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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 0-19880
ENDOSONICS CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 68-0028500
(State of Incorporation) (I.R.S. Employer Identification No.)
2870 Kilgore Road, Rancho Cordova, California 95670
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (916) 638-8008
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None None
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock,
$.001 par value.
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 [ ]
Indicated by a check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, as of March 14, 1997, was approximately $56,924,730 (based
upon the closing price for shares of the Registrant's Common Stock as reported
by the Nasdaq National Market for the last trading date prior to that date).
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
On March 14, 1997, approximately 13,535,566 shares of the Registrant's
Common Stock, $.001 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the Registrant's Proxy Statement for the 1997 Annual
Meeting of Shareholders to be held on or about May 28, 1997 are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
Endosonics Corporation ("Endosonics" or the "Company") develops,
manufactures and markets intravascular ultrasound ("IVUS") imaging systems and
percutaneous transluminal coronary angioplasty ("balloon angioplasty"),
catheters to assist in the diagnosis and treatment of cardiovascular and
peripheral vascular disease. The Company's IVUS imaging products enhance the
effectiveness of the diagnosis and treatment of coronary artery and other
vascular diseases by providing important diagnostic information not available
from conventional x-ray angiography. This information includes the location,
amount and composition of atherosclerotic plaque and enables physicians to
identify lesion characteristics, select an optimum course of treatment, position
therapeutic devices, treat disease sites with drugs or other therapies and
promptly assess the results of treatment. In 1993, the Company commenced the
Pinnacle Development Project to further enhance the image quality of its IVUS
imaging products. This project resulted in the Five-64 catheter line and an
enhancement to the Company's Oracle Imaging System. The Company received United
States Food and Drug Administration ("FDA") clearance for its Five-64 diagnostic
catheters, which were commercially available in the first quarter of 1996. The
Company believes that it offers the only FDA approved combined coronary balloon
angioplasty/IVUS imaging catheters, devices which can reduce the time and cost
of interventional procedures by providing both diagnostic and therapeutic
functions on the same catheter.
The Company's products are based on two core proprietary technologies:
digital, all-electronic IVUS imaging and specialized balloon catheter material
technology. The Company's IVUS imaging system and catheters use high speed,
computer-based electronics and proprietary integrated circuit technologies to
produce ultrasound images. The combination of these technologies and the
Company's manufacturing expertise enables its catheters to provide high-quality
ultrasound images while maintaining the small size, flexibility and trackability
necessary to access, diagnose and treat a wide range of coronary and peripheral
vessels. See "Risk Factors."
The Company currently holds approximately 45% of the outstanding shares
of the Common Stock of CardioVascular Dynamics, Inc. ("CVD"). CVD 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 ("M(3)") 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 was formerly a 84%-owned subsidiary of
the Company's until CVD completed its initial public offering in June of 1996.
PENDING BUSINESS ACQUISITION
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 (the "Merger"). Under the
terms of the agreement, each outstanding share of Cardiometrics Common Stock
will be converted, without any action on the part of the holder thereof, into
the right to receive 0.35 (the "Endosonics Exchange Ratio") newly-issued shares
of Endosonics Common Stock, 0.20 (subject to adjustments as described below, the
"CVD Exchange Ratio") shares of CVD Common Stock and $2.00 in cash (subject to
adjustment as described below, the "Cash Consideration," and together with such
shares of Endosonics Common Stock and CVD Common Stock, the "Merger
Consideration"); with the CVD Exchange Ratio subject to increase, such that
based on the average of closing prices of Endosonics Common Stock and CVD Common
Stock for the ten trading days immediately preceding (and including) the third
trading day prior to the Cardiometrics Meeting (May 13, 1997 at 10:00 a.m.
Pacific Time), the Merger Consideration shall equal $9.00; provided that, if the
CVD Exchange Ratio obtained thereby would exceed 0.2636, the CVD Exchange Ratio
shall be 0.2636; provided further, that Endosonics has the right to substitute
additional cash instead of increasing the CVD Exchange Ratio; provided further,
that the CVD Exchange Ratio shall not be less than 0.20 and the Cash
Consideration shall not be less than $2.00; and provided further, that the
shares of Cardiometrics Common Stock held by Endosonics will be cancelled and
extinguished without any conversion thereof. Cash will be paid in lieu of
fractional shares. The Merger is subject to the satisfaction of certain closing
conditions, including the approval of the stockholders of Cardiometrics, and is
anticipated to be completed in May 1997.
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Cardiometrics develops, manufactures and markets intravascular medical
devices to measure blood flow impairment caused by coronary artery disease.
Cardiometrics' principal products, the FloWire(R)Doppler guide wire and
FloMap(R) 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 catheterization 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/FloMap system has received
clearance from the U.S. Food and Drug Administration and many corresponding
European and Pacific Rim regulatory agencies. As of December 1996, more than
65,000 FloWire guide wires have been sold and cumulative FloMap shipments were
approximately 490.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of Private Securities Litigation Reform Act of
1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. The Company disclaims any obligation to update any such factors or
to publicly announce the result of any revisions to any of the forward-looking
statements contained or incorporated by reference herein to reflect any events
or developments.
PRODUCTS
Endosonics develops and markets IVUS imaging systems and catheters and
combination balloon angioplasty/IVUS imaging catheters.
IVUS IMAGING PRODUCTS
The Company believes it is the only company that markets IVUS products
using digital, all-electronic ultrasound technology. The Company believes that
all other IVUS devices sold by competitors employ mechanical ultrasound
technology. In mechanical ultrasound, a rotating component affixed to the end of
a drive shaft cable emits or reflects ultrasonic pulses that are, as the
component rotates, directed at different points in the vessel. The rotating
component can be the transducer that produces the ultrasonic pulses, a mirror
that reflects the pulses from a non-rotating transducer or a combination of
both.
The Company's IVUS imaging technology relies upon 64 solid-state
transducer elements and five miniaturized integrated circuits to emit and
receive signals in a predetermined controlled sequence, thereby imaging a
360-degree area around the catheter. The Company believes that its IVUS imaging
products have several important advantages over mechanical ultrasound devices.
The flexible drive shafts in mechanical ultrasound devices do not rotate
uniformly without vibration, resulting in images that are subject to distortion
referred to as non-uniform rotational distortion ("NURD"). The absence of such a
drive shaft in the Company's IVUS imaging catheters eliminates NURD. In
addition, due to the presence of a drive shaft, mechanical IVUS imaging
catheters generally track over guidewires using a side mounted technique. As a
result, the guidewire is on the outside of the signal-emitting component and,
unless retracted, obscures a portion of the desired cross-sectional image of the
vessel. In contrast, the Company's all electronic IVUS imaging catheters track
coaxially over guidewires that pass through the center of the transducer. As a
result, the guidewire does not block or reflect any signals emitted by the
transducer and does not interfere with the image. The Company believes this
coaxial design also improves the handling of its IVUS imaging catheters as
compared to mechanical IVUS imaging catheters. Furthermore, since electronic
IVUS imaging catheters do not have rotating drive shafts, diagnostic and
therapeutic functions can be combined on a single catheter. The Company believes
it offers the only combined coronary balloon angioplasty/IVUS imaging catheters
that have been approved by the FDA.
The Company's IVUS imaging systems are proprietary, high speed computer
systems, designed and manufactured by the Company to process the signals
received from the imaging catheters and to generate high-resolution
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images. The Company's synthetic aperture technology generates up to 512 focal
zones enabling the dynamic transmission and reception of the ultrasound signal.
This permits the Company's IVUS products to have greater resolution over a
broader depth of field. With mechanical systems, which use only one focal zone,
it is not feasible to vary transmission and reception of the ultrasound signal.
The Company's IVUS imaging products capture imaging data in a digital
format, providing a platform for further enhancements of image quality and
increased design flexibility in the development of new application catheters
such as the Company's Five-64 catheter line. These products do not rely on
mechanically rotating transducers and therefore can offer advanced features.
These features include the following: In-Vision(TM), an enhanced Windows-like
user interface, ChromaFLO(TM) imaging technology, which provides images of blood
flow and 3D Resolve(TM) option, which offers a three-dimensional reconstruction
of a specific region of interest in the artery. The Company believes that the
In-Vision(TM) option, ChromaFLO(TM) imaging and 3D Resolve(TM) will enable
easier image interpretation for purposes such as lesion differentiation and
characterization. Similarly, the Company is developing various balloon versions
of its five-64 catheters. ChromaFlo(TM) and 3D Resolve(TM) are currently
undergoing clinical evaluation by the Company.
The images produced by the Company's IVUS imaging systems are displayed
on a high resolution video screen located on the digital processor, and can be
permanently stored on video tape and CD-R. The systems' software can also
provide immediate measurements of lumen diameter, cross-sectional area and
vessel wall thickness. The systems' fluoroscopic windowing feature lets the user
simultaneously display both angiography and ultrasound images on the physician
interface module's video screen. The Company believes this feature gives the
physician the ability to analyze and compare ultrasound and angiographic images
of the same disease site, thereby facilitating a determination of the
therapeutic procedure and a review of the results.
The following table lists the Company's key IVUS systems and catheters:
<TABLE>
<CAPTION>
U.S. Regulatory First Commercial
Product Principal Application Status Sale
- --------------------------------- ---------------------------- --------------------------------- ---------------------
<S> <C> <C> <C>
IVUS IMAGING SYSTEMS
Oracle Imaging System Processes and displays 510(k) Approved Q4 1995
IVUS images (U.S. and Int'l)
In-Vision Enhanced user interface 510(k) Approved Q2 1996 (U.S. and Int'l)
ChromaFLO Images of blood flow 510(k) Applied For Expected Q2 (Int'l)
Expected Q3 (U.S.)
3D Resolve Three dimensional 510(k) Applied For Expected Q2 (Int'l)
representation of Expected Q3 (U.S.)
artery
IVUS IMAGING CATHETERS
Diagnostic/Therapeutic
Five-64 Therapeutic PTCA/IVUS imaging In development Expected 1997
Oracle-Micro Plus PTCA/IVUS imaging PMA Supplement Approved Q3 1994 (Int'l)
Q3 1995 (U.S.)
Oracle-Micro/FX PTCA/IVUS imaging Only sold outside the U.S. Q2 1995 (Int'l)
Oracle Focus F/X PTCA/IVUS imaging Only sold outside the U.S. Q4 1995 (Int'l)
Oracle Megasonics F/X High pressure PTCA/IVUS Only sold outside the U.S. Q1 1996 (Int'l)
imaging
Oracle Megasonics High pressure PTCA/IVUS PMA Supplement Approved Q4 1996 (U.S.)
imaging
Diagnostic
Visions Five-64 F/X IVUS imaging 510(k) Approved Q1 1996
(U.S. and Int'l)
Visions IVUS imaging 510(k) Approved Q2 1991
(U.S. and Int'l)
Visions F/X IVUS imaging 510(k) Approved Q4 1992 (Int'l)
Q1 1993 (U.S.)
- --------------------------------- ---------------------------- --------------------------------- ---------------------
</TABLE>
IVUS IMAGING SYSTEMS
Oracle Imaging System. The Oracle Imaging System is a proprietary,
high-speed computer system designed and manufactured by the Company to process
the signals received from its IVUS imaging catheters and provide physicians with
a real-time video image of an artery or other lumen. In 1993, the Company
commenced the Pinnacle Development Project
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to enhance the image quality of its IVUS products. This project resulted in an
enhancement to the Oracle Imaging System to upgrade its performance to be
compatible with the recently developed Five-64 catheter line while reducing the
manufacturing cost of the system. In October 1995, the Company announced the
receipt of 510(k) approval to market the upgraded Oracle Imaging System and
commercial sales of this system commenced in the fourth quarter of 1995. All of
the Company's IVUS imaging catheters are compatible with the upgraded Oracle
Imaging System.
IVUS IMAGING CATHETERS
Five-64. The Company's Five-64 catheters interface with the Company's
upgraded Oracle Imaging System. Each catheter contains a cylindrical transducer
array with 64 elements capable of separately sending and receiving approximately
166,000 pulses per second. Five proprietary miniaturized integrated circuit
microchips, mounted inside the catheter tip, control the transducer elements by
selecting a varying number of array elements in order to form thin acoustic
beams. Up to 128 such beams are reconstructed into a 360 degree cross-sectional
ultrasound image of the vessel under investigation. The microchips are
controlled by the Oracle Imaging System, which uses all-electronic beam forming
and synthetic aperture techniques to provide the user with improved image
quality. This technology also provides the user with an easily upgradeable
imaging platform. The Company obtained 510(k) approval for the diagnostic
version of the Five-64 catheter and currently plans to submit a PMA supplement
for the therapeutic version of the Five-64 catheter, a combination balloon
angioplasty/IVUS imaging catheter, by the second quarter of 1997.
Oracle-Micro Plus, Oracle-Micro F/X and Oracle Megasonics. The Company
received a PMA Supplement in June 1995 to distribute the Oracle-Micro Plus, a
combination balloon angioplasty/IVUS imaging catheter with better imaging and
handling capabilities than the Oracle-Micro, the predecessor to the Oracle-Micro
Plus. The Company believes that it offers the only combination coronary balloon
angioplasty/IVUS imaging catheter approved by the FDA. These combination
catheters are constructed with the inflatable balloon located at the end of the
catheter, just distal to the transducer. The Oracle-Micro catheters vary in
balloon and shaft sizes, allowing the catheters to be used in a variety of
coronary and peripheral vascular applications. The Oracle Megasonics catheter
has a high pressure balloon, dual markers and has varying balloon and shaft
sizes. The Oracle-Micro F/X, which is marketed outside of the United States, is
a rapid exchange version of the Oracle-Micro Plus. The Company believes that its
family of Oracle-Micro catheters has the ability to access a broad range of
coronary artery dimensions generally comparable to currently available
non-imaging balloon angioplasty catheters.
Oracle Focus F/X. This combination device incorporates CVD's FOCAL
Expansion Balloon ("FOCAL") Technology and is designed to address stent
placement and balloon angioplasty applications by combining the advantages of a
high pressure compliant/non-compliant balloon with IVUS imaging in one catheter.
This device is designed to enable physicians to obtain visual feedback before,
during and after interventional procedures without the need to exchange
catheters. In addition, the Oracle Focus F/X provides the physician with more
flexibility to vary balloon size and pressure during treatment.
Visions, Visions F/X and Visions Five-64 F/X. The Company's
Visions((TM)) and Visions F/X catheters are IVUS imaging catheters designed to
provide diagnostic information as an adjunct to diagnostic angiography, and in
conjunction with therapeutic interventional procedures, such as balloon
angioplasty.
PRODUCT DEVELOPMENT
The Company is conducting developmental programs to refine its
proprietary integrated circuit and transducer technology towards smaller and
more advanced integrated circuits and transducers in order to enhance image
quality. The Company has also focused the advancement of its catheter technology
on the expansion of the diagnostic applications of its products and the
combination of its core IVUS imaging technologies with its therapeutic catheter
technologies. The combination of these technologies resulted in the Oracle-Micro
family of catheters for combined balloon angioplasty/IVUS imaging in coronary
arteries. The Company is continuing to develop combination
diagnostic/therapeutic catheters as well as multiple therapeutic catheters such
as balloon angioplasty/site-specific drug delivery and balloon
angioplasty/perfusion catheters.
The Company is also developing micromotor-based IVUS imaging systems
and catheters based on technology obtained in connection with its acquisition of
Du-MED BV ("Du-Med"), a Netherlands based medical device manufacturer,
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for use in both the larger luminal areas of the body and for peripheral vascular
applications. The Company believes that catheters incorporating micromotor
technology may prove to be a cost-effective solution for these applications.
Du-MED holds certain patent rights related to technology for miniaturized
micromotors with dimensions of one millimeter or less in diameter. This
technology was developed at Erasmus University, Rotterdam, a leading center for
medical ultrasound research. Micromotors, which are placed at the tip of a
catheter, rotate a tiny mirror which deflects the acoustic beam generated by an
ultrasound transducer, resulting in a 360 degree cross sectional scanning of the
vessel wall. The same configuration detects the ultrasound signals reflected
from the surrounding tissue structures and communicates with an external
ultrasound system, which processes the signals into real-time images of tissue
structures within the body.
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. Pursuant to the
Development Agreement, the parties have developed an enhanced version of the
Oracle Megasonics which combines the IVUS technology and Cordis' high-pressure
Titan balloon. Cordis agreed to provide technical and manufacturing support for
the development efforts and to provide certain funding payable 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.
Substantially all of the Company's product development activities are
performed by the Company's team of research scientists, engineers, technicians
and consultants, who have extensive experience in ultrasound signal processing,
semiconductor design, acoustics and catheter development. The Company's
research, development and clinical expenditures approximated $8,445,000,
$7,127,000 and $5,746,000 in 1994, 1995 and 1996, respectively, excluding
acquired in-process research and development. The Company intends to continue to
make significant investments in research and development. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation --
Dependence on New Products; Rapid Technological Change."
MANUFACTURING
Oracle Imaging Systems are manufactured at the Company's Rancho
Cordova, California facility. The Oracle and Visions catheters are produced at
the Company's Pleasanton, California facility.The Company has consolidated its
Rancho Cordova operations at its new facility which is utilized for the
production of the Company's IVUS imaging systems and its Visions Five-64
catheters. The Company intends to close its Pleasanton facilities by mid-1997
and consolidate all manufacturing activities at Rancho Cordova, California.
There can be no assurance, however, that the Company's transition to Rancho
Cordova, California will be done in a timely manner.
The Company fabricates certain proprietary components, then assembles,
inspects, tests and packages all components into finished products. By designing
and assembling its systems and catheter products, the Company believes it is
better able to control quality and costs, limit third-party access to its
proprietary technology, and manage manufacturing process enhancements and new
product introductions. In addition, the Company purchases many standard and
custom built components from independent suppliers, and contracts with
third-parties for certain specialized electronic component manufacturing
processes. Most of these purchased components and processes are available from
more than one vendor. However, the manufacturing of the connection points on the
integrated circuit microchips is currently performed by a single vendor. Any
supply interruption from this single source vendor would have a material adverse
effect on the Company's ability to manufacture its products until a new source
of supply were qualified and, as a result, could have an adverse effect on the
Company's business, financial condition and results of operations. Although the
Company is in the process of identifying alternative vendors, the qualification
of additional or replacement vendors for certain components or services is a
lengthy process. See "Management's Discussion and Analysis of Financial
Condition and Results of Operation -- Future Operating Results - Limited
Manufacturing Experience."
The Company provides a one-year limited warranty on its imaging systems
sold in the United States. System repairs are made at the customer site by a
Company service technician. In addition to the one-year warranty, the customer
may
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purchase additional warranty coverage under the Company's extended warranty
program. Service on the Company's systems sold outside the United States is
provided either by the Company's European service manager or by the
international distributor responsible for the customer. The Company provides its
international distributors with a one-year limited warranty covering service and
parts.
The Company's success will depend in part on its ability to manufacture
its products in compliance with GMP regulations, ISO 9000 and other regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. In addition, the Company
intends to establish an automated manufacturing process for its Visions Five-64
catheter line in Rancho Cordova, California. Manufacturers often encounter
difficulties in scaling up production of new products and integrating automation
equipment, including problems involving production yields, quality control and
assurance, component supply and shortages of qualified personnel. The Company's
failure to fully integrate automation into the manufacturing process for the
Visions Five-64 catheter line in a timely manner, or to timely increase
production volumes of the Visions Five-64 catheter line, would materially
adversely affect the Company's business, financial condition and results of
operations. The Company instituted two voluntary product recalls in 1994 due to
manufacturing defects in its Vision catheter line. There can be no assurance
that defects will not occur in the Company's products in the future. Failure to
increase production volumes in a timely or cost-effective manner or to maintain
compliance with GMP, ISO 9000 and other regulatory requirements could have a
material adverse effect on the Company's sales and the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operation -- Limited
Manufacturing Experience."
BACKLOG
The Company had a backlog of customer purchase orders for products
representing approximately $1.7 million and $0.8 million as of December 31, 1995
and 1996, respectively. The Company expects that substantially all of the
backlog as of December 31, 1996 will be filled within three months. Orders in
backlog may be cancelled or rescheduled by customers without penalty. The
Company further believes that its backlog is not necessarily indicative of
Company sales for any future period. As is common in this industry, the
Company's backlog is typically not significant, and a substantial majority of
the product shipments in any given period relate to orders received within that
period. In addition, actual product shipment depends on production capacity,
manufacturing yields, and component availability, among other factors.
MARKETING AND SALES
The Company's products are sold in the United States, Canada and other
international markets, principally Europe and Japan. The Company's strategy
has been to leverage its technology by entering into distribution agreements
with strategic partners, supplemented by a small direct sales force. The Company
is currently a party to five such agreements.
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.
The Company and Cordis are currently in discussions with regard to amending the
Exclusive Distribution
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Agreement to cover both South America and Japan. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Dependence on
Strategic Relationships; Reliance on Cordis."
Fukuda and the Company entered into a Distribution Agreement in
February 1990 pursuant to which Fukuda was granted an exclusive distributorship
in Japan for the Company's Oracle Imaging Systems and certain related IVUS
imaging catheter products. The Distribution Agreement expired in February 1997,
and Fukuda did not exercise their option to extend the agreement for an
additional term of three years. In March 1990, Fukuda and certain other Japanese
entities acquired approximately $3.7 million of preferred stock of the Company.
In light of the Company's exclusive distribution relationship with
Cordis, the Company's revenue from sales of IVUS imaging products will depend
substantially on the distribution capabilities of Cordis. Further, in recent
years there has been significant consolidation among medical device suppliers as
the major suppliers have attempted to broaden their product lines in order to
focus on product configurations that address a given procedure or treatment and
in order to respond to cost pressures from health care providers. This
consolidation has made it increasingly difficult for smaller suppliers, such as
the Company, to effectively distribute their products without a major
relationship with one of the major suppliers. There can be no assurance that the
Company will be able to maintain its relationship with Cordis or replace Cordis
in the event the Company's relationship with Cordis would be terminated. In the
event of such a termination, the Company's ability to distribute its IVUS
imaging products would be materially adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
In 1994, 1995 and 1996, total export sales were $5,391,000, $9,901,000
and $16,868,000, respectively, or approximately 81%, 61% and 69%, respectively,
of total product sales. In 1994, 1995 and 1996 sales to Europe accounted for
$2,951,000, $6,996,000 and $9,820,000, respectively, and sales to Asia
represented $2,402,000, $2,891,000 and $6,689,000, respectively. A significant
portion of the Company's revenues, therefore, will continue to be subject to the
risks associated with international sales, including economic or political
instability, shipping delays, fluctuations in foreign currency exchange rates
and various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Future imposition of, or significant increases in the level of, customs duties,
export quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operation. The regulation
of medical devices, particularly in the European Community, continues to expand
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company.
STRATEGIC RELATIONSHIPS
The Company entered into a license agreement with CardioVascular
Dynamics, Inc. ("CVD"), dated December 22, 1995 (the "CardioVascular
Agreement"), pursuant to which CVD granted to Endosonics a non-exclusive,
royalty-free right to CVD's FOCAL technology for the development and sale of a
combined FOCAL/Ultrasound product. In exchange, CVD received a non-exclusive,
royalty-free right to submit PMA supplemental applications utilizing an
Endosonics PMA as a reference and to manufacture and distribute CVD products as
a supplement to the Endosonics PMA. The CardioVascular Agreement may be
terminated in the event of breach upon 60 days notice by the non-breaching
party, subject to the breaching party's right to cure. In the event of
termination, the CVD would be prohibited from submitting new PMA supplements
referencing the Endosonics PMA and would be required to seek independent FDA
approval for such products, which would have a material adverse effect on the
CVD's business, financial condition and results of operations.
