilities. Radiance's contracted manufacturing facility in The
Netherlands received such certification in 1993. This certification demonstrates
that Radiance manufactures its products in accordance with certain international
quality requirements. A manufacturer must receive ISO 9001/EN46001 certification
prior to applying for CE marking of specific products. In January 1998, Radiance
obtained the right to affix CE marking to all of its products currently sold in
all countries of the European Economic Area and Switzerland. Radiance is subject
to continued supervision by its Notified Body and will be required to report any
serious adverse incidents to the appropriate authorities. Radiance also must
comply with additional requirements of individual nations. Failure to maintain
compliance required for CE marking could have a material adverse effect upon
Radiance's business, financial condition and results of operations. There can be
no assurance Radiance will be able to achieve or maintain such compliance on all
or any of its products or that it will be able to produce its products timely
and profitably while complying with the MDD and other regulatory requirements.
PRODUCT LIABILITY
Radiance faces the risk of financial exposure to product liability claims.
Radiance'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. Radiance is currently covered under a product liability
insurance policy with coverage limits of $10.0 million per occurrence and $10.0
million per year in the aggregate. There can be no assurance that Radiance's
product liability insurance is adequate or that such insurance coverage will
remain available at acceptable costs. There can be no assurance that Radiance
will not incur significant product liability claims in the future. A successful
claim brought against Radiance in excess of its insurance coverage could have a
material adverse effect on Radiance's business, financial condition and results
of operations. Additionally, adverse product liability actions could negatively
affect the reputation and sales of Radiance's products and Radiance's ability to
obtain and maintain regulatory approval for its products, as well as
substantially divert the time and effort of management away from Radiance's
operations.
EMPLOYEES
As of December 31, 1999, Radiance had 73 employees, including 41 in
manufacturing, 20 in research, development, and regulatory and clinical affairs,
5 in sales and marketing and 7 in administration. Radiance
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believes that the success of its business will depend, in part, on its ability
to attract and retain qualified personnel. Radiance believes it has good
relations with its employees.
RESEARCH AND DEVELOPMENT
Expenditures for research and development amounted to $8,610,000 in fiscal
year 1999, $7,957,000 in fiscal year 1998, and $7,041,000 in fiscal 1997.
ITEM 2. PROPERTIES
Currently, Radiance leases facilities aggregating approximately 28,000
square feet in Irvine, California under various lease agreements, most of which
expire in May 2001. Radiance believes that its facilities are adequate to meet
its requirements through fiscal 2000.
ITEM 3. LEGAL PROCEEDINGS
On September 15, 1999, EndoSonics Corporation filed a complaint for
declaratory relief in the Superior Court in Orange County, California, relating
to the EndoSonics Agreements, see "Item 1 -- Strategic Relationships".
EndoSonics is seeking a declaratory judgement that the EndoSonics Agreements
entitle EndoSonics to place a stent on the licensed catheters, when used in a
procedure with an ultrasound transducer. The Company believes that EndoSonics is
authorized only to use the Focus technology with the EndoSonics ultrasound
transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position or operating results. However, if Endosonics prevails in
their suit, the Company may have to pay damages and/or renegotiate its license
agreement with Guidant. See Note 5.
Radiance is a party to other ordinary disputes arising in the normal course
of business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on Radiance's consolidated financial
position.
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 March 1, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Michael R. Henson..... 54 Chairman of the Board of Directors and Chief Executive
Officer
Jeffrey H. Thiel...... 44 President and Chief Operating Officer
Stephen R. Kroll...... 53 Vice President, Finance and Administration, Chief Financial
Officer and Corporate Secretary
Edward F. Smith, III.. 46 Vice President, Research and Development
Brett A. Trauthen..... 38 Vice President, Clinical Development
</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 in February 1992 as President, Chief
Executive Officer and Chairman of the Board of Directors, and currently serves
as Chief Executive Officer and Chairman of the Board of Directors. From June
1997 until March 1999, Mr. Henson served Chairman of the Board, Chief
17
<PAGE> 18
Executive Officer and President of the (former) Radiance Medical Systems, Inc.,
and as Chairman of the Board of the Company. Prior to joining the Company, Mr.
Henson served as the Chief Executive Officer of EndoSonics Corporation from 1988
to February 1995, and as Chairman of the Board from February 1993 to November
1996. Between April 1983 and February 1988, Mr. Henson served as President and
Chief Executive Officer of Trimedyne, Inc., a manufacturer of medical lasers and
catheters. Prior to joining Trimedyne in 1983, Mr. Henson held positions as Vice
President for G.D. Searle & Company, Director of Marketing for the Hospital
Products Division of Abbott Laboratories, and Marketing Manager for Bristol
Myers and Company. Mr. Henson also serves as chairman of the board of directors
of two private companies, Endologix, Inc. and Micrus Corporation.
Jeffrey H. Thiel was appointed President and Chief Operating Officer of the
Company in September 1999, served as Executive Vice President of the Company
from February 1999 to September 1999, and Vice President, Operations from
October 1996 to February 1999. Prior to joining Radiance, Mr. Thiel served as
Director of Operations of BEI Medical Systems from May 1995 to October 1996.
From July 1985 to November 1994, Mr. Thiel held various Manufacturing and
Operations Management positions with St. Jude Medical. Mr. Thiel also serves on
the board of directors of Micrus Corporation.
Stephen R. Kroll joined the Company in April 1998 as Vice President of
Finance and Administration, Chief Financial Officer and Corporate Secretary.
From May 1989 until May 1991, Mr. Kroll served as Vice President of Finance and
Corporate Secretary, and from May 1991 until March 1997 as Vice President of
Administration and Corporate Secretary, for Viking Office Products.
Edward F. Smith, III, Ph.D. joined Radiance in October 1999 as Vice
President, Research and Development. Prior to joining Radiance, Dr. Smith served
in various positions within the medical device and pharmaceutical industries.
Most recently Dr. Smith was employed at Mallinkrodt, Inc. and served as
Director, Endovascular Research and Development from 1995 to 1999, and Associate
Director, Cardiology Therapeutics Research and Development from 1992 to 1995.
Brett Trauthen joined the Company in January 1999 following its merger with
(former) Radiance Medical Systems, Inc., as Director of Research and Development
and Engineering. Since September 1999, Mr. Trauthen serves as the Company's Vice
President of Clinical Development. Mr. Trauthen served as Director of Research
and Development and Engineering for (former) Radiance Medical Systems, Inc. from
September 1997 until January 1999. From 1995 to August 1997 Mr. Trauthen held
various operations and executive staff positions with Applied Medical Resources
Corporation. From 1984 to 1995. Mr. Trauthen held various Engineering and
Research and Development positions at Baxter Healthcare Corporation, Edwards
Divisions.
18
<PAGE> 19
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 "RADX". 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 1998
First Quarter............................................... $ 6 3/8 $ 4 3/16
Second Quarter.............................................. 7 3/4 4 5/8
Third Quarter............................................... 6 1/4 2 1/2
Fourth Quarter.............................................. 5 2 1/4
FISCAL 1999
First Quarter............................................... $ 4 3/4 $ 3
Second Quarter.............................................. 4 2 1/4
Third Quarter............................................... 7 3/4 2 3/8
Fourth Quarter.............................................. 6 13/16 4 11/16
FISCAL 2000
First Quarter............................................... $12 3/4 $ 4 9/16
</TABLE>
On March 15, 2000 the closing sale price on the Nasdaq National Market was
$10 1/4 per share and there were approximately 282 record holders of Radiance
Common Stock.
SALES OF UNREGISTERED SECURITIES
None.
USE OF PROCEEDS
In the second quarter of 1996, the Company closed its initial public
offering of common stock (the "IPO"), SEC file number 333-04560, resulting in
net proceeds of $42.8 million after deducting underwriting discounts and
commissions and other expenses of the offering. The Company used approximately
$2.7 million of the net proceeds from the IPO for repayment of certain
outstanding indebtedness to EndoSonics, Inc., a holder of in excess of ten
percent of the Common Stock of the Company. From the date of the IPO until
December 31, 1999, the Company has paid a total of $4.0 million in salaries and
bonuses to fifteen present and former officers of the Company, and used $16.9
million for working capital. The Company has also used approximately $2.2
million of the net proceeds for machinery and equipment and leasehold
improvement purchases. Through the end of 1999, the Company used approximately
$3.7 million to purchase 686,000 shares of the Company's Common Stock on the
open market. In September of 1998, the Company exercised a Warrant to acquire
1,500,000 Series B Preferred Stock of Radiance Medical Systems, Inc. for $1.5
million. In January 1999, the Company paid $0.7 million to stockholders of RMS
who elected to receive cash for their RMS common stock and $0.6 million in costs
relating to the acquisition of the remaining common stock of RMS not held by the
Company. At December 31, 1999, approximately $21.3 million was held in temporary
investments, of which approximately $9.2 million was invested in U.S. Federal
and State Agency debt securities, and $12.1 million was invested in corporate
debt securities.
DIVIDEND POLICY
The Company has never paid any dividends. 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.
19
<PAGE> 20
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1996 1997(1) 1998 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Sales...................................... $ 3,462 $ 8,384 $ 9,438 $ 9,415 $ 3,856
License fee and other...................... -- 150 -- 2,760 2,855
Contract................................... 641 200 -- -- --
------- -------- -------- -------- --------
Total revenue...................... 4,103 8,734 9,438 12,175 6,711
Operating costs and expenses:
Cost of sales.............................. 2,051 4,111 6,102 6,152 2,823
Research and development................... 1,683 3,582 7,041 7,957 8,610
Marketing and sales........................ 1,526 3,358 6,691 5,371 1,989
General and administrative................. 1,331 1,548 2,347 2,937 2,468
Charge for acquired in-process research and
Development(2).......................... 488 2,133 -- 234 4,194
Minority interest.......................... -- -- -- (992) (6)
------- -------- -------- -------- --------
Total operating costs and
expenses......................... 7,079 14,732 22,181 21,659 20,078
------- -------- -------- -------- --------
Loss from operations......................... (2,976) (5,998) (12,743) (9,484) (13,367)
Other income................................. 102 1,374 2,225 1,498 2,587
------- -------- -------- -------- --------
Net loss..................................... $(2,874) $ (4,624) $(10,518) $ (7,986) $(10,780)
======= ======== ======== ======== ========
Basic and diluted net loss per share (pro
forma through June 1996)................... $ (0.71) $ (0.69) $ (1.15) $ (0.90) $ (0.98)
======= ======== ======== ======== ========
Shares used in computing basic and diluted
net loss per share (pro forma through June
1996)...................................... 4,052 6,755 9,118 8,862 10,951
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1996 1997(1) 1998(1) 1999
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 1,568 $ 17,192 $ 6,141 $ 1,437 $ 2,051
Marketable securities available-for-sale..... -- 25,733 24,773 23,375 20,004
Working capital (deficit).................... (774) 46,142 33,828 24,905 21,206
Total assets................................. 4,002 50,084 39,615 32,035 29,873
Convertible obligation....................... 750 -- -- -- --
Accumulated deficit.......................... (6,425) (11,049) (21,567) (29,553) (40,333)
Total stockholders' equity (net capital
deficiency)................................ $(1,098) $ 47,623 $ 36,127 $ 27,499 $ 25,111
</TABLE>
- ---------------
(1) Restated. See Note 1 of Notes to the 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 excess of the purchase price over
the net assets acquired for Intraluminal Devices, Inc. and (the former)
Radiance Medical Systems, Inc., and the associated acquisition expenses for
the years ended December 31, 1996 and 1998, respectively. See Notes 1 and 2
of Notes to Consolidated Financial Statements.
20
<PAGE> 21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Radiance Medical Systems, Inc. ("Radiance," or the "Company") develops,
manufactures and markets proprietary devices for the prevention of the
recurrence of atherosclerotic blockages following the interventional treatment
of atherosclerosis. Radiance currently is primarily engaged in conducting
research and development on radiation therapy, and its primary product under
development is the RDX Catheter, a balloon catheter-based delivery system
designed to deliver radioactive materials to the area of an artery that has been
treated with conventional interventional therapy such as Percutaneous
Transluminal Coronary Angioplasty ("PTCA"), atherectomy and/or stent deployment.
See "Item 1 -- Products."
The Company is the result of an acquisition effected by the merger of the
(former) Radiance Medical Systems, Inc. ("RMS") with and into CVD/RMS
Acquisition Corporation, a wholly-owned subsidiary of CardioVascular Dynamics,
Inc. (now named Radiance Medical Systems, Inc.). 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.
In 1994, the Company introduced for sale its angioplasty catheter products. Over
the next three years, the Company would continue its development and
introduction of what would be called its "Focus technology" angioplasty catheter
products and introduced its Vascular Access product line. While product sales
continued to grow into 1997, changes in angioplasty technology, and increasing
competition from much larger competitors would necessitate the development of
angioplasty devices based upon new technology. Because the Company's management
believed that radiation therapy technology would produce the next generation of
angioplasty catheters, in August of 1997, RMS was formed as a separate entity to
focus on the development of radiation therapy technology for the treatment of
cardiovascular disease and to obtain financing for such development from sources
other than the Company. In January 1999, after RMS had completed the initial
development of the RDX catheter, the Company reacquired all of the shares of RMS
that it did not own as a result of a merger and now concentrates its product
development on radiation therapy technology for angioplasty.
Radiance has not completed the development of the RDX catheter and
currently sells its existing products primarily through medical device
distributors. Radiance is a party to three agreements for the U.S. distribution
of products incorporating its Focus technology. Radiance distributes certain
products in Japan through an exclusive distribution agreement with Cathex.
Radiance also has distribution agreements with 22 companies covering 22
countries outside the United States and Japan. See "BUSINESS OF Radiance --
Strategic Relationships."
On July 15, 1996, Radiance entered into co-distribution agreements with
Medtronic, providing for the co-distribution of Radiance's FACT, CAT and ARC
balloon angioplasty catheters. Under the terms of these agreements, Medtronic
purchased a minimum number of angioplasty catheters manufactured by Radiance for
distribution worldwide for a period of up to three years. Specific products to
be distributed by Medtronic differed in individual country markets. The initial
term of the Medtronic agreements was for a period of three years from the date
of first delivery of a product. In May 1997, Medtronic advised Radiance of its
election to not make minimum purchases of product for the second year of the
agreement. In June 1997, Medtronic informed Radiance that it would not fulfill
its commitment for the first year of the agreement and that it did not believe
it was required to fulfill such commitment. This dispute adversely affected
Radiance's financial results for the second half of 1997 and first half of 1998.
In June 1998, Radiance entered into a technology license agreement with
Guidant Corporation, an international interventional cardiology products
company, granting Guidant rights to manufacture and distribute products using
Radiance's Focus technology for delivery of stents, including exclusive rights
in the United States. In exchange for those rights Radiance has received, and
will receive, certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products by Guidant using Focus technology.
In January 1999, the Company sold substantially all of the properties and
assets used exclusively in its Vascular Access product line to Escalon Medical
Corporation. The Company received an initial payment of
21
<PAGE> 22
$1.1 million for actual assets transferred, received an additional $1.0 million
upon the completion of the transfer of the assets and technology in October
1999, and also is entitled to receive royalty payments upon the sale of products
for a five-year period. During 1999, the Company recognized the minimum annual
royalty under the sale agreement of approximately $0.3 million. The Company
continued to manufacture certain vascular access products for eleven months
following the completion of the sale on a "cost plus" basis.
In January 1999, the Company acquired through a merger all of capital stock
which it did not own of the (former) Radiance Medical Systems, Inc. ("RMS").
Pursuant to the Merger, the Company paid the former stockholders of RMS $3.00
for each share of RMS preferred stock and $2.00 for each share of RMS common
stock, for a total consideration of approximately $7.0 million, excluding the
value of RMS common stock options to be provided to RMS optionholders in
exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company Common Stock, and $0.7
million in cash to certain RMS stockholders who elected cash. Options for
546,250 shares of RMS common stock accelerated and vested immediately prior to
the completion of the Merger. Of these, 1,250 were exercised, and the holders
received the same consideration for their shares of RMS Common Stock as other
holders of RMS Common Stock. The options not exercised prior to the completion
of the Merger were assumed by the Company and converted into options at the same
exercise price to purchase an aggregate of 317,776 share of the Company Common
Stock.
In addition, the former RMS stockholders and optionholders may receive
product development milestone payments of $2.00 for each share of RMS preferred
stock and $3.00 for each share of RMS common stock. One of the milestones, which
was scheduled during the second quarter of 1999 and extended into the third
quarter of 1999, was not met. As a result, the maximum total of potential
milestone payments, before adjustment for early or late achievement of the
milestones, is reduced to $1.69 for each share of preferred stock and $2.54 for
each share of common stock. The milestone payments may be increased up to 30%,
or reduced or eliminated if the milestones are reached earlier or later,
respectively, than the milestone target dates. The milestones represent
important steps in the United States Food and Drug Administration and European
approval process which the Company has determined are critical to bringing the
Company's technology to the marketplace.
The RMS merger consideration was allocated to tangible assets (aggregating
approximately $0.5 million) acquired and assumed liabilities (aggregating
approximately $0.2 million), with the remaining merger consideration being
allocated to acquired in-process research and development ("IPR&D"), developed
technology and employment contracts, according to an independent appraisal. See
Note 2.
In June of 1999, the Company granted Cosmotec Co., Ltd. of Japan
distribution rights to market its vascular radiation therapy products in Japan.
Radiance received $1.0 million as an upfront cash payment and will recognize the
revenue ratably over the seven-year term of the agreement. The Company
recognized $0.1 million of the aforementioned revenue for the year ended
December 31, 1999. Radiance will also receive $1.0 million from Cosmotec for a
debenture issuable in June 2000, which will be convertible into Radiance common
stock over the subsequent three-year period at an initial conversion price of $7
per share. As part of the transaction with Cosmotec, it was agreed that a joint
venture, between the Company and an affiliate of Cosmotec, would be formed to
distribute the Company's RDX catheter products in Japan. In August 1999, the
Company purchased for cash of $0.2 million a 51% interest in the joint venture,
named Radiatec.
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to manufacture its radiation therapy
catheter in Europe. According to the agreement, during 1999 and 2000, Radiance
will pay certain facility set-up fees, totaling approximately $0.8 million, and
all material and third party costs associated with production validation.
Radiance will prepare the manufacturing equipment used to perform the final
assembly of the RDX catheter, estimated to cost approximately $0.6 million, and
Bebig will purchase the equipment from Radiance for $0.5 million. Radiance will
also pay Bebig an agreed amount for each unit produced. For a nominal charge,
the Company can renew the agreement for three successive, two-year terms. In
conjunction with the contract manufacturing agreement, the Company entered into
a three year sub-license agreement for certain radiation technology that it
believed may be useful in the development of its radiation therapy products.
There is a minimum annual license fee of $0.2 million,
22
<PAGE> 23
subject to offset by certain amounts paid under the aforementioned manufacturing
agreement, beginning in July 2000 and royalty fees for any products sold
worldwide that incorporate the licensed technology. The sub-license is subject
to renewal, without cost, until the underlying patents' expiration dates.
As a result of the 1999 closing of Clinitec GmbH, the Company's German
distribution subsidiary, the Company reconsidered the initial accounting for the
acquisition of this subsidiary in 1997. In recording the acquisition, the
Company accounted for the forgiveness of its account receivable from Clinitec
for product sales to be a part of its total purchase price, and allocated such
amount to goodwill resulting from the business combination. In the accompanying
consolidated financial statements, the Company has restated 1997 sales to
eliminate $1.9 million in sales to Clinitec in that year, since no payment had
been received for these sales, and has written off as a bad debt expense in 1997
the remaining $0.1 million Clinitec account receivable balance related to 1996
sales. Net of related adjustments to cost of sales and amortization expense, the
Company has increased reported net loss for 1997 by $1.7 million and decreased
goodwill by a corresponding amount. The remaining $0.2 million balance of the
amount originally assigned to goodwill has been treated as an identifiable
intangible asset and was amortized over the period ended December 31, 1998. This
restatement has no effect on cash flows from operations or other sources or uses
of cash.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1999
Sales Revenue. Sales revenue in 1999 decreased 59% to $3.9 million compared
to $9.4 million for the same period of 1998. During 1998, the Company reduced
its domestic direct sales force and , in June of that year, licensed its focus
technology. In January 1999, it sold its Vascular Access product line and
related assets and acquired RMS as the Company sought to maximize the value of
existing technology, while acquiring a technology which management believes will
have greater potential for future product sales. As a result of the
aforementioned license and sale, and increased competition for angioplasty
catheter products, sales of Focus technology decreased $3.3 million, from $6.7
million in 1998 to $3.4 million in 1999, and Vascular Access products decreased
$2.2 million, from $2.7 million in 1998 to $0.5 million in 1999.
The Company expects that sales of its existing products will continue to
decline in 2000, compared with 1999 sales, as its remaining products age, and
the licensee's products gain wider regulatory approval and market acceptance.
Additionally, there will be no sales of Vascular Access products in 2000 (1999
sales of Vascular Access Products totaled approximately $0.5 million, or 13% of
total revenues).
If RDX technology development concludes successfully and we receive
regulatory approval for sale in Europe in late 2000, the ability of the Company
to generate product sales in 2000 and in the future will be dependent upon many
factors, including but not limited to market acceptance, medical reimbursement,
competitive products. See "Risk Factors."
License Fee and Other Revenue. License fee and other revenue increased from
$2.8 million in 1998 to $2.9 million in 1999. In 1998, the Company signed a
technology license agreement with Guidant Corporation resulting in $2.8 million
and $2.3 million in license fees in 1998 and 1999, respectively. Additionally,
the Company recognized $0.3 million and $0.3 million in minimum royalties under
the sale agreement for the Vascular Access product line and related assets and
the technology license agreement with Guidant, respectively, in 1999.
Because there are no more milestone payments due under the aforementioned
Guidant license agreement or Vascular Access sale agreement, management
anticipates significantly lower license revenue in 2000, compared with 1999.
However, some reduction in milestone payments should be offset by higher royalty
income in 2000, compared with 1999.
Cost of Sales. The cost of sales decreased to $2.8 million in 1999 compared
with $6.2 million in 1998. The cost of sales for 1999 decreased to 42% compared
to 51% of revenues for 1998. This decrease was primarily attributable to $2.9
million from licensing fees received in 1999 that had no associated cost of
sales and relatively lower product sales compared with 1998.
23
<PAGE> 24
The Company agreed to produce Vascular Access products for six months
following the sale of the Vascular Access product line and related assets in
January 1999 on a "cost plus" reimbursement basis for the acquiring company and
extended that commitment until December 1999. Thus, the margin that the Company
earned on sales of such products was substantially lower in 1999 compared with
1998.
Management anticipates lower margins on existing products for 2000,
compared with 1999, due to increasing competition and lower volume production.
Charge for Acquired In-Process Research and Development. Due to the
acquisition of a controlling interest in RMS in September 1998, and the
acquisition of the remaining shares of RMS not owned by the Company in January
1999, the Company recognized a charge of $0.2 million and $4.2 million for
acquired in-process research and development in 1998 and 1999, respectively. See
Note 1 -- Intangible Assets.
Research and Development. Research and development expenses, which include
clinical expenses, increased by 8% to $8.6 million for 1999 from $8.0 million in
1998. The primary reason for this increase was additional spending on
development of and clinical trials for the Company's new Radiation catheter. The
Company believes that the research, development and clinical expenses could be
substantially higher in 2000 compared with 1999, primarily due to higher costs
for the clinical expenses as the European and U.S. clinicals for the RDX
catheter began in late third quarter 1999 and first quarter 2000, respectively.
Marketing and Sales. Marketing and sales expenses declined 63% to $2.0
million in 1999, from $5.4 million in 1998. This decrease primarily reflects
reductions in the Company's domestic and international sales force and related
expenses.
General and Administrative. General and administrative expenses decreased
by 16% to $2.5 million for 1999 from $2.9 million for 1998. The decrease was due
primarily to lower bad debt expense in 1999, compared with 1998.
Other Income. Interest income declined to $1.2 million in 1999 compared
with $1.6 million in 1998. The decrease was due primarily to a reduction of $2.8
million in cash, cash equivalents and marketable securities during 1999, due to
the use of funds for operations, the purchase of treasury stock and capital
expenditures. Gain (loss) on sale of assets increased to $1.0 million in 1999
from $0.0 million in 1998 due mainly to the sale of the assets of the Vascular
Access product line and related assets in January 1999. Other income (expense)
increased to $0.4 million income in 1999 due primarily to other income from the
sale of an option to purchase an investment held by the Company. See Note
3 -- Deferred Revenue.
YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1998
Sales Revenue. Sales revenue in 1998 and 1997 was $9.4 million in each
year.
License Fee and Other Revenue. In 1998, the Company signed a technology
license agreement with Guidant Corporation resulting in $2.8 million in license
fees. The Company did not have any license fees in 1997.
Cost of Sales. The cost of sales increased to $6.2 million in 1998,
compared with $6.1 million in 1997. The cost of sales for 1998 decreased to 51%
of revenues compared to 65% of revenues for 1997. This decrease was primarily
attributable to the receipt of the $2.8 million Guidant licensing fees received
in 1998 that had no associated cost of sales.
Charge for Acquired In-Process Research and Development. Due to the
acquisition of a controlling interest in RMS, the Company recognized a charge of
$0.2 million for acquired in-process research and development in 1998. See Note
1 -- Intangible Assets.
Research and Development. Research and development expenses, which include
clinical expenses, increased by 13% to $8.0 million for 1998, from $7.0 million
in 1997. The primary reason for this increase was additional spending on
development of the Company's new Radiation catheter and Self-Expanding Arterial
Lining ("SEAL") technology and increased spending on clinical trials for these
products.
