<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000.
[ ] 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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<S> <C>
DELAWARE 68-0328265
(STATE OR OTHER JURISDICTION OF (I.R.S.EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
13700 ALTON PARKWAY, SUITE 160, IRVINE, CALIFORNIA 92618
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (949) 457-9546
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 PRECEEDING 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
----- -----
ON NOVEMBER 7, 2000, THE REGISTRANT HAD OUTSTANDING APPROXIMATELY 13,049,000
SHARES OF COMMON STOCK OF $.001 PAR VALUE, WHICH IS THE REGISTRANT'S ONLY CLASS
OF COMMON STOCK.
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RADIANCE MEDICAL SYSTEMS, INC.
FORM 10-Q
SEPTEMBER 30, 2000
TABLE OF CONTENTS
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<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2000 AND
DECEMBER 31, 1999 .................................................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 .................... 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 ............................. 5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ................. 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS ............................................ 14
PART II. OTHER INFORMATION
ITEMS 1 THROUGH 6. ............................................................. 24
SIGNATURES ..................................................................... 26
EXHIBIT INDEX .................................................................. 27
</TABLE>
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS $ 1,361 $ 2,051
MARKETABLE SECURITIES AVAILABLE-FOR-SALE 17,273 20,004
TRADE ACCOUNTS RECEIVABLE, NET 644 1,070
OTHER RECEIVABLES 1,619 742
INVENTORIES 1,075 822
OTHER CURRENT ASSETS 271 259
-------- --------
TOTAL CURRENT ASSETS 22,243 24,948
PROPERTY AND EQUIPMENT, NET 801 1,109
NOTES RECEIVABLE FROM OFFICERS 124 118
INTANGIBLES, NET 3,012 3,667
OTHER ASSETS 421 31
-------- --------
TOTAL ASSETS $ 26,601 $ 29,873
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 2,983 $ 2,714
DEFERRED REVENUE 273 1,028
-------- --------
TOTAL CURRENT LIABILITIES 3,256 3,742
DEFERRED REVENUE 380 786
MINORITY INTEREST 203 234
-------- --------
TOTAL LIABILITIES 3,839 4,762
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
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 AUTHORIZED, 12,232,000 AND 11,896,000
SHARES ISSUED, AND 11,546,000 AND 11,210,000 SHARES OUTSTANDING AS OF
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999, RESPECTIVELY 12 12
ADDITIONAL PAID-IN CAPITAL 71,519 69,483
DEFERRED COMPENSATION (386) (524)
ACCUMULATED DEFICIT (44,877) (40,333)
TREASURY STOCK AT COST, 686,000 COMMON SHARES AS OF
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999 (3,675) (3,675)
ACCUMULATED OTHER COMPREHENSIVE INCOME 169 148
-------- --------
TOTAL STOCKHOLDERS' EQUITY 22,762 25,111
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,601 $ 29,873
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
3
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
---- ---- ---- ----
(RESTATED)
<S> <C> <C> <C> <C>
REVENUE:
SALES $ 537 $ 648 $ 1,730 $ 2,985
LICENSE FEE AND OTHER 1,339 826 5,050 2,050
-------- -------- -------- --------
TOTAL REVENUES 1,876 1,474 6,780 5,035
COST OF SALES 518 412 1,377 2,312
-------- -------- -------- --------
GROSS PROFIT 1,358 1,062 5,403 2,723
OPERATING EXPENSES:
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH
AND DEVELOPMENT -- -- -- 4,194
RESEARCH, DEVELOPMENT AND CLINICAL 2,896 1,801 8,455 5,958
MARKETING AND SALES 222 297 864 1,230
GENERAL AND ADMINISTRATIVE 727 696 2,204 2,140
MINORITY INTEREST (8) -- (17) --
-------- -------- -------- --------
TOTAL OPERATING EXPENSES 3,837 2,794 11,506 13,522
-------- -------- -------- --------
LOSS FROM OPERATIONS (2,479) (1,732) (6,103) (10,799)
OTHER INCOME (EXPENSE):
INTEREST INCOME 300 280 887 935
GAIN ON SALE OF ASSETS 226 93 693 224
OTHER INCOME (EXPENSE) 27 82 (21) 5
-------- -------- -------- --------
TOTAL OTHER INCOME 553 455 1,559 1,164
-------- -------- -------- --------
NET LOSS ($ 1,926) ($ 1,277) ($ 4,544) ($ 9,635)
======== ======== ======== ========
BASIC AND DILUTED NET LOSS PER SHARE ($ 0.17) ($ 0.12) ($ 0.40) ($ 0.89)
======== ======== ======== ========
SHARES USED IN COMPUTING BASIC AND
DILUTED NET LOSS PER SHARE 11,406 11,044 11,346 10,874
======== ======== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES
4
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RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
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<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
2000 1999
---- ----
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ($ 4,544) ($ 9,635)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION 961 944
AMORTIZATION OF DEFERRED STOCK COMPENSATION 138 126
BAD DEBT EXPENSE 25 113
FOREIGN CURRENCY EXCHANGE LOSS 30 97
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT -- 4,194
LOSS (GAIN) ON SALE OF ASSETS 28 (224)
MINORITY INTEREST IN LOSSES OF RADIATEC (17) 0
CHANGES, NET OF EFFECTS FROM PURCHASE OF (FORMER) RADIANCE:
TRADE ACCOUNTS RECEIVABLE, NET 402 1,553
INVENTORIES (253) 198
OTHER ASSETS (896) (182)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 268 (2,795)
DEFERRED REVENUE (759) 1,277
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (4,617) (4,334)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PURCHASES OF AVAILABLE-FOR-SALE SECURITIES (10,853) (22,891)
SALES OF AVAILABLE-FOR-SALE SECURITIES 13,565 26,364
CAPITAL EXPENDITURES FOR PROPERTY AND EQUIPMENT
AND OTHER ASSETS (58) (422)
PROCEEDS FROM SALE OF OPTION ON INVESTMENT SECURITIES -- 1,232
SALE OF VASCULAR ACCESS PRODUCT LINE, NET -- 1,070
PURCHASE OF INTEREST IN (FORMER) RADIANCE, NET OF CASH ACQUIRED -- 553
PURCHASE OF MAJORITY INTEREST IN RADIATEC -- 233
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,654 6,139
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM ISSUANCE OF CONVERTIBLE DEBENTURE 1,000 --
PROCEEDS FROM SALE OF COMMON STOCK 228 168
PROCEEDS FROM EXERCISE OF COMMON STOCK OPTIONS 433 125
PROCEEDS FROM REPAYMENT OF AFFILIATE DEBT -- 64
COSTS OF PENDING ISSUANCE OF COMMON STOCK (388) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,273 357
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (690) 2,162
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,051 1,437
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,361 $ 3,599
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING ACTIVITIES:
IN JANUARY 1999, THE COMPANY ACQUIRED THE REMAINING COMMON STOCK OF (FORMER)
RADIANCE. THE FOLLOWING IS A SUMMARY OF THE TRANSACTION:
FAIR VALUE OF ASSETS ACQUIRED $ 8,962
CASH PAID (692)
COMMON STOCK AND OPTIONS ISSUED (8,035)
--------
LIABILITIES ASSUMED $ 235
========
CONVERSION OF CONVERTIBLE DEBENTURE TO COMMON STOCK $ 1,375
========
</TABLE>
SEE ACCOMPANYING NOTES
5
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
RADIANCE MEDICAL SYSTEMS, INC. (FORMERLY CARDIOVASCULAR DYNAMICS, INC. AND
HEREIN AFTER REFERRED TO AS "RADIANCE" OR THE "COMPANY") WAS INCORPORATED IN
MARCH 1992 IN THE STATE OF CALIFORNIA. THE COMPANY AND ITS SUBSIDIARIES ARE
DEVELOPING PROPRIETARY DEVICES TO DELIVER RADIATION TO PREVENT THE RECURRENCE OF
BLOCKAGES IN ARTERIES FOLLOWING BALLOON ANGIOPLASTY, VASCULAR STENTING, ARTERIAL
BYPASS SURGERY AND OTHER INTERVENTIONAL TREATMENTS OF BLOCKAGES IN CORONARY AND
PERIPHERAL ARTERIES (THE "RDX SYSTEM"). THE COMPANY ALSO MANUFACTURES AND SELLS
A BROAD RANGE OF ANGIOPLASTY CATHETERS AND STENT PRODUCTS, INCLUDING ITS FOCUS
TECHNOLOGY PRODUCT LINE, ON A LIMITED BASIS, PRIMARILY THROUGH MEDICAL DEVICE
DISTRIBUTORS. THE COMPANY OPERATES IN A SINGLE BUSINESS SEGMENT.