The Company entered into a separate license agreement with CVD on
February 6, 1996, pursuant to which Endosonics granted to CVD a non-exclusive,
royalty-free right and license to use and reference the Endosonics PMA to
enable CVD to file for and obtain PMA approval for coronary balloon dilatation
catheters from the FDA. The remaining terms of the February 6, 1996 agreement
are substantially identical to the terms of the Cardiovascular Agreement
described above.
COMPETITION
The Company believes that the primary competitive factors in the market
for IVUS imaging devices are: image quality, catheter size, flexibility and
trackability, ease of use, reliability and price. In addition, a company's
distribution capability and the time in which products can be developed and
receive regulatory approval are important competitive factors. Certain of the
Company's competitors have developed IVUS imaging products with high quality
images. Therefore, the Company believes that its competitive position is
dependent upon its ability to establish its reputation as a producer of high
quality imaging products. The Company's IVUS catheters compete with mechanical
ultrasound devices manufactured by Cardiovascular Imaging Systems, a subsidiary
of Boston Scientific Corporation ("CVIS"), and the Hewlett-Packard Company
("Hewlett-Packard"). Both CVIS and Hewlett-Packard are significantly larger than
the Company, have significantly greater financial, marketing and technical
resources available and have a significantly larger installed base of imaging
systems. Although the Company believes that these companies are not currently
marketing or clinically testing combined
7.
<PAGE> 9
coronary balloon angioplasty/IVUS imaging catheters, there can be no assurance
that they will not attempt to develop and market catheters in the future that
would compete with the Company's combination products. Moreover, companies
currently engaged in the manufacture and marketing of non-imaging balloon
angioplasty catheters could attempt to expand their product lines to include
combination balloon angioplasty/IVUS imaging products. Other companies could
also attempt to enter the market with competitive devices. Many of the Company's
competitors and potential competitors have substantially greater financial,
manufacturing, marketing, distribution and technical resources.
Competition in the market for devices used in the treatment of
cardiovascular and peripheral vascular disease is intense, and is expected to
increase. The interventional cardiology market is characterized by rapid
technological innovation and change, and the Company's products could be
rendered obsolete as a result of future innovations. The Company's non-imaging
catheters and combination balloon angioplasty/IVUS imaging catheters compete
with non-imaging balloon angioplasty catheters marketed by a number of
manufacturers, including ACS, a subsidiary of Guidant Corporation, SciMed Life
Systems, Inc., a subsidiary of Boston Scientific Corporation ("SciMed"), Cordis,
Medtronic, and Schneider. Such companies have established market positions,
substantial resources, and significantly larger sales and marketing
organizations. In addition, the Company faces competition from manufacturers of
atherectomy devices, vascular stents and pharmaceutical products intended to
treat cardiovascular disease.
THIRD-PARTY REIMBURSEMENT
In the United States, the Company's products are purchased primarily by
medical institutions, which then bill various third-party payors, such as
Medicare, Medicaid, and other government programs and private insurance plans,
for the health care services provided to patients. Government agencies, private
insurers and other payors determine whether to provide coverage for a particular
procedure and reimburse hospitals for medical treatment at a fixed rate based on
the diagnosis-related group ("DRG") established by the U.S. Health Care
Financing Administration ("HCFA"). The fixed rate of reimbursement is based on
the procedure performed, and is unrelated to the specific type or number of
devices used in a procedure. If a procedure is not covered by a DRG, payors may
deny reimbursement. In addition, some payors may deny reimbursement if they
determine that the device used in a treatment was unnecessary, inappropriate or
not cost-effective, experimental or used for a non-approved indication.
Currently, there are no established DRGs covering IVUS imaging
procedures. Reimbursement for the equipment and hospital expense of an
angioplasty procedure is covered under a DRG, but because the amount of
reimbursement is fixed, the amount of potential profit relating to the procedure
is reduced to the extent the physician performs additional procedures such as
IVUS Imaging or uses a more expensive product which combines ultrasound imaging
with therapeutic capabilities. Beginning in January 1997, HCFA implemented a
policy in which the physician will receive payment for the additional effort
required to obtain ultrasound images and interpret those images when imaging is
performed in conjunction with a therapeutic intervention. The level of payment
for this physician fee component may be less than the incremental cost of the
IVUS imaging and, therefore, physicians must determine that the clinical
benefits of intravascular ultrasound imaging justify the additional cost.
On April 1, 1996, the Japanese Ministry of Health approved
reimbursement for IVUS-based procedures. The reimbursements cover both the cost
of the physician and the cost of the devices.
The market for the Company's products could be adversely affected by
changes in governmental and private third-party payors' policies. Capital costs
for medical equipment purchased by hospitals are currently reimbursed separately
from DRG payments. Federal legislation reduced capital cost reimbursements under
the Medicare capital cost pass-through system. The legislation requires that the
aggregate amount of reimbursements in fiscal years 1992 through 1995 be reduced
by approximately 10% per year. Such reductions have had an adverse impact on
reimbursements to hospitals for the capital cost of equipment such as the Oracle
Imaging System.
Although the Company believes that less invasive procedures generally
provide less costly overall therapies as compared to alternative surgical
procedures, there can be no assurance that reimbursement for procedures using
the Company's products will be available or, if currently available, will
continue to be available, or that future reimbursement policies of payors will
not adversely affect the Company's ability to sell its products on a profitable
basis. Failure by hospitals and other users of the Company's products to obtain
reimbursement from third-party payors, or changes in government and private
third-party payors' policies toward reimbursement for procedures employing the
Company's products, would have
8.
<PAGE> 10
a material adverse effect on the Company's business, financial condition and
results of operations. Moreover, the Company is unable to predict what
additional legislation or regulation, if any, relating to the health care
industry or third-party coverage and reimbursement may be enacted in the future,
or what effect such legislation or regulation would have on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation --Limitations on Third-Party Reimbursement."
GOVERNMENT REGULATION
United States. The manufacturing and marketing of the Company's
products are subject to extensive and rigorous government regulation in the
United States. The process of obtaining and maintaining required regulatory
approvals is lengthy, expensive and uncertain. The Company believes that its
success will be significantly dependent upon commercial sales of improved
versions of its imaging systems and catheter products. The Company will not be
able to market these new products in the United States unless and until the
Company obtains approval from the FDA.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a device that was legally marketed prior
to May 1976, or to a device that the FDA has found to be substantially
equivalent to a legally marketed pre-1976 device, the manufacturer may seek
clearance from the FDA to market the device by filing a premarket notification
with the FDA under Section 510(k). A 510(k) premarket notification must be
supported by appropriate data establishing the claim of substantial equivalence
to the satisfaction of the FDA. Clearance under 510(k) normally takes at least
three months and may require submission of clinical safety and efficacy data to
the FDA. There can be no assurance that 510(k) clearance for any future product
or modification of an existing product will be granted or that the process will
not be unduly lengthy. In the future, the FDA will require manufacturers of
certain medical devices introduced prior to 1976 to present additional safety
and effectiveness data or face restrictions on the sale of these products,
including the possible withdrawal of such devices from the market. All of the
510(k) clearances received for the Company's products were based on substantial
equivalence to legally marketed pre-1976 devices. Review of the substantially
equivalent pre-1976 devices on which the 510(k) clearances for the Company's
catheters were based and any resulting restrictions on the Company or
requirements imposed to present additional data could have a material adverse
effect on the Company's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA
determines that the device or the particular application for the device requires
a more rigorous review, the FDA will require that the manufacturer submit a
pre-market approval ("PMA") application that must be reviewed and approved by
the FDA prior to sales and marketing of the device in the United States. The PMA
process is significantly more complex, expensive and time consuming than the
510(k) clearance process and frequently requires submission of clinical data. It
is expected that certain of the Company's combination balloon angioplasty/IVUS
imaging products under development will be subject to this PMA process. There
can be no assurance that PMA approval for any future product or modification of
an existing product will be granted or that the process will not be unduly
lengthy. Failure to comply with applicable regulatory requirements can, among
other consequences, result in fines, injunctions, civil penalties, suspensions
or loss of regulatory approvals, product recalls, seizure of products, operating
restrictions and criminal prosecution. In addition, governmental regulations may
be established that could prevent or delay regulatory approval of the Company's
products. Delays in receipt of approvals, failure to receive approvals or the
loss of previously received approvals would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device
manufacturer with the FDA and certain state agencies, such as the Food and Drug
Branch of the California Department of Health Services ("CDHS"). As such, the
Company is inspected on a routine basis by both the FDA and the CDHS for
compliance with the FDA's Good Manufacturing Practices ("GMP") regulations.
These regulations require that the Company manufacture its products and maintain
related documentation in a prescribed manner with respect to manufacturing,
testing and control activities. Further, the Company is required to comply with
various FDA requirements for labeling. The Medical Device Reporting regulation
requires that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its devices, as well as
product malfunctions that would likely cause or contribute to death or serious
injury if the malfunction were to recur. In addition, the FDA prohibits an
approved device from being marketed for unapproved applications. Specifically,
the Company's FOCAL balloon catheters are approved in certain European
countries, where the Company believes these catheters are being used principally
for deployment of coronary stents and balloon angioplasty. In October 1995,
Endosonics received FDA approval to market CVD's line of FACT catheters, which
utilize the FOCAL technology,
9.
<PAGE> 11
for coronary balloon angioplasty. These catheters may not be marketed by the
Company in the United States for stent deployment without further FDA approval.
If the FDA believes that a company is not in compliance with the law, it can
institute proceedings to detain or seize products, issue a recall, prohibit
marketing and sales of the company's products and assess civil and criminal
penalties against the company, its officers or its employees.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "-- Products."
International. International sales of the Company's products are
subject to the regulatory agency product registration requirements of each
country. The regulatory review process varies from country to country and may in
some cases require the submission of clinical data. The Company typically relies
on its distributors in such foreign countries to obtain the requisite regulatory
approvals. Distributors have obtained regulatory approval for certain products
in certain European countries and Japan and have applied for additional
approvals. There can be no assurance, however, that such approvals will be
obtained on a timely basis or at all.
The Company is in the process of implementing policies and procedures
which are intended to allow the Company to receive ISO 9001 qualification of its
processes and CE mark certifications. The ISO 9000 series of standards for
quality operations has been developed to ensure that companies know the
standards of quality to which they must adhere to receive certification. The
European Union has promulgated rules which require that medical products
receive, by mid-1998, the right to affix the CE mark, an international symbol of
adherence to quality assurance standards and compliance with applicable European
medical device directives. ISO 9000 certification is one of the CE mark
certification requirements. Failure to receive the right to affix the CE mark
will prohibit the Company from selling its products in member countries of the
European Union. In Europe, the Company has obtained ISO 9002 as of January 1997.
There can be no assurance that the Company will be successful in meeting
certification requirements.
PATENTS AND PROPRIETARY INFORMATION
The Company's policy is to protect its proprietary position by, among
other methods, filing U.S. and foreign patent applications to protect
technology, inventions and improvements that are important to the development of
its business. The Company holds six issued U.S. patents, and has other U.S. and
foreign patent applications pending covering various aspects of its IVUS
technology. The first issued U.S. patent covers IVUS imaging catheters,
including IVUS balloon catheters, in which multiple transducer elements are
electronically controlled by integrated circuits or other means mounted near the
transducer elements in the catheter. This patent expires in April 2007. Two
patents cover aspects of catheter design technology used by the Company in its
Oracle-Micro catheters. A fourth patent covers improvements to the IVUS imaging
system which enables it to obtain images closer to the transducer surface. The
fifth patent covers modifications to the catheter tip transducer technology. The
sixth patent covers a method and apparatus for imaging blood flow using an
ultrasound catheter. Eleven additional patent applications have been submitted
to the U.S. Patent Office and additional patent applications have been submitted
to international agencies for review. The basic patent for the Du-MED micromotor
technology was issued by the U.S. Patent Office in January 1993. Additional
patents covering this technology were subsequently issued in August 1993 and
December 1994. Additional U.S. and foreign patent applications have been filed.
No assurance can be given that pending patent applications will be approved, or
that any issued patents will provide competitive advantages for the Company's
products, or that they will not be challenged or circumvented by competitors.
The Company relies upon trade secrets, technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically requires its employees, consultants and advisors
to execute appropriate confidentiality and assignment of inventions agreements
in connection with their employment, consulting or advisory relationships with
the Company. There can be no assurance, however, that these agreements will not
be breached, or that the Company will have adequate remedies for any breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information and techniques, or
otherwise gain access to the Company's proprietary technology, or that the
Company can meaningfully protect its unpatented proprietary technology.
10.
<PAGE> 12
The interventional cardiology market in general and the market for
balloon angioplasty catheters in particular, has been characterized by
substantial litigation regarding patent and other intellectual property rights.
In the event that any relevant claims of third-party patents are upheld as valid
and enforceable, the Company could be prevented from utilizing the subject
matter claimed in such patents, or would be required to obtain licenses from the
patent owners of any such patents, or redesign its products or processes to
avoid infringement. There can be no assurance that such licenses would be
available or, if available, would be so on terms acceptable to the Company, or
that the Company would be successful in any attempt to redesign its products or
processes to avoid infringement. Litigation may be necessary to defend against
claims of infringement, to enforce patents issued to the Company, or to protect
trade secrets, and could result in substantial cost to, and diversion of effort
by, the Company.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to a risk of product liability and
other liability claims in the event that the use of their products results in
personal injury claims. Although the Company has not experienced any product
liability claims to date, any such claims could have an adverse impact on the
Company. The Company maintains liability insurance with coverage of $1.0 million
per occurrence and an annual aggregate maximum of $5.0 million. There can be no
assurance that product liability or other claims will not exceed such insurance
coverage limits, or that such insurance will continue to be available on
commercially acceptable terms, or at all.
EMPLOYEES
As of December 31, 1996, the Company had 173 employees, including 120
in manufacturing, 21 in research, development and regulatory affairs, 17 in
sales and marketing, and 15 in administration. The Company believes that the
success of its business will depend, in part, on its ability to attract and
retain qualified personnel. Certain of the Company's employees in The
Netherlands were covered by a collective labor agreement that was effective
through December 31, 1996. As of January 1, 1997, these Netherland employees
were no longer covered by a collective labor agreement.
11.
<PAGE> 13
ITEM 2. PROPERTIES.
PROPERTIES
Currently, the Company leases approximately 12,000 square feet in
Pleasanton, California, which is leased on a month-to-month basis, and
approximately 46,000 square feet in Rancho Cordova, California, which is leased
through the year 2006. In January 1996, the Company signed a lease through the
year 2001 for approximately 4,100 square feet in The Netherlands for its
European operations.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
12.
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of February 28,
1997, and their positions are as follows:
NAME Age Position
- ---- --- --------
Roger Salquist......... 55 Chairman of the Board
Reinhard J. Warnking... 48 President, Chief Executive Officer and Director
Michael J. Eberle...... 40 Senior Vice President, Engineering
Donald D. Huffman...... 50 Vice President, Finance and Administration and
Chief Financial Officer
Clifford Varney........ 46 Vice President, Catheter Development and
Manufacturing
Hans De Weerd.......... 50 Senior Vice President, European Operations
Richard Hebert......... 40 Vice President, Catheter Manufacturing
Donald Fraley.......... 40 Vice President, Sales and Marketing
Adam D. Savakus........ 40 Vice President, Clinical and Regulatory Affairs
and Quality Assurance
Thomas E. Black........ 41 Vice President, Systems Manufacturing
BACKGROUND
The principal occupations of each executive officer and key employee of
the Company for at least the last five years are as follows:
Roger Salquist. Mr. Salquist was appointed Chairman of the Board of
Directors of the Company in November 1996. Mr. Salquist serves as a Director of
and consultant to Calgene, Inc., a Davis, California based agribusiness
biotechnology company, where he served as Chairman and Chief Executive Officer
from 1984 through August 1996. He serves on the Board of Directors of Collagen
Corporation, a publicly-traded biomedical device company. He is also a member of
the Boards of two privately-held start-up companies, Balance Pharmaceuticals,
Inc. and Puroast Coffee Company, Inc. He served on the board of Celtrix
Pharmaceuticals, Inc. from 1990 through 1996 and as Chairman from 1993 through
1995. Mr. Salquist also serves on the Advisory Council of the Stanford
University Graduate School of Business and is past Chairman of the International
Advisory Board of the University of San Francisco McLaren School of Business. He
is a member of the Board of Trustees of the University of San Francisco and is a
Trustee of the Fidelity Investments' Charitable Gift Fund.
Reinhard J. Warnking. Mr. Warnking joined the Company as a director,
President and Chief Operating Officer in April 1993. On February 1, 1995, he was
appointed Chief Executive Officer. Prior to joining Endosonics, from August 1991
to March 1993 he was the President and Chief Executive Officer of Acoustic
Imaging Technology Corporation, a manufacturer of ultrasound systems and
transducers and a subsidiary of Dornier, and an Executive Vice President of the
Worldwide Dornier ultrasound division. From September 1990 to August 1991, Mr.
Warnking started and organized the ultrasound division of Dornier
Medizintechnik, GmbH as Executive Vice President. From February 1989 to
September 1990, he founded and operated Warnking Medizintechnik GmbH, which was
acquired by Dornier in September 1990. From August 1985 to February 1989, he
held positions as Technical Director, General Manager and Vice President
International for Squibb Medical Systems and Advanced Technology Laboratories.
Michael J. Eberle. Mr. Eberle joined the Company as Director of
Engineering in January 1985. In December 1985, he became a Vice President and
Director of Research, with primary responsibility for the development of the
Company's products. In 1992, Mr. Eberle became Senior Vice President,
Engineering and Chief Technical Officer. Prior to joining Endosonics, Mr. Eberle
served as an independent consultant, Manager of Electronic Research and
Development at Second Foundation, an ultrasound imaging company, and as a
scientist at GEC Hirst Research Center in the United Kingdom.
Donald D. Huffman. Mr. Huffman joined the Company in July 1995 as Vice
President of Finance and Administration and Chief Financial Officer. From July
1990 to July 1995 he was Vice President and Chief Financial Officer of
Qualimatrix, Inc., a manufacturer of measurement, imaging and process control
systems for a variety of industries. From June 1989 to July 1990 Mr. Huffman was
the Director of Treasury, responsible for Corporate Treasury and Administration
13.
<PAGE> 15
of Furon Company, a manufacturer of highly engineered plastics and industrial
components. Prior to joining Furon in 1989, he was Assistant Treasurer of Alumax
Inc., an international manufacturer and marketer of aluminum products.
Clifford Varney. Mr. Varney became Vice President of Catheter
Development and Manufacturing in March 1994. He joined the Company in October
1990 as Director of Catheter Manufacturing. Prior to joining the Company, Mr.
Varney was the Vice President, Manufacturing of BSW Technologies, a private
automated equipment manufacturing and consulting company from September 1984 to
October 1990.
Hans De Weerd. Dr. De Weerd became Senior Vice President and Managing
Director of European Operations effective September 1994. Previously, he was the
Managing Director of Du-MED BV, a Dutch company which the Company acquired, from
June 1993 to August 1994. Prior to joining Du-MED, he was the Managing Director
of EME GmbH, a transcranial Doppler ultrasound company which he acquired for
Nicolet Instrument Corporation in July 1992. From April 1983 until July 1992,
Dr. De Weerd was with Nicolet Instrument Corporation, a division of Thermo
Electron Corporation, in a variety of research and development, new business and
general management positions.
Richard Hebert. Mr. Hebert became Vice President of Catheter
Manufacturing in January 1996. He joined the Company in February 1993 as
Director of Quality Assurance. Prior to joining Endosonics, Mr. Hebert was
Manager of Quality Assurance at Resonex, a manufacturer of magnetic resonance
imaging systems, during the period of September 1991 to January 1993. From
January 1988 to August 1991, he was employed by Maxoptic, a manufacturer of
magneto- optical disk drives, where he was Manager of Process Quality and a
Senior Engineer.
Donald Fraley. Mr. Fraley joined the Company in February 1995, and was
appointed Vice President of Sales and Marketing in March 1995. Previously he was
the Executive Director of Marketing of Karl Storz Endoscopy America, a company
which manufactures and markets endoscopic products, joining them in August 1992.
From June 1983 to July 1992, he held various marketing and sales positions with
Baxter Healthcare Corporation.
Adam D. Savakus. Mr. Savakus was appointed Vice President, Clinical and
Regulatory Affairs and Quality Assurance in January 1996. Previously, Mr.
Savakus was Director of Clinical and Regulatory Affairs since January 1990. Mr.
Savakus was a founding member of Endosonics and joined the company as a Research
Scientist. Between 1984 and 1990, Mr. Savakus served as Manager of Technical
Affairs and as Manager of Project Development. Prior to joining Endosonics, Mr.
Savakus was a research scientist at Second Foundation, an ultrasound imaging
company.
Thomas E. Black. Mr. Black joined the Company as Test Engineering
Manager in August 1988. In 1989 he became Manager of Systems Manufacturing and
was promoted to Director of Systems Manufacturing in 1993. In January 1996, he
was appointed Vice President of Systems Manufacturing, with primary
responsibility of managing the Company's ultrasound system related departments.
Prior to joining EndoSonics he held technical positions within the ultrasound
division of General Electric Medical Systems.
14.
<PAGE> 16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock has been traded on the Nasdaq National
Market under the symbol "ESON" since the Company's initial public offering in
March 1992. The following table sets forth the high and low sales prices for the
Common Stock for the periods indicated, as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
------ -----
1995
- ----
<S> <C> <C>
First Quarter...................................................... $ 9.13 $ 6.75
Second Quarter..................................................... 12.25 7.75
Third Quarter...................................................... 14.63 8.88
Fourth Quarter..................................................... 16.38 12.75
</TABLE>
<TABLE>
<CAPTION>
1996
- ----
<S> <C> <C>
First Quarter...................................................... $18.63 $12.50
Second Quarter..................................................... 19.50 14.50
Third Quarter...................................................... 17.75 11.88
Fourth Quarter .................................................... 15.31 9.56
</TABLE>
On March 14, 1997, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $10.00 per share. As of March 14,
1997, there were approximately 135 holders of record of the Company's Common
Stock.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its
capital stock. The Company currently intends to retain any earnings to finance
future growth and does not anticipate paying any cash dividends in the
foreseeable future.
On January 25, 1997, the Company's Board of Directors approved a
dividend distribution of one CVD shares for every 25 shares of the Company's
Common Stock. The distribution will take place in the second half of 1997 to
the Company's stockholders then of record.
15.