24
<PAGE> 25
Marketing and Sales. Marketing and sales expenses declined 20% to $5.4
million in 1998, from $6.7 million in 1997. This decrease primarily reflects
reductions in the Company's domestic sales force and related expenses.
General and Administrative. General and administrative expenses increased
by 25% to $2.9 million for 1998, from $2.3 million for 1997. The increase was
due primarily to additions to the allowance for uncollectible accounts
receivable and the salary expense of an additional executive officer.
Other Income. Interest income declined to $1.5 million in 1998 compared
with $2.2 million in 1997. The decrease was due to a reduction of $6.1 million
in cash, cash equivalents and marketable securities during 1998, due to the use
of funds for operations, the purchase of treasury stock and capital
expenditures.
Radiance has experienced an operating loss for each of the last three years
and expects to continue to incur operating losses through at least 2001.
Radiance's results of operations have varied significantly from quarter to
quarter. Quarterly operating results depend upon several factors, including the
timing and amount of expenses associated with expanding the Company's
operations, the conduct of clinical trials and the timing of regulatory
approvals, new product introductions both in the United States and
internationally, the mix between pilot production of new products and full-scale
manufacturing of existing products, the mix between domestic and export sales,
variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent on orders received within that quarter. In addition,
the Company cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. The Company's expenses are relatively fixed and
difficult to adjust in response to fluctuation revenues. As a result of these
and other factors, the Company expects to continue to experience significant
fluctuations in quarterly operating results, and there can be no assurance that
the Company will be able to achieve or maintain profitability in the future.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily from the
sale of its equity securities, advances from EndoSonics, licensing its
technologies and through international product distribution agreements. Prior to
the Company's initial public offering, the Company had raised an aggregate of
approximately $11.4 million from the private sales of preferred and common stock
and $2.7 million in working capital from EndoSonics, which was repaid to
EndoSonics during the third quarter of 1996. In the second 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, 1999, 1998
and 1997, the Company's net cash used in operating activities was $6.6 million,
$5.0 million and $9.8 million, respectively. The increase in 1999 was primarily
the result of a decrease in net working capital. The decrease in 1998 was
primarily the result of a lower net loss and a decrease in net working capital.
At December 31, 1999, Radiance had cash, cash equivalents and marketable
securities available for sale of $22.1 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
June 30, 2001. Radiance'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
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<PAGE> 26
may require the Company to grant rights to certain technologies or products that
the Company would not otherwise grant.
RISK FACTORS
Operating Losses, Anticipated Future Losses and Future Capital
Requirements. From our formation in 1992 to the date of this filing, we have had
substantial annual operating losses and expect to have them at least through
2001, if not longer, due to our continued research and development activities,
and expenditures related to clinical testing and product development. We had an
accumulated deficit of approximately $40.3 million as of December 31, 1999.
Our activities are highly capital intensive. Although we believe that our
present capital and anticipated revenues from operations will be sufficient to
meet our presently planned capital needs at least through the second quarter of
2001, there can be no assurance that we will not require additional capital
during that time or thereafter. Our cash requirements in the future may be
significantly different from our current estimates and depend on many factors,
including:
- Research and development programs;
- Scope and results of clinical trials;
- Time and costs involved in obtaining regulatory approvals;
- Costs involved in obtaining and enforcing patents or any litigation by
third parties regarding intellectual property;
- Status of competitive products;
- Establishment and scale-up of manufacturing capacity;
- Establishment of sales and marketing capabilities; and
- Establishment of collaborative relationships with other parties and costs
related to the acquisition of new technologies and product development.
We may require additional funds to finance these activities and for working
capital requirements, and may seek such funds through additional rounds of
financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. In addition, we may be
required to undertake significant capital expenditures to achieve and maintain
any technological and competitive position in our industry. There can be no
assurance that funds will be raised on favorable terms, if at all. If adequate
funds are not available, we may be required to delay, scale back or eliminate
one or more of our development programs or obtain funds through arrangements
with collaborative partners or others that may require us to relinquish rights
to certain technologies, product candidates or products that we would not
otherwise relinquish. If we are successful in raising additional funds, we may
issue additional equity securities that may dilute our earnings and net tangible
book value per share.
Dependence on New and Unproven Radiation Technology. The RDX Catheter is
designed to reduce the frequency of restenosis following the interventional
treatment of atherosclerosis by locally applying beta radiation to the diseased
blood vessel. This and other radiation technologies and products that we intend
to develop are in the early stages of development and require significant
research, development and testing. Our development of these products is subject
to the risks of failure commonly experienced in the development of new products
based on innovative or novel technologies. While early clinical results by our
competitors indicate that radiation will reduce local restenosis, the limited
clinical trials of the technology show positive and lasting clinical results.
The possibility also exists that any or all of these proposed technologies and
products will be found to be ineffective or unsafe, will fail to meet applicable
regulatory standards or will fail to obtain required regulatory approvals. In
addition, even if radiation technology and products are developed successfully
and are effective, they may be uneconomical to market, or other companies may
hold the proprietary rights which could preclude us from marketing such
technologies and products.
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<PAGE> 27
Due to the relatively short half-life (i.e., shelf life) of the Company's
current RDX catheter design, unlike its existing products, it is critical to
ship the products as close to the date of use as possible. Moreover,
coordination between the Company, a contract manufacturer, the distributor and
the end user is necessary in order to reduce waste and returned products. To
help reduce the shipping time for the product and improve the Company's response
time, the Company has contracted with a third party manufacturer, Bebig, in
Europe to perform the final assembly and radioactive source manufacturing of the
devices for international use and anticipates the use of a similar facility in
the United States. If the Company fails to establish the aforementioned shipping
capability or adequate manufacturing sources, it could have a material adverse
effect on Radiance's business, financial condition and results of operations.
To achieve profitable operations, we must develop and obtain regulatory
approval for products based on radiation technology, and introduce and market
these products successfully. Significant preclinical and clinical development
work for the products based on the Radiance technologies remains to be
completed. We have not generated, nor can we be certain that we will generate in
the near future, any operating revenues based on new products. We cannot assure
you that we will develop, obtain regulatory approval for or introduce and market
these products successfully, and any failure on our part could have a material
adverse effect on our business and results of operations.
Dependence Upon New Products and Technology; Rapid Technological Change;
Risk of Obsolescence. We are in the rapidly changing, competitive and heavily
regulated medical device industry, which makes it difficult for us to predict
our risks and expenses with any amount of certainty. We cannot say with any
certainty that our research and development activities will enable us to produce
any products able to withstand competition. Our development of each product is
subject to the risks of failure commonly experienced in the development of
products based upon innovative technologies and the expense and difficulty of
obtaining approvals from regulatory agencies. All of our potential products
currently under development will require significant additional funding and
development and pre-clinical and clinical testing before we are able to submit
them to any of the regulatory agencies for approval for commercial use. We
cannot assure you that we will be able to license any technologies or proposed
products or to complete successfully any of our research and development
activities. Even if we do complete them, there is no assurance that we will be
able to market successfully any of the products, or that we will be able to
obtain the necessary regulatory approval, or that customers will like our
products. We also face the risk that any or all of our products will not work as
intended or that they will be toxic, or that, even if they do work and are safe,
that our products will be difficult to manufacture or market on a large scale.
We also face the risk that the proprietary rights of other persons or entities
will prevent us from marketing any of our products or that other persons or
entities might market their products as well as we market our products or even
better.
Even if we overcome all of the above obstacles successfully, our products
are subject to rapid technological change and obsolescence. In addition, our
competitors may introduce new products or new technology that could render our
products obsolete or unmarketable. We therefore may be required to make
significant capital expenditures to maintain any technological and competitive
position in our industry. Significant preclinical and clinical development work
for the products based on the Radiance technologies remains to be completed. We
have not generated, nor do we expect to generate in the near future, any
operating revenues based on our new radiation products. We cannot assure you
that we will develop, obtain regulatory approval for or introduce and market
these products successfully, and any failure on our part could have a material
adverse effect on our business and results of operations.
Limited Sales of Products to Date; Uncertainty of Market Acceptance. Our
catheters and stents are used in conjunction with angioplasty and other
intravascular procedures such as vascular stenting and solution delivery.
Although we have received regulatory clearance for a total of 97 product models,
only certain of these product models have been marketed, and then only in
limited quantities, or in certain markets, or in certain countries. Although
interventional catheters are used widely by physicians, because our catheter
designs are relatively new, our product's commercial success will depend upon
their acceptance by the medical community as useful, cost-effective components
of interventional vascular procedures and localized solution delivery. Continued
good relations with certain prominent doctors and researchers in the medical
community are essential for us to promote the uses and acceptance of our
approved products.
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<PAGE> 28
No products utilizing the Radiance radiotherapy technology are currently
commercially available. We cannot predict the clinical acceptance by physicians
of the Radiance technology -- integrating beta radiation with traditional
minimally invasive techniques -- as compared to more conventional treatment
modalities. We also cannot predict how a short shelf life for the products will
affect clinical acceptance by physicians. Other companies may have superior
resources to market similar products or technologies or have superior
technologies and products to market.
Significant Competition. We believe 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. Although we
believe we compete favorably with respect to the foregoing factors, we also
believe that our competitive position depends upon our ability to continue to
develop innovative new catheter technologies, such as the RDX catheter, to
obtain rapid regulatory approval and to manufacture and distribute such products
efficiently.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. There is rapid technological innovation and change in the
interventional cardiology device market and our products could be rendered
obsolete as a result of future innovations. The catheters, stents and other
products we are developing or have developed compete or will compete with
catheters and stents marketed by a number of manufacturers, including Guidant
Corporation, Boston Scientific Corporation, Johnson & Johnson, and Medtronic,
Inc.. Such companies have significantly greater financial, management and other
resources, established market positions, and significantly larger sales and
marketing organizations than we do. We also face competition from manufacturers
of other catheter-based atherectomy devices, vascular stents and pharmaceutical
products intended to treat vascular disease. In addition, we believe that many
of the purchasers and potential purchasers of our competitors' products prefer
to purchase catheter and stent products from a single source. Accordingly, many
of our competitors, because of their size and range of product offerings, have a
competitive advantage over Radiance. It is also possible that our competitors
may succeed in developing products that are safer or more effective than those
that we are developing and may obtain FDA approvals for their products faster
than we can.
Several companies are developing devices to improve the outcome of coronary
revascularization procedures, such as PTCA, including several companies that
have various radiation therapy products under investigation to reduce the
frequency of restenosis. The radiation therapy devices being developed by our
competitors include intravessel radiation delivered through a variety of means
and a variety of radiation sources, including gamma, beta and X-ray. We are not
certain that our research and development activities into the Radiance
technology will enable us to produce any products able to withstand competition.
There are more than ten competing development programs in the area of vascular
radiotherapy and our major competitors include the Novoste Corporation, Johnson
& Johnson, Guidant Corporation and Boston Scientific Corporation. Each of these
competitors have significantly greater financial, marketing, personnel and other
resources compared to us and there is no assurance that we can develop the
products able to compete with these larger competitors.
Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement. Our success will depend, in part, on our ability to get patent
protection for our products and processes in the United States and elsewhere. We
have filed and intend to continue to file patent applications as we need them.
We cannot say with any certainty, however, that any additional patents will
issue from any of these applications or, if patents do issue, that the claims
allowed will be sufficiently broad to protect our technology or that the issued
patents will provide competitive advantages for our products. If we are unable
to obtain sufficient protection of our proprietary rights in our products or
processes prior to or after obtaining regulatory clearances, our competitors may
be able to obtain regulatory clearance and market competing products by
demonstrating the equivalency of their products to our products. If they are
successful at demonstrating the equivalency between the products, our
competitors would not have to conduct the same lengthy clinical tests that we
have conducted.
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The interventional cardiovascular and peripheral vascular device market,
and more specifically, the market for balloon angioplasty catheters and coronary
stents (including those products we offer) has been subject to substantial
litigation regarding patent and other intellectual property rights. There can be
no assurance that our products do not infringe on such patents or rights, and we
cannot say with any certainty that any patents issued to us or licensed by us
can withstand challenges made by others or that we will be able to protect our
rights. We are aware of patent applications and issued patents belonging to our
competitors, and we are uncertain whether any of these, or any patent
applications which we do not know about, will require us to alter or cease our
potential products or processes. We cannot say with any certainty that we will
be able to obtain any licenses to technology that we will require or, if
obtainable, that the cost will be reasonable. Our failure to obtain any
necessary licenses to any technology could hurt our business substantially if we
could not redesign our products or processes to avoid infringement. Expensive
and drawn-out litigation also may be necessary for us to assert any of our
rights or to determine the scope and validity of rights claimed by other
parties. With no certainty as to the outcome, litigation could be too expensive
for us to pursue. Our failure to pursue litigation could result in the loss of
our rights that could hurt our business substantially. In addition, the laws of
certain foreign countries do not protect the Company's intellectual property
rights to the same extent that the laws of the United States, if at all.
We also own trade secrets and confidential information that we try to
protect by entering into confidentiality agreements with other parties. We
cannot be certain that any of the confidentiality agreements will be honored,
or, if breached, that we would have enough remedies to protect our confidential
information. Further, our competitors may independently learn our trade secrets
or develop similar or superior technologies. To the extent that our consultants,
key employees or others apply technological information independently developed
by them or by others to our projects, disputes may arise regarding the
proprietary rights to such information and there is no guarantee that such
disputes will be resolved in our favor.
Limited Manufacturing Experience and Reliance on Contract
Manufacturers. The Company's manufacturing experience is limited; we began
manufacturing certain products at our facilities in July 1995, introducing a
number of new products in 1996 and 1997. As the technology is changing at a
rapid pace, our expertise in manufacturing existing products does not provide
assurance that we will be able to manufacture products based on new technology.
We must manufacture our products in compliance with a variety of licensing and
other regulatory requirements, including the ISO 9001, the FDA's QSR
requirements, the U.S. Nuclear Regulatory Commission ("NRC") requirements, and
the requirements of the California Department of Health Services ("CDHS") in
order to succeed. In addition, building and operating production facilities that
can handle the radiation sources required for the manufacture of the RDX
Catheter will require substantial additional funds and other resources. We also
need to manage the simultaneous manufacture of different products efficiently
and to integrate the manufacture of new products with existing product lines.
During this process, we may 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.
In addition, we purchase many standard and custom built components from
independent suppliers and we subcontract certain manufacturing processes to
independent vendors. Most of these components and processes are available from
more than one vendor; however, we may not be able to enter into any arrangements
with outside manufacturers on terms favorable to us, if at all. Moreover,
certain manufacturing processes, such as final assembly and radioactive source
manufacturing of our RDX catheters, are currently performed by single vendors.
An interruption of performance by any of these vendors could cripple our ability
to manufacture our products until a new source of supply was qualified.
No Assurance of FDA Approval; Government Regulation. The FDA and other
similar agencies in foreign countries have substantial requirements for
therapeutic and diagnostic pharmaceutical and biological products. Such
requirements involve lengthy and detailed laboratory and clinical testing
procedures, sampling activities and other costly and time-consuming procedures.
It often takes companies several years to satisfy these requirements, depending
on the complexity and novelty of the product. The review process also is
extensive, which may delay the approval process even more. These regulatory
requirements could substantially hurt our ability to clinically test and
manufacture our potential products. Government regulation also could
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<PAGE> 30
delay our marketing of new products for a considerable period of time, impose
costly procedures upon our activities and give our competitors an advantage.
Moreover, the FDA and other regulatory agencies may not grant us approval for
any of our products on a timely basis, if at all. Any delay in obtaining, or
failure to obtain, such approvals could substantially hurt our marketing of any
proposed products and our ability to earn product revenue. Further, regulation
is subject to change and any additional regulation could limit or restrict our
ability to use any of our technologies, which could have a material adverse
effect on our business and results of operations.
Because the RDX Catheter uses radiation sources, its manufacture,
distribution, transportation, import/export, use and disposal is subject to
federal, state and/or local laws and regulations relating to the use and
handling of radioactive materials. We must obtain a license from the NRC to
commercially distribute such radiation sources and comply with all applicable
regulations, as does our supplier of radiation sources. We and our suppliers of
radiation sources must comply with NRC and U.S. Department of Transportation
regulations on the labeling and packaging requirements for shipment of radiation
sources to hospitals or to the other users of the RDX Catheter. In addition,
hospitals may be required to obtain or expand their licenses to use and handle
beta radiation prior to receiving radiation sources used in the RDX Catheter.
Comparable radiation regulatory requirements and/or approvals are anticipated in
markets outside the U.S.
Finally, we are subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. We may be required to incur significant costs
to comply with such laws and regulations now or in the future. In the future, we
could also be subject to other federal, state or local regulations that could
affect our research and development programs. We are unable to predict whether
any agency will adopt any rule that could substantially hurt our business and
our results of operations.
Uncertainty Related to Health Care Reimbursement and Reform
Measures. Health care providers, such as hospitals and physicians that purchase
or lease medical devices in the United States, generally rely on third-party
payors, principally Medicare, Medicaid and private health insurance plans,
including health maintenance organizations, to reimburse all or part of the cost
of the treatment for which the medical device is being used. Third party payors
increasingly have challenged the cost of medical products and services, which
have and could continue to have a significant effect on the ratification of such
products and services by many health care providers. Several proposals have been
made by federal and state government officials that may lead to health care
reforms, including a government directed national healthcare system and health
care cost-containment measures. The effect of changes in the healthcare system
or method of reimbursement for any medical device that we may market in the
United States cannot be determined.
Moreover, our success in developing products based on novel or innovative
technology, such as the RDX Catheter, may depend, in part, on whether our
customers will be reimbursed by government health administrative authorities,
private health insurers and other organizations. There is significant
uncertainty if costs associated with newly approved health care products will be
reimbursed. There is no assurance that sufficient reimbursement will be
available for us to establish and maintain price levels sufficient to realize an
appropriate return on developing our new products. Government and other third
party payors are attempting to contain health care costs more every day by
limiting both coverage and the level of reimbursement of new therapeutic and
diagnostic products approved for marketing by the FDA and by refusing, in some
cases, to provide any coverage of uses of approved products for disease
indications for which the FDA has not granted market approval. If adequate
coverage and reimbursement levels are not provided by government and third party
payors for use of our new products, it will be very difficult for us to market
our products to doctors and hospitals and will have a material adverse effect on
our business and results of operations.
Lastly, we cannot predict what additional legislation or regulations, if
any, may be enacted or adopted in the future relating to our business or the
healthcare industry, including third party coverage and reimbursement, or what
effect any such legislation or regulations may have on us.
Fluctuations in Quarterly Operating Results. We have experienced operating
losses for each of the last six years. Considering the anticipated operating
losses of Radiance, we expect to continue to incur consolidated operating losses
through at least 2001, and there can be no assurance that we will ever be able
to
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achieve or sustain profitability in the future. Our results of operations have
varied significantly from quarter to quarter. Quarterly operating results will
depend upon several factors, including timing and amount of expenses associated
with expanding our 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 payor's
reimbursement policies and healthcare reform. We do not operate with a
significant backlog of customer orders, and therefore revenues in any one
quarter are mainly dependent on orders received within that quarter. In
addition, we cannot predict ordering rates by distributors, some of whom place
infrequent stocking orders. Our expenses are relatively fixed and difficult to
adjust in response to fluctuating revenues. As a result of these and other
factors, we expect to continue to experience significant fluctuations in
quarterly operating results and we may not be able to achieve or maintain
profitability in the future.
Limited Marketing and Sales Resources; Dependence Upon Strategic
Partners. We depend on medical device distributors and certain strategic
relationships, some of which are with our competitors, to distribute our
products. Recently, 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 healthcare providers. This
consolidation has made it increasingly difficult for smaller suppliers, like us,
to distribute products effectively without a relationship with one or more of
the major suppliers. Through a licensing agreement, Guidant Corporation
currently markets certain products based on our patented Focus technology in the
U.S. and certain foreign markets. Revenue generated from these distributor
relationships will directly depend upon their efforts to market our products.
Product Liability and Insurance. Clinical testing, manufacturing and
marketing of our products may expose us to product liability claims. Although we
never have been subject to a product liability claim, we cannot assure you that
there will not be any claims brought against us in the future. Even then, the
coverage limits of our insurance policies may not be adequate and one or more
successful claims brought against us may have a material adverse effect upon our
business, financial condition and results of operations. Additionally, adverse
product liability actions could negatively affect the reputation and sales of
our products and our ability to obtain and maintain regulatory approval for our
products.
Dependence Upon International Sales. We derive significant revenue from
international sales, and therefore a significant portion of our revenues will
continue to be subject to the risks associated with international sales. These
risks include 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 our ability to deliver products
on a competitive and timely basis. In foreign countries, our products are
subject to governmental review and certification. The regulation of medical
devices in foreign countries, particularly in the European Union, continues to
expand and we cannot be certain that new laws or regulations will not have an
adverse effect on our business.
Limited Public Market; Volatility of Stock Price. Our Common Stock has been
traded on the Nasdaq National Market since June 1996 and the price of our Common
Stock has fluctuated significantly. We are in the medical device industry and
the market price of securities of small life sciences companies in general has
been very unpredictable. Announcements by us or our competitors concerning
technological innovations, new products, proposed governmental regulations or
actions, developments or disputes relating to patents or proprietary rights,
public concern over the safety of therapeutic products and other factors that
affect the market generally could significantly impact our business and the
market price of our securities.
Effect of Certain Charter Provisions. Certain provisions of our Amended &
Restated Certificate of Incorporation could make it more difficult for a third
party to acquire control of our business, even if such change in control would
be beneficial to our stockholders. Our Amended & Restated Certificate of
Incorporation allows our Board of Directors to issue up to 7,560,000 shares of
preferred stock without stockholder approval. Any such issuance could make it
more difficult for a third party to acquire our business and may adversely
affect the rights of our stockholders. In addition, our Board of Directors is
divided into
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three classes for staggered terms of three years. Although this measure is
designed to protect stockholder interests in the event of a hostile takeover
attempt against the Company, this provision can have the effect of delaying,
deterring or preventing a change in control of the Company, adversely effecting
the market price of our Common Stock.
Dividends. Since our formation in 1992, we have not paid cash dividends on
our Common Stock, nor do we anticipate paying any dividends on our Common Stock
in the future.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company does not believe that it has material exposure to interest
rate, foreign currency exchange rate or other relevant market risks.
Interest Rate Risk. The Company's exposure to market risk for changes in
interest rates relates primarily to the Company's investment profile. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its investments with high credit quality issuers
and, by policy, limits the amount of credit exposure to any one issuer. The
Company is adverse to principal loss and tries to ensure the safety and
preservation of its invested funds by limiting default risk, market risk, and
reinvestment risk. The Company attempts to mitigate default risk by investing in
only the safest and highest credit quality securities and by constantly
positioning its portfolio to respond appropriately to a significant reduction in
a credit rating of any investment issuer or guarantor. At December 31, 1999, the
portfolio includes only high grade corporate bonds and commercial paper and
government bonds all with remaining maturities of less than two years.
The table below provides information about our available-for-sale
investment portfolio. For investment securities, the table presents principal
cash flows and related weighted average fixed interest rates by expected
maturity dates.
The principal amounts by expected maturity at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>
FAIR VALUE
2000 2001 TOTAL 1999
------ ----- ------ ----------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C>
Cash and cash equivalents...................... 1,292 -- 1,292 1,292
Weighted average rate.......................... 3.09% 3.09%
Investments.................................... 17,150 3,000 20,150 20,003
Weighted average rate.......................... 5.51% 5.80% 5.56%
Total portfolio................................ 18,442 3,000 21,442 21,295
Weighted average rate.......................... 5.34% 5.80% 5.41%
</TABLE>
Foreign Currency Risk. The Company transacts business in various foreign
currencies, primarily in certain European countries. The Company does not have
hedging or similar foreign currency contracts. Although international revenues
approximated 48% of the Company's total revenues for the year ended December 31,
1999, only approximately 12% of the revenues are denominated in foreign
currencies. Significant currency fluctuations could adversely impact foreign
revenues, however the Company does not foresee or expect any significant changes
in foreign currency exposure in the near future.
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ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-1
Report of Ernst & Young LLP, Independent Auditors........... F-2
Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss)............................ F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</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
On August 10, 1999, Ernst and Young LLP was dismissed as the auditors for
Radiance. There were no disagreements with them on any matter of accounting
principles or practices, financial statement disclosure, auditing scope or
procedure or any reportable event. Ernst & Young LLP's reports on the Company's
financial statements for the fiscal years ended December 31, 1998 and December
31, 1997 (i) did not contain any adverse opinion or disclaimer of opinion, and
(ii) were not qualified as to uncertainty, audit scope or accounting principles.
On August 25, 1999, PricewaterhouseCoopers LLP was engaged at the Company's
independent accountants.
The foregoing was approved by the Audit Committee of the Board of Directors
of the Company.
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 stockholders for the Annual Meeting
to be held on or about June 6, 2000. 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 stockholders for the Annual Meeting
to be held on or about June 6, 2000.
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 stockholders for the Annual Meeting
to be held on or about June 6, 2000.
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 stockholders for the Annual Meeting
to be held on or about June 6, 2000.
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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:
.FINANCIAL STATEMENTS.
Report of PricewaterhouseCoopers LLP, Independent Accountants
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets -- December 31, 1998 and 1999
Consolidated Statements of Operations
for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Stockholders' Equity and Comprehensive Income
(Loss)
for the years ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows
for the years ended December 31, 1997, 1998 and 1999
Notes to Consolidated Financial Statements
for the years ended December 31, 1997, 1998 and 1999
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.
(c) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
2.4(12) Agreement and Plan of Merger dated November 3, 1998 by and
between CardioVascular Dynamics, Inc. and Radiance Medical
Systems, Inc.
2.5(13) Assets Sale and Purchase Agreement dated January 21, 1999 by
and between the Company and Escalon Medical Corp.