THE ACCOMPANYING CONDENSED CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED
IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR INTERIM
FINANCIAL INFORMATION AND WITH THE INSTRUCTIONS TO FORM 10-Q AND ARTICLE 10 OF
REGULATION S-X. ACCORDINGLY, THEY DO NOT INCLUDE ALL OF THE INFORMATION AND
FOOTNOTES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES FOR COMPLETE
FINANCIAL STATEMENTS. IN THE OPINION OF MANAGEMENT, ALL ADJUSTMENTS (CONSISTING
OF NORMAL RECURRING ACCRUALS) CONSIDERED NECESSARY FOR A FAIR PRESENTATION HAVE
BEEN INCLUDED. OPERATING RESULTS FOR THE THREE AND NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2000 ARE NOT NECESSARILY INDICATIVE OF RESULTS THAT MAY BE
EXPECTED FOR THE YEAR ENDING DECEMBER 31, 2000 OR ANY OTHER PERIOD. FOR FURTHER
INFORMATION, REFER TO THE CONSOLIDATED FINANCIAL STATEMENTS AND FOOTNOTES
THERETO INCLUDED IN THE COMPANY'S REGISTRATION STATEMENT ON FORM S-2 FILED ON
OCTOBER 3, 2000 AND THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1999.
AS A RESULT OF THE 1999 CLOSING OF RADIANCE MEDICAL SYSTEMS GMBH (FORMERLY KNOWN
AS CLINITEC GMBH), THE COMPANY'S GERMAN DISTRIBUTION SUBSIDIARY, THE COMPANY
RECONSIDERED THE INITIAL ACCOUNTING FOR THE ACQUISITION OF THIS SUBSIDIARY IN
1997. AS MORE FULLY DESCRIBED IN THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR
ENDED DECEMBER 31, 1999, THE COMPANY RESTATED OPERATING RESULTS PRIMARILY TO
ELIMINATE 1997 SALES TO CLINITEC NOT PAID FOR BY THE DATE OF THE ACQUISITION,
THE ASSOCIATED GOODWILL CAPITALIZED IN 1997 AND THE GOODWILL-RELATED CHARGES
RECORDED IN 1999. THE IMPACT OF THE RESTATEMENT ON GOODWILL AMORTIZATION OF $295
HAS BEEN REFLECTED IN THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999. THE
RESTATEMENT HAS NO EFFECT ON CASH FLOWS FROM OPERATIONS OR OTHER SOURCES OR USES
OF CASH.
6
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
2. NET LOSS PER SHARE
NET LOSS PER COMMON SHARE IS COMPUTED USING THE WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING DURING THE PERIODS PRESENTED. OPTIONS TO PURCHASE
SHARES OF THE COMPANY'S COMMON STOCK GRANTED UNDER THE COMPANY'S STOCK OPTION
PLAN AND SHARES ISSUABLE UPON THE CONVERSION OF THE CONVERTIBLE DEBENTURE HAVE
BEEN EXCLUDED FROM THE CALCULATION OF DILUTED EARNINGS PER SHARE AS THEY ARE
ANTI-DILUTIVE. SEE NOTE 5.
3. INVENTORIES
INVENTORIES ARE STATED AT THE LOWER OF COST, DETERMINED ON AN AVERAGE COST
BASIS, OR MARKET VALUE. INVENTORIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- -----------------
<S> <C> <C>
RAW MATERIALS $ 384 $ 398
WORK-IN-PROCESS 166 94
FINISHED GOODS 525 330
------- -------
$ 1,075 $ 822
======= =======
</TABLE>
4. DEFERRED REVENUE
DEFERRED DISTRIBUTOR FEES
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 $1,000 AS AN UP-FRONT CASH PAYMENT AND WILL RECOGNIZE THE
REVENUE RATABLY OVER THE SEVEN-YEAR TERM OF THE DISTRIBUTION AGREEMENT. DURING
THE THIRD QUARTER AND FIRST NINE MONTHS OF 1999, THE COMPANY RECOGNIZED $36 OF
THE AFOREMENTIONED REVENUE. DURING THE THIRD QUARTER AND FIRST NINE MONTHS OF
2000, THE COMPANY RECOGNIZED $20 AND $61, RESPECTIVELY, OF THE AFOREMENTIONED
REVENUE. IN ADDITION, THE COMPANY ISSUED A $1,000 CONVERTIBLE DEBENTURE TO
COSMOTEC. AS A RESULT OF THE VALUATION OF THE CONVERTIBLE DEBENTURE, THE REVENUE
TO BE RECOGNIZED AS A DEFERRED DISTRIBUTOR FEE WAS REDUCED BY $377 IN JUNE 2000.
SEE NOTE 5.
7
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
DEFERRED GAIN ON SALE OF ASSETS
IN AUGUST 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 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 $109 BEING RECOGNIZED AS
OTHER INCOME IN THE THIRD QUARTER OF 1999. A GAIN OF $231 AND $693 WAS
RECOGNIZED AS OTHER INCOME FOR THE THIRD QUARTER AND FIRST NINE MONTHS OF 2000,
RESPECTIVELY. THE REMAINDER OF $193 WILL BE RECOGNIZED IN THE FOURTH QUARTER OF
2000. ALTHOUGH THE LIKELIHOOD OF EXERCISE IS UNCERTAIN, IF THE OPTION IS
EXERCISED, THE COMPANY WILL RECEIVE AN ADDITIONAL PAYMENT OF APPROXIMATELY
$2,427 IN 2000.
DEFERRED LICENSE AND LICENSE REVENUE
IN JUNE 1998, THE COMPANY SIGNED A TECHNOLOGY LICENSE AGREEMENT WITH GUIDANT
CORPORATION, AN INTERNATIONAL INTERVENTIONAL CARDIOLOGY PRODUCTS COMPANY, TO
GRANT THEM THE ABILITY TO MANUFACTURE AND DISTRIBUTE STENT DELIVERY PRODUCTS
USING THE COMPANY'S FOCUS TECHNOLOGY. UNDER THE AGREEMENT, THE COMPANY WAS
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. THE LAST TWO MILESTONE PAYMENTS OF $1,000 WERE
RECEIVED IN THE FIRST SIX MONTHS OF 1999. BASED UPON THE COMPLETION OF CERTAIN
MILESTONES, THE COMPANY RECOGNIZED $563 AND $1,687 IN LICENSE REVENUE IN THE
THIRD QUARTER AND FIRST NINE MONTHS, RESPECTIVELY, OF 1999. DURING THE THIRD
QUARTER AND FIRST NINE MONTHS OF 2000, THE COMPANY RECORDED $1,244 AND $4,764,
RESPECTIVELY, IN LICENSE REVENUE DUE ON LICENSED PRODUCT SALES BY GUIDANT.
5. CONVERTIBLE DEBENTURE
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
CONVERTIBLE DEBENTURE AGREEMENT WAS EXECUTED BETWEEN THE COMPANY AND COSMOTEC
WHEREBY THE COMPANY WAS COMMITTED TO SELL COSMOTEC A 5%, $1,000 FACE AMOUNT
CONVERTIBLE DEBENTURE IN JUNE 2000. THE BORROWING UNDER THE AGREEMENT TOOK PLACE
IN JUNE 2000 AND WOULD HAVE MATURED IN JUNE 2003. ON AUGUST 10, 2000, COSMOTEC
NOTIFIED THE COMPANY THAT THEY WOULD CONVERT THE DEBENTURE AT THE INITIAL
8
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
CONVERSION PRICE OF $7.00 PER SHARE INTO 142,857 SHARES OF COMMON STOCK. THE
SHARES WERE ISSUED IN SEPTEMBER 2000.
