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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
---------------
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________.
COMMISSION FILE NUMBER: 0-19880
ENDOSONICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE (I.R.S. EMPLOYER IDENTIFICATION NO.)
(STATE OF INCORPORATION) 68-0028500
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 NAME OF EACH EXCHANGE ON
TO SECTION 12(b) OF THE ACT: WHICH REGISTERED
TITLE OF EACH CLASS
NONE NONE
SECURITIES 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, as of March 29, 1999, was approximately $116,555,926 (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 29, 1999, approximately 17,760,903 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 1999 Annual Meeting of
Stockholders to be held on or about June 10, 1999 are incorporated by reference
into Part III.
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PART I
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.
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 has 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 that can reduce the time and cost of
interventional procedures by providing both diagnostic and therapeutic functions
on the same catheter.
The Company's IVUS 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".
Cardiometrics, Inc., ("Cardiometrics"), acquired by the Company in 1997,
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 (or 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 31,
1998, more than 98,000 FloWire guide wires have been sold and cumulative FloMap
shipments were approximately 669. Cardiometrics has also developed the
WaveWire(TM)/WaveMap(TM) intracoronary blood pressure measurement system, which
was first used in a clinical case in Europe in December 1996. Cardiometrics
received a 510(k) approval in August 1997 for the WaveWire(TM)/WaveMap(TM)
system, and commenced shipments to United States customers in 1998.
BUSINESS ACQUISITION
On August 5, 1998, the Company acquired all of the outstanding shares of
Navius Corporation ("Navius") for approximately $9.5 million in Common Stock of
the Company, $7.7 million in cash and $2.3 million in other costs. The financial
results of Navius' operations have been combined with those of the Company since
the date of acquisition. Navius is a developer of balloon angioplasty catheters,
stents, and intravascular radiation catheters.
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The Company believes that the acquisition of Navius provides the company with
basic technology for further development of its combination imaging and
therapeutic products. The acquisition was accounted for using the purchase
method of accounting.
PRODUCTS
EndoSonics develops and markets IVUS imaging systems and catheters, balloon
angioplasty catheters, combination balloon angioplasty/IVUS imaging catheters
and coronary functional assessment products.
IVUS IMAGING PRODUCTS
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. Advanced features include the following:
In-Vision(TM), an enhanced Windows-like user interface, ChromaFLO(TM) imaging
technology, which provides images of blood flow and In-Line Digital(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 In-Line Digital(TM) enables easier image interpretation for purposes
such as lesion differentiation and characterization. The Company introduced the
Oracle MegaSonics imaging catheters in 1998 which utilizes combination
diagnostics (ultrasound imaging) and therapeutics (angioplasty balloon) in a
single device.
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.
FUNCTIONAL ASSESSMENT AND BALLOON ANGIOPLASTY PRODUCTS
The products produced by Cardiometrics include intravascular guidewires to
measure blood flow and blood pressure in diseased coronary arteries. These
products include the FloWire(TM) and WaveWire(TM), and the corresponding
instrumentation, FloMap(TM) and WaveMap(TM). These products enable the
cardiologist to evaluate the appropriateness of angioplasty interventions and
assess post-procedural results directly in the cardiac catheterization
laboratory. The Company believes that the use of these products can contribute
to reduced procedural costs and better patient outcomes, particularly when
stenting is avoided.
Navius develops and manufactures balloon angioplasty catheters in its San
Diego facility. These products are currently sold in Europe and Japan. The
market for these catheters is very competitive in regard to price and product
performance. Fukuda, the Company's exclusive distributor in Japan for Navius
balloon catheters, has submitted the latest generation of Navius' balloon
catheters for regulatory approval in Japan
The following table lists the Company's key IVUS systems and imaging
catheters, balloon catheters, and functional assessment instruments and
guidewire products.
<TABLE>
<CAPTION>
U.S. REGULATORY FIRST COMMERCIAL
PRODUCT STATUS SALE
------- ------ ----
<S> <C> <C>
Visions Five 64 F/X 510(k) Cleared Q1 1996
Visions 0.018 PV 510(k) Cleared Q2 1998
Visions 8.2F PV (AAA) 510(k) Cleared Q3 1998
Oracle System 510(k) Cleared Q4 1995
Oracle InVision System 510(k) Cleared Q2 1996
InLineDigital 510(k) Cleared Q2 1997
ChromaFlo 510(k) Cleared Q4 1996
Pull Back Device (PBD-1) 510(k) Cleared Q4 1996
Oracle MegaSonics OTW PMA Supplement Q1 1999
APPROVED
Oracle MegaSonics F/X NON USA Product Q4 1998
</TABLE>
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<TABLE>
<S> <C> <C>
Balance Balloon MOHW Approved Q4 1997
Catheter (Japan)
Cardiometrics FloMap 510(k) Cleared 1994
Cardiometrics FloWire 510(k) Cleared 1994
Cardiometrics WaveMap 510(k) Cleared Q1 1998
Cardiometrics WaveWire, 510(k) Cleared Q1 1998
</TABLE>
PRODUCT DEVELOPMENT
The Company has conducted 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 is continuing to develop combination diagnostic/therapeutic catheters as
well as multiple therapeutic catheters such as balloon angioplasty catheters and
IVUS/radiation delivery catheters. The Company is developing core technology for
imaging other bodily organs. In addition, the Company is continuing to develop
advanced functional assessment guidewire products.
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 $5.7 million, $6.3
million and $7.0 million in 1996, 1997, and 1998 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" and
"Risk Factors Dependence on New Products; Rapid Technological Change."