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS
DATA:
<S> <C> <C> <C> <C> <C>
Product sales ....................... $ 5,092 $ 4,165 $ 6,665 $ 16,175 $ 23,542
License fee ......................... -- -- 1,000 -- --
Contract revenue .................... -- 500 353 962 831
----------------------------------------------------------------
Total revenue ....................... 5,092 4,665 8,018 17,137 24,373
Operating expenses:
Cost of product sales ............. 4,730 4,058 4,716 11,270 15,688
Acquired in-process research and
development ..................... -- 2,000 2,315 488 --
Other research and development .... 2,464 3,938 8,445 7,127 5,746
Marketing and sales ............... 1,707 2,961 4,056 5,096 5,411
General and administrative ........ 1,284 2,572 2,757 4,498 4,618
Restructuring ..................... -- -- -- -- 518
----------------------------------------------------------------
Total operating expenses .......... 10,185 15,529 22,289 28,479 31,981
----------------------------------------------------------------
Loss from operations ................ (5,093) (10,864) (14,271) (11,342) (7,608)
Equity in net loss of CVD ........... -- -- -- -- (1,621)
Other income (expense):
Interest income ................... 1,374 1,669 1,124 888 2,269
Distributorship fees and other
income (expense) ................ 8 (18) (97) (18) (203)
----------------------------------------------------------------
Total other income, net ............. 1,382 1,651 1,027 870 2,066
----------------------------------------------------------------
Loss before minority interest ....... (3,711) (9,213) (13,244) (10,472) (7,163)
Minority interest ................... 145 158 -- -- --
Net loss ............................ $ (3,566) $ (9,055) $(13,244) $(10,472) $ (7,163)
================================================================
Net loss per share .................. $ (.42) $ (.99) $ (1.38) $ (1.01) $ (.53)
================================================================
Shares used in computing net loss per
share ............................... 8,505 9,166 9,584 10,386 13,395
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------
As of December 31,
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-
term investments ................ $37,709 $30,997 $20,410 $44,395 $40,192
Working capital ................. 40,177 32,047 23,517 49,872 44,679
Convertible obligation .......... -- -- -- 750 --
Total assets .................... 42,991 35,280 28,295 56,953 72,039
Total stockholders' equity ...... 40,634 33,155 22,268 48,155 66,067
</TABLE>
16.
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Annual Report on Form 10-K contains forward looking statements
which involve risks and uncertainties. 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,
those discussed in "Risk Factors" beginning on page [21].
INTRODUCTION
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 entered into the 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 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
connection with the execution of the Exclusive Distribution Agreement, the
Company issued 350,877 shares of its Common Stock to Cordis in a private
placement transaction for an aggregate purchase price of approximately
$5,000,000. The Company has since registered the shares of Common Stock issued
to Cordis. The Company and Cordis are currently in discussions with regard to
amending the Exclusive Distribution Agreement to cover both South America and
Japan. See "-- Dependence on Strategic Relationships, Reliance on Cordis."
CardioVascular Dynamics, Inc., formerly an 84%-owned subsidiary of the
Company's, 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 and, as a result, its assets,
liabilities and results of operations are no longer included in the Company's
consolidated financial statements. The Company currenty holds approximately 45%
of the outstanding shares of the Common Stock of CVD and accounts for its
investment 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. 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. The Company expects to incur an
approximate $40 million dollar in-process research and development charge as a
result of the acquisition. 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
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debt and contingent liabilities and amortization expenses related to intangible
assets acquired, any of which could materially adversely affect the Company's
business, 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 two
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 Du-MED'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. In addition, the Company
announced the receipt of a PMA to market its FOCAL catheter in October 1995. CVD
began sales of the FOCAL catheter commenced in 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 is currently expanding its manufacturing capacity
for these new products. See "Business -- Manufacturing". The Company's financial
results will be affected in the future by certain factors, including the scaling
up of manufacturing for the Company's Five-64 catheter line, 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operation."
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1996 WITH THE YEAR ENDED DECEMBER 31,
1995
CVD's results of operations were consolidated in the Company's results through
June 19, 1996, and accounted for on the equity method thereafter. (See Notes 3
and 4 to Consolidated Financial Statements.)
Total Revenue. Total revenue in 1996 increased by 42% to approximately
$24.4 million from approximately $17.1 million in 1995. This increase was
principally the result of an increase in IVUS sales in the United States and
Europe.
Sales of the Company's digital all-electronic IVUS imaging system and
catheters accounted for approximately 83% of total revenue. Sales of the Oracle
Imaging System and catheters were approximately $20.4 million in 1996 as
compared to approximately $12.7 million in 1995, an increase of 58%. The
increase is due both to the growth of the overall market for IVUS imaging
products and increased sales under the Company's distribution agreements with
Cordis and, to a lesser extent, with Fukuda.
Total revenue from CVD was approximately $3.8 million for the period
from January 1, 1996 to the date of the CVD Initial Public Offering (see Notes 3
and 4), as compared to approximately $4.1 million for all of 1995.
Currently, a majority of the Company's sales of IVUS products consists
of sales of the Company's IVUS imaging systems. The Company currently
anticipates that sales of IVUS imaging catheters will increase as a percentage
of total sales of IVUS products in future periods as the Company's installed
base grows. In 1996, export sales as a percentage of total revenue increased to
69% as compared to 58% in 1995. The Company currently anticipates that export
sales will continue to represent a substantial portion of the Company's total
revenue in future periods.
Cost of Product Sales. Cost of product sales as a percentage of product
sales decreased to approximately 67% in 1996 from 70% in 1995. Cost of sales as
a percentage of product sales in 1996 was reduced principally by improved
manufacturing efficiencies. Gross profit margins on product sales improved to
33% in 1996 as compared to 30% in 1995.
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<PAGE> 20
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.
Acquired In-process Research, Development and Clinical. The Company
recorded no acquired in-process research, development and clinical expenses in
1996 compared to $488,000 in 1995. In June 1995, Endosonics recorded a non-cash
charge of $488,000, reflecting the final payment in connection with the 1993
acquisition of CVD.
Other Research, Development and Clinical. Other research, development
and clinical expenses decreased by 19% to approximately $5.7 million in 1996
from approximately $7.1 million in 1995 due to a decrease in expenses related
to the Pinnacle Development Project and reimbursement from Cordis Corporation
for joint Research and Development projects, offset by continued investment in
CVD's infrastructure to launch and produce its new products until its initial
public offering in June of 1996. As a percentage of total revenues, these
expenses decreased to 29% for 1996 from 42% in 1995. These expenses decreased
by 20% from $5.4 million to $4.3 million for the IVUS business.
Marketing and Sales. Marketing and sales expenses increased by 6% to
approximately $5.4 million in 1996 as compared to approximately $5.1 million in
1995, primarily due to higher costs associated with increased staffing and
marketing programs in Europe and the United States to support higher sales
levels. As a percentage of total revenue, marketing and sales expenses decreased
to 22% in 1996 as compared to 30% in 1995 due to increased revenues. Marketing
and sales expenses for the IVUS business increased 20% from $3.5 million in 1995
to $4.2 million in 1996.
General and Administrative. General and administrative expenses
increased by 3% to approximately $4.6 million in 1996 from approximately $4.5
million in 1995. This increase is attributable to an overall increase in the
Company's level of operations; however, general and administrative expenses
decreased to 20% of total revenue in 1996 from 26% of total revenue in 1995.
These expenses for the IVUS business were $4.1 million for 1996 compared with
$3.2 million in 1995, a 28% increase.
Other Income, Net. Other income increased to approximately $2.1 million
in 1996 from approximately $.9 million in 1995, primarily due to a higher level
of interest income.
Net Loss. Net loss decreased to approximately $7.2 million, or $0.53
per share, in 1996 as compared to a net loss of approximately $10.5 million, or
$1.01 per share, in 1995. For the IVUS business, net loss decreased 25% from
$8.1 million to $6.1, $0.78 per share versus $0.45 per share.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1995 WITH THE YEAR ENDED DECEMBER 31,
1994
Total Revenue. Total revenue in 1995 increased by 114% to approximately
$17.1 million from approximately $8.0 million in 1994. This increase was
principally the result of an increase in IVUS sales in the United States and
Europe.
Sales of the Company's digital all-electronic IVUS imaging system and
catheters accounted for approximately 74% of total revenue. Sales of the Oracle
Imaging System and catheters were approximately $12.7 million in 1995 as
compared to approximately $5.6 million in 1994. The increase is due both to the
growth of the overall market for IVUS imaging products and increased sales under
the Company's distribution agreements with Cordis and, to a lesser extent, with
Fukuda.
Total revenue from CVD was approximately $4.1 million in 1995 as
compared to approximately $2.4 million in 1994. This increase was primarily the
result of the commencement of production and sale of a new line of advanced
therapeutic catheters.
Currently, a majority of the Company's sales of IVUS products consists
of sales of the Company's IVUS imaging systems. The Company currently
anticipates that sales of IVUS imaging catheters will increase as a percentage
of total sales of IVUS products in future periods as the Company's installed
base grows. In 1995, export sales as a percentage of total revenue decreased to
58% as compared to 67% in 1994. The Company currently anticipates that export
sales will continue to represent a substantial portion of the Company's total
revenue in future periods.
19.
<PAGE> 21
Cost of Product Sales. Cost of product sales as a percentage of product
sales decreased to approximately 70% in 1995 from 71% in 1994. Cost of sales as
a percentage of product sales in 1995 was reduced principally by improved
manufacturing efficiencies, offset by expenses of $664,000 related to the
voluntary recall of its Visions IVUS imaging catheters in the first quarter of
1995 due to manufacturing defects. The recall negatively impacted the ability of
the Company to sell catheters during the first quarter of 1995 due to production
capacity limitations associated with the replacement of these defective
catheters. Gross profit margins improved to 30% in 1995 as compared to 29% in
1994 despite the negative impact of the voluntary product recall. 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.
Acquired In-process, Research Development and Clinical. Acquired
in-process research, development and clinical expenses decreased to $488,000 in
1995 from approximately $2.3 million in 1994. In June 1995, Endosonics recorded
a non-cash charge of $488,000, reflecting the final payment in connection with
the 1993 acquisition of CVD. On August 12, 1994, Endosonics acquired all of the
capital stock of Du-MED. The excess of Endosonics' cost over the fair values
assigned to the net assets of Du-MED acquired in the amount of approximately
$2.3 million was charged to acquired in-process research, development and
clinical expenses in the quarter ended September 30, 1994, because the principal
assets acquired are products still in the development stage that have not yet
received regulatory approval.
Other Research, Development and Clinical. Other research, development
and clinical expenses decreased by 16% to approximately $7.1 million in 1995
from approximately $8.4 million in 1994 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.
Marketing and Sales. Marketing and sales expenses increased by 26% to
approximately $5.1 million in 1995 as compared to approximately $4.1 million in
1994, primarily due to higher costs associated with increased staffing and
marketing programs in Europe and the United States to support higher sales
levels. As a percentage of total revenue, marketing and sales expenses decreased
to 30% in 1995 as compared to 51% in 1994 due to increased revenues.
General and Administrative. General and administrative expenses
increased by 63% to approximately $4.5 million in 1995 from approximately $2.8
million in 1994. This increase is attributable to an overall increase in the
Company's level of operations; however, general and administrative expenses
decreased to 26% of total revenue in 1995 from 34% of total revenue in 1994.
Other Income, Net. Other income decreased to approximately $.9 million
in 1995 from approximately $1.0 million in 1994, primarily due to a lower level
of interest income.
Net Loss. Net loss decreased to approximately $10.5 million, or $1.01
per share, in 1995 as compared to a net loss of approximately $13.2 million, or
$1.38 per share, in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash, cash equivalents and
short-term investments of $40.2 million and no borrowings or credit facilities.
Net cash used in operations was $4.1 million in 1996, as compared to $12.2
million in 1995. Cash used in operating activities includes funding the
operating loss partially offset by decreases in accounts receivable and
inventory versus 1995 levels, increases in current liabilities and $5.0 million
from the issuance of common stock to Cordis Corporation. In 1995 the Company
received approximately $35 million from the issuance of common stock in a
follow-on offering. In 1994 the Company received $2.5 million from the sale of
CVD common stock. As a result of CVD completing its initial public offering
in June of 1996, its assets, liabilities, and results of operations are no
longer included in the Company's consolidated statements of cash flows which
resulted in a use of cash from investing activities of $6.4 million. 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, cash equivalents, and short-term investments as of December 31,
1996 will be sufficient to meet the Company's operating expenses and capital
requirements through 1997. 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. See "Future
Operating Results -- History of Operating Losses; Anticipated Future Losses."
20.
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TAX MATTERS
As of December 31, 1996, the Company had federal and state net
operating loss carryforwards of approximately $38 million and $9 million,
respectively. The Company also had federal research and development tax credit
carryforwards of approximately $1,060,000. The net operating loss and credit
carryforwards began expiring and will continue to expire at various dates
beginning in 1996 through 2011 if not utilized. Utilization of the net operating
losses and credits may be subject to a substantial annual limitation due to the
"change of ownership" rules provided by the Internal Revenue Code and similar
state tax provisions. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
income tax liabilities.
RISK FACTORS
History of Operating Losses; Anticipated Future Losses. The Company was
founded in 1984 and has experienced annual operating losses since its inception.
The Company's accumulated deficit at December 31, 1996 was approximately $58
million. The Company expects to continue to incur operating losses through 1997
and there can be no assurance that the Company will ever be able to achieve or
sustain profitability in the future. Although the Company believes that its
existing cash, cash equivalents and short-term investments will be sufficient to
meet its liquidity requirements through 1998, there can be no assurance that the
Company will not require additional financing or that such financing, if
required, will be available on satisfactory terms, if at all.
Acquisitions. 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. 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. The Company
expects to incur an approximate $40 million dollar in-process research and
development charge as a result of the such acquisition. 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, 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 two 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.
Uncertainty of Market Acceptance. Although external ultrasound imaging
and balloon angioplasty are widely used technologies, the use of IVUS imaging in
connection with interventional cardiology is relatively new. The commercial
success of the Company's products will depend upon their acceptance by the
medical community as a useful, cost-effective component of interventional
cardiovascular and peripheral vascular procedures. IVUS imaging is used in
conjunction with angioplasty and other intravascular procedures such as vascular
stenting. Accordingly, the medical community must determine that the information
obtained from the use of the Company's ultrasound products will increase the
safety or effectiveness or lower the overall cost of the care being provided and
that the value of such information justifies the incremental expense of
obtaining IVUS imaging. In addition, market acceptance of the Company's
combination balloon angioplasty/IVUS imaging catheters will depend, among other
things, on a determination by the medical community that the efficacy of the
therapeutic component of the Company's combination catheters is at least
comparable to that of competing non-imaging angioplasty catheters and other
types of therapy. Although IVUS imaging devices have been available for over ten
years, the market for such products has remained relatively small. Although the
Company believes the benefits of IVUS imaging can be demonstrated, there can be
no assurance that the benefits will be considered sufficient by the medical
community to enable the Company's products to achieve widespread market
acceptance. Failure of the Company's products to achieve market acceptance would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Business -- Products."
Dependence on Strategic Relationships; Reliance on Cordis. In February
1996, Endosonics and Cordis entered into the 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
21.
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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.
The Company and Cordis are currently in discussions with regard to amending the
Exclusive Distribution Agreement to cover both South America and Japan.
In light of the Company's exclusive distribution relationship with
Cordis, the Company's revenue from sales of IVUS imaging products will depend
substantially on the distribution capabilities of Cordis. Further, in recent
years there has been significant consolidation among medical device suppliers as
the major suppliers have attempted to broaden their product lines in order to
focus on product configurations that address a given procedure or treatment and
in order to respond to cost pressures from health care providers. This
consolidation has made it increasingly difficult for smaller suppliers, such as
the Company, to effectively distribute their products without a major
relationship with one of the major suppliers. There can be no assurance that the
Company will be able to maintain its relationship with Cordis or replace Cordis
in the event the Company's relationship with Cordis would be terminated. In the
event of such a termination, the Company's ability to distribute its IVUS
imaging products would be materially adversely affected, which would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on New Products; Rapid Technological Change. The medical
device industry generally, and the IVUS imaging device market in particular, are
characterized by rapid technological change, changing customer needs, and
frequent new product introductions. The Company's future success will depend
upon its ability to develop and introduce new products that address the
increasingly sophisticated needs of its customers. There can be no assurance
that the Company will be successful in developing and marketing new products
that achieve market acceptance or that the Company will not experience
difficulties that could delay or prevent the successful development,
introduction and marketing of new products.
In October 1995, the Company announced the receipt of approval from the
FDA to market its Five-64 diagnostic catheters, which are designed to enhance
image quality and reduce manufacturing cost relative to the Company's
Oracle-Micro(TM) catheter line. The Company introduced the Five-64 diagnostic
catheters in November 1995 and commenced commercial shipments of these catheters
in the first quarter of 1996. Any failure to meet this schedule could have a
material adverse effect on the Company. There can be no assurance that the
Company's competitors will not succeed in developing or marketing technologies
and products that are more effective or commercially attractive than any that
are being developed by the Company, or that such competitors will not succeed in
obtaining regulatory approval for introducing or commercializing any such
products prior to the Company. Furthermore, there can be no assurance that the
Company's products will not be rendered obsolete as a result of future
innovations. See "Business -- Products."
Dependence on International Sales. The Company derives, and expects to
continue to derive, a significant portion of its revenue from international
sales. In 1994, 1995 and 1996, the Company's international sales were $5.4
million, $9.9 million and $16.9 million, respectively, or 67%, 58% and 69% of
total revenue. Therefore, a significant portion of the Company's revenues will
continue to be subject to the risks associated with international sales,
including economic or political instability, shipping delays, changes in
applicable regulatory policies, fluctuations in foreign currency exchange rates
and various trade restrictions, all of which could have a significant impact on
the Company's ability to deliver products on a competitive and timely basis.
Future imposition of, or significant increases in the level of, customs duties,
import quotas or other trade restrictions, could have an adverse effect on the
Company's business, financial condition and results of operation. The regulation
of medical devices, particularly in the European Community, continues to expand
and there can be no assurance that new laws or regulations will not have an
adverse effect on the Company.
22.
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Limited Manufacturing Experience. The Company's success will depend in
part on its ability to manufacture its products in compliance with the FDA's GMP
regulations, ISO 9001 and other regulatory requirements, in sufficient
quantities and on a timely basis, while maintaining product quality and
acceptable manufacturing costs. CVD has limited experience producing its
products in commercial quantities. In addition, the Company intends to establish
an automated manufacturing process for its Five-64 catheter line in Rancho
Cordova, California. Manufacturers often encounter difficulties in scaling up
production of new products and integrating automation equipment, including
problems involving production yields, quality control and assurance, component
supply and shortages of qualified personnel. The Company's failure to fully
integrate automation into the manufacturing process for the Five-64 catheter
line in a timely manner, or to timely increase production volumes of the Five-64
catheter line, would materially adversely affect the Company's business,
financial condition and results of operation. The Company instituted two
voluntary product recalls in 1994 due to manufacturing defects in its
Visions(TM) IVUS imaging catheter line. There can be no assurance that defects
will not occur in the Company's products in the future. Failure to increase
production volumes in a timely or cost-effective manner or to maintain
compliance with GMP, ISO 9001 or other regulatory requirements could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company purchases many standard and custom built components from
independent suppliers, and contracts with third parties for certain specialized
electronic component manufacturing processes. Most of these purchased components
and processes are available from more than one vendor. However, the
manufacturing of the connection points on the integrated circuit microchips is
currently performed by a single vendor. Although the Company is in the process
of identifying alternative vendors, the qualification of additional or
replacement vendors for certain components or services is a lengthy process. Any
supply interruption from this single source vendor would have a material adverse
effect on the Company's ability to manufacture its products until a new source
of supply was qualified and, as a result, could have an adverse effect on the
Company's business, financial condition and results of operations. See "Business
- --Manufacturing" and "-- Government Regulation."
Limitations on Third-Party Reimbursement. In the United States, the
Company's products are purchased primarily by medical institutions, which then
bill various third-party payors, such as Medicare, Medicaid, and other
government programs and private insurance plans, for the health care services
provided to patients. Government agencies, private insurers and other payors
determine whether to provide coverage for a particular procedure and reimburse
hospitals for medical treatment at a fixed rate based on the DRG established by
the U.S. HCFA. The fixed rate of reimbursement is based on the procedure
performed, and is unrelated to the specific devices used in that procedure. If a
procedure is not covered by a DRG, payors may deny reimbursement. In addition,
some payors may deny reimbursement if they determine that the device used in a
treatment was unnecessary, inappropriate or not cost-effective, experimental or
used for a non-approved indication. Currently, there are no established DRGs
covering diagnostic IVUS imaging procedures. Reimbursement of balloon
angioplasty procedures is covered under a DRG, but because the amount of
reimbursement is fixed, the amount of potential profit relating to the procedure
is reduced to the extent the physician performs additional procedures such as
IVUS imaging or uses a more expensive product which combines IVUS imaging with
therapeutic capabilities. Accordingly, physicians must determine that the
clinical benefits of IVUS imaging justify the additional cost. Although the
Company believes that less invasive procedures generally provide less costly
overall therapies as compared to alternative surgical procedures, there can be
no assurance that reimbursement for such less invasive procedures will continue
to be available, or that future reimbursement policies of payors will not
adversely affect the Company's ability to sell its products on a profitable
basis. Failure by hospitals and other users of the Company's products to obtain
reimbursement from third-party payors, or changes in government and private
third-party payors' policies toward reimbursement for procedures employing the
Company's products, would have a material adverse effect on the Company's
business, financial condition and results of operations.
The market for the Company's products could be adversely affected by
changes in governmental and private third-party payors' policies. Capital costs
for medical equipment purchased by hospitals are currently reimbursed separately
from DRG payments. Recent federal legislation reduced capital cost
reimbursements under the Medicare capital cost pass-through system. The
legislation requires that the aggregate amount of reimbursements in fiscal years
1992 through 1995 be reduced by approximately 10% per year. Such reductions have
had an adverse impact on reimbursements to hospitals for the capital cost of
equipment such as the Oracle Imaging System. Moreover, the Company is unable to
predict what additional legislation or regulation, if any, relating to the
health care industry or third-party coverage and reimbursement may be enacted in
the future, or what effect such legislation or regulation would have on the
Company. See "Business -- Third-Party Reimbursement."
23.
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Competition. Competition in the market for devices used in the
diagnosis and treatment of cardiovascular and peripheral vascular disease is
intense, and is expected to increase. The interventional cardiology market is
characterized by rapid technological innovation and change, and the Company's
products could be rendered obsolete as a result of future innovations. The
Company's digital, all-electronic IVUS imaging catheters compete with mechanical
ultrasound devices manufactured by CVIS and Hewlett-Packard. Both CVIS and
Hewlett-Packard are significantly larger than the Company, have significantly
greater financial, sales and marketing and technical resources available and
have significantly larger installed bases of imaging systems. These competitors
have also developed IVUS imaging products with high quality images and the
Company believes that its competitive position is dependent upon its ability to
establish its reputation as a producer of high quality IVUS imaging products.
There can be no assurance that these companies are not currently developing, or
will not attempt to develop, combination balloon angioplasty/IVUS imaging
catheters that would compete with the Company's combination balloon
angioplasty/IVUS imaging products. Moreover, companies currently engaged in the
manufacture and marketing of non-imaging angioplasty catheters could attempt to
expand their product lines to include combination balloon angioplasty/IVUS
imaging products.