3.1(10) Amended and Restated Certificate of Incorporation, and
Certificates of Amendment thereof dated January 14, 1999 and
November 12, 1998.
3.2(11) Amended and Restated Bylaws of the Company
4.1(1) Specimen Certificate of Common Stock
4.2++ Form of $1,000,000 5% Convertible Debenture to be issued by
the Company to Cosmotec Co., Ltd. on June 15, 2000.
10.1(3) Form of Indemnification Agreement 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
10.7(3)* Stock Purchase and Technology License Agreement dated
September 10, 1994, as amended on September 29, 1995, by and
among EndoSonics, the Company and SCIMED Life Systems, Inc.
("SCIMED")
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.15(3) Industrial Lease dated February 23, 1995 by and between the
Irvine Company and the Company
10.20(6) License Agreement dated May 16, 1997, by and between the
Company and EndoSonics
10.21(6) Registration Rights Agreement dated as of January 26, 1997
by and between the Company and EndoSonics
10.22(7)** Supplemental Stock Option Plan
10.23(8) Stock Repurchase Agreement dated as of February 10, 1998 by
and between EndoSonics and the Company
10.24(9)* License Agreement by and between the Company and Guidant
Corporation dated June 19, 1998
10.25(14)** 1996 Stock Option/Stock Issuance Plan (as Amended and
Restated as of April 8, 1997, March 12, 1998 and November 3,
1998)
10.26(15)** 1997 Stock Option Plan (As Amended as of June 15, 1998)
assumed by Registrant pursuant to its acquisition of
Radiance Medical Systems, Inc. on January 14, 1999
10.27**+ Amendment to Employment Agreement dated as of February 1,
1999 between the Company and Michael R. Henson and form of
Employment Agreement entered into on January 14, 1999
between the Company and Michael R. Henson
10.27.1** Second Amendment to Employment Agreement dated December 10,
1999 between the Company and Michael R. Henson and form of
Employment Agreement entered into on January 14, 1999
between the Company and Michael R. Henson
10.28**+ Employment Agreement entered into as of February 1, 1999 by
and between the Company and Stephen R. Kroll
10.28.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Stephen R. Kroll
10.29**+ Form of Employment Agreement by and between the Company and
Jeffrey Thiel
10.29.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Jeffrey Thiel
10.31++ Joint Venture Agreement dated June 15, 1999 between the
Company and Globe Co., Ltd. The following exhibits to the
Joint Venture Agreement have not been filed: Supply
Agreement dated June 15, 1999 between the Company and
Radiatec, Inc.; and, International Distributor Agreement
dated June 15, 1999 between Radiatec, Inc., Globe Co., Ltd.,
Cosmotec Co. , Ltd. and the Company. The Registrant agrees
to furnish supplementally a copy of such omitted exhibits to
the Commission upon request
10.32** Form of Employment Agreement dated October 7, 1999 by and
between the Company and Edward Smith
10.33** Form of Employment Agreement dated January 14, 1999 by and
between the Company and Brett Trauthen
10.33.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Brett Trauthen
10.34* Facility Set-up and Contract Manufacturing Agreement dated
July 28, 1999 between the Company and Bebig GmbH
10.35* License Agreement dated July 28, 1999 between the Company
and Bebig GmbH
21.1+ List of Subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
</TABLE>
35
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
24.1+ Power of Attorney
27.1 1999 Financial Data Schedule
27.2 1998 Financial Data Schedule
27.3 1997 Financial Data Schedule
</TABLE>
- ---------------
* Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
** Indicates compensatory plan or arrangement.
+ Previously filed as an exhibit to the Company's Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1999.
++ Previously filed as an exhibit to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission on August 13, 1999.
(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.
(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.
(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on June 19,
1997.
(7) Previously filed as an exhibit to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December 12,
1997.
(8) Previously filed as Exhibit 10 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission as of May 14, 1998.
(9) Previously filed as Exhibit 10.24 to the Company's Report on Form 10-Q
filed with the Securities and Exchange Commission as of August 11, 1998.
(10) Previously filed as Exhibit 3.5 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of January 22, 1999.
(11) Previously filed as Exhibit 3.4 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of January 22, 1999.
(12) Previously filed as Exhibit 2.4 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of November 12, 1998.
(13) Previously filed as Exhibit 2 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of February 5, 1999.
(14) Previously filed as Annex III to the Company's Proxy Statement on Schedule
14A filed with the Securities and Exchange Commission on December 18, 1998.
(15) Previously filed as Exhibit 99.2 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on February 17,
1999.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
RADIANCE MEDICAL SYSTEMS, INC.
Date: April 14, 2000 By: /s/ MICHAEL R. HENSON
------------------------------------
Michael R. Henson
Chief Executive Officer
(Principal Executive Officer) and
Chairman
Date: April 14, 2000 By: /s/ STEPHEN R. KROLL
------------------------------------
Stephen R. Kroll
Vice President, Finance and
Administration,
Chief Financial Officer and
Secretary
(Principal Financial and Accounting
Officer)
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
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL R. HENSON Chief Executive Officer April 14, 2000
- -------------------------------------------------------- (Principal Executive Officer)
(Michael R. Henson) and Chairman
/s/ STEPHEN R. KROLL Vice President, Finance and April 14, 2000
- -------------------------------------------------------- Administration, Chief
(Stephen R. Kroll) Financial Officer and
Secretary
(Principal Financial and
Accounting Officer)
/s/ FRANKLIN D. BROWN Director April 14, 2000
- --------------------------------------------------------
(Franklin D. Brown)
/s/ WILLIAM G. DAVIS Director April 14, 2000
- --------------------------------------------------------
(William G. Davis)
/s/ GERARD VON HOFFMANN Director April 14, 2000
- --------------------------------------------------------
(Gerard von Hoffmann)
/s/ EDWARD M. LEONARD Director and Assistant April 14, 2000
- -------------------------------------------------------- Secretary
(Edward M. Leonard)
/s/ JEFFREY F. O'DONNELL Director April 14, 2000
- --------------------------------------------------------
(Jeffrey F. O'Donnell)
/s/ MAURICE BUCHBINDER, M.D. Director April 14, 2000
- --------------------------------------------------------
(Maurice Buchbinder, M.D.)
</TABLE>
37
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders
Radiance Medical Systems, Inc.
In our opinion, the consolidated financial statements listed in the Index
at Item 14(a)(1) for the year ended December 31, 1999 present fairly, in all
material respects, the financial position of Radiance Medical Systems, Inc. at
December 31, 1999, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States. In addition, in our opinion, the financial statement schedule
listed in the Index at Item 14(a)(2) for the year ended December 31, 1999
presents fairly, in all material respects, the information set forth therein for
the year ended December 31, 1999 when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
January 31, 2000
F-1
<PAGE> 39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Radiance Medical Systems, Inc.
We have audited the accompanying consolidated balance sheet of Radiance
Medical Systems, Inc. as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity (net capital deficiency) and cash
flows for each of the two years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Radiance Medical Systems, Inc. at December 31, 1998, and the consolidated
results of its operations and its cash flows for each of the two years in the
period ended December 31, 1998, in conformity with accounting principles
generally accepted in the United States. 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
February 18, 1999, except for the
fifth paragraph of Note 1, as to
which the date is April 14, 2000
F-2
<PAGE> 40
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1999
------------ --------
(SEE NOTE 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,437 $ 2,051
Marketable securities available-for-sale, including
unrealized gains of $209 and $7, respectively.......... 23,375 20,004
Accounts receivable, net of allowance for doubtful
accounts of $583 and $150, respectively................ 2,413 1,070
Other accounts receivable................................. 375 742
Inventories............................................... 1,623 822
Other current assets...................................... 218 259
-------- --------
Total current assets.............................. 29,441 24,948
-------- --------
Property and equipment:
Furniture and equipment................................... 2,326 2,169
Leasehold improvements.................................... 326 318
-------- --------
2,652 2,487
Less accumulated depreciation and amortization............ (1,120) (1,378)
-------- --------
Net property and equipment........................ 1,532 1,109
Intangibles, net of amortization............................ 387 3,667
Notes receivable from officers.............................. 116 118
Deferred charges and other assets........................... 559 31
-------- --------
Total assets...................................... $ 32,035 $ 29,873
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,286 $ 2,714
Deferred revenue.......................................... 250 1,028
-------- --------
Total current liabilities......................... 4,536 3,742
Deferred revenue............................................ -- 786
Minority interest........................................... -- 234
-------- --------
4,536 4,762
-------- --------
Commitments and contingencies (Notes 10 and 14)
Stockholders' equity
Convertible preferred stock, $.001 par value; 7,560,000
shares authorized, no shares issued and outstanding.... -- --
Common stock, $.001 par value; 30,000,000 shares
authorized, 9,578,000 and 11,896,000 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 10 12
Additional paid-in capital................................ 60,664 69,483
Deferred compensation..................................... (409) (524)
Accumulated deficit....................................... (29,553) (40,333)
Treasury stock, at cost; 686,000 common shares at December
31, 1998 and 1999...................................... (3,675) (3,675)
Accumulated other comprehensive income.................... 462 148
-------- --------
Total stockholders' equity........................ 27,499 25,111
-------- --------
Total liabilities and stockholders' equity........ $ 32,035 $ 29,873
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 41
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
------------ ------- --------
(SEE NOTE 1)
<S> <C> <C> <C>
Revenue:
Sales................................................... $ 9,438 $ 9,415 $ 3,856
License fee and other................................... -- 2,760 2,855
-------- ------- --------
Total revenue................................... 9,438 12,175 6,711
-------- ------- --------
Operating costs and expenses:
Cost of sales........................................... 6,102 6,152 2,823
Research and development................................ 7,041 7,957 8,610
Marketing and sales..................................... 6,691 5,371 1,989
General and administrative.............................. 2,347 2,937 2,468
Charge for acquired in-process research and
development.......................................... -- 234 4,194
Minority interest in losses of (former) Radiance........ -- (992) (6)
-------- ------- --------
Total operating costs and expenses.............. 22,181 21,659 20,078
-------- ------- --------
Loss from operations.................................... (12,743) (9,484) (13,367)
-------- ------- --------
Other income (expense):
Interest income......................................... 2,201 1,567 1,246
Gain (loss) on sale of assets........................... -- (47) 988
Other income (expense).................................. 24 (22) 353
-------- ------- --------
Total other income.............................. 2,225 1,498 2,587
-------- ------- --------
Net loss.................................................. $(10,518) $(7,986) $(10,780)
======== ======= ========
Basic and diluted net loss per share.................... $ (1.15) $ (0.90) $ (0.98)
======== ======= ========
Shares used in computing basic and diluted net loss per
share................................................ 9,118 8,862 10,951
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 42
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY
------------------- PAID-IN DEFERRED ACCUMULATED -----------------
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT(1) SHARES AMOUNT
---------- ------ ---------- ------------ ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance of December 31, 1996....... 9,004,000 $ 9 $58,869 $(376) $(11,049) -- $ --
Exercise of common stock options... 208,000 -- 238 -- -- -- --
Employee stock purchase plan....... 33,000 -- 266 -- -- -- --
SCIMED warrant exercise............ 120,000 -- 377 -- -- -- --
Sale of common stock to Cathex..... 25,000 -- 200 -- -- -- --
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock..... (1,000) -- (16) -- -- -- --
Deferred compensation resulting
from grant of non-employee
options.......................... -- -- 437 (437) -- -- --
Amortization of deferred
compensation..................... -- -- -- 179 -- -- --
Treasury common stock.............. -- -- -- -- -- 345,000 (2,205)
Net loss........................... -- -- -- -- (10,518) -- --
Unrealized gain on investments..... -- -- -- -- -- -- --
Unrealized exchange rate loss...... -- -- -- -- -- -- --
---------- --- ------- ----- -------- ------- -------
Balance at December 31, 1997....... 9,389,000 9 60,371 (634) (21,567) 345,000 (2,205)
Exercise of common stock options... 139,000 1 162 -- -- -- --
Employee stock purchase plan....... 50,000 -- 180 -- -- -- --
Deferred compensation resulting
from grant of non-employee
options.......................... -- -- 159 (159) -- -- --
Deferred compensation adjustment
due to grant revaluation......... -- -- (208) 208 -- -- --
Amortization of deferred
compensation..................... -- -- -- 176 -- -- --
Treasury shares purchased.......... -- -- -- -- -- 341,000 (1,470)
Net loss........................... -- -- -- -- (7,986) -- --
Unrealized gain on investments..... -- -- -- -- -- -- --
Unrealized exchange rate gain...... -- -- -- -- -- -- --
---------- --- ------- ----- -------- ------- -------
Balance at December 31, 1998....... 9,578,000 10 60,664 (409) (29,553) 686,000 (3,675)
Acquisition of RMS................. 1,900,000 2 8,033 -- -- -- --
Exercise of common stock options... 359,000 -- 259 -- -- -- --
Employee stock purchase plan....... 59,000 -- 168 -- -- -- --
Deferred compensation resulting
from grant of non-employee
options.......................... -- -- 359 (359) -- -- --
Amortization of deferred
compensation..................... -- -- -- 244 -- -- --
Net loss........................... -- -- -- -- (10,780) -- --
Unrealized loss on investments..... -- -- -- -- -- -- --
Unrealized exchange rate loss...... -- -- -- -- -- -- --
---------- --- ------- ----- -------- ------- -------
Balance at December 31, 1999....... 11,896,000 $12 $69,483 $(524) $(40,333) 686,000 $(3,675)
========== === ======= ===== ======== ======= =======
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE
COMPREHENSIVE STOCKHOLDERS' INCOME
INCOME EQUITY(1) (LOSS)(1)
------------- ------------- -------------
<S> <C> <C> <C>
Balance of December 31, 1996....... $ 170 $ 47,623
Exercise of common stock options... -- 238
Employee stock purchase plan....... -- 266
SCIMED warrant exercise............ -- 377
Sale of common stock to Cathex..... -- 200
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock..... -- (16)
Deferred compensation resulting
from grant of non-employee
options.......................... -- --
Amortization of deferred
compensation..................... -- 179
Treasury common stock.............. -- (2,205)
Net loss........................... -- (10,518) $(10,518)
Unrealized gain on investments..... 6 6 6
Unrealized exchange rate loss...... (23) (23) (23)
----- -------- --------
Balance at December 31, 1997....... 153 36,127 $(10,535)
========
Exercise of common stock options... -- 163
Employee stock purchase plan....... -- 180
Deferred compensation resulting
from grant of non-employee
options.......................... -- --
Deferred compensation adjustment
due to grant revaluation......... -- --
Amortization of deferred
compensation..................... -- 176
Treasury shares purchased.......... -- (1,470)
Net loss........................... -- (7,986) $ (7,986)
Unrealized gain on investments..... 33 33 33
Unrealized exchange rate gain...... 276 276 276
----- -------- --------
Balance at December 31, 1998....... 462 27,499 $ (7,677)
========
Acquisition of RMS................. -- 8,035
Exercise of common stock options... -- 259
Employee stock purchase plan....... -- 168
Deferred compensation resulting
from grant of non-employee
options.......................... -- --
Amortization of deferred
compensation..................... -- 244
Net loss........................... -- (10,780) $(10,780)
Unrealized loss on investments..... (202) (202) (202)
Unrealized exchange rate loss...... (112) (112) (112)
----- -------- --------
Balance at December 31, 1999....... $ 148 $ 25,111 $(11,094)
===== ======== ========
</TABLE>
- ---------------
(1) See Note 1.
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 43
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
------------ -------- --------
(SEE NOTE 1)
<S> <C> <C> <C>
Operating activities:
Net loss.................................................. $(10,518) $ (7,986) $(10,780)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 468 576 1,333
Amortization of deferred compensation................... 179 176 243
Bad debt expense........................................ 450 295 (168)
Charge for acquired in-process research and
development............................................ -- 234 4,194
Minority interest in losses of Radiance................. -- (992) --
Gain on disposal of assets.............................. -- -- (1,302)
Changes (net of effects of acquisition of interest in
(former) Radiance and Radiatec):
Trade accounts receivable, net.......................... (873) 44 1,510
Inventories............................................. (306) 1,582 97
Other assets............................................ 37 (125) (316)
Accounts payable and accrued expenses................... 836 928 (2,105)
Deferred revenue........................................ (79) 250 679
-------- -------- --------
Net cash used in operating activities....................... (9,806) (5,018) (6,615)
-------- -------- --------
Investing activities:
Purchases of available-for-sale securities.............. (43,208) (37,841) (25,256)
Sales of available-for-sale securities.................. 44,174 39,272 28,413
Capital expenditures for property and equipment......... (699) (431) (439)
Sale of Vascular Access business unit, net.............. -- -- 2,070
Proceeds from sale of option on investment securities... -- -- 1,232
Purchase of controlling interest in Radiatec, net of
cash acquired.......................................... -- -- 233
Purchase of interest in (former) Radiance, net of cash
acquired............................................... -- 587 455
Purchase of Clinitec, net of cash acquired.............. (30) -- --
Change in other assets.................................. (358) (625) 20
-------- -------- --------
Net cash (used in) provided by investing activities......... (121) 962 6,728
-------- -------- --------
Financing activities:
Proceeds from sale of common stock........................ 466 180 168
Proceeds from exercise of stock warrants.................. 377 -- --
Proceeds from exercise of stock options................... 238 163 260
Proceeds from repayment of affiliate debt................. -- 479 73
Purchase of treasury common stock......................... (2,205) (1,470) --
-------- -------- --------
Net cash (used in) provided by financing activities......... (1,124) (648) 501
-------- -------- --------
Net (decrease) increase in cash............................. (11,051) (4,704) 614
Cash and cash equivalents, beginning of year................ 17,192 6,141 1,437
-------- -------- --------
Cash and cash equivalents, end of year...................... $ 6,141 $ 1,437 $ 2,051
======== ======== ========
Supplemental disclosure of non-cash financing activities:
In September 1998, the Company exercised preferred stock
warrants bringing its ownership of (former) Radiance to
approximately 50%. In January 1999, the Company acquired
the remaining common stock of (former) Radiance. The
following is a summary of these transactions:
Fair value of assets acquired............................. $ 1,535 $ 8,962
Cash paid................................................. (1,463) (692)
Common stock and options issued........................... -- (8,035)
-------- --------
Liabilities assumed....................................... $ 72 $ 235
======== ========
The Company purchased all of the capital stock of Clinitec
for $30. In conjunction with the acquisition, the Company
assumed the following liabilities:
Fair value of assets acquired............................. $ 645
Cash paid for the capital stock........................... (30)
--------
Liabilities assumed....................................... $ 615
========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 44
RADIANCE MEDICAL SYSTEMS, 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
Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc and
herein after referred to the "Company" or "Radiance") was incorporated in March
1992 in the State of California. The Company and its subsidiaries design,
develop, manufacture and market proprietary therapeutic catheters and stents
used to treat certain vascular diseases. Accordingly, the Company operates in a
single business segment.
Currently, the Company markets its products under the trade name "Focus
technology" and is developing radiation therapy products. Prior to January 1999,
when the Company sold the assets of its Vascular Access product line, the
Company marketed its vascular access products under the trade name "Vascular
Access technology."
In August 1999, the Company purchased for cash of $233 a 51% interest in
Radiatec, a joint venture formed to distribute the Company's RDX catheter
products in Japan.
The consolidated financial statements include the accounts of the Company
and its wholly and majority-owned subsidiaries. Intercompany transactions have
been eliminated and any minority interest recognized. To conform with the 1999
financial statement presentation, certain reclassifications have been made to
the 1997 and 1998 financial statements.
As a result of the 1999 closing of Clinitec GmbH, the Company's German
distribution subsidiary, the Company reconsidered the initial accounting for the
acquisition of this subsidiary in 1997. In recording the acquisition, the
Company accounted for the forgiveness of its account receivable from Clinitec
for product sales to be a part of its total purchase price, and allocated such
amount to goodwill resulting from the business combination. In the accompanying
consolidated financial statements, the Company has restated 1997 sales to
eliminate $1.9 million in sales to Clinitec in that year, since no payment had
been received for these sales, and has written off as a bad debt expense in 1997
the remaining $0.1 million Clinitec account receivable balance related to 1996
sales. Net of related adjustments to cost of sales and amortization expense, the
Company has increased reported net loss for 1997 by $1.7 million and decreased
goodwill by a corresponding amount. The remaining $0.2 million balance of the
amount originally assigned to goodwill has been treated as an identifiable
intangible asset and was amortized over the period ended December 31, 1998. The
restatement has no effect on cash flows from operations or other sources or uses
of cash.
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 No. 115").
F-7
<PAGE> 45
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 stockholders' 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 for furniture and equipment range
from three to seven years and the estimated useful life for leasehold
improvements is seven years.
Intangible Assets
Intangible assets acquired in connection with business combinations are
amortized on the straight-line method over the estimated recovery period. The
intangible assets stemming from the acquisition of Clinitec and purchase of a
controlling interest in and acquisition of the (former) Radiance Medical
Systems, Inc. ("RMS"), $244 and $4,567, respectively, are being amortized over
two and three to seven years, respectively. Based upon an independent valuation
of intangible assets acquired in the purchase of a controlling interest in and
acquisition of RMS, $3,266 and $1,301 were capitalized as developed technology
and covenants not to compete, respectively, and $234 and $4,194 were expensed as
acquired in-process research and development in 1998 and 1999, respectively.
Long-Lived Assets
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of", long-lived
assets and certain identifiable intangibles to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. The Company evaluates
potential impairment by comparing the carrying amount of the assets with the
estimated undiscounted future cash flows associated with them. Should the review
indicate that the asset is not recoverable, the Company's carrying value of the
asset would be reduced by the estimated shortfall in future discounted cash
flows. Under those rules, the aforementioned identifiable intangible assets
acquired in purchase business combinations are included in impairment
evaluations when events or circumstances exist that indicate the carrying amount
of those assets may not be recoverable.
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
distributors worldwide. The Company performs on going credit evaluations of its
customers' financial condition and generally does not require collateral from
customers. Management believes that an adequate allowance for doubtful accounts
has been provided.
F-8
<PAGE> 46
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
During 1997, 1998 and 1999, product sales to Cathex, the Company's Japanese
distributor for Focus technology, comprised 16%, 22% and 6%, respectively, of
total revenues. Accounts receivable from Cathex represented 49% and 14% of net
accounts receivable at December 31, 1998 and 1999, respectively.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 16% of total
product sales during 1997.
In June of 1998, the Company signed a technology license agreement with
Guidant Corporation ("Guidant"), an international interventional cardiology
products company, to grant them the ability to manufacture and distribute
products using the Company's Focus technology. During 1998 and 1999, Radiance
recognized license fees from Guidant of $2,750 and $2,250, respectively, which
represented 23% and 34% of total revenues, respectively. (See Note 5.)
Beginning in the third quarter of 1999 the Company began receiving and
recognizing for 1999 minimum royalty fees of $250 per year from sales of Guidant
products based on the Company's Focus technology.
Export Sales
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1997 1998 1999
------ ---------- ------
<S> <C> <C> <C>
Europe......................................... $1,126 $2,476 $2,094
Japan.......................................... 2,350 2,622 382
Other.......................................... 1,209 789 673
------ ------ ------
$4,685 $5,887 $3,149
====== ====== ======
</TABLE>
Revenue Recognition and Warranty
The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment. License revenues were
recognized in 1998 and 1999 on a contract with Guidant based upon the transfer
of technology to Guidant. Royalties are recognized on the aforementioned
contract with Guidant and the agreement with Escalon Medical Corporation
(Escalon) based upon the sale of products using the Focus and Vascular Access
technologies, respectively. License revenues are recognized on a contract with
Cosmotec ratably over the life of the agreement. See Notes 3 and 5.
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 SFAS
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 the provisions of APB 25, the Company recognizes compensation
expense only to the extent that the exercise price of the Company's employee
stock options is less than the market price of the underlying stock on the date
of grant. Pro forma information regarding net loss and loss per share is
required by SFAS No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted under the
fair value method. 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
F-9
<PAGE> 47
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In calculating pro forma information regarding net loss and net loss 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 5.5%, 5.7% and
6.4%; a dividend yield of 0%, 0% and 0%; volatility of the expected market price
of the Company's common stock of 0.692, 0.696 and 0.889; and a weighted-average
expected life of the options of 5.0, 5.0 and 5.0 years for 1997, 1998 and 1999,
respectively.
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, 1997, 1998 and 1999
follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Pro forma net loss.................................. $(11,066) $(9,135) $(12,335)
Pro forma basic and diluted net loss per share...... $ (1.21) $ (1.03) $ (1.13)
</TABLE>
Disclosures about Segments of an Enterprise and Related Information
During the year ended December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 establishes standards for the way that public business enterprises report
selected information about operating segments in annual and interim financial
statements. Because the Company operates in one business segment and has no
significant foreign operations, no additional reporting is required under SFAS
No. 131.
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes," which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred income taxes are
recognized for the tax consequences in future years of differences between the
tax basis of assets and liabilities and their financial reporting amounts at
each year-end based on enacted tax laws and statutory rates applicable to the
periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized. The provision for income taxes
represents the tax payable for the period and the change during the period in
deferred tax assets and liabilities.
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 Radiance.
Net Loss Per Share
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Because of the net
losses during the years ended December 31, 1997, 1998 and 1999, options to
purchase the common stock of the Company were excluded from the computation of
loss per share because the effect would have been antidilutive. If they were
included, the number of shares used to compute loss per share would have been
increased by approximately 527,000 shares,
F-10
<PAGE> 48
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
387,000 shares and 292,000 shares for the years ended December 31, 1997, 1998
and 1999, respectively. However, options to purchase approximately 270,000
shares at a weighted average exercise price of $9.52, 444,000 shares at a
weighted average exercise price of $5.45 and 984,000 shares at a weighted
average exercise price of $5.25 that were outstanding during 1997, 1998 and
1999, respectively, would have still been excluded from the computation of
diluted loss per share because the options' exercise price was greater than the
average market price of the common shares.
