<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 11, 2000
REGISTRATION NO. 333-44450
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
RADIANCE MEDICAL SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 68-0328265
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
(949) 457-9546
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL R. HENSON, CHIEF EXECUTIVE OFFICER
RADIANCE MEDICAL SYSTEMS, INC.
13700 ALTON PARKWAY, SUITE 160
IRVINE, CALIFORNIA 92618
(949) 457-9546
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LAWRENCE B. COHN, ESQ. JAMES R. TANENBAUM, ESQ.
DANIEL P. MURPHY, ESQ. ANNA T. PINEDO, ESQ.
TIMOTHY F. O'BRIEN, ESQ. STROOCK & STROOCK & LAVAN LLP
STRADLING YOCCA CARLSON & RAUTH, P.C. 180 MAIDEN LANE
660 NEWPORT CENTER DRIVE, SUITE 1600 NEW YORK, NEW YORK 10038
NEWPORT BEACH, CALIFORNIA 92660 (212) 806-5400
(949) 725-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT MAXIMUM OFFERING PRICE MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PER UNIT(2) OFFERING PRICE REGISTRATION FEE(3)
------------------------------------------------------------------------------------------------------------------------------
Common Stock ($0.001 par value
per share).................. 3,278,150 $12.90625 $42,308,623 $11,169.48
------------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes 427,584 shares subject to an over-allotment option granted to the
underwriters.
(2) Estimated solely for purposes of calculating the registration fee, pursuant
to Rule 457(c) under the Securities Act of 1933, as amended, and based upon
the average of the reported high and low prices of the common stock as
reported by the Nasdaq National Market on August 18, 2000.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
RADIANCE AND THE SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE
SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN
ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION -- SEPTEMBER 11, 2000
PROSPECTUS
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2,825,132 Shares
[RADIANCE MEDICAL SYSTEMS, INC. LOGO]
Common Stock
--------------------------------------------------------------------------------
Radiance is offering 1,500,000 shares and the selling stockholder is offering
1,325,132 shares of common stock. Radiance will not receive any proceeds from
the sale of shares by the selling stockholder.
Radiance develops, manufactures and markets proprietary devices to prevent the
recurrence of blockages in arteries following interventional treatments of
blockages in coronary and peripheral arteries, including balloon angioplasty and
vascular stenting.
The shares of Radiance are quoted in the Nasdaq National Market under the symbol
"RADX". On September 8, 2000, the last reported sale price in the Nasdaq
National Market was $13.94 per share.
<TABLE>
<CAPTION>
Per Share Total
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Radiance...................... $ $
Proceeds, before expenses, to the selling stockholder....... $ $
</TABLE>
SEE "RISK FACTORS" ON PAGES 5 TO 15 FOR FACTORS THAT SHOULD BE
CONSIDERED BEFORE INVESTING IN THE SHARES OF RADIANCE.
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--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
--------------------------------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to 423,770
additional shares from Radiance at the public offering price, less underwriting
discounts and commissions. Delivery and payment for the shares will be on
, 2000.
PRUDENTIAL VECTOR HEALTHCARE GRUNTAL & CO., L.L.C.
A UNIT OF PRUDENTIAL SECURITIES
, 2000
<PAGE> 3
[INSIDE FRONT COVER OF PROSPECTUS]
[ARTWORK TO BE INSERTED]
DESCRIPTION OF PHOTOS ON INSIDE FRONT COVER OF PROSPECTUS
At the top of the page, aligned slight off-center to the left edge of the page
appears the title: "RDX(TM) Radiation Delivery System." The title is in white
lettering against a purple background.
Below the title is a thin white line extending from the left edge of the page
almost to the right edge of the page. The line wraps back to the middle of the
page forming a rectangular box surrounding additional text, appearing in all
capitals but in a smaller font size than the title: "The Next Generation in
Interventional Cardiology."
Below the text is a photograph of an RDX(TM) catheter used to treat blockages in
coronary arteries. Left justified and slightly off center in the page is text
connected to the photograph by a thin white line: "Our patented RDX(TM) system
carries a radioactive isotope on a balloon catheter, resulting in a delivery
system with precise radiation dosage and ease-of-use."
Below the first photograph is a second photograph of an RDX(TM) catheter with a
stent wrapped around the balloon portion of the catheter. Left justified,
slightly off center in the page and in the same left-right position on the page
as the text above is text connected to the photograph by a thin white line: "Our
RDX(TM) technology will allow us to combine the benefits of radiation therapy
with conventional Percutaneous Transluminal Coronary Angioplasty."
Below the second photograph is a third photograph of an RDX(TM) catheter
proposed for use in the treatment of blockages and potential blockages in the
peripheral vascular system. Left justified, slightly off center in the page and
in the same left-right position on the page as the text above is text connected
to the photograph by a thin white line: "Our RDX(TM) technology is being adapted
for use in the prevention of restenosis in the peripheral vascular system."
A picture of a red-colored blood vessel with an RDX(TM) catheter inside appears
on the right side of the page.
In the bottom left corner of the page is bold text in the same size font that
appears on the remainder of the page and states: "The RDX(TM) system is an
investigational device and is limited by U.S. federal law to investigational
use."
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Forward-Looking Statements............ 15
Use of Proceeds....................... 16
Price Range of Common Stock and
Dividend Policy..................... 17
Dilution.............................. 18
Capitalization........................ 19
Selected Consolidated Financial
Data................................ 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 30
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Management............................ 45
Certain Relationships and Related
Transactions........................ 47
Principal and Selling Stockholders.... 49
Description of Capital Stock.......... 51
Shares Eligible for Future Sale....... 54
Underwriting.......................... 55
Legal Matters......................... 56
Experts............................... 57
How to Get Additional Information
About Us............................ 57
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
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Radiance Medical Systems, Inc., RDX, Focus and our logo are trademarks of
Radiance. This prospectus also contains product names, trade names, trademarks
and service marks that belong to other companies.
--------------------------------------------------------------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you with
different information. We are not making an offer of these securities in any
jurisdiction where such an offer or sale is not permitted. You should not assume
that the information contained in this prospectus is accurate as of any date
other than the date on the front cover of this prospectus.
i
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and does not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully.
RADIANCE
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 deliver 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.
We designed the RDX system to provide safe and effective treatment for the
prevention of restenosis without many of the disadvantages inherent in
alternative radiation delivery systems. Our proprietary RDX system is the only
device in clinical trials that carries a radiation source on an inflatable
balloon catheter. This patented technology allows the RDX system to deliver a
therapeutic dose of radiation with approximately 80% less total radiation
activity than competing systems. As a result, the RDX system is easier to use,
does not require supplemental capital equipment and is readily disposable. In
addition, we believe that the RDX system is suitable to treat arteries that are
significantly larger and smaller than can be treated with alternative radiation
delivery systems. This flexibility will allow the RDX system to treat a larger
number of patients.
We designed the RDX system to treat restenosis in both coronary and
peripheral arteries that previously were treated with balloon angioplasty and/or
stents. In 1999, physicians performed approximately 1.2 million coronary artery
balloon angioplasty procedures worldwide. In addition, physicians perform
approximately 300,000 procedures in the United States each year to treat
peripheral vascular disease. More than 40% of all patients that undergo balloon
angioplasty develop restenosis which warrants a repeat intervention. The total
medical cost of all repeat revascularization procedures prompted by restenosis
exceeds $3 billion annually in the United States.
We are conducting clinical trials of the RDX system in Europe and the
United States to obtain regulatory approval to market the RDX system. As of July
31, 2000, we have used the system in approximately 150 patients in these trials.
In Europe, we have completed the required enrollment for our Conformite
Europeene, or CE, Mark approval, and filed an application for CE Mark approval
on August 30, 2000. The CE Mark is a European symbol of conformance to strict
product manufacturing and quality system standards. Following CE Mark approval,
we expect to begin marketing the RDX system in Europe and a number of other
overseas regions during the first half of 2001.
In the United States, we are conducting clinical trials to evaluate the
safety and efficacy of the RDX system in preventing restenosis in arteries that
previously were treated with stents. We began the U.S. study in February 2000
and have completed patient enrollment. We will continue clinical and diagnostic
evaluation of the patients enrolled in this study at six months following
treatment. In August 2000, we submitted technical documentation and data from
both our U.S. and European clinical studies to the Food and Drug Administration,
or FDA, and requested approval to begin the final phase of the U.S. clinical
trial.
In August 2000, we submitted a supplement to our U.S. Investigational
Device Exemption, or IDE, to initiate a clinical trial for the use of the RDX
system to prevent restenosis in patients who have undergone coronary artery
bypass graft, or CABG, surgery and have experienced a blockage in one or more of
the bypass grafts. We believe that we are the first to file for an IDE to treat
these patients. In addition, within the next year we plan to conduct clinical
trials to investigate the safety and efficacy of the RDX system in treating
restenosis in small coronary arteries. We also plan to seek marketing approval
for the RDX system to treat peripheral arteries.
1
<PAGE> 6
In July 2000, the U.S. Patent and Trademark Office notified us that we will
receive a patent for combining a stent on the same catheter that delivers
radiation to the coronary or peripheral vasculature. This technology could allow
us to design a catheter both to implant a stent into the blood vessel to open a
blockage and then to deliver radiation to prevent restenosis with the same
device. This patent also will include claims to the method of using the RDX
system to perform a conventional angioplasty procedure and then to deliver
radiation to the treated blood vessel site. This would allow us to reduce the
number of devices required for treatment and therefore potentially reduces the
cost of the procedure. We intend to initiate a program to develop the RDX system
for this application.
In addition to the RDX system, we designed and continue to manufacture and
market coronary stents, coronary stent delivery systems and balloon dilatation
catheters for coronary applications. We licensed our proprietary Focus balloon
technology to Guidant Corporation for use in Guidant's stent delivery systems.
Royalties from this license, as well as sales of our own interventional coronary
products, are the primary source of our current revenues.
WHERE TO CONTACT US
Our executive offices are located at 13700 Alton Parkway, Suite 160,
Irvine, California 92618. Our telephone number is (949) 457-9546. Our web site
is located at www.radiance.net. Information contained on our web site does not
constitute part of this prospectus.
2
<PAGE> 7
THE OFFERING
Shares offered by Radiance......... 1,500,000 shares
Shares offered by the selling
stockholder(1)..................... 1,325,132 shares
Total shares outstanding after this
offering........................... 12,895,696 shares
Use of proceeds by Radiance........ To fund clinical development of the RDX
system and to support operations,
including enhancement of our sales and
marketing capabilities, capital
expenditures, working capital and other
general corporate purposes.
Nasdaq National Market symbol...... RADX
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of September 6, 2000,
and does not include the following:
- 2,575,685 shares of common stock reserved for issuance under our stock
option plans, of which options to purchase 2,062,769 shares were
outstanding as of September 6, 2000, at a weighted average exercise price
of $4.47 per share;
- 192,419 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan;
- 142,857 shares reserved for issuance upon conversion of a convertible
debenture at $7.00 per share; and
- up to 423,770 shares of common stock that the underwriters may purchase
from us if they exercise their over-allotment option.
(1) EndoSonics Corporation is selling its entire ownership interest in us
in this offering. EndoSonics is our former parent and has owned shares since
1992. EndoSonics has no managerial role in the operation of our company.
EndoSonics has filed a motion for declaratory judgement relating to a technology
license agreement we have with EndoSonics. See "Business -- Legal Proceedings"
for a more detailed discussion of this litigation.
RISK FACTORS
You should consider the risk factors and the impact of various events that
could adversely affect our business before investing in our common stock.
3
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read this summary information with the discussion in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Consolidated Financial Statements and related notes to those
financial statements included elsewhere in this prospectus. We derived the
summary consolidated statement of operations data for the years ended December
31, 1997, 1998 and 1999 from our audited Consolidated Financial Statements
included elsewhere in this prospectus. We derived the summary consolidated
financial data as of June 30, 2000 and for the six months ended June 30, 1999
and 2000 from our unaudited Consolidated Financial Statements for those periods.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- -----------------
1997 1998 1999 1999 2000
-------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Sales.............................................. $ 9,438 $ 9,415 $ 3,856 $ 2,337 $ 1,193
License fee and other.............................. -- 2,760 2,855 1,224 3,711
-------- ------- -------- ------- -------
Total revenue.................................... 9,438 12,175 6,711 3,561 4,904
-------- ------- -------- ------- -------
Operating costs and expenses:
Cost of sales...................................... 6,102 6,152 2,823 1,900 859
Research and development........................... 7,041 7,957 8,610 4,157 5,559
Marketing and sales................................ 6,691 5,371 1,989 933 642
General and administrative......................... 2,347 2,937 2,468 1,444 1,477
Charge for acquired in-process research and
development...................................... -- 234 4,194 4,194 --
Minority interest in losses of subsidiary.......... -- (992) (6) -- (9)
-------- ------- -------- ------- -------
Total operating costs and expenses............... 22,181 21,659 20,078 12,628 8,528
-------- ------- -------- ------- -------
Loss from operations................................. (12,743) (9,484) (13,367) (9,067) (3,624)
Other income......................................... 2,225 1,498 2,587 709 1,006
-------- ------- -------- ------- -------
Net loss............................................. $(10,518) $(7,986) $(10,780) $(8,358) $(2,618)
======== ======= ======== ======= =======
Basic and diluted net loss per share................. $ (1.15) $ (0.90) $ (0.98) $ (0.77) $ (0.23)
======== ======= ======== ======= =======
Shares used in computing basic and diluted net loss
per share.......................................... 9,118 8,862 10,951 10,788 11,316
======== ======= ======== ======= =======
</TABLE>
The charge for acquired in-process research and development relates to the
purchase of the former Radiance Medical Systems, Inc. and represents the portion
of the purchase price allocated to the former Radiance's research and
development projects, which, at the date of the acquisition, were in-process,
had not reached technological feasibility and had no alternative future use. See
Note 2 to the Consolidated Financial Statements.
The following table presents our balance sheet as of June 30, 2000 on an
actual basis and on an as adjusted basis giving effect to our sale of 1,500,000
shares of common stock in this offering at an assumed public offering price of
$13.94 per share, after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
JUNE 30, 2000
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,585 $ 3,585
Marketable securities available-for-sale.................... 16,712 36,046
Working capital............................................. 20,757 40,091
Total assets................................................ 28,493 47,827
Convertible debenture....................................... 1,402 1,402
Total stockholders' equity.................................. 23,006 42,340
</TABLE>
4
<PAGE> 9
RISK FACTORS
You should carefully consider the following risk factors, in addition to
the other information set forth in this prospectus, before purchasing shares of
our common stock. Each of these risk factors could adversely affect our
business, operating results and financial condition, as well as adversely affect
the value of an investment in our common stock. This investment involves a high
degree of risk.
RISKS RELATED TO OUR BUSINESS
WE EXPECT TO INCUR LOSSES FOR THE FORESEEABLE FUTURE AND MAY NEVER ACHIEVE
PROFITABILITY.
From our formation in 1992 to June 30, 2000, we have incurred a cumulative
net loss of approximately $43.0 million. We incurred a net loss of $2.6 million
for the six month period ended June 30, 2000 and incurred a net loss of $10.8
million for 1999. We expect to continue to incur losses through at least 2001,
and it is possible that we may never achieve profitability. Even if we
eventually generate revenues from sales and achieve profitability, we
nevertheless expect to incur significant operating losses over the next several
years as we continue our research and development activities, and our
expenditures related to clinical testing and product development. Our ability to
become profitable will depend on:
- the time and expense necessary to research and develop the RDX system;
- whether and how quickly we obtain regulatory approvals for the RDX
system; and
- our success in bringing the RDX system to market.
WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO OBTAIN REGULATORY APPROVALS
FOR THE RDX SYSTEM.
We need to conduct additional human feasibility clinical trials for the RDX
system. The RDX system is the only product we have under development and has not
been approved for marketing by the Food and Drug Administration, or FDA, the
Nuclear Regulatory Commission, or NRC, or by any government entity outside of
the United States. We will require substantial additional funds to develop the
product, conduct clinical trials and gain regulatory approvals for the RDX
system. Prior to granting approval, the FDA or foreign regulatory bodies may
require more information or clarification of information provided in our
regulatory submissions, or more clinical studies, which could require
significant additional expenditures. If granted, the FDA or other foreign
regulatory body approval may impose limitations on the uses for which or how we
may market the RDX system. Should we experience delays or be unable to obtain
regulatory approvals, we may never generate significant revenues, and our
business prospects will be substantially impaired.
OUR OPERATIONS ARE CAPITAL INTENSIVE, AND WE MAY NEED TO RAISE ADDITIONAL
FUNDS IN THE FUTURE TO FUND OUR OPERATIONS.
Our activities are capital intensive. We currently are spending cash at a
rate of approximately $1.0 million per month, and based on our current plans, we
expect this rate of spending to continue for at least the next 12 to 18 months.
Although we believe that our cash, including the proceeds from this offering,
and anticipated revenues from operations will be sufficient to meet our planned
capital requirements at least through the second quarter of 2002, we may 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:
- the progress of our research and development programs for the RDX system;
- the scope and results of our clinical trials;
- the time and costs involved in obtaining regulatory approvals for the RDX
system;
- the costs involved in obtaining and enforcing patents or any litigation
by third parties regarding intellectual property;
5
<PAGE> 10
- the establishment of sales and marketing capabilities; and
- our success in entering into collaborative relationships with other
parties.
To finance these activities, we may seek funds through additional rounds of
financing, including private or public equity or debt offerings and
collaborative arrangements with corporate partners. We may be unable to raise
funds on favorable terms, or not at all. The sale of additional equity or
convertible debt securities could result in additional dilution to our
stockholders. If we issue debt securities, these securities could have rights
superior to holders of our common stock, and could contain covenants that will
restrict our operations. We might have to obtain funds through arrangements with
collaborative partners or others that may require us to relinquish rights to our
technologies, product candidates or products that we otherwise would not
relinquish. If adequate funds are not available, we might have to delay, scale
back or eliminate one or more of our development programs, which would impair
our future prospects.
EVEN IF WE RECEIVE NECESSARY REGULATORY APPROVAL, WE MAY NOT BE ABLE TO
COMMERCIALIZE THE RDX SYSTEM SUCCESSFULLY.
The RDX system and related 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. Any or all of these proposed technologies and products may
prove to be ineffective, unsafe or uneconomical to manufacture commercially.
Even if our products are safe and effective, we cannot guarantee that we will be
able to manufacture or market them successfully, either on our own or through
third parties, or that we will manage the expansion of our operations
successfully.
IF WE RECEIVE REGULATORY APPROVAL FOR OUR PRODUCTS, WE WILL NEED TO GROW
RAPIDLY. RAPID GROWTH MAY STRAIN THE CAPABILITIES OF OUR MANAGERS,
OPERATIONS AND FACILITIES AND, CONSEQUENTLY, COULD HARM OUR BUSINESS.
If we obtain the required regulatory approvals for the RDX system,
commercial-scale production will require us to expand our operations. Rapid
growth may strain our managerial and other organizational resources. Our ability
to manage our growth will depend on the ability of our officers and key
employees to:
- operate or contract with production facilities that can handle the
radiation sources required for the manufacture of the RDX system;
- manage the simultaneous manufacture of different products efficiently and
integrate the manufacture of new products with existing product lines;
- address difficulties in scaling up production of new products, including
problems involving production yields, quality control and assurance,
component supply and shortages of qualified personnel; and
- implement and improve our operational, management information and
financial control systems.
WE RELY ON A SINGLE VENDOR TO SUPPLY OUR RADIOACTIVE SOURCES AND PERFORM
FINAL ASSEMBLY OF THE RDX SYSTEM, AND ANY DISRUPTION IN OUR SUPPLY COULD
CURTAIL OUR OPERATIONS SEVERELY AND ADVERSELY AFFECT OUR PROFITABILITY.
Although we manufacture components and sub-assemblies for the RDX system,
we do not apply the beta radiation. We have contracted with a third party
manufacturer in Germany, Bebig GmbH, to perform the final assembly and
radioactive source manufacturing of the RDX system for use in Europe. Bebig has
not produced any units for us under the manufacturing agreement, as we are in
the process of setting up the Bebig radiation facility. We expect to complete
the facility set-up in the fourth quarter of 2000. We expect to enter into a
similar manufacturing supply relationship with a manufacturer in the United
States. Currently, we rely on a small, U.S. based manufacturer to supply us with
radioactive source balloons for
6
<PAGE> 11
use in research and clinical trials. Our reliance on a sole source supplier in
the United States and Europe may reduce our leverage in negotiating the terms of
manufacturing and supply agreements with these manufacturers and could,
therefore, reduce our profitability. In addition, our reliance on sole source
manufacturers exposes our operations and profitability to disruptions in supply
caused by:
- failure of our suppliers to comply with regulatory requirements;
- any strike or work stoppage;
- disruptions in shipping;
- a natural disaster caused by fire, floods or earthquakes;
- a supply shortage experienced by one of our sole source manufacturers;
and
- the fiscal health and manufacturing strength of our contract
manufacturer.
The occurrence of any of the above disruptions in supply or other unforeseen
events that could cause a disruption in supply from our sole source contract
manufacturers likely would cause us to lose sales and possibly market share.
Because of the short shelf-life of the RDX system, it is unlikely that we would
have sufficient inventory to mitigate the adverse impact of any supply
disruption. In addition, the risk of a supply disruption could occur because our
suppliers fail to comply with extensive radiation safety regulations in the
United States, Europe and other countries. The complexity of these regulations
and the danger inherent in handling radioactive material increases the
possibility of a supply disruption by one of our contract manufacturers. Because
we do not have alternative suppliers and manufacturers, our sales and
profitability would be harmed in the event of a disruption.