THE COMPANY RECORDED THE CONVERTIBLE DEBENTURE AT ITS FAIR VALUE OF $1,407, AND
THE DIFFERENCE BETWEEN THE FAIR VALUE AND THE CASH PROCEEDS RECEIVED FROM THIS
DEBENTURE HAS BEEN RECORDED AS A REDUCTION IN THE DEFERRED REVENUE ASSOCIATED
WITH THE DISTRIBUTION AGREEMENT. THE EXCESS OF THE DEBENTURE VALUE OVER ITS
MATURITY VALUE OF $1,000 WAS AMORTIZED TO INTEREST EXPENSE THROUGH SEPTEMBER 13,
2000, THE DATE OF CONVERSION, AND THE REMAINING UNAMORTIZED BALANCE WAS
CONVERTED TO EQUITY. DURING THE THIRD QUARTER AND FIRST NINE MONTHS ENDED
SEPTEMBER 30, 2000, $28 AND $32, RESPECTIVELY, WAS AMORTIZED TO INTEREST
EXPENSE. SEE NOTE 4.
6. COMPREHENSIVE LOSS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130 REQUIRES DISCLOSURE OF THE
TOTAL NON-STOCKHOLDER CHANGES IN EQUITY RESULTING FROM REVENUE, EXPENSE, AND
GAINS AND LOSSES, INCLUDING THOSE THAT DO NOT AFFECT RETAINED EARNINGS. THE
COMPANY'S COMPREHENSIVE LOSS INCLUDED THE FOLLOWING:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET LOSS $(1,926) $(1,277) $(4,544) $(9,635)
UNREALIZED LOSS ON
AVAILABLE-FOR-SALE SECURITIES 32 (82) (19) (190)
FOREIGN CURRENCY TRANSLATION
ADJUSTMENT 9 (40) 40 (102)
------- ------- ------- -------
COMPREHENSIVE LOSS $(1,885) $(1,399) $(4,523) $(9,927)
======= ======= ======= =======
</TABLE>
7. SALE OF ASSETS AND ACQUISITION
SALE OF ASSETS OF VASCULAR ACCESS ASSETS
IN JANUARY 1999, THE COMPANY SOLD SUBSTANTIALLY ALL OF THE PROPERTIES AND ASSETS
USED EXCLUSIVELY IN ITS VASCULAR ACCESS ASSETS TO ESCALON MEDICAL CORPORATION
("ESCALON"). THE COMPANY RECEIVED AN INITIAL PAYMENT OF $1,104 FOR ASSETS
TRANSFERRED, INCLUDING INVENTORY ($704) AND PROPERTY AND EQUIPMENT ($146). IT
RECEIVED AN ADDITIONAL $1,000 UPON THE COMPLETION OF THE TRANSFER OF THE ASSETS
AND
9
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RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
TECHNOLOGY IN OCTOBER 1999 AND ALSO IS ENTITLED TO RECEIVE ROYALTY PAYMENTS UPON
THE SALE OF PRODUCTS FOR A FIVE-YEAR PERIOD FOLLOWING THE SALE. IN 1999, THE
COMPANY CONTINUED TO MANUFACTURE CERTAIN VASCULAR ACCESS PRODUCTS FOR TEN MONTHS
FOLLOWING THE COMPLETION OF THE SALE ON A "COST PLUS" BASIS. DURING THE THIRD
QUARTER AND FIRST NINE MONTHS OF 1999, THE COMPANY RECOGNIZED ROYALTIES OF $89
AND $139, RESPECTIVELY. DURING THE THIRD QUARTER AND FIRST NINE MONTHS OF 2000,
THE COMPANY RECOGNIZED THE PRO RATA MINIMUM ROYALTY DUE OF $75 AND $225,
RESPECTIVELY.
ACQUISITION OF RMS
IN JANUARY 1999, CARDIOVASCULAR DYNAMICS, INC. (NOW NAMED RADIANCE MEDICAL
SYSTEMS, INC.) ("RADIANCE," OR "THE COMPANY") ACQUIRED THROUGH A MERGER ALL OF
THE CAPITAL STOCK WHICH IT DID NOT PREVIOUSLY OWN OF THE (FORMER) RADIANCE
MEDICAL SYSTEMS, INC. ("RMS"). PURSUANT TO THE MERGER, THE COMPANY PAID 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
$7,571, EXCLUDING THE VALUE OF RADIANCE 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 $692 IN CASH TO CERTAIN RMS STOCKHOLDERS WHO ELECTED
TO RECEIVE 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 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
SHARES OF THE COMPANY'S COMMON STOCK FOR TOTAL CONSIDERATION OF $1,150.
IN ADDITION, UNDER THE MERGER AGREEMENT, RADIANCE 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. AS OF NOVEMBER 7,
2000, THE FIRST TWO MILESTONES WERE NOT ACHIEVED AND COMPLETION OF THE THIRD
MILESTONE IS BEHIND SCHEDULE. BECAUSE THE FIRST TWO MILESTONES WERE NOT MET, THE
TOTAL OF POTENTIAL MILESTONE PAYMENTS, BEFORE ADJUSTMENT FOR EARLY OR LATE
ACHIEVEMENT OF THE MILESTONES, IS REDUCED TO $1.08 FOR EACH SHARE OF PREFERRED
STOCK AND $1.62 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
10
<PAGE> 11
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
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 $4,194, IN ACCORDANCE WITH
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES, IN THE FIRST QUARTER OF 1999. THE FAIR
VALUES OF THE DEVELOPED TECHNOLOGY AND EMPLOYMENT CONTRACTS (I.E., THE
IDENTIFIED INTANGIBLES) AT THE DATE OF THE ACQUISITION OF THE REMAINDER OF THE
CAPITAL STOCK OF RMS WERE $3,079 AND $1,229, RESPECTIVELY.
8. COMMITMENTS AND CONTINGENCIES
LEGAL MATTERS
ON SEPTEMBER 15, 1999, ENDOSONICS CORPORATION 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 IS VIGOROUSLY CONTESTING THIS MATTER AND CONTENDS THAT ENDOSONICS IS
11
<PAGE> 12
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
AUTHORIZED ONLY TO USE THE FOCUS TECHNOLOGY WITH THE ENDOSONICS ULTRASOUND
TRANSDUCER AND NOT ALSO WITH A STENT.
DISCOVERY IN THE CASE IS ALMOST COMPLETE AND A TRIAL IS SCHEDULED FOR FEBRUARY
13, 2001. 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 4.
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.
CONTRACT MANUFACTURING AND LICENSE AGREEMENT WITH BEBIG GMBH
IN JULY 1999, THE COMPANY ENTERED INTO A TWO-YEAR CONTRACT MANUFACTURING
AGREEMENT WITH BEBIG GMBH ("BEBIG") TO PERFORM THE FINAL ASSEMBLY OF ITS
RADIATION THERAPY CATHETER IN EUROPE. PURSUANT TO THE AGREEMENT, WHICH WAS
AMENDED IN JULY 2000, RADIANCE PAID $100 DURING 1999 AND, IN 2000 AND 2001, WILL
PAY APPROXIMATELY $1,247 AND $150, RESPECTIVELY, OF CERTAIN FACILITY SET-UP
FEES. RADIANCE WAS ALSO OBLIGATED TO PREPARE THE MANUFACTURING EQUIPMENT USED TO
PERFORM THE FINAL ASSEMBLY OF THE RDX CATHETER, ESTIMATED TO COST APPROXIMATELY
$700, AND BEBIG WAS OBLIGATED TO PURCHASE THE EQUIPMENT FROM RADIANCE FOR $500.
