<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2000.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from __________________ to ____________________
Commission file number 0-28440
RADIANCE MEDICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 68-0328265
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
13700 Alton Parkway, Suite 160, Irvine, California 92618
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (949) 457-9546
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exhange Act of
1934 during the preceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
On May 5, 2000, the Registrant had outstanding approximately 12,037,000 shares
of Common Stock (including 686,000 of treasury shares) of $.001 par value, which
is the Registrant's only class of Common Stock.
<PAGE> 2
RADIANCE MEDICAL SYSTEMS, INC.
Form 10-Q
March 31, 2000
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at March 31, 2000 and
December 31, 1999 3
Condensed consolidated statements of operations for the three
months ended March 31, 2000 and 1999 4
Condensed consolidated statements of cash flows for the three
months ended March 31, 2000 and 1999 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 13
Part II. Other Information
Items 1 through 6. 21
Signatures 22
Exhibit Index 23
<PAGE> 3
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,714 $ 2,051
Marketable securities available-for-sale 18,281 20,004
Trade accounts receivable, net 566 1,070
Other receivables 2,117 742
Inventories 766 822
Other current assets 154 259
-------- --------
Total current assets 23,598 24,948
Property and equipment, net 981 1,109
Notes receivable from officers 121 118
Intangibles, net 3,462 3,667
Other assets 32 31
-------- --------
Total assets $ 28,194 $ 29,873
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 2,293 $ 2,714
Deferred revenue 797 1,028
-------- --------
Total current liabilities 3,090 3,742
Deferred revenue 750 786
Minority interest 230 234
-------- --------
Total liabilities 4,070 4,762
-------- --------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value;
7,560,000 shares authorized, no shares issued and
outstanding -- --
Common stock, $.001 par value; 30,000,000 authorized,
12,030,000 shares and 11,896,000 shares outstanding as of
March 31, 2000 and December 31, 1999, respectively 12 12
Additional paid-in capital 69,872 69,483
Deferred compensation (478) (524)
Accumulated deficit (41,780) (40,333)
Treasury stock at cost, 686,000 common shares as of
March 31, 2000 and December 31, 1999 (3,675) (3,675)
Accumulated other comprehensive income 173 148
-------- --------
Total stockholders' equity 24,124 25,111
-------- --------
Total Liabilities and Stockholders' Equity $ 28,194 $ 29,873
======== ========
</TABLE>
See accompanying notes
3
<PAGE> 4
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
<S> <C> <C>
Revenue:
Sales $ 570 $ 1,193
License revenue 1,792 563
-------- --------
Total revenue 2,362 1,756
Cost of sales 493 847
-------- --------
Gross profit 1,869 909
-------- --------
Operating expenses:
Charge for acquired in-process research
and development -- 4,194
Research, development and clinical 2,745 2,047
Marketing and sales 323 767
General and administrative 727 770
Minority interest (1) --
-------- --------
Total operating expenses 3,794 7,778
-------- --------
Loss from operations (1,925) (6,869)
-------- --------
Other income (expense):
Interest income 293 315
Gain on sale of assets 233 228
Other expense (48) (22)
-------- --------
Total other income 478 521
-------- --------
Net loss $ (1,447) $ (6,348)
======== ========
Basic and diluted net loss per share ($ 0.13) ($ 0.60)
======== ========
Shares used in computing basic and
diluted net loss per share 11,279 10,600
======== ========
</TABLE>
See accompanying notes
4
<PAGE> 5
RADIANCE MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
2000 1999
------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,447) $ (6,348)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 322 375
Amortization of deferred compensation 46 58
Bad debt expense 38 38
Foreign currency exchange loss 46 78
Charge for acquired in-process research and
development -- 4,194
Loss (gain) on sale of assets 28 (228)
Minority interest in losses of Radiatec (1) 0
Changes, net of effects from 1999 purchase of
(former) Radiance:
Trade accounts receivable, net 466 973
Inventories 56 (10)
Other assets (1,273) 131
Accounts payable and accrued expenses (422) (1,837)
Deferred revenue (267) 438
------- --------
Net cash used in operating activities (2,408) (2,138)
------- --------
Cash flows provided by investing activities:
Purchases of available-for-sale securities (3,979) (11,544)
