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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 September 30, 1997
[ ] 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.)
2870 Kilgore Road, Rancho Cordova, California 95670
(Address of principal executive offices)
Registrant's telephone number, including area code (916) 638-8008
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 September 30, 1997, the registrant had outstanding 16,147,673 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 20 pages.
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ENDOSONICS CORPORATION
FORM 10-Q
THIRD QUARTER
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. Financial Information
Item 1. Condensed consolidated Financial Statements
Condensed consolidated balance sheets at September 30, 1997 and
December 31, 1996................................................ 3
Condensed consolidated statements of operations for the three
months and nine months ended September 30, 1997 and 1996..........4
Condensed consolidated statements of cash flows for the
nine months ended September 30, 1997 and 1996..................5
Notes to condensed consolidated financial statements.................6
Item 2. Management's discussion and analysis of financial condition
and results of operations..........................................11
Part II. Other Information Information
Item 1 through 3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders.................18
Item 5. Not Applicable
Item 6 Exhibits and Reports on Form 8K......................................18
(a) Exhibits:
Exhibit 27 - Financial Data Schedule
Signatures...................................................................19
Exhibit Index................................................................20
</TABLE>
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents 23,067 $ 34,943
Short-term investments -- 5,249
Trade accounts receivable, net 13,912 5,682
Inventories 7,011 3,572
Accrued interest receivable and other current assets 187 1,202
--------- ---------
Total current assets 44,177 50,648
Property and equipment, net 3,399 1,947
Investment in CardioVascular Dynamics, Inc. 10,460 19,444
Intangible assets, net 7,584 --
Other non-current assets 281 --
--------- ---------
$ 65,901 $ 72,039
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,323 $ 5,972
Accrued restructuring, integration and
other expenses 6,870 --
SHAREHOLDERS' EQUITY
Convertible preferred stock, $.001 par value
5,000,000 shares authorized, no shares issued and outstanding -- --
Common stock, $.001 par value; 25,000,000 shares authorized; and
16,147,673 and 13,522,572 shares issued and outstanding as of
September 30, 1997 and December 31, 1996, respectively 16 14
Additional paid-in capital 158,474 124,024
Accumulated deficit (108,912) (58,000)
Unrealized (gain) loss on available-for-sale securities 1 1
Foreign currency translation 129 28
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Total shareholder's equity 49,708 66,067
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$ 65,901 $ 72,039
========= =========
</TABLE>
See accompanying notes.
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 10,262 $ 5,493 $ 23,726 $ 18,266
Cost of sales 5,996 3,270 13,235 12,072
------------ ------------ ------------ ------------
Gross profit 4,266 2,223 10,491 6,194
Operating expenses:
Research, development and clinical 1,956 1,052 3,881 4,897
Marketing and sales 2,420 803 4,353 4,497
General and administrative 3,638 905 5,329 3,567
Restructuring 5,331 -- 5,331 518
Acquired in-process research and development 43,000 -- 43,000 --
Amortization of intangibles 208 -- 208 --
------------ ------------ ------------ ------------
Total operating expenses 56,553 2,760 62,102 13,479
------------ ------------ ------------ ------------
Loss from operations (52,287) (537) (51,611) (7,285)
Equity in net loss of CVD (502) (321) (1,028) (370)
Other income (expense):
Interest income 392 454 1,493 1,640
Gain realized on equity investment in CVD 3,954 -- 3,954 --
Distributorship fees and other (138) 32 (135) 16
------------ ------------ ------------ ------------
Total other income 4,208 486 5,312 1,656
------------ ------------ ------------ ------------
Net loss ($48,581) ($372) ($47,327) ($5,999)
============ ============ ============ ============
Net loss per share ($3.14) ($0.03) ($3.34) ($0.45)
============ ============ ============ ============
Shares used in the calculation of net loss per
share 15,461,563 13,455,841 14,188,661 13,340,895
============ ============ ============ ============
</TABLE>
See accompanying notes.