2. ACQUISITIONS AND SALE OF ASSETS
Acquisition of Clinitec
On July 29, 1997, the Company acquired all of the common stock of its
independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec").
The aggregate purchase price of the acquisition was cash of $30. The transaction
was accounted for by the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and the liabilities assumed
based on their fair market values at the date of acquisition. In connection with
the acquisition, the Company acquired assets and assumed liabilities with fair
market values of $401 and $615, respectively. The excess of the purchase price
over the fair value of the net assets acquired of $244 was allocated to
identifiable intangibles. The results of operations of Clinitec are included in
the consolidated statement of operations subsequent to the date of acquisition.
Acquisition of RMS
RMS was incorporated by the Company in August 1997 to develop radiation
products to treat restenosis based on the Company's patented focus delivery
systems technology. In consideration for the granting by RMS of a license to
this technology, RMS issued to the Company 750,000 shares of Series B preferred
stock, a warrant to purchase 1,500,000 shares of Series B preferred stock,
rights of first offer with respect to the commercialization of RMS's products,
and a promise to receive royalties on sales of products based upon the licensed
technology. Following the organization of RMS and its sale of common stock to
investors in a private offering, Radiance did not control RMS and accounted for
its investment on the equity method. In September 1998, the Company exercised
warrants to purchase an additional 1,500,000 preferred series B shares in RMS
for $0.975 per share or a total of $1,463, bringing the Company's ownership of
the outstanding equity of RMS to approximately 50%, and began accounting for its
investment in RMS under the consolidation method.
In November 1998, the Company signed a definitive merger agreement (the
"Merger Agreement") with RMS and in January 1999, the Company acquired RMS
pursuant to the Merger Agreement. Under the terms of the Merger Agreement, the
Company paid the shareholders of RMS $3.00 for each share of preferred stock and
$2.00 for each share of common stock for a total consideration of approximately
$7,432, excluding the value of Radiance common stock options to be provided to
RMS optionholders in exchange for their RMS common stock options. Such
consideration was paid by delivery of an aggregate of 1,900,157 shares of common
stock, and $692 in cash to certain RMS stockholders who elected to receive cash
pursuant to the Merger Agreement. Options for 546,250 shares of RMS common stock
accelerated and vested immediately prior to the completion of the merger. Of
these, 1,250 were exercised, and the holder received the same consideration for
his shares of RMS common stock as other holders of RMS common stock. The options
not exercised prior to the completion of the merger were assumed by the Company
and converted into options at the same exercise price to purchase an aggregate
of 317,776 shares of the Company's common stock for a total consideration of
$1,150.
In addition, under the Merger Agreement, former RMS share and option
holders could have received product development milestone payments of $2.00 for
each share of preferred stock and $3.00 for each share of common stock. The
first of the milestones, which was scheduled during the second quarter of 1999
and
F-11
<PAGE> 49
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
extended into the third quarter of 1999, was not met. As a result, the total of
potential milestone payments, before adjustment for early or late achievement of
the milestones, is reduced to $1.69 for each share of preferred stock and $2.54
for each share of common stock. The milestone payments may be increased up to
30%, or reduced or eliminated if the milestones are reached earlier or later,
respectively, than the milestone target dates. The milestones represent
important steps in the United States Food and Drug Administration and European
approval process that the Company believes are critical to bringing the
Company's technology to the marketplace. Any milestone payments will be
capitalized as additions to the purchase price.
The RMS merger consideration was allocated to tangible assets (aggregating
approximately $459) acquired and assumed liabilities (aggregating approximately
$235), with the remaining merger consideration being allocated to acquired
in-process research and development ("IPR&D"), developed technology and
employment contracts, according to an independent valuation.
Significant portions of the RMS merger consideration were identified as
intangible assets. Valuation techniques were employed that reflect recent
guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to IPR&D. At the date of the
merger, technological feasibility of IPR&D projects had not been reached and the
technology had no alternative future uses. Accordingly, the Company expensed the
portion of the purchase price allocated to IPR&D of $234 and $4,194, in
accordance with generally accepted accounting principles, in the years ended
December 31, 1998 and 1999, respectively.
The IPR&D is comprised of technological development efforts aimed at the
discovery of new, technologically advanced knowledge, the conceptual formulation
and design of possible alternatives, as well as the testing of process and
product cost improvements. Specifically, these technologies included, but were
not limited to, efforts to apply radiation to an angioplasty catheter, increase
the radiation activity level on the catheter and improve the performance of a
radioactive angioplasty catheter.
The amount of merger consideration allocated to IPR&D was determined by
estimating the stage of completion of each IPR&D project at the date of the
merger, estimating cash flows resulting from the future research and
development, clinical trials and release of products employing these
technologies, and discounting the net cash flows back to their present values.
The weighted average stage of completion for all projects, in aggregate,
was approximately 70% as of the merger date. As of that date, the estimated
remaining costs to bring the projects under development to technological
feasibility and through clinical trials and regulatory approval process were
approximately $5,500. The cash flow estimates from sales of products
incorporating those technologies commence in the year 2000, with revenues
increasing for the first four years, followed by declines in subsequent periods
as other new products are expected to be introduced and represent a larger
proportion of the total product offering. The cash flows from revenues
forecasted in each period are reduced by related expenses, capital expenditures,
the cost of working capital, and an assigned contribution to the core
technologies serving as a foundation for the research and development. The
discount rates applied to the individual technology's net cash flows ranged from
20% to 35%, depending on the level of risk associated with a particular
technology and the current return on investment requirements of the market.
These discount rates reflect "risk premiums" of 18% to 105% over the estimated
weighted average cost of capital of 17% computed for the Company.
As discussed above, a portion of the RMS merger consideration premium was
allocated to identifiable intangibles. The identifiable intangibles consist
primarily of developed technology and employment contracts (i.e., covenants not
to compete and the assembled workforce). The fair value of the developed
technology at the dates of acquisition of a majority of and the remainder of the
capital stock of RMS was $187 and $3,079, respectively, and represent the
acquired, aggregate fair value of individually identified technologies that were
fully developed at the time. As with the IPR&D, the developed technology was
valued using the future income
F-12
<PAGE> 50
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
approach, in context of the business enterprise value of RMS. The employment
contracts assigned values at the dates of acquisition of a majority of and the
remainder of the capital stock of RMS were approximately $72 and $1,229,
respectively.
The following table reflects unaudited pro forma combined results of
operations of the Company, Clinitec and RMS on the basis that the acquisitions,
or purchase of a controlling interest in the case of Radiance, had taken place
at the beginning of 1997 for Clinitec and at the inception of RMS in August
1997.
<TABLE>
<CAPTION>
1997 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
Revenues............................................... $ 9,739 $ 12,175
Net loss............................................... (11,748) (10,878)
Net loss per common share.............................. (1.17) (0.98)
Shares used in computation............................. 10,027 11,080
</TABLE>
Not reflected in the above unaudited pro forma results is the charge of
$4,194 for acquired in-process research and development. In addition to the
aforementioned charge, the Company capitalized intangible assets of $3,079 and
$1,229 for developed technology and employment contracts, respectively, as part
of the cost for the remaining common stock of RMS, as described more fully
above.
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 acquisitions been consummated at the beginning of 1997 or 1998,
respectively, or of future operations of the combined companies under the
ownership and management of the Company.
Sale of Vascular Access Assets
In October 1998, the Company signed a letter of intent to sell
substantially all of the properties and assets used exclusively in its Vascular
Access product line to Escalon Medical Corporation and in January 1999 the sale
was completed under a definitive Sale and Purchase Agreement ("Agreement").
Under the terms of the Agreement, the Company received an initial payment of
$1,104 in January 1999. This payment represented a $1,000 consideration payment
increased by the excess of the actual inventory transferred of $704 over the
contractual estimate of $600.
In October 1999, the Company received an additional $1,000 upon the
completion of the transfer of technology. As it is also entitled to receive
royalty payments upon the sale of products for a five-year period, the Company
recognized the pro-rata minimum royalty due for 1999 of $283. The Company will
recognize such additional payments as income when it is probable they will be
received. The Company continued to manufacture certain products on a "cost plus"
basis for ten months following the Agreement date.
F-13
<PAGE> 51
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table sets forth the Vascular Access operating profits for
the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Revenues.................................................. $2,419 $2,664 $ 486
Operating costs and expenses:
Costs of sales.......................................... 937 1,342 407
Research and development................................ 392 480 23
Marketing and sales..................................... 506 556 23
General and administrative.............................. 465 671 189
------ ------ -----
Total operating costs and expenses........................ 2,300 3,049 642
------ ------ -----
Operating profit (loss)................................... $ 119 $ (385) $(156)
====== ====== =====
</TABLE>
3. DEFERRED REVENUE
Deferred Distributor Fees
In June of 1999, the Company granted Cosmotec Co., Ltd. (Cosmotec) of Japan
distribution rights to market its vascular radiation therapy products in Japan.
Radiance received $1,000 as an up-front cash payment and will recognize the
revenue ratably over the seven-year term of the distribution agreement. The
Company recognized $71 of the aforementioned revenue during the year ended
December 31, 1999. In addition, the Company is committed to a credit facility
with Cosmotec. See Note 10.
Deferred Gain on Sale of Assets
In August of 1999, the Company sold an option to purchase an investment
held by the Company. Under the option agreement, the purchaser made a
non-refundable cash payment to the Company of $1,232 for the option and has
until December of 2000 to exercise the option. The option premium is being
recognized on a straight-line basis over the option term, resulting in a gain of
$347 being recognized as other income for the year ended December 31, 1999. The
remainder will be recognized in the year ended December 31, 2000.
Although the likelihood of exercise is uncertain, if the option is
exercised, the Company will receive an additional payment of approximately
$2,000 in 2000.
4. DISTRIBUTION AGREEMENT WITH CATHEX
The Company entered into a distribution agreement, dated May 1, 1997, with
Cathex, Ltd. ("Cathex Agreement"), whereby Cathex was appointed to serve as
Radiance's exclusive distributor for certain of the Company's products in Japan.
In exchange for this exclusive distributorship, Cathex shareholders agreed to
purchase $200 in Radiance common stock or approximately 25,000 shares. Cathex
also agreed to undertake all necessary clinical trails to obtain approval from
Japanese regulator authorities for the sale of said products in Japan. Cathex's
purchases under the Cathex Agreement are subject to certain minimum
requirements. The initial term of the Cathex Agreement expires on January 1,
2001, and is subject to a five-year extension. The Cathex Agreement may also be
terminated in the event of breach upon 90 days notice by the non-breaching
party, subject to cure within the notice period.
5. LICENSE AGREEMENTS
EndoSonics Corporation
In 1995 and 1997, the Company entered into license agreements with
EndoSonics pursuant to which the Company granted EndoSonics the non-exclusive,
royalty-free right to certain technology for use in the
F-14
<PAGE> 52
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
development and sale of certain products. In exchange, Radiance received the
non-exclusive, royalty-free right to utilize certain of EndoSonics' product
regulatory filings to obtain regulatory approval of Radiance products. See Note
14.
Guidant Corporation
In June of 1998, the Company signed a technology license agreement with
Guidant to grant Guidant the ability to manufacture and distribute stent
delivery products using the Company's Focus technology. Under the agreement, the
Company is entitled to receive certain milestone payments based upon the
transfer of the technology to Guidant, and royalty payments based upon the sale
of products using the Focus technology. An initial license payment of $2,000 was
received by the Company upon the signing of the agreement. In October of 1998,
the Company received another $1,000 license milestone payment upon the
completion of the technology transfer to Guidant. The final two milestone
payments, totaling $2,000, were received in the first half of 1999. Based upon
the completion of certain initial technology transfer milestones, the Company
recognized $2,750 and $2,250 in license revenue in 1998 and 1999, respectively.
In 1999, the Company recorded the minimum royalty due under the agreement of
$250.
6. 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 at December
31, 1998 and 1999.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
DECEMBER 31, 1998 ------------------------------------
------------------------------------ GROSS UNREALIZED
GROSS UNREALIZED FAIR HOLDING FAIR
COST HOLDING GAINS VALUE COST GAINS (LOSSES) VALUE
------- ---------------- ------- ------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other
agencies debt securities.... $ 5,928 $ 33 $ 5,961 $ 9,193 $(9) $ 9,184
Corporate debt securities..... 14,239 169 14,408 10,804 16 10,820
Foreign government debt
securities.................. 2,999 7 3,006 -- -- --
------- ---- ------- ------- --- -------
$23,166 $209 $23,375 $19,997 $ 7 $20,004
======= ==== ======= ======= === =======
</TABLE>
All debt securities mature within one year with the exception of debt
securities with a cost and fair value totaling $3,507 and $3,514, respectively,
and $2,988 and $2,971, respectively, at December 31, 1998 and 1999,
respectively, which mature within two years.
7. 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,
--------------
1998 1999
------ ----
<S> <C> <C>
Raw materials............................................... $ 630 $398
Work in process............................................. 87 94
Finished goods.............................................. 906 330
------ ----
$1,623 $822
====== ====
</TABLE>
F-15
<PAGE> 53
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
8. INTANGIBLES
Intangibles consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1998 1999
---- ------
<S> <C> <C>
Developed technology........................................ $187 $3,266
Employment contracts........................................ 72 1,301
Product license............................................. 175 --
---- ------
434 4,567
Accumulated amortization.................................... (47) (900)
---- ------
Intangible assets, net...................................... $387 $3,667
==== ======
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1999
------ ------
<S> <C> <C>
Accounts payable........................................... $1,281 $ 769
Accrued payroll and related expenses....................... 1,287 1,016
Accrued clinical studies................................... 979 401
Accrued office closing costs............................... 225 --
Other accrued expenses..................................... 514 528
------ ------
$4,286 $2,714
====== ======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancellable 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, 1999:
<TABLE>
<S> <C>
2000.................................................. $410
2001.................................................. 109
----
$519
====
</TABLE>
Rental expense charged to operations for all operating leases during the
years ended December 31, 1997, 1998 and 1999, was approximately $574, $639 and
$558, respectively.
Credit Facility with Cosmotec
In June 1999, in conjunction with an agreement to grant Cosmotec
distribution rights to market the Company's vascular radiation therapy products
in Japan, a 5%, $1,000 convertible debenture agreement was executed between the
Company and Cosmotec. The borrowing under the agreement will take place in June
2000 and will mature in June 2003. At any time prior to the repayment of the
debt, Cosmotec may convert the
F-16
<PAGE> 54
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
debenture into shares of common stock of the Company at an initial conversion
price of $7.00 per share. The conversion price may be adjusted due to equity
transactions including, but not limited to, stock issuances, convertible
security issuances, stock splits, dividends, and warrant issuances. See Note 3.
Contract Manufacturing Agreement with Bebig GmbH
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to manufacture its radiation therapy
catheter in Europe. According to the agreement, during 1999 and 2000 Radiance
will pay certain facility set-up fees, totaling approximately $0.8 million, and
all material and third party costs associated with production validation.
Radiance will also pay Bebig an agreed amount for each unit produced. For a
nominal charge, the Company can renew the agreement for three successive, two-
year terms. In conjunction with the contract manufacturing agreement, the
Company entered into a three year sub-license agreement for certain radiation
technology that it believed may be useful in the development of its radiation
therapy products. There is a minimum annual license fee of $0.2 million, subject
to offset by certain amounts paid under the aforementioned manufacturing
agreement, beginning in July 2000 and royalty fees for any products sold
worldwide that incorporate the licensed technology. The sub-license is subject
to renewal, without cost, until the underlying patents' expiration dates.
Other Contingencies
The Company has evaluated its operations to determine if any risks and
uncertainties exist that could severely impact its operations in the near term.
There are many operating risks faced by the Company, including but not limited
to the risks resulting from its limited capital, competitive position,
technology development hurdles and medical reimbursement issues. In addition,
certain manufacturing processes currently are performed by single vendors. While
the Company believes that there are other vendors available to perform these
processes, an interruption of performance by any of these vendors could have a
material adverse effect on the Company's ability to manufacture its products
until a new source of supply were qualified and, as a result, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
11. SHAREHOLDERS' EQUITY
Treasury Stock
In May 1997, the Board of Directors authorized the repurchase, at
management's discretion, of up to 700,000 shares of the Company's common stock
during the remainder of 1997 and 1998. In August 1998, the Board of Directors
increased this authorization to repurchase from 700,000 shares to 1,000,000
shares. The authorization for the repurchase of the common stock was based upon
the belief that the Company's stock was undervalued by the market at the time. A
total of 686,000 shares has been repurchased through December 31, 1999.
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. In September 1997, the Company adopted the 1997 Supplemental Stock Option
Plan (the "1997 Plan"). Under the terms of the 1996 and 1997 Plans, 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, a determined by the Board of Directors. At December 31, 1999 the Company
had authorized 2,850,000 and 90,000 shares of common stock for issuance under
the 1996 and 1997 Plan, respectively. At December 31, 1999, the Company had
54,000 shares and 16,000 shares of common
F-17
<PAGE> 55
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
stock available for grant under the 1996 and 1997 Plan, respectively. The
options granted under the Plans 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. The activity under both plans is summarized below:
<TABLE>
<CAPTION>
OPTION PRICE NUMBER
PER SHARE OF SHARES
--------------- ---------
<S> <C> <C>
Balance at December 31, 1996..................... $1.00 to $13.25 1,144,525
Granted.......................................... $5.00 to $ 9.50 1,000,000
Exercised........................................ $1.00 to $ 2.50 (208,259)
Forfeited........................................ $1.00 to $13.25 (204,229)
Cancelled........................................ $ 6.87 (130,000)
--------------- ---------
Balance at December 31, 1997..................... $1.00 to $13.25 1,602,037
Granted.......................................... $3.25 to $ 6.44 665,100
Exercised........................................ $1.00 to $ 2.50 (138,965)
Forfeited........................................ $1.00 to $ 9.50 (614,794)
Cancelled........................................ -- --
--------------- ---------
Balance at December 31, 1998..................... $1.00 to $12.00 1,513,378
Granted.......................................... $2.69 to $ 6.19 767,333
Granted as merger consideration.................. $ 0.11 317,776
Exercised........................................ $0.11 to $ 2.50 (358,722)
Forfeited........................................ $1.00 to $ 9.50 (213,918)
Cancelled........................................ -- --
--------------- ---------
Balance at December 31, 1999..................... $0.11 to $12.00 2,025,847
=============== =========
</TABLE>
Under the merger agreement with RMS, the options outstanding prior to the
Merger accelerated, vested and were, if unexercised, assumed by the Company and
converted into options at the same exercise price. See Note 2.
The Board of Directors approved repricing of the following options:
<TABLE>
<CAPTION>
ORIGINAL NEW
GRANT GRANT
DATE REPRICING APPROVED OPTION GRANT DATE PRICE PRICE
----------------------- ------------------ -------- -----
<S> <C> <C> <C>
April 21, 1997............................. August 5, 1996 $13.25 $6.88
November 4, 1996 12.50 6.88
April 7, 1998.............................. January 13, 1997 9.50 4.94
September 19, 1997 7.31 4.94
December 14, 1998.......................... April 21, 1997 6.88 3.63
May 20, 1998 6.00 3.63
May 26, 1998 5.88 3.63
June 10, 1998 6.44 3.63
</TABLE>
F-18
<PAGE> 56
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
As a result of the repricing, the vesting period on the aforementioned
options started anew. The following table summarizes information regarding stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- OPTIONS WEIGHTED-
OPTIONS REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE AT EXERCISE
EXERCISE PRICES AT 12/31/99 LIFE PRICE 12/31/99 PRICE
- --------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 0.11 104,371 9.0 $0.11 104,371 $0.11
1.00 - 2.50 228,793 5.6 1.34 228,356 1.34
2.69 - 6.19 1,625,683 8.9 4.30 344,915 4.59
6.88 - 12.00 67,000 7.2 9.00 47,063 9.04
--------- --- ----- ------- -----
0.11 - 12.00 2,025,847 8.5 $3.90 724,705 $3.21
========= === ===== ======= =====
</TABLE>
The weighted-average grant-date fair value of options granted during 1997,
1998 and 1999, for options where the exercise price on the date of grant was
equal to the stock price on that date, was $4.50, $2.99 and $4.18, respectively.
The weighted-average grant-date fair value of options granted during 1997, 1998
and 1999, for options where the exercise price on the date of grant was less
than the stock price on that date, was $0, $0, and $0, respectively, excluding
RMS merger consideration. Under the merger agreement with RMS, 317,776 options
were granted at a weighted-average grant-date fair value of $3.94 per share and
an exercise price of $0.11 per share.
During the years ended December 31, 1997, 1998 and 1999, $437, $159 and
$359, respectively, of deferred compensation was recorded to recognize
compensation for non-employee option grants. Deferred compensation is being
amortized over the vesting period of the related options. $179, $176 and $244 of
deferred compensation was amortized in the years ended December 31, 1997, 1998
and 1999, respectively. No compensation expense was recorded in the financial
statements for stock options issued to employees for 1997, 1998, and 1999
because the options were granted with an exercise price equal to the market
price of the Company's common stock on the date of grant.
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. During 1999, a total of approximately 59,000 shares of
common stock were purchased at an average price of $2.83 per share.
F-19
<PAGE> 57
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. INCOME TAXES
Significant components of the Company's deferred tax assets and
(liabilities) are as follows at December 31:
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Net operating loss carryforward............................. $ 6,072 $ 8,962
Effect of state income taxes................................ -- (1,022)
Accrued expenses............................................ 572 333
Tax credits................................................. 953 1,730
Bad debt reserve............................................ 236 64
Depreciation................................................ (85) (114)
Amortization................................................ 71 (1,782)
Inventory write-downs....................................... 749 266
Capitalized research and development........................ 963 2,313
Deferred revenue............................................ 100 777
Deferred compensation amortization.......................... 215 327
Other....................................................... 249 3
-------- --------
Deferred tax assets......................................... 10,095 11,857
Valuation allowance......................................... (10,095) (11,857)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $3,486 and $1,762 in 1998 and 1999,
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, 1999, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $26,000 and $3,100,
respectively, which expire in the years 2002 through 2019. In addition, the
Company has research and development and other tax credits for federal and state
income tax purposes of approximately $912, and $818, respectively, which expire
in the years 2011 through 2014.
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.
The results of operations for the years ended December 31, 1997, 1998 and
1999 includes the net losses of the Company's wholly-owned German subsidiary of
$1,115, $1,029 and $177, respectively.
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 1997, 1998 or
1999.
F-20
<PAGE> 58
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. LEGAL MATTERS
On September 15, 1999, EndoSonics Corporation (see Note 5) filed a
complaint for declaratory relief in the Superior Court in Orange County,
California, relating to a License Agreement dated May 16, 1997, between
EndoSonics and the Company. Under that License Agreement, EndoSonics was granted
certain royalty-free rights to the Company's Focus technology for use on
catheters with EndoSonics' ultrasound transducers. EndoSonics is seeking a
declaratory judgement that the License Agreement entitles EndoSonics to also
place a stent on such catheters. The Company believes that EndoSonics is
authorized only to use the Focus technology with the EndoSonics ultrasound
transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position, operating results, or cash flows. However, if Endosonics
prevails in their suit, the Company may have to pay damages and/or renegotiate
its license agreement with Guidant. See Note 5.
Radiance is a party to ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on the Company's consolidated financial
position.
F-21
<PAGE> 59
RADIANCE MEDICAL SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ---------------------- ---------- --------
ADDITIONS
---------------------- BALANCE
BALANCE AT CHARGES TO CHARGED AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999.
Allowance for doubtful accounts..... $ 583 $ (168) $-- $ (601) $ 150
Reserve for excess and obsolete
inventories...................... $1,856 $ -- $-- $(1,234) $ 622
Year ended December 31, 1998
Allowance for doubtful accounts..... $ 500 $ 295 $-- $ (212) $ 583
Accrued warranty expenses........... $ $ -- $-- $ -- $ --
Reserve for excess and obsolete
inventories...................... $1,100 $1,274 $-- $ (518) $1,856
Year ended December 31, 1997
Allowance for doubtful accounts..... $ 377 $ 450 $-- $ (327) $ 500
Accrued warranty expenses........... $ 29 $ -- $-- $ (29) $ --
Reserve for excess and obsolete
inventories...................... $ 145 $ 955 $-- $ -- $1,100
</TABLE>
II-1
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBER PAGE
------- ----------- -------------
<S> <C> <C>
2.4(12) Agreement and Plan of Merger dated November 3, 1998 by and
between CardioVascular Dynamics, Inc. and Radiance Medical
Systems, Inc................................................
2.5(13) Assets Sale and Purchase Agreement dated January 21, 1999 by
and between the Company and Escalon Medical Corp............
3.1(3) Certificate of Incorporation................................
3.2(3) Amended Bylaws..............................................
4.1(1) Specimen Certificate of Common Stock........................
4.2++ Form of $1,000,000 5% Convertible Debenture to be issued by
the Company to Cosmotec Co., Ltd. on June 15, 2000..........
10.1(3) Form of Indemnification Agreement 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 Purchases Plan and forms of
agreement thereunder........................................
10.7(3)* Stock Purchase and Technology License Agreement dated
September 10, 1994, as amended on September 29, 1995, by and
among EndoSonics, Radiance and SCIMED Life Systems, Inc.
("SCIMED")..................................................
10.15(3) Industrial Lease dated February 23, 1995 by and between the
Irvine company and Radiance.................................
10.20(6) License Agreement dated May 16, 1997 by and between Radiance
and EndoSonics..............................................
10.21(6) Register Rights Agreement dated May 14, 1997 by and between
Radiance and EndoSonics.....................................
10.22(7)** 1997 Supplemental Stock Option Plan.........................
10.23(8) Stock Purchase Agreement dated as of February 10, 1997 by
and between EndoSonics and the Company......................