Sales of available-for-sale securities 5,680 11,263
Capital expenditures for property and equipment
and other assets (19) (75)
Sale of Vascular Access product line, net -- 1,082
Purchase of Radiance, net of cash acquired -- 455
------- --------
Net cash provided by investing activities 1,682 1,181
------- --------
Cash flows provided by financing activities:
Proceeds from sale of common stock 107 89
Proceeds from exercise of common stock options 282 15
Proceeds from repayment of affiliate debt -- 56
------- --------
Net cash provided by financing activities 389 160
------- --------
Net decrease in cash and cash equivalents (337) (797)
Cash and cash equivalents, beginning of period 2,051 1,437
------- --------
Cash and cash equivalents, end of period $ 1,714 $ 640
======= ========
Supplemental disclosure of non-cash investing activities:
The Company acquired the remaining common stock of RMS
and, in connection with the transaction, the following
liabilities were assumed:
Fair value of assets acquired $ 8,962
Cash paid (692)
Common stock and options issued (8,035)
--------
Liabilities assumed $ 235
========
</TABLE>
See accompanying notes
5
<PAGE> 6
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
MARCH 31, 2000
1. BASIS OF PRESENTATION
Radiance Medical Systems, Inc. (formerly Cardiovascular Dynamics, Inc. and
herein after referred to as "Radiance" or the "Company") was incorporated in
March 1992 in the State of California and reincorporated in Delaware in 1993.
The Company and its subsidiaries design, develop, manufacture and market
proprietary therapeutic catheters and stents used to treat certain vascular
diseases. Accordingly, the Company operates in a single business segment.
The accompanying condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31, 2000
are not necessarily indicative of results that may be expected for the year
ending December 31, 2000 or any other period. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
2. NET LOSS PER SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding during the periods presented. Options to purchase
shares of the Company's common stock granted under the Company's stock option
plan have been excluded from the calculation of diluted earnings per share as
they are anti-dilutive.
6
<PAGE> 7
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
3. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
Raw materials $402 $398
Work-in-process 158 94
Finished goods 206 330
---- ----
$766 $822
==== ====
4. LICENSE REVENUE
In June of 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute stent delivery products
using the Company's Focus technology. Under the agreement, the Company was
entitled to receive certain milestone payments based upon the transfer of the
technology to Guidant, and royalty payments based upon the sale of products
using the Focus technology. A milestone payment for $1,000 was received in the
first quarter of 1999. Based upon the completion of certain milestones, the
Company recognized $562 in license revenue in the first quarter of 1999. During
the first quarter of 2000, the Company recorded $1,681 in license revenue due on
licensed product sales by Guidant.
5. COMPREHENSIVE LOSS
Statement of Financial Accounting Standards No. 130 requires disclosure of the
total non-stockholder changes in equity resulting from revenue, expense, and
gains and losses, including those that do not affect retained earnings. The
Company's comprehensive loss included the following:
THREE MONTHS ENDED
----------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Net loss $(1,447) $(6,348)
Unrealized loss on
available-for-sale securities (22) (101)
Foreign currency translation
adjustment 47 (64)
------- -------
Comprehensive loss $(1,422) $(6,513)
======= =======
7
<PAGE> 8
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
6. SALE OF ASSETS AND ACQUISITION
Sale of Assets of Vascular Access Product Line
In January 1999, the Company sold substantially all of the properties and assets
used exclusively in its Vascular Access product line to Escalon Medical
Corporation ("Escalon"). The Company received an initial payment of $1,104 for
assets transferred, including inventory ($704) and property and equipment
($146). It received an additional $1,000 upon the completion of the transfer of
the assets and technology in October 1999 and also is entitled to receive
royalty payments upon the sale of products for a five-year period following the
sale. In 1999, the Company continued to manufacture certain vascular access
products for ten months following the completion of the sale on a "cost plus"
basis. In the first quarter of 2000, the Company recognized the pro rata minimum
royalty due for the quarter of $75.