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Nine months ended September 30,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss ($47,327) ($ 5,999)
Adjustments to reconcile net loss to net
cash used in operating activities:
Acquired in-process research and development 43,000 --
Depreciation and amortization 801 471
Gain on sale and distribution of CVD shares (3,954) --
Amortization of deferred compensation -- 57
Equity in net loss of CVD 1,028 --
Net changes in :
Operating assets (5,144) 421
Operating liabilities and deferred revenue 5,657 687
-------- --------
Net cash used in operating activities (5,939) (4,363)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments -- (11,859)
Sales of short-term investments -- 158
Maturities of short-term investments 5,249 15,311
Acquisition of Cardiometrics net of cash acquired (11,103) --
Impact of CVD IPO -- (6,569)
Sale of CVD shares 211 --
Capital expenditures for property and equipment (1,229) (1,104)
-------- --------
Net cash used in investing activities (6,872) (4,063)
-------- --------
Cash flows from financing activities:
Proceeds from common stock issuance to Cordis Corp. -- 5,000
Proceeds from exercise of stock options 935 2,152
Deferred compensation -- (150)
-------- --------
Net cash provided by financing activities 935 7,002
-------- --------
Net decrease in cash and equivalents (11,876) (1,424)
Cash and equivalents, beginning of period 34,943 36,757
-------- --------
Cash and equivalents, end of period $ 23,067 $ 35,333
======== ========
</TABLE>
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information is unaudited. In the opinion of management of
EndoSonics Corporation ("EndoSonics" or the "Company"), the condensed
consolidated financial statements included in this report reflect all
adjustments necessary, consisting only of normal recurring adjustments, to
present fairly the Company's consolidated financial position at September 30,
1997 and the consolidated results of its operations and cash flows for the three
and nine month periods ended September 30, 1997, and 1996. Results for the
interim periods 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, 1996, contained in the Company's Annual Report on Form
10-K/A.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of EndoSonics
Corporation, a Delaware Corporation, and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated.
Investments in unconsolidated subsidiaries, and other investments in which the
Company has a 20% to 50% interest or otherwise has the ability to exercise
significant influence, are accounted for under the equity method (see Note 4).
INVESTMENTS
In accordance with SFAS 115, the Company has divided its investment portfolio
into held-to-maturity and available-for-sale categories. Unrealized losses on
available-for-sale securities are recorded as a separate component of
shareholders' equity.
2. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
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<S> <C> <C>
Raw materials $2,455 $ 798
Work-in-process 2,898 1,181
Finished goods 1,658 1,593
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Total $7,011 $3,572
====== ======
</TABLE>
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3. COMPUTATION OF NET LOSS PER SHARE
Net income per share is computed based on the weighted average number of common
shares outstanding during each year, including dilutive common equivalent
shares, such as stock options. Net loss per share is computed using the weighted
average number of shares of common stock outstanding. Common equivalent shares,
such as stock options, are excluded from the computation of net loss per share
because their effect is antidilutive.
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, (SFAS No. 128) which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. SFAS No. 128 requires presentation of basic and diluted earnings per
share. Under the new requirements for calculating basic earnings per share, the
dilutive effect of stock options will be excluded. Stock options will be
included in the calculation of diluted earnings per share if the effect is
dilutive. The Company does not expect the adoption of SFAS No. 128 to have a
material impact on the financial statements. The impact of SFAS No. 128 on the
calculation of fully diluted earnings per share for the three months and nine
months ended September 30, 1997 and September 30, 1996 is not expected to be
material.
4. CHANGE IN OWNERSHIP PERCENTAGE OF CARDIOVASCULAR DYNAMICS, INC.
On June 19, 1996, EndoSonics' 84% owned subsidiary, CardioVascular Dynamics,
Inc. (CVD), successfully completed an Initial Public Offering (IPO) of 3,400,000
shares of common stock at $12.00 per share, followed by an additional 510,000
shares issued in July 1996 (over-allotment option granted to CVD's
underwriters).
On September 26, 1997, the Company distributed to shareholders and stock
optionholders of record as of September 5, 1997, .04 shares of CVD stock for
each of the Company's shares or shares subject to option held. Approximately
750,000 shares of CVD common stock owned by the Company were distributed in the
taxable distribution. The Company recognized approximately $1 million in
compensation expense, and a gain of approximately $211, related to the
distribution to employees, directors and consultants.
As of September 30, 1997, EndoSonics owned 24% of the outstanding shares of CVD.