MANUFACTURING
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 imaging integrated
circuit microchips and pressure microchips is currently performed by a single
vendor. Any supply interruptions from these single source vendors would have a
material adverse effect on the Company's ability to manufacture its products
until a new source of supply could be identified and 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 - Suppliers."
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
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 engineer 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 Good Manufacturing Practices, "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 continues to automate manufacturing processes for its
imaging 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 imaging catheter line in a timely manner, or to timely increase
production volumes of the imaging catheter line, would materially adversely
affect the Company's business, financial condition and results of operations.
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
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condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operation" and "Risk Factors - Limited
Manufacturing Experience."
BACKLOG
The Company had a backlog of customer purchase orders for products
representing approximately $0.6 million as of December 31, 1997. However, the
Company did not have any backlog of customer purchase orders for products as of
December 31, 1998.
MARKETING AND SALES
The Company's products are sold in the United States, Canada and other
international markets, principally Europe and Japan. The Company sells its
products through a direct sales force in the United States and Germany, and
through distributors in other geographic markets. In several countries, where
products are sold through distributors, the Company employs clinical and
marketing representatives.
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 superseded and replaced 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 was obligated during each year of the Exclusive Distribution
Agreement to use reasonable efforts to purchase certain minimum annual amounts
of products from EndoSonics. The Exclusive Distribution Agreement was terminated
in April 1998 and replaced with a Transition Agreement which provides for Cordis
to retain limited distribution rights through March, 1999.
In March 1997, the Company and Johnson & Johnson Medical KK ("JJMKK"), a
subsidiary of Johnson and Johnson, entered into a distribution agreement whereby
JJMKK was granted exclusive right to distribute EndoSonics IVUS imaging products
for coronary applications in Japan. The agreement contained similar terms as the
Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement
was amended in December 1998 to extend the agreement through December 1999.
In April 1997, the Company and Johnson and Johnson, Professional Group-Latin
America ("J & J Medical-LA"), a subsidiary of Johnson and Johnson, entered into
a distribution agreement whereby J & J Medical-LA was granted exclusive rights
to distribute EndoSonics IVUS imaging products for coronary applications in
certain countries of Latin America. The agreement contained similar terms as the
Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement
was amended in December 1998 to extend the agreement through December 2000.
In July, 1998, the Company announced that it has agreed in principal to enter
into a strategic relationship with Fukuda Denshi Co., Ltd. ("Fukuda"), which
includes an equity investment and research and development funding totaling $13
million in EndoSonics by Fukuda. Approximately $8.4 million of Fukuda's
investment was for the purchase of newly issued EndoSonics common stock. The
remaining $4.6 million of the investment will fund certain research and
development/technical assistance programs for products intended for the Japanese
market which will be distributed by Fukuda. The funding will occur over a
two-year period commencing in August, 1998.
In December 1998, the Company and JOMED N.V., ("JOMED") entered into an
agreement for exclusive distribution of certain EndoSonics products into
specified European and Middle Eastern countries. Also in December, EndoSonics
and JOMED entered into an IVUS guided stent delivery system agreement which
calls for the development of a JOMED balloon and stent incorporated into a
modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply
subassemblies to JOMED who will complete the manufacturing process and
distribute the resulting product in the territory which is defined as certain
European and Middle Eastern countries. In certain countries within the
territory, EndoSonics may distribute exclusively or jointly with JOMED.
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. The loss of one or more of these
distributors could
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materially affect the ability of the Company to distribute its products which
could materially adversely affect the Company's business, financial condition
and results of operations.
In 1996, 1997 and 1998, total export sales were $16.9 million, $21.9 million
and $32.2 million respectively, or approximately 72%, 66% and 75% respectively,
of total product sales. In 1996, 1997 and 1998, sales to Europe accounted for
$9.8 million, $11.5 million and $10.6 million respectively, and sales to Asia
represented $6.7 million, $9.3 million, and $20.3 million 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 Radiance (Radiance Medical
Systems, Inc., "Radiance", formerly Cardiovascular Dynamics, Inc.) dated
December 22, 1995 (the "Radiance Agreement"), pursuant to which Radiance granted
to EndoSonics a non-exclusive, royalty-free right to Radiance's FOCAL technology
for the development and sale of a combined FOCAL/Ultrasound product. In
exchange, Radiance received a non-exclusive, royalty-free right to submit PMA
supplemental applications utilizing an EndoSonics PMA as a reference and to
manufacture and distribute Radiance products as a supplement to the EndoSonics
PMA. The Radiance 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, Radiance 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 Radiance's business, financial condition and
results of operations.
The Company entered into a separate license agreement with Radiance on
February 6, 1996, pursuant to which EndoSonics granted to Radiance a
non-exclusive, royalty-free right and license to use and reference the
EndoSonics PMA to enable Radiance 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
Radiance Agreement described above.
On August 31, 1998, the Company entered into a strategic relationship with
the Fukuda Denshi Company, Ltd. ("Fukuda"), a Japanese medical products company,
which includes an equity investment and research and development and technical
guidance funding totaling $13 million in EndoSonics by Fukuda. Approximately
$8.4 million of the $13 million represents an equity investment. The remaining
$4.6 million will fund research and development programs over the next 24
months. In October, 1998, the Company received approximately $8.4 million in
cash and issued 965,730 shares of the Company's common stock, at a price of
$8.70 per share, related to this strategic relationship with Fukuda.