The Company's combination balloon angioplasty/IVUS imaging catheters
compete or will compete with therapeutic catheters marketed by a number of
manufacturers, including ACS, SciMed, Cordis, Medtronic, Inc. ("Medtronic"), and
Schneider USA, a subsidiary of Pfizer, Inc. ("Schneider"). Such companies have
substantial resources, established market positions, and significantly larger
sales and marketing organizations. In addition, the Company faces competition
from manufacturers of atherectomy devices, vascular stents and pharmaceutical
products intended to treat cardiovascular disease. See "Business --
Competition."
Reliance on Patents and Proprietary Technology; Risk of Patent
Infringement. The Company holds six issued United States patents and has other
United States and several foreign patent applications pending covering various
aspects of its IVUS imaging technology. No assurance can be given, however, that
the Company's patent applications will issue as patents or that any issued
patents will provide competitive advantages for the Company's products or will
not be successfully challenged or circumvented by its competitors. Although the
Company attempts to ensure that its products do not infringe other party's
patents and proprietary rights, there can be no assurance that its products do
not infringe such patents or rights. The interventional cardiovascular market
has been characterized by substantial litigation regarding patent and other
intellectual property rights. In the event that any relevant claims of
third-party patents are upheld as valid and enforceable, the Company could be
prevented from practicing the subject matter claimed in such patents, or would
be required to obtain licenses from the owners of any such patents or redesign
its products or processes to avoid infringement. There can be no assurance that
such licenses would be available or, if available, would be so on terms
acceptable to the Company or that the Company would be successful in any attempt
to redesign its products or processes to avoid infringement. The Company also
relies on trade secrets and proprietary technology and enters into
confidentiality and non-disclosure agreements with its employees and
consultants. There can be no assurance that the confidentiality of such trade
secrets or proprietary information will be maintained by employees, consultants,
advisors or others, or that the Company's trade secrets or proprietary
technology will not otherwise become known or be independently developed by
competitors in such a manner that the Company has no practical recourse.
Litigation may be necessary to defend against claims of infringement or
invalidity, to enforce patents issued to the Company or to protect trade secrets
and could result in substantial cost to, and diversion of effort by, the
Company. See "Business -- Patents and Proprietary Technology."
Government Regulation. The manufacturing and marketing of the Company's
products are subject to extensive and rigorous government regulation in the
United States and in other countries. The Company believes that its success will
be significantly dependent upon commercial sales of improved versions of its
imaging systems and catheter products. The Company will not be able to market
these new products in the United States unless and until the Company obtains
approval from the FDA.
If a medical device manufacturer can establish that a newly developed
device is "substantially equivalent" to a device that was legally marketed prior
to May 1976, or to a device that the FDA has found to be substantially
equivalent to a legally marketed pre-1976 device, the manufacturer may seek
clearance from the FDA to market the device by filing a premarket notification
with the FDA under Section 510(k) of the Federal Food, Drug, and Cosmetic Act
("510(k)"). There can be no assurance that 510(k) clearance for any future
product or modification of an existing product will be granted or that the
process will not be unduly lengthy. All of the 510(k) clearances received for
the Company's catheters were based on substantial equivalence to legally
marketed pre-1976 devices. Review of the substantially equivalent pre- 1976
devices on which the 510(k) clearances for the Company's catheters were based
and any resulting restrictions on the Company or
24.
<PAGE> 26
requirements imposed to present additional data could have a material adverse
effect on the Company's business, financial condition and results of operations.
If substantial equivalence cannot be established, or if the FDA
determines that the device or the particular application for the device requires
a more rigorous review, the FDA will require that the manufacturer submit a PMA
application that must be reviewed and approved by the FDA prior to sales and
marketing of the device in the United States. The PMA process is significantly
more complex, expensive and time consuming than the 510(k) clearance process and
frequently requires the submission of clinical data. It is expected that certain
of the Company's combination angioplasty/IVUS imaging products under development
will be subject to this PMA process. Failure to comply with applicable
regulatory requirements can, among other consequences, result in fines,
injunctions, civil penalties, suspensions or loss of regulatory approvals,
product recalls, seizure of products, operating restrictions and criminal
prosecution. In addition, governmental regulations may be established that could
prevent or delay regulatory approval of the Company's products. Delays in
receipt of approvals, failure to receive approvals or the loss of previously
received approvals would have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company is also required to register as a medical device
manufacturer with the FDA and certain state agencies, such as the Food and Drug
Branch of CDHS. As such, the Company is inspected on a routine basis by both the
FDA and the CDHS for compliance with the GMP regulations. These regulations
require that the Company manufacture its products and maintain related
documentation in a prescribed manner with respect to manufacturing, testing and
control activities. Further, the Company is required to comply with various FDA
requirements for labeling. The Medical Device Reporting regulation requires that
the Company provide information to the FDA on deaths or serious injuries alleged
to have been associated with the use of its devices, as well as product
malfunctions that would likely cause or contribute to death or serious injury if
the malfunction were to recur. In addition, the FDA prohibits an approved device
from being marketed for unapproved applications. Specifically, the Company's
FOCAL balloon catheters are approved in certain European countries. The Company
believes that these catheters are being used in those countries principally for
deployment of coronary stents and balloon angioplasty. In October 1995,
Endosonics received FDA approval to market CVD's line of FACT catheters, which
utilize the FOCAL technology, for coronary balloon angioplasty. Without specific
FDA approval for use in stent deployment, these catheters may not be marketed by
the Company in the United States for such use. If the FDA believes that a
company is not in compliance with applicable laws and regulations, it can
institute proceedings to detain or seize products, issue a recall, prohibit
marketing and sales of the company's products and assess civil and criminal
penalties against the company, its officers or its employees.
The Company is also subject to other federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory
and manufacturing practices. The extent of government regulation that might
result from any future legislation or administrative action cannot be accurately
predicted. Failure to comply with regulatory requirements could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Products" and "-- Government Regulation."
International sales of the Company's products are subject to the
regulatory agency product registration requirements of each country. The
regulatory review process varies from country to country and may in some cases
require the submission of clinical data. The Company typically relies on its
distributors in such foreign countries to obtain the requisite regulatory
approvals. There can be no assurance, however, that such approvals will be
obtained on a timely basis or at all.
The Company is in the process of implementing policies and procedures
which are intended to allow the Company to receive ISO 9001 qualification of
its processes. The ISO 9000 series of standards for quality operations has been
developed to ensure that companies know the standards of quality to which they
must adhere to receive certification. The European Union has promulgated rules
which require that medical products receive by mid-1998 the right to affix the
CE mark, an international symbol of adherence to quality assurance standards
and compliance with applicable European medical device directives. ISO 9001
certification is one of the CE mark certification requirements. Failure to
receive the right to affix the CE mark will prohibit the Company from selling
its products in member countries of the European Union. In Europe, the Company
has obtained ISO 9002 as of January 1997. There can be no assurance that the
Company will be successful in meeting certification requirements.
Potential Product Liability; Limited Insurance. The Company faces the
risk of financial exposure to product liability claims. The Company's products
are often used in situations in which there is a high risk of serious injury or
death. Such risks will exist even with respect to those products that have
received, or in the future may receive, regulatory approval
25.
<PAGE> 27
for commercial sale. The Company maintains product liability insurance with
coverage limits of $1.0 million per occurrence and $5.0 million per year in the
aggregate. There can be no assurance that the Company's product liability
insurance is adequate or that such insurance coverage will remain available at
acceptable costs. There can be no assurance that the Company will not incur
significant product liability claims in the future. A successful claim brought
against the Company in excess of its insurance coverage could have a material
adverse effect on the Company's business, financial condition and results of
operations. Additionally, adverse product liability actions could negatively
affect the reputation and sales of the Company's products as well as the
Company's ability to obtain and maintain regulatory approval for its products.
See "Business -- Product Liability and Insurance."
Volatility of Stock Price.
The Company's Common Stock has experienced and can be expected to continue
to experience substantial price volatility in response to actual or anticipated
quarterly variations in operating results, announcements of technological
innovations or new products by the Company or its competitors, developments
related to patents or other intellectual property rights, developments in the
Company's relationships with its customers, distributors or suppliers,
acquisitions or divestitures of other companies in the health care industry, and
other events or factors. In addition, any shortfall or changes in revenue, gross
margins, earnings, or other financial results from analysts' expectations could
cause the price of the Company's Common Stock to fluctuate significantly. In
recent years, the stock market in general has experienced extreme price and
volume fluctuations, which have particularly affected the market price of many
technology and health care companies and which have often been unrelated to the
operating performance of those companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. See "Market for
Registrant's Common Equity and Related Stockholder Matters."
26.
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS
Page
Report of Ernst & Young LLP, Independent Auditors
Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The financial statement schedule listed under Part IV, Item 14, is
filed as part of this Form 10-K.
27.
<PAGE> 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about May 28, 1997.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about May 28, 1997. The information concerning the
Company's executive officers required by this item is incorporated by reference
to the section of Part I hereof entitled "Executive Officers of the Registrant."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about May 28, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item is incorporated by reference from
the Company's Proxy Statement, to be mailed to shareholders for the Annual
Meeting to be held on or about May 28, 1997.
28.
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Annual Report on
Form 10-K:
1. Financial Statements of the Company.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements for the years ended
December 31, 1994, 1995 and 1996
2. Financial Statement Schedule.
II - Valuation and Qualifying Accounts
Schedules not listed above have been omitted because they are
not applicable or are not required to be set forth herein as
such information is included in the Consolidated Financial
Statements or the notes thereto.
3. Exhibits. Reference is made to Item 14(c) of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year covered by this Annual Report on Form 10-K.
(c) Exhibits.
2.1(1) Agreement and Plan of Reorganization dated as of June 9, 1993 among the
Company, Endosonics Acquisition Corporation and CardioVascular
Dynamics, Inc. ("CVD").
2.2(1) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among the Company, Endosonics Acquisition Corporation
and CVD.
2.3(8) Agreement and Plan of Reorganization between Endosonics and
Cardiometrics, Inc.
3.1(2) Certificate of Incorporation.
3.2(4) Amended Bylaws.
4.1(2) Specimen Certificate of Common Stock.
4.2(3) Loan and Warrant Purchase Agreement dated May 19, 1988.
10.1(3) Series F Preferred Stock Purchase Agreement dated February 1, 1991
between the Company and Esaote Biomedica S.p.A. ("Esaote") and
Registration Rights and Right of First Offer Agreement.
29.
<PAGE> 31
10.2(3) Distribution Agreement dated February 28, 1990 between the Company and
Fukuda Denshi Co., Ltd.
10.3(3) Distribution Agreement dated as of January 31, 1991 between the
Company and Esaote.
10.4(3) Line of Credit Agreement between the Company and Wells Fargo Bank,
N.A. dated November 19, 1990.
10.5(3) Lease dated October 31, 1991 between the Company and Olympia
Investments, Inc. for the Pleasanton facilities.
10.6(3) Lease dated May 1, 1990 between the Company and Commonwealth Growth
Fund I and the Rancho Cordova facilities and Amendment to Lease dated
January 9, 1992.
10.7(3) 1988 Stock Option Plan and forms of a Stock Option Agreement and a
Stock Purchase Agreement.
10.8(3) 1984 Restricted Stock Purchase Plan and form of a Stock Purchase
Agreement.
10.9(3) Form of Indemnification Agreement between the Company and directors of
the Company.
10.10(5) Form of Domestic Distribution Agreement.
10.11(4) Supplemental Stock Purchase Agreement dated June 5, 1992, by and
between the Company and CVD.
10.12(4) Stock Purchase Agreement dated June 5, 1992, by and between the
Company and CVD.
10.13(4) Product Development Agreement dated June 5, 1992, by and between the
Company and CVD.
10.14(6) Distribution Agreement dated May 28, 1993 between CVD and Fukuda
Denshi Co., Ltd.
10.15(6) Micro Motor Catheter and Instrument Development Agreement, Funding and
Option Agreement, Escrow and License agreement, and Distribution
Agreement dated October 1993 between the Company and Du-MED.
10.16(9) Stock Purchase and Technology License Agreement dated September 10,
1994 by and among Endosonics, CVD and SCIMED Life Systems, Inc.
10.17(9) Exclusive Distribution Agreement dated November 1, 1994 between Cordis
S.A. and Endosonics, as amended on December 20, 1994.
10.18(7) Imaging/Therapeutic Combination Devices Development Agreement dated as
of February 2, 1996 by and between Cordis Corporation ("Cordis") and
the Company.
10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and between
Cordis and the Company.
10.20(10) Shareholder Agreement dated June 19, 1996 between Endosonics and CVD.
10.21 License Agreement dated May 16, 1997 between Endosonics and CVD.
10.22 Registration Rights Agreement dated May 14, 1997 by and between
Endosonics and CVD.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 33 of this Report on
Form 10-K/A.)
27.1** Financial Data Schedule.
- ----------
* Confidential Treatment Granted.
** Previously filed.
(1) Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 0-19880) filed with the Commission on July 14, 1993.
(2) Filed as an exhibit to the Company's Registration Statement on Form
8-B filed with the Securities and Exchange Commission (the
"Commission") on September 25, 1992 and incorporated by reference
herein.
(3) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-45280) filed with the Securities and Exchange
Commission on January 24, 1992 (the "Registration Statement") and
incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File
No. 0-19880) filed with the Commission on March 31, 1993.
30.
<PAGE> 32
(5) Filed as Exhibit 10.13 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-45280) filed with the Commission on
February 25, 1992 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K (File
No. 0-19880) filed with the Commission on March 24, 1994.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K/A
(File No. 0-19880) filed with the Commission on July 29, 1996.
(8) Filed as an exhibit to the Company's Form 8-K (File No. 0-19880)
filed with the Commission on February 10, 1997 and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
(File No. 0-19880) filed with the Commission on March 21, 1995.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K
(File No. 0-19880) filed with the Commission on March 19, 1997.
(d) 1. Financial Statements of Cardiovascular Dynamics, Inc.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1995 and 1996
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996
Notes to Consolidated Financial Statements for the years ended
December 31, 1994, 1995 and 1996
2. Financial Statement Schedule.
II - Valuation and Qualifying Accounts
31.
<PAGE> 33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K/A
to be signed on its behalf by the undersigned, thereunto duly authorized.
ENDOSONICS CORPORATION
Date: June 13, 1997 By: /s/ Reinhard J. Warnking
-------------------------------
Reinhard J. Warnking
Chief Executive Officer
(Principal Executive Officer)
By: /s/ Donald D. Huffman
-------------------------------
Donald D. Huffman
Vice President, Finance and Administration
(Principal Financial and Accounting Officer)
32.
<PAGE> 34
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report on Form 10-K/A has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
Reinhard J. Warnking* President, Chief Executive Officer and Director June 13, 1997
- ------------------------- (Principal Executive Officer)
Reinhard J. Warnking
/s/ Donald D. Huffman Vice President, Finance and Administration June 13, 1997
- ------------------------- (Principal Financial and Accounting Officer)
Donald D. Huffman
Roger Salquist* Chairman of the Board of Directors June 13, 1997
- -------------------------
Roger Salquist
Thomas J. Cable* Director
- ------------------------- June 13, 1997
Thomas J. Cable
William G. Davis* Director
- ------------------------- June 13, 1997
William G. Davis
Michael R. Henson* Director
- ------------------------- June 13 1997
Michael R. Henson
Edward M. Leonard* Director
- ------------------------- June 13, 1997
Edward M. Leonard
Paul R. Norris* Director
- ------------------------- June 13, 1997
Paul R. Norris
David H. Rammler* Director
- ------------------------- June 13, 1997
David H. Rammler
</TABLE>
*By: /s/ Donald D. Huffman
----------------------------------------
(Donald D. Huffman - Attorney-in-Fact)
33.
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... F-2
Consolidated Balance Sheets............................................................ F-3
Consolidated Statements of Operations.................................................. F-4
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)............... F-5
Consolidated Statements of Cash Flows.................................................. F-6
Notes to Consolidated Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
EndoSonics Corporation
We have audited the accompanying consolidated balance sheets of EndoSonics
Corporation as of December 31, 1996, and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of EndoSonics Corporation at December 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Sacramento, California
February 14, 1997
F-2
<PAGE> 37
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
December 31,
(In thousands, except share and per share amounts) 1996 1995
=======================================================================================================================
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 34,943 $ 36,757
Short-term investments 5,249 7,638
Trade accounts receivable, net of allowance for doubtful accounts of
$646 and $360 at December 31, 1996 and 1995, respectively 5,682 5,852
Inventories 3,572 4,046
Accrued interest receivable and other current assets 1,202 973
- -----------------------------------------------------------------------------------------------------------------------
Total current assets 50,648 55,266
Property and equipment, net 1,947 1,687
Investment in Cardio Vascular Dynamics, Inc. 19,444 -
- -----------------------------------------------------------------------------------------------------------------------
$ 72,039 $ 56,953
=======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 5,969 $ 5,394
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 5,969 5,394
Deferred distributorship fee revenue 3 154
Convertible obligation - 750
Commitments
Minority interest - 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,
13,522,572 and 12,831,512 shares issued and outstanding as of
December 31, 1996 and 1995, respectively 14 13
Additional paid-in capital 124,024 98,989
Accumulated deficit (58,000) (50,837)
Unrealized gain (loss) on available-for-sale securities 1 (7)
Foreign currency translation 28 (3)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 66,067 48,155
- -----------------------------------------------------------------------------------------------------------------------
$ 72,039 $ 56,953
=======================================================================================================================
</TABLE>
See accompanying notes
F-3
<PAGE> 38
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
(In thousands, except share and per share amounts) 1996 1995 1994
========================================================================================================================
<S> <C> <C> <C>
Revenues:
Product sales $ 23,542 $ 16,175 $ 6,665
License fee - - 1,000
Contract revenue 831 962 353
- ------------------------------------------------------------------------------------------------------------------------
Total revenue 24,373 17,137 8,018
Operating expenses:
Cost of product sales 15,688 11,270 4,716
Acquired in-process research, development and clinical - 488 2,315
Other research, development and clinical 5,746 7,127 8,445
Marketing and sales 5,411 5,096 4,056
General and administrative 4,618 4,498 2,757
Restructuring 518 - -
- ------------------------------------------------------------------------------------------------------------------------
Total operating expenses 31,981 28,479 22,289
- ------------------------------------------------------------------------------------------------------------------------
Loss from operations (7,608) (11,342) (14,271)
Equity in net loss of CardioVascular Dynamics, Inc. (1,621) - -
Other income (expense):
Interest income 2,269 888 1,124
Distributorship fees and other income (expense) (203) (18) (97)
- ------------------------------------------------------------------------------------------------------------------------
Total other income, net 2,066 870 1,027
- ------------------------------------------------------------------------------------------------------------------------
Net loss $ (7,163) $ (10,472) $ (13,244)
========================================================================================================================
Net loss per share $ (0.53) $ (1.01) $ (1.38)
========================================================================================================================
Shares used in computing net loss per share 13,394,728 10,386,549 9,583,693
========================================================================================================================
</TABLE>
See accompanying notes
F-4
<PAGE> 39
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
UNREALIZED
CONVERTIBLE GAIN (LOSS) ON
PREFERRED STOCK COMMON STOCK ADDITIONAL AVAILABLE- FOREIGN TOTAL
(IN THOUSANDS, ----------------------------------- PAID-IN ACCUMULATED FOR-SALE CURRENCY STOCKHOLDERS
EXCEPT SHARE AMOUNTS) SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT SECURITIES TRANSLATION EQUITY
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993..... - $ - 9,296,989 $ 9 $ 60,267 $(27,121) $ - $ - $ 33,155
Issuance of shares
in Du-MED acquisition......... - - 560,000 1 2,659 - - - 2,660
Exercise of common
stock options................. - - 126,042 - 144 - - - 144
Unrealized loss on
available-for-sale
securities.................... - - - - - - (451) - (451)
Foreign currency
translation................... - - - - - - - 4 4
Net loss....................... - - - - - (13,244) - - (13,244)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994..... - - 9,983,031 10 63,070 (40,365) (451) 4 22,268
Issuance of shares to
complete CVD acquisition...... - - 50,000 - 488 - - - 488
Issuance of common stock
in follow-on offering,
net of issuance
costs of $2,806.............. - - 2,645,000 3 34,882 - - - 34,885
Exercise of common
stock options................. - - 153,481 - 549 - - - 549
Change in unrealized
loss on available-for-sale
securities.................... - - - - - - 444 - 444
Foreign currency
translation................... - - - - - - - (7) (7)
Net loss....................... - - - - - (10,472) - - (10,472)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995..... - - 12,831,512 13 98,989 (50,837) (7) (3) 48,155
Increase in carrying value
from CardioVascular Dynamics,
Inc., initial public offering. - - - - 17,606 - - - 17,606
Sale of shares to Cordis
Corporation.................. 350,877 1 5,000 - - - 5,001
Exercise of common stock options - - 340,183 - 2,429 - - - 2,429
Change in unrealized
loss on available-for-sale
securities.................. - - - - - - 8 - 8
Foreign currency translation... - - - - - - - 31 31
Net loss....................... - - - - - (7,163) - - (7,163)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996..... - $ - 13,522,572 $14 $124,024 $(58,000) $ 1 $28 $ 66,067
===================================================================================================================================
</TABLE>
F-5
<PAGE> 40
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Year ended December 31,
(In thousands) 1996 1995 1994
======================================================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,163) $ (10,472) $ (13,244)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 618 415 1,035
Issuance of common stock for in-process research,
development and clinical - 488 2,315
Equity in net loss of CardioVascular Dynamics, Inc. 1,621 - -
Net changes in:
Trade accounts receivable, net 170 (2,409) (2,166)
Inventories 505 (2,142) (937)
Accrued interest receivable and other current assets (229) (106) 207
Accounts payable and accrued expenses 575 2,132 949
Deferred revenue (151) (111) (118)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (4,054) (12,205) (11,959)
======================================================================================================================
INVESTING ACTIVITIES
Purchase of short-term investments (4,000) - (10,996)
Sales of short-term investments 289 6,815 14,976
Maturities of short-term investments 6,108 1,539 8,105
Capital expenditures for property and equipment (1,164) (438) (964)
Effect of CardioVascular Dynamics, Inc., initial public
offering (6,423) - -
Business acquisitions, net of cash and cash equivalents
acquired - - 143
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (5,190) 7,916 11,264
======================================================================================================================
FINANCING ACTIVITIES
Proceeds from common stock issuance to Cordis
Corporation 5,001 - -
Proceeds from issuance of common stock 2,429 35,434 144
Proceeds from convertible obligation - 750 -
Proceeds from sale of CVD common stock - - 2,500
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 7,430 36,184 2,644
- ----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (1,814) 31,895 1,949
Cash and equivalents, beginning of year 36,757 4,862 2,913
- ----------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year $ 34,943 $ 36,757 $ 4,862
======================================================================================================================
Non-cash financing and investing activities:
Common stock issued in business acquisition $ - $ - $ 2,660
Capital expenditures for property and equipment 292 - -
Effect of CardioVascular Dynamics, Inc.,
initial public offering 17,606 - -
======================================================================================================================
</TABLE>
See accompanying notes
F-6
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
EndoSonics Corporation (EndoSonics), a Delaware corporation, develops,
manufactures and markets intravascular ultrasound imaging systems, diagnostic
imaging catheters, combined angioplasty imaging catheters and drug delivery
catheters for the diagnosis and treatment of coronary and peripheral vascular
disease.