Acquisition of RMS
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of
the capital stock which it did not own of the (former) Radiance Medical Systems,
Inc. ("RMS"). Pursuant to the merger, the Company paid former stockholders of
RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS
common stock, for a total consideration of approximately $7,432, excluding the
value of Radiance common stock options to be provided to RMS optionholders in
exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company common stock, and $692
in cash to certain RMS stockholders who elected to receive cash. Options for
546,250 shares of RMS common stock accelerated and vested immediately prior to
the completion of the merger. Of these, 1,250 were exercised, and holders
received the same consideration for their shares of RMS common stock as other
holders of RMS common stock. The options not exercised prior to the completion
of the merger were assumed by the Company and converted into options at the same
exercise price to purchase an aggregate of 317,776 shares of the Company's
common stock for total consideration of $1,150.
8
<PAGE> 9
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
In addition, under the merger agreement, Radiance share and option holders could
have received product development milestone payments of $2.00 for each share of
preferred stock and $3.00 for each share of common stock. The first of the
milestone payments, 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
Company's technology to the marketplace. Any milestone payments will be
capitalized as additions to the purchase price.
The RMS merger consideration was allocated to tangible assets (aggregating
approximately $459), acquired and assumed liabilities (aggregating approximately
$235), with the remaining merger consideration being allocated to acquired
in-process research and development ("IPR&D"), developed technology and
employment contracts, according to an independent valuation.
Significant portions of the RMS merger consideration were identified as
intangible assets. Valuation techniques were employed that reflect recent
guidance from the Securities and Exchange Commission on approaches and
procedures to be followed in developing allocations to IPR&D. At the date of the
merger, technological feasibility of IPR&D projects had not been reached and the
technology had no alternative future uses. Accordingly, the Company expensed the
portion of the purchase price allocated to IPR&D of $4,194, in accordance with
generally accepted accounting principles, in the first quarter of 1999. The fair
values of the developed technology and employment contracts (i.e., the
identified intangibles) at the date of the acquisition of the remainder of the
capital stock of RMS were $3,079 and $1,229, respectively.
9
<PAGE> 10
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
7. DEFERRED REVENUE
Deferred Distributor Fees
In June of 1999, the Company granted Cosmotec Co., Ltd. (Cosmotec) of Japan
distribution rights to market its vascular radiation therapy products in Japan.
Radiance received $1,000 as an up-front cash payment and will recognize the
revenue ratably over the seven-year term of the distribution agreement. The
Company recognized $36 of the aforementioned revenue during the quarter ended
March 31, 2000. In addition, the Company is committed to a credit facility with
Cosmotec. See Note 8.
Deferred Gain on Sale of Assets
In August of 1999, the Company sold an option to purchase an investment held by
the Company. Under the option agreement, the purchaser made a non-refundable
cash payment to the Company of $1,232 for the option and has until December of
2000 to exercise the option. The option premium is being recognized on a
straight-line basis over the option term, resulting in a gain of $231 being
recognized as other income for the quarter ended March 31, 2000. The remainder,
$655, will be recognized ratably over the next three quarters.
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.
8. Commitments and Contingencies
Legal Matters
On September 15, 1999, EndoSonics Corporation filed a complaint for declaratory
relief in the Superior Court in Orange County, California, relating to a License
Agreement dated May 16, 1997, between EndoSonics and the Company.
Under that License Agreement, EndoSonics was granted certain royalty-free rights
to the Company's Focus technology for use on catheters with EndoSonics'
ultrasound transducers. EndoSonics is seeking a declaratory judgement that the
10
<PAGE> 11
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
License Agreement entitles EndoSonics to also place a stent on such catheters.
The Company believes that EndoSonics is authorized only to use the Focus
technology with the EndoSonics ultrasound transducer and not also with a stent.