10.24(9)* License Agreement by and between the Company and Guidant
Corporation dated June 19, 1998.............................
10.25(14)** 1996 Stock Option/Stock Issuance Plan (as Amended and
Restated as of April 8, 1997, March 12, 1998 and November 3,
1998).......................................................
10.26(15)** 1997 Stock Option Plan (As Amended as of June 15, 1998)
assumed by Registrant pursuant to its acquisition of
Radiance Medical Systems, Inc. on January 14, 1999..........
10.27**+ Amendment to Employment Agreement dated as of February 1,
1999 between the Company and Michael R. Henson and form of
Employment Agreement entered into on January 14, 1999
between the Company and Michael R. Henson...................
10.27.1** Second Amendment to Employment Agreement dated December 10,
1999 between the Company and Michael R. Henson and form of
Employment Agreement entered into on January 14, 1999
between the Company and Michael R. Henson...................
10.28**+ Employment Agreement entered into as of February 1, 1999 by
and between the Company and Stephen R. Kroll................
</TABLE>
II-2
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION NUMBER PAGE
------- ----------- -------------
<S> <C> <C>
10.28.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Stephen R. Kroll................
10.29**+ Form of Employment Agreement by and between the Company and
Jeffrey Thiel...............................................
10.29.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Jeffrey Thiel...................
10.31++ Joint Venture Agreement dated June 15, 1999 between the
Company and Globe Co., Ltd. The following exhibits to the
Joint Venture Agreement have not been filed: Supply
Agreement dated June 15, 1999 between the Company and
Radiatec, Inc.; and, International Distributor Agreement
dated June 15, 1999 between Radiatec, Inc., Globe Co., Ltd.,
Cosmotec Co. , Ltd. and the Company. The Registrant agrees
to furnish supplementally a copy of such omitted exhibits to
the Commission upon request.................................
10.32** Form of Employment Agreement dated October 7, 1999 by and
between the Company and Edward Smith........................
10.33** Form of Employment Agreement by dated January 14, 1999 by
and between the Company and Brett Trauthen..................
10.33.1** Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Brett Trauthen..................
10.34* Facility Set-up and Contract Manufacturing Agreement dated
July 28, 1999 between the Company and Bebig GmbH............
10.35* License Agreement dated July 28, 1999 between the Company
and Bebig GmbH..............................................
21.1 List of Subsidiaries........................................
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.................................................
23.2 Consent of Ernst & Young LLP, Independent Auditors..........
24.1+ Power of Attorney (Reference is made to page 37 of the
Annual Report on Form 10-K).................................
27.1 1999 Financial Data Schedule................................
27.2 1998 Financial Data Schedule................................
27.3 1997 Financial Data Schedule................................
</TABLE>
- ---------------
* Portions of this exhibit are omitted and were filed separately with the
Securities and Exchange Commission pursuant to the Company's application
requesting confidential treatment under Rule 24b-2 of the Securities
Exchange Act of 1934.
** Indicates compensatory plan or arrangement.
+ Previously filed as an exhibit to the Company's Report on Form 10-K filed
with the Securities and Exchange Commission on March 31, 1999.
++ Previously filed as an exhibit to the Company's Report on Form 10-Q file
with the Securities and Exchange Commission on August 13, 1999.
(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.
(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.
II-3
<PAGE> 62
(6) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 filed with the Securities and Exchange Commission on June 19,
1997.
(7) Previously field as an exhibit to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on December 12,
1997.
(8) Previously filed as Exhibit 10 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission as of May 14, 1998.
(9) Previously filed as Exhibit 10.24 to the Company's Report on Form 10-Q
filed with the Securities and Exchange Commission as of August 11, 1998.
(10) Previously filed as Exhibit 3.5 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of January 22, 1999.
(11) Previously filed as Exhibit 3.4 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of January 22, 1999.
(12) Previously filed as Exhibit 2.4 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of November 12, 1998.
(13) Previously filed as Exhibit 2 to the Company's Report on Form 8-K filed
with the Securities and Exchange Commission as of February 5, 1999.
(14) Previously filed as Annex III to the Company's Proxy Statement on Schedule
14A filed with the Securities and Exchange Commission on December 18, 1998.
(15) Previously filed as Exhibit 99.2 to the Company's Registration Statement on
Form S-8 filed with the Securities and Exchange Commission on February 17,
1999.
II-4
<PAGE> 1
Exhibit 10.27.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
This Second Amendment to Employment Agreement (the "Amendment") is made
as of December 10, 1999, between Radiance Medical Systems, Inc., a Delaware
corporation (the "Company"), and Michael R. Henson, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that
certain Employment Agreement dated January 14. 1999 and amended February 1, 1999
(the "Employment Agreement"); and
WHEREAS, the Company and Executive desire to amend the Employment
Agreement to extend the automatic renewal terms set forth in the Employment
Agreement, as provided in greater detail below;
NOW THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth and for other valuable consideration, the Company and
Executive hereby agree as follows:
AGREEMENT
1. DEFINITIONS.
Unless otherwise defined herein, capitalized terms used herein shall
have the meanings assigned to them in the Employment Agreement.
2. AMENDMENT TO SECTION 2 OF THE EMPLOYMENT AGREEMENT.
Section 2 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"2. TERM. The term of this Agreement will begin on January 14,
1999 (the "Effective Date"), and shall continue thereafter for a two (2)
year period, and commencing on the first anniversary of the Effective
Date shall be extended on each day for one (1) day so that the remaining
term hereof is always one (1) year unless either party elects to
terminate this Agreement in accordance with its provisions. Executive's
employment is subject to earlier termination as hereafter specified."
3. AMENDMENT TO SECTION 5.5.
Section 5.5 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of
this Agreement, the Executive resigns for one of the reasons stated in
Section 5.3, or the Company terminates the Executive's service, except
as provided in Sections 5.1 or 5.2 hereof, the Executive shall be
entitled to the following compensation: (i) the portion of his then
current Base Salary which has accrued through his date of termination,
(ii) any payments for unused vacation and reimbursement expenses, which
are due, accrued or payable at the date of Executive's termination,
(iii)
<PAGE> 2
severance payment in an amount (the "Severance Amount") equal to
Executive's then-current Base Salary, payable for the remainder of the
Term; and (iv) to the extent not already vested under Section 4.5 or
otherwise all of Executive's options to purchase shares of the Company's
common stock and restricted stock shall accelerate and automatically
vest by one additional year, and such options shall otherwise be
exercisable in accordance with their terms. In addition, in such event,
Executive shall be entitled to (a) a prorated payment equal to the
target bonus amount for which Executive would be eligible for the year
in which such resignation or termination occurred, and (b) continuation
of the insurance benefits set forth in Exhibit C and, to the extent
permissible, participation in the Company's 401k plan, for the remainder
of the Term."
4. MISCELLANEOUS.
(a) Continuing Force and Effect. Except as herein expressly
amended, all terms, covenants and provisions of the Employment Agreement are and
shall remain in full force and effect and all references therein to such
Employment Agreement shall henceforth refer to the Employment Agreement as
amended by this Amendment. This Amendment shall be deemed incorporated into, and
a part of, the Employment Agreement.
(b) Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first
above written.
RADIANCE MEDICAL SYSTEMS, INC.
/s/ Jeffrey Thiel
- ----------------------------------------
Jeffrey Thiel, President and Chief
Operating Officer
EXECUTIVE
/s/ Michael R. Henson
- ----------------------------------------
Michael R. Henson
2
<PAGE> 1
Exhibit 10.28.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") is made
as of December 10, 1999, between Radiance Medical Systems, Inc., a Delaware
corporation (the "Company"), and Stephen R. Kroll, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that
certain Employment Agreement dated February 1, 1999 (the "Employment
Agreement"); and
WHEREAS, the Company and Executive desire to amend the Employment
Agreement to extend the automatic renewal terms set forth in the Employment
Agreement, as provided in greater detail below;
NOW THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth and for other valuable consideration, the Company and
Executive hereby agree as follows:
AGREEMENT
1. DEFINITIONS.
Unless otherwise defined herein, capitalized terms used herein shall
have the meanings assigned to them in the Employment Agreement.
2. AMENDMENT TO SECTION 2 OF THE EMPLOYMENT AGREEMENT.
Section 2 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"2. TERM. The term of this Agreement will begin on February 1,
1999 (the "Effective Date"), and shall continue thereafter for a two (2)
year period, and commencing on the first anniversary of the Effective
Date shall be extended on each day for one (1) day so that the remaining
term hereof is always one (1) year unless either party elects to
terminate this Agreement in accordance with its provisions. Executive's
employment is subject to earlier termination as hereafter specified."
3. AMENDMENT TO SECTION 5.5.
Section 5.5 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of
this Agreement, the Executive resigns for one of the reasons stated in
Section 5.3, or the Company terminates the Executive's service, except
as provided in Sections 5.1 or 5.2 hereof, the Executive shall be
entitled to the following compensation: (i) the portion of his then
current Base Salary which has accrued through his date of termination,
(ii) any payments for unused vacation and reimbursement expenses, which
are due, accrued or payable at the date of Executive's termination,
(iii) severance payment in an amount (the "Severance Amount") equal to
Executive's
<PAGE> 2
then-current Base Salary, payable for the remainder of the Term; and
(iv) to the extent not already vested under Section 4.5 or otherwise all
of Executive's options to purchase shares of the Company's common stock
and restricted stock shall accelerate and automatically vest by one
additional year, and such options shall otherwise be exercisable in
accordance with their terms. In addition, in such event, Executive shall
be entitled to (a) a prorated payment equal to the target bonus amount
for which Executive would be eligible for the year in which such
resignation or termination occurred, and (b) continuation of the
insurance benefits set forth in Exhibit C and, to the extent
permissible, participation in the Company's 401k plan, for the remainder
of the Term."
4. MISCELLANEOUS.
(a) Continuing Force and Effect. Except as herein expressly
amended, all terms, covenants and provisions of the Employment Agreement are and
shall remain in full force and effect and all references therein to such
Employment Agreement shall henceforth refer to the Employment Agreement as
amended by this Amendment. This Amendment shall be deemed incorporated into, and
a part of, the Employment Agreement.
(b) Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first
above written.
RADIANCE MEDICAL SYSTEMS, INC.
/s/ Michael R. Henson
- ------------------------------------------
Michael R. Henson, Chief Executive Officer
and Chairman of the Board
EXECUTIVE
/s/ Stephen R. Kroll
- ------------------------------------------
Stephen R. Kroll
2
<PAGE> 1
Exhibit 10.29.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") is made
as of December 10, 1999, between Radiance Medical Systems, Inc., a Delaware
corporation (the "Company"), and Jeffrey Thiel, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that
certain Employment Agreement dated February 1, 1999 (the "Employment
Agreement"); and
WHEREAS, the Company and Executive desire to amend the Employment
Agreement to extend the automatic renewal terms set forth in the Employment
Agreement, as provided in greater detail below;
NOW THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth and for other valuable consideration, the Company and
Executive hereby agree as follows:
AGREEMENT
1. DEFINITIONS.
Unless otherwise defined herein, capitalized terms used herein shall
have the meanings assigned to them in the Employment Agreement.
2. AMENDMENT TO SECTION 1 OF THE EMPLOYMENT AGREEMENT.
Section 1 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"1. EMPLOYMENT. Effective October 1, 1999, the Company hereby
agrees to employ the Executive as the President and Chief Operating
Officer, reporting to the Chief Executive Officer ("CEO") of the
Company, and the Executive accepts such employment and agrees to devote
substantially all his business time and effort and skills on such
reasonable duties as shall be assigned to him by the Company
commensurate with such position."
3. AMENDMENT TO SECTION 2 OF THE EMPLOYMENT AGREEMENT.
Section 2 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"2. TERM. The term of this Agreement will begin on February 1,
1999 (the "Effective Date"), and shall continue thereafter for a two (2)
year period, and commencing on the first anniversary of the Effective
Date shall be extended on each day for one (1) day so that the remaining
term hereof is always one (1) year unless either party elects to
terminate this Agreement in accordance with its provisions. Executive's
employment is subject to earlier termination as hereafter specified."
<PAGE> 2
4. AMENDMENT TO SECTION 3.1 OF THE EMPLOYMENT AGREEMENT.
Section 3.1 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"3.1 SERVICE WITH THE COMPANY. Effective October 1, 1999, during
the term of this Agreement, the Executive agrees to perform such
reasonable duties and on such basis as shall be assigned to him from
time to time by the CEO; such duties, however, to be commensurate with
the Executive's position as President and Chief Operating Officer of the
Company. In particular, and without limitation, such duties shall
include, within the guidelines set by the CEO, setting up long-range
strategic plans, guidance of day-to-day operations of the Company,
preparing operating budgets for presentation to the CEO, and
implementation of operating plans as approved by the CEO."
5. AMENDMENT TO SECTIONS 4.1. AND 4.3 OF THE EMPLOYMENT AGREEMENT.
Sections 4.1 and 4.3 of the Employment Agreement are hereby amended as
follows:
Effective October 1, 1999, Executive's Base Salary is $180,000
and the bonus percentage is Thirty percent (30%).
6. AMENDMENT TO SECTION 5.5.
Section 5.5 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of
this Agreement, the Executive resigns for one of the reasons stated in
Section 5.3, or the Company terminates the Executive's service, except
as provided in Sections 5.1 or 5.2 hereof, the Executive shall be
entitled to the following compensation: (i) the portion of his then
current Base Salary which has accrued through his date of termination,
(ii) any payments for unused vacation and reimbursement expenses, which
are due, accrued or payable at the date of Executive's termination,
(iii) severance payment in an amount (the "Severance Amount") equal to
Executive's then-current Base Salary, payable for the remainder of the
Term; and (iv) to the extent not already vested under Section 4.5 or
otherwise all of Executive's options to purchase shares of the Company's
common stock and restricted stock shall accelerate and automatically
vest by one additional year, and such options shall otherwise be
exercisable in accordance with their terms. In addition, in such event,
Executive shall be entitled to (a) a prorated payment equal to the
target bonus amount for which Executive would be eligible for the year
in which such resignation or termination occurred, and (b) continuation
of the insurance benefits set forth in Exhibit C and, to the extent
permissible, participation in the Company's 401k plan, for the remainder
of the Term."
7. MISCELLANEOUS.
(a) Continuing Force and Effect. Except as herein expressly
amended, all terms, covenants and provisions of the Employment Agreement are and
shall remain in full force and effect
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<PAGE> 3
and all references therein to such Employment Agreement shall henceforth refer
to the Employment Agreement as amended by this Amendment. This Amendment shall
be deemed incorporated into, and a part of, the Employment Agreement.
(b) Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first
above written.
RADIANCE MEDICAL SYSTEMS, INC.
/s/ Michael R. Henson
- ------------------------------------------
Michael R. Henson, Chief Executive Officer
and Chairman of the Board
EXECUTIVE
/s/ Jeffrey Thiel
- ------------------------------------------
Jeffrey Thiel
3
<PAGE> 1
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of October 7, 1999 by and between RADIANCE MEDICAL SYSTEMS, INC., a Delaware
corporation (the "Company"), and Edward F. Smith, III, Ph.D., an individual (the
"Executive").
RECITAL
The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the
Vice President of Research and Development of the Company, reporting to the
Chief Operating Officer ("COO") of the Company, and the Executive accepts such
employment and agrees to devote substantially all his business time and efforts
and skills on such reasonable duties as shall be assigned to him by the Company
commensurate with such position.
2. TERM. The term of this Agreement will begin on October 7, 1999 (the
"Effective Date"), and shall continue thereafter for a one (1) year period and
shall be extended on each day for one (1) day so that the remaining term hereof
is always one (1) year unless either party elects to terminate this Agreement in
accordance with its provisions. Executive's employment is subject to earlier
termination as hereafter specified.
3. POSITION AND DUTIES.
3.1 SERVICE WITH THE COMPANY. During the term of this Agreement, the
Executive agrees to perform such reasonable duties and on such basis as shall be
assigned to him from time to time by the COO; such duties, however, to be
commensurate with the Executive's position as Vice President of Research and
Development of the Company. In particular, and without limitation, such duties
shall include, within the guidelines set by the COO, setting up long-range
research and development plans, guidance of day-to-day research and development
operations of the Company, preparing operating budgets for presentation to the
COO, and implementation of research and development plans as approved by the
COO.
3.2 NO CONFLICTING DUTIES. Except as provided in Exhibit A hereto,
during the term hereof, the Executive shall not serve as an officer, director,
employee, consultant or advisor to any other business; provided, however, that
the Executive may serve as a director of another corporation so long as (i) such
corporation does not compete, directly or indirectly, with the Company or any of
its Affiliates for such products as defined as "Competitive Products" in Exhibit
B attached to this Agreement, and (ii) such services do not adversely affect
Executive's ability to perform his duties under this Agreement, unless such
other service is approved by the COO, Chief Executive Officer or Board of
Directors of the Company. For purposes of this Agreement, the term
<PAGE> 2
"Affiliate" means any corporation, association or other business entity of
which more than 50% of the total voting power of shares of stock entitled to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled by the Company. Notwithstanding the foregoing, nothing
contained herein shall prevent Executive from making and expending any time of
passive personal investments and/or expending reasonable amounts of time for
educational and charitable activities. Except as provided in Exhibit A hereto,
the Executive confirms that he is under no contractual commitment inconsistent
with his obligations set forth in this Agreement.
4. COMPENSATION.
4.1 BASE SALARY. As compensation for all services to be rendered by
the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $140,000 per year until December 31, 1999, and $150,000 per year
commencing January 1, 2000, ("Base Salary"), which shall be paid on a regular
basis in accordance with the Company's normal payroll procedures and policies.
The amount of the Base Salary shall be reviewed by the Compensation Committee
of the Board of Directors, which may annually increase Executive's Base Salary
in amounts consistent with industry practices as determined in its sole
discretion. Executive's performance, the performance of the Company and such
other factors as the Compensation Committee of the Board of Directors deem
appropriate shall also be considered.
4.2 INCENTIVE COMPENSATION PLANS. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to a bonus of $7,000 for 1999 and shall thereafter be entitled to earn
up to twenty-five percent (25%) of his Base Salary as incentive compensation.
All amounts to which the Executive may be entitled under any incentive
compensation plans shall be subject to the provisions, rules and regulations of
any such plan which apply to other management employees.
4.3 PARTICIPATION IN BENEFIT PLANS. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit C.
4.4 EXPENSES. In accordance with the Company's policies established
from time to time, the Company will pay or reimburse the Executive for all
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.
4.5 ACCELERATION OF OPTIONS. Notwithstanding any provisions of the
Company's option or stock incentive plan, or of the Executive's stock option or
restricted stock agreements, in the event of a "Corporate Transaction" or
"Change of Control," as defined below, during the period of the Executive's
employment hereunder; all of the Executive's stock options shall vest in full
and all rights of the company to repurchase restricted stock of the Executive
shall terminate. For
2
<PAGE> 3
purposes hereof, "Change in Control" shall mean a change in ownership or
control of the Company effected through either of the following transactions:
(i) the acquisition, directly or indirectly, by any person or
related group of persons (other than the Company or a person that
directly or indirectly controls, is controlled by, or is under common
control with, the Company), of beneficial ownership (within the meaning
of Rule 13d-3 of the 1934 Act) of securities processing more than fifty
percent (50%) of the total combined voting power of the Company's
outstanding securities pursuant to a tender or exchange offer made
directly to the Company's stockholders which the Board does not
recommend such stockholders to accept, or
(ii) a change in the composition of the Board over a period of
thirty-six (36) consecutive months or less such that a majority of the
Board members ceases, by reason of one or more contested elections for
Board membership, to be comprised of individuals who either (A) have
been Board members continuously since the beginning of such period or
(B) have been elected or nominated for election as Board members during
such period by at least a majority of the Board members described in
clause (A) who were still in office at the time the Board approved such
election or nomination.
"Corporate Transaction" shall mean either of the following
stockholder-approved transactions to which the Company is a party:
(i) a merger or consolidation in which securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities are transferred to a person or persons
different from the persons holding those securities immediately prior
to such transaction; or
(ii) the sale, transfer or other disposition of all or
substantially all of the Company's assets in complete liquidation or
dissolution of the Company.
5. TERMINATION.
5.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following acts
or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause";
(a) Willful misconduct by Executive causing material harm to
the Company but only if Executive shall not have discontinued such misconduct
within 30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.
(b) Any material act or omission by the Executive involving
gross negligence in the performance of the Executive's duties to, or material
deviation from any of the policies or directives of, the Company, other than a
deviation taken in good faith by the Executive for the benefit of the Company;
(c) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any
3
<PAGE> 4
allegation of such illegal or felonious act is investigated.
Termination by the Company for cause shall be accomplished
by written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct his conduct.
5.2 TERMINATION FOR DEATH OR DISABILITY. In addition to
termination for cause pursuant to Section 5.1 hereof, the Executive's employment
pursuant to this Agreement shall be immediately terminated without notice by the
Company (i) upon the death of the Executive or (ii) upon the Executive becoming
totally disabled. For purposes of this Agreement, the term "totally disabled"
means an inability of Executive, due to a physical or mental illness, injury or
impairment, to perform a substantial portion of his duties for a period of one
hundred eighty (180) or more consecutive days, as determined by a competent
physician selected by the Company's Board of Directors and reasonably agreed to
by the Executive, following such one hundred eighty (180) day period.
5.3 TERMINATION FOR GOOD REASON. Executive's employment
pursuant to this Agreement may be terminated by the Executive for "good reason"
if the Executive voluntarily terminates his employment as a result of any of the
following:
(a) Without the Executive's prior written consent, a
reduction in his then current Base Salary;
(b) Without Executive's prior written consent, a
relocation of the Executive's place of employment outside of Orange County,
California;
(c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;
(d) A reduction in duties and responsibilities which
results in the Executive no longer having duties customary for an Executive Vice
President, Operations; or
(e) The Company materially breaches any provision of this
Agreement.
5.4 TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.
5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term
of this Agreement, the Executive resigns for one of the reasons stated in
Section 5.3, or the Company terminates the Executive's service, except as
provided in Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the
following compensation: (i) the portion of his then current Base Salary which
has accrued through his date of termination, (ii) any payments for unused
vacation and reimbursement expenses, which are due, accrued or payable at the
date of Executive's termination, (iii) severance payment in an amount (the
"Severance Amount") equal to Executive's then-current Base Salary, payable for
the remainder of the Term; and (iv) to the extent not already vested under
Section 4.5 or otherwise all of Executive's options to purchase shares of the
Company's common stock and restricted stock shall accelerate and automatically
vest by one additional year, and such options shall otherwise be exercisable in
accordance with their terms. In addition, in such event,
4
<PAGE> 5
Executive shall be entitled to (a) a prorated payment equal to the target bonus
amount for which Executive would be eligible for the year in which such
resignation or termination occurred, and (b) continuation of the insurance
benefits set forth in Exhibit C and, to the extent permissible, participation in
the Company's 401k plan, for the remainder of the Term.
All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the Executive shall be entitled to only the compensation set forth in
items (i and (ii) of the first paragraph of this Section 5.5.
To the extent that any or all of the payments and benefits provided for
in this Agreement constitute "parachute payments" within the meaning of Section
280G of the Internal Revenue Code (the "Code") and, but for this paragraph,
would be subject to the excise tax imposed by Section 4999 of the Code, then at
the Executive's election:
(A) the Executive shall receive all such payments and benefits
the Executive is entitled to receive hereunder, and any liability for
taxes pursuant to the above shall be the liability solely of the
Executive; or
(B) the aggregate amount of such payments and benefits shall
be reduced such that the present value thereof (as determined under the
Code and applicable regulations) is equal to 2.99 times the Executive's
"base amount" (as defined in the Code).
The determination of any reduction or increase of any payment or
benefits under this paragraph 5 pursuant to the foregoing provision shall be
made by a nationally recognized public accounting firm chosen by the Company in
good faith, and such determination shall be conclusive and binding on the
Company and the Executive.
6. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.
7. SUCCESSORS. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
5
<PAGE> 6
8. MISCELLANEOUS.
8.1 GOVERNING LAW. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.
8.2 PRIOR AGREEMENTS. This Agreement contains the entire agreement
of the parties relating to the subject matter hereof and supersedes all prior
agreements and understanding with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this Agreement which are not set forth herein.
8.3 ARBITRATION. In the event of any controversy, claim or dispute
between the parties hereto arising out of or relating to this Agreement, the
matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.
8.4 WITHHOLDING TAXES. The Company may withhold from any salary and
benefits payable under this Agreement all federal, state, city or other taxes or
amounts as shall be required to be withheld pursuant to any law or governmental
regulation or ruling.
8.5 AMENDMENTS. No amendment or modification of this Agreement shall
be deemed effective unless made in writing signed by the parties hereto.
8.6 NO WAIVER. No term or condition of this Agreement shall be
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
8.7 SEVERABILITY. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
8.8 COUNTERPART EXECUTION. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.
8.9 ATTORNEYS FEES. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or his reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.
6
<PAGE> 7
8.10 NOTICES. Any notice required or permitted to be given hereunder
shall be in writing and may be personally served or sent by United States Mail,
and shall be deemed to have been given when personally served or two days after
having been deposited in the United States Mail, registered mail, return receipt
requested, with first class postage prepaid and properly addressed as follows:
If to Executive: Edward F. Smith, III
7 Freesia
Las Flores, CA 92688
If to the Company: Radiance Medical Systems, Inc.
13700 Alton Parkway, Suite 160
Irvine, CA 92618
Attn: Chief Executive Officer
8.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
"COMPANY"
RADIANCE MEDICAL SYSTEMS, INC.,
a Delaware corporation
By: /s/ JEFFREY THIEL
--------------------------------------
Its: President and Chief Operating Officer
"EXECUTIVE"
/s/ EDWARD F. SMITH, III
- -------------------------------------
Edward F. Smith, III
7
<PAGE> 8
EXHIBIT A
Edward F. Smith Board of Director Memberships
None.