Consolidation
The accompanying consolidated financial statements include the accounts of
EndoSonics and its subsidiaries (EndoSonics and its subsidiaries are
collectively referred to hereinafter as the "Company"). All significant
inter-company accounts and transactions have been eliminated in consolidation.
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 Notes 3
and 4).
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and in the
accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
The local currency is the functional currency of the Company's foreign
subsidiary. Exchange gains or losses resulting from foreign currency
translation are included as a component of stockholders' equity. Transaction
exchange gains or losses are included in other income and expense in the
consolidated statement of operations, and have not been significant in any year
presented.
Cash Equivalents and Short-Term Investments
The Company invests its excess cash in various investment grade,
interest-bearing securities. As of December 31, 1996 and 1995, cash
equivalents and short-term investments consisted of money market mutual funds,
U.S. Treasury Notes and obligations of other U.S. government agencies and
corporate debt securities. With the exception of the U.S. government and its
agencies, by policy, the amount of credit exposure to any one issuer is
limited. The Company has not experienced any significant losses on such
investments.
The Company accounts for its marketable investments under Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Management determines the
appropriate classification of debt securities at the time of purchase and
re-evaluates such designation as of each balance sheet date. At December 31,
1996 and 1995, the Company's entire portfolio of investments is classified as
available-for-sale pursuant to SFAS No. 115. These securities are stated at
fair market value, determined based on quoted market prices, with the
unrealized gains and losses reported in a separate component of stockholders'
equity.
The amortized cost of debt securities classified as available-for-sale
is adjusted for amortization of premiums and accretion of discounts to
maturity, over the estimated life of the security. Such amortization is
included in interest income. Realized gains and losses, which were not
significant in any year presented, and declines in value judged to be
other-than-temporary are included in other income (expense). The cost of
securities sold is based on the specific identification method.
For purposes of reporting cash flows, the Company considers highly
liquid investments with original maturities of three months or less as cash
equivalents.
Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value.
F-7
<PAGE> 42
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to five years.
Concentrations of Credit Risk, Significant Customers and Export Sales
The Company sells its products primarily to medical institutions and
distributors worldwide (see Note 6). The Company performs ongoing credit
evaluations of its customers' financial condition and generally does not
require collateral from customers. Management believes that an adequate
allowance for doubtful accounts has been provided. Accounts receivable from
two of the Company's distributors, Cordis Corporation (Cordis) and Fukuda
Denshi Co., Ltd. (Fukuda), represented 75% and 7% of net trade accounts
receivable, respectively, at December 31, 1996 (54% and 15%, respectively, at
December 31, 1995).
During 1996, sales to Cordis and Fukuda comprised 62% and 9% of the
Company's total product sales, respectively. During 1995, sales to Cordis and
Fukuda comprised 53% and 16% of the Company's total product sales,
respectively. During 1994, sales to Fukuda comprised 33% of the Company's
total product sales.
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1996 1995 1994
========================================================
<S> <C> <C> <C>
Europe $9,820 $6,996 $2,951
Asia 6,689 2,891 2,402
Other 359 14 38
--------------------------------------------------------
$16,868 $9,901 $5,391
========================================================
</TABLE>
Revenue Recognition and Warranties
The Company recognizes revenue from the sale of its products when the goods are
shipped to its customers, including distributors. Contract revenue is
recognized upon the completion of specified milestones. For ultrasound imaging
systems sold in the United States, the Company provides a 12-month limited
warranty covering materials and workmanship. For ultrasound imaging systems
sold to its international distributors, the Company provides various warranty
periods up to 12 months covering replacement parts. A provision for anticipated
warranty expenses is accrued at the time of shipment. Customers may purchase
extended warranty coverage for additional one-year periods. Revenue from sales
of extended warranties is deferred and recognized as revenue on a straight-line
basis over the term of the extended warranty.
Advertising Expenses
The Company expenses advertising costs when incurred. Advertising expenses
have not been significant in any period presented.
Stock Compensation
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which
the Company adopted in 1996, the Company has elected to follow Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25") and related interpretations in accounting for its employee stock
option plans. Under APB 25, if the exercise price of the Company's employee
stock options equals or exceeds the fair value of the underlying stock on the
date of grant as determined by the Company's Board of Directors, no
compensation expense is recognized. See Note 12 for pro forma disclosures
required by SFAS 123.
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 and
warrants are excluded from the computation because their effect is
antidilutive.
F-8
<PAGE> 43
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December 31,
1996 and 1995:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
===========================================================================
<S> <C> <C> <C> <C>
December 31, 1996
U.S. Treasury notes and
obligations of other
U.S. government agencies $18,946 $2 $ - $18,948
Corporate debt securities 17,164 - (1) 17,163
--------------------------------------------------------------------------
$36,110 $2 $(1) $36,111
===========================================================================
===========================================================================
December 31, 1995
U.S. Treasury notes and
obligations of other
U.S. government agencies $37,008 $- $(5) $37,003
Corporate debt securities 1,529 1 (3) 1,527
--------------------------------------------------------------------------
$38,537 $1 $(8) $38,530
===========================================================================
</TABLE>
Included in the above table are securities with fair values totaling $30,862
and $30,892 at December 31, 1996 and 1995, respectively, which are classified
as cash equivalents in the accompanying balance sheet.
The amortized cost and estimated fair value of debt securities at
December 31, 1996, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because the issuers of the
securities may have rights to prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
---------------------------------------------------------
Estimated
Amortized Fair Market
Cost Value
=========================================================
<S> <C> <C>
Due in one year or less $34,865 $34,864
Due after one year 1,245 1,247
---------------------------------------------------------
$36,110 $36,111
=========================================================
</TABLE>
3. BUSINESS ACQUISITIONS
In August 1994, EndoSonics acquired all of the capital stock of Du-MED BV
(Du-MED), a company incorporated in the Netherlands, in exchange for 560,000
shares of EndoSonics common stock with an aggregate fair market value of
$2,660. EndoSonics also incurred certain acquisition costs of approximately
$282 in conjunction with this transaction. Du-MED is developing electronic
micromotor medical ultrasound imaging technology. Du-MED's results of
operations are included in the consolidated statement of operations from the
date of acquisition. EndoSonics accounted for this transaction as an
acquisition under the purchase method of accounting. In connection with the
acquisition, EndoSonics recorded intangible assets of approximately $308 which
have been fully amortized as of December 31, 1995. Additionally, $2,315 was
charged to acquired in-process research, development and clinical expense
related to products still in the development stage, which have not yet received
regulatory approval and which do not have identified alternative future uses.
Prior to the Du-MED acquisition, the Company had been funding certain
research and development at Du-MED under the terms of a development agreement.
Research and development expense includes $800 for the year ended December 31,
1994 related to this agreement.
F-9
<PAGE> 44
Pursuant to an Agreement and Plan of Reorganization between EndoSonics and
CardioVascular Dynamics, Inc., in June 1993 EndoSonics acquired all of the
preferred and common shares of CVD held by others in exchange for $335 in cash
and 250,000 shares of EndoSonics' common stock with an aggregate market value of
$1,563. EndoSonics also incurred direct acquisition costs of approximately $236
in conjunction with this transaction which have been included as part of the
purchase price. EndoSonics accounted for the acquisition of the interest in CVD
under the purchase method of accounting. In connection with the acquisition,
$2,000 was charged to acquired in-process research, development and clinical
expense related to CVD products which had not received regulatory approval and
did not have identified alternative uses. Pursuant to the terms of the
Agreement and Plan of Reorganization, in June 1995, the Company became obligated
to issue 50,000 shares of its common stock to the former shareholders of CVD
because the market price of the Company's common stock did not exceed a
specified price for a specified period during the two year period following the
acquisition. The fair market value of such shares of $488 has been charged to
acquired in- process research, development and clinical expenses (see notes 4
and 5).
In March 1996, the Company purchased 400,000 shares of CVD Series B Preferred
Stock at $20.00 per share for an aggregate purchase price of $8,000. The
Company converted their shares to common shares upon the consummation of CVD's
initial public offering.
4. CHANGE IN OWNERSHIP PERCENTAGE OF CARDIOVASCULAR DYNAMICS, INC.
On June 19, 1996, EndoSonics' 84% owned subsidiary, CVD (see Note 3),
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). As
of December 31, 1996, EndoSonics owned 45% of the outstanding shares of CVD.
As a result of this transaction, CVD's results of operations have been
consolidated through June 19, 1996, and accounted for on the equity method
thereafter. In June 1996, the Company recorded an increase to additional
paid-in capital of approximately $17.6 million representing the Company's
proportionate share of CVD's net assets following the IPO. For the period from
June 20, 1996 to December 31, 1996, the Company recorded ($1,621) representing
its proportionate share of CVD's net losses for the period. Condensed financial
information for CVD is shown below:
<TABLE>
<CAPTION>
--------------------------------------------------------
Balance Sheet December 31,
(In thousands) 1996
========================================================
<S> <C>
Current assets $48,574
Property and equipment, net 1,182
Other assets 328
-------
Total assets $50,084
=======
Current liabilities $2,432
Deferred distributorship fee revenue 29
Stockholders' equity 47,623
-------
Total liabilities and stockholders'
equity $50,084
=======
EndoSonics' share of CVD's net assets $19,444
========================================================
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations Year ended
(In thousands) December 31, 1996
=============================================================
<S> <C>
Total revenue $8,734
Cost of sales 4,111
Gross profit 4,623
Total operating expenses 10,621
Other income 1,374
-------------------------------------------------------------
Net loss ($4,624)
=============================================================
</TABLE>
CardioVascular Dynamics, Inc.'s stock is quoted on the Nasdaq Stock Market. The
closing price of CVD's stock at December 31, 1996 was $13.00 per share. The
Company held 4,040,000 shares of CVD's common stock at December 31, 1996.
F-10
<PAGE> 45
5. PRODUCT LICENSE AGREEMENTS
In September 1994, EndoSonics and CVD entered into a Stock Purchase and
Technology License Agreement with SciMed Life Systems, Inc. (SciMed). SciMed
acquired a 19% interest in CVD in exchange for $2,500 in cash. From September
1994 through the date of CVD's initial public offering, SciMed had the right to
exchange its shares of CVD preferred stock for shares of EndoSonics common
stock at a guaranteed conversion rate. Accordingly, during this period
SciMed's entire investment in CVD was allocated to minority interest and all of
the net losses incurred by CVD are included in the operating results of
EndoSonics.
In 1994, CVD also granted SciMed an exclusive license to certain
patents in the cardiovascular field of use, which allow SciMed to manufacture
the Transport PTCA infusion catheter (the "Transport") developed by CVD in
exchange for a $1,000 license fee.
In addition, SciMed paid approximately $641 and $220 during 1995 and
1994, respectively, to fund CVD's development of technology and for other
support, which is included in contract revenue in the accompanying statement of
operations.
6. DISTRIBUTION AGREEMENTS
During 1994, the Company entered into agreements with Cordis for the exclusive
distribution by Cordis of certain of EndoSonics intracoronary ultrasound
systems and catheters worldwide, excluding Japan, Canada and certain European
countries. These agreements expired in 1995. In February 1996, the Company
and Cordis entered into a new agreement which provides for the exclusive
distribution of EndoSonics' products in North America, Europe, Africa and the
Middle East through 1998. During the term of the agreement, Cordis shall use
reasonable efforts to make Minimum Purchase Amounts, as defined, of $10
million, $15 million and $20 million in 1996, 1997 and 1998 respectively.
The Company and Cordis also entered into an agreement for the
development of certain catheters. Under the terms of this agreement, the
Company may receive payments from Cordis as contract milestones are achieved.
During 1996, the Company received a payment totaling $705.
In connection with the above agreements, in February 1996, Cordis
purchased 350,877 shares of the Company's common stock at $14.25 per share.
The Company has executed distribution agreements with Fukuda, a common
shareholder of EndoSonics. The agreements provide Fukuda with exclusive
distribution rights relative to certain of the Company's products in Japan for
periods extending through May 1999, which may be extended at the option of the
parties. Distribution fees received from Fukuda are being recognized as
revenue over the initial periods covered by the respective agreement. There
are no purchase commitments between Fukuda and the Company.
In July 1995, CVD amended its distribution agreement with Fukuda to
include additional products. Under the terms of the amendment, Fukuda made a
$750 payment which is convertible into equity securities of CVD upon the
occurrence of certain events. Upon the CVD initial public offering, the $750
convertible obligation was converted to equity securities of CVD.
F-11
<PAGE> 46
7. 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 December
31, 1996 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Representing
Asset Write- Future Cash
(In thousands) Provision Downs Outlays
============================================================================
<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>
The charges are included in the accompanying Consolidated Statements of
Operations for the year ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------
(In thousands) 1996
=======================================================
<S> <C>
Cost of sales $794
Other research, development and clinical 475
Marketing and sales 480
General and administrative 799
Restructuring 518
-------------------------------------------------------
Total charges $3,066
=======================================================
</TABLE>
The provision for restructuring and other charges was approximately $932 as of
December 31, 1996. Subsequent to the balance sheet date, the Company decided
to close its Pleasanton, CA manufacturing facility:
8. INVENTORIES
Inventories consisted of the following as of December 31:
<TABLE>
<CAPTION>
-------------------------------------------------------
1996 1995
=======================================================
<S> <C> <C>
Raw materials $798 $1,225
Work-in-process 1,181 1,575
Finished goods 1,593 1,246
-------------------------------------------------------
$3,572 $4,046
=======================================================
</TABLE>
9. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
-------------------------------------------------------
1996 1995
-------------------------------------------------------
<S> <C> <C>
Furniture, fixtures and
equipment $5,459 $4,353
Leasehold improvements 332 411
-------------------------------------------------------
5,791 4,764
Less accumulated depreciation
and amortization (3,844) (3,077)
-------------------------------------------------------
$1,947 $1,687
=======================================================
</TABLE>
F-12
<PAGE> 47
10. CURRENT LIABILITIES
Accounts payable and accrued expenses consisted of the following as of December
31:
<TABLE>
<CAPTION>
-------------------------------------------------------
1996 1995
=======================================================
<S> <C> <C>
Accrued restructuring $933 -
Accounts payable 1,624 $1,468
Accrued payroll and related
expenses 1,647 1,637
Accrued product transition 312 580
costs
Accrued royalties 3 521
Accrued warranty 295 290
Other accrued expenses 1,155 898
-------------------------------------------------------
$5,969 $5,394
=======================================================
</TABLE>
11. OPERATING LEASES
The Company leases its administrative, research and manufacturing facilities
and certain equipment under long-term non-cancelable lease agreements that have
been accounted for as operating leases. Certain of these leases include
scheduled rent increases and renewal options as prescribed by the agreements.
Future minimum payments by year under long-term noncancelable
operating leases are as follows:
<TABLE>
=======================================================
<S> <C>
1997 $387
1998 543
1999 559
2000 554
2001 567
Thereafter 2,385
-------------------------------------------------------
$4,995
=======================================================
</TABLE>
Rental expense charged to operations for all operating leases during 1996, 1995
and 1994 was approximately $630, $576 and $412, respectively.
F-13
<PAGE> 48
12. EQUITY
COMMON STOCK
In 1995 the Company completed a second public offering of 2,645,000 shares of
its common stock. The Company received net proceeds of approximately $35
million.
STOCK OPTIONS
In March 1988, EndoSonics established a stock option plan (the "1988 Plan")
under which key employees, directors, officers and consultants may participate.
Either incentive stock options or nonstatutory stock options may be granted
under the 1988 Plan. Option prices are established by the Board of Directors
and cannot be less than 85% of the fair market value of a share of common stock
on the date of the option grant in the case of nonstatutory options, or 100% of
the fair market value in the case of incentive stock options (110% in the case
of any options granted to a person who owns more than 10% of the total combined
voting power of all classes of stock of the Company). Options generally vest
over periods ranging from one to four years (principally four years) and are
exercisable upon vesting over five or ten year terms as specified in the option
grants. Certain options granted in 1995 and 1996 have accelerated vesting
provisions. As of December 31, 1996, 3,200,000 common shares were reserved for
issuance, 998,334 shares were fully exercisable (723,861 at December 31, 1995)
and 391,958 shares were available for future grant (none at December 31, 1995).
The following is a summary of the activity, including the range of per
share option prices, in the 1988 Plan during each of the three years in the
period ended December 31, 1996:
<TABLE>
<CAPTION>
----------------------------------------------------------------
Weighted
Shares Option Avg.
Under Price Exercise
Option Per Share Price
================================================================
<S> <C> <C> <C>
Balance at
December 31, 1993 1,076,369 $.32 - $16.50 $5.50
Granted 497,236 3.75 - 7.00 5.43
Canceled (43,486) .80 - 9.75 7.11
Exercised (124,094) .32 - 7.00 1.27
---------------------------------------------------------------
Balance at
December 31, 1994 1,406,025 .32 - 16.50 6.57
Granted 852,850 7.75 - 13.88 10.34
Canceled (86,941) 5.25 - 10.00 6.20
Exercised (126,545) .32 - 7.75 5.59
---------------------------------------------------------------
Balance at
December 31, 1995 2,045,389 .32 - 16.50 8.24
Granted 668,685 11.88 - 16.00 12.18
Canceled (61,324) 3.75 - 13.88 10.92
Exercised (337,384) .32 - 9.75 7.28
---------------------------------------------------------------
Balance at
December 31, 1996 2,315,366 $.32 - $16.50 $7.90
================================================================
</TABLE>
No shares purchased under the option plan are subject to repurchase at
December 31, 1996.
F-14
<PAGE> 49
As part of the CVD acquisition, the Company agreed to the assumption
of all of the outstanding stock options previously granted by CVD and that such
option holders may upon exercise of their options purchase up to 39,820 shares
of EndoSonics common stock at exercise prices ranging from $.167 to $.334 per
share. Through December 31, 1996, 31,683 of these options have been exercised.
The options outstanding at December 31, 1996 have been segregated into
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
---------------------------------------------------
Options Outstanding
---------------------------------------------------
Weighted-
Options Average
Outstanding Remaining Weighted
Range of at Contractual -Average
Exercise December 31, Life Exercise
Prices 1996 (in years) Price
===================================================
<S> <C> <C> <C>
$0.00-$2.50 51,432 4.5 $1.06
2.50-5.00 202,880 6.4 4.27
5.00-7.50 439,915 9.8 6.72
7.50-10.00 572,266 8.6 8.36
10.00-12.50 604,685 9.4 11.75
12.50-15.00 400,445 9.0 13.36
$15.00-20.00 43,743 8.9 16.21
---------------------------------------------------
2,315,366 8.8 $9.43
===================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------
Options Exercisable
----------------------------------------------------
Range of Options Currently Weighted-
Exercise Exercisable at Average
Prices December 31, 1996 Exercise Price
====================================================
<S> <C> <C>
$0.00-$2.50 51,432 $1.06
2.50-5.00 147,758 4.47
5.00-7.50 296,578 6.78
7.50-10.00 319,195 8.56
10.00-12.50 66,562 11.48
12.50-15.00 98,066 13.49
$15.00-$20.00 18,743 16.50
----------------------------------------------------
998,334 $7.90
====================================================
</TABLE>
Pro forma information regarding net loss and loss per share is
required by Statement 123. The fair value for these options was estimated at
the date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free
interest rates between 6.06% and 6.74% for both years; a dividend yield of 0%;
volatility factor of the expected market price of the Company's common stock of
1.09 for both years and a weighted-average expected life of the option of
between 5 and 8.25 years for both years.
F-15
<PAGE> 50
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):
<TABLE>
<CAPTION>
--------------------------------------------------------
1996 1995
========================================================
<S> <C> <C>
Pro forma net loss $ (10,642) $ (12,315)
Pro forma net loss per share $ (.80) $ (1.19)
========================================================
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully realized until 1997.
13. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows at
December 31, 1996:
<TABLE>
<CAPTION>
---------------------------------------------------------
1996 1995
Federal Federal
=========================================================
<S> <C> <C>
Net operating loss
carry-forward $ 13,828 $ 14,716
Research and development
and other tax credit
carry-forward 1,411 1,068
Other 2,374 2,104
---------------------------------------------------------
Gross deferred tax 17,613 17,888
assets
Valuation allowance (17,613) (17,888)
---------------------------------------------------------
Net deferred tax assets $ - $ -
=========================================================
</TABLE>
A valuation allowance has been established against the deferred tax
assets, as it is more likely than not that the tax benefits of the future
deductible temporary differences at December 31, 1996 will not be realized.
The valuation allowance increased by $3,891 and $3,523 in 1995 and 1994,
respectively.
At December 31, 1996, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $38 million and $9
million, respectively, which expire in the years 1996 through 2011. At
December 31, 1996, the Company has research and development credit
carryforwards for federal income tax purposes of approximately $1,060, which
expire in the years 2004 through 2010.
As a result of the deconsolidation of CVD for income tax purposes
which occurred as a result of its initial public offering, the net deferred tax
assets have decreased by approximately $1,671 of which approximately $962 is
related to CVD net operating losses and research and development credits.
Because of the "change of ownership" provision of the Tax Reform Act
of 1986, utilization of the Company's net operating loss carryforwards and tax
credit carryforwards may be subject to an annual limitation against taxable
income in future periods. As a result of the annual limitation, a portion of
these carryforwards may expire before ultimately becoming available to reduce
future income tax liabilities.
F-16
<PAGE> 51
14. SUBSEQUENT EVENT
On January 27, 1997, EndoSonics Corporation and Cardiometrics, Inc., jointly
announced the signing of a definitive merger agreement for a transaction valued
at approximately $9.00 per share of Cardiometrics common stock or $68.2
million. Under the merger agreement approved by the boards of both companies,
Cardiometrics' stockholders will receive 0.35 newly issued shares of EndoSonics
common stock, 0.20 shares of CardioVascular Dynamics, Inc., common stock, held
by EndoSonics, and $2.00 cash, in exchange for each share of Cardiometrics
common stock. The CVD exchange ratio will be increased, up to a maximum of
0.2636 per Cardiometrics common share, if the total merger consideration is
less than $9.00 per Cardiometrics common share during a specified period
immediately preceding the stockholders meeting of Cardiometrics to approve the
merger. EndoSonics has the right to substitute cash for these additional CVD
shares. CVD is a 45%-owned publicly-traded subsidiary of EndoSonics.
The merger is expected to close during the second calendar quarter of
1997 and is subject to the approval of the stockholders of Cardiometrics and
certain regulatory approvals. It is anticipated that the combination will be
accounted for under the purchase method of accounting. Cardiometrics also
granted EndoSonics an option to purchase up to 19.9% of its outstanding shares
exercisable only on the occurrence of specified events including termination of
the merger agreement following commencement of a tender offer by a third party
for Cardiometrics.
Also, in January 1997, the Board of Directors of EndoSonics approved a
dividend of .04 shares of CVD common stock to be paid on each outstanding share
of EndoSonics common stock with the record date and exact date of distribution
to be determined after the close of merger described above.
F-17
<PAGE> 52
ENDOSONICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------------------------------------------------------------------------------------
Additons
-------------------------------------
Balance at Charges to Charged to Balance or
Description beginning of period cost and expenses other accounts end of period
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts $ 360 $ 497 $ - $ (211)(2) $ 646
Accrued warranty expenses $ 280 $ 350 $ - $ (335)(1)(3) $ 295
Year ended December 31, 1995
Allowance for doubtful accounts $ 365 $ 365 $ 85 $ 445(2) $ 360
Accrued warranty expenses $ 321 $ 257 $ - $ 298(1) $ 280
Year ended December 31, 1994
Allowance for doubtful accounts $ 102 $ 402 $ - $ 139(2) $ 365
Accrued warranty expenses $ 75 $ 324 $ - $ 78(1) $ 321
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Deductions represent actual warranty expenses charged against
the accrual.