THE SHORT SHELF-LIFE OF THE RDX SYSTEM WILL REQUIRE US TO DEVELOP AN
EFFICIENT DISTRIBUTION SYSTEM AND INCREASES THE LIKELIHOOD OF PRODUCT
WASTE, REDUCED MARGINS AND LOSSES.
The beta radiation we use in the RDX system has a relatively short
half-life. Therefore, we expect the RDX system to have a shelf-life of
approximately 12 days, which will make it critical for us and for our contract
manufacturers to ship the products as close to the date of use as possible
before the radioactive isotope decays into stable, non-radioactive elements. To
do this, we will need to develop an efficient distribution system with a high
degree of coordination among us, a contract manufacturer, the distributor, the
shipping carrier and the end user.
If we fail to establish adequate shipping and logistic capabilities or
manufacturing sources, we will be unable to commercialize the RDX system
successfully. Moreover, even if we establish an efficient distribution system,
any disruption or lack of coordination will result in product waste, which would
reduce our margins and may make sales of the RDX system unprofitable.
OUR INTERNATIONAL SALES EXPOSE OUR BUSINESS TO A VARIETY OF RISKS THAT
COULD RESULT IN SIGNIFICANT FLUCTUATIONS IN OUR RESULTS OF OPERATIONS.
We made approximately 83% of our total sales in 1999 to foreign purchasers,
particularly in countries located in Europe and Asia, and we plan to increase
the sale of our products to foreign purchasers in the future. As a result, a
significant portion of our sales is and will continue to be subject to the risks
of international business, including:
- fluctuations in foreign currencies;
- trade disputes;
- changes in regulatory requirements, tariffs and other barriers;
- the possibility of quotas, duties, taxes or other changes or restrictions
upon the importation or exportation of our products being implemented by
the United States or these foreign countries;
- timing and availability of import/export licenses;
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<PAGE> 12
- political and economic instability;
- difficulties collecting accounts receivable collections;
- difficulties complying with laws;
- increased tax exposure if our revenues in foreign countries are subject
to taxation by more than one jurisdiction;
- accepting customer purchase orders governed by foreign laws, which may
differ significantly from U.S. laws and limit our ability to enforce our
rights under such agreements and to collect damages, if awarded; and
- the general economies of these countries in which we transact business.
THE USE OF RADIOACTIVE MATERIAL IN OUR PRODUCT MAY INCREASE OUR RISK IN THE
EVENT OF PRODUCT LIABILITY CLAIMS OR ACCIDENTAL EXPOSURE.
Our third party manufacturers must comply with extensive radiation safety
regulations in the United States, Europe and other countries that govern the
import/export, manufacture, distribution, use and disposal of radioactive
materials. For example:
- Bebig and any other manufacturer, supplier and distributor must obtain
licenses from United States and international nuclear regulators, as
applicable, such as the U.S. NRC, to distribute radiation sources
commercially;
- Bebig or any other manufacturer, supplier and distributor must comply
with U.S. or international nuclear regulations, U.S. Department of
Transportation and International Air Transport Association regulations,
as applicable, governing the labeling and packaging requirements for
shipment of radiation sources to hospitals or to the other users of the
RDX system; and
- hospitals may need to obtain or expand their licenses to use and handle
beta radiation prior to using the RDX system.
Violations of these regulations and laws by us, our suppliers or our
distributors, or any malfunctions of our system or errors by hospitals and
physicians in administering treatment, could result in accidental contamination
or injury, as well as unexpected remedial costs and penalties. Any such
violation or incident could adversely impact the market for our system or lead
to suspension of our trials or cessation of sales of the RDX system. Regulatory
enforcement action such as civil penalties or license suspension or revocation
likewise could lead to suspension of our clinical trials or cessation of sales.
Even if our clinical trials or product sales are not affected, we may need to
spend substantial funds to litigate and defend ourselves from any claims or pay
any settlements. In addition, because the RDX system is a new treatment, any
similar regulatory violations or incidents involving our competitors could
reduce the likelihood of regulatory approval for the RDX system or could delay
or erode acceptance of the RDX system by physicians and patients.
In the event of an accidental release of radioactive material into a
patient, we may face significant liability to the patient, to medical personnel
exposed to the release and to other third parties affected by the exposure. In
the event of such a release, our liability would be difficult to estimate, as it
would depend on such factors as the nature and extent of the exposure to the
radiation and the probable long-term effects of such an exposure.
A SIGNIFICANT PERCENTAGE OF OUR REVENUES COME FROM OUR FOCUS TECHNOLOGY
LICENSE AGREEMENT WITH GUIDANT.
Our current and future revenues partially depend on the number of stent
delivery systems that incorporate our Focus technology that are sold by Guidant
Corporation. Approximately 70% of our total revenues in the first half of 2000
were payments pursuant to a license agreement with Guidant. This agreement
grants Guidant the right to manufacture and distribute stent delivery products
using our Focus
8
<PAGE> 13
technology, including exclusive rights within the United States. Under the
agreement, we receive royalty payments based upon the sale of products using the
Focus technology. We expect that our revenues from the Guidant license agreement
will decline over the next few years as technological changes in the stent
market make our Focus stent technology obsolete. Our revenues may decline
precipitously, and our business may be harmed, if Guidant:
- terminates the license agreement;
- is unable to sell stent delivery systems that incorporate our Focus
technology; or
- does not incorporate our Focus technology into future generations of its
stent delivery systems.
WE WILL NEED TO DEVOTE SIGNIFICANT RESOURCES TO MARKET OUR PRODUCTS AND
TECHNOLOGY TO PHYSICIANS IN ORDER TO ACHIEVE MARKET ACCEPTANCE. IF WE FAIL
TO ACHIEVE MARKET ACCEPTANCE, OUR BUSINESS WILL SUFFER.
No products utilizing radiation to treat restenosis are currently available
commercially in the United States. We cannot predict the clinical acceptance by
physicians of the RDX system or other products integrating radiation versus more
conventional, minimally invasive treatments. We also cannot predict how the
short shelf-life of our 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. Therefore,
even if our products gain regulatory approval, we will need to spend significant
resources prior to achieving market acceptance. Any failure of our products to
achieve commercial acceptance, or any inability on our part to devote the
requisite resources necessary to market our products, will harm our business.
WE MAY RELY ON THIRD-PARTY DISTRIBUTORS TO SELL AND MARKET THE RDX SYSTEM.
THEY MAY DO SO INEFFECTIVELY.
We may depend on medical device distributors and certain strategic
relationships, some of which may be with our competitors, to distribute the RDX
system. Significant consolidation among medical device suppliers 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.
Consequently, we may enter into agreements with third parties to distribute the
RDX system. If we enter into such relationships, we will depend directly on
their efforts to market the RDX system, yet we will be unable to control their
efforts completely. If our distributors fail to market and sell the RDX system
effectively, our operating results and business may suffer substantially, or we
may have to make significant additional expenditures to market the RDX system
effectively.
THE RDX SYSTEM RELIES UPON OUR NON-EXCLUSIVE SUB-LICENSE OF THE HEHRLEIN
PATENTS FROM BEBIG. IF BEBIG TERMINATES THE SUB-LICENSE, WE MAY BE FORCED
TO RE-CONFIGURE OUR EXISTING BASE TECHNOLOGY AND SEEK NEW REGULATORY
APPROVALS.
We own one United States patent and own several pending patent applications
relating to the proprietary devices comprising the RDX system. We also have
obtained a non-exclusive license from Bebig to utilize technology covered by the
Hehrlein patents concerning the uniform application of radiation to a balloon.
The license with Bebig terminates in July 2002, although either party may renew
the sub-license through the date that the Hehrlein patents expire. Furthermore,
either party may terminate the sub-license for material breach. In the event
that Bebig terminates the sub-license, we may be forced to re-design the RDX
system to allow for the application of radiation to the balloon catheter in a
manner that is still effective in treating restenosis, and also may need to seek
new regulatory approvals.
THE MARKET FOR OUR PRODUCTS IS HIGHLY COMPETITIVE, AND COMPETING MEDICAL
DEVICE TECHNOLOGIES MAY PROVE MORE EFFECTIVE IN TREATING THESE CONDITIONS
THAN OUR PRODUCT CANDIDATES.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and we expect it to
increase. The RDX system and other potential products will compete with
treatment methods that are well established in the medical community, as well as
treatments based on new technologies. We face competition from manufacturers of
other catheter-based atherectomy devices, vascular stents and pharmaceutical
products intended to treat vascular disease.
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In the next few years, we expect to face competition from treatments based
on new technologies that Novoste Corporation, Johnson & Johnson and Guidant are
developing. The most significant treatments that pose a competitive challenge to
us include:
- Novoste's beta radiation seed-based system, which is available in Europe
and for which a pre-market approval application was submitted to the FDA
in April 2000;
- Johnson & Johnson's gamma radiation wire-based system, which is available
in Europe and for which a pre-market approval application was submitted
to the FDA in June 1999;
- Guidant's beta radiation wire-based system, which is available in Europe
and is in the pivotal clinical trial stage in the United States;
- radioactive stents;
- other radioactive wire-based systems; and
- other technologies in various phases of development, including drugs,
drug-coated stents, gene therapy, x-ray and ultrasound.
Any of these treatments could prove to be more effective or may achieve
greater market acceptance than the RDX system. Even if these treatments are not
as effective as the RDX system, many of the companies pursuing these treatments
and technologies have:
- significantly greater financial, management and other resources;
- more extensive research and development capability;
- established market positions; and
- larger sales and marketing organizations.
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, will have an advantage over us.
OUR FUTURE OPERATING RESULTS ARE DIFFICULT TO PREDICT AND MAY VARY
SIGNIFICANTLY FROM QUARTER TO QUARTER. THIS FLUCTUATION MAY NEGATIVELY
IMPACT OUR STOCK PRICE IN THE FUTURE.
Because the RDX system is still in the research and development phase, we
cannot predict when, if ever, we will have revenues based on the sales of the
RDX system. Also, our current revenues are attributable primarily to a license
agreement with Guidant, which limits our ability to predict future revenues.
Moreover, we expect revenues pursuant to the license agreement with Guidant to
diminish in the future as technology changes. In addition to the foregoing
factors, our quarterly revenues and results of operations have fluctuated in the
past and may fluctuate in the future due to:
- the conduct of clinical trials;
- the timing of regulatory approvals;
- the relatively short shelf-life of the RDX system that will require us to
ship the product as close as possible to its expected date of use, and
the consequent lack of a significant order backlog will make it difficult
to forecast future revenues and operating results;
- reductions in the size, delays in the timing or cancellation of
significant customer orders;
- fluctuations in our expenses associated with expanding our operations;
- 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;
- changes in the proportion between domestic and export sales;
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<PAGE> 15
- variations in foreign exchange rates; and
- changes in third-party payors' reimbursement policies.
Therefore, we believe that period to period comparison of our operating
results may not necessarily be reliable indicators of our future performance. It
is likely that in some future period our operating results will not meet your
expectations or those of public market analysts.
Any unanticipated change in revenues or operating results is likely to
cause our stock price to fluctuate since such changes reflect new information
available to investors and analysts. New information may cause investors and
analysts to revalue our stock, which could cause you to lose some or all of the
value of your investment.
LITIGATION WITH ENDOSONICS CORPORATION MAY ADVERSELY AFFECT OUR REVENUES
AND DEPRESS OUR STOCK PRICE.
We are involved in litigation with EndoSonics Corporation, the selling
stockholder in this offering, over the interpretation of a license we granted to
EndoSonics. EndoSonics is seeking a declaratory judgement that the EndoSonics
agreement entitles EndoSonics to place a stent on the licensed catheters when
used in a procedure with an ultrasound transducer. We believe that EndoSonics is
authorized only to use the Focus technology with the EndoSonics ultrasound
transducer and not also with a stent. If we are not successful in this lawsuit,
EndoSonics may choose to market and sell stents that use the technology we
licensed to Guidant. If this happens, Guidant may claim damages attributable to
any sales of those stents in the United States or may choose to renegotiate the
terms of its license with us. Because 70% of our total revenues in the first
half of 2000 were payments from Guidant pursuant to the license agreement, any
re-negotiation or termination of the license agreement could materially and
adversely affect our revenues. Even if we are successful in the EndoSonics
litigation, the ongoing costs associated with the litigation could have a
material adverse effect on our financial condition.
IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, WE WILL NOT BE ABLE TO
EXPAND OUR BUSINESS.
We require skilled personnel to develop, manufacture and sell the RDX
system. Our business and future operating results also depend in significant
part on our ability to continue to hire, train, retain and motivate additional
skilled personnel, particularly regulatory, clinical, manufacturing, technical,
marketing, sales and support personnel. Competition for skilled personnel is
intense, and we may not succeed in attracting or retaining such personnel. Our
inability to attract and retain skilled employees as needed could materially and
adversely affect our business, financial condition and results of operations.
RISKS RELATED TO OUR INDUSTRY
OUR PRODUCTS AND MANUFACTURING ACTIVITIES ARE SUBJECT TO EXTENSIVE
GOVERNMENTAL REGULATION THAT COULD MAKE IT MORE EXPENSIVE AND TIME
CONSUMING FOR US TO INTRODUCE NEW AND IMPROVED PRODUCTS.
Our products must comply with regulatory requirements imposed by the FDA
and similar agencies in foreign countries. These requirements involve lengthy
and detailed laboratory and clinical testing procedures, sampling activities, an
extensive FDA review process 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. We also are subject to numerous
additional licensing and regulatory requirements relating to safe working
conditions, manufacturing practices, environmental protection, fire hazard
control and disposal of hazardous or potentially hazardous substances. Some of
the most important requirements we face include:
- FDA pre-market approval process;
- U.S., individual state and foreign nuclear requirements;
- California Department of Health Services' requirements;
- ISO 9001/EN46001 certification;
- U.S. Department of Transportation and International Air Transport
Association requirements; and
- European Union's CE Mark requirements.
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Government regulation may impede our ability to conduct clinical trials and
to manufacture the RDX system and other prospective products. Government
regulation also could delay our marketing of new products for a considerable
period of time and impose costly procedures on our activities. The FDA and other
regulatory agencies may not approve any of our products on a timely basis, if at
all. Any delay in obtaining, or failure to obtain, such approvals could impede
our marketing of any proposed products and reduce our product revenues.
Further, regulations may change, and any additional regulation could limit
or restrict our ability to use any of our technologies, which could harm our
business. We also could be subject to new federal, state or local regulations
that could affect our research and development programs and harm our business in
unforeseen ways. If this happens, we may have to incur significant costs to
comply with such laws and regulations.
WE CANNOT PREDICT THE EXTENT TO WHICH THIRD-PARTY PAYORS MAY PROVIDE
REIMBURSEMENT FOR THE USE OF OUR PRODUCTS.
Our success in marketing products based on novel or innovative technology,
such as the RDX system, depends in large part on whether domestic and
international government health administrative authorities, private health
insurers and other organizations will reimburse customers for the cost of our
product. Reimbursement systems in international markets vary significantly by
country and by region within some countries, and reimbursement approvals must be
obtained on a country-by-country basis. Further, many international markets have
government managed healthcare systems that control reimbursement for new devices
and procedures. In most markets there are private insurance systems as well as
government managed systems. We cannot assure you that sufficient reimbursement
will be available for the RDX system, in either the United States or
internationally, to establish and maintain price levels sufficient to realize an
appropriate return on the development of our new products.
If government and third party payors do not provide adequate coverage and
reimbursement for our new products, it will be very difficult for us to market
our products to doctors and hospitals, and we may not achieve commercial
success.
WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY FROM INFRINGEMENT. A
FAILURE TO PROTECT OUR TECHNOLOGY MAY AFFECT OUR BUSINESS NEGATIVELY.
The market for medical devices is subject to frequent litigation regarding
patent and other intellectual property rights. It is possible that our patents
or licenses may not withstand challenges made by others or protect our rights
adequately.
Our success depends in large part on our ability to secure effective patent
protection for our products and processes in the United States and
internationally. We have filed and intend to continue to file patent
applications for various aspects of our technology. However, we face the risks
that:
- we may fail to secure necessary patents prior to or after obtaining
regulatory clearances, thereby permitting competitors to market competing
products; and
- our already-granted patents may be reexamined, reissued or invalidated.
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 to our projects that
they develop independently or others develop, disputes may arise regarding the
ownership of proprietary rights to such information and there is no guarantee
that such disputes will be resolved in our favor. If we are unable to protect
our intellectual property adequately, our business and commercial prospects
likely will suffer.
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IF OUR CURRENT PRODUCTS INFRINGE UPON THE INTELLECTUAL PROPERTY OF OUR
COMPETITORS, OUR SALE OF THESE PRODUCTS MAY BE CHALLENGED AND WE MAY HAVE
TO DEFEND COSTLY AND TIME-CONSUMING INFRINGEMENT CLAIMS.
We may need to engage in expensive and prolonged litigation 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
some foreign countries do not protect our intellectual property rights to the
same extent as the laws of the United States, if at all.
Our failure to obtain rights to intellectual property of third parties or
the potential for intellectual property litigation could force us to do one or
more of the following:
- stop selling, making or using our products that use the disputed
intellectual property;
- obtain a license from the intellectual property owner to continue
selling, making or using our products, which license may not be available
on reasonable terms, or at all;
- redesign our products or services; and
- subject us to significant liabilities to third parties.
If any of the foregoing occurs, we may be unable to manufacture and sell our
products and may suffer severe financial harm. Whether or not an intellectual
property claim is valid, the cost of responding to it, in terms of legal fees
and expenses and the diversion of management resources, could harm our business.
WE MAY FACE PRODUCT LIABILITY THAT COULD RESULT IN COSTLY LITIGATION AND
SIGNIFICANT LIABILITIES.
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 on 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.
THE PRICE OF OUR STOCK MAY FLUCTUATE UNPREDICTABLY IN RESPONSE TO FACTORS
UNRELATED TO OUR OPERATING PERFORMANCE.
The stock market from time to time experiences significant price and volume
fluctuations that are unrelated to the operating performance of particular
companies. These broad market fluctuations may cause the market price of our
common stock to drop. In particular, the market price of securities of small
medical device companies, like ours, has been very unpredictable and may vary in
response to:
- announcements by us or our competitors concerning technological
innovations;
- introductions of new products;
- FDA and foreign regulatory actions;
- developments or disputes relating to patents or proprietary rights;
- public concern over the safety of radiation-based therapeutic products;
- failure of our results of operations to meet the expectations of stock
market analysts and investors;
- changes in stock market analyst recommendations regarding our common
stock;
- changes in healthcare policy in the United States or other countries; and
- general stock market conditions.
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RISKS RELATED TO THIS OFFERING
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY MAKE TAKEOVER ATTEMPTS
DIFFICULT, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND INHIBIT YOUR
ABILITY TO RECEIVE A PREMIUM PRICE FOR YOUR SHARES.
Provisions of our amended and 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 and restated certificate of incorporation allows our board of directors
to issue up to five million shares of preferred stock and to fix the rights and
preferences of such shares 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 three classes for staggered terms of three years.
These provisions may delay, deter or prevent a change in control of us,
adversely affecting the market price of our common stock. See "Description of
Capital Stock" for a more detailed discussion of the anti-takeover effects of
our charter and bylaws.
OUR MANAGEMENT AND BOARD OF DIRECTORS COULD SPEND OR INVEST OUR NET
PROCEEDS FROM THIS OFFERING INEFFECTIVELY OR IN WAYS WITH WHICH OUR
STOCKHOLDERS MAY DISAGREE.
Our management and board of directors will have broad discretion to
allocate the proceeds of this offering, and no stockholder approval will be
required. We cannot assure you that our management will allocate these proceeds
in a manner acceptable to you or advantageous to our business.
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY
DEPRESS OUR STOCK PRICE AND MAKE IT DIFFICULT FOR YOU TO RECOVER THE FULL
VALUE OF YOUR INVESTMENT IN OUR SHARES.
Most of our outstanding shares of common stock are freely tradable. The
market price of our common stock could drop due to sales of a large number of
shares or the perception that such sales could occur. These factors also could
make it more difficult to raise funds through future offerings of common stock.
After this offering, 12,895,696 shares of our common stock will be outstanding,
or 13,319,466 shares if the underwriters exercise their over-allotment option in
full. All of these shares, except for 1,529,288 shares and any shares purchased
by our affiliates, as that term is defined in Rule 144 under the Securities Act,
will be freely tradable without restrictions under the Securities Act. After the
effectiveness of this offering, we plan to file a resale registration statement
for 142,857 of these shares of our common stock, which will allow these shares
to be freely traded, subject to the lock-up agreement described below.
We, our officers and directors, the selling stockholder and one other
stockholder have entered into lock-up agreements. We, our officers and
directors, and one other stockholder have agreed not to offer or sell any shares
of our common stock for a period of 90 days after the date of this prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the underwriters. The selling stockholder has agreed not to offer or
sell any shares of our common stock from the date of the filing of this
registration statement until November 30, 2000, without the prior written
consent of Prudential Securities Incorporated, on behalf of the underwriters.
However, Prudential Securities Incorporated may, at any time and without notice,
waive the terms of these lock-up agreements. After the lock-up agreements
expire, approximately 1,192,096 shares may be sold without regard to compliance
with Rule 144 and 337,192 shares will become eligible for sale in the public
market subject to compliance with the volume limitations and other restrictions
of Rule 144.
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YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF THE VALUE OF THE
COMMON STOCK YOU PURCHASE IN THIS OFFERING.
