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 Quarter Ended March 31, 1996
[ ] 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 0-19880
ENDOSONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0028500
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporated or organization) Identification No.)
6616 Owens Drive, Pleasanton, California 94588
(Address of principal executive offices)
Registrant's telephone number, including area code (510) 734-0464
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
On March 31, 1996, the registrant had outstanding 13,421,896 shares of Common
Stock of $.001 par value, which is the registrant's only class of Common Stock.
This report on Form 10-Q including all exhibits, contains 11 pages.
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ENDOSONICS CORPORATION
FORM 10-Q
FIRST QUARTER
TABLE OF CONTENTS
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated balance sheets at
March 31, 1996 and December 31, 1995.......................... 3
Consolidated statements of operations for the
three months ended March 31, 1996 and 1995.................... 4
Condensed consolidated statements of cash flows
for the three months ended March 31, 1996 and 1995............ 5
Notes to condensed consolidated financial statements............. 6
Item 2. Management's discussion and analysis of financial
condition and results of operations............................ 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K................................. 11
Signatures................................................................. 11
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<TABLE>
ENDOSONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<CAPTION>
March 31, December 31,
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 36,511 $ 36,757
Short-term investments 13,280 7,638
Trade accounts receivable, net 5,506 5,852
Inventories 4,462 4,046
Accrued interest receivable and other current assets 862 973
---------- ----------
Total current assets 60,621 55,266
Property and equipment, net 1,719 1,687
---------- ----------
$ 62,340 $ 56,953
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 5,404 $ 5,384
Deferred extended warranty revenue 2 10
---------- ----------
Total current liabilities 5,406 5,394
Deferred distributorship fee revenue 136 154
Convertible obligation 750 750
Minority Interest 2,500 2,500
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value
5,000,000 shares authorized, no shares issued and outstanding
Common stock, $.001 par value, 25,000,000 shares authorized
and 13,421,896 and 12,831,512 shares issued and outstanding
as of March 31, 1996 and December 31, 1995, respectively 14 13
Additional paid-in capital 106,101 98,989
Accumulated deficit (52,076) (50,837)
Unrealized loss on available-for-sale securities (36) (7)
Deferred Compensation (369) --
Foreign currency translation (86) (3)
---------- ----------
Total stockholder's equity 53,548 48,155
---------- ----------
$ 62,340 $ 56,953
========== ==========
<FN>
See accompanying notes
</FN>
</TABLE>
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
Three Months Ended March 31,
1996 1995
----------- -----------
Revenues:
Product sales $5,182 $2,512
License fee 100 120
Contract revenue 390 90
----------- -----------
Total revenue 5,672 2,722
Operating expenses:
Cost of product sales 3,496 2,268
Research, development and clinical 1,613 1,792
Marketing and sales 1,555 1,165
General and administrative 856 949
----------- -----------
Total operating expenses 7,520 6,174
----------- -----------
Loss from operations (1,848) (3,452)
Other income:
Interest income 591 201
Distributorship fees 18 18
----------- -----------
Total other income, net 609 219
----------- -----------
Net loss ($1,239) ($3,233)
=========== ===========
Net loss per share ($0.09) ($0.32)
Shares used in computing
net loss per share 13,094,157 9,986,926
=========== ===========
See accompanying notes
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Three months ended March 31,
1996 1995
---------- --------
Cash flows from operating activities
Net loss ($1,239) ($3,233)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization of deferred compensation 26 --
Depreciation and amortization 175 212
Net changes in:
Operating assets (42) (211)
Operating liabilities and deferred revenue (6) (301)
---------- --------
Net cash used in operating activities (1,086) (3,533)
Cash flows from investing activities:
Purchases of short-term investments (11,859) --
Sales of short-term investments 80 --
Maturities of short-term investments 6,108 2,083
Capital expenditures for property and equipment (207) (113)