As a result of the IPO, CVD's results of operations are accounted for on the
equity method. For the nine months ended September 30, 1997, the Company
recorded a charge of $1,028 representing its proportionate share of CVD's net
losses for the period. Financial information for CVD is shown below:
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CONDENSED BALANCE SHEET INFORMATION - CVD
<TABLE>
<CAPTION>
(Unaudited) September 30, 1997
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(In thousands)
<S> <C>
Current assets $42,470
Property and equipment, net 1,472
Other assets 2,443
-------
Total assets $46,385
=======
Current liabilities $ 2,228
Stockholders' equity 44,157
-------
Total liabilities and stockholders'
equity $46,385
=======
EndoSonics' share of CVD's net assets $10,460
=======
</TABLE>
CONDENSED STATEMENT OF OPERATIONS - CVD
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended Nine Months Ended
(In thousands) September 30, 1997 September 30,1997
------------------ --------------------
<S> <C> <C>
Total revenue $ 2,569 $ 8,943
Cost of sales 1,405 4,392
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Gross profit 1,164 4,551
Total operating expenses 3,861 9,610
------- -------
Loss from operations (2,697) (5,059)
Other income 631 1,806
------- -------
Net loss ($2,066) ($3,253)
======= =======
EndoSonics' share of net losses of CVD ($ 502) ($1,028)
======= =======
</TABLE>
CardioVascular Dynamics, Inc., stock is quoted on The Nasdaq Stock Market. The
closing price of CVD's stock at September 30, 1997 was $8.00 per share. The
Company held 2,227,316 shares of CVD's common stock at September 30, 1997.
5. RESTRUCTURING AND OTHER CHARGES
In June 1996, the Company recorded restructuring and other charges of
approximately $3.1 million in connection with the consolidation of the Company's
IVUS manufacturing operations and with the start-up production of the new
Five-64 imaging devices. The elements of the total charges as of September 30,
1997 are as follows:
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<TABLE>
<CAPTION>
(In Thousands)
Representing
Asset Future
Provision Write-Downs Cash Outlays
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<S> <C> <C> <C>
Consolidation of facilities $ 994 $ 994
Conversion to new technology 1,849 $ 808 1,041
Corporate reorganization 223 223
---------------------------------------
$3,066 $ 808 $2,258
=======================================
</TABLE>
As of September 30, 1997, the reserve for restructuring and other charges was
approximately $526.
6. BUSINESS ACQUISITION
On July 23, 1997, the Company acquired all of the outstanding shares of
Cardiometrics, Inc. (Cardiometrics) for approximately $73.4 million. The results
of Cardiometrics' operations have been combined with those of the Company since
the date of acquisition.
The acquisition was accounted for using the purchase method of accounting.
Consideration for this transaction consisted of the following (in thousands):
<TABLE>
<S> <C>
Cash $22,300
EndoSonics common stock 33,500
CVD common stock 8,200
Cancellation of the Company's pre-merger investment in Cardiometrics 2,300
Liabilities assumed
(including Cardiometrics termination benefits of $1,900) 4,800
Transaction costs 2,300
-------
$73,400
=======
</TABLE>
Certain items affecting the allocation of the purchase price are preliminary.
The Company expects that the final purchase price allocation will be known by
December 31, 1997. A summary of the preliminary purchase price allocation is as
follows:
<TABLE>
<S> <C>
Tangible assets acquired $22,600
In-process research and development 43,000
Developed technology 5,200
Other intangibles 700
Goodwill 1,900
-------
$73,400
=======
</TABLE>
The purchased in-process research and development had not reached technological
feasibility, had no probable alternative future uses, and was charged to
operations upon acquisition. Goodwill and other intangible assets are being
amortized over three-to-eight years. In addition, the Company recognized a gain
of $3.7 million related to the excess of the fair value of the book value of CVD
common stock used as part of the purchase price consideration.