You will experience immediate and substantial dilution of approximately
$10.90 per share, representing the difference between our net tangible book
value per share after giving effect to this offering and the offering price,
assuming a public offering price of $13.94 per share. All of the shares issuable
upon the exercise of currently outstanding stock options will be issued at a
purchase price lower than the price per share of our common stock in this
offering. We also expect to offer stock options to employees, officers and
directors in the future. These issuances could further dilute the value of your
investment in our common stock.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. We have
based these forward-looking statements largely on our current expectations and
projections about future events and trends affecting the financial condition of
our business. These forward-looking statements are subject to a number of risks,
uncertainties, and assumptions including, among other things:
- research and development of our products;
- development and management of our business and anticipated trends on our
business;
- our ability to attract, retain and motivate qualified personnel;
- our ability to attract and retain customers;
- the market opportunity for our products and technology;
- the nature of regulatory requirements that apply to us, our suppliers and
competitors and our ability to obtain and maintain any required
regulatory approvals;
- our future capital expenditures and needs;
- our ability to obtain financing on commercially reasonable terms;
- our ability to compete;
- general economic and business conditions;
- other risk factors set forth under "Risk Factors" in this prospectus.
You can identify forward-looking statements generally by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"intends," "plans," "should," "could," "seeks," "pro forma," "anticipates,"
"estimates," "continues," or other variations thereof, including their use in
the negative, or by discussions of strategies, opportunities, plans or
intentions.
Unless otherwise required by law, we undertake no obligation to publicly
update or revise any forward-looking statements, either as a result of new
information, future events or otherwise after the date of this prospectus. The
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause actual results to differ in significant ways from
any future results expressed or implied by the forward-looking statements.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately $19.3
million from our sale of common stock in this offering, or $24.9 million if the
underwriters exercise their over-allotment option in full, assuming a public
offering price of $13.94 per share, after deducting underwriting discounts and
commissions and our share of estimated offering expenses. We will not receive
any proceeds from the sale of shares by the selling stockholder.
We intend to use approximately $8.0 million of the net proceeds of this
offering for clinical development of the RDX system for coronary applications
and $5.0 million towards the development of the RDX system for peripheral
vascular applications. We currently do not have specific plans for the balance
of the net proceeds of this offering, but will use the remaining proceeds of
this offering to support our operations, including enhancement of our sales and
marketing capabilities, capital expenditures in the ordinary course of business
and working capital and other general corporate purposes.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and currently are not engaged in any negotiations with respect to these
transactions. Accordingly, our management will retain broad discretion as to the
allocation of the net proceeds of this offering.
Prior to their use, we intend to invest the net proceeds of this offering
in investment-grade, interest bearing securities or guaranteed obligations of
the U.S. Government.
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PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock is quoted in the Nasdaq National Market under the symbol
"RADX" and has been traded publicly since our initial public offering in June
1996. The following table sets forth the high and low closing sale prices per
share for our common stock as reported by the Nasdaq National Market for the
periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1998
First Quarter............................................. $ 6.38 $4.19
Second Quarter............................................ 7.75 4.63
Third Quarter............................................. 6.25 2.50
Fourth Quarter............................................ 5.00 2.25
YEAR ENDED DECEMBER 31, 1999
First Quarter............................................. $ 4.75 $3.00
Second Quarter............................................ 4.00 2.25
Third Quarter............................................. 7.75 2.38
Fourth Quarter............................................ 6.81 4.69
YEAR ENDING DECEMBER 31, 2000
First Quarter............................................. $12.75 $4.56
Second Quarter............................................ 10.94 7.00
Third Quarter (through September 8, 2000)................. 15.13 7.69
</TABLE>
On September 8, 2000, the last reported sale price of our common stock in
the Nasdaq National Market was $13.94 per share. As of September 8, 2000, there
were approximately 254 record holders and approximately 4,300 beneficial owners
of our common stock.
We have never declared or paid and do not anticipate declaring or paying
any dividends on our common stock in the foreseeable future. Any future decision
to pay dividends will be at the discretion of our board of directors and will
depend on then existing conditions, including our financial condition, result of
operations, contractual restrictions, capital requirements, business prospects
and such other factors as our board of directors deems relevant. We currently
intend to retain any future earnings to support our operations and to finance
the growth and development of our business.
17
<PAGE> 22
DILUTION
Purchasers of our common stock in this offering will experience immediate
and substantial dilution in the pro forma net tangible book value of their
common stock. Our net tangible book value as of June 30, 2000 was approximately
$19.8 million, or $1.74 per share of common stock. Net tangible book value per
share is equal to our total tangible assets less total liabilities, divided by
the number of shares of common stock outstanding at June 30, 2000. Assuming the
sale by us of 1.5 million shares of common stock in this offering and after
deducting the underwriting discounts and commissions and our share of the
estimated offering expenses and the estimated offering expenses payable by us,
our pro forma net tangible book value at June 30, 2000 would have been $39.1
million, or $3.04 per share of common stock. This represents an immediate
increase in pro forma net tangible book value of $1.30 per share to existing
stockholders and an immediate and substantial dilution of $10.90 per share to
new investors purchasing shares in this offering. Therefore, after this
offering, the excess of our tangible assets over our liabilities on a per share
basis will be less than the purchase price paid for those shares by investors in
this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price............................... $13.94
Net tangible book value at June 30, 2000.................. $1.74
Increase in book value.................................... 1.30
-----
Pro forma net tangible book value after this offering....... 3.04
------
Dilution to new investors................................... $10.90
======
</TABLE>
The following table summarizes, as of June 30, 2000, the total number of
shares of common stock purchased from us, the total consideration paid and the
average price per share paid to us by those stockholders and by new investors
purchasing shares in this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Stockholders who purchased from us... 11,356,787 88.3% $65,019,000 75.7% $ 5.73
New investors........................ 1,500,000 11.7% 20,910,000 24.3% 13.94
---------- ----- ----------- -----
Total.............................. 12,856,787 100.0% $85,929,000 100.0%
========== ===== =========== =====
</TABLE>
The foregoing table and calculations:
- are based on 11,356,787 shares outstanding at June 30, 2000 and exclude
2,034,152 shares of common stock issuable upon exercise of options
outstanding at June 30, 2000, at a weighted average exercise price of
$4.26 per share; and
- do not give effect to the sale of our common stock by the selling
stockholder in this offering, which will reduce the number of shares held
by existing stockholders to 10,031,655 shares, or 78%, of the total
number of shares of common stock to be outstanding after this offering,
and will increase the number of shares held by new investors to 2,825,132
shares, or 22% of the total number of shares of common stock outstanding
after this offering. See "Principal and Selling Stockholders."
To the extent outstanding options are exercised, there will be further
dilution to new investors. If all of these options had been exercised on June
30, 2000, our pro forma net tangible book value would have been approximately
$28.4 million, or $2.12 per share. Upon the issuance of common stock in this
offering, our pro forma as adjusted net tangible book value on June 30, 2000
would have been approximately $47.8 million, or $3.21 per share. The increase in
pro forma as adjusted net tangible book value attributable to new investors
would have been $1.09 per share and the dilution and pro forma as adjusted net
tangible book value to new investors would have been $10.73 per share. See Note
12 to the Consolidated Financial Statements.
18
<PAGE> 23
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000:
- on an actual basis; and
- on an as adjusted basis to give effect to our sale of 1,500,000 shares of
common stock in this offering at an assumed public offering price of
$13.94 per share and the application of the net proceeds, after deducting
underwriting discounts and commissions and our share of the estimated
offering expenses.
This table should be read in conjunction with our Consolidated Financial
Statements and related notes appearing elsewhere in this prospectus. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 2000
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 1,402 $ 1,402
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding, actual or
as adjusted............................................ -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized, 12,042,762 shares issued, 11,356,787 shares
outstanding, actual; 13,542,762 shares issued and
outstanding, as adjusted............................... 12 14
Additional paid-in capital................................ 69,924 85,581
Deferred compensation..................................... (432) (432)
Accumulated deficit....................................... (42,951) (42,951)
Treasury stock at cost; 685,975 common shares actual and
none as adjusted....................................... (3,675) --
Accumulated other comprehensive income.................... 128 128
-------- --------
Total stockholders' equity.................................. 23,006 42,340
-------- --------
Total capitalization........................................ $ 24,408 $ 43,742
======== ========
</TABLE>
The table above excludes the following shares at June 30, 2000:
- 2,594,599 shares of common stock reserved for issuance under our stock
option plans, of which options to purchase 2,034,152 shares were
outstanding at June 30, 2000 at a weighted average exercise price of
$4.26 per share;
- 212,435 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan;
- 142,857 shares reserved for issuance upon conversion of a convertible
debenture at $7.00 per share; and
- up to 423,770 shares of common stock that the underwriters may purchase
from us if they exercise their over-allotment option.
19
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL DATA
We derived the consolidated statement of operations data for the years
ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet data
as of December 31, 1998 and 1999 from our audited Consolidated Financial
Statements included elsewhere in this prospectus. We derived the consolidated
statement of operations data for the years ended December 31, 1995 and 1996 and
the consolidated balance sheet data as of December 31, 1995, 1996 and 1997 from
our audited Consolidated Financial Statements not included in this prospectus.
The consolidated statement of operations data for the six months ended June 30,
1999 and 2000 and the consolidated balance sheet data as of June 30, 2000, are
unaudited but have been prepared on the same basis as our audited financial
statements and, in the opinion of management, contain all adjustments,
consisting only of normal recurring adjustments, necessary for the fair
presentation of our operating results for these periods and our financial
condition as of that date. The historical results are not necessarily indicative
of results to be expected for any future period. The following data is qualified
in its entirety by and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this prospectus. Our interim results of operations do not necessarily indicate
our results for the full year.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------------- ------------------
1995 1996 1997 1998 1999 1999 2000
------- ------- -------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Sales........................... $ 3,462 $ 8,384 $ 9,438 $ 9,415 $ 3,856 $ 2,337 $ 1,193
License fee and other........... -- 150 -- 2,760 2,855 1,224 3,711
Contract........................ 641 200 -- -- -- -- --
------- ------- -------- ------- -------- ------- -------
Total revenue................. 4,103 8,734 9,438 12,175 6,711 3,561 4,904
------- ------- -------- ------- -------- ------- -------
Operating costs and expenses:
Cost of sales................... 2,051 4,111 6,102 6,152 2,823 1,900 859
Research and development........ 1,683 3,582 7,041 7,957 8,610 4,157 5,559
Marketing and sales............. 1,526 3,358 6,691 5,371 1,989 933 642
General and administrative...... 1,331 1,548 2,347 2,937 2,468 1,444 1,477
Charge for acquired in-process
research and development...... 488 2,133 -- 234 4,194 4,194 --
Minority interest in losses of
subsidiary.................... -- -- -- (992) (6) -- (9)
------- ------- -------- ------- -------- ------- -------
Total operating costs and
expenses.................... 7,079 14,732 22,181 21,659 20,078 12,628 8,528
------- ------- -------- ------- -------- ------- -------
Loss from operations.............. (2,976) (5,998) (12,743) (9,484) (13,367) (9,067) (3,624)
Other income...................... 102 1,374 2,225 1,498 2,587 709 1,006
------- ------- -------- ------- -------- ------- -------
Net loss.......................... $(2,874) $(4,624) $(10,518) $(7,986) $(10,780) $(8,358) $(2,618)
======= ======= ======== ======= ======== ======= =======
Basic and diluted net loss per
share (pro forma through June
1996)........................... $ (0.71) $ (0.69) $ (1.15) $ (0.90) $ (0.98) $ (0.77) $ (0.23)
======= ======= ======== ======= ======== ======= =======
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 10,788 11,316
======= ======= ======== ======= ======== ======= =======
</TABLE>
The charge for acquired in-process research and development for the year
ended December 31, 1995 reflects additional purchase price allocated to us by
EndoSonics as a result of the payment of additional consideration by EndoSonics
related to EndoSonics' acquisition of us in 1993. The charge for acquired in-
process research and development for the year ended December 31, 1996 relates to
our acquisition of Intraluminal Devices, Inc. The charges for acquired
in-process research and development for the years ended December 31, 1998 and
1999 relate to our acquisition of the former Radiance Medical Systems, Inc.
These charges represent the portion of the purchase price allocated to the
acquired research and development projects, which, at the date of the
acquisitions, were in-process, had not reached technological feasibility and had
no alternative future use. See Note 2 to the Consolidated Financial Statements.
20
<PAGE> 25
We computed net loss per share prior to our initial public offering in June
1996 on a pro forma basis assuming common shares issuable upon conversion of
convertible preferred stock and a convertible obligation had been outstanding
for the entire periods.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------- JUNE 30,
1995 1996 1997 1998 1999 2000
------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash
equivalents............. $ 1,568 $ 17,192 $ 6,141 $ 1,437 $ 2,051 $ 3,585
Marketable securities
available-for-sale...... -- 25,733 24,773 23,375 20,004 16,712
Working capital
(deficit)............... (774) 46,142 33,828 24,905 21,206 20,757
Total assets.............. 4,002 50,084 39,615 32,035 29,873 28,493
Convertible obligation.... 750 -- -- -- -- --
Convertible debenture..... -- -- -- -- -- 1,402
Total stockholders' equity
(net capital
deficiency)............. (1,098) 47,623 36,127 27,499 25,111 23,006
</TABLE>
21
<PAGE> 26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Consolidated Financial Data" and our Consolidated Financial Statements
and the related notes included in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of various factors including the risks we discuss in
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Our Business
We 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. We incorporate our proprietary
RDX technology into catheter-based systems that deliver 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.
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 and 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 balloon technology to Guidant 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 of 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.
In June 1998, we entered into a technology license agreement with Guidant,
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
payments based upon the sale
22
<PAGE> 27
of products by Guidant using the Focus technology. The payments under the
Guidant license are the primary source of our existing revenues. Until we obtain
regulatory approvals and successfully 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 5 to the 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
- 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 our 1999
acquisition 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 to
treat 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, $692,000 in cash, and $1.1 million in common stock 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
receive product development milestones of up to $1.69 for each share of
preferred stock and $2.54 for each share of common stock of the former Radiance.
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. The first milestone was not achieved, and the second milestone is
behind schedule. See Note 2 to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
Sales. Sales decreased 49% to $1.2 million in the six months ended June 30,
2000 from $2.3 million in the six months ended June 30, 1999. The decrease
resulted primarily from reductions in the sale of products as a result of the
license of our Focus technology to Guidant and the divestiture of our vascular
access product line in January 1999.
License Fee and Other. License revenue increased 203% to $3.7 million in
the six months ended June 30, 2000 from $1.2 million in the six months ended
June 30, 1999. We recognized $3.5 million in 2000 and $1.1 million in 1999 for
royalties on product sales under the technology license agreement with Guidant.
Cost of Sales. The cost of sales decreased 55% to $859,000 in the six
months ended June 30, 2000 from $1.9 million in the six months ended June 30,
1999. The decrease is attributable primarily to the
23
<PAGE> 28
decrease in product sales and due to the allocation of a larger portion of
manufacturing costs to units produced for research and development programs and
clinical trials.
Research and Development. Research and development expenses, which include
clinical expenses, increased 34% to $5.6 million in the six months ended June
30, 2000 from $4.2 million in the six months ended June 30, 1999. This increase
is due to our increased development efforts during 2000. We expect our overall
expenditures to increase during the remainder of 2000, compared to our
expenditures for the same period of 1999, due to higher expenditures anticipated
for clinical trials and for programs to develop the RDX system for saphaneous
vein graft and peripheral vascular interventions.
Marketing and Sales. Marketing and sales expenses decreased 31% to $642,000
in the six months ended June 30, 2000 from $933,000 in the six months ended June
30, 1999. This decrease is primarily due to reductions in our international
sales force and related expenses.
General and Administrative. General and administrative expenses increased
2% to $1.5 million in the six months ended June 30, 2000 from $1.4 million in
the six months ended June 30, 1999. This increase is due primarily to an
increase in payroll and related benefit expenses and investor relations
expenses. Payroll and related benefit expenses were higher because of increases
in the salaries paid to our executive officers.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $4.2 million for acquired in-process research and development in the
six months ended June 30, 1999. This charge is attributable to the acquisition
in January 1999 of the shares of the former Radiance that we did not already
own. We allocated a portion of the purchase price to in-process research and
development because, as of the date of the merger, significant uncertainties
remained regarding the technological feasibility, conceptual formulation and
design and various process aspects of the former Radiance's efforts to apply
radiation to an angioplasty catheter. See Note 2 to the Consolidated Financial
Statements.
Minority Interest. The $9,000 minority interest relates to our partner's
49% ownership of the Japanese distribution joint venture, Radiatec, described
more fully in "Liquidity and Capital Resources." The Radiatec venture began
limited operations in the third quarter of 1999 to obtain Japanese regulatory
approval for the RDX system, and once this approval is obtained, will begin
marketing the RDX system in Japan.
Other Income (Expense). Other income increased 42% to $1.0 million in the
six months ended June 30, 2000 from $709,000 in the six months ended June 30,
1999. This increase is 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. Under the option agreement, the purchaser paid us a
non-refundable cash payment of $1.2 million for the option and has until
December 2000 to exercise the option. We recognized a gain of $462,000 in other
income in the six months ended June 30, 2000. Although the likelihood of
exercise is uncertain, if the purchaser does exercise the option, we will
receive an additional payment of approximately $2.0 million in the year ending
December 31, 2000. See Note 3 to the Consolidated Financial Statements.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1999
Sales. Sales decreased 59% to $3.9 million in the year ended December 31,
1999 from $9.4 million in the year ended December 31, 1998. During 1998, we
reduced our domestic direct sales force, and in June 1998, licensed to Guidant
our Focus technology for use with stents. In January 1999, we sold our vascular
access product line and related assets and acquired the former Radiance. We
undertook these actions to maximize the value of existing technology and acquire
a technology that we believe would have greater potential for future product
sales. As a result of the license to Guidant and increased competition for
angioplasty catheter products, sales of our Focus technology products decreased
49% to $3.4 million in the year ended December 31, 1999 from $6.7 million in
year ended December 31, 1998, and as a result of our sale of the vascular access
product line, sales of our vascular access products decreased 82% to $486,000 in
the year ended December 31, 1999 from $2.7 million in the year ended December
31, 1998.
24
<PAGE> 29
License Fee and Other. License fee and other increased 3% to $2.9 million
in the year ended December 31, 1999 from $2.8 million in the year ended December
31, 1998. In 1998, we signed a technology license agreement with Guidant, which
resulted in $2.8 million in milestone-related license fees in 1998 and $2.3
million in milestone-related license fees and $250,000 in royalties in 1999. In
addition, in 1999, we recognized $300,000 in minimum royalties under the sale
agreement for the vascular access product line and related assets.
Cost of Sales. The cost of sales decreased 54% to $2.8 million in the year
ended December 31, 1999 from $6.2 million in the year ended December 31, 1998.
This decrease was attributable primarily to $2.9 million from licensing fees
received in 1999 that had no associated cost of sales and to relatively lower
product sales compared with 1998.
We agreed to produce vascular access products for six months following the
sale of our 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 we earned on sales of such
products was substantially lower in 1999 compared with 1998.
Research and Development. Research and development expenses increased 8% to
$8.6 million in the year ended December 31, 1999 from $8.0 million in the year
ended December 31, 1998. The primary reason for this increase was additional
spending on development of and clinical trials for the RDX system.
Marketing and Sales. Marketing and sales expenses decreased 63% to $2.0
million in the year ended December 31, 1999 from $5.4 million in the year ended
December 31, 1998. This decrease primarily was the result of reductions in our
domestic and international sales force and related expenses.
General and Administrative. General and administrative expenses decreased
16% to $2.5 million in the year ended December 31, 1999 from $2.9 million in the
year ended December 31, 1998. The decrease was due primarily to lower bad debt
expense in 1999 compared with 1998.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $4.2 million in the year ended December 31, 1999 and a charge of
$234,000 in the year ended December 31, 1998. We incurred the 1999 charge for
the acquisition in January 1999 of the shares of the former Radiance Medical
Systems that we did not already own. We incurred the 1998 charge upon exercise
in September 1998 of a warrant to purchase additional equity securities in the
former Radiance, which exercise resulted in our ownership of approximately 50%
of the former Radiance, and thus an acquisition of a controlling interest.
Other Income (Expense). Other income increased 73% to $2.6 million for the
year ended December 31, 1999 from $1.5 million in the year ended December 31,
1998. Interest income decreased 20% to $1.2 million in the year ended December
31, 1999 from $1.6 million in the year ended December 31, 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 on sale of assets
increased to $1.0 million in 1999 from a loss of $47,000 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 $353,000 in 1999 from an
expense of $22,000 in 1998 due primarily to other income from the sale of an
option to purchase equity securities we hold as an investment.
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1998
Sales. Sales were $9.4 million in each of the years ended December 31, 1998
and 1997.
License Fee and Other. We recognized $2.8 million in license fees in the
year ended December 31, 1998 due to a technology license agreement with Guidant.
We did not have any license fees in the year ended December 31, 1997.
Cost of Sales. The cost of sales increased 1% to $6.2 million in the year
ended December 31, 1998 from $6.1 million in the year ended December 31, 1997.
25
<PAGE> 30
Research and Development. Research and development expenses increased 13%
to $8.0 million in the year ended December 31, 1998 from $7.0 million in the
year ended December 31, 1997. The primary reason for this increase was
additional spending on development of the RDX system and other research stage
products.
Marketing and Sales. Marketing and sales expenses decreased 20% to $5.4
million in the year ended December 31, 1998 from $6.7 million in the year ended
December 31, 1997. This decrease primarily was the result of reductions in our
domestic sales force and related expenses.
General and Administrative. General and administrative expenses increased
by 25% to $2.9 million in the year ended December 31, 1998 from $2.3 million in
the year ended December 31, 1997. The increase was due primarily to additions to
the allowance for uncollectible accounts receivable and the salary expense of an
additional executive officer.