In December 1998, the Company and JOMED entered into an agreement for
exclusive distribution of certain EndoSonics products into specified European
and Middle Eastern countries. Also in December, EndoSonics and JOMED entered
into an IVUS guided stent delivery system agreement which calls for the
development of a JOMED balloon and stent incorporated into a modular EndoSonics
IVUS catheter. Under the agreement, EndoSonics will supply subassemblies to
JOMED who will complete the manufacturing process and distribute the resulting
product in the territory which is defined as certain European and Middle Eastern
countries. In certain countries within the territory, EndoSonics may distribute
exclusively or jointly with JOMED.
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"). CVIS is significantly larger than the
Company, and has significantly greater financial, marketing and technical
resources available. Although the Company believes that CVIS is not currently
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marketing or clinically testing combined coronary balloon angioplasty/IVUS
imaging catheters, there can be no assurance that CVIS 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 and Medtronic.
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, that then bill various third-party payors, (such as
Medicare, Medicaid, and other government programs) and private insurance plans
(such as Blue Cross/Blue Shield, United Healthcare), for the health care
services provided to patients. U.S. Medical institutions are reimbursed for the
care of Medicare hospital patients based on a predetermined lump sum amount for
one of over 500 diagnostic related group, or DRGs (such as DRG 112 Percutaneous
Cardiovascular Procedures), regardless of the costs involved. The amount of
money paid for a specific DRG is determined by the average resource consumption
needed to treat a specific disease, including the nursing time, operating room
time and supplies. Reimbursement for Medicare patients for the equipment and
hospital expense of an angioplasty procedure is usually covered under a specific
DRG. However, since the amount of reimbursement is fixed and the amount of
potential profit for the medical institution relating to the procedure may be
reduced to the extent the physician performs additional procedures such as IVUS
imaging, pressure measurement or uses a more expensive product that combines
ultrasound imaging with therapeutic capabilities.
Private insurers and other payors determine whether to provide coverage for a
particular procedure and reimburse hospitals for medical treatment also usually
at a fixed rate base. 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. 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.
Physicians in the United States are reimbursed for performing medical
procedures based on Current Procedural Terminology, "CPT" codes. Each type of
procedure reimburses the physician a specific amount based on the amount of
resource costs needed to provide the services. Included in the cost of providing
each service are the physician work, practice expense and malpractice insurance.
Payments are also adjusted for geographic differences. CPT codes are now
available for all EndoSonics technology. CPT codes have been available since
1997 to reimburse physicians to perform ultrasound procedures and interpret the
results when imaging is performed in conjunction with a therapeutic
intervention. In January 1999 CPT codes were established to reimburse physician
for performing physiological assessment including Doppler Flow and Pressure
Measurement. These physician reimbursements are paid directly to the physician
and are not intended to cover the costs of the supplies to perform the
procedures. Physicians in the United States receive approximately $160 for
physiological testing, $190 for IVUS and $1,232 for MegaSonics balloon and IVUS
combination device for two vessel evaluation an/or treatment in a patient.
Physicians are responsible for determining that the clinical benefits of
intravascular ultrasound imaging justify the additional costs for the medical
institutions.
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 and are approximately $2,000.
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 in the United States are currently
reimbursed separately from DRG payments. Medical institutions are reimbursed for
a portion of the total capital equipment required to provide treatment.
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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 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" and "Risk Factors - 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 products under development,
such as an imaging-radiation catheter, 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
8
<PAGE> 9
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 Radiance's line of FACT catheters,
which utilize the FOCAL technology, 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 has received ISO 9001 certification of its Quality System as well
as CE Mark certifications for most of its products. 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 obtain the right to affix the CE Mark, an international symbol
of adherence to quality assurance standards and compliance with applicable
European medical device directives. All medical devices placed on the market
within the European Union are required to bear the CE Mark. ISO 9000
certification is one of the CE Mark certification requirements. Failure to
receive the right to affix the CE Mark for any product will prohibit the Company
from selling that product in member countries in the European Union. In Europe,
the Company has obtained ISO 9001 certification for operations at the EndoSonics
Europe, B.V. office. There can be no assurance that the Company will be
successful in meeting ongoing 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 47 U.S. and 24 foreign issued patents; 38 are
EndoSonics, 3 are Du-MED, and 30 are Cardiometrics. The Company has other U.S.
and foreign patent applications pending covering various aspects of its
technology. One 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 catheters. A
fourth patent covers improvements to the IVUS imaging system which enables it to
obtain images closer to the transducer surface. A fifth patent covers
modifications to the catheter tip transducer technology. A sixth patent covers a
method and apparatus for imaging blood flow using an ultrasound catheter.
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.
9
<PAGE> 10
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, 1998, the Company had 350 employees, including 220 in
manufacturing, 65 in research, development and regulatory affairs, 42 in sales
and marketing, and 23 in administration. The Company believes that the success
of its business will depend, in part, on its ability to attract and retain
qualified personnel.
ITEM 2. PROPERTIES
Currently, the Company leases approximately 59,000 square feet in Rancho
Cordova, California, which is leased through the year 2006. The Company also
leases approximately 4,100 square feet in The Netherlands for its European
operations, which lease expires at the end of the year 2001. In connection with
the acquisition of Navius, the Company obtained 11,000 square feet in San Diego,
California, which is leased through August 31, 2000. In March 1998, the Company
closed its Mountain View, California facility and consolidated the manufacturing
operations conducted there into its Rancho Cordova facility. In February 1999,
the Company executed a lease for approximately 44,000 square feet in San Diego,
California which is leased through March 31, 2006.