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Unaudited proforma combined results of operations for the nine month periods
ending September 30, 1997 and 1996, giving effect to certain adjustments,
including the acquisition restructuring, as if the Cardiometrics acquisition had
occurred at the beginning of 1996, are displayed in the following table:
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------
1997 1996
---- ----
(in thousands except per share data)
<S> <C> <C>
Total revenue $30,786 $28,294
Net loss ($6,979) ($51,742)
Loss per share ($0.50) ($3.32)
</TABLE>
The unaudited proforma results of operations for the nine months ended September
30, 1996 include one-time charges of $43 million related to the write-off of
acquired in-process research and development, and $5.3 million related to
restructuring and integration of the two companies. These charges are excluded
from the unaudited proforma results of operations for the nine months ended
September 30, 1997.
Concurrent with the purchase of Cardiometrics, the Company recorded
restructuring, integration and other non-merger charges of approximately $9.5
million related to plans to reduce overhead of the combined companies and
increase operating efficiency in future periods. The restructuring and other
charges include approximately $7.5 million of corporate reorganization costs and
approximately $2.0 million related to relocation of certain product lines and
overall integration of the Company's operations. The charges are included in the
accompanying Consolidated Statements of Operations as follows:
<TABLE>
<CAPTION>
(In thousands) 1997
------
<S> <C>
Cost of sales $1,351
Research and development 200
Marketing and sales 542
General and administrative 1,737
Restructuring 5,331
Other 296
------
Total charges $9,457
======
</TABLE>
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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 successful integration with Cardiometrics,
the Company's relationship with Cordis Corporation and any changes that may
occur to that relationship 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 - History of Operating Losses; Anticipated Future
Losses" in the Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1996.
OVERVIEW
Since its inception in 1984, EndoSonics has been engaged primarily in the
research and development of products for the diagnosis and treatment of
cardiovascular disease. Since 1991, a majority of the Company's net revenue has
been derived from sales of its IVUS imaging systems and catheters.
The Company markets and distributes its IVUS imaging products in the United
States, Europe and Japan through relationships with strategic partners, certain
other distributors and, to a lesser extent, through a direct sales force. In
February 1996, EndoSonics and Cordis Corporation (now a Johnson & Johnson
Company) entered into an Exclusive Distribution 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 supersedes and replaces a
prior distribution agreement between Cordis and EndoSonics and a prior
distribution agreement between EndoSonics Netherlands 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 connection with the execution of the Exclusive
Distribution Agreement, the Company issued 350,877 shares of Common Stock to
Cordis in a private placement transaction for an aggregate purchase price of
approximately
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$5,000,000. The Company has since registered the shares of Common Stock issued
to Cordis. In April 1997, the Company and Cordis amended the Exclusive
Distribution agreement to include certain territories in South America. The
Company and Cordis expect to execute in the fourth quarter of 1997, an Amendment
to the Exclusive Distribution Agreement which covers Japan. CardioVascular
Dynamics, Inc. (CVD), formerly an 84%-owned subsidiary of the Company, designs,
develops, manufactures and markets catheters used to treat certain vascular
diseases. CVD's catheters are used in conjunction with angioplasty and other
interventional procedures such as vascular stenting and drug delivery. CVD's
proprietary FOCAL and Multiple Microporous Membrane ("M3") technologies enable
physicians to deliver therapeutic radial force, stents, drugs or contrast media
accurately and effectively to the treatment site in addition to allowing the
perfusion of blood during an interventional procedure. CVD's catheters are
designed to address three principal challenges facing cardiologists: restenosis
of a treated vessel, chronic total occlusions and acute reclosure of a vessel
during or soon after a procedure. CVD completed its initial public offering in
June of 1996. As a result of the public offering and certain other dispositions
by the Company of CVD shares, as of September 30, 1997, the Company held
approximately 24% of the outstanding shares of the Common Stock of CVD.
Accordingly, the Company no longer consolidates CVD's financial results into the
Company's financial statements and accounts for its investment in CVD on the
equity method.
The Company's business strategy includes acquiring related businesses, products
or technologies. In January 1997, the Company entered into an agreement to
acquire Cardiometrics, Inc. (Cardiometrics) through the merger of a wholly-owned
subsidiary of the Company with and into Cardiometrics, with Cardiometrics
surviving as a wholly-owned subsidiary of the Company.
Cardiometrics develops, manufactures, and markets intravascular medical devices
to measure blood flow impairment caused by coronary artery disease.