Charge for Acquired In-Process Research and Development. We recognized a
charge of $234,000 for acquired in-process research and development in 1998, due
to the acquisition of a controlling interest in the former Radiance.
Other Income (Expense). Other income decreased 33% to $1.5 million in the
year ended December 31, 1998 from $2.2 million in the year ended December 31,
1997. Interest income decreased 29% to $1.6 million in the year ended December
31, 1998 from $2.2 million in the year ended December 31, 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.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily by:
- selling our equity securities;
- obtaining advances from EndoSonics, our former parent company and the
selling stockholder in this offering;
- 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 25,000 shares of our common stock to Cathex, Ltd. under a May 1997
agreement that gave Cathex exclusive product distribution rights in Japan for
our existing products until January 1, 2001.
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 2 to the 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
26
<PAGE> 31
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 August 10, 2000, Cosmotec notified us of their intention to
convert the debenture into 142,857 shares of our common stock at $7.00 per
share. See Note 10 to the 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 processes. Pursuant to the agreement,
Bebig will build a facility for the production of the RDX system. We paid Bebig
$100,000 during 1999, and in the last six months of 2000, will pay an additional
approximately $1.2 million for facility set-up fees. We will 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 will purchase
the equipment from us for $500,000. We will also pay Bebig an agreed amount for
each unit produced. We also will pay all material and third party costs
associated with production validation and an agreed amount for each unit
produced. The cost of the facility set-up fees, equipment costs and other costs
could increase materially as the design of the production processes and
facilities evolves over the coming year. We have expensed all costs incurred by
us with Bebig as research and development costs.
In conjunction with the contract manufacturing agreement, in July 1999, we
entered into a three-year sub-license agreement to use Bebig's exclusive license
of the Hehrlein patents 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 by us worldwide that incorporate
the licensed technology. The sub-license is subject to renewal, without cost,
through the expiration dates of Bebig's patents.
Net cash used in operating activities increased 101% to $3.1 million for
the six months ended June 30, 2000 from $1.6 million for the six months ended
June 30, 1999. The increase in net cash used, comparing the second quarter of
2000 and 1999, resulted primarily from an accrued royalty receivable, which
Guidant pays in the quarter after it recognizes revenue related to the license
of our Focus technology, and from higher research and development and clinical
expenditures.
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
selling the RDX system in Europe once we receive CE Mark approval in the first
half of 2001.
At June 30, 2000, we had cash, cash equivalents and marketable securities
available for sale of $20.3 million. We expect to incur substantial costs
related to, among other things, clinical testing, product development, marketing
and sales of the RDX system, and expect to utilize increased levels of working
capital prior to achieving positive cash flow from operations. We anticipate
that our cash, including the net proceeds from this offering, and anticipated
revenues from operations will be sufficient to fund our operations through the
second quarter of 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;
- the establishment of manufacturing capacity;
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- 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 45% to $590,000 at June 30, 2000
from $1.1 million at December 31, 1999. The decrease resulted primarily from
lower product sales.
Other receivables increased 195% to $2.2 million at June 30, 2000 from
$742,000 at December 31, 1999. The increase is attributable primarily to an
increase in the license revenue receivable from Guidant of $1.6 million for
licensed product sales during the second quarter of 2000.
Inventory increased 29% to $1.1 million at June 30, 2000 from $822,000 at
December 31, 1999. The increase was due to June 2000 production to meet
anticipated product demand for July 2000 and relatively higher RDX system
production for research and development and clinical units.
Accounts payable and accrued expenses increased 9% to $3.0 million at June
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 50% to $904,000 at June 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 six months of 2000, as well as a reallocation of $407,000 to
convertible debenture to recognize the fair value of the Cosmotec debenture
issued in June 2000. See Notes 3 and 10 to the Consolidated Financial
Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we currently have material exposure to interest
rate, foreign currency exchange rate or other relevant market risks.
Interest Rate and Market Risk. Our exposure to market risk for changes in
interest rates relates primarily to our investment profile. We do not use
derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy, limit the amount of
credit exposure to any one issuer. We are averse to principal loss and try to
ensure the safety and preservation of our invested funds by limiting default
risk, market risk, and reinvestment risk. We attempt to mitigate default risk by
investing in only the safest and highest credit quality securities and by
constantly positioning our portfolio to respond appropriately to a significant
reduction in a credit rating of any investment issuer or guarantor. At June 30,
2000, the portfolio included only high grade corporate bonds and commercial
paper and government bonds all with remaining maturities of less than two years.
Foreign Currency Exchange Risk. We do not believe that we currently have
material exposure to foreign currency exchange risk because of the relative
insignificance of our foreign subsidiaries and because our international
transactions are denominated primarily in U.S. dollars.
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.
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Principal amounts by expected maturity in the subsequent twelve month
periods ending June 30:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDING FAIR VALUE AT
--------------------- JUNE 30,
2001 2002 TOTAL 2000
--------- -------- ------- -------------
(IN THOUSANDS, EXCEPT INTEREST RATES)
<S> <C> <C> <C> <C>
Cash and cash equivalents......................... $ 2,999 -- $ 2,999 $ 2,980
Weighted average interest rate.................... 6.57% -- 6.57%
Investments....................................... $14,867 $2,000 $16,867 $16,762
Weighted average interest rate.................... 5.79% 8.38% 6.10%
Total portfolio................................... $17,866 $2,000 $19,866 $19,742
Weighted average interest rate.................... 5.92% 8.38% 6.17%
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission, or SEC, issued
Staff Accounting Bulletin No. 101, or SAB 101, entitled "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
believe that adopting SAB 101 will not have a material impact on our financial
position or results of operations.
In March 2000, the FASB issued Interpretation No. 44, or FIN 44, entitled
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board No. 25, or APB 25. This
interpretation clarifies:
- the definition of an employee for purposes of applying APB 25;
- the criteria for determining whether a plan qualifies as a
noncompensatory plan;
- the accounting consequences of various modifications to the terms of a
previously fixed stock option or award; and
- the accounting for an exchange of stock compensation awards in a business
combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe that the adoption of FIN 44 will not have a material impact on our
financial position or results of operations.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On August 10, 1999, we dismissed Ernst & Young LLP as our auditors. 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 our financial statements for
the calendar years ended December 31, 1998 and December 31, 1997 did not contain
any adverse opinion or disclaimer of opinion and were not qualified as to
uncertainty, audit scope or accounting principles.
On August 25, 1999, we engaged PricewaterhouseCoopers LLP as our
independent accountants.
The foregoing was approved by the audit committee of our board of
directors.
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BUSINESS
OVERVIEW
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 deliver beta radiation to the site of a treated
blockage in an artery in order to decrease the likelihood of restenosis. 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.
We designed the RDX system for the prevention of restenosis without many of
the disadvantages inherent in alternative radiation delivery systems. Our
proprietary RDX system is the only device in clinical trials that carries a
radiation source on an inflatable balloon catheter. This patented technology
allows the RDX system to deliver a therapeutic dose of radiation with
approximately 80% less total radiation activity than competing systems. As a
result, the RDX system is easier to use, does not require supplemental capital
equipment, and is readily disposable. In addition, we believe that the RDX
system is suitable to treat arteries that are significantly larger and smaller
than can be treated with alternative radiation delivery systems.
In addition to the RDX system, we manufacture and market coronary stents,
coronary stent delivery systems and balloon dilatation catheters for coronary
applications. We licensed our proprietary Focus balloon technology to Guidant
Corporation for use in Guidant's stent delivery systems. Royalties from this
license, as well as sales of our own interventional coronary products, are the
primary source of our current revenues.
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 generally is characterized by the
progressive accumulation of plaque on the walls of arteries as a result of the
deposit of cholesterol and other fatty materials. This accumulation of plaque
leads to a narrowing of the interior passage, or lumen, of the arteries,
reducing blood flow to the heart. Insufficient blood flow to the heart restricts
the oxygen supply, resulting in heart attack and/or death.
Coronary artery disease is treated by re-opening or bypassing narrowed
blood vessels, thereby increasing blood flow to the heart. The three most common
forms of treatment are:
- coronary artery bypass graft, or CABG;
- percutaneous transluminal coronary angioplasty, or PTCA; and
- stenting.
CABG is a highly invasive, open-chest surgical procedure in which blood
vessel grafts from the patient's leg or chest 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.
PTCA is the principal less invasive alternative to CABG. PTCA is performed
in a cardiac catheterization laboratory, commonly referred to as a cath lab, by
an interventional cardiologist. During PTCA, the cardiologist inserts a
guidewire into a blood vessel through a puncture in the leg, or arm in some
cases, and guides it through the blood vessel to the diseased site. The
cardiologist then guides a balloon-tipped catheter over the wire to the location
of the plaque, or lesion, obstructing the artery. After
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positioning the balloon across the lesion inside the vessel, the cardiologist
inflates and deflates the balloon several times. Frequently, the cardiologist
inflates successively larger balloons 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 passage. PTCA
typically results in increased blood flow without the actual removal of any
plaque. However, injury to the arterial wall often occurs under balloon
pressure. Clinical studies indicate that patients treated with PTCA often
experience restenosis within six months following the procedure.
Coronary stents are expandable, implantable metal devices permanently
deployed at a lesion site. Stents maintain increased diameter in the coronary
artery by mechanically supporting the diseased site. Of all the non-surgical
treatments that have sought to improve PTCA, stents have shown the best results
in reducing the rate of restenosis. In 1999, stents were used in approximately
70% to 90% of the PTCA procedures performed in the United States. In a typical
stent procedure, a cardiologist pre-dilates the artery at the lesion site with a
balloon catheter, delivers the stent to the site of the lesion and, with the use
of a second balloon catheter, expands the stent and firmly positions it in
place. Once placed, stents support the walls of the coronary artery to enable
the artery to remain open and functional.
The use of stents has grown rapidly since their commercial introduction in
the United States in 1994. Despite their rapid adoption, stents have some
disadvantages. While stents appear to be effective in reducing the frequency of
restenosis resulting from elastic recoil and appear to limit vascular
remodeling, they may increase, rather than decrease, the excessive proliferation
of cells at the treatment site, referred to as hyperplasia. Stents not only are
permanent implants that may result in unforeseen long-term adverse effects, but
stents also cannot be used in cases where the coronary arteries are too tortuous
or too narrow.
Peripheral Vascular Disease
Peripheral vascular disease encompasses a broad spectrum of blockages
outside the coronary circulatory system. Peripheral vascular disease generally
is characterized by atherosclerosis of the inside walls of the peripheral, or
non-coronary, arteries, frequently those of the legs. This condition leads to a
narrowing of the lumen, reducing blood flow to the extremities, especially the
feet and legs. Insufficient blood flow to these areas restricts the oxygen
supply, resulting in tissue death and, in extreme cases, gangrene and
amputation. Treatment methods for these patients include arterial bypass surgery
and balloon angioplasty.
Restenosis
Restenosis typically refers to a renarrowing of an artery within six months
of a revascularization treatment to less than 50% of the artery's size following
the original procedure. Restenosis is a vascular response to arterial injury and
occurs frequently after a revascularization procedure. A revascularization
stretches arteries or otherwise damages the treated segment of an 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 or years. Restenosis that occurs shortly after a revascularization
procedure usually results from elastic recoil 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, known as hyperplasia, or from a remodeling of the arterial segment, the
causes of which are not well understood. 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.
Radiation Therapy and Vascular Brachytherapy
For more than 50 years, radiation therapy has been used routinely to treat
proliferative cellular disorders, such as cancer. There are two types of
radiation used for brachytherapy, beta and gamma. While
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externally applied radiation has shown little beneficial effect on treated
arteries, the application of beta and gamma radiation within the blood vessel at
the site of arterial injury has proven clinically effective in treating
restenosis by inhibiting cell proliferation. This type of treatment is referred
to as vascular brachytherapy.
A number of clinical trials indicate that the application of radiation
inhibits cellular proliferation, which is a cause of restenosis. An advantage of
beta radiation is that it travels only a short distance, approximately 2 to 4
millimeters, after which its radiation activity diminishes to a negligible
amount. This relatively short distance of travel makes it compatible with
current cath lab practices. Gamma radiation is significantly more penetrating
and therefore potentially more hazardous to use than beta radiation. For
example, healthcare workers leave the cath lab during administration of gamma
radiation to ensure their safety by limiting their exposure to gamma radiation.
In addition, gamma radiation impacts patient tissue beyond the treatment site.
MARKET OPPORTUNITY
Size of Market
Coronary Artery Disease. Coronary artery disease is the leading cause of
death in the United States and Europe. In 1999, physicians performed
approximately 1.2 million PTCA procedures worldwide to treat this disease.
Approximately 40% of PTCA patients experience restenosis within six months of
the initial procedure. These patients may require another angioplasty procedure
or a CABG procedure. Approximately 400,000 CABG procedures are performed
annually in the United States. Approximately 25% of all heart bypass grafts
narrow or become blocked within five years, requiring a repeat procedure.
Approximately 70% to 90% of angioplasty procedures include the placement of
a stent. Clinical studies indicate that 15% to 30% of the patients who receive
stents following balloon angioplasty experience restenosis, referred to as
"in-stent" restenosis. Patients suffering from in-stent restenosis often
experience recurrent restenosis and, as a result, are prone to multiple
revascularization procedures. The likelihood of recurrent restenosis in this
group of patients is between 40% to 65%. In total, approximately $3 billion is
spent annually in the United States on repeat revascularization procedures
prompted by restenosis.
Peripheral Vascular Disease. Peripheral vascular disease encompasses a
broad spectrum of blockages outside the coronary circulatory system. This
disease afflicts up to 5% of all men and 2% of all women age 50 or older,
resulting in approximately 350,000 newly diagnosed cases per year in the United
States. Physicians perform approximately 300,000 peripheral vascular blockage
revascularization procedures annually in the United States. Of these,
approximately 35% to 40% are peripheral balloon angioplasty procedures. More
than 40% of these patients experience restenosis. At present, the treatment
options for restenosis in these patients include a repeat angioplasty or a
peripheral artery bypass procedure.
Limitations of Alternative Radiation Technologies
In addition to the RDX system, other radiation treatment products are in
various phases of development, and in some cases have been approved in Europe,
to deliver radiation inside of coronary arteries. These technologies are based
upon previously developed cancer treatments and utilize the same types of
technology that oncologists have used for decades. These technologies typically
deliver radiation via a seed or wire in a catheter-based system. Seed-based
technology, which oncologists pioneered as a treatment for prostate cancer and
other forms of cancer, involves the delivery of beta radiation via a "train" of
several miniature sealed sources containing a beta-emitting radioisotope
hydraulically delivered and retrieved via a catheter. Source wires with
gamma-emitting radioactive tips have been used for some time in cancer therapy.
Radioactive source wires and seed trains are used in conjunction with an
afterloader, a specialized piece of equipment that may be computer controlled to
automatically calculate treatment times, control movement of the source wire,
and store and shield the source wire when not in use. Radioactive stents, which
are similar to a conventional stent treated to emit radiation, are also in
development.
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We believe there are a number of limitations and disadvantages to
alternative radiation technologies for the treatment of restenosis:
- Use of Gamma Radiation. Some competing technologies use gamma radiation,
which, although potentially effective to treat restenosis, is much more
penetrating and difficult to limit to the targeted area than beta
radiation. Gamma radiation may damage a patient's healthy tissue during
treatment. In addition, during gamma procedures, healthcare professionals
must use cumbersome shielding and leave the treatment area to minimize
their radiation exposure, a precaution not required with beta radiation.
Also, treatment time is up to five times longer with gamma than with beta
radiation.
- Existing Beta Radiation Systems Require Large Amounts of
Radiation. Competing products use beta radiation on a wire or in seeds
which can be 1 to 2 millimeters away from the arterial wall.
Consequently, these systems must use high levels of beta radiation
activity to deliver a therapeutic dose at the arterial wall.
- Wire and Seed-Based Systems are Difficult to Center Within the
Artery. Because wire and seed-based systems are not apposed to the vessel
wall, the radiation source must be centered within the artery, which may
be difficult or impossible. If it is not centered, the source of
radiation may be closer to one side of the arterial wall than to the
other. Consequently, one side may receive too little radiation, which
could increase rather than decrease cell proliferation, while the other
side receives too much radiation, which may damage the arterial wall.
- Wire and Seed Based Systems Require Calculation of Dwell-Time During the
Procedure. Because of the differing sizes of the arteries and the depth
of penetration, dwell-times, or the time the source irradiates the tissue
to generate the prescribed dose, must be calculated during the procedure
after making arterial measurements. Even if computerized, this adds
significant procedure time and adds an additional source of potential
procedural error.
- Limited Capabilities for Small Coronary Arteries. Native coronary
arteries range from 1.5 to 4.0 millimeters in diameter. All of the
competitive vascular brachytherapy devices require a separate delivery
catheter to provide access to the coronary anatomy prior to inserting the
wire or seed-based device. The two device mechanism deployed in wire or
seed-based procedures makes it difficult to access small coronary
arteries that are less than 2.5 millimeters in diameter.
- Limited Capability for Large Arteries. All of the competitive vascular
brachytherapy devices are severely limited in treating blockages in large
arteries such as peripheral arteries and CABG grafts. For example, the
arteries in the femoral and iliac regions of the legs range from 5 to 12
millimeters in diameter. Using a wire or seed-based system in these
arteries can be difficult because beta radiation penetrates approximately
2 to 4 millimeters from the radioactive source. Thus, for most patients,
the arterial passage is too large for effective penetration of beta
radiation. Although doctors can use gamma radiation to treat peripheral
arteries, gamma radiation has the problems previously noted.
- Expensive, Bulky Equipment. Competitive wire and seed-based devices
require expensive and sometimes bulky equipment in order to safely house
the radioactive agents. The expense of this equipment may increase the
patient's cost of treatment. Some treatment facilities may view the bulk
of the equipment as a drawback.
- Difficult Handling and Disposal of Radioactive Material. Long-lived
radioisotopes or devices with higher radiation activity may require
special and expensive handling, transportation and storage.
- Additional Training and More Complicated Procedures. Wire and seed-based
systems require extensive training to use and calibrate their radiation
delivery system. These systems also involve complicated procedures and
use a guide wire and a catheter, or in other cases a centering balloon,
dummy wire and then a radioactive wire.
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- Radioactive Stents Have Failed to Show Efficacy. Radioactive stents have
failed to reduce the rate of restenosis in clinical trials despite
testing of varying sizes of stents and varying amounts of radiation.
Various clinical trials of a variety of radioactive stents have concluded
that the arterial wall at the edges of the stent tend to block the
artery, in what is known as the "candy-wrapper" effect. To date in
clinical trials, radioactive stents have exhibited a candy-wrapper effect
and have failed to show significant reduction in restenosis rates.
OUR RDX TECHNOLOGY SOLUTION
Because it is the only method of vascular brachytherapy that was developed
specifically to treat arterial restenosis and not derived from cancer treatment
methods, we believe that the RDX system is a second generation vascular
brachytherapy treatment. The RDX system enables solid form radioactive material
of virtually any isotope to be integrated into the wall of the balloon material
itself, which creates a radioactive balloon catheter. Our second generation
approach combines the demonstrated benefits of beta radiation with the utility
of direct blood vessel wall apposition associated with balloon deployment.
Advantages of the RDX System
We believe the RDX system provides the following advantages compared to
competing technologies:
- Highly Accurate Dose Delivery. The RDX system places the radiation source
directly against, or apposed to, the arterial wall. This feature
overcomes the problem of inconsistent dose delivery inherent with
alternative vascular brachytherapy devices.
- Approximately 80% Less Radiation Activity. The RDX system delivers a
therapeutic dose with approximately 80% less total radiation activity
compared to other radiation technologies. The RDX system requires less
radiation activity because, unlike competing systems, the radioactive
source is apposed to the arterial wall.
- No Costly Capital Equipment. The RDX system does not require expensive
capital equipment, such as an afterloader system, nor does it require
extensive radiation shielding. The afterloader system stores, delivers
and computes the dwell time to deliver the appropriate radiation dose to
the treatment site. Our system consists of a catheter with a plastic
shield that covers the beta radiation source.
- Ease of Dwell-Time Calculation. With the RDX system, the dwell-time is
calculated at the time of manufacture and printed on the package. With
other devices, a dwell-time must be calculated during the procedure for
each vessel size to deliver the correct dose.
- Capable of Treating Small Vessels. Coronary arteries range from 1.5 to
4.0 millimeters in diameter. Many competing systems cannot treat coronary
arteries smaller than 2.5 millimeters in diameter due to the large size
or multiple components. We can make the RDX system with small balloon
sizes, giving it the capability to treat smaller and more tortuous
vessels.
- Capable of Treating Large Vessels. Beta radiation falls off rapidly the
farther it travels from the source. Small diameter radiation sources
centered in large arteries cannot treat these vessels effectively because
the radiation dose is too weak by the time it reaches the target area.
The RDX system overcomes this limitation by placing the radiation source
against the vessel surface.
- Easy to Use and Disposable. The RDX system is simple, easy to use and
disposable. The RDX system is similar to other types of catheters
interventional cardiologists are familiar with and accustomed to using.
In addition, the hospital disposes of the source as normal medical waste
after holding the radioactive source balloon for approximately one year.
- Safe to Use. The RDX system double balloon construction protects and
contains the radiation in the solid film substrate during use. Also, the
use of the beta isotope as a radiation source with less total radiation
activity than competing devices increases the safety of the RDX system
for patients, physicians and hospital personnel.
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- Overcomes Barriers to Treatment. The RDX system effectively delivers
radiation treatment through barriers such as stents or calcium deposits
due to the close proximity of the radioactive source to the artery wall.