<PAGE> 9
EXHIBIT B
"Competitive Products"
1. PTCA Catheters
2. Conventional Coronary Stents -- Without Drug Delivery
3. Conventional Coronary Stents -- with Radiation
4. Coronary and Peripheral Vascular Radiation Catheters
<PAGE> 10
EXHIBIT C
Edward F. Smith Benefits
-- Health Insurance
-- Dental Insurance
-- Long Term Disability Insurance
-- Prescription Drug Insurance
-- Group Life Insurance
-- 401(k) Program Participation
-- Employee Stock Purchase Program Participation
-- Paid Company Holidays
-- Paid vacation per company policy
<PAGE> 1
Exhibit 10.33
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of January 14, 1999 by and between CARDIOVASCULAR DYNAMICS, INC., a Delaware
corporation (the "Company"), and Brett Trauthen, an individual (the
"Executive").
R E C I T A L
The Company desires to employ Executive in the capacity hereinafter
stated, and the Executive desires to enter into the employ of the Company in
that capacity pursuant to the terms and conditions set forth herein.
A G R E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the Company and the Executive,
intending to be legally bound, hereby agree as follows:
1. EMPLOYMENT. The Company hereby agrees to employ the Executive as the
Director of Research and Development for Coronary Radiation Catheter Products of
the Company, and the Executive accepts such employment and agrees to devote
substantially all his business time and efforts and skills on such reasonable
duties as shall be assigned to him by the Company commensurate with such
position.
2. TERM. The initial term of the Executive's employment hereunder shall
commence January 14, 1999, ("Effective Date") and shall be for a period of two
(2) years, and shall automatically extend for successive one year periods
following the initial term unless either party delivers written notice to the
other no later than sixty (60) days prior to the end of the second anniversary
of the Effective Date or any successive anniversary of the Effective Date, as
the case may be, of intent not to renew. Executive's employment is subject to
earlier termination as hereafter specified.
3. POSITION AND DUTIES.
3.1 SERVICE WITH THE COMPANY. During the term of this Agreement,
the Executive agrees to perform such reasonable duties and on such basis as
shall be assigned to him from time to time by the Company (the "Company"); such
duties, however, to be commensurate with the Executive's position. In
particular, and without limitation, such duties shall include:
(a) managing projects related to beta emitting balloon
catheters for the treatment or prevention of restenosis, including, without
limitation, supervision of the project for obtaining approvals of (i) an IDE for
the initiation of human clinical trials in the United States, (ii) CE Mark
approvals, and (iii) PMA filing and approvals in the United States. In
performing these duties, Executive will work under the guidance of the Radiation
Management Committee.
<PAGE> 2
(b) the position of Project Director for Coronary
Radiation Catheter products. In this position, the Executive will manage all
projects to develop such products and coordinate the clinical, regulatory and
quality assurance functions required to bring such products to the commercial
market.
(c) transferring the technology know-how regarding
Coronary Radiation Catheter products to Company Technical and Business
personnel.
(d) Managing other projects as assigned by the Company
President, or his designee.
3.2 NO CONFLICTING DUTIES. Except as provided in Exhibit A
hereto, during the term hereof, the Executive shall not serve as an officer,
director, employee, consultant or advisor to any other business; provided,
however, that the Executive may serve as a director of another corporation so
long as (i) such corporation does not compete, directly or indirectly, with the
Company or any of its Affiliates in the area of Vascular Radiation Products, and
(ii) such services do not adversely affect Executive's ability to perform his
duties under this Agreement, unless such other service is approved by the Board
of Directors of the Company. For purposes of this Agreement, the term
"Affiliate" means any corporation, association or other business entity of which
more than 50% of the total voting power of shares of stock entitled to vote in
the election of directors, managers or trustees thereof is at the time owned or
controlled by the Company. Notwithstanding the foregoing, nothing contained
herein shall prevent Executive from making and expending any time of passive
personal investments and/or expending reasonable amounts of time for educational
and charitable activities. Except as provided in Exhibit A hereto, the Executive
confirms that he is under no contractual commitment inconsistent with his
obligations set forth in this Agreement.
4. COMPENSATION.
4.1 BASE SALARY. As compensation for all services to be rendered
by the Executive under this Agreement, the Company shall pay to the Executive a
base salary of $115,000 ("Base Salary"), which shall be paid on a regular basis
in accordance with the Company's normal payroll procedures and policies. The
amount of the Base Salary shall be reviewed by the President of the Company,
which may annually increase Executive's Base Salary in amounts consistent with
industry practices as determined in his sole discretion. Executive's
performance, the performance of the Company and such other factors as the
President deems appropriate shall also be considered.
4.2 INCENTIVE COMPENSATION PLANS. In addition to the Base Salary,
Executive shall be eligible to participate in management incentive compensation
plans approved by the Company's Board of Directors, such participation to be on
terms similar to those afforded to other management employees holding positions
with the Company. In addition to the Base Salary, the Executive shall be
entitled to earn up to twenty percent (20%) of his Base Salary as incentive
compensation. All amounts to which the Executive may be entitled under any
incentive compensation plans shall be subject to the provisions, rules and
regulations of
-2-
<PAGE> 3
any such plan which apply to other management employees.
4.3 PARTICIPATION IN BENEFIT PLANS. During the term of this
Agreement, Executive shall be entitled to participate in all employee benefit
plans, profit-sharing, stock options, vacation and other perquisite plans and
programs for which key employees of the Company are generally eligible. The
Executive's participation in any such plan or program shall be subject to the
provisions, rules and regulations thereof that are generally available to all
participants thereon, provided, however, in no event shall Executive's benefits
be less than the benefits described in Exhibit B.
4.4 EXPENSES. In accordance with the Company's policies
established from time to time, the Company will pay or reimburse the Executive
for all reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this Agreement, provided that Executive submits
appropriate vouchers and expense reports substantiating the amount thereof and
the business purposes for which such expenses were incurred.
5. TERMINATION.
5.1 TERMINATION BY THE COMPANY FOR CAUSE. Any of the following
acts or omissions shall constitute grounds for the Company to terminate the
Executive's employment pursuant to this Agreement for "cause":
(a) Willful misconduct by Executive causing material harm
to the Company but only if Executive shall not have discontinued such misconduct
within 30 days after receiving written notice from the Company describing the
misconduct and stating that the Company will consider the continuation of such
misconduct as cause for termination of this Agreement.
(b) Any material act or omission by the Executive
involving gross negligence in the performance of the Executive's duties to, or
material deviation from any of the policies or directives of, the Company, other
than a deviation taken in good faith by the Executive for the benefit of the
Company;
(d) Any illegal act by the Executive which materially and
adversely affects the business of the Company or any felony committed by
Executive, as evidenced by conviction thereof, provided that the Company may
suspend the Executive with pay while any allegation of such illegal or felonious
act is investigated.
Termination by the Company for cause shall be accomplished by
written notice to the Executive and shall be preceded by a written notice
providing a reasonable opportunity for the Executive to correct his conduct.
5.2 TERMINATION FOR DEATH OR DISABILITY. In addition to
termination for cause pursuant to Section 5.1 hereof, the Executive's employment
pursuant to this Agreement shall be immediately terminated without notice by the
Company (i) upon the death of the Executive or (ii) upon the Executive becoming
totally disabled. For purposes of this Agreement, the term "totally disabled"
means an inability of Executive, due to a physical or
-3-
<PAGE> 4
mental illness, injury or impairment, to perform a substantial portion of his
duties for a period of one hundred eighty (180) or more consecutive days, as
determined by a competent physician selected by the Company's Board of Directors
and reasonably agreed to by the Executive, following such one hundred eighty
(180) day period.
5.3 TERMINATION FOR GOOD REASON. Executive's employment pursuant
to this Agreement may be terminated by the Executive for "good reason" if the
Executive voluntarily terminates his employment as a result of any of the
following:
(a) Without the Executive's prior written consent, a
reduction in his then current Base Salary;
(b) Without Executive's prior written consent, a
relocation of the Executive's place of employment outside of Orange County,
California;
(c) Resignation as a result of unlawful discrimination, as
evidenced by a final court order;
(d) A reduction in duties and responsibilities which
results in the Executive no longer having duties described in Section 3.1.; or
(e) The Company materially breaches any provision of this
Agreement.
5.4 TERMINATION WITHOUT CAUSE. The Company may terminate this
Agreement, and the employment of the Executive under this Agreement, without
cause at any time upon at least thirty (30) days prior written notice to the
Executive.
5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of
this Agreement, the Executive resigns for one of the reasons stated in Section
5.3, or the Company terminates the Executive's service, except as provided in
Sections 5.1 or 5.2 hereof, the Executive shall be entitled to the following
compensation: (i) the portion of his then current Base Salary which has accrued
through his date of termination, (ii) any payments for unused vacation and
reimbursement expenses, which are due, accrued or payable at the date of
Executive's termination, (iii) severance payment in an amount (the "Severance
Amount") equal to Executive's then-current Base Salary, payable for the
remainder of the Term; and (iv) all of Executive's options to purchase shares of
the Company's common stock and restricted stock shall accelerate and
automatically vest by one additional year. Such options shall be exercisable in
accordance with their terms.
All payments required to be made by the Company to the Executive
pursuant to this Section 5.5 shall be paid on a regular basis in accordance with
the Company's normal payroll procedures and policies, including, without
limitation, the Severance Amount which shall be paid at such times and in such
amounts consistent with the Company's normal payroll procedures and policies
over the number of months immediately succeeding the date of termination that is
equal to the number of months of Base Salary payable as the Severance Amount. If
the Company terminates the Executive's employment pursuant to Sections 5.1 or
5.2, or if the Executive voluntarily resigns (except as provided in Section
5.3), then the
-4-
<PAGE> 5
Executive shall be entitled to only the compensation set forth in items (i) and
(ii) or the first paragraph of this Section 5.5.
6. ASSIGNMENT. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party, except
that the Company may, without the consent of the Executive, assign its rights
and obligations under this Agreement to an Affiliate or to any corporation, firm
or other business entity (i) with or into which the Company may merge or
consolidate, or (ii) to which the Company may sell or transfer all or
substantially all of its assets. After any such assignment by the Company, the
Company shall be discharged from all further liability hereunder and such
assignee shall thereafter be deemed to be the Company for the purposes of all
provisions of this Agreement including this Section 6.
7. SUCCESSORS. This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive should die while any amounts are still payable to him hereunder, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Executive's devisee, legatee, or other
designee or, if there be no such designee, to the Executive's estate.
8. MISCELLANEOUS.
8.1 GOVERNING LAW. This Agreement is made under and shall be
governed by and construed in accordance with the laws of the State of
California.
8.2 PRIOR AGREEMENTS. This Agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
all prior agreements and understanding with respect to such subject matter, and
the parties hereto have made no agreements, representations or warranties
relating to the subject matter of this Agreement which are not set forth herein.
8.3 ARBITRATION. In the event of any controversy, claim or
dispute between the parties hereto arising out of or relating to this Agreement,
the matter shall be determined by arbitration, which shall take place in Orange
County, California, under the rules of the American Arbitration Association. The
arbitrator shall be a retired Superior Court judge mutually agreeable to the
parties and if the parties cannot agree such person shall be chosen in
accordance with the rules of the American Arbitration Association. The
arbitrator shall be bound by applicable legal precedent in reaching his or her
decision. Any judgment upon such award may be entered in any court having
jurisdiction thereof. Any decision or award of such arbitrator shall be final
and binding upon the parties and shall not be appealable. The parties hereby
consent to the jurisdiction of such arbitrator and of any court having
jurisdiction to enter judgment upon and enforce any action taken by such
arbitrator. The fees payable to the American Arbitration Association and the
arbitrator shall be paid by the Company.
8.4 WITHHOLDING TAXES. The Company may withhold from any salary
and benefits payable under this Agreement all federal, state, city or other
taxes or amounts as shall be required to be withheld pursuant to any law or
governmental regulation or ruling.
-5-
<PAGE> 6
8.5 AMENDMENTS. No amendment or modification of this Agreement
shall be deemed effective unless made in writing signed by the parties hereto.
8.6 NO WAIVER. No term or condition of this Agreement shall be
deemed to have been waived nor shall there be any estoppel to enforce any
provisions of this Agreement, except by a statement in writing signed by the
party against whom enforcement of the waiver or estoppel is sought. Any written
waiver shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than that specifically waived.
8.7 SEVERABILITY. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this Agreement shall be unaffected and
shall continue in full force and effect.
8.8 COUNTERPART EXECUTION. This Agreement may be executed by
facsimile and in counterparts, each of which shall be deemed an original and all
of which when taken together shall constitute but one and the same instrument.
8.9 ATTORNEYS FEES. Should any legal action or arbitration be
required to resolve any dispute over the meaning or enforceability of this
Agreement or to enforce the terms of this Agreement, the prevailing party shall
be entitled to recover its or his reasonable attorneys fees and costs incurred
in such action, in addition to any other relief to which that party may be
entitled.
8.10 NOTICES. Any notice required or permitted to be given
hereunder shall be in writing and may be personally served or sent by United
States Mail, and shall be deemed to have been given when personally served or
two days after having been deposited in the United States Mail, registered mail,
return receipt requested, with first class postage prepaid and properly
addressed as follows:
If to Executive: Brett Trauthen
2021 Port Weybridge Place
Newport Beach, CA 92660
If to the Company: Cardiovascular Dynamics, Inc.
13700 Alton Parkway, Suite 160
Irvine, CA 92618
Attn: Chief Executive Officer
8.11 PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT. Executive
agrees to sign the Company's standard form of employee proprietary information
and inventions agreement.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year set forth above.
COMPANY
CARDIOVASCULAR DYNAMICS, INC.,
a Delaware corporation
By: /s/ Jeffrey O'Donnell
--------------------------------
Its: President
-------------------------------
EXECUTIVE
/s/ Brett Trauthen
--------------------------------
Brett Trauthen
-7-
<PAGE> 8
Exhibit A
B. Trauthen Company Associations
NONE
<PAGE> 9
Exhibit B
B. Trauthen Benefits
--Health Insurance
--Dental Insurance
--Prescription Drug Insurance
--401K Program Participation
--Employee Stock Purchase Program Participation
--Paid Company Holidays
--Paid vacation per company policy
--Reimbursement for all travel on company business
<PAGE> 1
Exhibit 10.33.1
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This First Amendment to Employment Agreement (the "Amendment") is made
as of December 10, 1999, between Radiance Medical Systems, Inc., a Delaware
corporation (the "Company"), and Brett Trauthen, an individual ("Executive").
RECITALS
WHEREAS, the Company currently employs Executive pursuant to that
certain Employment Agreement dated January 14, 1999 (the "Employment
Agreement"); and
WHEREAS, the Company and Executive desire to amend the Employment
Agreement to extend the automatic renewal terms set forth in the Employment
Agreement, as provided in greater detail below;
NOW THEREFORE, in consideration of the mutual agreements and covenants
hereinafter set forth and for other valuable consideration, the Company and
Executive hereby agree as follows:
AGREEMENT
1. DEFINITIONS.
Unless otherwise defined herein, capitalized terms used herein shall
have the meanings assigned to them in the Employment Agreement.
2. AMENDMENT TO SECTION 2 OF THE EMPLOYMENT AGREEMENT.
Section 2 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"2. TERM. The term of this Agreement will begin on January 14,
1999 (the "Effective Date"), and shall continue thereafter for a two (2)
year period, and commencing on the first anniversary of the Effective
Date shall be extended on each day for one (1) day so that the remaining
term hereof is always one (1) year unless either party elects to
terminate this Agreement in accordance with its provisions. Executive's
employment is subject to earlier termination as hereafter specified."
3. AMENDMENT TO SECTION 5.5.
Section 5.5 of the Employment Agreement is hereby amended to read in its
entirety as follows:
"5.5 PAYMENTS UPON REMOVAL OR TERMINATION. If during the term of
this Agreement, the Executive resigns for one of the reasons stated in
Section 5.3, or the Company terminates the Executive's service, except
as provided in Sections 5.1 or 5.2 hereof, the Executive shall be
entitled to the following compensation: (i) the portion of his then
current Base Salary which has accrued through his date of termination,
(ii) any payments for unused vacation and reimbursement expenses, which
are due, accrued or payable at the date of Executive's termination,
(iii) severance payment in an amount (the "Severance Amount") equal to
Executive's
<PAGE> 2
then-current Base Salary, payable for the remainder of the Term; and
(iv) to the extent not already vested under Section 4.5 or otherwise all
of Executive's options to purchase shares of the Company's common stock
and restricted stock shall accelerate and automatically vest by one
additional year, and such options shall otherwise be exercisable in
accordance with their terms. In addition, in such event, Executive shall
be entitled to (a) a prorated payment equal to the target bonus amount
for which Executive would be eligible for the year in which such
resignation or termination occurred, and (b) continuation of the
insurance benefits set forth in Exhibit C and, to the extent
permissible, participation in the Company's 401k plan, for the remainder
of the Term."
4. MISCELLANEOUS.
(a) Continuing Force and Effect. Except as herein expressly
amended, all terms, covenants and provisions of the Employment Agreement are and
shall remain in full force and effect and all references therein to such
Employment Agreement shall henceforth refer to the Employment Agreement as
amended by this Amendment. This Amendment shall be deemed incorporated into, and
a part of, the Employment Agreement.
(b) Counterparts. This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, we have set our hands hereto as of the date first
above written.
RADIANCE MEDICAL SYSTEMS, INC.
/s/ Jeffrey Thiel
- ------------------------------------------
Jeffrey Thiel, Chief Operating Officer
and President
EXECUTIVE
/s/ Brett Trauthen
- ------------------------------------------
Brett Trauthen
2
<PAGE> 1
Exhibit 10.34
FACILITY SET-UP AND CONTRACT MANUFACTURING AGREEMENT
between
Radiance Medical Systems, Inc. (Hereafter "RMS")
located at 13700 Alton Parkway, Suite 160,
in Irvine, California, 92618
and
BEBIG Isotopentechnik and Umweltdiagnostik GmbH,
(hereafter "BEBIG)
located at Robert-Rossle-Str. 10,
in D-13125 Berlin, Germany
BACKGROUND
A) Radiance Medical Systems has developed a radioactive balloon catheter
("PRODUCT") for the treatment of restenosis and is looking for a contract
manufacturer for certain process steps;
B) BEBIG develops and builds production equipment for radioactive components
and provides contract manufacturing for medical device companies utilizing
such components.
In light of the above, both parties desire to enter into the following Facility
Set-up and Contract Manufacturing Agreement (the "AGREEMENT"):
1. PROVISION OF FACILITY SPACE
a) Facility Preparation. BEBIG will prepare and make available, in
return for a one-time facility fee of US [*] approximately 100 square
meters of laboratory space (the "FACILITY") in its radioisotope laboratory
at Robert-Rossle-Str. 10, D-13125 Berlin, Germany. The Facility shall be
suitable for the handling and the production of radioactive balloon
catheters with product characteristics as described in Attachment A
("PRODUCT SPECIFICATIONS").
b) Rental Term, Responsibility for Licenses. BEBIG will sustain the
Facility for a period of at least two years ("RENTAL TERM") from the date
of execution of the Agreement. It will maintain all local licenses needed
for the Facility and the handling of Product, and if necessary, apply for
updates.
[*] Confidential Portions Omitted and Filed Separately with the Commission.
1
<PAGE> 2
c) Extension of Rental Term. RMS may request up to 3 times an extension
of the Rental Term for two years each by a) giving advance written notice,
three months before the end of a term, to BEBIG that RMS desires an
extension of the Rental Term, and b) by paying, upon the beginning of a new
Rental Term, an extension fee of US[*].
2. INSTALLATION OF PRODUCTION EQUIPMENT
a) Line Set-Up. BEBIG will have installed at the Facility, within
approximately 270 days after the execution of the Agreement and with the
help of RMS, production equipment ("PRODUCTION LINE") suitable for the
production of radioactive balloon catheters meeting Product Specifications.
b) Components from RMS. BEBIG obliges itself to buy various parts for the
Production Line ("THE COMPONENTS") from RMS. The price for these Components
shall be US [ * ] payable to a bank account in RMS' name upon
receipt of shipment. The shipment itself shall take place approximately 180
after the execution of this agreement.
c) Component Terms. The Components will be delivered by RMS to the Facility
free of shipment charges, taxes, duties, or other expenses. They will be
accompanied by adequate operating instructions and other documents, which
BEBIG, at its sole discretion, may find necessary. If BEBIG requires, RMS
in English also will make available an instructor who is familiar with the
Components and can introduce them to BEBIG staff members.
d) Right of First Refusal in Case of Component Disposal. Should BEBIG, at
the end of the Rental Term, decide to dispose of the Equipment and the
Components, then it shall give written notice of its intention to RMS,
which may opt, in writing and within 15 business days after receipt of said
notice, to buy back the Components or the remainder of it from BEBIG for
[ * ]. All cost, fees, and taxes associated with the buy-back of
the Components, like transport, storage, or shipping charges, are to be
born by RMS. RMS also acknowledges that BEBIG cannot guarantee the
functionality of the bought-back Components.
e) Other Parts. The remaining parts for the Production Line are to be
procured from third parties at BEBIG sole discretion.
[*] Confidential Portions Omitted and Filed Separately with the Commission.
2
<PAGE> 3
3. VALIDATION OF PRODUCTION PROCESS AND EQUIPMENT
a) Validation Process. BEBIG and RMS to jointly develop a process
validation plan and schedule. Once all Components and line parts have been
procured, delivered, and assembled, BEBIG will give written notice to RMS
that it intends to validate the production process ("PROCESS VALIDATION").
BEBIG will then integrate the various parts and Components into a working
production line and start verifying the validity of the output parameters.
Based on these efforts, BEBIG will also begin preparing the applications
for the various licenses and documentation that are needed to use the
Product in clinical trials in the European Union.
b) Joint Effort. RMS will fully support BEBIG in the Process Validation,
and, if BEBIG finds it necessary, second RMS staff members familiar with
the Product and the Components to the Facility. It will make best effort to
help BEBIG with the license application and among others will make
available to BEBIG all internal RMS product information that BEBIG, for the
purpose of license applications, may reasonably request.
c) Third Party Cost. All material cost and third party expenses during the
Validation Process will be borne by RMS, except the cost for European Union
Product licenses.
d) BEBIG to Provide Assistance. Should RMS require assistance in the
preparation of additional licenses, for example for territories other than
the European Union, then BEBIG agrees to provide such assistance as
required, and RMS agrees to compensate BEBIG at a rate of US[*]/hour for
such time as required from BEBIG.
e) Operational Readiness. Once Process Validation has been completed, BEBIG
shall compile and send to RMS a summary of all production process parameter
("PRODUCTION PARAMETER") that have been validated and that apply to the
Production Process. RMS shall review the document, and, within 10 business
days after receipt, either a) certify to BEBIG that the parameter are
accepted and that operational readiness ("OPERATIONAL READINESS") has been
achieved, or b) specify in detail any modification that may RMS deems
necessary. In the latter case, BEBIG and RMS shall negotiate in good faith
a plan of action, a reimbursement formula, and an implementation schedule
for the desired modifications.
[*] Confidential Portions Omitted and Filed Separately with the Commission.
3
<PAGE> 4
4. RESPONSIBILITY FOR SHIPPING CONTAINER
a) Shipping Container. RMS understands that the prerequisite for a license
a) may be the existence of a suitable and certified shipping container for
Product, and that b) RMS is responsible for providing said shipping
container.
b) BEBIG to Provide Assistance. Should RMS require assistance in the
selection and development of suitable packaging material, then BEBIG agrees
to provide such assistance as required, and RMS agrees to compensate BEBIG
at a rate of US$ 100/hour for such time as required from BEBIG.
5. PROCEDURE IF VALIDATION IS NOT SUCCESSFUL
a) Failure to Validate Process. If BEBIG did not succeed, despite best
effort and within 3 months after the beginning of the Process Validation,
to integrate the Components into a production line that manufactures
Product meeting Product Specifications, then BEBIG shall inform RMS about
this situation in writing, documenting the efforts, and citing in detail
the reasons why an integration of the Components has not worked or why a
Process Validation could not be achieved. RMS may then investigate the
issue itself and suggest reasonable alternatives. BEBIG will make best
effort to accommodate these suggestions, or negotiate with RMS, in good
faith for a period of at least 120 days, possible modifications to the
Product Specifications.
b) Right to Terminate. Should it not be possible, after these 120 days of
continued discussions, to set-up a production line that manufactures
Product meeting Product Specifications, then both parties shall be at
liberty to terminate this agreement.
6. CONTRACT MANUFACTURING
a) Minimum Production Commitment. Upon Operational Readiness of the
Production Line BEBIG will start to accept orders and manufacture Products
for at least the end of the Rental Term.
b) Parts to be Supplied. RMS will supply to BEBIG, free of charge and free
Facility, all parts for the Product listed in Attachment B ("PRODUCT
COMPONENTS TO BE SUPPLIED BY RMS"). It will provide BEBIG with a reasonable
stock of inventory.
4
<PAGE> 5
c) Responsibility for Raw Material. BEBIG will procure, in an economic
fashion, but otherwise at its sole discretion, the remaining parts and raw
materials. RMS will reimburse BEBIG for the cost of these items. The
reimbursements are due against invoice within 7 days after the end of the
month in which the cost occurred. In cases where there is a substantial
outlay of expenses, BEBIG may request, and RMS will accept, an advance
payment.
d) Transfer Price. For each unit of Product meeting Product Specifications,
BEBIG shall receive a product process fee ("FEE") of US[*]. It shall be due
within 7 days after the end of the month in which the product was
manufactured.