Cardiometrics' primary products, the FloWire(R) Doppler guide wire and FloMap
ultrasound instrument, represent an advance in functional testing of blood flow
impairment, enabling cardiologists to evaluate the appropriateness of
angioplasty interventions and assess post-procedural results directly in the
cardiac catherization laboratory. Clinical experience demonstrates that the
measurement of blood flow impairment downstream from (distal to) an obstruction,
which Cardiometrics calls functional angiometry, provides information to improve
the quality of patient care and procedure outcomes in the diagnosis and
treatment of cardiovascular disease. The FloWire(R)/FloMap system has received
clearance from the FDA and many corresponding European and Pacific Rim
regulatory agencies. Cardiometrics has also developed the WaveWire(TM)/WaveMap
intracoronary blood pressure measurement system, which was first used in a
clinical case in Europe in December 1996. Cardiometrics received a 510(k)
approval in August 1997 and expects the product will be available for sale as
early as the first quarter of 1998.
The Acquisition of Cardiometrics, which was finalized on July 23, 1997, was
accounted for under the purchase method of accounting. The Company incurred a
$43 million in-process research and development charge as a result of the
acquisition and $9.5 million in restructuring, integration and other non-merger
charges in connection with plans to reduce overhead of the combined companies.
The Company expects that it may pursue additional acquisitions in the future.
Any future acquisitions may result in potentially dilutive issuances of equity
securities, the write-off of in-process research and development, the incurrence
of debt and contingent liabilities and amortization expenses related to
intangible assets acquired, any of which could materially adversely affect the
Company's business
<PAGE> 13
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financial condition and results of operations. In particular, if the Company is
unable to use the "pooling of interests" method of accounting, the Company will
be required to amortize any intangible assets acquired in connection with any
additional acquisitions and the amortization periods for such costs will be over
the useful lives of such assets, which range from three years to eight years.
Additionally, unanticipated expenses may be incurred relating to the integration
of technologies and research and development, and administrative functions. Any
acquisition will involve numerous risks, including difficulties in the
assimilation of the acquired company's employees, operations and products,
uncertainties associated with operating in new markets and working with new
customers, the potential loss of the acquired company's key employees as well as
the costs associated with completing the acquisition and integrating the
acquired company.
The Company acquired Du-Med BV ("Du-Med") in 1994 in order to obtain micromotor
IVUS technology and subsequently established the Company's European headquarters
at DuMed's facility in The Netherlands.
In 1993, the Company introduced both its Oracle Imaging System, a platform
upgrade from its previous system, and enhanced imaging catheters. The Company
also commenced the Pinnacle Development Project, which involved the development
of new IVUS technology and resulted in the Five-64 catheter line and an enhanced
Oracle Imaging System. The Company announced the receipt of FDA approval to
market these products in October 1995. The Company began commercial sales of the
enhanced Oracle Imaging System in the fourth quarter of 1995 and began
commercial sales of the Five-64 catheter line in the first quarter of 1996. The
Company's financial results will be affected in the future by certain factors,
including the market acceptance of the Company's new products and the revenue
mix between sales of imaging systems and catheters and changes in government
regulation regarding third-party reimbursement applicable to the Company's
System and Products.
RESULTS OF OPERATIONS
THIRD QUARTER OF 1997 COMPARED TO THE SAME PERIOD IN 1996
Total Revenue. Total revenue increased 87% to $10.3 million for the third
quarter of 1997, which included $3.3 million of Cardiometrics revenue, from $5.5
million for the third quarter of 1996, which included no Cardiometrics revenue.
Revenues for the IVUS business increased 27% to $7.0 million in the third
quarter of 1997. The principal reasons for this increase are continued growth in
demand for IVUS products both in the U.S. and overseas markets, and increased
sales through the Company's principal distributor, Cordis Corporation. As a
result of the increased level of sales and the acquisition of Cardiometrics,
trade accounts receivables have increased 144% from $5.7 million to $13.9
million at September 30, 1996 and 1997, respectively, and inventories have
increased 95% from $3.6 million to $7.0 million at September 30, 1996 and 1997
respectively.