---------- --------
Net cash provided by investing activities (5,878) 1,970
Cash flows from financing activities:
Proceeds from common stock issuance to Cordis Corp. 5,000 --
Proceeds from exercise of employee stock options 1,718 9
---------- --------
Net cash provided by financing activities 6,718 9
---------- --------
Net (decrease) increase in cash and equivalents (246) (1,554)
Cash and equivalents, beginning of period 36,757 4,862
---------- --------
Cash and equivalents, end of period $36,511 $3,308
========== =========
See accompanying notes
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial information at March 31, 1996 and for the three month periods
ended March 31, 1996 and 1995 is unaudited. Information at December 31, 1995 has
been derived from audited financial statements. In the opinion of management of
EndoSonics Corporation ("EndoSonics" or the "Company"), the condensed
consolidated financial statements included in this report reflect all
adjustments, consisting of normal recurring adjustments, necessary to present
fairly the Company's consolidated financial position at March 31, 1996 and the
consolidated results of its operations and cash flows for the three month
periods ended March 31, 1996, and 1995. Results for the interim are not
necessarily indicative of consolidated results to be expected for the entire
fiscal year. These financial statements should be read in conjunction with the
Company's audited financial statements for the year ended December 31, 1995,
contained in the Company's Annual Report on Form 10-K.
2. 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, 1996 December 31, 1995
-------------- -----------------
Raw materials $1,371 $1,225
Work-in-process 1,806 1,575
Finished goods 1,285 1,246
-------- ------
Total $4,462 $4,046
======== =======
3. COMPUTATION OF NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares of
common stock outstanding. Common equivalent shares from stock options are
excluded from the computation because their effect is antidilutive.
4. STOCKHOLDER'S EQUITY
The increase in common stock and additional paid-in capital resulted from the
sale of 350,877 shares of common stock to Cordis Corporation at $14.25 per share
and from exercises of employee stock options.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward looking statements. The
Company's business is subject to risks and uncertainties and the Company's
actual results may differ significantly from the results discussed in the
forward looking statements. Factors that might cause such a difference include,
but are not limited to, the Company's relationship with Cordis Corporation and
the effect on Cordis of its acquisition by Johnson & Johnson, Inc., scale-up of
the Company's manufacturing operations for the Company's existing products and
the introduction of new products, FDA approval of new products and changes in
regulatory requirements and third-party reimbursement policies. For a discussion
of these and other factors, please see "Future Operating Results" beginning on
page 22 of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
OVERVIEW
Since inception in 1984, EndoSonics has engaged primarily in the research and
development of products for the diagnosis and treatment of cardiovascular
disease. 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 (Investigational Device Exemption) sites
and the number of patients permitted to be treated in the related clinical
trials, future changes in government regulations and third party reimbursement
policies applicable to the Company's products, the revenue mix of Oracle imaging
systems and catheters, 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 from quarter to quarter.
In February 1996, EndoSonics and Cordis entered into an agreement pursuant to
which Cordis was granted the exclusive right to distribute EndoSonics' IVUS
imaging products for coronary applications in North America, Europe, Africa and
the Middle East (the "Exclusive Distribution Agreement"). The Exclusive
Distribution Agreement supersedes and replaces a prior distribution agreement
between Cordis and EndoSonics and a prior distribution agreement between
EndoSonics Nederland B.V., a wholly owned subsidiary of EndoSonics, and Cordis
S.A. Cordis is obligated during each year of the Exclusive Distribution
Agreement to use reasonable efforts to purchase certain minimum annual amounts
of products from EndoSonics. Subject to certain exceptions, Cordis' failure to
meet the minimum annual purchase amount during any year of the Exclusive
Distribution Agreement shall constitute a material breach of such agreement.