7. COMPENSATIONS
a) Compensations. RMS will compensate BEBIG for its activities with various
service payments ("PAYMENTS") totaling US[*] including the above mentioned
facility of US[*].
b) Payments Due. The Payments are due at the following dates:
<TABLE>
<CAPTION>
Milestone DATE DUE US$
----------------------------------------------------------------------------
<S> <C> <C>
1 Upon execution of Agreement [*]
2 90 days thereafter [*]
3 upon arrival of Components at the Facility [*]
4 upon delivery of the first RMS RDX catheter [*]
meeting RMS specifications
----------------------------------------------------------------------------
Total [*]
</TABLE>
8. MISCELLANEOUS
a) Non-assumption of liabilities. Neither party shall assume, discharge or
be liable for any debts, liabilities or obligations of the other party,
including, without limitations, (a) any liabilities of the other to its
creditors or equity owners, (b) liabilities or obligations of the other
party with respect to any transactions, (c) taxes or other liabilities or
obligations of the other party in connection with the grant of
[*] Confidential Portions Omitted and Filed Separately with the Commission.
5
<PAGE> 6
the option, or (d) contingent liabilities or obligations of the other
party.
b) Assignment. Both BEBIG and RMS may assign this Agreement to their
respective Affiliates only, and to any successor or acquirer of the
business to which this Agreement relates, by sale of assets, merger, or
otherwise. "Affiliates" shall mean any Person directly or indirectly
controlling, controlled by or under direct or indirect common control with,
a named party hereto, and shall include any director or officer of such
party and the term control shall refer to the possession, directly or
indirectly, of the power to direct management or policies, whether through
ownership of voting securities, contract or otherwise of such Person or
party.
c) Notices. Any notices or other communications required or permitted
hereunder shall be sufficiently given if faxed (with written
acknowledgement by the receiving party) or delivered personally or sent by
registered or certified mail, postage prepaid, addressed to:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
if to BEBIG: If to RMS:
--------------------------------------------------------------------------
<S> <C>
BEBIG Isotopentechnik und Umwelt- Radiance Medical Systems
diagnostik GmbH, Michael Henson,
Andreas Eckert, President
General Manager 13700 Alton Parkway
Robert-Rossle-Str. 10 Suite 160
D-13125 Berlin Irvine, CA 92618
GERMANY USA
Fax: +49-30-9410-8412 001-949-7335
--------------------------------------------------------------------------
</TABLE>
d) Execution in Counterparts. This agreement may be executed in
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
e) Succession. All the terms and provisions of this agreement shall be
binding upon and inure to the benefit of, and be enforceable by, RMS and
BEBIG and their successors and valid assigns.
f) Entire Understanding. This agreement constitutes the entire agreement
between the parties hereto, and there are no agreements, understandings,
restrictions, warranties or representations between the parties other than
those set
6
<PAGE> 7
forth herein.
g) Governing Law. This Agreement shall be governed by and construed and
enforced in accordance with, the substantive laws of Germany.
h) Severability. Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof or affecting the validity or
enforceability of such provision in any other jurisdiction. In the event that
any provision of this Agreement shall be determined to be unenforceable by
reason of its extension for too great a period of time or over too large a
geographic area or over too great a range of activities, it shall be interpreted
to extend only over the maximum period of time, geographic area or range of
activities as to which it may be enforceable.
i) Confidential Information. Each party shall hold in confidence any
Confidential Information disclosed by the other or otherwise obtained by such
party as a result of activities contemplated by this Agreement, and each party
shall protect the confidentiality thereof with the same degree of care that it
exercises with respect to its own information of a like nature, but in no event
less than reasonable care. Access to Confidential Information must be restricted
to the receiving party's employees, who, in each case, need to have access to
carry out a permitted use and are bound in writing to maintain the
confidentiality of such Confidential Information. The Confidential Information
and all copies of part or all thereof, shall be and remain the exclusive
property of the disclosing party, and the receiving party shall acquire only
such rights as are expressly set forth under the terms and conditions of this
Agreement and only for so long as such rights are in effect.
j) Amendments. This Agreement may be amended, modified or supplemented only
by a written instrument executed by the parties hereto.
Date: Date:
/s/ A. ECKERT /s/ MICHAEL HENSON
- ------------------------------------ ------------------------------
BEBIG GmbH RMS
7
<PAGE> 8
ADDENDUM TO FACILITY SET-UP AND CONTRACT MANUFACTURING
AGREEMENT (the "Agreement")
1. PRODUCT MANUFACTURING DEVELOPMENT
1.1 BEBIG'S OBLIGATIONS. BEBIG agrees to use its diligent, best efforts
to design, develop and test manufacturing processes in order to ensure the
manufacture of the Product in a manner which satisfies the Product
Specifications.
1.2 PERIODIC REVIEW; CONSULTATION. In carrying out the development of
manufacturing processes with respect to the Product, BEBIG shall consult
regularly with RMS and keep RMS generally informed of its progress toward
completion of development of manufacturing processes with respect to the
Product. RMS shall be entitled to inspect such progress during normal business
hours, and/or require delivery to it of reasonable documentation. Further,
BEBIG shall provide RMS complete disclosure of all material developments and
technical information. Each party shall designate an authorized representative
(an "Authorized Representative") who shall oversee the day-to-day operation of
the rights and obligations of each such party under this Agreement. The
Authorized Representative for RMS shall be Jeff Thiel, and the Authorized
Representative of BEBIG shall be Andreas Eckert. Either party may change its
Authorized Representative by giving the other party written notice of its new
representative in the manner provided herein.
1.3 CHANGE REQUESTS. RMS may from time to time request BEBIG to alter,
amend, enhance, add to or delete from the Specifications of BEBIG's obligations
hereunder (a "Change Request"). In the event a Change Request is material, RMS
and BEBIG shall jointly determine in good faith the impact, if any, of the
Change Request on the development schedule and BEBIG's compensation under this
Agreement. Upon receipt of authorization, BEBIG shall promptly commence
performance in accordance with the Change Request, and the Development Schedule
and Specifications shall be deemed amended accordingly.
1.4 OWNERSHIP. BEBIG and RMS acknowledge and agree that during the period
of this Agreement the parties may solely or jointly develop improvements to the
RMS Technology. BEBIG hereby agrees that, for any sole or joint improvement to
RMS Technology not covered under any RMS patent, know how or trade secret,
BEBIG will grant RMS a perpetual, worldwide, non-exclusive, fully paid-up,
royalty free license to all patent, trade secrets and copyright rights and
other proprietary rights therein, and enhancements and upgrades made to the RMS
Technology during the manufacturing and supply of the Product. For purposes
hereof, "RMS Technology" shall mean all know-how, drawings, sketches,
configurations, models, prototypes, designs, schematics, layouts, inventions,
processes, machines, ideas, concepts and any other information owned by RMS or
developed by RMS which is used in the design, development, modification,
improvement and manufacture of the Product, including, without limitation, all
patent, trade secret and copyright rights, and any other proprietary rights.
BEBIG agrees that it is to have no right, title or interest in or to the RMS
Technology. BEBIG shall take all actions and execute all documents as RMS may
reasonably request to effectuate the acknowledgment of such ownership herein,
including the right to submit any patent, copyright or trademark application or
registration.
1.5 MANUFACTURING DOCUMENTATION. At the request of RMS, BEBIG agrees to
provide RMS with copies of all manufacturing drawings, schematics and
specifications
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necessary or appropriate to permit manufacture of the Product and any
improvements thereto. RMS shall reimburse BEBIG its reasonable
reproduction and transport costs.
2. SUPPLY BY BEBIG
2.1 EXCLUSIVE SUPPLY OF PRODUCT. BEBIG shall supply only RMS with the
Product and BEBIG shall have no rights to supply the Product to any third party
nor to use the RMS Technology to manufacture any other device for any other
purpose. RMS shall submit firm purchase orders to BEBIG from time to time and
BEBIG hereby agrees to accept such purchase orders so long as this Agreement is
in effect. BEBIG agrees to fulfill the terms of all firm purchase orders. Terms
of supply and delivery of the Product not covered by this Agreement shall be in
accordance with the terms of each purchase order tendered by RMS in connection
with this Agreement; provided that if any of the terms of this Agreement
conflict with any of the terms of RMS's purchase order, the terms of this
Agreement shall govern.
2.2 SALE AND PURCHASE. BEBIG, within the limitations contained in this
Section 2.2, agrees to use its best efforts to sell to RMS such quantities of
the Product as RMS may require.
2.3 REGULATORY COMPLIANCE.
2.3.1 MANUFACTURE. BEBIG warrants and represents that the Product
manufactured for and supplied by BEBIG under this Agreement will be manufactured
with all applicable ISO 9000 and EN 46000 regulations. Should RMS and BEBIG
agree that BEBIG or any of its affiliates manufacture any RMS Product in any
country that does not fall within EN 46000 and/or ISO 9000 Series standards,
the two parties agree to reasonably negotiate an addendum to this Agreement
covering such manufacturing regulations and the costs involved in implementing
such manufacturing. BEBIG shall promptly notify RMS in writing prior to any
change in the manufacturing process or components of the Product is made,
identifying by serial number of the Product unit at which such change is to be
implemented. BEBIG shall ensure that any such change is not implemented without
the prior written consent of RMS. In addition, BEBIG agrees to have implemented
such quality control systems and procedures as shall be appropriate to assure
compliance with the requirements of International Standards Organization 9000
Series standards as applicable to BEBIG or its agents.
2.3.2 REPORTS. BEBIG shall make such reports, filings and
disclosures as shall be required to comply with the foregoing Section 2.3.1,
and shall provide RMS with copies thereof.
2.3.3 INSPECTION. RMS shall be entitled to inspect any facilities
in which any part of the Product is being manufactured for purposes of assuring
compliance with the foregoing rules, regulations and standards, and discharge
of its own responsibilities thereunder, and BEBIG shall ensure that RMS will
have the ability to inspect such facilities upon one (1) week's prior notice.
BEBIG shall provide RMS with copies of all documents reasonably requested by
RMS for such purposes.
2.4 WARRANTY. BEBIG represents and warrants that the Product, when
delivered to RMS, and for the agreed upon product shelf life thereafter, will
meet the Product Specifications in effect as of the time of delivery and be
free from defects in material or workmanship. BEBIG further represents and
warrants that (i) the manufacturing process for the Product will not infringe
or abridge any patent,
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<PAGE> 10
copyright, trade secret or other proprietary right of any third party; (ii)
BEBIG has, and at all times during the term of this Agreement, will have all
rights necessary for the performance of its obligations hereunder; and (iii)
all property and ownership rights in and to the RMS Technology shall remain
exclusively in RMS and no other party shall have any right, title or interest
in or to the RMS Technology. EXCEPT AS SET FORTH IN SECTION 2.3.1 THE FOREGOING
WARRANTIES ARE EXCLUSIVE IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED
(INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE). NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR
SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOSS OF PROFITS) AS A
RESULT OF A BREACH OF THIS AGREEMENT REGARDLESS OF WHETHER THE PARTY LIABLE OR
ALLEGEDLY LIABLE WAS ADVISED, HAD OTHER REASON TO KNOW OR IN FACT KNEW OF THE
POSSIBILITY. ALL WARRANTY REPAIRS OR REPLACEMENT OF THE PRODUCT SHALL BE
PERFORMED BY BEBIG WITHOUT CHARGE. IN ADDITION, BEBIG AGREES TO PERFORM
ADDITIONAL SERVICES REASONABLY REQUESTED BY RMS DURING THE TERM OF THIS
AGREEMENT. ANY REPAIRS OR SERVICES PROVIDED BY BEBIG OUTSIDE THE WARRANTY SHALL
BE PERFORMED AT BEBIG'S STANDARD HOURLY RATE.
2.5 DELIVERY. The delivery of Product shall be to the location or
locations specified in RMS's purchase order. RMS agrees to pay BEBIG for
reasonable shipping costs for such delivery.
2.6 REJECTION OF NONCONFORMING PRODUCT.
2.6.1 TESTING. BEBIG shall ensure that each Product is thoroughly
tested in accordance with methods approved by RMS prior to its delivery to RMS
to verify that it complies with the Product Specifications. BEBIG shall provide
RMS with a description of all testing performed upon delivery of each Product.
2.7 CERTIFICATE OF COMPLIANCE. All shipments of Product shall be
accompanied by a certificate of compliance from BEBIG, which shall be executed
by an authorized officer or agent of BEBIG, that states that the Product meets
the Product Specifications and otherwise complies with the warranty set forth
in Section 2.4.
2.8 DEFECTIVE PRODUCT. RMS will promptly return to BEBIG any Product
which has been found to be defective, and BEBIG agrees to promptly replace, at
its sole cost and expense, any defective Product which has been returned to
BEBIG by RMS.
3. TERM AND TERMINATION
3.1 DEFAULT. This Agreement may be terminated immediately upon written
notice by either party to the other party in the event of a material default by
the other party in the performance of its obligations hereunder, which default
shall not have been remedied within ninety (90) days after written notice
thereof shall have been delivered by the non-defaulting party to the defaulting
party.
3.2 DELIVERY. If BEBIG fails to timely deliver at least 80% of the amount
of the Product ordered by RMS as required hereunder for any reason, excluding
force majeure, as measured over any period of fifteen (15) or more consecutive
days, then RMS may upon ten (10) days' prior written notice
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to BEBIG terminate this Agreement. For the purposes hereof, properly rejected
Product shall not be considered delivered.
3.3 EFFECT OF TERMINATION. Upon termination of this Agreement, BEBIG
shall cease all design, development, and manufacture of the Product and shall
grant RMS a perpetual worldwide, non-exclusive, fully paid-up, royalty free
license to all new and/or improved RMS Technology as described in Section 1.4
of this Addendum. Termination shall not cancel outstanding purchase orders
except as mutually agreed by the parties. BEBIG shall also render an accounting
to RMS of all inventory of the Products, Components and Equipment held by BEBIG
and its Affiliates or agents, shall make delivery in accordance with the terms
of effective purchase orders and shall ensure the prompt return to RMS of all
Components as set forth in Section 2(d) of the Agreement.
4. INDEMNIFICATION
4.1 INDEMNITIES. BEBIG shall indemnify, defend and hold harmless RMS and
its Affiliates and their respective officers, directors and employees from any
liability, claim, demand, cost, expense or injury (including reasonable
attorneys' and expert witnesses' fees) arising from the manufacture of any
defective Product by BEBIG or its agents (including, but not limited to,
product liability claims) and from any breach of BEBIG's representations,
warranties or covenants under this Agreement. RMS shall indemnify, defend and
hold harmless BEBIG and its Affiliates and their respective officers, directors
and employees from any liability, claim, cost, expense, demand or injury
(including reasonable attorneys' fees) arising from RMS design or marketing of
the Product by RMS or its agents and any breach of RMS's obligations under this
Agreement. The indemnifying party shall have the right to control the defense
of such lawsuit or claim, provided that the indemnifying party shall not,
without the indemnified party's written consent, settle or compromise any such
lawsuit or claim in a manner that could result in any liability of the
indemnified party. The provisions of this Section shall survive the termination
of this Agreement. For purposes hereof, "Affiliate" shall mean any corporation,
or other entity, controlling, controlled by, or under common control with a
party to this Agreement. For such purpose, "control" shall mean the ownership,
directly or indirectly, of more than 50% of the voting stock of a corporate
entity, or more than 50% of the beneficial interest of any entity other than a
corporation.
5. GENERAL
5.1 PROVISIONS CONTRARY TO LAW. In performing this Agreement, the parties
shall comply with all applicable laws. Nothing in this Agreement shall be
construed so as to require the violation of any law, and wherever there is any
conflict between any provision of this Agreement and any law the law shall
prevail, but in such event the affected provision of this Agreement shall be
affected only to the extent necessary to bring it within the applicable law,
provided that any such change is consistent with the original intention of the
parties and the terms of this Agreement taken as a whole.
5.2 UNITED NATIONS CONVENTION. The parties specifically waive any rights
and obligations under any applicable provisions of the United Nations
Convention for the International Sale of Goods.
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5.3 SURVIVAL. The following Sections shall survive the termination of the
Agreement for a period of three (3) years: Sections 2(d) and 8 of the Agreement,
and Sections 1.4, 2.4 and 4 of this Addendum.
5.4 FORCE MAJEURE. Neither party of this Agreement shall be liable for
delay or failure in the performance of any of its obligations hereunder if such
delay or failure is due to causes beyond its reasonable control, including,
without limitation, acts of God, fires, earthquakes, strikes and labor
disputes, acts of war, civil unrest or intervention of any governmental
authority, but any such delay or failure shall be remedied by such party as
soon as is reasonably possible.
5.5 INDEPENDENT CONTRACTOR. Each party hereto shall be and remain an
independent contractor and nothing herein shall be deemed to constitute the
parties as partners. Further, neither party shall have any authority to act, or
attempt to act, or represent itself, directly or by implication, as an agent of
the other or in any manner assume or create, or attempt to assume or create,
any obligation on behalf of or in the name of the other, nor shall either be
deemed the agent of the other.
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<PAGE> 1
Exhibit 10.35
LICENSE AGREEMENT
This License Agreement ("Agreement") is made as of the 28 day of July, 1999
(the "Effective Date") by and between Radiance Medical Systems, Inc., a
Delaware corporation ("RMS") with its principal place of business located at
13700 Alton Parkway, Irvine, California, United States, 92618 and BEBIG GmbH,
("BEBIG") with its principal place of business located at Robert-Rossle-Str.
10, 13125 Berlin, Germany.
WHEREAS, BEBIG has developed and owns certain proprietary processes and
materials from the manufacture of medical devices for the delivery of radiation
therapy to the human body;
WHEREAS, BEBIG is the exclusive licensee of the Hehrlein Patents (as
defined below);
WHEREAS, RMS desires to acquire a license to such technology and a
sublicense to such patents for the development, manufacture and
commercialization of medical devices for the delivery of radiation therapy to
the human body; and
WHEREAS, BEBIG is willing to grant such license and sublicense upon the
terms and subject to the conditions set forth herein.
NOW THEREFORE, in consideration of the mutual promises, covenants,
representations and warranties contained in this License Agreement, the parties
agree as follows:
1. DEFINITIONS.
The following capitalized terms shall have the meanings given below:
1.1 "Affiliate" shall mean, with respect to any Person, any other
Person which controls, is controlled by, or is under common control with the
first Person. For purposes of this definition, "control" means: (a) in the case
of corporate entities, direct or indirect ownership of more than fifty percent
(50%) of the stock or shares entitled to vote for the election of directors;
and (b) in the case of non-corporate entities, direct or indirect ownership of
more than fifty percent (50%) of the equity interest with the power to direct
the management and policies of such non-corporate entities.
1.2 "Effective Date" shall have the meaning set forth in the
Preamble to this License Agreement.
1.3 "Field" shall mean the design, development and commercialization
of medical devices suitable for the radioactive treatment of occlusive
cardiovascular and peripheral vascular diseases.
1.4 "Hehrlein license" shall mean that certain Patent License
Agreement between Dr. Christoph Hehrlein and BEBIG dated October 26, 1998.
1.5 "Hehrlein Patents" shall mean all patents, pending patent
applications and improvements related to be "C. Hehrlein Balloon-Based Radiation
Delivery Devices" as more fully described on Exhibit A.
<PAGE> 2
1.6 "Licensed Know-How" means information regarding methods and devices
for the radioactive treatment of occlusive cardiovascular and peripheral
vascular disease related to the Licensed Patents now existing or hereafter
developed which is either confidential or not known or used by others who do
not have licenses for such use, including, but not limited to, devices,
specifications, methods of use, inventions and technical, business, design,
manufacturing, bench, animal, clinical and the like information.
1.7 "Licensed Patents" means (1) the patent rights owned or controlled or
licensed by BEBIG or its Affiliates in the patents and patent applications
identified on Exhibit A attached hereto, and the inventions covered by those
applications and patents, and foreign counterparts thereof, and (ii) any
additional patent rights BEBIG or its Affiliates now owns, controls or has
access to, or may own, control or have access to in the future which are
continuations, continuations-in-part, divisionals or refilings of the original
applications upon which the aforementioned patent rights are based, and the
inventions covered thereby, or foreign counterparts thereof, and upon any
reexaminations, reissues, renewals or extensions thereof.
1.8 "Licensed Product" shall mean a product, that incorporates, embodies,
uses or is designed or produced using the Licensed Technology or Licensed
Know-How.
1.9 "Licensed Technology" shall mean the Licensed Patents and the
Licensed Know-How.
1.10 "Manufacturing Agreement" shall mean that certain facility set-up and
contract manufacturing Agreement by and between BEBIG and RMS of even date
herewith.
1.11 "Net Sales" shall mean the amount invoiced for sales, leases or other
dispositions of Licensed Products (other than sales, leases or other
dispositions to Affiliates unless such Affiliate is the end user) less the
following deductions (to the extent they are not already reflected in the
amount billed):
(a) Discounts taken in amounts customary in the trade;
(b) Import, export, excise, sales or use taxes, tariffs and duties
directly imposed with reference to particular sales;
(c) Outbound transportation prepaid or allowed; and
(d) Amounts allowed or credited on returns, rebates or retroactive
price deductions.
Licensed Products shall be considered "sold" when billed out or
invoiced to a third party. If a Licensed Product is incorporated into another
product or is sold in combination with other products or services and not
invoiced separately, such Licensed Product shall be included in Net Sales at
the then current list price for such quantities of such Licensed Product with
any discount from list price being applied proportionately to the discount from
list price of the product into which the Licensed Product was incorporated or
the list price of the other products sold, as the case may be. If there is no
then current list price for such Licensed Product, Net Sales will be based on
the separate value of such Licensed Product and such other products or
services, but in no event shall the
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<PAGE> 3
value of such Licensed Product for such calculation be less than RMS's cost of
goods for such Licensed Product, determined in accordance with generally
accepted accounting principles.
1.12 "Person" shall mean any person, corporation, organization, body
or other legal entity.
1.13 "Valid Claim" means a claim of an issued patent that has not been
held or declared invalid, unpatentable or unenforceable by the relevant national
patent office or a court of competent jurisdiction, unappealable or unappealed
within the time allowed for appeal, and which has not been admitted to be
invalid or unenforceable.
2. LICENSE TERMS.
2.1 License Grant to RMS. Subject to the terms and conditions of this
License Agreement, BEBIG hereby grants to RMS a worldwide, non-exclusive license
under the Licensed Technology, including a sublicense under the Hehrlein
license, to practice methods and to design, develop, manufacture, have
manufactured, import, export, use, offer to sell, sell and otherwise dispose of
License Products in the Field.
2.2 Sublicensees. RMS shall give BEBIG notice of any sublicense
granted by RMS. RMS shall be responsible for all obligations of such
sublicensees hereunder, including without limitation their obligation to
maintain confidentiality of information and to report Net Sales and to pay
royalties on sales of Licensed Products.
2.3 Hehrlein License Maintenance. BEBIG shall perform all of its
obligations under the Hehrlein License and use its best efforts to maintain the
Hehrlein license in full force and effect for the entire term of this Agreement,
as it may be extended. In the event that despite such best efforts, BEBIG knows
or has reason to believe that the Hehrlein License will be terminated, it shall
provide prompt notice to RMS and shall cooperate with RMS in maintaining the
Hehrlein License in effect, which cooperation may include assignment of the
Hehrlein License to RMS or the loan or other advancing of funds to BEBIG to meet
its financial or other obligations under the License.
3. TERM.
3.1 Term. The initial term of this License Agreement (the "Initial
Term") shall commence as of the Effective Date, and shall continue until July 1,
2002.
3.2 Option to Renew. Upon the expiration of the Initial Term of this
License Agreement, RMS has the option to extend this License Agreement until
the expiration of all Licensed Patents hereunder, unless earlier terminated
pursuant to Section 8 (the "Option Period"). RMS shall notify BEBIG of its
option to extend this License Agreement, pursuant to Section 10.9, no later
than July 1, 2002.
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<PAGE> 4
4. LICENSE FEES
4.1 Closing Fee. Within fifteen (15) days of the Effective Date of
this License Agreement, RMS shall pay to BEBIG a one time license and option
fee of [ * ] (the "Closing Fee").
4.2 Annual Fee. Subject to the provisions set forth in Section 4.3,
during the Initial Term of this License Agreement, RMS shall pay to BEBIG an
aggregate amount of [ * ] payable in three annual installments (the
"Annual License Fee"). Each Annual License Fee shall be [ * ], less any
License Fee Offset as set forth in Section 4.4. The first Annual License Fee is
payable July 1, 2000, and each subsequent Annual License Fee is payable at one
year intervals thereafter.
4.3 Royalties. Subject to the provisions set forth in Section 4.3(b)
and 4.4, if RMS exercises its option to extend this License Agreement pursuant
to Section 3.2, the consideration payable to BEBIG during the Option Period
(the "Royalties") shall be as follows:
(a) Royalty Rate. RMS shall pay to BEBIG (i) a royalty of [*]
percent[*] of Net Sales of Licensed Products if the sales would infringe a Valid
Claim of the German Licensed Patent [ * ], no matter what country the
Licensed Product is sold in (i.e., BEBIG shall be entitled to royalties on
worldwide Net Sales so long as the Licensed Product is covered by a Valid Claim
of the German Licensed Patent [ * ]), and (ii) no royalties if such
sales would not infringe a Valid Claim of the German Licensed Patent [ *
] Such Royalties shall be subject to adjustments as set forth in Sections 4.3(b)
and 4.4 below.
(b) Adjustment of Royalty Rate. In the event that BEBIG
licenses or sublicenses the Licensed Technology to a third party, the Royalties
otherwise payable under Section 4.3(a) above shall be reduced by [ * ] percent
[ * ] to a royalty rate of [ * ] percent [ * ] of Net Sales of Licensed
Products.