(2) Deductions represent accounts written off.
(3) Deductions represent effect of CVD initial public offering.
F-18
<PAGE> 53
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors...................................... F-19
Consolidated Balance Sheets............................................................ F-20
Consolidated Statements of Operations.................................................. F-21
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)............... F-22
Consolidated Statements of Cash Flows.................................................. F-23
Notes to Consolidated Financial Statements............................................. F-24
</TABLE>
F-19
<PAGE> 54
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
CardioVascular Dynamics, Inc.
We have audited the accompanying consolidated balance sheets of
CardioVascular Dynamics, Inc. and subsidiary as of December 31, 1995 and 1996,
and the related consolidated statements of operations, stockholders' equity (net
capital deficiency) and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(d)1. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
CardioVascular Dynamics, Inc. and subsidiary at December 31, 1995 and 1996, and
the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
January 30, 1997
F-20
<PAGE> 55
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................................... $1,568 $17,192
Marketable securities available-for-sale................................ -- 25,733
Accounts receivable, net of allowance for doubtful accounts of $180 and
$377, respectively................................................... 1,117 2,268
Other accounts receivable............................................... -- 320
Inventories............................................................. 754 2,899
Other current assets.................................................... 58 162
------ -------
Total current assets............................................ 3,497 48,574
Property and equipment:
Furniture and equipment................................................. 357 1,161
Leasehold improvements.................................................. 174 310
------ -------
531 1,471
Less accumulated depreciation and amortization.......................... (107) (289)
------ -------
Net property and equipment...................................... 424 1,182
Notes receivable from officers............................................ -- 325
Other assets.............................................................. 81 3
------ -------
Total assets.................................................... $4,002 $50,084
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued expenses................................... $1,684 $ 2,382
Payable to Parent....................................................... 2,537 --
Deferred distributorship fee revenue, current portion................... 50 50
------ -------
Total current liabilities....................................... 4,271 2,432
Deferred distributorship fee revenue...................................... 79 29
Convertible obligation.................................................... 750 --
Commitments
Stockholders' equity (net capital deficiency):
Convertible Preferred Stock, $.001 par value; aggregate liquidation
preference of $13,160,000 as of December 31, 1995; 7,560,000 shares
authorized, 2,000,000 and no shares issued and outstanding as of
December 31, 1995 and 1996, respectively............................. 2 --
Common Stock, $.001 par value; 30,000,000 shares authorized, no shares
and 9,004,000 shares issued or outstanding at December 31, 1995 and
1996, respectively................................................... -- 9
Additional paid-in capital.............................................. 5,670 58,869
Deferred compensation................................................... (345) (376)
Accumulated deficit..................................................... (6,425) (11,049)
Unrealized gain on available-for-sale securities........................ -- 170
------ -------
Total stockholders' equity (net capital deficiency)............. (1,098) 47,623
------ -------
Total liabilities and stockholders' equity (net capital
deficiency).................................................... $4,002 $50,084
====== =======
</TABLE>
See accompanying notes.
F-21
<PAGE> 56
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Revenue:
Sales (including $43 to a related party in 1994).......... $ 1,169 $ 3,462 $ 8,384
License fee and other from related party.................. 1,000 -- 150
Contract.................................................. 220 641 200
------ ------- -------
Total revenue.......................................... 2,389 4,103 8,734
Operating costs and expenses:
Cost of sales............................................. 848 2,051 4,111
Charge for acquired in-process research and development... -- 488 2,133
Research and development (including $73 in 1994 paid to
EndoSonics)............................................ 1,228 1,683 3,582
Marketing and sales....................................... 748 1,526 3,358
General and administrative (including $227, $340 and $156
for the years ended December 31, 1994, 1995 and 1996,
respectively, paid to EndoSonics)...................... 587 1,331 1,548
------ ------- -------
Total operating costs and expenses................ 3,411 7,079 14,732
------ ------- -------
Loss from operations........................................ (1,022) (2,976) (5,998)
Other income:
Interest income........................................... -- 42 1,324
Distributorship fees and other income..................... 51 60 50
------ ------- -------
Total other income................................ 51 102 1,374
------ ------- -------
Net loss.................................................... $ (971) $(2,874) $(4,624)
====== ======= =======
Net loss per share (pro forma through June 1996)............ $ (0.25) $ (0.65) $ (0.65)
====== ======= =======
Shares used in computing net loss per share (pro forma
through June 1996)........................................ 3,876 4,441 7,141
====== ======= =======
</TABLE>
See accompanying notes.
F-22
<PAGE> 57
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK ADDITIONAL UNREALIZED EQUITY
------------------ ------------------ PAID-IN DEFERRED ACCUMULATED GAIN ON (NET CAPITAL
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INVESTMENTS DEFICIENCY)
---------- ------ ---------- ------ ---------- ------------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993................. -- -- 3,240,000 3 2,336 -- (2,580) (241)
Sale of Common Stock to
corporate investor... -- -- 760,000 1 2,499 -- -- 2,500
Net loss............... -- -- -- -- -- -- (971) (971)
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1994................. -- -- 4,000,000 4 4,835 -- (3,551) 1,288
Additional effects of
merger with
EndoSonics
Acquisition Corp..... -- -- -- -- 488 -- -- 488
Issuance of Preferred
Stock in exchange for
Common Stock......... 2,000,000 2 (4,000,000) (4) 2 -- -- --
Deferred compensation
resulting from grant
of options........... -- -- -- -- 345 (345) -- --
Net loss............... -- -- -- -- -- -- (2,874) (2,874)
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1995................. 2,000,000 2 -- -- 5,670 (345) (6,425) (1,098)
Sale of Preferred Stock
to EndoSonics........ 400,000 -- -- -- 8,000 -- -- 8,000
Conversion of Preferred
Stock................ (2,400,000) (2) 4,800,000 5 (3) -- -- --
Exercise of Common
Stock Options........ -- -- 139,000 -- 138 -- -- 138
Initial Public Offering
of Common Stock...... -- -- 3,910,000 4 42,764 -- -- 42,768
Deferred compensation
resulting from grant
of options........... -- -- -- -- 150 (150) -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 119 -- 119
Acquisition of
Intraluminal Devices,
Inc.................. -- -- 93,000 -- 1,400 -- -- -- 1,400
Conversion of $750,000
debt by Fukuda
Denshi............... -- -- 62,000 -- 750 -- -- -- 750
Net loss............... -- -- -- -- -- -- (4,624) (4,624)
Unrealized gain on
investments.......... -- -- -- -- -- -- -- 170 170
---------- ----- ---------- --- ------- ----- -------- ---- -------
Balance at December 31,
1996................. -- $ -- 9,004,000 $ 9 $ 58,869 $ (376) $ (11,049) $ 170 $47,623
========== ===== ========== === ======= ===== ======== ==== =======
</TABLE>
See accompanying notes.
F-23
<PAGE> 58
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Operating activities
Net loss......................................................... $ (971) $(2,874) $ (4,624)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.................................. 18 74 182
Amortization of deferred compensation.......................... -- -- 119
Bad debt expense............................................... -- 249 221
Charge for acquired in-process research and development........ -- 488 1,400
Net changes in:
Trade accounts receivable, net................................. (662) (639) (1,372)
Receivable from related parties................................ (125) 125 --
Inventories.................................................... (14) (704) (2,145)
Other assets................................................... -- (135) (671)
Accounts payable and accrued expenses.......................... 273 1,369 698
Deferred distributor fee revenue............................... (50) (54) (50)
----- ------- -------
Net cash used in operating activities............................ (1,531) (2,101) (6,242)
Investing activities:
Purchase of available-for-sale securities........................ -- -- (25,563)
Capital expenditures for furniture, fixtures and equipment....... (35) (443) (940)
----- ------- -------
Net cash used in investing activities............................ (35) (443) (26,503)
Financing activities:
Proceeds from issuance of convertible obligation............... -- 750 --
Proceeds from sale of Common Stock............................. 2,500 -- 42,768
Proceeds from exercise of stock options........................ -- -- 138
Proceeds from sale of Preferred Stock to Parent................ -- -- 8,000
Payable to Parent, net......................................... 1,898 (17) (2,537)
----- ------- -------
Net cash provided by financing activities........................ 4,398 733 48,369
----- ------- -------
Net increase (decrease) in cash.................................. 2,832 (1,811) 15,624
Cash and cash equivalents, beginning of period................... 547 3,379 1,568
----- ------- -------
Cash and cash equivalents, end of period......................... $ 3,379 $ 1,568 $ 17,192
===== ======= =======
Supplemental disclosures of non-cash financing activities:
Common stock issued upon the acquisition of Intraluminal
Devices, Inc., Note 1....................................... -- -- $ 1,400
Conversion of Debentures to Common Stock, Note 4............... -- -- 750
</TABLE>
See accompanying notes.
F-24
<PAGE> 59
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Business and Basis of Presentation
CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March
16, 1992 in the State of California. The Predecessor, and its successor
corporation discussed below, develops, manufactures and markets proprietary
therapeutic catheters used to treat certain vascular diseases.
In June 1992, EndoSonics Corporation ("EndoSonics") acquired a 40%
preferred interest in the Predecessor. EndoSonics, a Delaware corporation,
develops, manufactures, and markets intravascular ultrasound imaging systems and
diagnostic, therapeutic and imaging catheters for the treatment of coronary and
peripheral vascular disease.
In June 1993, EndoSonics acquired all of the remaining Preferred and Common
Stock of the Predecessor. The acquisition was accomplished through a merger
between the Predecessor and EndoSonics Acquisition Corp., a wholly owned
subsidiary of EndoSonics (which then changed its name to CardioVascular
Dynamics, Inc.) (hereinafter referred to as "CVD" or the "Company").
The acquisition by EndoSonics resulted in a new basis for the CVD assets
and liabilities. Accordingly, the purchase price paid by EndoSonics has been
allocated to the identifiable assets and liabilities, including in-process
research and development, which was immediately expensed as no CVD products had
received regulatory approval and the technology did not have identifiable
alternative uses. The amount by which the purchase price exceeded the
Predecessor's net book value has been reflected as paid-in capital in the
accompanying financial statements. Pursuant to the terms of the original merger
agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its
Common Stock to the former shareholders of the Predecessor. The fair market
value of such shares of $488 has been reflected in the accompanying financial
statements as an additional charge for acquired in-process technology.
Subsequent to the acquisition, EndoSonics began performing certain services
for CVD (see Note 3), including general management, accounting, cash management,
and other administrative and engineering services. The amounts charged to CVD
for such services have been determined based on proportional cost allocations
and have been agreed to by the management of CVD and EndoSonics. In the opinion
of CVD's management, the allocation methods used are reasonable. Such
allocations, however, are not necessarily indicative of costs that would have
been incurred had CVD continued to operate independent of EndoSonics. No formal
agreement currently exists which specifies the nature of services to be provided
by EndoSonics to CVD, or the charges for such services. Therefore, amounts are
not necessarily indicative of the future charges to be incurred by CVD.
In 1994 and 1996, the Board of Directors of CVD approved a 16,200-for-1 and
a 2-for-1 Common Stock split, respectively, which has been reflected
retroactively for all periods in the accompanying financial statements.
On June 19, 1996, the Company closed its initial public offering (the
"Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per
share. On July 17, 1996, the Company's underwriters exercised their
overallotment option to purchase an additional 510,000 shares of Common Stock at
$12.00 per share. CVD received net offering proceeds from the sale of Common
Stock of approximately $42.8 million after deducting underwriting discounts and
commissions and other expenses of the Offering.
In October 1996, CVD acquired 100% of the common stock of Intraluminal
Device, Inc. ("IDI") in exchange for CVD common stock valued at $1.4 million.
The acquisition was accomplished through the
F-25
<PAGE> 60
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
formation of IDI Acquisition, Inc., a wholly-owned subsidiary of CVD, and the
merging of IDI into IDI Acquisition, Inc. (See Note 2).
The consolidated financial statements for December 31, 1996 include the
accounts of the Company and its subsidiary. Intercompany transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Cash and cash equivalents includes cash on hand, demand deposits, and
short-term investments with original maturities of three months or less.
Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115").
The Company has classified its entire investment portfolio as
available-for-sale. Available-for-sale securities are stated at fair value with
unrealized gains and losses included in shareholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and accretions of
discounts to maturity. Such amortization is included in interest income.
Realized gains and losses are included in other income (expense). The cost of
securities sold is based on the specific identification method.
Inventories
Inventories are comprised of raw materials, work-in-process and finished
goods and are stated at the lower of cost, determined on an average cost basis,
or market value.
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized on a
straight-line basis over the lesser of the estimated useful lives of the assets
or the lease term. The estimated useful lives range from three to seven years.
Long-lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-lived Assets to be Disposed of," was
issued. SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used or disposed of by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. During 1996, the Company
adopted this statement and determined that no impairment loss need be recognized
for the applicable assets.
Concentrations of Credit Risk and Significant Customers
The Company maintains its cash and cash equivalents in deposit accounts and
in pooled investment accounts administered by a major financial institution.
F-26
<PAGE> 61
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company sells its products primarily to medical institutions and
distributors worldwide. The Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral from
customers. Management believes that an adequate allowance for doubtful accounts
has been provided.
During 1994, 1995, and 1996 product sales to Fukuda Denshi Co., Ltd.,
("Fukuda"), the Company's Japanese distributor (see Note 4), comprised 61%, 18%
and 14% of total revenue. Accounts receivable from Fukuda represented 15% and 1%
of net accounts receivable at December 31, 1995 and 1996, respectively.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% of total
revenues during 1996. At December 31, 1996, 27% of accounts receivable were due
from Medtronic. One other customer comprised 12% of revenues for the year ended
December 31, 1995 and 14% of accounts receivable at December 31, 1995.
Export Sales
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------
1994 1995 1996
---- ------ ------
<S> <C> <C> <C>
Europe..................................................... $255 $1,179 $1,614
Japan...................................................... 715 744 1,240
Latin America.............................................. -- 131 243
Other...................................................... -- -- 417
---- ------ ------
$970 $2,054 $3,514
==== ====== ======
</TABLE>
Revenue Recognition and Warranty
The Company recognizes revenue from the sale of its products when the goods
are shipped to its customers. Reserves are provided for anticipated product
returns and warranty expenses at the time of shipment.
Accounting for Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the expected
stock price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the
F-27
<PAGE> 62
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
In calculating pro forma information regarding net income and net income
per share the fair value was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the options on the Company's common stock: risk-free interest
rate of 6.0%; a dividend yield of 0%; volatility of the expected market price of
the Company's common stock of 0.475; and a weighted-average expected life of the
options of 3.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for the years ended December 31, 1995 and 1996 follows:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Pro forma net loss..................................... $(2,905) $(5,170)
Pro forma net loss per share........................... (0.65) (0.72)
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
Income Taxes
From June 1993 until June 1996, the Company's results of operations have
been included in consolidated tax returns filed by EndoSonics. There was no
income tax provision for the consolidated tax group during the periods covered
by these financial statements. All net operating loss and credit carryforwards
and deferred tax assets and liabilities have been disclosed herein on a separate
company basis for CVD.
Net Loss Per Share
Pro forma net loss per share is computed using the weighted average number
of shares of Common Stock, convertible Preferred Stock (using the
as-if-converted method) and Common Stock issuable upon conversion of the
Convertible Obligation, outstanding. Common equivalent shares from stock options
and warrants are not included as the effect is anti-dilutive, except that in
accordance with Securities and Exchange Commission Staff Accounting Bulletins,
common equivalents shares issued by the Company at prices substantially below
the anticipated initial public offering price during the period beginning one
year prior to the proposed public offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the estimated initial public offering price).
For periods subsequent to the Company's initial public offering in June
1996, the Company's net loss per share has been calculated based on the weighted
average number of common and dilutive common equivalent shares outstanding.
Common Stock equivalents that are anti-dilutive are excluded from the
calculation.
Reclassifications
To conform with the 1996 financial statement presentation, certain
reclassifications have been made to the 1995 and 1994 financial statements.
2. ACQUISITION OF INTRALUMINAL DEVICES, INC.
On October 16, 1996, the Company acquired all of the outstanding shares of
IDI in exchange for approximately 93,000 shares of CVD common stock valued at
$1.4 million. The acquisition was accounted for using the purchase method of
accounting. As the assets of IDI were patents for products still in their
F-28
<PAGE> 63
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
development stage, the purchase price and the associated costs of acquisition
$0.7 million were expensed as acquired in-process research and development.
The following table reflects unaudited pro forma combined results of
operations of the Company and IDI on the basis that the acquisition had taken
place and the related charge, noted above, was recorded at the beginning of 1996
as IDI operations were not material to the Company's operations prior to 1996:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Revenues................................................. $ 8,734
Net loss................................................. (4,820)
Net loss per common share................................ (0.67)
Shares used in computation............................... 7,214
</TABLE>
In management's opinion, the unaudited pro forma combined results of
operations are not indicative of the actual results that would have occurred had
the acquisition been consummated at the beginning of 1996 or of future
operations of the combined companies under the ownership and management of the
Company.
3. SCIMED LIFE SYSTEMS, INC.
In September 1994, CVD and EndoSonics entered into a Stock Purchase and
Technology License Agreement with SCIMED Life Systems, Inc. ("SCIMED"). SCIMED
acquired a 19% interest in CVD in exchange for $2,500 in cash.
CVD also granted SCIMED an exclusive license to certain patents in the
cardiovascular field of use, which allows SCIMED to manufacture the Transport
PTCA infusion catheter (the "Transport") developed by CVD in exchange for a
$1,000 license fee that was paid in 1994. SCIMED will pay royalties to CVD on
sales of the Transport and other products which use this patented technology.
CVD retains rights to this technology and the associated patents for use outside
of the cardiovascular field.
During June 1995, the Company issued a warrant to SCIMED to purchase up to
40,000 shares of Series A Preferred Stock at an exercise price of $6.58 per
share in exchange for a waiver of SCIMED's anti-dilution right. The warrant
expires in September 1997.
During May 1996, the Company agreed to issue an additional warrant to
SCIMED to purchase up to 20,000 shares of Series A Preferred Stock at an
exercise price of $6.58 per share in exchange for a waiver of SCIMED's
anti-dilution right related to the shares to be issued under the 1996 Plan.
SCIMED also paid CVD $220, $641 and $200 in 1994, 1995 and 1996,
respectively, on a cost reimbursement basis to fund continuing development of
the technology and for other support. Additionally, the Company recorded $43 in
product sales to SCIMED during 1994 (none in 1995 or 1996).
4. RELATED PARTY TRANSACTIONS
The following is a summary of significant transactions between CVD and
EndoSonics:
- During 1994 and a portion of 1995, EndoSonics manufactured certain of the
Company's catheter products at cost plus a mark-up of 30%. Total
purchases from EndoSonics during 1994 and 1995 amounted to $843 and $172,
respectively. In addition, during 1994 EndoSonics performed certain
billing and collection services for CVD in return for a fee per invoice
which aggregated to $10.
- Prior to the Company's initial public offering in June 1996, certain
EndoSonics corporate expenses, primarily related to executive management
time, accounting, cash management, and other administrative and
engineering services, have been allocated to the Company. Total expenses
allocated were $290, $340, and $156 for the years ended December 31,
1994, 1995 and 1996, respectively.
F-29
<PAGE> 64
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No interest expense has been charged on the net payable due to EndoSonics.
The following is an analysis of the payable to EndoSonics:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1994 1995 1996
------------ ------ ------
<S> <C> <C> <C>
Beginning balance.................................... $ 656 $2,554 $2,537
Inventory purchases.................................. 843 172 --
Corporate cost allocations........................... 300 340 156
Cash disbursements made by EndoSonics on behalf of
CVD................................................ 1,730 312 --
Cash collections made by EndoSonics on behalf of
CVD................................................ (318) (700) --
Cash payments to EndoSonics.......................... (549) -- (2,693)
Cash disbursements made by CVD on behalf of
EndoSonics and other............................... (108) (141) --
----- ------ ------
Ending balance....................................... $2,554 $2,537 $ --
===== ====== ======
Average balance during period........................ $1,750 $2,551 $1,974
===== ====== ======
</TABLE>
In connection with the initial public offering, CVD and EndoSonics entered
into a Tax Allocation Agreement that provides, among other things, for (i) the
allocation of tax liabilities and adjustments thereto as between the business of
the Company and other businesses conducted by EndoSonics and its affiliates
related to periods in which the Company is includable in consolidated federal
income tax returns filed by EndoSonics, (ii) the allocation of responsibility
for filing tax returns and (iii) the conduct of and responsibility for taxes
owed in connection with tax audits and various related matters.
EndoSonics and CVD entered into a Stockholder Agreement providing that all
transactions between the Company and EndoSonics or any affiliate of EndoSonics
must be approved by a special committee of CVD's Board of Directors comprised of
two directors who are not officers, directors, employees or affiliates of
EndoSonics. The provisions of this agreement became effective upon the
consummation of the initial public offering and will terminate on the earlier of
seven years from the date of the agreement or on the date EndoSonics
beneficially owns less than 25% of CVD's Common Stock.
- ---------------
(See Notes 5 and 11)
5. AGREEMENTS WITH FUKUDA
The Company has executed a distribution agreement with Fukuda. The
agreement provides Fukuda with exclusive distribution rights relative to certain
of the Company's products in Japan for periods extending through May 1999, which
may be extended at the option of the parties. Distribution fee revenue received
from Fukuda are deferred and are being recognized as revenue over the initial
periods covered by the respective agreements.
In July 1995 and May 1996, the distribution agreement with Fukuda was
amended. In exchange for the exclusive distribution rights to additional CVD
products, the Company received $750,000 which converted into the right to
receive 62,500 shares of Common Stock upon the consummation of the initial
public offering. The Company has accounted for this as a convertible obligation
payable as of December 31, 1995. In November, 1996, Fukuda exercised the
conversion feature of said obligation.
6. LICENSE AGREEMENTS
In January 1995 the Company entered into a license agreement with Advanced
CardioVascular Systems, Inc. ("ACS") under which the Company acquired the
exclusive worldwide rights to ACS' SmartNeedle
F-30
<PAGE> 65
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
technology. The Company assumed responsibility for manufacturing the product in
1996, subject to the payment of royalties. ACS was granted an option, which was
exercised in February 1996, to obtain exclusive worldwide rights to certain CVD
perfusion technology. In exchange for the perfusion technology, ACS is obligated
to make milestone and minimum royalty payments to CVD, and also has certain
obligations to develop and market the perfusion technology. An initial milestone
of $150 was earned in the year ended December 31, 1996.
The Company entered into a license agreement with EndoSonics pursuant to
which CVD granted EndoSonics the non-exclusive, royalty-free right to certain
technology for use in the development and sale of certain products. In exchange,
CVD received the non-exclusive, royalty-free right to utilize certain of
EndoSonics' product regulatory filings to obtain regulatory approval of CVD
products.