The Company has filed an answer and discovery is commencing. Although the
outcome of the matter cannot be predicted with any certainty, the Company
believes that this matter will not have a material adverse effect on its
financial position, operating results, or cash flows. However, if EndoSonics
prevails in their suit, the Company may have to pay damages and/or renegotiate
its license agreement with Guidant. See Note 4.
Radiance is a party to ordinary disputes arising in the normal course of
business. Management is of the opinion that the outcome of these matters will
not have a material adverse effect on the Company's consolidated financial
position.
Credit Facility with Cosmotec
In June 1999, in conjunction with an agreement to grant Cosmotec distribution
rights to market the Company's vascular radiation therapy products in Japan, a
5%, $1,000 convertible debenture agreement was executed between the Company and
Cosmotec. The borrowing under the agreement will take place in June 2000 and
will mature in June 2003. At any time prior to the repayment of the debt,
Cosmotec may convert the debenture into shares of common stock of the Company at
an initial conversion price of $7.00 per share. The conversion price may be
adjusted due to equity transactions including, but not limited to, stock
issuances, convertible security issuances, stock splits, dividends, and warrant
issuances. See Note 7.
Contract Manufacturing and License Agreement with Bebig GmbH
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to manufacture its radiation therapy
catheter in Europe. According to the agreement, during 1999 Radiance paid $100
and, in 2000, will pay approximately $675 of certain facility set-up fees.
Radiance
11
<PAGE> 12
RADIANCE MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(CONTINUED)
will prepare the manufacturing equipment used to perform the final assembly of
the RDX catheter, estimated to cost approximately $600 to $700, and Bebig will
purchase the equipment from Radiance for $500. The cost of the facility set up
fees, equipment costs and other costs could increase materially from the
aforementioned amounts as the design of the production processes and facilities
evolves over the next three quarters. The Company will pay all material and
third party costs associated with production validation. Radiance will also pay
Bebig an agreed amount for each unit produced. For a nominal charge, the Company
can renew the agreement for three successive, two-year terms.
In conjunction with the contract manufacturing agreement, the Company entered
into a three year sub-license agreement for certain radiation technology that it
believes may be useful in the development of its radiation therapy products.
There is a minimum annual license fee of $200, subject to offset by certain
amounts paid under the aforementioned manufacturing agreement, beginning in July
2000 and royalty fees for any products sold worldwide that incorporate the
licensed technology. The sub-license is subject to renewal, without cost, until
the underlying patents' expiration dates. All costs associated with the contract
manufacturing and license agreements with Bebig have been expensed.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Radiance cautions stockholders that, in addition to the historical financial
information included herein, this Report on Form 10-Q includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 that are based on
management's beliefs, as well as on assumptions made by and information
currently available to management. All statements other than statements of
historical fact included in this Report on Form 10-Q, including without
limitation, certain statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," and statements
located elsewhere herein regarding Radiance's financial position and business
strategy, may constitute forward-looking statements. In addition, you generally
can identify forward-looking statements by the use of forward-looking
terminology such as "believes," "may," "will," "expects," "intends,"
"estimates," "anticipates," "plans," "seeks," or "continues," or the negative
thereof or variations thereon or similar terminology. Such forward-looking
statements involve known and unknown risks, including, but not limited to,
economic and market conditions, the regulatory environment in which Radiance
operates, competitive activities or other business conditions. We cannot assure
you that our actual results, performance or achievements will not differ
materially from any future results, performance or achievements expressed or
implied from such forward-looking statements. Important factors that could cause
actual results to differ materially from Radiance's expectations ("Cautionary
Statements") are disclosed in the Annual Report on Form 10-K, including, but not
limited to, those discussed in "Item 7--Risk Factors." All subsequent written
and oral forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by these Cautionary Statements.