ITEM 3. LEGAL PROCEEDINGS
In October 1998, the Company entered into a five-year litigation standstill
agreement with Intravascular Research Limited with respect to certain
intellectual property claims. The agreement includes the dismissal without
prejudice of a pending Delaware lawsuit involving patent infringement claims.
The agreement does not toll any potential patent infringement damages which may
be accruing.
The Company is subject to various legal actions and claims arising in the
ordinary course of business. Management believes the outcomes of these matters
will have no material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of March 29, 1999, and
their positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Roger H. Salquist 57 Chairman of the Board
Reinhard J. Warnking 50 President, Chief Executive
Officer and Director
Dr. Hans P. de Weerd 51 Senior Vice President, European
Operations
Michael J. Eberle 42 Senior Vice President and General
Manager, SmartWire Division
Richard L. Fischer 57 Vice President, Finance and Chief
Financial Officer
Joerg Schulze-Clewing 41 Vice President and General
Manager, Imaging Division
Vice President and General
Clifford R. Varney 48 Manager Image Guided Therapy
Division
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
Oti M. Wooster 47 Vice President, Human Resources
and Administration
</TABLE>
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 H. Salquist. Mr. Salquist was appointed Chairman of the Board in
November of 1996. Since March 1997, Mr. Salquist has been a partner in Bay City
Capital, a life sciences merchant banking firm. Mr. Salquist served as Chairman
and Chief Executive Officer of Calgene, Inc., a Davis, California-based
agribusiness biotechnology company, from 1984 through August 1996. He also
served on the Board of Directors of Collagen Corporation from 1988 through
October 1997. Mr. Salquist serves on the Advisory Council of the Stanford
University Graduate School of Business and is a member of the Board of Trustees
of the University of San Francisco.
Reinhard J. Warnking. Mr. Warnking joined EndoSonics in 1993 as a director,
President and Chief Operating Officer. Mr. Warnking was appointed Chief
Executive Officer on February 1, 1995. He was the President and Chief Executive
Officer of Acoustic Imaging Technology Corporation, a manufacturer of ultrasound
and transducer systems, from August 1991 to March 1993. From February 1989 to
September 1990, he founded and operated Warnking Medizintechnik GmbH, which was
acquired by Dornier Medizintechnik GmbH in September 1990. After the
acquisition, Mr. Warnking founded and managed the ultrasound division of Dornier
Medizintechnik. 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 (ATL).
Dr. Hans P. de Weerd. Dr. de Weerd became Senior Vice President and Managing
Director of European Operations effective September 1994. From June 1993 to
August 1994, he was the Managing Director of Du-MED BV, a Dutch company which
the Company acquired. 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.
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. In 1998, Mr. Eberle became Senior Vice President and
General Manager of the Smart Wire Division. 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.
Richard L. Fischer. Mr. Fischer joined the Company in November 1997 as Vice
President, Finance, and Chief Financial Officer. From August 1996 to August 1997
he was Vice President and Chief Financial Officer of Calydon, Inc., an emerging
biopharmaceutical company developing therapeutics for the treatment of prostate
cancer. From October 1989 to August 1996, Mr. Fischer was Vice President and
Chief Financial Officer of Microgenics Corporation, a manufacturer of
immunoassays for medical diagnostics. Prior to joining Microgenics, he was Vice
President, Finance and Chief Financial Officer for Verilink Corporation, a
manufacturer of telecommunications equipment.
Joerg Schulze-Clewing. Mr. Schulze-Clewing joined the Company in February
1997 as Vice President and Chief Technical Officer of MicroSound Corporation a
former subsidiary of EndoSonics Corporation. In September 1998, MicroSound was
merged with and into EndoSonics. Mr. Schulze-Clewing was promoted to the Vice
President and General Manager of EndoSonics' Imaging Division in July, 1998.
Before joining EndoSonics in 1997, he was an independent consultant.
11
<PAGE> 12
Clifford R. Varney. Mr. Varney became Vice President of Catheter Development
and Manufacturing in March 1994 and was promoted in 1998 to Vice President and
General Manager, Image Guided Therapy Division. He joined the Company in October
1990 as Director of Catheter Manufacturing. From September 1984 to October 1990,
prior to joining the Company, Mr. Varney was the Vice President, Manufacturing
of BSW Technologies, a private automated equipment manufacturing and consulting
company.
Oti M. Wooster. Ms. Wooster joined the Company in April 1997 as Vice
President, Human Resources and Administration. She is responsible for directing
the Company's human resources, facilities and administration activities. From
1994 to 1997, Ms. Wooster was Director, Human Resources and Operations for U.S.
West Cellular, a multinational telecommunications company. From 1987 to 1994,
she was Vice President, Human Resources and Administration for Government
Technology Services, Inc., the world's largest seller of computer products and
services to the federal government. Prior to 1987, Ms. Wooster was a member of
the Executive Staff, and Cabinet member at Northern Telecom. She held various
line, human resources and administration management positions in both domestic
and international levels there and at General Electric Corporation.
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 close of market sales
prices for the Common Stock for the periods indicated, as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
First Quarter $ 10.38 $ 8.06
Second Quarter 5.00 9.25
Third Quarter 9.38 4.50
Fourth Quarter 9.94 4.25
1997
First Quarter $ 15.38 $ 9.25
Second Quarter 12.25 8.00
Third Quarter 15.88 10.50
Fourth Quarter 15.13 8.50
</TABLE>
On March 29, 1999, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $6.5625 per share. As of March 29,
1999, there were approximately 213 holders of record of the Company's Common
Stock.