IN AUGUST 2000, BASED UPON THE DELIVERY OF THE MANUFACTURING EQUIPMENT BY THE
COMPANY TO BEBIG AND THE PERFORMANCE OF A PORTION OF THE MANUFACTURING
FACILITIES SET UP BY BEBIG, BEBIG PAID $500 TO RADIANCE AND RADIANCE PAID $732
TO BEBIG. OF THE REMAINING $665 OF FACILITY SET-UP FEES TO BE PAID TO BEBIG,
$515 AND $150 ARE EXPECTED TO BE PAID IN THE FOURTH QUARTER OF 2000 AND THE
FIRST QUARTER OF 2001, RESPECTIVELY.
THE COST OF THE FACILITY SET UP FEES, EQUIPMENT COSTS AND OTHER COSTS COULD
INCREASE MATERIALLY FROM THE AFOREMENTIONED AMOUNTS AS THE DESIGN OF THE
PRODUCTION PROCESSES AND FACILITIES EVOLVES OVER THE NEXT TWO QUARTERS. THE
COMPANY WILL PAY 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.
12
<PAGE> 13
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
IN CONJUNCTION WITH THE CONTRACT MANUFACTURING AGREEMENT, THE COMPANY ENTERED
INTO A THREE YEAR SUB-LICENSE AGREEMENT WITH BEBIG FOR CERTAIN RADIATION
TECHNOLOGY THAT IT BELIEVES MAY BE USEFUL IN THE DEVELOPMENT OF ITS RADIATION
THERAPY PRODUCTS. THERE IS A MINIMUM ANNUAL LICENSE FEE OF $200, 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. ALL COSTS
ASSOCIATED WITH THE CONTRACT MANUFACTURING AND LICENSE AGREEMENTS WITH BEBIG
HAVE BEEN EXPENSED AS RESEARCH AND DEVELOPMENT COSTS.
9. RECENT ACCOUNTING PRONOUNCEMENTS
IN DECEMBER 1999, THE SECURITIES EXCHANGE COMMISSION ("SEC") ISSUED STAFF
ACCOUNTING BULLETIN NO. 101 ("SAB 101"), REVENUE RECOGNITION, WHICH OUTLINES THE
BASIC CRITERIA THAT MUST BE MET TO RECOGNIZE REVENUE AND PROVIDES GUIDANCE FOR
THE PRESENTATION OF REVENUE AND FOR DISCLOSURE RELATED TO REVENUE RECOGNITION
POLICIES IN FINANCIAL STATEMENTS FILED WITH THE SEC. WE WILL ADOPT SAB 101 IN
THE FOURTH QUARTER OF 2000 AND BELIEVE THAT ADOPTING IT WILL NOT HAVE A MATERIAL
IMPACT ON OUR FINANCIAL POSITION OR RESULTS OF OPERATIONS.
10. SUBSEQUENT EVENT
ON OCTOBER 3, 2000, THE COMPANY CLOSED A SECONDARY OFFERING AND SOLD 1.5 MILLION
SHARES OF ITS COMMON STOCK AT $9.50 PER SHARE, WHICH RESULTED IN NET PROCEEDS OF
APPROXIMATELY $13.0 MILLION AFTER DEDUCTING UNDERWRITING DISCOUNTS AND
COMMISSIONS AND OTHER EXPENSES OF THE OFFERING.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RADIANCE CAUTIONS STOCKHOLDERS THAT, IN ADDITION TO THE HISTORICAL FINANCIAL
INFORMATION INCLUDED HEREIN, THIS REPORT ON FORM 10-Q 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 REPORT ON FORM 10-Q, 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 THE REGISTRATION STATEMENT ON FORM S-2 FILED ON
OCTOBER 3, 2000 AND IN THE 1999 ANNUAL REPORT ON FORM 10-K, INCLUDING, BUT NOT
LIMITED TO, THOSE DISCUSSED IN "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. WE
DISCLAIM ANY OBLIGATION TO UPDATE INFORMATION CONTAINED IN ANY FORWARD-LOOKING
STATEMENT.
OVERVIEW
OUR BUSINESS
WE ARE DEVELOPING PROPRIETARY DEVICES TO DELIVER RADIATION TO PREVENT THE
RECURRENCE OF BLOCKAGES IN ARTERIES FOLLOWING BALLOON ANGIOPLASTY, VASCULAR
STENTING AND OTHER INTERVENTIONAL TREATMENTS OF BLOCKAGES IN CORONARY AND
PERIPHERAL ARTERIES. WE INCORPORATE OUR PROPRIETARY RDX TECHNOLOGY INTO
CATHETER-BASED SYSTEMS THAT DELIVERS BETA RADIATION TO THE SITE OF A TREATED
BLOCKAGE IN AN ARTERY IN ORDER TO DECREASE THE LIKELIHOOD OF RESTENOSIS.
RESTENOSIS IS THE RECURRENCE OF A BLOCKAGE FOLLOWING INTERVENTIONAL THERAPY. THE
APPLICATION OF BETA RADIATION INSIDE THE ARTERY AT THE SITE OF A BLOCKAGE HAS
PROVEN CLINICALLY EFFECTIVE IN INHIBITING CELL PROLIFERATION, A CAUSE OF
RESTENOSIS.
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PRIOR TO JUNE 1998, WE FOCUSED ON MANUFACTURING AND SELLING A BROAD RANGE OF
ANGIOPLASTY CATHETERS AND STENT PRODUCTS, INCLUDING OUR FOCUS TECHNOLOGY PRODUCT
LINE. AS CATHETER AND STENT PRODUCTS BECAME WIDELY AVAILABLE SUBJECT TO
INCREASING PRICE PRESSURE, WE SHIFTED OUR FOCUS TO THE RESEARCH AND DEVELOPMENT
OF RADIATION THERAPY DEVICES TO TREAT RESTENOSIS. SINCE JUNE 1998, WE HAVE:
- ACQUIRED THE PORTION OF OUR FORMER RADIANCE MEDICAL SYSTEMS SUBSIDIARY THAT
WE DID NOT ALREADY OWN, WHICH WAS RESEARCHING AND DEVELOPING RADIATION
THERAPY TREATMENT DEVICES TO PREVENT BLOCKAGES IN ARTERIES FOLLOWING
INTERVENTIONAL TREATMENTS;
- SOLD OUR VASCULAR ACCESS PRODUCT LINE AND RELATED ASSETS;
- LICENSED OUR PROPRIETARY FOCUS TECHNOLOGY FOR BALLOON ANGIOPLASTY TO
GUIDANT CORPORATION FOR USE IN GUIDANT'S STENT DELIVERY SYSTEMS; AND
- REDUCED OUR DIRECT SALES FORCE.
WE CONTINUE TO SELL OUR REMAINING STENT AND CATHETER PRODUCTS, INCLUDING OUR
FOCUS TECHNOLOGY PRODUCTS, ON A LIMITED BASIS THROUGH MEDICAL DEVICE
DISTRIBUTORS.
DEVELOPMENT AND OPERATIONS
WE PLAN TO CONTINUE TO DEDICATE OUR CORPORATE RESOURCES TO:
- COMPLETING CLINICAL TRIALS FOR THE RDX SYSTEM;
- OBTAINING REGULATORY APPROVALS FOR THE RDX SYSTEM; AND
- CONTINUING RESEARCH AND DEVELOPMENT ACTIVITIES RELATED TO DEVICES FOR THE
DELIVERY OF RADIATION TO TREAT RESTENOSIS.
OVER THE PAST FEW YEARS, OUR SOURCE OF REVENUES HAS SHIFTED GRADUALLY FROM
DIRECT SALES TO ROYALTIES FROM LICENSES INVOLVING OUR PRODUCTS. WE ARE A PARTY
TO SEVERAL AGREEMENTS FOR THE DISTRIBUTION OF PRODUCTS INCORPORATING OUR FOCUS
TECHNOLOGY AND OTHER EXISTING PRODUCTS IN THE UNITED STATES AND 23 OTHER
COUNTRIES, THE MOST SIGNIFICANT OF WHICH IS OUR LICENSE AGREEMENT WITH GUIDANT
CORPORATION.