Overview
Incorporated in March 1992, Radiance Medical Systems, Inc. ("Radiance," or the
"Company") develops, manufactures and markets proprietary devices for the
prevention of the recurrence of atherosclerotic blockages following the
interventional treatment of atherosclerosis. Radiance currently is primarily
engaged in conducting research and development on radiation therapy, and its
primary product under development is the RDX Catheter, a balloon catheter-based
delivery system designed to allow the temporary delivery of radioactive
materials to the area of an artery that has been treated with conventional
interventional therapy such as Percutaneous Transluminal Coronary Angioplasty
("PTCA"), atherectomy and/or stent deployment.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
The Company is the result of an acquisition effected in January 1999 by the
merger of the (former) Radiance Medical Systems, Inc. ("RMS") with and into
CVD/RMS Acquisition Corporation, a wholly-owned subsidiary of CardioVascular
Dynamics, Inc. (now named Radiance Medical Systems, Inc.). RMS originally was
formed by the Company as a separate entity to focus on the development of
radiation therapy technology for the treatment of cardiovascular disease, and to
obtain financing for such development from sources other than the Company. As a
result of the merger, the Company reacquired all of the shares of RMS which it
did not own.
The Company's financial results will be affected in the future by several
factors, including the timing of any FDA approval to market the Company's
products, FDA approval of IDE sites and the number of patients permitted to be
treated, future changes in government regulations and third party reimbursement
policies applicable to the Company's products, the progress of competing
technologies and the ability of the Company to develop the manufacturing and
marketing capabilities necessary to support commercial sales. As a result of
these factors, revenue levels, gross margins and operating results may fluctuate
materially from quarter to quarter.
In June 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute products using the
Company's focus technology. Under the terms of the agreement, the Company was
entitled to receive certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products using focus technology by Guidant. See Note 4 to the Condensed
Consolidated Financial Statements.
In January 1999, the Company sold substantially all of the properties and assets
used exclusively in its Vascular Access product line to Escalon Medical
Corporation ("Escalon"). The Company received an initial payment of $1.1 million
for actual assets transferred, and an additional $1.0 million upon the
completion of the transfer of the assets and technology in October 1999, and
also is entitled to receive royalty payments upon the sale of products for a
five-year period. The Company continued to manufacture certain vascular access
products on a "cost plus" basis for ten months following the completion of the
sale. See Note 6 to the Condensed Consolidated Financial Statements.
In January 1999, Cardiovascular Dynamics, Inc. (now named Radiance Medical
Systems, Inc.) ("Radiance," or "the Company") acquired through a merger all of
14
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the capital stock which it did not own of the (former) Radiance Medical Systems,
Inc. ("RMS"). Pursuant to the merger, the Company paid former stockholders of
RMS $3.00 for each share of RMS preferred stock and $2.00 for each share of RMS
common stock, for a total consideration of approximately $7.4 million, excluding
the value of Radiance common stock options to be provided to RMS optionholders
in exchange for their RMS common stock options. The consideration was paid by
delivery of an aggregate of 1,900,157 shares of Company common stock, and $0.7
million in cash to certain RMS stockholders who elected to receive cash. Options
for 546,250 shares of RMS common stock accelerated and vested immediately prior
to the completion of the Merger. Of these, 1,250 were exercised, and holders
received the same consideration for their shares of RMS common stock as other
holders of RMS common stock. The options not exercised prior to the completion
of the Merger were assumed by the Company and converted into options at the same
exercise price to purchase an aggregate of 317,776 shares of the Company's
common stock.
In addition, 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 milestone payments, 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 Company's technology to the
marketplace. See Note 6 to the Condensed Consolidated Financial Statements.
In June 1999, the Company granted Cosmotec Co., Ltd. ("Cosmotec") of Japan
distribution rights to market its vascular radiation therapy products in Japan.
Radiance received $1.0 million as an upfront cash payment and began recognizing
income ratably over the seven year term of the agreement. Radiance will also
receive $1.0 million from Cosmotec for a debenture issuable in June 2000, which
will be convertible into Radiance common stock over the subsequent three-year
period at an initial conversion price of $7 per share. As part of the
transaction with Cosmotec, it was agreed that a joint venture between the
Company and an affiliate of Cosmotec would be formed to gain regulatory approval
of and provide
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
distribution for the Company's RDX catheter products in Japan. In August 1999,
the Company purchased for $0.2 million a 51% interest in the joint venture,
named Radiatec.