- Potentially Useful in a Wide Variety of Vascular Applications. In
addition to coronary and peripheral vascular disease, the RDX system is
potentially useful in other vascular applications such as renal arteries,
carotid arteries and kidney dialysis grafts because of its ability to
deploy radiation regardless of vessel size by using larger or smaller
balloons. This could broaden the clinical utility and market potential
for the RDX system.
PRODUCTS
The RDX System
Device description. The RDX system is a patented device that we believe
represents a second generation radiation delivery technology for use in vascular
brachytherapy. The RDX system is unique among devices developed for this purpose
due to its use of a radioactive source carried by a balloon. Our innovative RDX
system is fabricated by encapsulating, or sandwiching, a radioactive film source
within two balloon membranes. The two balloon membranes isolate the source from
direct contact with the patient and the inflation media, thereby fully
containing the isotope. The source element is a thin film containing solid state
Phosphorous-32, or (32)P. (32)P is a pure beta emitter, with a half-life of 14.3
days.
A customized plastic shield approximately 2.0 centimeters in diameter
covers the radioactive portion of the catheter. Plastic is an effective shield
for beta isotopes. Dose rates measured on the surface of the shield while the
balloon is in the shield are less than the hand dose received from other medical
equipment typically used in a catheterization procedure. The radiation is low
enough that the RDX system can be packaged in a standard catheter kit and
shipped via overnight delivery. The shield serves both to protect personnel from
radiation while the device is not in use, and to introduce the device into the
guiding catheter. We are developing the RDX system in a variety of balloon
diameters and source lengths for coronary and peripheral treatment applications.
We designed the RDX system's catheter to allow for its configuration in both
over-the-wire and rapid-exchange format, the two methods used to deploy
angioplasty balloons.
The RDX System Treatment Procedure. The RDX system is approximately as
flexible as a conventional PTCA catheter, and delivers the balloon radiation
source to the lesion site the same way as a conventional balloon catheter. The
RDX system does not require any custom guides, catheters or wires for use. Prior
to using the RDX system, the cardiologist completes the primary
revascularization procedure, leaving the guidewire across the lesion.
The cardiologist introduces the RDX system into the patient and advances it
to the treatment site in a manner similar to any PTCA catheter. Once in place,
low pressure inflation of the balloon at two atmospheres deploys the source
directly against the internal wall of the vessel. After leaving the RDX catheter
in place for the dwell time, which is pre-printed on the package, to achieve the
correct dose, the cardiologist deflates the balloon and withdraws the source
back into the shield.
For disposal, the source portion is cut off of the catheter into a shielded
container, and the balance of the catheter is disposed of as normal medical
waste. Approximately one year later, the medical facility disposes of the source
portion as normal medical waste.
RDX System Product Pipeline. We are developing an RDX system to treat
peripheral vascular disease. In addition, in July 2000 the U.S. Patent and
Trademark Office notified us that we will receive a patent for combining a stent
on the same catheter as an RDX system for delivering radiation to the coronary
or peripheral vasculature. This patent application includes claims that cover
the RDX system to perform an angioplasty procedure, deliver a stent and deliver
radiation to the treated blood vessel site. We intend to initiate a program to
develop the RDX system for this application.
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Existing Catheter and Stent Products
We manufacture a number of coronary integrated stent delivery systems. In
addition, using our patented Focus technology we have created angioplasty
balloons that expand to different sizes, permitting cardiologists to deliver
stents and perform other interventional procedures in blood vessels of varying
diameters and anatomical locations. This design enables cardiologists to avoid
the costs and difficulties of inflating multiple balloons to treat blood vessels
of varying diameters. In June 1998, we licensed our Focus technology to Guidant
for use in stent delivery as part of a long term technology license agreement.
CLINICAL TRIALS
Our RDX Clinical Trials
We currently are conducting two clinical trials in the United States and
Europe to obtain regulatory approval to market the RDX system, the Beta
Radiation Trial to Eliminate Restenosis, or BETTER, clinical study in Europe and
the Beta Radiation to Reduce In-Stent Restenosis, or BRITE, clinical study in
the United States. The BETTER study is designed to provide us with the data we
need to obtain CE Mark approval and commercialize the RDX system in Europe and
other foreign countries. We expect that data from both trials will support our
pre-market approval applications to the FDA to market our device in the United
States. We also have announced plans to conduct two additional studies, the
first for restenosis in small arteries and the second for restenosis in CABG
grafts. The treatment of these indications represents approximately 25% to 30%
of the procedures performed by interventional cardiologists on a worldwide
basis.
BETTER Clinical Study. We continue to enroll patients in the multi-center
European BETTER study testing the ability of the RDX system to prevent
restenosis in a wide variety of patients following conventional balloon
angioplasty and/or coronary stenting. We have enrolled more than 130 patients in
this study thus far. We have completed the required enrollment and submitted an
application for CE Mark approval on August 30, 2000. Following CE Mark approval,
we expect to begin marketing the RDX system in Europe and other regions during
the first half of 2001.
In August 2000, we released preliminary data from 99 of the patients in the
BETTER study. Restenosis occurred within the treated artery in approximately 12
percent of these patients. In a subgroup of 24 patients treated for in-stent
restenosis, restenosis occurred in one patient. These results are preliminary
and not necessarily indicative of the final results that may be shown upon
completion of the study.
BRITE Clinical Study. The objective of the U.S. multi-center BRITE study is
to evaluate the safety and efficacy of the RDX system in preventing the
recurrence of restenosis in patients who have received stents. We began Phase I
in February 2000 and have now completed the enrollment and the initial one-
month evaluation of each patient included in this phase of the study. We will
continue to evaluate diagnostically the patients treated with the RDX system in
Phase I for six months. In August 2000, we submitted technical documentation and
data from both the BETTER and the BRITE clinical studies to the FDA and
requested approval to begin the final randomized, controlled phase of the BRITE
study.
Small Coronary Artery Trial. This multinational clinical trial is designed
to prove the value of the RDX system in reducing restenosis within smaller
coronary arteries. This trial targets patients with atherosclerotic disease in
smaller coronary arteries of less than 3.0 millimeters in diameter. Following
either conventional balloon angioplasty or coronary stenting, these smaller
arteries are highly susceptible to restenosis. We believe that the RDX catheter
is ideal for the treatment of such difficult to treat small coronary arteries.
This study will require approximately 18 to 24 months for completion. To our
knowledge, the RDX system is the only vascular brachytherapy system in a
randomized clinical trial to treat such patients.
Restenosis in CABG Patients Trial. In August 2000, we filed a supplement to
our existing investigational device exemption, or IDE, with the FDA to initiate
a clinical trial to prove the safety and efficacy of the RDX system in reducing
restenosis in CABG patients. This clinical study will include
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patients who have undergone a coronary bypass surgical procedure and, following
a diagnosis of a blockage in one of the bypass grafts, require further
interventional treatment. The vessels in such patients are larger than normal
coronary arteries and are 3.5 to 6.0 millimeters in size. We believe we can
design the RDX system to treat arteries of any size by using different size
balloons. Therefore, these graft patients are excellent candidates for treatment
with the RDX system. We expect to complete the initial phase of this study in
early 2001.
Other Clinical Trials of Beta Radiation Brachytherapy
In addition to the four clinical trials we are sponsoring or soon will
sponsor, other clinical trials have demonstrated that beta radiation is a useful
treatment for restenosis. Third parties are conducting and have completed
clinical trials of other vascular brachytherapy devices. Two of the more
significant trials are the Stents and Radiation Therapy, or START, trial and the
Proliferation Reduction with Vascular Energy Trial, or PREVENT, trial. These
trials indicate that beta radiation sources are safe and effective in reducing
restenosis following an interventional procedure in the coronary vasculature.
START Trial. In March 2000, the results from the START trial were released.
This trial included 476 patients at 50 clinical sites in North America and
Europe and studied the safety and effectiveness of a system for delivering beta
radiation sources to the site of in-stent restenosis in a coronary artery. The
START trial is the only beta trial reporting randomized results. The START trial
results showed the following statistically significant results for patients with
in-stent restenosis treated with seed-based beta radiation when compared to
patients treated with placebo:
- 34% reduction in the rate of target vessel revascularization, or
requirement for repeat procedures in the treated vessel;
- 66% decrease in rate of restenosis at the stented portion of the treated
artery;
- 36% reduction in the rate of restenosis at a longer section of the
artery, beyond the area treated with radiation or revascularization
methods; and
- 31% decrease in the rate of major, adverse cardiac events.
PREVENT Trial. The PREVENT trial evaluated the clinical safety and
angiographic efficacy of a (32)P wire system for the prevention of restenosis.
The trial enrolled approximately 18 patients into a placebo group and
approximately 55 patients in a group treated with three different (32)P dose
levels. The PREVENT trial demonstrated a significant reduction in the target
lesion restenosis rates within radiated vessels.
MANUFACTURING
The RDX System. We manufacture the base catheter of the RDX system at our
facilities in Irvine, California. In Europe, we have an agreement with Bebig to
activate the radioactive sources and complete final assembly of the RDX system.
Pursuant to a two year manufacturing agreement that is renewable three times for
subsequent two-year terms, Bebig will perform final assembly with our
proprietary equipment and proprietary processes. Bebig has not produced any
units for us under the manufacturing agreement as we are still in the process of
setting up the Bebig facility. In the United States, we expect to enter into a
similar agreement. Currently, all radioactive source manufacture and final
assembly have been produced by a U.S.-based, licensed radiation facility.
Regulations require that a licensed facility must perform the handling of
radioactive materials. We do not have and do not intend to pursue such a
license, and therefore we contract with outside facilities to handle radioactive
materials for us.
Due to the shelf-life of the RDX system, it is critical to manufacture and
ship these products as close to the date of use as possible. Moreover,
coordination among us, the contract manufacturer, the shipping carrier and the
end user is necessary in order to reduce product waste. Because radioactive
sources must travel from one licensed facility to another licensed facility, the
source manufacturer, such as Bebig, will be responsible for warehousing the
final RDX system and shipping it to the end user.
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Catheter and Stent Products. With the exception of final assembly and
sterilization procedures for those products designed to be sold only outside the
United States, we produce all of our current products at our facilities in
Irvine, California.
We fabricate certain proprietary components, then assemble, inspect, test
and package all components into finished products. By designing and assembling
our catheter products, we believe we are better able to control quality and
costs, limit third-party access to our proprietary technology, and manage
manufacturing process enhancements and new product introductions. In addition,
we purchase many standard and custom-built components from independent suppliers
and subcontract certain processes from independent vendors. Most of these
components and processes are available from more than one vendor.
We have obtained the right to affix the CE Mark to all of our products
currently sold in the countries of the European Economic Area and Switzerland.
As part of the CE Mark process, we also received ISO 9001/EN46001 certification
with respect to the manufacturing of all of our currently marketed products. We
have undergone and expect to continue to undergo regular QSR and ISO 9001
inspections in connection with the manufacture of our products at our
facilities.
MARKETING AND SALES
We are developing the RDX system for commercial marketing and sale in
domestic and international markets. We presently are exploring distribution
strategies for the RDX system in both domestic and international markets. These
strategies include establishing a direct sales force and partnering with a major
device manufacturer. Our present intention is to develop our own direct sales
and marketing capabilities and continue to evaluate alternative strategies.
Pursuant to our sub-license agreement with Bebig, we must pay a minimum
annual license fee beginning in July 2000 and royalty fees for any products sold
by us worldwide that incorporate the licensed technology. The sub-license is
subject to renewal, without cost, through the expiration dates of the patents.
We currently sell our PTCA catheters and coronary stent systems through
medical device distributors and direct sales personnel. Our existing products
are sold primarily in international markets. However, some of our products are
not available in each market due to regulatory and intellectual property
restrictions. Our most important distribution agreements and licensing
arrangements are with Guidant, Cathex and Cosmotec.
Guidant Corporation. In June 1998, we entered into a technology license
agreement with Guidant, an international interventional cardiology products
company, granting them a 10 year license to manufacture and distribute stent
delivery products using our Focus technology. Under this agreement, we have
received certain milestone payments based upon the transfer of the technological
knowledge to Guidant and royalty payments based upon Guidant's sales of products
using Focus technology. During 1999, we received $2.0 million in milestone
payments and recorded the minimum annual royalty of $250,000. No additional
milestone payments are due under the agreement, but royalties are due as long as
the agreement is in effect.
Cathex. We entered into an exclusive distribution agreement in Japan with
Cathex in May 1997 which terminates in January 2001. Sales to Cathex accounted
for 16% of total revenues in 1997, 22% of total revenues in 1998 and 6% of total
revenues in 1999.
Cosmotec Co., Ltd. In June 1999, we granted Cosmotec of Japan distribution
rights to market our vascular radiation therapy products in Japan. We received
an upfront cash payment and are recognizing the income over the seven-year term
of the distribution agreement. We also received $1.0 million from Cosmotec for a
debenture issued in June 2000. As part of this transaction, 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.
In 1998 and 1999, we reduced our U.S. sales force and did not actively
promote our products in the United States due to regulatory approval
requirements, the competitive environment and our decision to
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focus our efforts on the development of the RDX system. Due to the licensing in
June 1998 of the technology upon which our currently-marketed products are
based, and the sale of our vascular access product line and related assets in
January 1999, our product sales were substantially lower in 1999 compared with
1998, and we expect them to decrease further in 2000.
PATENTS AND PROPRIETARY INFORMATION
We own one issued United States patent and hold a non-exclusive license to
a second issued United States patent along with its issued German counterpart,
covering the present design of the RDX system. All three issued patents relate
to radiation delivery catheters in which the radioisotope is carried by an
inflatable balloon for positioning against a vessel wall. We own two additional
issued United States patents relating to radiation delivery systems which are
not incorporated in the present design of the RDX system.
In July 1999, we entered into a three-year technology sub-license agreement
with Bebig for non-exclusive rights to the Hehrlein patents for radiation
technology. Pursuant to this sub-license agreement, we must pay to Bebig a
minimum annual license fee beginning in July 2000, and royalty fees for any
products sold by us worldwide that incorporate the licensed technology. The
sub-license is subject to renewal at our option, without cost, through the
expiration dates of the patents.
Including the patents and rights to the RDX system and radiation delivery,
we own or have the rights to 27 issued U.S. patents, one issued European patent
and two Japanese patents covering certain aspects of our technologies. Our
policy is to protect our 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 our business. We cannot
assure you that any issued patents will provide competitive advantages for our
products or that they will not be challenged or circumvented by our competitors.
COMPETITION
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;
- availability of third-party reimbursement;
- distribution capability;
- time necessary to develop products successfully; and
- ability to receive regulatory approval.
Radioactive source wires or seed trains represent the most common
competitive approach. Three companies are analyzing the effectiveness of this
type of technology in treating in-stent restenosis. Johnson & Johnson submitted
a pre-market approval application to the FDA in June 1999 for the use of a
manually advanced gamma radiation wire system. This application was based on the
results of three recently concluded clinical trials, all of which demonstrated a
substantial reduction in restenosis. This system is available in Europe, but
Johnson & Johnson has not yet announced FDA approval for its wire-based system
in the U.S. Guidant's beta radiation wire-based system is available in Europe,
and Guidant has completed enrollment in a trial data relating to its beta
wire/afterloader system. Guidant
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presently is in the follow-up stage with respect to this trial. Novoste's beta
radiation seed-based system is available in Europe. Novoste has completed its
START trial and in April 2000 submitted a pre-market approval application to the
FDA.
Guidant is developing a beta radiation coronary stent and recently
initiated a 30-patient feasibility trial to study the safety of its device.
Johnson & Johnson also has developed a radioactive stent that has been evaluated
in several clinical trials but is not being marketed currently.
Our catheters, stents and other products compete with catheters and stents
marketed by a number of manufacturers, including Guidant, Johnson & Johnson,
Medtronic and Boston Scientific. We also compete with manufacturers of other
catheter-based atherectomy devices, vascular stents and pharmaceutical products
intended to treat vascular disease. We believe that many of the purchasers and
potential purchasers of our current 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 us.
Although we believe we compete favorably overall with respect to most
competitive factors, most of our competitors have substantially greater capital
resources than we do and also have greater resources and expertise in the areas
of research and development, obtaining regulatory approvals, manufacturing and
marketing. We cannot assure you 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. Additionally,
many of the competitors have the capability to bundle a wide variety of products
in sales to cath labs. We may be unable to compete effectively against such
competitors and other potential competitors in terms of manufacturing, marketing
and sales.
Any product we develop that gains regulatory clearance or approval will
have to compete for market acceptance and market share. An important factor in
such competition may be the timing of market introduction of competitive
products. Accordingly, we expect the relative speed with which we can develop
products, gain regulatory approval and reimbursement acceptance and supply
commercial quantities of the product to the market to be an important
competitive factor. In addition, we believe that the primary competitive factors
for products addressing restenosis include safety, efficacy, ease of use,
reliability, suitability for use in cath labs, service and price. We also
believe that physician relationships, especially relationships with leaders in
the interventional cardiology community, are important competitive factors.
THIRD-PARTY REIMBURSEMENT
In the United States, our 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
healthcare 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 established by the U.S. Healthcare Finance
Administration. 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 diagnosis-related group, 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 our products is currently
covered under a diagnosis-related group. We cannot assure you that reimbursement
for such procedures will continue to be available to hospitals and other users
of our products, or that future reimbursement policies of payors will not hamper
our ability to sell our products on a profitable basis.
Outside the United States, market acceptance of the RDX system depends
partly upon the availability of reimbursement within the prevailing healthcare
payment systems. Reimbursement systems vary significantly by country, and by
region within some countries, and reimbursement approvals must be
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obtained on a country-by-country basis. Reimbursement is obtained from a variety
of sources, including government sponsored healthcare and private health
insurance plans.
Some countries have centrally organized healthcare systems, but in most
cases there is a degree of regional autonomy either in deciding whether to pay
for a particular procedure or in setting the reimbursement level. The manner in
which new devices enter the healthcare system depends on the system: there may
be a national appraisal process leading to a new procedure or product coding, or
it may be a local decision made by the relevant hospital department. The latter
is particularly the case where a global payment is made that does not detail
specific technologies used in the treatment of a patient. Most foreign countries
also have private insurance plans that may reimburse patients for alternative
therapies. Although not as prevalent as in the United States, managed care is
gaining prevalence in certain European countries.
We will seek international reimbursement approvals, although we may fail to
obtain such approvals in a timely manner or at all. We believe that
reimbursement in the future will be subject to increased restrictions such as
those described above, both in the United States and in other countries. The
general escalation in medical costs has led to and probably will continue to
create increased pressures on the healthcare providers, to reduce the cost of
products and services, including products our products. If third-party
reimbursements are inadequate to provide us with a profit on our products,
efforts to develop and market our products may fail.
GOVERNMENT REGULATION
The manufacturing and marketing of our products are subject to extensive
and rigorous government regulation in the United States and in other countries.
Prior to commercialization, new products must meet rigorous governmental agency
requirements for pre-clinical and clinical testing and patient follow-up.
Federal regulations control the ongoing safety, efficacy, manufacture, storage,
labeling, record-keeping, and marketing of all medical devices. We cannot sell
or market our existing products or the RDX system without U.S. and foreign
approvals.
If a medical device manufacturer establishes 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 Food and Drug Administration, or FDA, has not
called for a pre-market approval application, or 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 our catheters were based on
substantial equivalence to legally marketed devices. We cannot assure you that
the FDA will grant us timely 510(k) clearance for any of our future products or
significant modifications of our existing products. In addition, if the FDA has
concerns about the safety or effectiveness of any of our products, it could act
to withdraw approval or clearances of those products or request that we present
additional data.
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 typically 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. The RDX system and 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, we expect to file an
application with the Ministry of Health and Welfare in Japan. This procedure
requires completion of 60 to 100 patients in two to three Japanese clinical
investigation sites. We expect the Japanese approval process to take
approximately 18 to 24 months.
Because the RDX system 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
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the use and handling of radioactive materials. Specifically, we will need to
obtain approval from the U.S. Nuclear Regulatory Commission, or NRC, or an
equivalent state agency, of our radiation sources for certain medical uses to
distribute the radiation sources commercially to licensed recipients in the
United States. In addition, we and/or our 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. We and/or our
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 system. 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 system. We expect to comply with comparable radiation regulatory
requirements and/or approvals in markets outside the United States.
FDA regulations require us to register as a medical device manufacturer
with the FDA. Additionally, the California Department of Health Services, or
CDHS, requires us to register as a medical device manufacturer within the state.
Because of this, the FDA and the CDHS inspect us on a routine basis for
compliance with QSR regulations. These regulations require that we manufacture
our products and maintain related documentation in a prescribed manner with
respect to manufacturing, testing and control activities. We have undergone and
expect to continue to undergo regular QSR inspections in connection with the
manufacture of our products at our facilities. Further, the FDA requires us to
comply with various FDA regulations regarding labeling. The Medical Device
Reporting laws and regulations require us to provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of our
devices, as well as product malfunctions that likely would 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. We have received FDA approval to market the catheters which
utilize our 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 us in the United States for such use. As we licensed the Focus
technology to Guidant in June 1998, we have 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 our 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 our business, financial
condition and results of operations.
We are subject to other federal, state and local laws, regulations and
recommendations relating to safe working conditions, laboratory and
manufacturing practices. We cannot accurately predict the extent of government
regulation that might result from any future legislation or administrative
action. Failure to comply with regulatory requirements could have a material
adverse effect on our business, financial condition and results of operations.