IN JUNE 1998, WE ENTERED INTO A TECHNOLOGY LICENSE AGREEMENT WITH GUIDANT
CORPORATION, GRANTING GUIDANT RIGHTS, INCLUDING EXCLUSIVE RIGHTS IN THE UNITED
STATES, TO MANUFACTURE AND DISTRIBUTE PRODUCTS USING OUR FOCUS TECHNOLOGY FOR
THE DELIVERY OF STENTS. IN EXCHANGE, WE RECEIVED MILESTONE PAYMENTS BASED UPON
THE TRANSFER OF THE TECHNOLOGICAL KNOWLEDGE TO GUIDANT, AND CONTINUE TO RECEIVE
ROYALTY
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
PAYMENTS BASED UPON THE SALE OF PRODUCTS BY GUIDANT USING THE FOCUS TECHNOLOGY.
THE PAYMENTS UNDER THE GUIDANT LICENSE ARE THE PRIMARY SOURCE OF OUR EXISTING
REVENUES. UNTIL WE SUCCESSFULLY DEVELOP AND COMMERCIALIZE THE RDX SYSTEM, WE
ANTICIPATE THAT OUR REVENUES WILL CONTINUE TO DECLINE AS SALES OF PRODUCTS
INCORPORATING OUR LICENSED TECHNOLOGY DECLINE AND AS OUR TECHNOLOGY BECOMES
OBSOLETE. SEE NOTE 4 TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
WE HAVE EXPERIENCED AN OPERATING LOSS FOR EACH OF THE LAST THREE YEARS AND
EXPECT TO CONTINUE TO INCUR OPERATING LOSSES THROUGH AT LEAST THE END OF 2001.
OUR RESULTS OF OPERATIONS HAVE VARIED SIGNIFICANTLY FROM QUARTER TO QUARTER, AND
WE EXPECT THAT OUR RESULTS OF OPERATIONS WILL CONTINUE TO VARY SIGNIFICANTLY IN
THE FUTURE. OUR QUARTERLY OPERATING RESULTS DEPEND UPON SEVERAL FACTORS,
INCLUDING:
- THE TIMING AND AMOUNT OF EXPENSES ASSOCIATED WITH DEVELOPMENT OF THE RDX
SYSTEM;
- THE PROGRESS OF CLINICAL TRIALS AND THE TIMING OF REGULATORY APPROVALS;
- NEW PRODUCT INTRODUCTIONS BOTH IN THE UNITED STATES AND INTERNATIONALLY;
- VARYING PRODUCT SALES BY OUR LICENSEE;
- VARIATIONS IN FOREIGN EXCHANGE RATES; AND,
- CHANGES IN THIRD-PARTY PAYORS' REIMBURSEMENT POLICIES.
WE DO NOT OPERATE WITH A SIGNIFICANT BACKLOG OF CUSTOMER ORDERS, AND THEREFORE
REVENUES IN ANY QUARTER ARE SIGNIFICANTLY DEPENDENT ON ORDERS RECEIVED DURING
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.
ORGANIZATIONAL HISTORY
WE WERE FORMED IN 1992, AND OUR COMMON STOCK BEGAN TRADING PUBLICLY IN 1996. THE
CURRENT RADIANCE MEDICAL SYSTEMS, INC. RESULTED FROM THE 1999 ACQUISITION BY US
OF THE PORTION OF OUR FORMER RADIANCE MEDICAL SYSTEMS SUBSIDIARY THAT WE DID NOT
ALREADY OWN. WE ORIGINALLY INCORPORATED THE FORMER RADIANCE AS A SEPARATE ENTITY
TO FOCUS ON THE RESEARCH AND DEVELOPMENT OF RADIATION THERAPY FOR THE TREATMENT
OF CARDIOVASCULAR DISEASE, AND TO OBTAIN OUTSIDE SOURCES OF FINANCING FOR SUCH
RESEARCH AND DEVELOPMENT. IN JANUARY 1999, WE PAID APPROXIMATELY $6.9 MILLION IN
STOCK AND $692,000 IN CASH, AND ASSUMED $1.1 MILLION OF OPTIONS TO ACQUIRE THE
PORTION OF THE FORMER RADIANCE THAT WE DID NOT ALREADY OWN. IN ADDITION, THE
STOCKHOLDERS AND OPTIONHOLDERS OF THE FORMER RADIANCE MAY STILL
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
RECEIVE PRODUCT DEVELOPMENT MILESTONES OF UP TO $1.08 FOR EACH SHARE OF
PREFERRED STOCK AND $1.62 FOR EACH SHARE OF COMMON STOCK. THESE 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. AS
OF NOVEMBER 7, 2000, THE FIRST TWO MILESTONES WERE NOT ACHIEVED AND ACHIEVEMENT
OF THE THIRD MILESTONE IS BEHIND SCHEDULE. SEE NOTE 7 TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
SALES. SALES DECREASED 17% TO $0.5 MILLION IN THE THREE MONTHS ENDED
SEPTEMBER 30, 2000 FROM $0.6 MILLION IN THE THREE MONTHS ENDED SEPTEMBER 30,
1999. THE DECREASE RESULTED PRIMARILY FROM INCREASING COMPETITION AND THE SALE
OF COMPETING PRODUCTS BY GUIDANT USING THE COMPANY'S FOCUS TECHNOLOGY.
MANAGEMENT ANTICIPATES THAT PRODUCT SALES REVENUE WILL CONTINUE TO BE MATERIALLY
LOWER IN THE FOURTH QUARTER OF 2000 COMPARED WITH THE SAME PERIOD OF 1999 FOR
THE ABOVE-MENTIONED REASONS.
LICENSE FEE AND OTHER. LICENSE REVENUE INCREASED 62% TO $1.3 MILLION IN
THE THREE MONTHS ENDED SEPTEMBER 30, 2000 FROM $0.8 MILLION IN THE THREE MONTHS
ENDED SEPTEMBER 30, 1999. $1.2 MILLION AND $0.6 MILLION IN LICENSE REVENUE WERE
RECOGNIZED IN THE THIRD QUARTER OF 2000 AND 1999, RESPECTIVELY, FOR ROYALTIES ON
PRODUCT SALES UNDER THE TECHNOLOGY LICENSE AGREEMENT WITH GUIDANT. MANAGEMENT
ANTICIPATES THAT LICENSE REVENUES WILL BE MATERIALLY HIGHER IN THE FOURTH
QUARTER OF 2000 COMPARED WITH THE SAME PERIOD OF 1999 AS GUIDANT BEGAN MARKETING
THE LICENSED PRODUCTS LATE IN THE THIRD QUARTER OF 1999.
COST OF SALES. THE COST OF SALES INCREASED 26% TO $0.5 MILLION, OR 96%
OF SALES REVENUES, IN THE THREE MONTHS ENDED SEPTEMBER 30, 2000 FROM $0.4
MILLION, OR 64% OF SALES REVENUES, IN THE THREE MONTHS ENDED SEPTEMBER 30, 1999.
THE INCREASE IN COST OF SALES, RELATIVE TO SALES REVENUES, IS ATTRIBUTABLE
PRIMARILY TO PRICING PRESSURE AND LOWER MANUFACTURING EFFICIENCY ASSOCIATED WITH
LOW VOLUME PRODUCTION.
RESEARCH AND DEVELOPMENT. RESEARCH AND DEVELOPMENT EXPENSES, WHICH
INCLUDE CLINICAL EXPENSES, INCREASED 61% TO $2.9 MILLION IN THE THREE MONTHS
ENDED SEPTEMBER 30, 2000 FROM $1.8 MILLION IN THE THREE MONTHS ENDED SEPTEMBER
30, 1999. THE INCREASE IN EXPENSES DURING THE QUARTER ENDED SEPTEMBER 30, 2000
RESULTED PRIMARILY FROM EXPENDITURES FOR CLINICAL TRIALS. THE COMPANY EXPECTS
THE OVERALL EXPENDITURES TO INCREASE IN THE REMAINDER OF 2000, COMPARED TO THE
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
EXPENDITURES FOR THE SAME PERIODS OF 1999, DUE TO HIGHER EXPENDITURES
ANTICIPATED FOR PROGRAMS TO DEVELOP THE RDX SYSTEM FOR SAPHANEOUS VEIN GRAFT AND
PERIPHERAL VASCULAR INTERVENTIONS.