Cost of Sales. Cost of sales as a percentage of product sales decreased to 58%
for the third quarter of 1997, which includes $1.2 million of Cardiometrics cost
of sales, from 60% in the third quarter of 1996, which included no Cardiometrics
cost of sales. For the IVUS business, cost of sales increased to 69% in the
third quarter of 1997. After adjusting for $1.4 million of non-recurring charges
in 1997, primarily related to integration and other expenses, cost of sales
decreased to 49% in the third quarter of 1997. Cost of sales as a percentage of
product sales in 1997 was reduced principally by volume increases and improved
manufacturing efficiencies. Gross profit margins for the IVUS business, after
adjusting for $1.4 million of non-recurring charges, were 51% for the third
quarter of 1997 as compared to 40% for the third quarter of 1996. After
adjusting for $1.4 million of
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non-recurring charges, gross profit margins, including Cardiometrics, were 56%
in the third quarter of 1997. 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 expenses
increased to $2.0 million, which included $0.7 million of Cardiometrics
research, development and clinical expense for the third quarter of 1997 as
compared to $1.1 million (all IVUS) for the third quarter of 1996. After
adjusting for $0.5 million of non-recurring charges in 1997, primarily related
to integration and other expenses, and excluding Cardiometrics, the Company's
IVUS research, development, and clinical expense decreased to $0.8 million. As a
percentage of total revenue, research, development and clinical expenses for
IVUS decreased to 10% for the third quarter of 1997 as compared to 19% for the
third quarter of 1996.
Marketing and Sales. Marketing and sales expenses increased to $2.4 million for
the third quarter of 1997, which included $0.5 million of Cardiometrics
marketing and sales expenses, from $0.8 million (all IVUS) for the third quarter
of 1996. After adjusting for $0.7 million of non-recurring charges in 1997,
primarily related to integration and other expenses, and excluding
Cardiometrics, IVUS marketing and sales increased 54% due to increased staffing
and marketing programs related to the acquisition of Cardiometrics. As a
percentage of total revenue, marketing and sales expenses for IVUS increased to
18% for the three months ended September 30, 1997 compared to 15% for the three
months ended September 30, 1996. The Company expects marketing and sales expense
to increase in anticipation of the expiration of the Cordis Agreements at the
end of 1998.
General and Administrative. General and administrative expenses increased to
$3.6 million for the third quarter of 1997, which includes $0.3 million of
Cardiometrics general and administrative expenses from $0.9 million (all IVUS)
for the third quarter of 1996. For the IVUS business, general and administrative
expenses increased 272% to $3.3 million in the third quarter of 1997. After
adjusting for $2.1 million of non-recurring charges in 1997, primarily related
to integration and other expenses, and excluding Cardiometrics, general and
administrative expenses increased 37% due to an overall increase in the
Company's level of operations. As a percentage of total IVUS revenues, general
and administrative expenses increased to 18% for the three months ended
September 30, 1997, as compared to 16% of total revenue for the three months
ended September 30, 1996.
Acquired in-process research and development write-off. In connection with the
Company's acquisition of Cardiometrics, the Company engaged an independent
appraiser to provide the Company with a recommendation of value for certain
assets acquired. Based on this valuation analysis, $43 million of the purchase
price has been assigned to in-process research and development. Because the
technological feasibility of the acquired in-process research and development
has not been established and has no alternative uses, it was expensed in the
third quarter of 1997.
Restructuring charges. Concurrent with the purchase of Cardiometrics, the
Company recorded restructuring charges of $5.3 million related to corporate
reorganization costs and plans to reduce overhead of the combined companies.
Other Income, Net. Other income increased to $4.2 million for the three months
ended September 30, 1997 from $0.5 million for the three months ended September
30, 1996. The increase is primarily the
<PAGE> 15
15
result of gains realized on the shares of CVD common stock used to acquire
Cardiometrics and for distributions to the Company's shareholders and
optionholders.
Net Loss. Net loss was $48.6 million, or ($3.14) per share for the three months
ended September 30, 1997, as compared to a net loss of $0.4 million, or ($0.03)
per share, for the three months ended September 30, 1996. The third quarter 1997
included $0.5 million of losses of CVD, which the Company accounts for using the
equity method, as compared to $0.3 million for the same period in 1996.