DIVIDEND POLICY
The Company declared a dividend for all stockholders of record on September
5, 1997 of .04 shares of Radiance Medical Systems, Inc. (NASDAQ: RADX) Common
Stock for each outstanding EndoSonics share. The dividend was distributed on
September 26, 1997. 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.
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<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Product sales $ 6,665 $ 16,175 $ 23,542 $ 33,141 $ 42,929
License fee 1,000 -- -- -- --
Contract revenue 353 962 831 856 1,215
-------- -------- -------- -------- --------
Total revenue 8,018 17,137 24,373 33,997 44,144
Cost of sales 4,716 11,270 15,688 17,962 20,089
-------- -------- -------- -------- --------
Gross margin 3,302 5,867 8,685 16,035 24,055
OPERATING EXPENSES:
Research, development and clinical 8,445 7,127 5,746 6,309 7,045
Marketing and sales 4,056 5,096 5,411 6,068 9,575
General and administrative 2,854 4,516 4,821 5,840 4,849
Acquisition related expenses 2,315 488 518 47,956 10,554
Amortization of intangibles -- -- -- 475 1,391
-------- -------- -------- -------- --------
Total operating expenses 17,670 17,227 16,496 66,648 33,414
-------- -------- -------- -------- --------
Loss from operations (14,368) (11,360) (7,811) (50,613) (9,359)
Equity in net loss of Radiance -- -- (1,621) (2,358) (158)
Other income:
Interest income 1,124 888 2,269 1,881 1,208
Gain realized on equity investment in
Radiance -- -- -- 4,021 739
-------- -------- -------- -------- --------
Total other income 1,124 888 2,269 5,902 1,947
-------- -------- -------- -------- --------
Net loss before provision for income taxes (13,244) (10,472) (7,163) (47,069) (7,570)
Provision for income taxes -- -- -- 175 222
-------- -------- -------- -------- --------
Net loss $(13,244) $(10,472) $ (7,163) $(47,244) $ (7,792)
-------- -------- -------- -------- --------
Basic and diluted net loss per share $ (1.38) $ (1.01) $ (0.53) $ (3.22) $ (0.47)
-------- -------- -------- -------- --------
Shares used in per share calculation 9,584 10,387 13,395 14,670 16,472
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments $20,410 $44,395 $40,192 $23,009 $25,018
Working capital 23,517 49,872 44,676 30,146 34,263
Convertible obligation -- 750 -- -- --
Total assets 28,295 56,953 72,039 62,807 66,730
Total stockholders' equity 22,268 48,155 66,067 49,254 54,252
</TABLE>
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 19.
13
<PAGE> 14
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. Cordis was obligated during each year of the
Exclusive Distribution Agreement to use reasonable efforts to purchase certain
minimum annual amounts of products from EndoSonics. 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 $5.0 million. The Company has since
registered the shares of Common Stock issued to Cordis. The exclusive
Distribution Agreement was terminated in April, 1998. EndoSonics and Cordis
entered into a Transition Agreement in April, 1998 which provided for Cordis to
maintain significantly reduced distribution rights. These distribution rights
terminated in March, 1999.
In March 1997, the Company and Johnson & Johnson Medical K.K. ("JJMKK"),
entered into a distribution agreement whereby JJMKK was granted exclusive right
to distribute EndoSonics IVUS imaging products for coronary applications in
Japan. The agreement contained similar terms as the Exclusive Distribution
Agreement between Cordis and EndoSonics. The agreement was amended in December
1998 to extend the agreement through December 1999.
In April 1997, the Company and Johnson & Johnson, Professional Group - Latin
America ("J & J Medical-LA"), entered into a distribution agreement whereby J &
J Medical-LA was granted exclusive rights to distribute EndoSonics IVUS imaging
products for coronary applications in certain countries of Latin America. The
agreement contained similar terms as the Exclusive Distribution Agreement
between Cordis and EndoSonics. The agreement was amended in December 1998 to
extend the agreement through December 2000.
In July, 1998, the Company announced that it has agreed in principal to enter
into a strategic relationship with Fukuda which includes an equity investment
and research and development funding totaling $13 million in EndoSonics by
Fukuda. Approximately $8.4 million of Fukuda's investment was for the purchase
of newly issued EndoSonics common stock. The balance of the investment will fund
certain research and development/technical assistance programs for products
intended for the Japanese market which will be distributed by Fukuda. The
funding will occur over a two-year period commencing in August, 1998.
In December 1998, the Company and JOMED N.V., ("JOMED") entered into an
agreement for exclusive distribution of certain EndoSonics products into
specified European and Middle Eastern countries. Also in December, EndoSonics
and JOMED entered into an IVUS-guided stent delivery system agreement which
calls for the development of a JOMED balloon and stent incorporated into a
modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply
subassemblies to JOMED who will complete the manufacturing process and
distribute the resulting product in the territory which is defined as certain
European and Middle Eastern countries. In certain countries within the
territory, EndoSonics may distribute exclusively or jointly with JOMED.
Radiance, formerly a majority-owned subsidiary of the Company, designs,
develops, manufactures and markets catheters used to treat certain vascular
diseases. Radiance's catheters are used in conjunction with angioplasty and
other interventional procedures such as vascular stenting and drug delivery.
Radiance 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. At December 31, 1998, the Company
held approximately 15% of the outstanding shares of the Common Stock of Radiance
and accounted for its investment on the cost method.
The Company's business strategy includes acquiring related businesses,
products or technologies. On July 23, 1997, the Company acquired Cardiometrics
through the merger of a wholly owned subsidiary of the Company with and into
Cardiometrics, with Cardiometrics surviving as a wholly owned subsidiary of the
Company.