MARKETING AND SALES. MARKETING AND SALES EXPENSES DECREASED 25% TO $0.2
MILLION IN THE THREE MONTHS ENDED SEPTEMBER 30, 2000 FROM $0.3 MILLION IN THE
THREE MONTHS ENDED SEPTEMBER 30, 1999. THE RELATIVE DECREASE IN EXPENSES
RESULTED PRIMARILY FROM THE CLOSURE OF THE GERMAN SALES OFFICE.
GENERAL AND ADMINISTRATIVE. GENERAL AND ADMINISTRATIVE EXPENSES
TOTALLED $0.7 MILLION IN THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999.
MINORITY INTEREST. THE MINORITY INTEREST RELATES TO OUR PARTNER'S 49%
OWNERSHIP OF THE JAPAN DISTRIBUTION JOINT VENTURE, RADIATEC, DESCRIBED MORE
FULLY IN "LIQUIDITY AND CAPITAL RESOURCES." THE VENTURE BEGAN LIMITED OPERATIONS
IN THE THIRD QUARTER OF 1999 TO OBTAIN JAPANESE REGULATORY APPROVAL AND WILL
BEGIN MARKETING THE RDX SYSTEM IN JAPAN ONCE IT RECEIVES REGULATORY APPROVAL.
OTHER INCOME (EXPENSE). OTHER INCOME INCREASED 22% TO $0.6 MILLION IN THE THREE
MONTHS ENDED SEPTEMBER 30, 2000 FROM $0.5 MILLION IN THE THREE MONTHS ENDED
SEPTEMBER 30, 1999, PRIMARILY DUE TO THE RECOGNITION OF A PORTION OF THE INCOME
FROM THE SALE IN AUGUST 1999 OF AN OPTION TO PURCHASE EQUITY SECURITIES WE HELD
AS AN INVESTMENT HELD BY THE COMPANY. UNDER THE OPTION AGREEMENT, THE PURCHASER
MADE A NON-REFUNDABLE CASH PAYMENT TO THE COMPANY OF $1.2 MILLION FOR THE OPTION
AND HAS UNTIL DECEMBER 2000 TO EXERCISE THE OPTION. A GAIN OF $231,000 WAS
RECOGNIZED IN OTHER INCOME IN THE THIRD QUARTER OF 2000. ALTHOUGH THE LIKELIHOOD
OF EXERCISE IS UNCERTAIN, IF THE AFOREMENTIONED OPTION IS EXERCISED, THE COMPANY
WILL RECEIVE AN ADDITIONAL PAYMENT OF APPROXIMATELY $2.4 MILLION IN THE FOURTH
QUARTER OF 2000. SEE NOTE 4 TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
SALES. SALES DECREASED 42% TO $1.7 MILLION IN THE NINE MONTHS ENDED
SEPTEMBER 30, 2000 FROM $3.0 MILLION IN THE NINE MONTHS ENDED SEPTEMBER 30,
1999. THE DECREASE RESULTED PRIMARILY FROM REDUCTIONS IN THE SALES OF PRODUCTS
AS A RESULT OF THE LICENSE OF OUR FOCUS TECHNOLOGY TO GUIDANT AND THE
DIVESTITURE OF THE VASCULAR ACCESS PRODUCT LINE IN JANUARY 1999.
LICENSE FEE AND OTHER. LICENSE REVENUE INCREASED 146% TO $5.1 MILLION
IN THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FROM $2.1 MILLION IN THE NINE MONTHS
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
ENDED SEPTEMBER 30, 1999. $4.8 MILLION AND $1.9 MILLION IN LICENSE REVENUE WERE
RECOGNIZED IN THE FIRST NINE MONTHS OF 2000 AND 1999, RESPECTIVELY, FOR
ROYALTIES ON PRODUCT SALES UNDER THE TECHNOLOGY LICENSE AGREEMENT WITH GUIDANT.
COST OF SALES. THE COST OF SALES DECREASED 40% TO $1.4 MILLION, OR 80%
OF SALES, IN THE NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO $2.3 MILLION,
OR 77% OF SALES, IN THE NINE MONTHS ENDED SEPTEMBER 30, 1999. THE INCREASE,
RELATIVE TO SALES, IS ATTRIBUTABLE PRIMARILY TO PRICING PRESSURE AND LOWER
MANUFACTURING EFFICIENCY ASSOCIATED WITH LOW VOLUME PRODUCTION.
CHARGE FOR ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. DUE TO THE
ACQUISITION OF THE REMAINING SHARES OF RMS NOT OWNED BY THE COMPANY IN JANUARY
1999, THE COMPANY RECOGNIZED A CHARGE OF $4.2 MILLION FOR ACQUIRED IN-PROCESS
RESEARCH AND DEVELOPMENT IN THE NINE MONTHS ENDED SEPTEMBER 30, 1999. SEE NOTE 7
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
RESEARCH AND DEVELOPMENT. RESEARCH AND DEVELOPMENT EXPENSES, WHICH
INCLUDE CLINICAL EXPENSES, INCREASED 42% TO $8.5 MILLION IN THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 FROM $6.0 MILLION IN THE NINE MONTHS ENDED SEPTEMBER
30, 1999. THE INCREASE IN EXPENSES DURING THE PERIOD ENDED SEPTEMBER 30, 2000
RESULTED PRIMARILY FROM EXPENDITURES FOR CLINICAL TRIALS.
MARKETING AND SALES. MARKETING AND SALES EXPENSES DECREASED 30% TO $0.9
MILLION IN THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FROM $1.2 MILLION IN THE
NINE MONTHS ENDED SEPTEMBER 30, 1999. THIS DECREASE IS PRIMARILY DUE TO
REDUCTIONS IN THE COMPANY'S DOMESTIC AND INTERNATIONAL SALES FORCE AND RELATED
EXPENSES.
GENERAL AND ADMINISTRATIVE. GENERAL AND ADMINISTRATIVE EXPENSES
INCREASED 3% TO $2.2 MILLION IN THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FROM
$2.1 MILLION IN THE NINE MONTHS ENDED SEPTEMBER 30, 1999 DUE PRIMARILY TO AN
INCREASE IN PAYROLL AND RELATED BENEFIT EXPENSES AND INVESTOR RELATIONS
EXPENSES.
MINORITY INTEREST. THE MINORITY INTEREST RELATES TO OUR PARTNER'S 49%
OWNERSHIP OF THE JAPAN DISTRIBUTION JOINT VENTURE, RADIATEC, DESCRIBED MORE
FULLY IN "LIQUIDITY AND CAPITAL RESOURCES." THE VENTURE BEGAN LIMITED OPERATIONS
IN THE THIRD QUARTER OF 1999 TO OBTAIN JAPANESE REGULATORY APPROVAL AND WILL
BEGIN MARKETING THE RDX SYSTEM IN JAPAN ONCE IT RECEIVES REGULATORY APPROVAL.
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
OTHER INCOME (EXPENSE). OTHER INCOME INCREASED 34% TO $1.6 MILLION IN
THE NINE MONTHS ENDED SEPTEMBER 30, 2000 FROM $1.2 MILLION IN THE NINE MONTHS
ENDED SEPTEMBER 30, 1999, PRIMARILY DUE TO THE RECOGNITION OF A PORTION OF THE
INCOME FROM THE SALE OF AN OPTION IN AUGUST 1999 TO PURCHASE EQUITY SECURITIES
WE HELD AS AN INVESTMENT. A GAIN OF $0.7 MILLION WAS RECOGNIZED IN OTHER INCOME
IN THE NINE MONTHS ENDED SEPTEMBER 30, 2000. SEE ABOVE DISCUSSION UNDER "RESULTS
OF OPERATIONS, COMPARISONS OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
2000."