Excluding CVD, the Company reported a net loss of $48.1 million for the third
quarter of 1997 as compared to a net loss of $0.05 million for the third quarter
of 1996. After adjusting for $49.2 million of non-recurring items, primarily
related to the write-off of acquired in-process research and development, other
integration and restructuring charges, and gains recognized on CVD stock in
1997, and excluding CVD, net income was $1.1 million, or $0.07 per share, for
the third quarter of 1997.
FIRST NINE MONTHS OF 1997 COMPARED TO SAME PERIOD OF 1996
Total Revenue. Total revenue increased 30% to $23.7 million, including $3.3
million in Cardiometrics revenues, and no CVD revenue, for the nine months ended
September 30, 1997, from $18.3 million for the nine months ended September 30,
1996, which included $3.8 million of CVD revenue. Revenues for the IVUS business
increased 42% to $20.4 million for the nine months ended September 30, 1997 from
$14.4 million for the nine months ended September 30, 1996. The principal
reasons for this increase are continued growth in demand for IVUS products both
in the U.S. and overseas markets, and increased sales through the Company's
agreement with Cordis Corporation.
Costs of Sales. Costs of sales as a percentage of product sales decreased to 56%
for the nine months ended September 30, 1997, which includes $1.2 million in
Cardiometrics cost of sales, from 66% for the nine months ended September 30,
1996, which included $1.9 million of CVD cost of sales. For the IVUS business,
cost of sales decreased to 59% from 77% of product sales for the nine months
ended September 30, 1997 and 1996 respectively. Cost of sales as a percentage of
product sales in 1997 was reduced principally due to volume increases and
improved manufacturing efficiencies. Gross profit margins for the IVUS business,
after adjusting for $1.4 million of non-recurring charges, primarily related to
integration and other expenses, were increased to 48% for the nine months ended
September 30, 1997 as compared to 32% for the nine months ended September 30,
1996. After adjusting for $1.4 million of non-recurring charges in 1997, and
including Cardiometrics, gross profit margins were 50%. 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 the Company's gross profit margin will improve in future
periods.
Research, Development and Clinical. Research, development and clinical decreased
21% to $3.9 million, which includes $0.7 million of Cardiometrics research,
development and clinical expense, for the nine months ended September 30, 1997
as compared to $4.9 million for the nine months ended September 30, 1996, which
included $1.4 million of CVD research, development and clinical expense. After
adjusting for $0.5 million of non-recurring charges in 1997, primarily related
to integration and other expenses, and excluding Cardiometrics, the Company's
research, development and clinical expense for the IVUS business decreased to
$2.6 million, as compared to $3.5 million for the same period in 1996. As a
percentage of total revenue, research,
<PAGE> 16
16
development and clinical expenses for the IVUS business decreased to 13% from
24% for the nine months ended September 30, 1997 and 1996, respectively.
Marketing and Sales. Marketing and sales expenses decreased to $4.4 million for
the nine months ended September 30, 1997, which includes $0.5 million of
Cardiometrics marketing and sales expense, from $4.5 million for the nine months
ended September 30,1996 which included $1.2 million of CVD marketing and sales
expenses. For the IVUS business, marketing and sales expenses increased to $3.9
million from $3.3 million for the nine months ended September 30, 1996. After
adjusting for $0.7 million of non-recurring charges in 1997, primarily related
to integration and other expenses, marketing and sales expenses decreased 4%,
which is primarily the result of a stabilization of costs associated with
staffing and marketing programs both internationally and in the United States in
support of higher sales. As a percentage of total revenue, marketing and sales
expenses for IVUS decreased to 16% for the nine months ended September 30, 1997
as compared to 23% for the nine months ended September 30, 1996, due primarily
to increased revenues. The Company expects marketing and sales expense to
increase in anticipation of the expiration of the Cordis Agreements at the end
of 1998.
General and Administrative. General and administrative expenses increased to
$5.3 million for the nine months ended September 30, 1997, which includes $0.3
million of Cardiometrics general and administrative expense, from $3.6 million
for the nine months ended September 30, 1996, which included $0.5 million of CVD
general and administrative expense. For the IVUS business, general and
administrative expenses increased to $5.0 million from $3.0 million for the nine
months ended September 30, 1996. After adjusting for $2.1 million of
non-recurring charges in 1997, primarily related to integration and other
expenses, and excluding Cardiometrics, general and administrative expenses
decreased 3%. As a percentage of total IVUS revenues, general and administrative
expenses decreased to 14% for the nine months ended September 30, 1997, as
compared to 21% for the nine months ended September 30, 1996.