7. MARKETABLE SECURITIES AVAILABLE-FOR-SALE
The Company's investments in debt securities are diversified among high
credit quality securities in accordance with the Company's investment policy.
The Company's investment portfolio is managed by a major financial institution.
The following is a summary of investments in debt securities classified as
current assets and available-for-sale at December 31, 1996:
<TABLE>
<CAPTION>
GROSS
UNREALIZED
HOLDING
(LOSSES)
COST GAINS FAIR VALUE
------- ---------- ----------
<S> <C> <C> <C>
U.S. Treasury and other agencies debt securities...... $10,000 $(19) $ 9,981
Corporate debt securities............................. $15,563 189 15,752
------- ----- -------
$25,563 $170 $ 25,733
------- ----- -------
</TABLE>
All short-term investments at December 31, 1996 were due within one year.
8. INVENTORIES
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------------ ------
<S> <C> <C>
Raw materials.................................................. $162 $1,015
Work in process................................................ 330 510
Finished goods................................................. 262 1,374
--- ----
$754 $2,899
=== ====
</TABLE>
F-31
<PAGE> 66
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1996
------------ ------
<S> <C> <C>
Accounts payable............................................... $ 962 $ 750
Accrued payroll and related expenses........................... 352 1,040
Accrued warranty............................................... 113 29
Customer Deposits.............................................. -- --
Other accrued expenses......................................... 257 563
---- ----
$1,684 $2,382
==== ====
</TABLE>
10. COMMITMENTS
Operating Leases
The Company leases its administrative, research and manufacturing
facilities and certain equipment under long-term, noncancelable lease agreements
that have been accounted for as operating leases. Certain of these leases
include scheduled rent increases and renewal options as prescribed by the
agreements.
Future minimum payments by year under long-term, noncancellable operating
leases were as follows as of December 31:
<TABLE>
<S> <C>
1997........................................................ $ 392
1998........................................................ 354
1999........................................................ 178
2000........................................................ 57
-----
$ 981
=====
</TABLE>
Rental expense charged to operations for all operating leases during the
years ended December 31, 1994, 1995 and 1996, was approximately $60, $171 and
$365, respectively.
11. SHAREHOLDERS EQUITY
Preferred Stock
In February 1995, every two shares of the Company's outstanding Common
Stock was exchanged for one share of Series A Preferred Stock with a liquidation
preference of $6.58 per share. In March 1996, the Company issued 400,000 shares
of Series B Preferred Stock to EndoSonics at $20.00 per share for aggregate
proceeds of $8,000.
The preferred stockholders converted their shares to common shares upon the
consummation of the Company's initial public offering.
Stock Option Plan
In May 1996, the Company adopted the 1996, Stock Option/Stock Issuance Plan
(the "1996 Plan") which is the successor to the Company's 1995 Stock option
plan. Under the terms of the 1996 Plan eligible key employees, directors, and
consultants can receive options to purchase shares of the Company's Common Stock
at a price not less than 100% for incentive stock options and 85% for
nonqualified stock options of the fair value on the date of grant, as determined
by the Board of Directors. The Company has authorized 1,200,000 shares of
F-32
<PAGE> 67
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock for issuance under the 1996 Plan. The options granted under the
1996 Plan are exercisable over a maximum term of ten years from the date of
grant and generally vest over a four year period. Shares underlying the exercise
of unvested options are subject to various restrictions as to resale and right
of repurchase by the Company which lapses over the vesting period.
<TABLE>
<CAPTION>
OPTION PRICE NUMBER
PER SHARE OF SHARES
---------------- ---------
<S> <C> <C>
Balanced at January 1, 1994.............................. --
Granted.................................................. $1.00 464,000
Exercised................................................ --
Forfeited................................................ --
Cancelled................................................ --
--------------- ---------
Balanced at December 31, 1994............................ $1.00 464,000
Granted.................................................. $1.00 to $ 1.50 493,000
Exercised................................................ --
Forfeited................................................ --
Cancelled................................................ --
--------------- ---------
Balanced at December 31, 1995............................ $1.00 to $ 1.50 957,000
Granted.................................................. $2.50 to $13.25 319,000
Exercised................................................ $1.00 to $ 1.50 (138,600)
Forfeited................................................ $1.00 to $13.25 (18,875)
Cancelled................................................ --
--------------- ---------
Balance at December 31, 1996............................. $1.00 to $13.25 1,118,525
=============== =========
</TABLE>
No options had been exercised and 125,000 options were exercisable at December
31, 1995. As of December 31, 1996, 253,525 options were exercisable.
During 1995, the Company recorded deferred compensation of approximately
$345 for financial reporting purposes to reflect the difference between the
exercise price of certain options and the deemed fair value, for financial
statement presentation purposes, of the Company's shares of Common Stock. An
additional $150 of deferred compensation was recorded during the year ended
December 31, 1996. Deferred compensation is being amortized over the vesting
period of the related options. $119 of deferred compensation was amortized in
the year ended December 31, 1996.
Stock Purchase Plan
Under the terms of the Company's 1996 Employee Stock Purchase Plan (the
"Purchase Plan"), eligible employees can purchase Common Stock through payroll
deductions at a price equal to the lower of 85% of the fair market value of the
Company's Common Stock at the beginning or end of the applicable offering
period. A total of 200,000 shares of Common Stock are reserved for issuance
under the Purchase Plan.
F-33
<PAGE> 68
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows at
December 31:
<TABLE>
<CAPTION>
1995 1996
----------------- -----------------
FEDERAL STATE FEDERAL STATE
------- ----- ------- -----
<S> <C> <C> <C> <C>
Net operating loss carryforward................ $ 1,322 $ 60 $ 1,792 $ 44
Accrued expenses............................... 20 3 456 78
Research and development credits............... 97 25 256 144
Bad debt reserve............................... 63 11 132 23
Depreciation................................... -- -- 52 9
Inventory write-downs.......................... 73 13 51 9
Capitalized research and development........... -- 150 -- 276
Deferred revenue............................... 45 8 28 5
Other.......................................... -- -- 47 57
------- ----- ------- -----
Gross deferred tax assets...................... 1,620 270 2,814 645
Valuation allowance............................ (1,620) (270) (2,814) (645)
Total deferred tax assets...................... -- -- -- --
------- ----- ------- -----
Net deferred tax assets........................ $ -- $ -- $ -- $ --
======= ===== ======= =====
</TABLE>
The valuation allowance increased by $1,569 and $1,072 in 1996 and 1995,
respectively.
The Company's effective tax rate differs from the statutory rate of 35% due
to federal and state losses which were recorded without tax benefit.
At December 31, 1996, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $5,120,000 and $740,000,
respectively, which expire in the years 1997 through 2010. In addition, the
Company has research and development tax credits for federal and state income
tax purposes of approximately $256,000 and $144,000, respectively, which expire
in the years 2008 through 2010.
Because of the "change of ownership" provision of the Tax Reform Act of
1986, utilization of the Company's net operating loss and research credit
carryforwards may be subject to an annual limitation against taxable income in
future periods. As a result of the annual limitation, a portion of these
carryforwards may expire before ultimately becoming available to reduce future
income tax liabilities.
13. EMPLOYEE BENEFIT PLAN
The Company provides a 401(k) Plan for all employees 21 years of age or
older with over 3 months of service. Under the 401(k) Plan, eligible employees
voluntarily contribute to the Plan up to 15% of their salary through payroll
deductions. Employer contributions may be made by the Company at its discretion
based upon matching employee contributions, within limits, and profit sharing
provided for in the Plan. No employer contributions were made in 1996 and 1995.
F-34
<PAGE> 69
CARDIOVASCULAR DYNAMICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995, and 1994
(In thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
- ---------------------------------------------- -------- ----------------------- -------- --------
Additions
-----------------------
Balance at Charges to Charged Balance
Beginning Cost and to Other End of
Description of Period Expenses Accounts Deductions Period
- ----------------------------------------------- --------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996
Allowance for doubtful accounts.............. $180 $221 $-- $(24) $377
Accrued warranty expenses.................... $113 $ -- $-- $(84) $ 29
Year Ended December 31, 1995
Allowance for doubtful accounts.............. $ 85 $ 95 $-- $ -- $180
Accrued warranty expenses.................... $ 20 $ 93 $-- $ -- $113
Year Ended December 31, 1994
Allowance for doubtful accounts.............. $ -- $ 85 $-- $ -- $ 85
Accrued warranty expenses.................... $ -- $ 20 $-- $ -- $ 20
</TABLE>
F-35
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- ----------- ------------
<S> <C> <C>
2.1(1) Agreement and Plan of Reorganization dated as of June 9, 1993 among the
Company, Endosonics Acquisition Corporation and CardioVascular
Dynamics, Inc. ("CVD") .....................................................
2.2(1) First Amendment dated as of June 30, 1993 to the Agreement and Plan of
Reorganization among the Company, Endosonics Acquisition Corporation
and CVD ....................................................................
2.3(8) Agreement and Plan of Reorganization between Endosonics and
Cardiometrics, Inc. ........................................................
3.1(2) Certificate of Incorporation ...............................................
3.2(4) Amended Bylaws .............................................................
4.1(2) Specimen Certificate of Common Stock .......................................
4.2(3) Loan and Warrant Purchase Agreement dated May 19, 1988 .....................
10.1(3) Series F Preferred Stock Purchase Agreement dated February 1, 1991
between the Company and Esaote Biomedica S.p.A. ("Esaote") and
Registration Rights and Right of First Offer Agreement .....................
10.2(3) Distribution Agreement dated February 28, 1990 between the Company and
Fukuda Denshi Co., Ltd .....................................................
10.3(3) Distribution Agreement dated as of January 31, 1991 between the Company
and Esaote. ................................................................
10.4(3) Line of Credit Agreement between the Company and Wells Fargo Bank, N.A.
dated November 19, 1990 ....................................................
10.5(3) Lease dated October 31, 1991 between the Company and Olympia
Investments, Inc. for the Pleasanton facilities ............................
10.6(3) Lease dated May 1, 1990 between the Company and Commonwealth Growth
Fund I and the Rancho Cordova facilities and Amendment to Lease dated
January 9, 1992 ............................................................
10.7(3) 1988 Stock Option Plan and forms of a Stock Option Agreement and a
Stock Purchase Agreement ...................................................
10.8(3) 1984 Restricted Stock Purchase Plan and form of a Stock Purchase
Agreement ..................................................................
10.9(3) Form of Indemnification Agreement between the Company and a director of
the Company ................................................................
10.10(5) Form of Domestic Distribution Agreement ....................................
10.11(4) Supplemental Stock Purchase Agreement dated June 5, 1992, by and
between the Company and CVD ................................................
10.12(4) Stock Purchase Agreement dated June 5, 1992, by and between the Company
and CVD ....................................................................
10.13(4) Product Development Agreement dated June 5, 1992, by and between the
Company and CVD ............................................................
10.14(6) Distribution Agreement dated May 28, 1993 between CVD and Fukuda Denshi
Co., Ltd ...................................................................
10.15(6) Micro Motor Catheter and Instrument Development Agreement, Funding and
Option Agreement, Escrow and License agreement, and Distribution
Agreement dated October 1993 between the Company and Du-MED ................
10.16(9) Stock Purchase and Technology License Agreement dated September 10,
1994 by and among Endosonics, CVD and SCIMED Life Systems, Inc .............
10.17(9) Exclusive Distribution Agreement dated November 1, 1994 between Cordis
S.A. and Endosonics, as amended on December 20, 1994 .......................
10.18(7) Imaging/Therapeutic Combination Devices Development Agreement dated as
of February 2, 1996 by and between Cordis Corporation ("Cordis") and the
Company ....................................................................
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C> <C>
10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and between
Cordis and the Company ....................................................
10.20(10) Shareholder Agreement dated June 19, 1996 between Endosonics and CVD ......
10.21 License Agreement dated February 6, 1997 between Endosonics and CVD .......
10.22 Registration Rights Agreement dated May 14, 1997 by and between
Endosonics and CVD ........................................................
23.1 Consent of Ernst & Young LLP, Independent Auditors ........................
24.1 Power of Attorney (Reference is made to page 33 of this
Report on Form 10-K/A.) ...................................................
27.1** Financial Data Schedule ...................................................
</TABLE>
- ----------
* Confidential Treatment Granted.
** Previously filed.
(1) Filed as an exhibit to the Company's Current Report on Form 8-K (File
No. 0-19880) filed with the Commission on July 14, 1993.
(2) Filed as an exhibit to the Company's Registration Statement on Form
8-B filed with the Securities and Exchange Commission (the
"Commission") on September 25, 1992 and incorporated by reference
herein.
(3) Filed as an exhibit to the Company's Registration Statement on Form
S-1 (File No. 33-45280) filed with the Securities and Exchange
Commission on January 24, 1992 (the "Registration Statement") and
incorporated by reference herein.
(4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File
No. 0-19880) filed with the Commission on March 31, 1993.
(5) Filed as Exhibit 10.13 to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (File No. 33-45280) filed with the Commission on
February 25, 1992 and incorporated herein by reference.
(6) Filed as an exhibit to the Company's Annual Report on Form 10-K (File
No. 0-19880) filed with the Commission on March 24, 1994.
(7) Filed as an exhibit to the Company's Annual Report on Form 10-K/A
(File No. 0-19880) filed with the Commission on July 29, 1996.
(8) Filed as an exhibit to the Company's Form 8-K (File No. 0-19880)
filed with the Commission on February 10, 1997 and incorporated
herein by reference.
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
(File No. 0-19880) filed with the Commission on March 21, 1995.
(10) Filed as an exhibit to the Company's Annual Report on Form 10-K
(File No. 0-19880) filed with the Commission on March 19, 1997.
<PAGE> 1
LICENSE AGREEMENT
THIS LICENSE AGREEMENT (the "Agreement") is effective as of
this 16th day of May, 1997 (the "Effective Date"), by and between Endosonics
Corporation, a corporation organized and existing under the laws of the State of
Delaware and having a principal place of business at 2870 Kilgore Road, Rancho
Cordova, California 95670 ("Endosonics") and Cardiovascular Dynamics, Inc., a
corporation organized and existing under the laws of the State of Delaware and
having a principal place of business at 13844 Alton Parkway, Suite 140, Irvine,
California 92718 ("CVD").
WHEREAS, CVD is the owner of the entire right, title and
interest in and to the Licensed Patents set forth in Exhibit A;
WHEREAS, CVD has developed various catheter products using
proprietary technology covered by the Licensed Patents;
WHEREAS, ENDOSONICS is desirous of acquiring a non-exclusive
license to the Licensed Materials (as defined below) which shall include a
limited exclusive license to make, have made, use, sell and have sold catheter
products developed by Endosonics using the Licensed Materials;
WHEREAS, CVD is desirous of acquiring a non-exclusive license
to use Endosonics PMA Number P910031 (the "Endosonics PMA"), to reference, use
and rely upon information in the Endosonics PMA in order to enable CVD to file
for and obtain PMA approval for the Focus Catheters from the U.S. Food and Drug
Administration ("FDA"); and
WHEREAS, the parties are willing to grant such licenses upon
the terms and subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and other
mutual covenants, terms and conditions hereinafter expressed, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE I
DEFINITIONS
1.1 "LICENSED PATENTS" shall mean the patents set forth in
Exhibit A attached hereto and incorporated herein by this reference, and any and
all divisions, continuations-in-part, reissues, renewals, or extensions thereof.
<PAGE> 2
1.2 "FOCUS CATHETERS" shall mean all catheter products
combining CVD Focus Technology on the same catheter with an Endosonics
transducer developed by Endosonics pursuant to this Agreement using the Licensed
Patents and/or CVD Focus Technology for use in coronary applications.
1.3 "CVD FOCUS TECHNOLOGY" shall mean all CVD inventions
(whether or not patentable), ideas, know-how, trade secrets, processes and other
technical information necessary or useful in manufacturing the Focus Catheters
(including without limitation the Specifications (as defined below)) that CVD
(i) owns or controls as of the Effective Date or (ii) acquires or develops
during the term of this Agreement.
1.4 "LICENSED MATERIALS" shall mean the Licensed Patents
associated with CVD Focus Technology.
1.5 "ENDOSONICS TRANSDUCER" shall mean the Endosonics
ultrasound transducer product(s) set forth in Exhibit B attached hereto and
incorporated herein by this reference.
1.6 "SPECIFICATIONS" shall mean the specifications for Focus
Catheter products developed by CVD using or incorporating the Licensed
Materials.
ARTICLE II
LICENSE GRANT
2.1 Subject to the terms and conditions of this Agreement, CVD
hereby grants to Endosonics (i) a non-exclusive, worldwide, fully paid-up,
royalty-free right and license to practice under the Licensed Patents and to use
the CVD Focus Technology to make, have made and use the Focus Catheters, (ii) an
exclusive, worldwide, fully paid-up, royalty-free right and license to market,
sell or otherwise distribute the Focus Catheters for coronary applications only
as bundled on the same catheter device with an Endosonics Transducer. Upon
execution of this Agreement, CVD shall transfer a copy of all existing Licensed
Materials to Endosonics.
2.2 Subject to the terms and conditions of this Agreement,
Endosonics hereby grants to CVD a non-exclusive, worldwide, fully paid-up,
royalty-free right and license to reference, use, and rely upon information in
the Endosonics PMA in order to enable CVD to file for and obtain PMA approval,
as evidenced by a separate CVD PMA number on file at the FDA, for the coronary
balloon dilatation catheters from the FDA. CVD shall use, reference, or rely
upon the Endosonics PMA for the limited purpose of obtaining FDA approval of a
unique PMA which will be in CVD's name and shall not be a PMA supplement to
Endosonics' PMA.
2.
<PAGE> 3
2.3 Subject to the terms and conditions of this Agreement,
Endosonics shall furnish to CVD a complete copy of all manufacturing information
in the Endosonics PMA applicable to CVD's manufacture of CVD coronary balloon
dilatation products.
2.4 Subject to the provisions of this Agreement, Endosonics is
authorized to improve, modify, correct and enhance the technology of the
Licensed Materials as it may deem appropriate, and Endosonics shall exclusively
control, and own all right, title and interest in and to, the resulting
improvement, modification, correction or enhancement including, without
limitation, any patent rights available with respect thereto, any trade secrets
pertaining thereto and any copyrights subsisting therein as derivative works,
but only to the extent that the same shall be separate and clearly
distinguishable from the underlying work. Nothing in this Section 2.4 is
intended to modify Endosonics' limited rights to market, sell or otherwise
distribute Focus Catheters only as bundled on the same catheter with an
Endosonics Transducer, as defined in Section 2.1 of this Agreement.
ARTICLE III
REPORTS AND EXPENSE REIMBURSEMENT
3.1 Should Endosonics incur any out-of-pocket expenses to
assist CVD in executing Sections 2.2 or 2.3 of this Agreement, CVD shall
reimburse Endosonics for such out-of-pocket expenses up to a maximum of One
Thousand Dollars ($1,000.00). If such out-of-pocket expenses exceed One Thousand
Dollars ($1,000.00), Endosonics shall request CVD's prior written approval prior
to incurring such expenses.
3.2 Should CVD incur any out-of-pocket expenses to assist
Endosonics in executing Section 2.1 of this Agreement, Endosonics shall
reimburse CVD for such out-of-pocket expenses up to a maximum of One Thousand
Dollars ($1,000.00). If such expenses exceed One Thousand Dollars ($1,000.00),
CVD shall request Endosonics' prior written approval prior to incurring such
expenses.
ARTICLE IV
OWNERSHIP
4.1 CVD Rights. As between the parties and subject to the
rights granted to Endosonics under this Agreement, all right, title and interest
in and to the Licensed Materials (including, without limitation, all patent
rights, copyrights, trade secret rights and other proprietary rights) is and
shall remain in CVD.
3.
<PAGE> 4
4.2 Endosonics' Rights to Endosonics' PMA. Subject to the
rights granted to CVD under Section 2.2 of this Agreement, all right, title and
interest in and to the information contained in the Endosonics PMA (including,
without limitation, all patent rights, copyrights, trade secret rights and other
proprietary rights shall remain in Endosonics).
ARTICLE V
PATENT AND REGULATORY MATTERS
5.1 Patent Enforcement. During the term of this Agreement, CVD
shall diligently maintain, protect and enforce the Licensed Patents, which shall
include taking all reasonably necessary action to prevent and terminate any
third party infringement of the Licensed Patents. CVD shall have no
responsibility to maintain, protect and enforce any technology or patents
resulting from any modifications to the Licensed Materials.
5.2 Domestic Regulatory Matters; CVD PMA Submission.
Endosonics shall cooperate fully with CVD in preparing regulatory filings
associated with CVD's submission of a PMA for all current Focus Catheter
products and shall prepare and execute promptly all documents or instruments
necessary to enable CVD to make such regulatory filings and to obtain FDA
approval of the PMA, including, without limitation:
(a) a signed, written statement from Endosonics to the FDA
that authorizes CVD and the FDA to reference, use, and reply upon the Endosonics
PMA in seeking approval for a PMA for CVD's Focus Catheter products; and
(b) a statement signed by both CVD and Endosonics confirming
that Endosonics has furnished CVD with a complete copy of all manufacturing
information in the Endosonics PMA applicable to CVD's manufacture of the Focus
Catheter products.
5.3 Domestic Regulatory Matters; Annual Reporting
Requirements. CVD shall cooperate fully with Endosonics in preparing regulatory
filings associated with Endosonics submission of PMA reports required by the
FDA, including but not limited to Annual Reports. CVD shall disclose to
Endosonics all changes to any product distributed under the Endosonics PMA,
whether considered significant or not, and whether undertaken before or after
initial product introduction, no later than August 15 of each calendar year.
CVD's obligations under this Section shall terminate upon abandonment of
Endosonics' PMA approvals for CVD distributed products. A final report of all
changes as described above shall be submitted to Endosonics fifteen (15) days
following such abandonment.
4.
<PAGE> 5
5.4 Domestic Regulatory Matters; Distribution of CVD Product
under Endosonics' PMA. CVD agrees to file one or more submissions to the U.S.
FDA within ninety (90) days following the date of execution of this agreement
and use its best efforts to have such submission approved as promptly as
practicable. This submission will include all CVD products currently approved or
pending under the Endosonics PMA. No new applications shall be made under
Endosonics PMA following approval of the first CVD PMA by the FDA, and no CVD
product will be marketed under Endosonics' PMA after six months following
approval of the CVD PMA.
5.5 Foreign Regulatory Matters. Endosonics shall obtain and
maintain all applicable approvals and registrations for the Catheters in any
country into which Endosonics shall distribute the Focus Catheters and CVD shall
render all necessary assistance to enable Endosonics to accomplish the
foregoing.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF CVD
6.1 Title. CVD represents and warrants that, to the best of
its knowledge, it has complete title to the Licensed Materials, free from any
liens or encumbrances, and that, to the best of its knowledge, the use of, or
practice under, the Licensed Materials in the United States and its territories
will not infringe the patent apparatus claims of any third party.
6.2 Validity. CVD represents and warrants that, to the best of
its knowledge, the Licensed Patents are valid and enforceable and that, to the
best of its knowledge, there are no third party infringers of the Licensed
Materials.