LIQUIDITY AND CAPITAL RESOURCES
SINCE INCEPTION, WE HAVE FINANCED OUR OPERATIONS PRIMARILY BY:
- SELLING OUR EQUITY SECURITIES;
- OBTAINING ADVANCES FROM ENDOSONICS CORPORATION, OUR FORMER PARENT COMPANY;
- LICENSING OUR TECHNOLOGIES; AND
- ENTERING INTO INTERNATIONAL PRODUCT DISTRIBUTION AGREEMENTS.
PRIOR TO OUR INITIAL PUBLIC OFFERING IN 1996, WE RAISED AN AGGREGATE OF
APPROXIMATELY $11.4 MILLION FROM THE PRIVATE SALES OF PREFERRED AND COMMON STOCK
AND $2.7 MILLION IN WORKING CAPITAL ADVANCES FROM ENDOSONICS, WHICH WE REPAID
DURING THE THIRD QUARTER OF 1996.
IN THE SECOND QUARTER OF 1996, WE CLOSED OUR INITIAL PUBLIC OFFERING OF COMMON
STOCK, WHICH RESULTED IN NET PROCEEDS OF APPROXIMATELY $42.8 MILLION AFTER
DEDUCTING UNDERWRITING DISCOUNTS AND COMMISSIONS AND OTHER EXPENSES OF THE
OFFERING.
IN THE THIRD QUARTER OF 1997, SCIMED LIFE SYSTEMS, INC. EXERCISED 120,000 COMMON
STOCK WARRANTS, OBTAINED FROM US THROUGH A 1995 STOCK PURCHASE AND TECHNOLOGY
LICENSE AGREEMENT, FOR $377,000. WE ALSO RECEIVED $200,000 FROM THE SALE OF OUR
COMMON STOCK TO CATHEX, LTD. UNDER A MAY 1997 AGREEMENT THAT GAVE CATHEX
EXCLUSIVE PRODUCT DISTRIBUTION RIGHTS OF OUR EXISTING PRODUCTS THROUGH JANUARY
1, 2001.
IN THE THIRD QUARTER OF 1997, SCIMED LIFE SYSTEMS, INC. EXERCISED 120,000 COMMON
STOCK WARRANTS, OBTAINED FROM US THROUGH A 1995 STOCK PURCHASE AND TECHNOLOGY
LICENSE AGREEMENT, FOR $377,000. WE ALSO RECEIVED $200,000 FROM THE SALE OF OUR
COMMON STOCK TO CATHEX, LTD. UNDER A MAY 1997 AGREEMENT THAT GAVE CATHEX
EXCLUSIVE PRODUCT DISTRIBUTION RIGHTS OF OUR EXISTING PRODUCTS THROUGH JANUARY
1, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IN JANUARY 1999, WE ALSO SOLD SUBSTANTIALLY ALL OF OUR VASCULAR ACCESS PRODUCT
LINE AND RELATED ASSETS TO ESCALON MEDICAL CORPORATION FOR APPROXIMATELY $2.1
MILLION. WE EXPECT TO RECEIVE THE MINIMUM ROYALTY PAYMENT OF $300,000 PER YEAR
CONCLUDING IN JANUARY 2004. SEE NOTE 7 TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
IN JUNE 1999, WE GRANTED COSMOTEC CO., LTD OF JAPAN THE EXCLUSIVE DISTRIBUTION
RIGHTS TO MARKET OUR VASCULAR RADIATION THERAPY PRODUCTS IN JAPAN. WE RECEIVED
$1.0 MILLION FROM COSMOTEC AS AN UPFRONT CASH PAYMENT AND BEGAN RECOGNIZING
INCOME RATABLY OVER THE SEVEN-YEAR TERM OF THE AGREEMENT. AS PART OF THE
TRANSACTION WITH COSMOTEC, IN AUGUST 1999, WE ACQUIRED A 51% INTEREST, FOR
$233,000, IN A JOINT VENTURE NAMED RADIATEC, WITH AN AFFILIATE OF COSMOTEC TO
GAIN REGULATORY APPROVAL OF AND PROVIDE DISTRIBUTION FOR THE RDX SYSTEM IN
JAPAN.
CONVERTIBLE DEBENTURE DEBT ROSE TO $1.4 MILLION IN JUNE 2000 TO REFLECT THE FAIR
VALUE OF A 5%, $1.0 MILLION FACE AMOUNT CONVERTIBLE DEBENTURE THAT WE SOLD TO
COSMOTEC. ON SEPTEMBER 13, 2000, COSMOTEC CONVERTED THE DEBENTURE INTO 142,857
SHARES OF OUR COMMON STOCK AT $7.00 PER SHARE. SEE NOTE 5 TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
IN JULY 1999, WE ENTERED INTO A TWO-YEAR CONTRACT MANUFACTURING AGREEMENT WITH
BEBIG GMBH TO ACTIVATE THE RADIOACTIVE SOURCES AND COMPLETE FINAL ASSEMBLY OF
THE RDX SYSTEM USING OUR PROPRIETARY EQUIPMENT AND PROPRIETARY PROCESSES.
PURSUANT TO THE AGREEMENT, BEBIG WILL BUILD A FACILITY FOR THE PRODUCTION OF THE
RDX SYSTEM. WE PAID $100,000 DURING 1999, AND, IN 2000 AND THE FIRST QUARTER OF
2001, WE WILL PAY APPROXIMATELY $1.2 MILLION AND $0.2 MILLION, RESPECTIVELY, FOR
FACILITY SET-UP FEES. WE WILL ALSO PAY ALL MATERIAL AND THIRD PARTY COSTS
ASSOCIATED WITH PRODUCTION VALIDATION. RADIANCE WAS ALSO OBLIGATED TO PREPARE
THE MANUFACTURING EQUIPMENT TO BE USED BY BEBIG TO PERFORM THE FINAL ASSEMBLY OF
THE RDX SYSTEM, ESTIMATED TO COST APPROXIMATELY $700,000, AND BEBIG WAS
OBLIGATED TO PURCHASE THE EQUIPMENT FROM US FOR $500,000. IN AUGUST 2000, BASED
UPON THE DELIVERY OF THE MANUFACTURING EQUIPMENT BY THE COMPANY TO BEBIG AND THE
PERFORMANCE OF A PORTION OF THE MANUFACTURING FACILITIES SET UP BY BEBIG, BEBIG
PAID THE COMPANY $0.5 MILLION AND RADIANCE PAID BEBIG $0.7 MILLION,
RESPECTIVELY. WE WILL ALSO PAY BEBIG AN AGREED AMOUNT FOR EACH UNIT PRODUCED.
THE COST OF THE FACILITY SET-UP FEES, EQUIPMENT COSTS AND OTHER COSTS COULD
INCREASE MATERIALLY FROM THE AFOREMENTIONED AMOUNTS AS THE DESIGN OF THE
PRODUCTION PROCESSES AND FACILITIES EVOLVES OVER THE NEXT TWO QUARTERS. WE HAVE
EXPENSED ALL COSTS INCURRED UNDER THE AFOREMENTIONED AGREEMENTS AS RESEARCH AND
DEVELOPMENT EXPENSES.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
IN CONJUNCTION WITH THE CONTRACT MANUFACTURING AGREEMENT, IN JULY 1999, WE
ENTERED INTO A THREE-YEAR, NON-EXCLUSIVE, SUB-LICENSE AGREEMENT TO USE BEBIG'S
HEHRLEIN PATENT FOR RADIATION TECHNOLOGY THAT MAY BE USEFUL IN THE DEVELOPMENT
OF THE RDX SYSTEM. PURSUANT TO THIS SUB-LICENSE AGREEMENT, WE MUST PAY TO BEBIG
ROYALTY FEES FOR ANY PRODUCTS SOLD WORLDWIDE BY US THAT INCORPORATE THE LICENSED
TECHNOLOGY. THE SUB-LICENSE IS SUBJECT TO RENEWAL, WITHOUT COST, THROUGH THE
EXPIRATION DATES OF THE UNDERLYING PATENTS.