Cardiometrics develops, manufactures, and markets intravascular medical
devices to measure blood flow impairment caused by coronary artery disease.
Cardiometrics' initial products, the FloWire(TM) Doppler guide wire and FloMap
ultrasound instrument, represent an advance in functional testing of blood flow
impairment, enabling cardiologists to evaluate the appropriateness of
angioplasty interventions and assess post-procedural results directly
14
<PAGE> 15
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(TM)/FloMap(TM)
systems has received clearance from the FDA and many corresponding European and
Pacific Rim regulatory agencies. Cardiometrics has also developed the
WaveWire(TM)/WaveMap intracoronary blood pressure measurement system, which was
first used in a clinical case in Europe in December 1996. Cardiometrics received
a 510(k) approval in August 1997 for the WaveWire(TM)/WaveMap(TM) System, and
commenced shipment to United States customers in 1998.
On August 5, 1998, the Company acquired Navius Corporation, a San Diego
based, privately-held developer of angioplasty balloons, stents, intravascular
radiation devices and other medical products. Navius' results of operations are
combined with those of the Company since the date 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 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 three years to eight years. Additionally, unanticipated expenses may be
incurred relating to the integration of technologies and research and
development, and administrative functions. Any acquisition will involve numerous
risks, including difficulties in the assimilation of the acquired company's
employees, operations and products, uncertainties associated with operating in
new markets and working with new customers, the potential loss of the acquired
company's key employees as well as the costs associated with completing the
acquisition and integrating the acquired company.
The Company's financial results will be affected in the future by certain
factors, market acceptance of the Company's new products, 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 "Risk Factors."
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1998 with the Year Ended December
31, 1997
Cardiometrics' results of operations were included in the Company's
consolidated results of operations beginning July 24, 1997. Navius' results of
operations were included in the Company's consolidated results of operations
beginning August 5, 1998. (See Note 3 to Consolidated Financial Statements.)
Total Revenue. Total revenue in 1998 increased by 30% to approximately $44.1
million from $34.0 million in 1997. The increase is a result of an additional
$4.4 million in IVUS sales, primarily in Europe and Japan, and $4.4 million in
Cardiometrics revenue. The majority of the increase in Cardiometrics revenue was
due to the inclusion of Cardiometrics for a full twelve month period in 1998 as
compared to 5 months in 1997. In addition, there was an increase of $1.4
million, primarily sales of balloon catheters, as a result of the Navius
acquisition.
Sales of the Company's digital all-electronic IVUS imaging system and
catheters accounted for 72% of total revenue and a 16% increase over 1997
results. The increase is due both to the growth of the overall market for IVUS
imaging products and increased unit sales of the Company's imaging catheters.
The sales of IVUS imaging catheters as a percentage of total IVUS sales has
increased from 42% in 1997 to 50% in 1998 due to the increase in the Company's
installed base. In 1998, export sales as a percentage of total revenue increased
to 73% as compared to 64% in 1997, primarily due to strong customer demand in
Japan. 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 46% from approximately 52% in 1997. Cost of
sales as a percentage of product sales in 1998 was reduced principally by volume
increases and improved manufacturing efficiencies, as well as favorable margins
on Cardiometrics products. Gross profit margins on product sales improved to 54%
in 1998 as compared to 48% in 1997. Due to the uncertainty associated with
continued improvements in efficiency of the Company's manufacturing processes
and
15
<PAGE> 16
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.
Acquisition Related Expenses. In connection with the Company's
acquisition of Navius in 1998 , the Company wrote off in-process research and
development totaling $10.6 million. This amount was expensed as an Acquisition
Related Charge on the acquisition date. This write-off was necessary because the
acquired technology had not yet reached technological feasibility and had no
future alternative uses. The Navius acquired in-process research and development
relates primarily to the development of intravascular ultrasound radiation
devices. The Company anticipates that products using the acquired in-process
technology will be generally released before the end of 2001. The Company
expects that the acquired in-process research and development will be
successfully developed, but there can be no assurance that technological
viability of these products will be achieved.
The nature of the efforts required to develop the purchased in-process
technology into technologically viable products principally relate to efficacy
validation and regulatory approval.
The value of the purchased in-process technology was determined by
estimating the projected net cash flows related to such products, which
incorporate the in-process technology including percent complete prior to the
date of acquisition, percent remaining to be developed post acquisition, time to
completion, and costs to complete the development of the technology and the
future revenues to be earned upon commercialization of the products. These cash
flows were discounted back to their net present value. The resulting projected
net cash flows from such projects were based on management's estimates of
revenues and operating profits related to such projects.
The purchased in-process technology acquired in the Navius acquisition
primarily relates to the radiation guide wire technology. The Company intends to
use this technology to develop an IVUS radiation delivery product. This product
will combine Navius' guide wire technology with the Company's IVUS imaging
technology.
Revenue attributable to the in-process technology was assumed to begin in
2001 and increase over the 12 year projection period (2001 to 2012) at rates
ranging from 591% to 10%, resulting in projected annual revenues of
approximately $2 million to approximately $98 million. Such projections were
derived from the projected number of units sold and the expected price per unit.