International sales of our 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. We typically rely on our distributors in such foreign countries to obtain
the requisite regulatory approvals. We cannot assure you, however, we will
obtain such approvals 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 our products within Europe, we must comply with the
requirements of the Medical Devices Directive, or MDD, and affix the CE Mark on
our products to attest to such compliance. To achieve compliance, our products
must meet the "Essential Requirements" of the MDD relating to safety and
performance and we must successfully undergo verification of our regulatory
compliance, or conformity
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assessment, by a Notified Body selected by us. The level of scrutiny of such
assessment depends on the regulatory class of the product, and many of our
coronary products are currently in Class III, the highest risk class, and
therefore subject to the most rigorous controls.
In December 1996, we received ISO 9001/EN46001 certification from our
Notified Body with respect to the manufacturing of all of our products in our
Irvine facilities. Our contracted manufacturing facility in The Netherlands
received such certification in 1993. This certification demonstrates that we
manufacture our products in accordance with certain international quality
requirements. A manufacturer must receive ISO 9001/EN46001 certification prior
to applying for the CE Mark of specific products. In January 1998, we obtained
the right to affix the CE Mark to all of our products currently sold in Europe.
We are subject to continued supervision by our Notified Body and will be
required to report any serious adverse incidents to the appropriate authorities.
We also must comply with additional requirements of individual nations. Failure
to maintain compliance required for the CE Mark could have a material adverse
effect upon our business, financial condition and results of operations. We
cannot assure you that we will be able to achieve or maintain such compliance on
all or any of our products or that we will be able to produce our products
timely and profitably while complying with the MDD and other regulatory
requirements.
On August 30, 2000, we filed an application for CE Mark approval of the RDX
system. Following CE Mark approval, we expect to begin marketing the RDX system
in Europe and other regions during the first half of 2001.
PRODUCT LIABILITY
We face the risk of financial exposure to product liability claims. Our
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. We are 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. We cannot assure you that our product liability insurance is
adequate or that such insurance coverage will remain available at acceptable
costs. We also cannot assure you that we will not incur significant product
liability claims in the future. A successful claim brought against us in excess
of its insurance coverage could have a material adverse effect on 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, as well as substantially divert the time and effort of management away
from our operations.
EMPLOYEES
As of September 6, 2000, we had 60 employees, including 29 in
manufacturing, 20 in research, development, and regulatory and clinical affairs,
3 in sales and marketing and 8 in administration. We believe that the success of
our business will depend, in part, on our ability to attract and retain
qualified personnel. Our employees are not subject to a collective bargaining
agreement, and we believe we have good relations with our employees.
RESEARCH AND DEVELOPMENT
We spent $8.6 million in fiscal year 1999, $8.0 million in fiscal year
1998, and $7.0 million in fiscal year 1997 on research and development.
PROPERTIES
Currently, we lease facilities aggregating approximately 28,000 square feet
in Irvine, California under various lease agreements, most of which expire in
May 2001. We signed an amendment to our lease extending the lease through
October 2003. We believe that our facilities are adequate to meet requirements
through the term of our lease.
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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 license agreement. EndoSonics is seeking a declaratory
judgement that the EndoSonics agreement entitles EndoSonics to place a stent on
the licensed catheters, when used in a procedure with an EndoSonics ultrasound
transducer. We believe that EndoSonics is authorized only to use the Focus
technology with the EndoSonics ultrasound transducer and not also with a stent.
We have filed an answer, and discovery is continuing. If EndoSonics
prevails in their suit, EndoSonics may choose to market and sell stents that use
the technology we licensed to Guidant. If this happens, Guidant may claim
damages attributable to any sales of those stents in the United States or may
choose to renegotiate the terms of its license with us. Although the outcome of
the matter cannot be predicted with any certainty, we believe that this matter
will not have a material adverse effect on our financial position or operating
results.
We are 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 our consolidated financial position.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information as of September 6, 2000 with
respect to our executive officers and directors:
<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
Joseph A. Bishop..................... 36 Vice President, Operations
Edward F. Smith, III, Ph.D........... 47 Vice President, Research and Development
Brett A. Trauthen.................... 38 Vice President, Clinical Development
Franklin D. Brown.................... 56 Director
Maurice Buchbinder, M.D.............. 47 Director
William G. Davis..................... 68 Director
Edward M. Leonard.................... 58 Director
Jeffrey F. O'Donnell................. 40 Director
Gerard von Hoffmann.................. 44 Director
</TABLE>
Michael R. Henson. Mr. Henson joined us in February 1992 as President,
Chief Executive Officer and Chairman of our board of directors, and currently
serves as Chief Executive Officer and Chairman of our board of directors. From
June 1997 until March 1999, Mr. Henson served as the Chairman of our board of
directors, and as the Chairman of the board of directors, Chief Executive
Officer and President of the former Radiance Medical Systems, Inc. From 1988 to
February 1995, Mr. Henson served as the Chief Executive Officer of EndoSonics
Corporation and, from February 1993 to November 1996, as Chairman of the board
of directors. From April 1983 to February 1988, Mr. Henson served as President
and Chief Executive Officer of Trimedyne, Inc., a manufacturer of medical lasers
and catheters. Mr. Henson also serves on the board of directors of three private
medical device companies, Endologix, Inc., Anchor Medical Technologies, Inc. and
Micrus Corporation.
Jeffrey H. Thiel. Mr. Thiel joined us in October 1996 and serves as our
President and Chief Operating Officer. From February 1999 to September 1999, Mr.
Thiel served as our Executive Vice President, and from October 1996 to February
1999 as Vice President, Operations. From May 1995 to October 1996, Mr. Thiel
served as Director of Operations of BEI Medical Systems. Mr. Thiel also serves
on the board of directors of Micrus Corporation.
Stephen R. Kroll. Mr. Kroll joined us in April 1998 as and serves as our
Vice President, Finance and Administration, Chief Financial Officer and
Corporate Secretary. From May 1989 until May 1991, Mr. Kroll served as Vice
President, Finance and Corporate Secretary, and from May 1991 until March 1997
as Vice President, Administration and Corporate Secretary for Viking Office
Products.
Joseph A. Bishop. Mr. Bishop joined us in August 1996 and serves as our
Vice President, Operations. From May 1998 to August 2000, Mr. Bishop served as
our Director of Manufacturing and from August 1996 to May 1998, held several
management and engineering positions. Prior to joining us, Mr. Bishop held
several manufacturing supervision positions with Guidant Corporation from June
1986 to August 1996.
Edward F. Smith, III, Ph.D. Dr. Smith joined us in October 1999 and serves
as Vice President, Research and Development. From November 1992 to July 1999,
Dr. Smith was employed by Mallinkrodt, Inc., and served as Director,
Endovascular Research and Development from July 1995 to July 1999, and as
Associate Director, Cardiology Therapeutics Research and Development from
November 1992 to June 1995.
45
<PAGE> 50
Brett A. Trauthen. Mr. Trauthen joined us in January 1999 following our
merger with the former Radiance and serves as Director of Research and
Development and Engineering. From January 1999 to September 1999, Mr. Trauthen
has served as our Vice President of Clinical Development. From September 1997 to
January 1999, Mr. Trauthen served as Director of Research and Development and
Engineering for the former Radiance. From 1995 to August 1997, Mr. Trauthen held
various operations and executive staff positions with Applied Medical Resources
Corporation.
Franklin D. Brown. Mr. Brown joined us as a director in 1997. Mr. Brown is
the President and Chief Executive Officer of Endologix, Inc. From October 1994
until the sale of the company in September 1997, Mr. Brown served as Chairman,
President and Chief Executive Officer at Imagyn Medical, Inc. From 1986 until
the sale of the company in 1994, Mr. Brown served as President and Chief
Executive Officer of Pharmacia Deltec, Inc., an ambulatory drug delivery
company. Mr. Brown also serves on the boards of directors of Xillix Technologies
and Bridge Medical.
Maurice Buchbinder, M.D. Dr. Buchbinder joined us as a director in January
1999, following our merger with the former Radiance. Dr. Buchbinder was a
co-founder and member of the board of directors of the former Radiance from
August 1997 to January 1999. Since 1995, Dr. Buchbinder has served as the
Director of Interventional Cardiology at Sharp Memorial Hospital, San Diego,
California and as the Director of Interventional Cardiology at the Foundation
for Cardiovascular Research, Scripps Memorial Hospital, La Jolla, California.
From 1985 to 1995, Dr. Buchbinder served at various intervals as the Professor
of Medicine and the Associate Professor of Medicine, Cardiology Division, UCSD
Medical Center, San Diego, California. Dr. Buchbinder is Board certified,
Diplomat, from the American Board of Cardiovascular Diseases and the American
Board of Internal Medicine.
William G. Davis. Mr. Davis joined us as a director in 1995. Mr. Davis is
an independent business consultant. From 1957 to 1984, Mr. Davis was employed by
Eli Lilly and Company, a diversified healthcare company, where he served as
Executive Vice President, Eli Lilly International Corporation, from 1972 to
1975, Executive Vice President, Pharmaceutical Division, from 1975 to 1982, and
President, Medical Instrument Systems Division, from 1982 until his retirement
in 1984.
Edward M. Leonard. Mr. Leonard joined us as a director in 1996. Mr. Leonard
has been a Managing Director of Broadview International LLC, an investment bank
specializing in mergers and acquisitions for information technology companies,
since September 1997. From 1978 to September 1997, Mr. Leonard was a partner in
the law firm of Brobeck, Phleger & Harrison.
Jeffrey F. O'Donnell. Mr. O'Donnell joined us as a director in 1999. Mr.
O'Donnell has served as President and Chief Executive Officer of PhotoMedex
since November 1999. From March 1999 to November 1999, Mr. O'Donnell served as
the President and Chief Executive Officer of X-SITE Medical. Mr. O'Donnell
served as our President from January 1998 until March 1999, and Chief Executive
Officer from June 1998 until March 1999. From November 1995 to January 1998, Mr.
O'Donnell served as our Vice President, Sales and Marketing. From January 1994
to May 1995, Mr. O'Donnell served as the President and Chief Executive Officer
of Kensey Nash Corporation, a diversified medical device company. Mr. O'Donnell
is a member of the board of directors of Escalon Medical Corporation, a
manufacturer and distributor of cardiovascular and ophthalmology devices.
Gerard von Hoffmann. Mr. von Hoffmann joined us as a director in April
1996. He has been with the law firm of Knobbe, Martens, Olson & Bear LLP, our
patent counsel, since 1986 and has been a partner since 1989. Mr. von Hoffmann
also serves on the board of directors of two privately-held medical device
companies, Anchor Medical Technologies, Inc. and NeoMatrix, Inc.
46
<PAGE> 51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Former Radiance Merger
On November 3, 1998, we signed a merger agreement with the former Radiance,
pursuant to which the former Radiance agreed to merge with and into our
wholly-owned subsidiary. The merger was approved by our stockholders and
completed on January 14, 1999. Pursuant to the merger, we paid the stockholders
of the former Radiance approximately $6.9 million in stock, $692,000 in cash,
and $1.1 million in common stock options to acquire the portion of the former
Radiance that we did not already own. The equity portion of the merger
consideration consisted of an aggregate of 1,900,157 shares of our common stock
and 317,776 options at an exercise price of $0.11 per share.
As part of the merger consideration, the former Radiance stockholders and
optionholders may still receive product development milestone payments of up to
$1.71 for each share of former Radiance preferred stock and $2.56 for each share
of former Radiance common stock held prior to the merger. These 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 FDA and European approval process. The first
milestone was not achieved, and the second milestone is behind schedule.
In connection with our merger agreement with the former Radiance, some of
our officers and directors who were officers, directors or stockholders of the
former Radiance received shares of our stock as merger consideration for shares
of the former Radiance that they owned. In addition, options held by them to
purchase stock of the former Radiance were converted pursuant to the merger into
options to purchase shares of our stock. The following table shows the
consideration and all other compensation received by such persons pursuant to
the merger.
The consideration shown below for Mr. Henson includes consideration
received by his wife for shares of the former Radiance. 180,180 of the shares of
our common stock received by Mr. Henson were received in exchange for 300,000
shares of the former Radiance acquired in June 1998 at $0.065 per share in
return for agreeing not to take a salary from the former Radiance in his
position as Chairman of the Board and Chief Executive Officer from June 1998
until March 1999. The consideration shown below as other compensation received
by Dr. Buchbinder is a result of our agreement pursuant to the merger to appoint
Dr. Buchbinder as our Medical Director on a consulting basis for a period of
four years. Mr. Thiel and Mr. O'Donnell received options to purchase common
stock in the former Radiance in exchange for providing management services
relating to research and development, regulatory, manufacturing and marketing.
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
SHARES OF OUR FOR OUR MILESTONE
COMMON STOCK COMMON STOCK OTHER COMPENSATION SHARES
------------- ------------------- ------------------ ---------
<S> <C> <C> <C> <C>
Michael R. Henson................. 194,143 102,040 options at an -- up to
exercise price of $0.11 372,223 shares
per share
Maurice Buchbinder, M.D. ......... 693,000 93,294 options at an 50,000 options at an up to
exercise price of $0.11 exercise price of $3.43 502,424 shares
per share per share
Gerard von Hoffmann............... 14,414 11,661 options at an -- up to
exercise price of $0.11 22,875 shares
per share
Jeffrey O'Donnell................. -- 2,915 options at an -- up to
exercise price of $0.11 3,734 shares
per share
Jeffrey H. Thiel.................. -- 2,915 options at an -- up to
exercise price of $0.11 3,734 shares
per share
Brett A. Trauthen................. -- 70,000 options at an -- up to
exercise price of $0.11 52,277 shares
per share
</TABLE>
47
<PAGE> 52
We believe that all related-party transactions described below were on
terms no less favorable than otherwise could have been obtained from
unaffiliated third parties. All future transactions between us and any director,
officer or principal stockholder will be subject to approval by a majority of
the disinterested members of our board of directors.
Other Transactions
On January 24, 1997, we loaned $100,000 to Mr. Thiel. A second deed of
trust on Mr. Thiel's home secured the promissory note, which has a five-year
term with interest compounding semi-annually at 6%. The principal and interest
under the promissory note will be due January 24, 2002.
During February 1999, our board of directors approved the transfer of
150,000 shares of Endologix, Inc. to Mr. Henson as compensation for his return
of options to purchase 130,000 shares of our common stock in 1997, for giving us
the opportunity to acquire 625,000 shares of Endologix in 1997 and for agreeing
to return to the role of Chief Executive Officer upon Mr. O'Donnell's departure
in March 1999. The estimated value of the Endologix shares at the date of
transfer was $52,500. Mr. Henson received $388,500 from a third party in August
1999 for an option to purchase the Endologix shares that we transferred to him.
Mr. Henson also will receive $643,500 and up to an additional $118,500 if the
third party exercises its option to purchase the Endologix shares.
In August 1999, we sold an option to purchase our shares in Endologix to
the same third party in exchange for a non-refundable cash payment of $1.2
million. The purchaser has until December 2000 to exercise the option. Although
the likelihood of exercise is uncertain, if the purchaser exercises the option,
we will receive an additional payment of approximately $2.0 million later in
2000.
48
<PAGE> 53
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of September 6, 2000, and as adjusted to
reflect the sale of the shares of common stock offered in this offering for:
- each person or group of affiliated persons known by us to beneficially
own more than 5% of outstanding shares of our common stock, including the
selling stockholder;
- each of our directors;
- each of our executive officers whose combined salary and bonus exceeded
$100,000 for 1999; and
- all of our directors and executive officers as a group.
We determined beneficial ownership in accordance with the rules of the SEC
and includes voting and investment power with respect to shares. Unless
otherwise indicated, the persons named in the table have sole voting and sole
investment control with respect to all shares beneficially owned, subject to
community property laws where applicable. Shares of common stock subject to
options and warrants currently exercisable or convertible, or exercisable or
convertible within 60 days of September 6, 2000, are deemed beneficially owned
and outstanding for computing the percentage of the person holding such
securities, but are not considered outstanding for computing the percentage of
any other person. The percentage of shares beneficially owned prior to the
offering is based on 11,395,696 shares of common stock outstanding as of
September 6, 2000. The percentage of shares beneficially owned after the
offering is based on 12,895,696 shares outstanding immediately after this
offering and assumes no exercise of the underwriters' over-allotment option. The
address for those individuals for which an address is not otherwise indicated
is: c/o Radiance Medical Systems, Inc., 13700 Alton Parkway, Suite 160, Irvine,
California 92618.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
---------------------- NUMBER OF SHARES --------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT BEING OFFERED NUMBER PERCENT
------------------------------------- ---------- -------- ---------------- --------- -------
<S> <C> <C> <C> <C> <C>
EndoSonics Corporation(1)........... 1,325,132 11.6% 1,325,132 -- --
Dimensional Fund Advisors(2)........ 637,773 5.6% -- 637,773 5.0%
William Harris Investors(3)......... 599,571 5.3% -- 599,571 4.7%
Michael R. Henson(4)................ 563,807 4.9% -- 563,807 4.4%
Jeffrey H. Thiel(5)................. 106,585 * -- 106,585 *
Stephen R. Kroll(6)................. 88,403 * -- 88,403 *
Joseph A. Bishop(7)................. 28,263 * -- 28,263 *
Edward F. Smith, III, Ph.D.(8)...... 13,832 * -- 13,832 *
Brett A. Trauthen(9)................ 49,608 * -- 49,608 *
Franklin D. Brown(10)............... 42,500 * -- 42,500 *
Maurice Buchbinder, M.D.(11)........ 837,544 7.3% -- 837,544 6.5%
William G. Davis(12)................ 50,430 * -- 50,430 *
Edward M. Leonard(13)............... 71,192 * -- 71,192 *
Jeffrey F. O'Donnell(14)............ 221,268 1.9% -- 221,268 1.7%
Gerard von Hoffmann(15)............. 75,429 * -- 75,429 *
William G. Rigas(16)................ 35,191 * -- 35,191 *
Claire K. Walker(17)................ 45,793 * -- 45,793 *
All directors and officers as a group
(14 persons)(18).................. 2,229,845 18.3% -- 2,229,845 16.3%
Total Principal and Selling
Stockholders...................... 4,792,321 39.3% 1,325,132 3,467,189 25.3%
</TABLE>
---------------
* Represents beneficial ownership of less than 1%.
(1) EndoSonics Corporation's address is 2870 Kilgore Road, Rancho Cordova,
California 95670.
49
<PAGE> 54
(2) Pursuant to a schedule 13G filed with the SEC on February 3, 2000,
Dimensional Fund Advisors reported that it has sole voting and dispositive
power over 637,773 shares. Dimensional reported that all shares are owned
by investment funds it serves as investment adviser or manager, and
disclaims beneficial ownership of such shares. Dimensional Fund Advisors'
address is 1299 Ocean Avenue, Eleventh Floor, Santa Monica, California
90401.
(3) Pursuant to a Schedule 13G filed with the SEC on February 14, 2000, William
Harris Investors reported that it had shared voting and sole dispositive
power over 599,571 shares. William Harris Investors' address is Two North
La Salle Street, Suite 400, Chicago, Illinois 60602.
(4) Includes 52,708 shares subject to options exercisable within 60 days after
September 6, 2000.
(5) Includes 83,334 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Thiel shares voting and investment power with his
spouse with respect to 23,251 shares.
(6) Includes 64,792 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Kroll shares voting and investment power with his
spouse as co-trustee with respect to 23,611 shares held in a revocable
trust.
(7) Includes 23,553 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Bishop shares voting and investment power with his
spouse with respect to 4,710 shares.
(8) Includes 12,500 shares subject to options exercisable within 60 days after
September 6, 2000.
(9) Includes 18,542 shares subject to options exercisable within 60 days after
September 6, 2000.
(10) Includes 37,500 shares subject to options exercisable within 60 days after
September 6, 2000.
(11) Includes 134,544 shares subject to options exercisable within 60 days after
September 6, 2000.
(12) Includes 43,500 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Davis shares voting and investment power with his
spouse as co-trustee with respect to 6,930 shares held in a revocable
trust.
(13) Includes 37,500 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Leonard shares voting and investment power as a
beneficiary with respect to 22,807 shares held in a retirement trust. Mr.
Leonard disclaims beneficial ownership with respect to 200 shares held by
his spouse and 3,000 shares held as custodian for his minor children under
the Uniform Gift to Minors Act.
(14) Includes 216,457 shares subject to options exercisable within 60 days after
September 6, 2000.
(15) Includes 37,500 shares subject to options exercisable within 60 days after
September 6, 2000.
(16) Includes 33,437 shares subject to options exercisable within 60 days after
September 6, 2000. Mr. Rigas is no longer our employee. Mr. Rigas left us
on January 6, 2000.
(17) Includes 1,520 shares subject to options exercisable within 60 days after
September 6, 2000. Ms. Walker is no longer our employee. Ms. Walker left us
on February 19, 2000.
(18) Includes 797,387 shares subject to options exercisable within 60 days after
September 6, 2000.
50
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will
consist of 30 million shares of common stock, $0.001 par value per share, and
five million shares of preferred stock, $0.001 par value per share.
COMMON STOCK
Upon completion of this offering, we will have 12,895,696 shares of common
stock outstanding.
The following summarizes the rights of holders of our common stock:
- each holder of common stock is entitled to one vote per share on all
matters to be voted upon by the stockholders;
- subject to preferences that may apply to shares of preferred stock that
we may issue in the future, the holders of common stock are entitled to
receive such lawful dividends as may be declared by the board of
directors;
- upon our liquidation, dissolution or winding up, the holders of shares of
common stock are entitled to receive a pro rata portion of all our assets
remaining for distribution after satisfaction of all our liabilities and
the payment of any liquidation preference of any outstanding preferred
stock;
- there are no redemption or sinking fund provisions applicable to our
common stock; and
- there are no preemptive or conversion rights applicable to our common
stock.