In July 1999, the Company entered into a two year contract manufacturing
agreement with Bebig GmbH ("Bebig") to manufacture its radiation therapy
catheter in Europe. Pursuant to the agreement, during 1999 Radiance paid $0.1
million and, in 2000, will pay approximately $0.7 million of certain facility
set-up fees. The Company will also pay all material and third party costs
associated with production validation. Radiance will prepare the manufacturing
equipment used to perform the final assembly of the RDX catheter, estimated to
cost approximately $0.6 million to $0.7 million, and Bebig will purchase the
equipment from Radiance for $0.5 million. Radiance will also pay Bebig an agreed
amount for each unit produced. The cost of the facility set up fees, equipment
costs and other costs could increase materially from the aforementioned amounts
as the design of the production processes and facilities evolves over the coming
year. All costs incurred by the Company under the aforementioned agreements with
Bebig have been expensed.
For a nominal charge, the Company can renew the agreement with Bebig 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. Pursuant to the sub-license agreement, the
Company must pay a minimum annual license fee of $0.2 million, subject to offset
by certain amounts paid under the aforementioned manufacturing agreement,
beginning in July 2000, and royalty fees for any products sold worldwide that
incorporate the licensed technology. The sub-license is subject to renewal,
without cost, until the underlying patents' expiration dates.
In August of 1999, the Company sold an option to purchase an investment held by
the Company. Under the option agreement, the purchaser made a non-refundable
cash payment to the Company of $1.2 million for the option and has until
December of 2000 to exercise the option. A gain of $0.2 million was recognized
in other income in the first quarter of 2000 and the remainder, $0.7 million,
will be recognized over the remaining term of the option. Although the
likelihood of exercise is uncertain, if the aforementioned option is exercised,
the Company will receive an additional payment of approximately $2.0 million in
2000. See Note 7 to the Condensed Consolidated Financial Statements.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
First quarter of 2000 compared to the same period in 1999
Sales Revenue. Sales revenue for the first quarter of 2000 decreased
52% to $0.6 million compared to $1.2 million for the first quarter of 1999. The
decrease resulted primarily from the sale of competing products by Guidant based
upon the license of Focus technology to them and the sale of the Vascular Access
product line in January 1999. Management anticipates that product sales revenue
will continue to be materially lower in subsequent periods of 2000 compared with
the same periods of 1999 for the above-mentioned reasons.
License Revenue. $1.8 million in license revenue was recognized in the
first quarter of 2000 for royalties on product sales under the technology
license agreement with Guidant. Management anticipates that license revenues
will continue to be materially higher in subsequent periods of 2000 compared
with the same periods of 1999 as Guidant began marketing the licensed products
late in the third quarter of 1999.
Cost of Sales. The cost of sales for the first quarter of 2000
decreased to 21% compared to 48% of revenues for the same period of 1999. The
decrease is attributable primarily to the increase in license revenues, as
mentioned above, that had no associated cost of sales, offset somewhat by
relatively higher cost of sales due to pricing pressure in certain foreign
markets and higher per unit costs on low volume production.
Charge for Acquired In Process Research and Development. Due to the
acquisition of the remaining shares of RMS not owned by the Company, the Company
recognized a charge of $4.2 million for acquired in-process research and
development in January 1999. See Note 6 to the Condensed Consolidated Financial
Statements.
Research and Development. Research and development expenses, which
include clinical expenses, were $2.7 million and $2.0 million in the quarters
ended March 31, 2000 and 1999, respectively. During the quarter ended March 31,
2000, the Company directed its development efforts on the RDX catheter and
expects the overall expenditures to increase in the second quarter and in the
remainder of 2000, compared to the expenditures for the same periods of 1999, if
the technology continues to prove to be suitable for clinical trials.