Projected revenues consider, among other factors, presumed market penetration,
retention of the Company's existing customer base, as well as, new customer
transactions
Operating expenses include cost of goods sold, general and administrative
expense, selling and marketing expense, and maintenance research and development
costs. Operating expenses were estimated as a percentage of annual revenue. Cost
of goods sold was estimated to be approximately 40%. General and administrative
expenses and sales and marketing expenses as a percent of revenues were
estimated to be 12% and 20% , respectively. Maintenance research and development
cost are the costs to sustain the products once they have been introduced to the
market. Maintenance research and development costs were estimated to be 2% of
revenues. Operating profits were estimated to be approximately 26% of revenues
and ranged from approximately $0.6 million to $25.5 million during the
projection period.
The projected net cash flows were discounted to their present value. The
Weighted Average Cost of Capital ("WACC") was used to determine an appropriate
discount rate. The WACC calculation produces the average required rate of return
of an investment in an operating enterprise, based on required rates of return
from investments in various areas of the enterprise. The Company used a 30%
discount rate to calculate the present value of the in process technology. This
rate was determined by applying a risk premium of 11%, to the calculated WACC of
19%. The risk premium was added to reflect the general business risks associated
with the technology which has not yet reached technological feasibility.
In calculating the present value of the developed technology and other
acquired intangibles a 20% discount rate, which approximates the Company's WACC,
was used. This rate reflects the fact that these assets face substantially the
same risks as the business as a whole.
The Company estimates that the cost to complete development of the in
process technology will be approximately $6 million.
Research, Development and Clinical. Research, development and clinical
expenses increased 12% to $7.0 million in 1998 from approximately $6.3 million
in 1997. This increase is due to a $0.9 million increase in clinical expenses
compared to 1997 and the acquisition of Navius offset in part by research and
development expenses which increased by $0.4 million. The majority of the
increase in clinical expenses was due to the inclusion of Cardiometrics for a
full twelve-month period in 1998.
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<PAGE> 17
Marketing and Sales. Marketing and sales expenses increased 58% to
approximately $9.6 million from $6.1 million in 1997, primarily due to increased
staffing and marketing programs related to staffing a direct sales force in the
United States and Germany. As a percentage of total revenue, marketing and sales
expenses increased to 22% as compared to 18% in 1997.
General and Administrative. General and administrative expenses decreased by
17% to approximately $4.8 million in 1998 from approximately $5.8 million in
1997. After adjusting for integration charges of $1.4 million in 1997, general
and administrative expenses increased $0.4 million. The increase is attributable
to an overall increase in the Company's level of operations; however, general
and administrative expenses decreased to 11% of total revenue in 1998 as
compared to 17% of total revenue in 1997.
Other Income. Other income decreased to approximately $1.9 million in 1998
from approximately $5.9 million in 1997. The decrease is due to the 1997 gains
realized on the shares of Radiance common stock used to acquire Cardiometrics,
distributions to the Company's stockholders and option holders, and the sale of
Radiance stock. Interest income declined by $0.7 million due to reduced cash
balances and lower short-term interest rates.
Net Loss. Net loss was $7.8 million, or $0.47 per share for 1998, as
compared to a net loss of approximately $47.2 million, or $3.22 per share in
1997.
Comparison of the Year Ended December 31, 1997 with the Year Ended December 31,
1996
Radiance Medical Systems' results of operations were included in the
Company's consolidated results through June 19, 1996, and accounted for on the
equity method thereafter. Cardiometrics' results of operations were included in
the Company's consolidated results of operations beginning July 24, 1997. (See
Note 3 to Consolidated Financial Statements.)
Total Revenue. Total revenue in 1997 increased by 39% to approximately $34.0
million from $24.4 million in 1996. The increase is a result of the
Cardiometrics acquisition, which resulted in an additional $6.8 million in
revenue and a $6.6 million increase in IVUS sales, primarily in Europe and
Japan.
Sales of the Company's digital all-electronic IVUS imaging system and
catheters accounted for approximately 78% of total revenue and a 32% increase
over 1996 results. 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 Fukuda.
Total revenue from Cardiometrics was approximately $6.8 million for the
period from the acquisition, July 24, 1997 through December 31, 1997. Total
Radiance revenue was approximately $3.8 million in 1996. There was no Radiance
revenue included in 1997.
A majority of the Company's sales of IVUS products consists of sales of IVUS
imaging systems. The sales of IVUS imaging catheters as a percentage of total
IVUS sales has increased from 30% in 1996 to 42% in 1997 due to the increase in
the Company's installed base. In 1997, export sales as a percentage of total
revenue decreased to 64% as compared to 69% in 1996, as domestic sales increased
at a greater rate than export sales. 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 52% from approximately 63% in 1996. Cost of
sales as a percentage of product sales in 1997 was reduced principally by volume
increases and improved manufacturing efficiencies, as well as favorable margins
on Cardiometrics products. Gross profit margins on product sales improved to 48%
in 1997 as compared to 37% in 1996. Due to the uncertainty associated with
continued improvements in 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.
Acquisition Related Expenses. In connection with the Company's acquisition
of Cardiometrics in 1997, the Company wrote-off in-process research and
development totaling $43.0 million. This write-off was necessary because the
acquired technology had not reached technological feasibility and had no future
alternative uses. The Cardiometrics acquired in-process research and development
relates primarily to the development of intravascular guidewires to measure
blood flow and blood pressure in diseased coronary arteries, as well as, other
functional assessment instruments. The nature of the efforts required to
complete development of the various purchased in-process research and
development projects into technologically viable products principally relate to
efficacy and regulatory approval and are projected to be completed from 1997 to
1999. Additionally, the Company recorded restructuring charges of $5.0 million
related to corporate reorganization costs
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<PAGE> 18
and plans to reduce overhead of the combined companies. The charges primarily
consist of cash expenditures anticipated in 1998 related to termination of
certain agreements and relocation and consolidation of facilities.