Cordis is also obligated during the term of the Exclusive Distribution Agreement
to undertake certain efforts to market, promote, distribute and sell EndoSonics'
IVUS imaging products, including the provision of adequate personnel and
facilities, the maintenance of sufficient inventory for demonstration purposes
and the appointment of a United States and European intracoronary ultrasound
marketing manager to interface with EndoSonics' United States and European
clinical and support staff. The Exclusive Distribution Agreement also contains
standard representations and warranties of each party and standard provisions
regarding indemnification, service and maintenance and confidentiality. Under
the terms of the Exclusive Distribution Agreement, Cordis shall purchase IVUS
imaging products from EndoSonics at agreed upon prices set forth in such
agreement, which prices shall be jointly reviewed by EndoSonics and Cordis every
six months. The Exclusive Distribution Agreement initially expires on December
31, 1998, but may be extended by the parties for successive one year periods.
In February 1996, EndoSonics and Cordis Corporation entered into an
Imaging/Therapeutic Combination Devices Development Agreement (the "Development
Agreement") pursuant to which the parties agreed to cooperate in the development
and marketing of advanced, cost effective imaging/therapeutic combination
devices. The Development Agreement provides, among other things, that the
parties shall jointly agree upon the specifications of the products to be
developed, the budget, and the schedule for completion. Cordis agreed to provide
technical and manufacturing support for the development efforts and to provide
certain funding payable
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over a period not to exceed thirty months. The Development Agreement expires
upon the earlier of thirty months from the date of the Development Agreement or
the completion of the products that the parties agree to develop under such
agreement. EndoSonics agreed, during the term of the Development Agreement, not
to enter into an agreement with any other party for the development,
manufacture, or sale of a product for use in the intracoronary ultrasound market
that is similar to the products developed, if any, during the term of the
Development Agreement.
On May 3, 1996, EndoSonics' 84% owned subsidiary, Cardiovascular Dynamics, Inc.
(CVD) filed a Registration Statement with the Securities and Exchange Commission
for a public offering of its Common Stock. Although EndoSonics is not selling
any shares in the offering, if it is successfully completed, EndoSonics'
ownership of CVD will be less than 50%, and therefore EndoSonics will begin
accounting for its investment in CVD on the equity method.
The Company presently intends to distribute or otherwise transfer to EndoSonics
stockholders a portion (up to a majority) of the CVD shares owned by EndoSonics.
The precise amount and timing of any such distribution or transfer will depend
upon, among other matters, an analysis of the tax consequences to EndoSonics and
its stockholders, and in any event cannot occur prior to 180 days following
successful completion of the offering. However, EndoSonics is not obligated to
make any such distribution or transfer nor is it obligated to take any action or
refrain from taking any action with respect to the shares of CVD which it will
hold upon completion of the offering.
RESULTS OF OPERATIONS
FIRST QUARTER OF 1996 COMPARED TO THE SAME PERIOD IN 1995
Total Revenue. Total revenue increased 108% to $5.7 million for the first
quarter of 1996 from $2.7 million for the first quarter of 1995. This
improvement was principally the result of an increase in intravascular
ultrasound (IVUS) sales in the United States and Europe. The improvement is also
due to the growth of the overall market for IVUS imaging products and increased
sales under the Company's distribution agreements with Cordis Corporation, and
to a lesser extent, with Fukuda Denshi.
Sales of the Company's all electronic IVUS imaging system and catheters
accounted for $3.4 million of total revenue, but CVD also had a strong increase
in total revenues to $2.0 million from $0.4 million in the first quarter of
1995. CVD's increased revenues were primarily the result of continued growth in
sales of its FOCAL catheters, a line of advanced therapeutic catheters
introduced in the first quarter of 1995.