17
<PAGE> 18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
At any time during the development process, work on the technology
could be halted or restarted under a different design, for example, unless the
efficacy of the design and technology is proven at each stage of its
development. There is no certainty that the technology will ever reach the
market or produce material sales due to many risks, including competitor
development of superior technologies or products, an unrecoverable product cost,
lack of product reimbursement, the uncertainty of regulatory approval and other
factors mentioned below concerning the risks associated with Radiance's
operations within this market.
Marketing and Sales. Marketing and sales expenses decreased 58% to $0.3
million, down $0.5 million in the quarter ended March 31, 2000, compared to $0.8
million in the same period of 1999. This decrease primarily reflects reductions
in the Company's international sales force and related expenses.
General and Administrative. General and administrative expenses
decreased by 6% to $0.7 million for the quarter ended March 31, 2000, from $0.8
million for the same quarter in 1999 due primarily to reduction of the German
sales operation.
Minority Interest. The minority interest relates to a 49% ownership of
the Japan distribution joint venture, Radiatec, mentioned above. The venture
began limited operations in the third quarter of 1999 to obtain Japanese
regulatory approval and, thereafter, will begin marketing the Company's RDX
catheter products.
Other Income (Expense). Other income was $0.5 million in the first
quarter of 2000 and the same period of 1999 and consists of interest income and
the pro rata portion of income from the sale of assets. See Notes 6 and 7 to the
Condensed Consolidated Financial Statements.
Radiance has experienced an operating loss for each of the last three
years and expects to continue to incur operating losses through at least the end
of 2000. Radiance's results of operations have varied significantly from quarter
to quarter. Quarterly operating results depend upon several factors, including
the timing and amount of expenses associated with development of the RDX
catheter, the conduct of clinical trials and the timing of regulatory approvals,
new product introductions both in the United States and internationally, varying
product sales by the Company's licensee, the mix between domestic and export
sales, variations in foreign exchange rates, changes in third-party payors'
reimbursement policies and healthcare reform. The Company does not operate with
a significant backlog of customer orders, and therefore revenues in any quarter
are significantly dependent
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
on orders received within that quarter. In addition, the Company cannot predict
ordering rates by distributors, some of whom place infrequent stocking orders.
The Company's expenses are relatively fixed and difficult to adjust in response
to fluctuating revenues. As a result of these and other factors, the Company
expects to continue to experience significant fluctuations in quarterly
operating results, and there can be no assurance that the Company will be able
to achieve or maintain profitability in the future.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily through
the sale of its equity securities, advances from EndoSonics (Radiance's former
parent company), licensing its technologies and through international product
distribution agreements. Prior to the Company's initial public offering, the
Company had raised an aggregate of approximately $11.4 million from the private
sales of preferred and common stock and $2.7 million in working capital advances
from EndoSonics Corporation, which was repaid to EndoSonics during the third
quarter of 1996.
In the second quarter of 1996, the Company closed its initial public offering of
common stock, resulting in net proceeds of approximately $42.8 million after
deducting underwriting discounts and commissions and other expenses of the
offering. For the quarters ended March 31, 2000 and 1999, the Company's net cash
used in operating activities was $2.4 and $2.1 million, respectively. The
increase in net cash used, comparing the first quarter of 2000 and 1999,
resulted primarily from relatively lower product sales and thus accounts
receivable collections in the first quarter of 2000.
On March 31, 2000, the Company had cash, cash equivalents and marketable
securities available for sale of $20.0 million. The Company expects to incur
substantial costs related to, among other things, clinical testing, product
development, marketing and sales expenses, and expects to utilize increased
levels of working capital prior to achieving positive cash flow from operations.
The Company anticipates that its existing capital resources will be sufficient
to fund its operations through June 30, 2001. Radiance's future capital
requirements will depend on many factors, including its research and development
programs, the scope and results of clinical trials, the regulatory approval
process, the costs involved in intellectual property rights enforcement or
litigation, competitive products, the establishment of manufacturing capacity,
the establishment of sales and marketing capabilities, and the establishment of
collaborative relationships with other parties. The Company may need to raise
funds through additional
19
<PAGE> 20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
financings, including private or public equity offerings and collaborative
arrangements with existing or new corporate partners. There can be no assurance
that funds will be raised on favorable terms, or at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its development programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to grant rights to
certain technologies or products that the Company would not otherwise grant.