ARTICLE VII
CONFIDENTIALITY
Each party agrees that all inventions, processes, materials,
chemicals, reagents, know-how and ideas and all other business, technical and
financial information it obtains from the other are the confidential property of
the disclosing party ("Proprietary Information" of the disclosing party). Except
as expressly allowed in this Agreement, the receiving party will hold in
confidence and not use or disclose any Proprietary Information of the disclosing
party and shall similarly bind its employees in writing. The receiving party
shall not be obligated under this Article VII with respect to information that:
5.
<PAGE> 6
(i) is or has become readily publicly available through
no fault of the receiving party or its employees or agents; or
(ii) is received from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information and provided the receiving party abides by all restrictions imposed
by such third party; or
(iii) was rightfully in the possession of the receiving
party prior to its disclosure by the other party provided the receiving party
abides by all restrictions imposed on its possession of such information; or
(iv) was independently developed by employees or
consultants of the receiving party without access to such Proprietary
Information; or
(v) is required by order of a government agency or
court of competent jurisdiction to be disclosed.
ARTICLE VIII
INDEMNIFICATION
CVD agrees to indemnify Endosonics from, for, and against any
loss, cost, damages, liability or expense (including reasonable attorney's fees)
arising out of any claim ("Claim") brought by third parties (i) alleging that
the manufacture, use or sale of a Focus Catheter infringes any third party
apparatus patent or (ii) relating to any breach of the warranties set forth in
Article VI above (collectively, "Damages"); provided, however, that CVD's
indemnification obligations hereunder shall not apply to the extent (and only to
the extent) that such Damages result from (i) Endosonics's use or distribution
of technology and materials other than the Licensed Materials or (ii)
modifications, improvements, corrections or enhancements made by Endosonics to
the Licensed Materials. Endosonics agrees to indemnify CVD from, for, and
against Damages incurred by CVD that are excluded from CVD's indemnification
obligations pursuant to the foregoing sentence. In the event of a Claim, the
party seeking indemnification hereunder shall promptly notify the indemnifying
party of such Claim, shall allow the indemnifying party to have sole defense of
such Claim and shall cooperate and render reasonable assistance upon the
request, and at the expense, of the indemnifying party.
6.
<PAGE> 7
ARTICLE IX
DISCLAIMERS AND LIMITATION OF LIABILITY
9.1 EXCEPT FOR THE WARRANTIES EXPRESSLY SET FORTH IN THIS
AGREEMENT, NEITHER PARTY MAKES ANY WARRANTIES WITH RESPECT TO THE TECHNOLOGY OR
MATERIALS THAT IT PROVIDES TO THE OTHER PARTY UNDER THIS AGREEMENT AND EACH
PARTY HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ALL WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
9.2 NEITHER PARTY WILL BE LIABLE TO THE OTHER (I)
WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER
ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR
EQUITABLE THEORY FOR ANY SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES OR (II)
FOR LOST PROFITS OR DATA.
ARTICLE X
TERM AND TERMINATION
10.1 This Agreement shall commence as of the Effective Date,
and shall continue in force (unless terminated earlier in accordance with this
Article X) until the last of the Licensed Patents expires and any PMA or
regulatory approvals obtained through the use of Endosonics' PMA are abandoned,
or the last of the Licensed Patents is ruled invalid or unenforceable in a final
decision by a court of competent jurisdiction or by the United States Patent and
Trademark Office.
10.2 This Agreement and all licenses granted hereunder may be
terminated by either party immediately if the other party breaches a material
term or provision of this Agreement and fails to cure such breach within sixty
(60) days after written notice from the non-breaching party.
10.3 This Agreement also may be terminated by either party, at
its option, upon written notice to the other party, (i) upon the institution by
the other party of insolvency, receivership or bankruptcy proceedings or any
similar proceedings for the settlement of its debts, or (ii) upon the
institution of such proceedings against the other party, which are not dismissed
or otherwise resolved in such party's favor within sixty (60) days thereafter.
10.4 The following Articles shall survive termination of this
Agreement: I, II, IV, VI, VII, VIII, IX and XI, along with Sections 5.3, 5.4 and
this Section 10.4.
7.
<PAGE> 8
ARTICLE XI
MISCELLANEOUS
11.1 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto, their respective subsidiaries,
successors and permitted assigns. Either party may freely assign this Agreement
to an acquiror of all or substantially all of its stock, business or assets
relating to this Agreement (whether by merger, acquisition or otherwise).
11.2 Notices. All notices given by either party under the
terms of this Agreement shall be in writing and personally delivered, sent by
certified mail (return receipt requested) or by commercial overnight courier
service to a party's address as set forth in the initial paragraph of this
Agreement. Notices shall be effective five (5) days after mailing or upon actual
receipt, whichever is sooner. Either party may change the person to whom, or
address to which, notice should be directed by giving written notice thereof.
11.3 Entire Agreement. This Agreement constitutes the entire
agreement and understanding between the parties and supersedes the December 22,
1995 License Agreement between the parties in its entirety, and all other
previous or contemporaneous communications, memoranda, understandings or
agreements, either oral or written, between the parties with respect to the
subject matter hereof.
11.4 Governing Law. This Agreement shall be governed by and
interpreted in accordance with the laws of the State of California without
regard to the conflicts of laws provisions thereof. The sole jurisdiction and
venue for actions related to the subject matter hereof shall be the California
state and U.S. federal courts having within their jurisdiction the location of
Endosonics's principal place of business. Both parties consent to the
jurisdiction of such courts and agree that process may be served in the manner
provided herein for giving of notices or otherwise as allowed by California
state or U.S. federal law. In any action or proceeding to enforce rights under
this Agreement, the prevailing party shall be entitled to recover costs and
attorneys' fees.
11.5 Headings. Headings and captions are for convenience only
and are not to be used in the interpretation of this Agreement.
11.6 Severability. If any provision of this Agreement is held
by a court of competent jurisdiction to be illegal, invalid or unenforceable,
that provision shall be limited or eliminated to the minimum extent necessary so
that this Agreement shall otherwise remain in full force and effect and
enforceable.
11.7 Relationship of Parties. The parties hereto expressly
understand and agree that for the purposes of this Agreement the other is an
independent contractor
8.
<PAGE> 9
in the performance of each and every part of this Agreement and is solely
responsible for all of its employees and agents and its labor costs and expenses
arising in connection therewith. This Agreement in no way creates a partnership,
joint venture or agency relationship between the parties and neither party shall
have the right or authority to bind the other in any way as a result of this
Agreement.
11.8 Amendment and Waiver. Except as otherwise expressly
provided herein, any provision of this Agreement may be amended and the
observance of any provision of this Agreement may be waived (either generally or
in any particular instance and either retroactively or prospectively) only with
the written consent of the parties. The failure of either party to enforce its
rights under this Agreement at any time for any period shall not be construed as
a waiver of such rights.
IN WITNESS WHEREOF, each party has caused this Agreement to be
executed by its duly authorized representative as of the day and year first
above written.
ENDOSONICS CORPORATION
By: /s/ Reinhard J. Warnking
--------------------------------
Title: President and CEO
------------------------------
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ Michael R. Henson
--------------------------------
Title: Chairman/CEO
------------------------------
9.
<PAGE> 10
EXHIBIT A
LICENSED PATENTS
o U.S. Patent No. 5,470,313
o U.S. Patent App. No. 08/201935
o EPO Patent App. No. 94119841.8
<PAGE> 11
EXHIBIT B
ENDOSONICS TRANSDUCER
Any ultrasound transducer designed,
developed and manufactured by Endosonics, and using any
Art disclosed in the following patents:
US
5603327 Ultrasound catheter probe
5453575 Apparatus and method for detecting blood flow in intravascular
ultrasonic imaging
5368037 Ultrasound catheter
5183048 Methods and apparatus for removing artifacts from
ultrasonically generated image of a small cavity
5167233 Dilating and imaging Apparatus
5135486 Self-Venting balloon dilation catheter
4917097 Apparatus and method for imaging small cavities
EPO
0339087 B1 Device for imaging small cavities
0519060 B1 Dilating and imaging Apparatus
JPO
2020066 Apparatus for imaging
2552421 Dilating and imaging Apparatus
<PAGE> 1
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
entered into as of May 14, 1997, between Endosonics Corporation, a Delaware
corporation ("Endosonics"), and CardioVascular Dynamics, Inc., a Delaware
corporation ("CVD").
WHEREAS, pursuant to that certain Agreement and Plan of
Reorganization (the "Reorganization Agreement") dated as of January 26, 1997, by
and among Endosonics, Cardiometrics, Inc., a Delaware corporation ("Target"),
and River Acquisition Corporation, a Delaware corporation and a wholly-owned
subsidiary of Endosonics ("Merger Sub"), it is contemplated that the following
will occur at the Effective Time (as defined in the Reorganization Agreement):
Merger Sub will merge with and into Target (the "Merger"); Target will continue
as the surviving corporation and Target shall become a wholly owned subsidiary
of Endosonics (collectively, the "Transaction");
WHEREAS, Endosonics and Target will undertake to obtain approval
of the Transaction by the stockholders of Target at a special meeting of
stockholders, and in connection therewith will mail a proxy statement regarding
the Transaction (which together with the related Registration Statement is
herein referred to as the "Merger Proxy Statement") approximately 30 days in
advance of such stockholders meeting (the date the Merger Proxy Statement is
mailed being herein referred to as the "Proxy Mailing Date").
WHEREAS, a portion of the consideration to be provided to Target
stockholders in the Merger shall be shares of Common Stock of CVD held by
Endosonics immediately prior to the Merger (the "CVD Shares") which CVD Shares
shall be distributed to Target stockholders immediately following the Merger
(the "Distribution");
WHEREAS, pursuant to Section 5.1(b) of the Reorganization
Agreement, in order to induce Target to enter into the Reorganization Agreement,
Endosonics has agreed to use all reasonable efforts to cause CVD to prepare and
file a registration statement with the Securities and Exchange Commission
("SEC") with respect to the Distribution of the CVD Shares;
WHEREAS, an independent committee of the Board of Directors of
CVD
<PAGE> 2
("Independent Committee"), after consulting with independent legal counsel and
an independent financial advisor, has approved the terms and conditions
contained in this Registration Rights Agreement;
NOW, THEREFORE, in consideration of the foregoing, the covenants
and representations set forth below and for other good and valid consideration,
receipt of which is hereby acknowledged, the parties hereto agree as follows:
1. Obligations of CVD Regarding Registration of CVD Shares.
(a) CVD will, as soon as practicable following the date
of this Agreement, (i) prepare and file with the SEC on such form as is then
available a registration statement under the Securities Act of 1933, as amended
(the "Act") with respect to the Distribution of the CVD Shares (the
"Registration Statement") and shall use its reasonable best efforts to cause the
Registration Statement to become and remain effective at and following the Proxy
Mailing Date in order that the CVD Shares will be freely tradeable by the former
stockholders, warrantholders and optionholders of Target, subject to compliance
with Rule 145 under the Act; and (ii) use its best efforts to register or
qualify the CVD Shares covered by such Registration Statement under state
securities or blue sky laws to the extent reasonably required to effectuate the
Transaction.
(b) Subject to the provisions of Section 4, paragraph
(b) below and the final clause of this paragraph (b), CVD will, as soon as
practicable following the date it receives notification from Endosonics with
respect to the proposed date of the Dividend Transaction (as defined in
paragraph 4(b) below): (i) prepare and file with the SEC a registration
statement with respect to the Dividend Transaction (the "Dividend Registration
Statement") and shall use its reasonable best efforts to cause the Dividend
Registration Statement to become and remain effective at and following the
record date established by the Endosonics Board of Directors for the Dividend
Transaction (the "Dividend Transaction Record Date") such that the CVD Shares
will be freely tradeable by the stockholders of Endosonics at and following the
Dividend Transaction Record Date; and (ii) use its best efforts, to the extent
required by applicable law, to register or qualify the CVD Shares covered by
such Dividend Registration Statement under state securities or blue sky laws to
the extent reasonably required to effectuate the Dividend Transaction; provided
that the obligation of CVD to cooperate to prepare and file the Dividend
Registration Statement shall be subject to Endosonics entering into a written
agreement which provides that (x) Endosonics shall bear all costs and expenses
related to the Dividend Transaction, including costs and expenses related to the
Dividend Registration Statement and other related filings by CVD, and (y) CVD
and Endosonics shall allocate indemnification and contribution obligations
related to the Dividend Transaction in substantially the same manner as such
obligations have been allocated herein with respect to the Transaction.
2.
<PAGE> 3
2. Access to Information.
(a) Obligations of CVD. CVD shall afford Endosonics
and Target and their respective accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to such information as Endosonics and Target may reasonably
request in connection with the preparation of the registration statements in
accordance with Section (1) hereof and the proxy statements related to the
Reorganization Agreement.
(b) Obligations of Endosonics. Endosonics (i) shall
keep CVD and its independent legal counsel and independent financial advisor
fully informed with respect to the status of the Merger Proxy Statement; (ii)
shall provide to the Independent Committee, and its financial advisor and
independent legal counsel, copies of all filings by Endosonics with the SEC
related to the Transaction as are reasonably requested by the Independent
Committee's legal counsel or independent financial advisor; and, (iii) shall use
its best efforts to provide at least 30 days advance oral or written notice with
respect to the earliest expected date of the Effective Time.
3. Expenses.
Endosonics shall bear and pay (or reimburse CVD for) all
out-of-pocket costs and expenses directly or indirectly incurred by CVD and the
Independent Committee in connection with the Independent Committee's approval of
this Agreement, CVD's fulfilling its obligations under this Agreement or in
connection with the Transaction, including, but not limited to, (i) all costs
and expenses reasonably incurred by the Independent Committee, including fees of
its independent legal counsel and independent financial advisor, (ii) all costs
and expenses related to the registration, filing or qualification of the CVD
Shares pursuant to this Agreement, including (without limitation) all
registration, filing and qualification fees, printers and accounting fees and
the reasonable fees and disbursements of counsel to CVD, and, (iii) all fees and
expenses of CVD up to a maximum of $7,500 for investor relations and
communications activities related to the substantial number of CVD shares which
will become tradeable in the over-the-counter market at the Effective Time.
4. Further Obligations of Endosonics.
(a) Cooperation with Financial Advisor. Endosonics
agrees that it shall use its reasonable best efforts to cause Target to
cooperate with the Independent Committee's financial advisor regarding efforts
by the financial advisor to communicate directly with Target stockholders with
respect to the Distribution and the business of CVD, as well as with respect to
whether such Target stockholders intend to maintain an investment in CVD
following the Effective Time and/or alternatives available to such Target
stockholders with regard to disposing of their CVD Shares following the
Effective Time, including participation in a block trade and/or conducting sales
through a
3.
<PAGE> 4
designated market maker.
(b) Further Reduction of Endosonics Ownership.
Endosonics hereby agrees that it shall, during the period beginning (but not
before) 90 days following the Effective Time and ending 12 months following the
Effective Time (the "Dividend Window"), at such time and in such manner as it
shall reasonably determine, further reduce its ownership of CVD common stock by
conducting a 1 for 25 distribution of its CVD common stock in the form of a
dividend to its shareholders (the "Dividend Transaction"); provided, that,
Endosonics agrees that it will not conduct the Dividend Transaction during any
period within the Dividend Window if the Independent Committee, after consulting
with its financial advisor, concludes in good faith (and so advises Endosonics
in writing) that conducting the Dividend Transaction during such period (i)
could materially and adversely affect the market price for CVD common shares,
(ii) could interfere with a material pending transaction to which CVD is a
party, or (iii) would require public disclosure of information regarding CVD in
advance of the time such disclosure is appropriate and in the best interest of
CVD.
(c) License Agreement Amendments. Concurrent with the
signing of this Agreement Endosonics and CVD enter into an amendment to that
certain License Agreement attached hereto as Exhibit 1.
5. Indemnification and Contribution Obligations of the
Parties.
(a) Definitions. The following terms shall have the
following meanings for purposes of this Section 5:
(i) "Registration Statement" shall mean the
Registration Statement described in Section
1 of this Registration Rights Agreement;
(ii) "Prospectus" shall mean the form of
prospectus contained in the Registration
Statement on file with the Securities and
Exchange Commission at the Effective Time
(as the same may from time to time be
amended and supplemented after the Effective
Time);
(iii) "Other Filing" shall mean any application or
other document or written communication
executed by CVD or based upon written
information furnished by CVD in any
jurisdiction in order to qualify the CVD
common shares for sale under the securities
law of such jurisdictions or filed with
Commission, or any state securities
commission or agency, the National
Association of Securities Dealers, Inc. or
the Nasdaq
4.
<PAGE> 5
National Market.
(iv) "Claims or Losses" shall mean losses,
claims, damages, expenses or liabilities,
joint or several (and actions in respect
thereof) as such are incurred, including any
and all legal fees and expenses and other
expenses reasonably incurred in
investigating, preparing or defending
against any litigation, commenced or
threatened.
(b) Indemnification Obligations of CVD. CVD agrees to
indemnify and hold harmless Endosonics and each of its directors and each of its
officers against any and all Claims or Losses to which Endosonics and/or such
officers and directors may become subject under the Act, the Securities Exchange
Act of 1934 (the "Exchange Act") or any other statute or at common law or
otherwise, to the extent such Claims or Losses arise out of or are based upon
any untrue statement of a material fact contained in the Registration Statement,
the Prospectus or Other Filing or the omission to state in the Registration
Statement, Prospectus or Other Filing a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which they were made (such untrue statements or
omissions being hereinafter referred to as "CVD Misstatements or Omissions");
provided, however, CVD shall not be liable to provide any indemnification to the
extent that any such Claims or Losses arise out of or are based upon any untrue
statement made in or omission from the Registration Statement, Prospectus or
Other Filing in reliance upon, and in conformity with, information provided by
Endosonics.
(c) Indemnification Obligations of Endosonics.
Endosonics agrees to indemnify and hold harmless CVD and each of its directors
and each of its officers against any and all Claims or Losses to which CVD
and/or such officers and directors may become subject under the Act, the
Exchange Act or any other statute or at common law or otherwise, to the extent
such Claims or Losses relate to or arise out of the Transaction or the
Distribution, including, but not limited to litigation initiated by CVD
shareholders related to the registration rights granted by this Agreement or
litigation related to any untrue statement of a material fact contained in the
Merger Proxy Statement or the omission to state in the Merger Proxy Statement a
material fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances under which they were made;
provided, however, Endosonics shall not be liable to provide any indemnification
to the extent that any such Claims or Losses arise out of or are based upon any
CVD Misstatements or Omissions.
(d) Notice; Selection of Counsel. Promptly after
receipt by an indemnified party under this Section 5 notice of the commencement
of any action, suit or proceeding, such indemnified party shall, if a claim in
respect thereof is to be made against one or more indemnifying parties under
this Section 5, notify each party against
5.
<PAGE> 6
whom indemnification is to be sought in writing of the commencement thereof (but
failure so to notify an indemnifying party shall not relieve it from any
liability that it may have under this Section 5 except to the extent that it has
been prejudiced in any material respect by such failure or from any liability
that it may have otherwise). In case any such action is brought against any
indemnified party, and it notifies the indemnifying party or parties of the
commencement thereof, the indemnifying party or parties will be entitled to
participate therein, and to the extent it (or they) may elect by written notice
delivered to the indemnified party promptly after receiving the aforesaid notice
from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel reasonably satisfactory to
such indemnified party to have charge of the defense of such actions within a
reasonable time after notice of commencement of the action or (iii) such
indemnified party or parties shall have reasonably concluded that there may be
defenses available to it or them that are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying parties shall not have the right to assume the defense of such
action on behalf of the indemnified party or parties), in any of which events
such fees and expenses of one additional counsel shall be borne by the
indemnifying parties. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate, but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances.
Anything in this Section 5 to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claims or action effected
without its written consent, provided, however, that such consent was not
unreasonably withheld.
(e) Contribution. In order to provide for just and
equitable contribution in any case in which (i) an indemnified party makes claim
for indemnification pursuant to this Section 5, but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of this Section 5 provide for indemnification
in such case, or (ii) contribution under the Act may be required on the part of
any indemnified party, then each indemnifying party shall contribute to the
aggregate amount paid as a result of such losses, claims, damages, expenses or
liabilities (or action in respect thereof) (A) in such proportion as is
appropriate to reflect the relative benefits received by each of the
contributing parties, on the one hand, and the party to be indemnified on the
other hand, from the Transaction or (B) if the allocation provided by clause (A)
above is not permitted by
6.
<PAGE> 7
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (A) above but also the relative fault of
each of the contributing parties, on the one hand, and the party to be
indemnified on the other hand in connection with the statements or omission that
resulted in such losses, claims, damages, expenses or liabilities, as well as
any other relevant equitable considerations. In any case where Endosonics is the
contributing party and CVD is the indemnified party, the relative benefits
received by Endosonics on the one hand, and CVD on the other, shall be deemed to
be in the same proportion as the total value of the Transaction to Target
stockholders shall bear to the total economic benefit derived by CVD from the
Transaction. The amount paid or payable by an indemnified party as a result of
the losses, claims, damages, expenses or liabilities (or actions in respect
thereof) referred to above in this section shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party in connection
with investigating or defending any such action or claim. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5, each officer of
CVD who has signed the Registration Statement, and each director of CVD shall
have the same rights to contribution as CVD, subject in each case to this
Section 5(e). Any party entitled to contribution will, promptly after receipt of
notice of commencement of any action, suit or proceeding against such party in
respect to which a claim for contribution may be made against another party or
parties under this Section 5(e), notify such party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have hereunder or otherwise than under this
Section 5(e), but only to the extent that such party or parties were not
adversely affected by such omission. The contribution agreement set forth above
shall be in addition to any liabilities which any indemnifying party may have at
common law or otherwise.
(f) Nonexclusivity. The obligations of CVD and
Endosonics under this Section 5 shall be in addition to any liability that CVD
or Endosonics may have to the other at common law or otherwise.
6. Successors and Assigns.
This Agreement and all of the provisions hereof shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but, except as otherwise specifically provided
herein, neither this Agreement nor any of the rights, interests, or obligations
of the parties hereto may be assigned by either of the parties without the prior
written consent of the other.
7. Survival.
The obligations of the parties set forth in Sections 4 and 5
hereof shall
7.
<PAGE> 8
survive the completion of the Distribution and the expiration of the
Registration Statement contemplated by this Agreement.
8. Counterparts.
This Agreement may be executed in several counterparts, each of
which shall be an original, but all of which together shall constitute one and
the same agreement.
9. Governing Law.
This Agreement is being executed and delivered and shall be
governed by and construed in accordance with the laws of the State of
California.
8.
<PAGE> 9
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed on the day and year first above written.
ENDOSONICS CORPORATION
By: /s/ Reinhard J. Warnking
---------------------------------
Name: Reinhard J. Warnking
-------------------------------
Title: President and CEO
------------------------------
CARDIOVASCULAR DYNAMICS, INC.
By: /s/ Michael R. Henson
---------------------------------
Name: Michael R. Henson
-------------------------------
Title: Chairman/CEO
------------------------------
9.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-93330) pertaining to the Restated 1988 Stock Option Plan and
in the Registration Statements (Form S-3, Nos. 33-98084 and 333-1058, and Form
S-4) and related Prospectuses of EndoSonics Corporation, of our report dated
February 14, 1996, with respect to the consolidated financial statements and
schedule of EndoSonics Corporation included in this Annual Report (Form
10-K/A) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Sacramento, California
June 9, 1997