Cost of Sales Cost of sales as a percentage of product sales decreased to 67%
for the three months ended March 31, 1996 from 90% for the first quarter of
1995. While improving over the corresponding period of the prior year, costs
were negatively impacted in the first quarter of 1996 by manufacturing
inefficiencies associated with production ramp-up of three new IVUS catheter
products, including the Five-64. During the quarter ended March 31, 1995, the
Company voluntarily recalled certain diagnostic catheters due to manufacturing
problems related to these catheters. As a result, the Company incurred costs
related to reworking these units, as well as
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writing off of a portion that could not be reworked. In addition, the Company's
manufacturing facility was not producing at a normal rate and consequently,
unfavorable manufacturing variances were incurred. This resulted in lower than
anticipated product margins. Total expenses applicable to this recall were
approximately $664,000 and were charged to current operations in the first
quarter of 1995. CVD's cost of sales as a percentage of product sales was 53%
for the three months ended March 31, 1996.
Gross profit margins improved to 37% for the three months ended March 31, 1996
as compared to 10% for the first quarter of 1995. Due to the uncertainty
associated with continued improvements in the efficiency of the Company's
manufacturing process and the impact of increasingly competitive pricing, there
can be no assurance that the Company's gross profit margin will be maintained or
continue to improve in future periods.
Research, Development and Clinical. Research, development and clinical decreased
by 10% to $1.6 million for the three months ended March 31, 1996 from $1.8
million for the first quarter of 1995 due to a decrease in expenses related to
the Pinnacle Development Project, offset by continued investment in CVD's
infrastructure to launch and produce its new catheters. As a percentage of total
revenue, research, development and clinical decreased to 28% for the first three
months of 1996 compared to 66% for the three months ended March 31, 1995.
Marketing and Sales. Marketing and sales expenses increased 33% to $1.6 million
for the three months ended March 31, 1996 from $1.2 million for the first
quarter of 1995 due to higher costs associated with increased staffing and
marketing programs, especially at CVD, to support higher sales levels. As a
percentage of total revenue, marketing and sales expenses decreased to 27% for
the three months ended March 31, 1996 compared to 43% for the three months ended
March 31, 1995 due to increased revenues.
General and Administrative. General and administrative expenses decreased 10% to
$0.9 million for the three months ended March 31, 1996 from $1.0 million for the
first three months of 1995. General and administrative expenses decreased to 15%
of total revenue for the first three months of 1996 from 35% of total revenue
for the three months ended March 31, 1995.
Other Income, Net. Other income increased to $609,000 for the three months ended
March 31, 1996 from $219,000 for the three months ended March 31, 1995 due to a
higher level of interest income earned on the proceeds of an equity financing
completed in the fourth quarter of 1995.
Net Loss. Net loss decreased to $1.2 million, or $0.09 per share for the three
months ended March 31, 1996 as compared to a net loss of $3.2 million or $0.32
per share, for the first quarter of 1995.
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LIQUIDITY AND CAPITAL RESOURCES
On March 31, 1996, the Company had cash and equivalents of $36.5 million and
short-term investments of $13.3 million. As reflected in the condensed
consolidated statements of cash flows, the Company's operations continue to
result in negative cash flows. Net cash used in operations was $1.1 million for
the three months ended March 31, 1996, as compared to $3.5 million in the
corresponding period in the previous year. The Company expects to incur
substantial additional costs, primarily relating to ongoing research and
development and clinical programs, and increased marketing efforts prior to
achieving positive cash flow from operations. EndoSonics anticipates using cash
resources generated from product sales and existing cash balances to fund
operations in 1996.
The Company is seeking additional equity funding for CVD (see "Overview"). There
can be no assurance that the Company can complete an equity financing such as
that described in the "Overview" section.
The Company believes its available cash and equivalents, short-term investment
and working capital positions as of March 31, 1996, will be sufficient to meet
the Company's operating expenses and capital requirements through mid-1997.
10
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PART II.
OTHER INFORMATION
ITEM 6. No reports of Form 8-K were filed during the period.
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 the
undersigned thereunto duly authorized.
ENDOSONICS CORPORATION
/s/ Donald D. Huffman
----------------------
Donald D. Huffman
Vice President,
Finance and Administration and
Chief Financial Officer
Date: May 14, 1996
11
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<NAME> EndoSonics
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