(c) Payment Dates and Statements. Within ninety (90) days of
the end of each calendar quarter in which Net Sales occur, RMS shall calculate
the Royalties owed to BEBIG under this Section 4 and shall remit to BEBIG the
amount owed to BEBIG. Such payment shall be accompanied by a statement showing
the calculation of the amount owed for Licensed Products, including the Net
Sales of Licensed Products for that quarter (including the gross invoiced sales
and permissible deductions therefrom), and the exchange rate (as determined
pursuant to Section 4.6) used to directly convert any royalty amounts into U.S.
Dollars.
(d) Records and Accounting. RMS shall keep complete and
accurate records of the latest three (3) years of Net Sales. BEBIG shall have
the right annually at its own expense to have an independent, certified public
accountant review such records upon at least twenty (20) days' notice and
during reasonable business hours for the purpose of verifying Royalties payable
to BEBIG. Such review shall be conducted so as not to unreasonably interfere
with RMS's operations. Such accountant shall agree to appropriate
confidentiality provisions and transmit to BEBIG only the results of its review
and items necessary to show any discrepancy between RMS's reports. Results of
such review shall be made available to both parties. If the review results in a
determination of an underpayment of royalties to BEBIG, such underpayment shall
be promptly
[*] Confidential Portions Omitted and Filed Separately with the Commission.
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remitted to BEBIG with interest as provided in Section 4.5. If such review
determines that RMS' Net Sales were more than 110% of the Net Sales reported by
RMS for the period under review, RMS shall pay all of the reasonable costs of
such review.
4.4 License Fee Offset. The Annual License Fee and the Royalties are
subject to the following offsets (each, a "License Fee Offset"):
(a) the Closing Fee of [*];
(b) all payments by RMS to BEBIG and its Affiliates, or paid by
RMS for the account of BEBIG, including, but not limited to those related to or
incurred in the performance of the Manufacturing Agreement such as {*} in
service expenses; and revenues paid to BEBIG for the production of the Licensed
Products, minus the amount expended for equipment purchases by BEBIG from RMS;
(c) amounts expended by RMS in the enforcement of intellectual
property rights pursuant to Section 6.3; and
(d) amounts expended by RMS in obtaining or maintaining its
rights to the Licensed Patents and/or Licensed Technology pursuant to Section
6.2.
Such License Fee Offsets will be applied to either the Annual License Fee
or Royalties, whichever is then applicable, on the date the same is paid or
incurred by RMS. Each License Fee Offset is accrued and cumulative over the
period this License Agreement is in effect, and any excess License Fee Offset
not used shall be retained and used as an offset to a subsequent payment due
hereunder.
4.5 Late Payments. Any payment owed by BEBIG under this License
Agreement that is not paid on or before the date such payment is due shall bear
interest, to the extent permitted by applicable law, at [*] percent [*] per
annum, calculated on the number of days such payment is delinquent.
4.6 Currency of Payments. All payments under this License Agreement
shall be made U.S. Dollars by wire transfer to such bank account as BEBIG may
designate from time to time. Any payments due hereunder on Net Sales outside of
the United States shall be payable U.S. Dollars at the average rate of exchange
of the currency of the country in which the Net Sales are made as reported in
the New York edition of The Wall Street Journal for the last month of the
quarter for which the royalties are payable.
4.7 Blocked Currency. If the law or regulation of any country shall
at any time operate to prohibit the transfer of funds therefrom to BEBIG, RMS
shall notify BEBIG to such effect and (provided that RMS shall first attempt in
good faith to follow BEBIG's instructions pursuant to the first sentence of
Section 4.6) shall have the right to pay or cause to be paid royalties
hereunder on account of its sales and the sales of its Affiliates and
sublicensees in such country by depositing local currency (if RMS is paid in
such currency) to the account of BEBIG in an interest-bearing account if
permissible at the prevailing commercial interest rate in a bank in such
country (which account and bank are reasonably acceptable to BEBIG). RMS shall
thereafter cooperate with BEBIG in
[*] Confidential Portions Omitted and Filed Separately with the Commission.
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<PAGE> 6
BEBIG's efforts to obtain the lawful release of said funds to BEBIG, but shall
have no further responsibility therefor.
4.8 Tax Withholding. If laws or regulations require the withholding
of income taxes owed by BEBIG on account of royalties accruing under this
License Agreement, such taxes shall be deducted on a country-by-country basis
by RMS from such remittable royalty and will be paid by it to the proper taxing
authority. Proof of payment shall be secured and sent to BEBIG as evidence of
such payment.
4.9 Other Taxes. RMS shall pay all sales, use, transfer or similar
taxes, whether foreign, federal (United States), state or local, however
designated, that are levied or imposed by reason of the sale or transfer of
Licensed Products contemplated hereby, and any penalties, interest and
collection or withholding costs associated with any of the foregoing items,
excluding, however, taxes accruing to BEBIG under applicable law.
5. TRANSFER OF TECHNOLOGY.
5.1 Transfer of Technology. Within forty-five (45) days of the
Effective Date, BEBIG will supply RMS with such information and materials in
its possession relating to the Licensed Materials which is reasonably necessary
or useful to enable RMS to develop, design, [manufacture, have manufactured],
use and sell Licensed Products in the Field. Thereafter, BEBIG shall supply
such assistance as is reasonably requested by RMS, subject to the parties
agreement regarding payment therefor.
5.2 Periodic Review; Consultation. During the development and
manufacture of Licensed Products, the parties shall consult regularly with one
another and keep each other generally informed of progress. Each party shall
designate an authorized representative (and "Authorized Representative") who
shall oversee the day-to-day operation of the rights and obligations of each
such party under this Agreement. Either party may change its Authorized
Representative by giving the other party written notice of its new
representative in the manner provided herein. The Authorized Representatives
shall meet at least once per calendar year to review progress on the
development of Licensed Products. Such meetings will take place at a mutually
agreeable time and place and may be attended by other employees or consultants
of the parties.
6. INTELLECTUAL PROPERTY.
6.1 Ownership of Intellectual Property. Except to the extent
licenses or rights are granted herein, BEBIG retains the entire right, title
and interest in and to the Licensed Technology, RMS and BEBIG shall each own,
and have the right to apply for patents with respect to any inventions made
solely by its respective employees. RMS and BEBIG shall jointly own any
inventions made jointly by employees of both parties. In such event, the parties
shall cooperate to obtain patent protection on such joint inventions as they may
reasonably determine and shall share equally the costs thereof (provided
however, that if BEBIG's interest in such joint invention is included in the
Licensed Technology and licensed to RMS hereunder, BEBIG shall pay all the
costs of obtaining patent protection). In the event one party does not wish to
obtain such patent protection of a joint invention, the other party may seek
such patent protection in its own name only, with all rights in such joint
invention being assigned to such party.
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6.2 Patent Prosecution. BEBIG shall file, prosecute and maintain the
Licensed Patents. BEBIG shall periodically confer with RMS regarding its
planned patent activities, and shall reasonably consider RMS' requests with
respect thereto. In the event BEBIG determines not to file, prosecute or
maintain any Licensed Patent in any jurisdiction or jurisdictions, BEBIG shall
notify RMS of such determination at least ninety (90) days prior to any
applicable deadline. If BEBIG makes such determination, RMS may elect to file,
prosecute or maintain any such Licensed Patent in such jurisdiction at its own
expense, and BEBIG shall provide reasonable assistance. In such event, RMS may
deduct from amounts payable to BEBIG hereunder, as a License Fee Offset, its
expenses in filing, prosecuting and maintaining such Licensed Patents.
6.3 Enforcement of Intellectual Property Rights. In the case of any
infringement of any Licensed Patents or other violation of any intellectual
property rights contained in the Licensed Technology by any third party during
the term of this License Agreement, BEBIG shall have the right, at BEBIG's
expense, to cause such party to cease such infringement and to otherwise
enforce such Licensed Patent or such other intellectual property rights. RMS
shall assist BEBIG as reasonably requested in taking any such actions against
any such infringer. Should BEBIG fail to take action within sixty (60) days
after having been notified of any alleged infringement or violation, and
provided that such infringement has occurred in the Field, RMS may, upon notice
to BEBIG, take any steps RMS may deem appropriate against such infringer at
RMS' own expense. BEBIG shall assist RMS as reasonably requested in taking any
such action against any such infringer. Any amount recovered as a result of any
action taken by BEBIG or RMS hereunder shall be first applied to reimbursing the
party taking such action for its out-of-pocket expenses, and then to
reimbursing the other party for its out-of-pocket expenses, if any. In the event
that RMS does not recover its expenses, any amount not recovered shall be
considered as a License Fee Offset as against amounts payable to BEBIG under
this License Agreement pursuant to Section 4.4.
6.4 Invalidity or Non-Infringement Action. In the event that a
declaratory judgment action alleging invalidity or non-infringement of any of
the Licensed Patents shall be brought against either party, and in such event
BEBIG does not elect to defend against such action, BEBIG shall notify RMS and
RMS, at its option, shall have the right, within thirty (30) days after such
notice from BEBIG, to intervene and take over the defense of the action at its
own expense; provided that RMS shall consult with BEBIG on material aspects of
such litigation and provided further that RMS shall select counsel to which
BEBIG has no reasonable objection. No settlement, consent judgment or other
voluntary final disposition of the suit may be entered into without the consent
of BEBIG, which consent shall not be unreasonably withheld or delayed.
6.5 Abandonment of Suit. Should BEBIG or RMS commence or defend a
suit under the foregoing provisions and thereafter elect to abandon the same,
the abandoning party shall give timely written notice to the other party and
such other party may continue prosecution of such suit, with the expenses and
recovery being allocated as set forth in Section 6.3.
6.6 Alleged Infringement. If, during the term of this License
Agreement, any third party (other than an Affiliate of a party) claims that
RMS' making, using or selling of Licensed Products hereunder infringes on a
third-party patent, or other proprietary rights of a third party as a result of
the use of the Licensed Patents and/or the Licensed Technology, within one
hundred and twenty (120) days after notice by RMS, BEBIG shall either (i)
procure for RMS the right to exercise all rights licensed under this License
Agreement without any additional payment therefor by RMS.
7
<PAGE> 8
or (ii) advise RMS that it elects not to procure such rights itself. If BEBIG
does not procure such right within such 120-day period after notice of such
claim by RMS, RMS shall have the right, but not the obligation, to procure such
rights itself. RMS shall be entitled to offset any expenses or costs it incurs
in obtaining or maintaining such rights as an License Fee Offset as against
amounts payable to BEBIG under this License Agreement pursuant to Section 4.4.
6.7 Cooperation. In the event of any action against or by a third
party, the party not bringing or defending such suit shall cooperate in all
respects, execute any documents reasonably necessary to permit the other party
to prosecute or defend such suit, and to the extent reasonable shall make
available its employees and relevant records to provide evidence for such suit.
6.8 Intellectual Property Representations and Warranties. BEBIG
represents, warrants and covenants to RMS, as of the Effective Date, as follows:
(a) It is the sole and exclusive owner of the entire right,
title and interest in the Licensed Patents and Licensed Technology (subject to
the [ * ]), with the right to license the same to RMS, free and clear of all
encumbrances, liens, claims, licenses and security interests of any kind and has
not exclusively licensed the same to any third party.
(b) It is the sole and exclusive license of the [ * ] Patents
under the [ * ], such license is in full force and effect and neither BEBIG or
[ * ] is in breach thereof, and a true copy of such license has been delivered
to RMS.
(c) There are no actions, suits or proceedings pending or, to
BEBIG's knowledge, threatened against BEBIG or any of its Affiliates, at law or
in equity before any court or administrative office or agency which affect the
use of the Licensed Patents or the Licensed Technology by RMS hereunder.
(d) Each of the patents in the Licensed Patents is valid and in
good standing and each of the patent applications included in the Licensed
Patents is currently pending and in good standing, and has not been abandoned.
(e) To BEBIG's knowledge, the practice by RMS of the Licensed
Technology, and the activities of BEBIG under the Development and Manufacturing
Agreement, will not violate the patent or other proprietary rights of any third
party.
7. CONFIDENTIAL INFORMATION
7.1 Confidentiality. RMS and BEBIG realize that some information
received by one party from the other pursuant to this License Agreement will be
confidential. It is therefore agreed that any information received by one party
from the other which is in writing or promptly reduced to writing shall not be
disclosed by the receiving party to any third party and shall not be used by
the receiving party for purposes other than those contemplated by this License
Agreement for a period of three (3) years from and after the date such
information is disclosed. The receiving party shall use the same degree of care
with respect to such information that it uses with respect to its own
information which it intends to maintain proprietary and confidential. Except
as expressly granted herein, nothing in this License Agreement shall be
construed to grant either party any license or other right to the confidential
information or proprietary information (including but not limited to
[*] Confidential Portions Omitted and Filed Separately with the Commission.
8
<PAGE> 9
patents, patent applications, know-how, trade secrets and copyrighted works of
the other party. However, nothing in this License Agreement shall prevent the
receiving party from exercising any legal rights to use, disclose, duplicate,
or publish any such information:
(a) which was in the public domain at the time of the disclosure to
the receiving party, or which thereafter fell into the public domain without
any fault of the receiving party;
(b) which the receiving party rightfully had in its possession prior
to the disclosure as evidenced in writing;
(c) which the receiving party lawfully obtained without restriction
from a third party who is not under any confidentiality obligations to the
disclosing party;
(d) which, in the case of an oral disclosure, shall not have been
subsequently disclosed in writing to the receiving party within thirty (30)
days after such oral disclosure;
(e) which is developed by the receiving party independently of such
disclosure; or
(f) which is inherently or necessarily disclosed to the public by
the display or commercial sale of any product or system, by the issuance of a
related patent or in compliance with the lawful requirements of the Department
of Health and Human Services of the United States.
7.2 Confidentiality Agreements. Each party shall maintain agreements with
their respective employees and representatives providing for confidentiality
and non-use commitments consistent with its obligations hereunder and will
require all of their employees, consultants, clinical collaborators, agents or
others who have access to any such confidential information of the other party
to execute confidentiality and non-use agreements covering such confidential
information subject to Section 6 and will exercise its reasonable best efforts
to obtain compliance therewith.
7.3 No Disclosure Without Consent Or Legal Requirement. Neither party
shall release any information to any third party with respect to the terms or
existence of this License Agreement without the prior written consent of the
other party (which consent shall not be unreasonably withheld). This prohibition
includes, but is not limited to, press releases, educational and scientific
conferences, promotional materials, and disclosures to (or disclosures with)
the media. It is understood, however that the parties shall have the right to
provide required information concerning this License Agreement to investors and
potential investors, and to Affiliates in order to enable them to carry out the
activities contemplated hereunder. In addition, each party may, in its
reasonable judgment, disclose such information as may be required by law. Each
party agrees to notify the other party of its intention to disclose such
information to a third party (but not the identity of the third party). Neither
party shall use the name of the other party in any publication or promotional
material or in any form for public distribution without the prior written
consent of the other party.
9
<PAGE> 10
8. TERMINATION.
8.1 Default and Effects Thereof. Upon any failure of either party to
comply with its obligations under the License Agreement in any material respect
which shall continue for more than sixty (60) days after notice thereof from
the non-defaulting party to the defaulting party, the non-defaulting party
shall be entitled, without prejudice to any of its other rights under this
License Agreement, and in addition to any other remedies available to it by law
or in equity, to terminate this License Agreement by giving notice to that
effect to the defaulting party. The right of either party to effect such
termination of such license shall not be affected in any way by its waiver or
failure to take action with respect to any previous default with respect to this
License Agreement.
8.2 Insolvency or Bankruptcy. Either party may, in addition to any
other remedies available to it by law or in equity, terminate this License
Agreement by written notice to the other party in the event (i) the other party
shall have become insolvent or bankrupt, or shall have made an assignment for
the benefit of its creditors, or (ii) there shall have been appointed a trustee
or receiver of the other party or for all or a substantial part of its
property, or (iii) any case or proceeding shall have been commenced or some
other action taken by or against the other party in bankruptcy or seeking
reorganization, liquidation, dissolution, winding-up, arrangement, composition
or readjustment of its debts or any other relief under any bankruptcy,
insolvency, reorganization or other similar act of law of any jurisdiction now
or hereafter in effect or there shall have been issued a warrant of attachment,
execution, distraint or similar process against any substantial part of the
property of the other party, and any such event or action shall have continued
for ninety (90) days undismissed, unbounded and undischarged; provided,
however, that no such right to terminate shall pertain solely by virtue of a
voluntary reorganization for the purpose of solvent amalgamenation or
reconstruction.
8.3 Effect of Termination. Upon termination of this License Agreement
for any reason:
(a) Neither party shall be released from any obligation that
matured prior to the effective date of such termination.
(b) Each party will return and deliver to the other party all
materials and documents containing Confidential Information of the other party.
(c) The provisions of Sections 7 and 9 shall survive any
termination of this License Agreement or any license hereunder for a period of
three (3) years.
(d) In the case of expiration of this License Agreement
resulting from expiration of all Licensed Patents, RMS shall retain a
non-exclusive, fully-paid, worldwide, perpetual license to exploit the Licensed
Technology in the Field.
9. INDEMNIFICATION.
9.1 Indemnification of BEBIG. RMS will indemnify and hold BEBIG
harmless against all actions, suits, claims, demands, or prosecutions
("claims") that may be brought or instituted against BEBIG arising from RMS'
exploitation of the license granted to hereunder except to
10
<PAGE> 11
the extent such claims from the negligence or the breach by BEBIG of its
obligations hereunder or the License, Development and Manufacturing Agreement.
BEBIG will promptly notify RMS within a reasonable time after it
become aware of any claim, action or proceeding that may be subject to
indemnification pursuant to this Section 9.1 and will cooperate with and
authorize RMS to carry out the sole management and defense of such claim,
action or proceeding with counsel reasonably acceptable to BEBIG. BEBIG will
not compromise or settle any claim, action or proceeding subject to
indemnification without the prior written approval of RMS.
9.2 Idemnification by RMS. BEBIG shall defend, indemnify and hold
RMS harmless from and BEBIG shall defend or settle, any claim, demand, action,
proceeding or suit against RMS, its Affiliates or sublicensees arising out of
any breach of BEBIG's covenants, representations and warranties herein.
10. MISCELLANEOUS PROVISIONS
10.1 No Partnership. Nothing in this License Agreement is intended
or shall be deemed to constitute a partnership, agency, employer, employee or
joint venture relationship between the parties. Neither party shall incur any
debts or make any commitments for the other.
10.2 Assignments. Except as otherwise provided herein, neither this
License Agreement nor any interest hereunder shall be assignable by either
party by operation of law or otherwise without the prior written consent of the
other (which shall not be unreasonably withheld), provided, however, that no
consent shall be required for any assignment of this License Agreement by
either party in connection with the transfer of substantially all of its
business to which this License Agreement relates.
10.3 Force Majeure. Neither party shall be liable to the other for
loss or damages or shall have any right to terminate this License Agreement for
any default or delay attributable to any act of God, earthquake, flood, fire,
explosion, strike, lockout, labor dispute, casualty or accident, war,
revolution, civil commotion, act of public enemies, blockage or embargo,
injunction, law, order, proclamation, regulation, ordinance, demand or
requirement of any government or subdivision, authority (including, without
limitation, medical device regulatory authorities) or representative of any
such government if the party affected shall give prompt notice of any such
cause to the other party. The party given such notice shall thereupon be
excused from such of its obligations hereunder as it is so disabled from
performing. Notwithstanding the foregoing, nothing in this Section shall excuse
or suspend the obligation to make any payment due hereunder in the manner and
at the time provided.
10.4 No Trademark Rights. Except as set forth above, no right,
express or implied, is granted by this License Agreement to use in any manner
any trade name or trademark of BEBIG or RMS in connection with the performance
of this License Agreement or the exploitation of any license granted hereunder.
10.5 Public Announcements. Copies of press releases or similar
written communications containing a party's name shall be provided to that
party for approval prior to release.
11
<PAGE> 12
10.6 Entire Agreement of the Parties; Amendment. This License Agreement
constitutes and contains the entire understanding and agreement of the parties
and cancels and supersedes any and all prior negotiations, correspondence and
understandings and agreements, whether verbal or written, between the parties
respecting the subject matter hereof. No waiver, modification or amendment of
any provision of this License Agreement shall be valid or effective unless made
in writing and signed by a duly authorized officer of each of the parties.
10.7 Severability. In the event any one or more of the provisions of this
License Agreement should for any reason be held by any court or authority having
jurisdiction over this License Agreement or either of the parties to be invalid,
illegal or unenforceable, such provision or provisions shall be validly reformed
by addition or deletion of working as appropriate to avoid such result and as
nearly as possible approximate the intent of the parties and, if unreformable,
shall be divisible and deleted in such jurisdiction; elsewhere, this License
Agreement shall not be affected.
10.8 Captions. The captions to this License Agreement are for convenience
only, and are to be of no force or effect in construing or interpreting any of
the provisions of this License Agreement.
10.9 Notice and Delivery. Any notice, requests, delivery, approval or
consent required or permitted to be given under this License Agreement shall be
in writing and shall be deemed to have been sufficiently given if delivered in
person, transmitted by internationally recognized courier or telecopier (with
confirmed answer-back) to the party to whom it is directed at its address shown
below or such other address as such party shall have last given by notice to the
other party.
If to RMS, addressed to:
Radiance Medical Systems, Inc.
13700 Alton Parkway, Suite 160
Irvine, California 92618
Telephone: 001-949-457-9546
Telecopier: 001-949-457-9561
Attention: Chief Executive Officer
If to BEBIG, addressed to:
BEBIG GmbH
Robert-Rossle-Str. 10,
13125 Berlin, Germany
Telephone: 011-49-30-94-10-8430
Telecopier: 011-49-30-9410-8412
Attention: General Manager
10.10 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER
FOR INDIRECT, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR EXEMPLARY DAMAGES ARISING
OUT OF ANY OF THE TERMS OR CONDITIONS OF
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<PAGE> 13
THIS LICENSE AGREEMENT OR WITH RESPECT TO THEIR PERFORMANCE OR LACK THEREOF.
10.11 Informal Dispute Resolution. In an effort to resolve informally
and amicably any claim, controversy, or dispute arising out of or related to the
interpretation, performance, or breach of this License Agreement (a "Dispute")
without resorting to litigation, each party shall notify the other party to the
Dispute in writing of any Dispute hereunder that requires resolution. Such
notice shall set forth the nature of the Dispute, the amount involved, if any,
and the remedy sought. Each party shall promptly designate an executive-level
employee to investigate, discuss and seek to settle the matter between them. If
the two designated representatives are unable to settle the matter within thirty
(30) days after such notification, the matter shall be submitted to BEBIG's and
RMS' Chief Executive Officer for consideration. If settlement cannot be reached
through their efforts within an additional thirty (30) days (or such longer time
period as they shall agree upon in writing) then either party may thereafter
take such actions as they deem appropriate. The parties agree that any
applicable statute of limitations shall be tolled during the pendency of such
informal dispute resolution process and that neither party shall raise or
assert any claim of laches or other legal or equitable principle of limitation
or repose of action based upon such process.
10.12 Attorneys' Fees. Except as otherwise provided herein, each party
shall bear its own legal fees incurred in connection with the transactions
contemplated hereby, provided, however, that if any party to this License
Agreement seeks to enforce its rights under this License Agreement by legal
proceedings or otherwise, the non-prevailing party shall pay all costs and
expenses incurred by the prevailing party, including, without limitation, all
reasonable attorneys' fees.
10.13 Governing Law, Venue. This License Agreement shall be governed
by and construed in accordance with the laws of the State of California, United
States, without regard to the conflict of laws provisions thereof, and, subject
to the informal dispute resolution in Section 10.11, all disputes with respect
to this Agreement shall be exclusively heard in the federal or state court, in
Orange County, California.
IN WITNESS WHEREOF, the parties have caused this License Agreement to be
executed by their respective duly authorized officers as of the day and year
first set forth above, each copy of which shall for all purposes be deemed to be
an original.
RADIANCE MEDICAL SYSTEMS, INC.
By: /s/ MICHAEL R. HENSEN
-------------------------------------
Name: Michael R. Hensen
-------------------------------------
Title: CEO and President
-------------------------------------
BEBIG GmbH
By: /s/ A. ECKERT
-------------------------------------
Name: A. Eckert
-------------------------------------
Title: General Manager
-------------------------------------
13
<PAGE> 14
EXHIBIT A
BEBIG LICENSED PATENTS
- ----------------------
1. German Patent # DE 19600669 C2
2. PCT Application # WO 96/22121 41
3. All other issued patents and patent applications
licensed to BEBIG dealing with "C. Hehrlein Balloon-Based
Radiation Delivery Devices"
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
1. CVD/RMS Acquisition Corp., a Delaware corporation.
2. Radiance Medical Systems GmbH, a German corporation.
3. IDI Acquisition Corporation, a Delaware corporation.
4. Radiatec, Inc., a Japanese corporation.
<PAGE> 1
EXHIBIT 23.1
CONSENT INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 No. 333-07959, No. 333-42161 and No. 333-72531 and the
Registration Statements on Form S-3 No. 333-35343, No. 333-33997, No.
333-71053, and No. 333-59305 of our report dated January 31, 2000, which is
included in this Annual Report on Form 10-K for the year ended December 31,
1999.
/s/ PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
April 14, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
on Form S-8 No. 333-07959, No. 333-42161 and No. 333-72531 and the Registration
Statements on Form S-3 No. 333-35343, No. 333-33997, No. 333-71053, and No.
333-59305 of our report dated February 18, 1999 and April 14, 2000, with respect
to the consolidated financial statements and schedule of Radiance Medical
Systems, Inc. (formerly Cardiovascular Dynamics, Inc.) and subsidiaries at
December 31, 1998 and for each of the two years in the period then ended,
included in this Annual Report (Form 10-K) for the year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Orange County, California
April 14, 2000
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