PREFERRED STOCK
We have authorized five million shares of preferred stock, none of which
are outstanding. However, our amended and restated certificate of incorporation
authorizes our board of directors, without stockholder approval, to issue our
preferred stock in one or more series and to fix the rights, preferences and
privileges thereof. Among other rights, the board of directors may determine,
without further vote or action by our stockholders:
- the number of shares and designation of any series;
- the dividend rate on the shares of the series, whether dividends will be
cumulative, and if so, from which date or dates, and the relative rights
of priority, if any, of payment of dividends on shares of the series;
- whether the series will have voting rights in addition to the voting
rights provided by law and, if so, the terms of the voting rights;
- whether the series will have conversion privileges and if so, the terms
and conditions of conversion;
- whether or not the shares of the series will be redeemable or
exchangeable and if so, the dates, terms and conditions of redemption or
exchange, as the case may be;
- whether the series will have a sinking fund for the redemption or
purchase of shares of that series and if so, the terms and amount of the
sinking fund; and
- the rights of the shares of the series in the event our voluntary or
involuntary liquidation, dissolution of winding up and the relative
rights or priority, if any, of payment of shares of the series.
Although we presently do not have plans to issue any shares of preferred
stock, any future issuance of shares of preferred stock, or the issuance of
rights to purchase preferred shares, may delay, defer or prevent a change of
control in our company or an unsolicited acquisition proposal. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the
51
<PAGE> 56
holders of common stock or could adversely affect the rights and powers,
including voting rights, of the holders of common stock.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND CHARTER PROVISIONS
We are subject to Section 203 of the Delaware General Corporation Law. In
general, the statute prohibits a publicly held Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder unless:
- prior to such date, the board of directors of the company approved either
the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder's
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the company outstanding at the time the
transaction commenced, excluding those shares owned by persons who are
directors and also officers, and employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines "business combination" to include:
- any merger or consolidation involving the company and the interested
stockholder;
- any sale, transfer, pledge or other disposition involving the interested
stockholder of 10% or more of the assets of the company;
- subject to exceptions, any transaction that results in the issuance or
transfer by the company of any stock of the company to the interested
stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the company.
In general, Section 203 defines an interested stockholder as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
company and any entity or person affiliated with or controlling or controlled by
the entity or person.
Our amended and restated bylaws provide that our stockholders may call a
special meeting of stockholders only upon a request of stockholders owning at
least 50% of our capital stock. This could discourage potential acquisition
proposals and could delay or prevent a change in control of us. Delaware law and
our bylaw provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board of directors and in the policies
formulated by the board of directors, and could discourage certain types of
transactions that may involve an actual or threatened change of control of us
including an unsolicited acquisition proposal. However, such provisions could
have the effect of discouraging others from making tender offers for our shares
and, as a consequence, they also may prevent stockholders from receiving a
premium price for their shares of our common stock that they otherwise could
receive in the event of an actual or rumored takeover attempt. These provisions
also may have the effect of preventing changes in our management.
Our board of directors currently consists of seven members divided into
three different classes. The term of office for each of our directors is three
years. As a result, only one class of directors will be elected at each annual
meeting of our stockholders, with the other classes continuing for the remainder
of their respective terms. Between stockholder meetings, the board may appoint
new directors to fill vacancies or newly created directorships.
52
<PAGE> 57
REGISTRATION RIGHTS
In connection with the 5% convertible debenture that we sold to Cosmotec,
on August 10, 2000 Cosmotec notified us of their intent to convert the debenture
into 142,857 shares of our common stock. Pursuant to the debenture, Cosmotec
can, subject to limitations, require us to include their shares of common stock
in future registration statements we file. We plan to file a resale registration
statement for these shares as soon as practicable after the closing of this
offering.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
53
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline due to sales of a large
number of shares of our common stock or the perception that these sales could
occur. These factors could also make it more difficult to raise funds through
future offerings of common stock.
After this offering, 12,895,696 shares of our common stock will be
outstanding, or 13,319,466 shares if the underwriters exercise their
over-allotment option in full. All of these shares, except for 1,529,288 shares
and any shares purchased by our affiliates, as that term is defined in Rule 144
under the Securities Act, will be freely tradable without restriction under the
Securities Act. After the effectiveness of this offering, we plan to file a
resale registration statement for 142,857 of these shares of our common stock,
which will allow these shares to be freely traded, subject to the lock-up
agreement described below.
We, our officers and directors, the selling stockholder and one other
stockholder have entered into lock up agreements. We, our officers and
directors, and one other stockholder have agreed not to offer or sell any shares
of common stock or securities convertible into or exchangeable or exercisable
for shares of common stock for a period of 90 days after the date of this
prospectus without the prior written consent of Prudential Securities
Incorporated, on behalf of the underwriters. The selling stockholder has agreed
not to offer or sell shares of common stock or securities convertible into or
exchangeable or exercisable for shares of common stock from the date of the
filing of this registration statement until November 30, 2000 without the prior
written consent of Prudential Securities Incorporated, on behalf of the
underwriters. Prudential Securities Incorporated may, at any time and without
notice, waive any of the terms of these lock-up agreements.
After the lock-up agreements expire, approximately 1,192,096 shares may be
sold without regard to compliance with Rule 144 and 337,192 shares will become
eligible for sale in the public market subject to the compliance with the volume
limitations and other restrictions of Rule 144.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least one year, is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
- 1% of the then-outstanding shares of common stock; and
- the average weekly trading volume of the common stock during the four
calendar weeks immediately preceding the date on which the notice of such
sale on Form 144 is filed with the Securities and Exchange Commission.
Sales under Rule 144 are also subject to certain provisions relating to notice
and manner of sale and the availability of current public information about us.
In addition, a person (or persons whose shares are aggregated) who has not been
affiliated with us at any time during the 90 days immediately preceding a sale,
and who has beneficially owned the shares for at least two years, would be
entitled to sell such shares under Rule 144(k) without regard to the volume
limitation and other conditions described above. The foregoing summary of Rule
144 is not intended to be a complete description.
54
<PAGE> 59
UNDERWRITING
We and the selling stockholder have entered into an underwriting agreement
with the underwriters named below, for whom Prudential Securities Incorporated
and Gruntal & Co., L.L.C. are acting as representatives. We and the selling
stockholder are obligated to sell, and the underwriters are obligated to
purchase, all of the shares offered on the cover page of this prospectus, if any
are purchased. Subject to certain conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the shares indicated opposite its
name:
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Prudential Securities Incorporated..........................
Gruntal & Co., L.L.C. ......................................
---------
Total.................................................. 2,825,132
=========
</TABLE>
The underwriters may sell more shares than the total number of shares
offered on the cover page of this prospectus and they have, for a period of 30
days from the date of this prospectus, an over-allotment option to purchase up
to 423,770 additional shares from us. If any additional shares are purchased,
the underwriters will severally purchase the shares in the same proportion as
per the table above.
The representatives of the underwriters have advised us and the selling
stockholder that the shares will be offered to the public at the offering price
indicated on the cover page of this prospectus. The underwriters may allow to
selected dealers a concession not in excess of $ per share and such dealers
may reallow a concession not in excess of $ per share to certain other
dealers. After the shares are released for sale to the public, the
representatives may change the offering price and the concessions.
We and the selling stockholder have agreed to pay to the underwriters the
following fees, assuming both no exercise and full exercise of the underwriters'
over-allotment option to purchase additional shares.
<TABLE>
<CAPTION>
TOTAL FEES
----------------------------------------------
FEE WITHOUT EXERCISE OF FULL EXERCISE OF
PER SHARE OVER-ALLOTMENT OPTION OVER-ALLOTMENT OPTION
--------- --------------------- ---------------------
<S> <C> <C> <C>
Fees paid by us............................ $ $ $
Fees paid by the selling stockholder....... $ $ $
</TABLE>
In addition, we estimate that we will spend approximately $ in
expenses for this offering. The selling stockholder will pay for its own
expenses in this offering. We and the selling stockholder have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, or contribute to payments that the underwriters may be
required to make in respect of these liabilities.
We, our officers and directors, the selling stockholder and one other
stockholder have entered into lock-up agreements with Prudential Securities
Incorporated. We have agreed not to offer or sell shares of common stock or
securities convertible into or exchangeable or exercisable for shares of common
stock for a period of 90 days from the date of this prospectus without the prior
written consent of Prudential Securities Incorporated, on behalf of the
underwriters. The selling stockholder has agreed not to offer or sell shares of
common stock or securities convertible into or exchangeable or exercisable for
shares of common stock from the date of the filing of this registration
statement until November 30, 2000. Prudential Securities Incorporated may, at
any time and without notice, waive the terms of these lock-up agreements
specified in the underwriting agreement.
55
<PAGE> 60
Prudential Securities Incorporated, on behalf of the underwriters, may
engage in the following activities in accordance with applicable securities
rules:
- Create a syndicate short position by making short sales of our common
stock and may purchase our common stock on the open market to cover
syndicate short positions created by short sales. Short sales involve the
sale by the underwriters of a greater number of shares of common stock
than they are required to purchase in the offering. Short sales can be
either "covered" or "naked". "Covered" short sales are sales made in an
amount not greater than the underwriters' over-allotment option to
purchase additional shares in the offering. "Naked" short sales are sales
in excess of the over-allotment option. A naked short position is more
likely to be created if the underwriters are concerned that there may be
downward pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase in the
offering.
- Stabilizing and short covering. Stabilizing bids to purchase the shares
are permitted if they do not exceed a specified maximum price. Prudential
Securities Incorporated, on behalf of the underwriters, may close out any
covered short position by either exercising the over-allotment option or
purchasing shares in the open market and must close out any naked short
position by purchasing shares in the open market. In determining the
source of shares to close out the covered short position, Prudential
Securities Incorporated, on behalf of the underwriters, will consider,
among other things, the price of shares available for purchase in the
open market as compared to the price shares may be purchased through the
over-allotment option. These activities may cause the price of the shares
to be higher than would otherwise exist in the open market.
- Penalty bids permitting representatives to reclaim concessions from a
syndicate member of the shares purchased in the stabilizing or short
covering transactions.
Such activities may be commenced and discontinued at any time, may be
effected on the Nasdaq National Market, in the over-the-counter market or
otherwise. Also and prior to the pricing of the shares, and until such time when
a stabilizing bid may have been made, some or all of the underwriters who are
market makers in the shares may make bids for or purchases of shares subject to
certain restrictions, known as passive market making activities.
Each underwriter has represented that it has complied and will comply with
all applicable laws and regulations in connection with the offer, sale or
delivery of the shares and related offering materials in the United Kingdom,
including:
- the Public Offers of Securities Regulations 1995,
- the Financial Services Act 1986, and
- the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, as amended.
Prudential Securities Incorporated facilitates the marketing of new issues
online through its PrudentialSecurities.com division. Clients of Prudential
Advisor(SM), a full service brokerage firm program, may view offering terms and
a prospectus online and place orders through their financial advisors.
LEGAL MATTERS
Stradling Yocca Carlson & Rauth, a professional corporation, Newport Beach,
California will pass on the validity of the issuance of the shares of common
stock for us. Stroock & Stroock & Lavan LLP, New York, New York will pass on
certain legal matters in connection with this offering on behalf of the
underwriters. Current shareholders of Stradling Yocca Carlson & Rauth
beneficially own an aggregate of 7,260 shares of our common stock.
56
<PAGE> 61
EXPERTS
The consolidated financial statements as of December 31, 1999 and for the
year then ended included in this Prospectus, and the related financial statement
schedule included in the Registration Statement, have been so included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The consolidated financial statements and schedule of Radiance Medical
Systems, Inc. at December 31, 1998, and for each of the two years in the period
ended December 31, 1998, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of such firm as experts in accounting
and auditing.
HOW TO GET ADDITIONAL INFORMATION ABOUT US
We have filed with the SEC a registration statement on Form S-2 under the
Securities Act with respect to the common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all of
the information set forth in the registration statement or the exhibits and
schedules which are part of the registration statement. Statements contained in
this prospectus relating to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the registration
statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified by such
reference. For further information with respect to us and our common stock,
reference is made to the registration statement and the exhibits and schedules
thereto.
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. A copy of the registration statement and such reports,
proxy statements and other information may be inspected without charge at the
public reference room of the SEC located at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the SEC located at Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of all or any part of the registration
statement may be obtained at the prescribed rates from the Public Reference
Section of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549 and
its public reference facilities in New York, New York and Chicago, Illinois,
upon the payment of the fees prescribed by the SEC. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC. The address of the SEC's web address is
http://www.sec.gov.
57
<PAGE> 62
INCORPORATION BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. We incorporate by reference the following
documents we filed with the SEC pursuant to Section 13 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"):
(i) Our Annual Report on Form 10-K for the year ended December 31,
1999;
(ii) Our Quarterly Reports on Form 10-Q for quarters ended March 31,
2000 and June 30, 2000.
You may request a copy of these filings at no cost, by writing or
telephoning us at the following address:
Radiance Medical Systems, Inc.
13700 Alton Parkway, Suite 160
Irvine, California 92618
Attention: Secretary
Telephone: (949) 457-9546
58
<PAGE> 63
RADIANCE MEDICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-2
Report of Ernst & Young LLP, Independent Auditors........... F-3
Consolidated Balance Sheets at December 31, 1998 and 1999
and at June 30, 2000 (unaudited).......................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 (unaudited) and 2000 (unaudited)...... F-5
Consolidated Statements of Stockholders' Equity (Deficit)
and Comprehensive Income (Loss) for the years ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 2000 (unaudited)........................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 1999 (unaudited) and 2000 (unaudited)...... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders
Radiance Medical Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity and comprehensive
income (loss) and of cash flows 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.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit 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-2
<PAGE> 65
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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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.
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-3
<PAGE> 66
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ JUNE 30,
1998 1999 2000
------------ -------- -----------
(SEE NOTE 1) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,437 $ 2,051 $ 3,585
Marketable securities available-for-sale, including
unrealized gains (losses) of $209, $7 and ($44),
respectively............................................ 23,375 20,004 16,712
Accounts receivable, net of allowance for doubtful
accounts of $583, $150 and $187, respectively........... 2,413 1,070 590
Other accounts receivable................................. 375 742 2,188
Inventories............................................... 1,623 822 1,060
Other current assets...................................... 218 259 91
-------- -------- --------
Total current assets............................... 29,441 24,948 24,226
-------- -------- --------
Property and equipment:
Furniture and equipment................................... 2,326 2,169 2,151
Leasehold improvements.................................... 326 318 318
-------- -------- --------
2,652 2,487 2,469
Less accumulated depreciation and amortization............ (1,120) (1,378) (1,594)
-------- -------- --------
Net property and equipment.............................. 1,532 1,109 875
Intangibles, net of amortization............................ 387 3,667 3,237
Notes receivable from officers.............................. 116 118 123
Deferred charges and other assets........................... 559 31 32
-------- -------- --------
Total assets....................................... $ 32,035 $ 29,873 $ 28,493
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,286 $ 2,714 $ 2,965
Deferred revenue.......................................... 250 1,028 504
-------- -------- --------
Total current liabilities.......................... 4,536 3,742 3,469
Deferred revenue............................................ -- 786 400
Convertible debenture....................................... -- -- 1,402
Minority interest........................................... -- 234 216
-------- -------- --------
4,536 4,762 5,487
-------- -------- --------
Commitments and contingencies (Notes 11 and 15)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares
authorized, no shares issued and outstanding............ -- -- --
Common stock, $0.001 par value; 30,000,000 shares
authorized, 9,578,000, 11,896,000 and 12,043,000 shares
issued, and 8,892,000, 11,210,000, and 11,357,000 shares
outstanding at December 31, 1998 and 1999 and June 30,
2000, respectively...................................... 10 12 12
Additional paid-in capital................................ 60,664 69,483 69,924
Deferred compensation..................................... (409) (524) (432)
Accumulated deficit....................................... (29,553) (40,333) (42,951)
Treasury stock, at cost; 686,000 common shares at December
31, 1998 and 1999 and June 30, 2000..................... (3,675) (3,675) (3,675)
Accumulated other comprehensive income.................... 462 148 128
-------- -------- --------
Total stockholders' equity......................... 27,499 25,111 23,006
-------- -------- --------
Total liabilities and stockholders' equity......... $ 32,035 $ 29,873 $ 28,493
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
<PAGE> 67
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -----------------
1997 1998 1999 1999 2000
------------ ------- -------- ------- -------
(SEE NOTE 1) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Sales.................................. $ 9,438 $ 9,415 $ 3,856 $ 2,337 $ 1,193
License fee and other.................. -- 2,760 2,855 1,224 3,711
-------- ------- -------- ------- -------
Total revenue.................. 9,438 12,175 6,711 3,561 4,904
-------- ------- -------- ------- -------
Operating costs and expenses:
Cost of sales.......................... 6,102 6,152 2,823 1,900 859
Research and development............... 7,041 7,957 8,610 4,157 5,559
Marketing and sales.................... 6,691 5,371 1,989 933 642
General and administrative............. 2,347 2,937 2,468 1,444 1,477
Charge for acquired in-process research
and and development................. -- 234 4,194 4,194 --
Minority interest in losses of
subsidiary.......................... -- (992) (6) -- (9)
-------- ------- -------- ------- -------
Total operating costs and
expenses..................... 22,181 21,659 20,078 12,628 8,528
-------- ------- -------- ------- -------
Loss from operations................... (12,743) (9,484) (13,367) (9,067) (3,624)
-------- ------- -------- ------- -------
Other income (expense):
Interest income........................ 2,201 1,567 1,246 655 587
Gain (loss) on sale of assets.......... -- (47) 988 131 467
Other income (expense)................. 24 (22) 353 (77) (48)
-------- ------- -------- ------- -------
Total other income............. 2,225 1,498 2,587 709 1,006
-------- ------- -------- ------- -------
Net loss................................. $(10,518) $(7,986) $(10,780) $(8,358) $(2,618)
======== ======= ======== ======= =======
Basic and diluted net loss per share..... $ (1.15) $ (0.90) $ (0.98) $ (0.77) $ (0.23)
======== ======= ======== ======= =======
Shares used in computing basic and
diluted net loss per share............. 9,118 8,862 10,951 10,788 11,316
======== ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-5
<PAGE> 68
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 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............. -- -- (49) 49 -- -- --
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)
Exercise of common stock options
(unaudited)...................... 101,000 -- 334 -- -- -- --
Employee stock purchase plan
(unaudited)...................... 46,000 -- 107 -- -- -- --
Amortization of deferred
compensation (unaudited)......... -- -- -- 92 -- -- --
Net loss (unaudited)............... -- -- -- -- (2,618) -- --
Unrealized loss on investments
(unaudited)...................... -- -- -- -- -- -- --
Unrealized exchange rate gain
(unaudited)...................... -- -- -- -- -- -- --
---------- --- ------- ----- -------- ------- -------
Balance at June 30, 2000
(unaudited)...................... 12,043,000 $12 $69,924 $(432) $(42,951) 686,000 $(3,675)
========== === ======= ===== ======== ======= =======
<CAPTION>
ACCUMULATED
OTHER COMPREHENSIVE
COMPREHENSIVE STOCKHOLDERS' INCOME
INCOME EQUITY (LOSS)
------------- ------------- -------------
<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............. -- --
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)
Exercise of common stock options
(unaudited)...................... -- 334
Employee stock purchase plan
(unaudited)...................... -- 107
Amortization of deferred
compensation (unaudited)......... -- 92
Net loss (unaudited)............... -- (2,618) (2,618)
Unrealized loss on investments
(unaudited)...................... (51) (51) (51)
Unrealized exchange rate gain
(unaudited)...................... 31 31 31
------- -------- --------
Balance at June 30, 2000
(unaudited)...................... $ 128 $ 23,006 $ (2,638)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-6
<PAGE> 69
RADIANCE MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ ------------------
1997 1998 1999 1999 2000
-------- -------- -------- -------- -------
(SEE (UNAUDITED)
NOTE 1)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net loss.................................................. $(10,518) $ (7,986) $(10,780) $ (8,358) $(2,618)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 468 576 1,333 633 660
Amortization of deferred compensation..................... 179 176 243 68 92
Bad debt expense.......................................... 450 295 (168) 37 38
Charge for acquired in-process research and development... -- 234 4,194 4,194 --
Minority interest in losses of subsidiary................. -- (992) -- -- (9)
Gain on disposal of assets................................ -- -- (1,302) (131) 28
Changes (net of effects of acquisition of interest in
(former) Radiance and Radiatec):
Trade accounts receivable, net.......................... (873) 44 1,510 1,148 442
Inventories............................................. (306) 1,582 97 29 (238)
Other assets............................................ 37 (125) (316) 70 (1,259)
Accounts payable and accrued expenses................... 836 928 (2,105) (1,132) 251
Deferred revenue........................................ (79) 250 679 1,876 (507)
-------- -------- -------- -------- -------
Net cash used in operating activities....................... (9,806) (5,018) (6,615) (1,566) (3,120)
-------- -------- -------- -------- -------
Investing activities:
Purchase of available-for-sale securities................. (43,208) (37,841) (25,256) (15,482) (7,283)
Sales of available-for-sale securities.................... 44,174 39,272 28,413 15,877 10,523
Capital expenditures for property and equipment........... (699) (431) (439) (112) (26)
Sale of Vascular Access business unit, net................ -- -- 2,070 1,070 --
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 (259) --
Purchase of Clinitec, net of cash acquired................ (30) -- -- -- --
Change in other assets.................................... (358) (625) 20 16 (1)
-------- -------- -------- -------- -------
Net cash (used in) provided by investing activities......... (121) 962 6,728 1,110 3,213
-------- -------- -------- -------- -------
Financing activities:
Proceeds from issuance of convertible debenture........... -- -- -- -- 1,000
Proceeds from sale of common stock........................ 466 180 168 89 107
Proceeds from exercise of stock warrants.................. 377 -- -- -- --
Proceeds from exercise of stock options................... 238 163 260 67 334
Proceeds from repayment of affiliate debt................. -- 479 73 64 --
Purchase of treasury common stock......................... (2,205) (1,470) -- -- --
-------- -------- -------- -------- -------
Net cash (used in) provided by financing activities......... (1,124) (648) 501 220 1,441
-------- -------- -------- -------- -------
Net (decrease) increase in cash and cash equivalents........ (11,051) (4,704) 614 (236) 1,534
Cash and cash equivalents, beginning of period.............. 17,192 6,141 1,437 1,437 2,051
-------- -------- -------- -------- -------
Cash and cash equivalents, end of period.................... $ 6,141 $ 1,437 $ 2,051 $ 1,201 $ 3,585
======== ======== ======== ======== =======
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, including intangible
assets.................................................. $ 1,535 $ 8,962 $ 8,962
Cash paid................................................. (1,463) (692) (692)
Common stock and options issued........................... -- (8,035) (8,035)
-------- -------- --------
Liabilities assumed....................................... $ 72 $ 235 $ 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, including intangible
assets.................................................. $ 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-7
<PAGE> 70
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 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.