Acquired in-process research and development write-off. In connection with the
Company's acquisition of Cardiometrics, the Company engaged an independent
appraiser to provide the Company with recommendation of value for certain assets
acquired. Based on this valuation analysis, $43 million of the purchase price
has been assigned to in-process research and development. Because the
technological feasibility of the acquired in-process research and development
has not been established and has no alternative uses, it was expensed in the
third quarter of 1997.
Restructuring charges. Concurrent with the purchase of Cardiometrics, the
Company recorded restructuring charges of $5.3 million related to corporate
reorganization costs and plans to reduce overhead of the combined companies.
Other Income, Net. Other income increased to $5.3 million for the nine months
ended September 30, 1997 from $1.7 million for the nine months ended September
30, 1996. The increase relates primarily to gains realized on the shares of CVD
common stock used to acquire Cardiometrics and for distribution to the Company's
shareholders and optionholders.
Net Loss. Net loss was $47.3 million or ($3.34) per share for the nine months
ended September 30, 1997, as compared to a net loss of $6.0 million or ($0.45)
per share for the nine months ended September 30, 1996. The net loss for the
nine month period ended September 30, 1997, includes $1.0 million of losses of
CVD which the Company accounts for using the equity method, as compared to $0.4
million for the
<PAGE> 17
17
same period in 1996. Excluding the CVD losses, the Company reported a net loss
of $46.3 million for the nine months ended September 30, 1997 as compared to a
net loss of $5.6 million for the nine months ended September 30, 1996. After
adjusting for $49.2 million of non-recurring items primarily related to the
write-off of acquired in-process research and development, other integration and
restructuring charges and gains recognized on CVD stock in 1997, and excluding
CVD, net income was $2.9 million, or $0.21 per share, for the nine months ended
September 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997 the Company had cash, cash equivalents and short-term
investments of $23,067 million and no borrowings or credit facilities. Net cash
used in operations was $5.9 million as compared to $4.4 million in 1996. Cash
used in operating activities primarily consists of increases in accounts
receivables versus 1996 levels and decreases in current liabilities as compared
to September 30, 1996. The Company anticipates using cash resources primarily
for capital expenditures, product development, sales and marketing, and working
capital purposes, prior to achieving positive cash flow from operations. The
Company believes that its existing cash and cash equivalents as of September 30,
1997 will be sufficient to meet the Company's operating expenses and capital
requirements through 1998. However, there can be no assurance that the Company
will not be required to seek other financing or that such financing, if
required, will be available on terms satisfactory to the Company.
<PAGE> 18
18
Part II.
OTHER INFORMATION
ITEMS 1 through 3. Not applicable.
ITEM 4. None.
ITEM 5.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) On August 6, 1997, the Company filed a report on Form 8-K, for an Item 2
event regarding its acquisition of Cardiometrics, Inc., pursuant to the
Agreement and Plan of Reorganization.
<PAGE> 19
19
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/ Reinhard J. Warnking
----------------------------------
Reinhard J. Warnking
President and
Chief Executive Officer
Date: November 14, 1997
/s/ Richard L. Fischer
---------------------------------
Richard L. Fischer
Vice President-Finance,
Chief Financial Officer, and
Principal Accounting Officer
Date: November 14, 1997
<PAGE> 20
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 23,067
<SECURITIES> 0
<RECEIVABLES> 14,499
<ALLOWANCES> 587
<INVENTORY> 7,011
<CURRENT-ASSETS> 44,177
<PP&E> 3,399
<DEPRECIATION> 0
<TOTAL-ASSETS> 65,901
<CURRENT-LIABILITIES> 16,193
<BONDS> 0
0
0
<COMMON> 16
<OTHER-SE> 49,692
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 23,726
<TOTAL-REVENUES> 23,726
<CGS> 13,235
<TOTAL-COSTS> 62,102
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> (47,327)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (47,327)
<EPS-PRIMARY> (3.34)
<EPS-DILUTED> (3.34)
</TABLE>