Trade accounts receivable, net, decreased 47% to $0.6 million as of March 31,
2000, compared with $1.1 million at December 31, 1999. The decrease resulted
primarily from the license of technology to Guidant and the sale of the Vascular
Access product line in the first quarter of 1999.
Other receivables increased 185% to $2.1 million as of March 31, 2000 compared
with $0.7 million at December 31, 1999. The increase is primarily attributable
to an increase in the license revenue receivable from Guidant of $1.5 million
for licensed product sales during the first quarter of 2000.
Accounts payable and accrued expenses decreased 16% to $2.3 million at March 31,
2000, compared with $2.7 million at the end of 1999, primarily due to annual
incentive compensation and other payroll-related payments.
Deferred revenue decreased 15% to $1.5 million at March 31, 2000 from $1.8
million at the end of 1999. The decrease was due to the recognition of deferred
revenue on the sale of an asset and deferred license revenue during the first
quarter of 2000. See Notes 4, 6 and 7 to the Condensed Consolidated Financial
Statements.
20
<PAGE> 21
PART II.
OTHER INFORMATION
Items 1, 3, 4 and 5. Not applicable
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) Use of Proceeds
In the second quarter of 1996, the Company closed its initial public offering
of common stock ("IPO"), SEC file number 333-04560, resulting in net proceeds of
$42.8 million after deducting underwriting discounts and commissions and other
expenses of the offering. The Company used approximately $2.7 million of the net
proceeds from its IPO for repayment of certain outstanding indebtedness to
EndoSonics, Inc., a holder of in excess of ten percent of the Common Stock of
the Company. From the date of the IPO until March 31, 2000, in the normal course
of business, the Company has paid salaries and bonuses in excess of $0.1 million
each to ten present and former officers of the Company and used $18.2 million
for working capital. The Company has also used approximately $2.2 million of the
net proceeds for machinery and equipment and leasehold improvement purchases.
Through the end of the first quarter of 2000, the Company used approximately
$3.7 million to purchase 686,000 shares of the Company's Common Stock on the
open market. In September of 1998, the Company exercised a warrant to acquire
1,500,000 shares of Series B Preferred Stock of Radiance Medical Systems, Inc.
for $1.5 million. In January 1999, the Company paid $0.7 million to stockholders
of RMS who elected to receive cash for their RMS common stock and $0.6 million
in costs relating to the acquisition of the remaining common stock of RMS not
held by the Company. At March 31, 2000, approximately $19.5 million was held
in temporary investments, of which approximately $5.5 million, $13.0 million
and $1.0 million was invested in U.S. Federal and State Agency debt securities,
corporate debt securities and foreign government debt securities, respectively.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 -- Financial Data Schedule
(b) No Reports on Form 8-K were filed during the quarter.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
RADIANCE MEDICAL SYSTEMS, INC.
Date: May 12, 2000 /s/ Michael R. Henson
--------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: May 12, 2000 /s/ Stephen R. Kroll
--------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
22
<PAGE> 23
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,714
<SECURITIES> 18,281
<RECEIVABLES> 753
<ALLOWANCES> 187
<INVENTORY> 766
<CURRENT-ASSETS> 23,598
<PP&E> 2,462
<DEPRECIATION> 1,481
<TOTAL-ASSETS> 28,194
<CURRENT-LIABILITIES> 3,090
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 24,112
<TOTAL-LIABILITY-AND-EQUITY> 28,194
<SALES> 570
<TOTAL-REVENUES> 2,362
<CGS> 493
<TOTAL-COSTS> 493
<OTHER-EXPENSES> 3,757
<LOSS-PROVISION> 37
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,447)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,447)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,447)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