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 contributed cash of $233 in return for 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 of 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 increases net loss per common share by $0.19. 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.
Interim Financial Statements
The consolidated financial statements at June 30, 2000 and 1999 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. They do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
F-8
<PAGE> 71
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 six months ended June 30, 2000 and 1999 are
not necessarily indicative of results that may be expected for the year ending
December 31, 2000 or any other period.
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").
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 Radiance Medical Systems, Inc. (the
"former Radiance"), $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 the former Radiance, $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
F-9
<PAGE> 72
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
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 for stent deployment. 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. For the first six months of
2000, the Company recognized royalty fees of $3,520 (unaudited) from sales of
Guidant products.
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 from
milestone payments 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.
F-10
<PAGE> 73
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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
F-11
<PAGE> 74
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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, 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.
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 believe that
adopting SAB 101 will not have a material impact on our financial position or
results of operations.
In March 2000, the FASB issued Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of APB 25. This interpretation clarifies: (1) the definition of
an employee for purposes of applying APB 25; (2) the criteria for determining
whether a plan qualifies as a noncompensatory plan; (3) the accounting
consequences of various modifications to the terms of a previously fixed stock
option or award; and (4) the accounting for an exchange of stock compensation
awards in a business combination.
This interpretation is effective July 1, 2000, but certain conclusions in
this interpretation cover specific events that occur after either December 15,
1998, or January 12, 2000. To the extent that this interpretation covers events
occurring during the period after December 15, 1998, or January 12, 2000, but
before the effective date of July 1, 2000, the effects of applying this
interpretation are recognized on a prospective basis from July 1, 2000. We
believe that the adoption of FIN 44 will not have a material impact on our
financial position or results of operations.
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
F-12
<PAGE> 75
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 the former Radiance
The former Radiance was incorporated by the Company in August 1997 to
develop radiation products to treat restenosis based on the Company's patented
Focus technology. In consideration for the Company granting to the former
Radiance a license to the Focus technology, the former Radiance 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 the former Radiance's products, and a promise to pay
royalties to the Company based on sales of products utilizing the licensed
technology. Following the organization of the former Radiance's sale of stock to
investors in a private offering, the Company did not control the former Radiance
and accounted for its investment on the equity method. In September 1998, the
Company exercised warrants to purchase an additional 1,500,000 Series B
preferred shares in the former Radiance for $0.975 per share or a total of
$1,463, bringing the Company's ownership of the outstanding equity of the former
Radiance to approximately 50%, and began accounting for its investment in the
former Radiance under the consolidation method. Due to losses incurred by the
former Radiance, the balance of the minority interest was reduced to zero.
Thereafter, the Company consolidated 100% of the net losses incurred by the
former Radiance as the minority shareholders of the former Radiance were not
committed to fund the losses. Accordingly, the minority interest account at
December 31, 1998 had a zero balance.
In November 1998, the Company signed a definitive merger agreement (the
"Merger Agreement") with the former Radiance and in January 1999, the Company
acquired the former Radiance pursuant to the Merger Agreement. Under the terms
of the Merger Agreement, the Company paid the shareholders of the former
Radiance $3.00 for each share of preferred stock and $2.00 for each share of
common stock for a total consideration of approximately $7,571, excluding the
value of Radiance common stock options to be provided to the former Radiance
optionholders in exchange for their the former Radiance 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 the former Radiance stockholders who
elected to receive cash pursuant to the Merger Agreement. Options for 546,250
shares of the former Radiance 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 the former Radiance
common stock as other holders of the former Radiance 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
approximately $1,150.
In addition, under the Merger Agreement, the former 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. The first 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 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
F-13
<PAGE> 76
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Company's technology to the marketplace. Any milestone payments will be
capitalized as additions to the purchase price.
The former Radiance 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 former Radiance 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 2001, 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 former Radiance 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 the former Radiance 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 approach, in
context of the business enterprise value of the former Radiance. The employment
contracts assigned values at the dates of acquisition of a majority of and the
remainder of the capital stock of the former Radiance were approximately $72 and
$1,229, respectively.
F-14
<PAGE> 77
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table reflects unaudited pro forma combined results of
operations of the Company, Clinitec and the former Radiance 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
the former Radiance 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.......................... 10,027,000 11,080,000
</TABLE>
Not reflected in the above unaudited pro forma results is the charge of
$4,194 for acquired IPR&D. 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 the former Radiance, 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 and for the first
six months of 2000 of $150 (unaudited). 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.
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:
Cost 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>
F-15
<PAGE> 78
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3. 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. The
Company recognized $71 and $41 (unaudited) of the aforementioned revenue during
the year ended December 31, 1999 and the six months ended June 30, 2000,
respectively. In addition, the Company has 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 distribution fee was reduced by $377
(unaudited) in June 2000. See Note 10.
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 $347 and $462
(unaudited) being recognized as other income for the year ended December 31,
1999 and the six months ended June 30, 2000, respectively. The remainder will be
recognized in the last six months of 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 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 15.
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
F-16
<PAGE> 79
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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. For the first six months of 2000, the Company recorded $3,520 (unaudited)
in royalties under the agreement.
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, 1998 DECEMBER 31, 1999
------------------------------------ ---------------------------------------------
GROSS UNREALIZED FAIR GROSS UNREALIZED
COST HOLDING GAINS VALUE COST HOLDING GAINS (LOSSES) FAIR 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,
-------------- JUNE 30,
1998 1999 2000
------ ---- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials........................................... $ 630 $398 $ 403
Work in process......................................... 87 94 220
Finished goods.......................................... 906 330 437
------ ---- ------
$1,623 $822 $1,060
====== ==== ======
</TABLE>
F-17
<PAGE> 80
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,
-------------- JUNE 30,
1998 1999 2000
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Developed technology.................................... $187 $3,266 $ 3,266
Employment contracts.................................... 72 1,301 1,301
Product license......................................... 175 -- --
---- ------ -------
434 4,567 4,567
Accumulated amortization................................ (47) (900) (1,330)
---- ------ -------
Intangible assets, net.................................. $387 $3,667 $ 3,237
==== ====== =======
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable...................................... $1,281 $ 769 $1,220
Accrued payroll and related expenses.................. 1,287 1,016 693
Accrued clinical studies.............................. 979 401 566
Accrued office closing costs.......................... 225 -- --
Other accrued expenses................................ 514 528 486
------ ------ ------
$4,286 $2,714 $2,965
====== ====== ======
</TABLE>
10. CONVERTIBLE DEBENTURE (UNAUDITED)
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 will mature in June 2003. At any time prior to the
repayment of the debt, Cosmotec may convert the 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.
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 is being amortized as to interest expense over
the debenture's three-year term. During June 2000, $5 (unaudited) was amortized
to interest expense. See Note 3. On August 10, 2000, Cosmotec notified the
Company that they will convert the debenture into 142,857 shares of the
Company's common stock. The net book value of the debenture on the conversion
date will be reclassified to stockholders' equity.
F-18
<PAGE> 81
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
11. 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.
Contract Manufacturing Agreement with Bebig GmbH
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to activate the radioactive sources and
complete final assembly of the RDX system in Europe. Pursuant to the agreement,
which was amended in July 2000, Radiance paid $100 during 1999 and, in 2000,
will pay approximately $1,247 (unaudited) of certain facility set up fees, 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 $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.
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.
F-19
<PAGE> 82
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. STOCKHOLDERS' 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 June 30, 2000.
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 June 30, 2000, the Company had
authorized 3,450,000 and 90,000 shares of common stock for issuance under the
1996 and 1997 Plan, respectively. At June 30, 2000, the Company had 548,947
(unaudited) shares and 11,500 (unaudited) shares of common 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>
NUMBER OF
OPTION PRICE PER SHARE 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
Granted (unaudited).................................. $6.59 to $ 7.00 212,000
Exercised (unaudited)................................ $0.11 to $ 9.50 (100,855)
Forfeited (unaudited)................................ -- --
Cancelled (unaudited)................................ $3.00 to $ 9.50 (102,840)
--------------- ---------
Balance at June 30, 2000 (unaudited)................. $0.11 to $12.00 2,034,152
=============== =========
</TABLE>
F-20
<PAGE> 83
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Under the Merger Agreement with the former Radiance, 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>
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>
RANGE OF WEIGHTED-AVERAGE
EXERCISE OPTIONS OUTSTANDING REMAINING WEIGHTED-AVERAGE OPTIONS EXERCISABLE WEIGHTED-AVERAGE
PRICES AT 12/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/99 EXERCISE 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
the former Radiance merger consideration. Under the merger agreement with the
former Radiance, 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
F-21
<PAGE> 84
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Plan. During 1999, a total of approximately 59,000 shares of common stock were
purchased at an average price of $2.83 per share.
13. 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.
14. 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-22
<PAGE> 85
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
15. 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 judgment 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 continuing. 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-23
<PAGE> 86
DESCRIPTION OF PHOTOS ON INSIDE BACK COVER OF PROSPECTUS
Title: "The Importance of Accurate Dose Delivery." The title is centered at the
top of the page and is in large and small capitals. The text appears in black
lettering against a background picture depicting a cardiologist performing an
angioplasty procedure using the RDX(TM) system in a catheterization lab.
Below the title, in the center of the page is a slugline separated from the left
and right edges of the page by approximately one inch of space.
Below the slugline appears text: "The RDX(TM) system places our radiation source
directly against, or apposed to, the arterial wall ensuring that a consistent
dose of radiation is delivered evenly to the target tissue, regardless of artery
size."
Below the text, in the center of the page is a slugline separated from the left
and right edges of the page by approximately one inch of space.
Below the second slugline is centered text: "Non-Centered."
Below the text is a centered picture, approximately 1.5 inches tall and wide, of
an artery appearing in blue with a small silver circle inside the artery.
Centered beneath the picture, in smaller font, is descriptive italicized text:
"This artery cross section shows that it is difficult or impossible for a linear
device such as a radioactive wire, ribbon or seed-train (depicted in silver), to
deliver a uniform dose of radiation (depicted in yellow) to the vessel wall.
Studies have shown that delivery of radiation less than the prescribed dose can
increase rather than decrease cell proliferation, while delivery of radiation
greater than the prescribed dose may damage the arterial wall."
Below the italicized text is centered text: "Centered."
Centered beneath the picture, in smaller font, is descriptive italicized text:
"Our patented RDX(TM) system encapsulates the radioactive source (depicted in
blue) within the membrane of the balloon catheter. When inflated, the
radioactive source is fully apposed to the arterial wall for precise and uniform
delivery of the prescribed dose of radiation (depicted in yellow)."
Along the right one and one-half inches of the page is a series of three
pictures depicting what happens over time in a blocked human artery when the
RDX(TM) system is utilized. The top picture appears in the top right corner and
the latest picture in the sequence appears last.
Above the top picture is text centered over the picture: "Pre-Procedure."
Centered beneath the picture is descriptive italicized text: "Prior to the
interventional procedure, this patient angiogram shows a near total blockage of
the coronary artery."
Above the middle picture is text centered over the picture: "Post-Procedure."
Beneath the picture is descriptive italicized text: "Immediately after PTCA and
subsequent radiation delivery with the RDX system there is no indication of
blockage within the treated segment of the artery."
Above the bottom picture is text centered over the picture: "Six Month
Follow-up." Centered beneath the picture is descriptive italicized text:
"Six-month angiographic follow-up shows a completely open coronary artery."
In the bottom left corner of the page is bold text in the same font that appears
on the remainder of the page and states "The RDX(TM) system is an
investigational device and is limited by U.S. federal law to investigational
use."
<PAGE> 87
--------------------------------------------------------------------------------
[RADIANCE MEDICAL SYSTEMS, INC. LOGO]
PRUDENTIAL VECTOR HEALTHCARE
A UNIT OF PRUDENTIAL SECURITIES
GRUNTAL & CO., L.L.C.
--------------------------------------------------------------------------------
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of the common stock being registered hereunder. We have entered into an
agreement with the selling stockholder pursuant to which the selling stockholder
agreed to pay half of our expenses shown below, except for the SEC registration
fee which will be allocated according to the proportionate number of shares of
stock registered by us and the selling stockholder hereunder. All of the amounts
shown are estimates except for the SEC registration fee, the Nasdaq National
Market application fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 11,169
NASD filing fee............................................. 4,731
Nasdaq application fee...................................... 15,000
Printing expenses........................................... 90,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 190,000
Blue sky fees and expenses.................................. 15,000
Transfer agent fees......................................... 5,000
Miscellaneous............................................... 44,100
--------
Total............................................. $625,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
(a) As permitted by Delaware law, our amended and restated certificate of
incorporation eliminates the liability of directors to us or our stockholders
for monetary damages for breach of fiduciary duty as directors, except to the
extent otherwise required by Delaware law.
(b) Our amended and restated certificate of incorporation provides that we
will indemnify each person who was or is made a party to any proceeding by
reason of the fact that such person is or was a director or officer of the
company against all expense, liability and loss reasonably incurred or suffered
by such person in connection therewith to the fullest extent authorized by
Delaware law. Our bylaws provide for a similar indemnity to our directors and
officers to the fullest extent authorized by Delaware law.
(c) We maintain liability insurance upon our officers and directors.
(d) Our amended and restated certificate of incorporation also gives us the
ability to enter into indemnification agreements with each of our directors and
officers. We have entered into indemnification agreements with certain of our
directors and officers, which provide for the indemnification of our directors
or officers against any and all expenses, judgments, fines, penalties and
amounts paid in settlement, to the fullest extent permitted by law.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
1.1(19) Form of Underwriting Agreement between the Registrant,
EndoSonics Corporation, Prudential Securities Incorporated
and Gruntal & Co., L.L.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
3.2(2) Amended and Restated Bylaws
</TABLE>
II-1
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
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
5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional
corporation
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.
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
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(16) 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(16) 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(16) 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(16) Form of Employment Agreement dated October 7, 1999 by and
between the Company and Edward Smith
10.33(16) Form of Employment Agreement dated January 14, 1999 by and
between the Company and Brett Trauthen
10.33.1(16) Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Brett Trauthen
10.34(16)* Facility Set-up and Contract Manufacturing Agreement dated
July 28, 1999 between the Company and Bebig GmbH
</TABLE>
II-2
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
10.34.1(18) Amendment to the Facility Set-Up and Contract Manufacturing
Agreement and the License Agreement dated July 17, 2000
between the Company and Bebig GmbH
10.35(16)* License Agreement dated July 28, 1999 between the Company
and Bebig GmbH
10.36 Form of Employment Agreement dated August 21, 2000 by and
between the Company and Joseph A. Bishop
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1+ Power of Attorney
27(17) 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.
+ 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.
(2) Previously filed as Exhibit 3.4 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission on November 16, 1998.
(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.
(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.
(16) Previously filed as an exhibit to the Company's report on Form 10-K with
the Securities and Exchange Commission on April 14, 2000.
(17) Previously filed as an exhibit to the Company's report on Form 10-Q with
the Securities and Exchange Commission on August 11, 2000.
(18) Previously filed as Exhibit 10.35 to the Company's Registration Statement
on Form S-2 filed with the Securities and Exchange Commission on August 24,
2000.
(19) Previously filed as Exhibit 1.1 to the Company's Registration Statement on
Form S-2 filed with the Securities and Exchange Commission on August 24,
2000.
II-3
<PAGE> 91
(b) FINANCIAL STATEMENT SCHEDULE
RADIANCE MEDICAL SYSTEMS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN C
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
------------------------------------- ---------- ------------------------ ---------- ---------
BALANCE AT CHARGES TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT 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) $-- $ (265) $ 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-4
<PAGE> 92
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
Radiance Medical Systems, Inc.
Our audit of the consolidated financial statements referred to in our
report dated January 31, 2000 appearing in this Registration Statement on Form
S-2 of Radiance Medical Systems, Inc. also included an audit of the financial
statement schedule listed in Item 16(b) of such Registration Statement on Form
S-2. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Costa Mesa, California
January 31, 2000
II-5
<PAGE> 93
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Radiance Medical Systems, Inc.
We have audited the consolidated financial statements of Radiance Medical
Systems, Inc. as of December 31, 1998 and for each of the two years in the
period ended December 31, 1998, and have issued our report thereon dated
February 18, 1999, except for the fifth paragraph of Note 1, as to which the
date is April 14, 2000 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule for such periods listed in
Item 16(b) of this Registration Statement. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
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
II-6
<PAGE> 94
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 95
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on September 11, 2000.
RADIANCE MEDICAL SYSTEMS, INC.
By: /s/ MICHAEL R. HENSON
------------------------------------
Michael R. Henson
President and Chief Executive
Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Radiance Medical Systems,
Inc. do hereby constitute and appoint Michael Henson and Stephen R. Kroll or
either of them, our true and lawful attorneys-in-fact and agents, each with full
power to sign for us or any of us in our names and in any and all capacities,
any and all amendments (including post-effective amendments) to this
Registration Statement, or any related registration statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
as amended, and to file the same, with all exhibits thereto and other documents
required in connection therewith, and each of them with full power to do any and
all acts and things in our names and in any and all capacities, which such
attorneys-in-fact and agents, or either of them, may deem necessary or advisable
to enable Radiance Medical Systems, Inc. to comply with the Securities Act of
1933, as amended, and any rules, regulations, and requirements of the Securities
and Exchange Commission, in connection with this Registration Statement; and we
hereby do ratify and confirm all that the such attorneys-in-fact and agents, or
either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL R. HENSON Chief Executive Officer (Principal September 11, 2000
--------------------------------------------- Executive and Chairman)
Michael R. Henson
/s/ STEPHEN R. KROLL Vice President, Finance and September 11, 2000
--------------------------------------------- Administration, Chief Financial
Stephen R. Kroll Officer and Secretary (Principal
Financial and Accounting Officer)
* Director September 11, 2000
---------------------------------------------
Franklin D. Brown
* Director September 11, 2000
---------------------------------------------
William G. Davis
* Director September 11, 2000
---------------------------------------------
Gerard von Hoffmann
* Director September 11, 2000
---------------------------------------------
Edward M. Leonard
* Director September 11, 2000
---------------------------------------------
Jeffrey F. O'Donnell
* Director September 11, 2000
---------------------------------------------
Maurice Buchbinder, M.D.
*By: /s/ MICHAEL R. HENSON
---------------------------------------
Michael R. Henson
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 96
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
1.1(19) Form of Underwriting Agreement between the Registrant,
EndoSonics Corporation, Prudential Securities Incorporated
and Gruntal & Co., L.L.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
3.2(2) Amended and Restated 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
5.1 Opinion of Stradling Yocca Carlson & Rauth, a professional
corporation
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.
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
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(16) 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(16) 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(16) 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
</TABLE>
<PAGE> 97
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------- -----------
<C> <S>
10.32(16) Form of Employment Agreement dated October 7, 1999 by and
between the Company and Edward Smith
10.33(16) Form of Employment Agreement dated January 14, 1999 by and
between the Company and Brett Trauthen
10.33.1(16) Amendment to Employment Agreement dated December 10, 1999 by
and between the Company and Brett Trauthen
10.34(16)* Facility Set-up and Contract Manufacturing Agreement dated
July 28, 1999 between the Company and Bebig GmbH
10.34.1(18) Amendment to the Facility Set-Up and Contract Manufacturing
Agreement and the License Agreement dated July 17, 2000
between the Company and Bebig GmbH
10.35(16)* License Agreement dated July 28, 1999 between the Company
and Bebig GmbH
10.36 Form of Employment Agreement dated August 21, 2000 by and
between the Company and Joseph A. Bishop
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Ernst & Young LLP, Independent Auditors
24.1+ Power of Attorney
27(17) 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.
+ 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.
(2) Previously filed as Exhibit 3.4 to the Company's Report on Form 10-Q filed
with the Securities and Exchange Commission on November 16, 1998.
(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.
(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.
<PAGE> 98
(16) Previously filed as an exhibit to the Company's report on Form 10-K with
the Securities and Exchange Commission on April 14, 2000.
(17) Previously filed as an exhibit to the Company's report on Form 10-Q with
the Securities and Exchange Commission on August 11, 2000.
(18) Previously filed as Exhibit 10.35 to the Company's Registration Statement
on Form S-2 filed with the Securities and Exchange Commission on August 24,
2000.
(19) Previously filed as Exhibit 1.1 to the Company's Registration Statement on
Form S-2 filed with the Securities and Exchange Commission on August 24,
2000.