WE BELIEVE THAT RESEARCH AND DEVELOPMENT EXPENSES RELATING TO THE RDX SYSTEM
WILL INCREASE, AS WILL COSTS ASSOCIATED WITH COMMERCIALIZATION OF THE RDX SYSTEM
IF WE SUCCESSFULLY OBTAIN REGULATORY APPROVALS. WE EXPECT TO BEGIN SALES OF THE
RDX SYSTEM IN EUROPE ONCE WE RECEIVE CE MARK APPROVAL.
ON OCTOBER 3, 2000, THE COMPANY FILED A REGISTRATION STATEMENT ON FORM S-2 AND
SOLD 1.5 MILLION SHARES OF ITS COMMON STOCK AT $9.50 PER SHARE, WHICH RESULTED
IN NET PROCEEDS OF APPROXIMATELY $13.0 MILLION AFTER DEDUCTING UNDERWRITING
DISCOUNTS AND COMMISSIONS AND OTHER EXPENSES OF THE OFFERING.
NET CASH USED IN OPERATING ACTIVITIES INCREASED 7% TO $4.6 MILLION FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2000 FROM $4.3 MILLION FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999. THE INCREASE IN NET CASH USED, COMPARING THE FIRST NINE
MONTHS OF 2000 AND 1999, RESULTED PRIMARILY FROM THE INCREASE IN ROYALTY
PAYMENTS RECEIVABLE, WHICH GUIDANT MAKES IN THE QUARTER AFTER IT RECOGNIZES
REVENUE RELATED TO THE LICENSE OF OUR FOCUS TECHNOLOGY.
AT SEPTEMBER 30, 2000, WE HAD CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
AVAILABLE FOR SALE OF $18.6 MILLION. WE EXPECT TO INCUR SUBSTANTIAL COSTS
RELATED TO, AMONG OTHER THINGS, CLINICAL TESTING, PRODUCT DEVELOPMENT, MARKETING
AND SALES EXPENSES OF THE RDX SYSTEM, AND EXPECT TO UTILIZE INCREASED LEVELS OF
WORKING CAPITAL PRIOR TO ACHIEVING POSITIVE CASH FLOW FROM OPERATIONS. INCLUDING
THE PROCEEDS FROM OUR OCTOBER 3, 2000 PUBLIC OFFERING, WE ANTICIPATE THAT OUR
EXISTING CAPITAL RESOURCES WILL BE SUFFICIENT TO FUND OUR OPERATIONS THROUGH
MARCH 31, 2002. OUR FUTURE CAPITAL REQUIREMENTS WILL DEPEND ON MANY FACTORS,
INCLUDING:
- OUR 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;
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
- THE ESTABLISHMENT OF MANUFACTURING CAPACITY;
- THE ESTABLISHMENT OF SALES AND MARKETING CAPABILITIES; AND
- THE ESTABLISHMENT OF COLLABORATIVE RELATIONSHIPS WITH OTHER PARTIES.
WE MAY NEED TO RAISE FUNDS THROUGH ADDITIONAL FINANCINGS, INCLUDING PRIVATE OR
PUBLIC EQUITY OFFERINGS AND COLLABORATIVE ARRANGEMENTS WITH EXISTING OR NEW
CORPORATE PARTNERS. WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO RAISE FUNDS ON
FAVORABLE TERMS, OR AT ALL. IF ADEQUATE FUNDS ARE NOT AVAILABLE, WE MAY NEED 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 GRANT RIGHTS TO CERTAIN TECHNOLOGIES OR PRODUCTS THAT WE WOULD NOT
OTHERWISE GRANT.
TRADE ACCOUNTS RECEIVABLE, NET, DECREASED 40% TO $0.6 MILLION AT SEPTEMBER 30,
2000 FROM $1.1 MILLION AT DECEMBER 31, 1999. THE DECREASE RESULTED PRIMARILY
FROM LOWER PRODUCT SALES CAUSED BY INCREASING COMPETITION WITH OUR EXISTING
PRODUCTS, WHICH ARE BASED ON FOCUS TECHNOLOGY.
OTHER RECEIVABLES INCREASED 118% TO $1.6 MILLION AT SEPTEMBER 30, 2000 FROM $0.7
MILLION AT DECEMBER 31, 1999. THE INCREASE IS ATTRIBUTABLE PRIMARILY TO AN
INCREASE IN THE LICENSE REVENUE RECEIVABLE FROM GUIDANT OF $1.2 MILLION FOR
LICENSED PRODUCT SALES DURING THE THIRD QUARTER OF 2000.
OTHER LONG-TERM ASSETS INCREASED TO $0.4 MILLION AT SEPTEMBER 30, 2000 FROM $0.0
MILLION AT DECEMBER 31, 1999 DUE TO COSTS EXPENDED IN THE THIRD QUARTER OF 2000
ASSOCIATED WITH OUR OCTOBER 3, 2000 PUBLIC OFFERING MORE FULLY DESCRIBED ABOVE.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES INCREASED 10% TO $3.0 MILLION AT SEPTEMBER
30, 2000 FROM $2.7 MILLION AT DECEMBER 31, 1999, DUE PRIMARILY TO HIGHER
ACCRUALS FOR RESEARCH AND DEVELOPMENT AND CLINICAL EXPENDITURES.
DEFERRED REVENUE DECREASED 64% TO $0.7 MILLION AT SEPTEMBER 30, 2000 FROM $1.8
MILLION AT DECEMBER 31, 1999. THE DECREASE WAS DUE TO THE RECOGNITION OF
DEFERRED REVENUE ON THE SALE OF AN OPTION AND DEFERRED LICENSE REVENUE DURING
THE FIRST NINE MONTHS OF 2000, AS WELL AS A REALLOCATION OF $0.4 MILLION TO THE
CONVERTIBLE DEBENTURE TO RECOGNIZE THE FAIR VALUE OF THE COSMOTEC DEBENTURE
ISSUED IN JUNE 2000. SEE NOTES 4 AND 5 TO THE CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS.
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Part II.
OTHER INFORMATION
Items 1, 3, 4 and 5. Not applicable
Item 2. Changes in Securities and Use of Proceeds
c) Recent Sales of Unregistered Securities
On September 13, 2000, we issued Cosmotec Co., Ltd. of Japan 142,857 shares of
our common stock at a purchase price of $7.00 per share, pursuant to the
conversion by Cosmotec of a $1.0 million convertible debenture originally issued
by us to Cosmotec on June 15, 1999. The securities issued by the Company
pursuant to this transaction were issued without registration under the
Securities Act of 1933, as amended, in reliance upon the exemptions from
registration provided under Section 4(2) of the Securities Act of Rule 506 of
Regulation D promulgated thereunder by the Securities and Exchange Commission.
The foregoing transaction did not involve any public offering, the investor
either received or had access to adequate information about us in order to make
an informed investment decision, and we reasonably believed that the investor
was "sophisticated" within the meaning of Section 4(2) of the Securities Act.
d) Use of Proceeds
In the second quarter of 1996, the Company closed its initial public offering of
common stock ("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 its 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 September 30, 2000, in the normal
course of business, the Company has paid salaries and bonuses in excess of
$100,000 each (approximately $4.9 million, in aggregate) to twelve present and
former officers of the Company and used $23.8 million for working capital. The
Company has also used approximately $2.3 million of the net proceeds for
machinery and equipment and leasehold improvement purchases. Through the end of
the third quarter of 2000, 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 shares
of Series B Preferred Stock of Radiance Medical Systems, Inc. for $1.5 million.
In January 1999, the Company paid $692,000 to stockholders of RMS who elected to
receive cash for their RMS common stock and $588,000 in costs relating to the
acquisition of the remaining common stock of RMS not held by the Company. At
September 30, 2000, approximately $18.3 million was held in temporary
investments, of which approximately $3.5 million and $14.8 million was
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invested in U.S. Federal and State Agency debt securities, and corporate debt
securities and commercial paper, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
RADIANCE MEDICAL SYSTEMS, INC.
Date: November 13, 2000 /s/ Michael R. Henson
---------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2000 /s/ Stephen R. Kroll
---------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
27 FINANCIAL DATA SCHEDULE
-------------------------
27