Research, Development and Clinical. Research, development and clinical
expenses increased 10% to $6.3 million in 1997 from approximately $5.7 million
in 1996. Cardiometrics portion of research, development and clinical expense for
1997 was approximately $1.9 million.
Marketing and Sales. Marketing and sales expenses increased 12% to
approximately $6.1 million from $5.4 million in 1996, primarily due to increased
staffing and marketing programs related to the acquisition of Cardiometrics.
After adjusting for $0.5 million in integration charges in 1997, marketing and
sales remained constant. As a percentage of total revenue, marketing and sales
expenses decreased to 18% as compared to 22% in 1996.
General and Administrative. General and administrative expenses increased by
21% to approximately $5.8 million in 1997 from approximately $4.8 million in
1996. After adjusting for integration charges of $1.4 million in 1997 and $0.3
million in 1996, general and administrative expenses increased $0.1 million. The
increase is attributable to an overall increase in the Company's level of
operations; however, general and administrative expenses decreased to 17% of
total revenue in 1997 as compared to 20% of total revenue in 1996.
Other Income. Other income increased to approximately $5.9 million in 1997
from approximately $2.3 million in 1996. The increase is due to the result of
gains realized on the shares of Radiance common stock used to acquire
Cardiometrics, distributions to the Company's stockholders and option holders,
and the sale of Radiance stock, offset in part by a reduction in interest income
of $0.4 million due to reduced cash balances.
Net Loss. Net loss was $47.2 million, or $3.22 per share for 1997, as
compared to a net loss of approximately $7.2 million, or $0.53 per share in
1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash, cash equivalents and short-term
investments of $25 million and no borrowings or credit facilities. Net cash
provided from operations was $2.1 million in 1998, as compared to cash used in
operations of $3.6 million in 1997. Working capital increased to $34.3 million
in 1998, as compared to $30.1 million in 1997. The increase is primarily due to
the sale of common stock to Fukuda, the sale of Radiance common stock, and
reduced accrued restructuring and integration expenses offset in part by the
cash used in the acquisition of Navius and the acquisition of stock under the
Company's stock repurchase program.
Net cash used in investing activities was $11.3 million, as compared to
$17.9 million in 1997. On August 5, 1998, the Company acquired all of the
outstanding shares of Navius. As a result, Navius' assets, liabilities and
results of operations since the acquisition date are included in the Company's
consolidated statements of cash flows. Net cash used in the acquisition was $6.5
million.
Net cash provided by financing activities was $4.0 million as compared to
$0.6 million in 1997. In 1998, the Company received $8.8 million from the
issuance of common stock, primarily related to the sale of common stock to
Fukuda for $8.4 million and the exercise of stock options of $0.4 million. In
1997 proceeds from the issuance of common stock was $0.6 million.
Intangible assets total approximately $12.4 million as of December 31,
1998 and consist primarily of developed technology, goodwill, and other
intangible assets acquired in connection with the acquisitions of Cardiometrics
and Navius in 1997 and 1998, respectively. The Company continually evaluates
the value and future benefits of its intangible assets, and assesses the
recoverability of the intangible assets using cash flows and income from
operations of the related acquired businesses as measures. Under this approach,
the carrying value would be reduced if it becomes probable that our best
estimate for expected future cash flows of the related business would be less
than the carrying amount of the intangible assets. As of December 31, 1998,
there have been no adjustments to the carrying amounts of intangibles resulting
from these evaluations. As of December 31, 1998, intangible assets represented
approximately 19% of our total assets and 23% of stockholders equity.
The Company anticipates using cash resources primarily for capital
expenditures, product development, sales and marketing efforts 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, 1998 will be sufficient to meet the Company's
operating expenses and capital requirements through 1999. 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 " Risk Factors--Future Operating Results--History of Operating
Losses; Anticipated Future Losses."*
IMPACT OF YEAR 2000
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions to operations, including, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities. Should any of these disruptions occur, the financial
impact on the Company is unknown.
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<PAGE> 19
The Company has completed an assessment and will have to modify or replace
certain portions of its existing software in order for its computer systems to
function properly with respect to dates in the year 2000 and thereafter.
However, independent of the Year 2000 Issue, the Company has plans to replace
the majority of its existing computer programs with an integrated,
enterprise-wide software platform. The Company has identified a software program
which meets the Company's operational needs and is also Year 2000 compliant. The
Company believes that the new software can be installed and tested with regards
to the Year 2000 Issue by September, 1999. It is expected that the cost of the
new software, installation, and testing will be approximately $1.2 million, the
majority of which would be capitalized. In the event that the new software does
not function properly with regard to the Year 2000, and an adequate solution is
not readily available, the Company's believes that it can make the necessary
modifications, primarily software version upgrades, to its current computer
programs in order to make them Year 2000 compliant.
It is anticipated that the Year 2000 project will be completed not later than
September, 1999, which is prior to any anticipated impact on its operating
systems. The Company believes that with the planned software conversion or with
modifications to the existing software, the Year 2000 Issue will not pose a
significant operational problem. However, if such modifications are not
completed timely, the Year 2000 Issue could have a material impact on the
operations of the Company. Likewise, if any of the Company's key suppliers,
vendors or customers experience a prolonged business interruption as a result of
the Year 2000 Issue, it could have a material impact on the operations of the
Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which assume certain future events, including the continued availability of
certain resources. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
effectiveness of the new software and, if necessary, the upgrades received from
the Company's software vendors at addressing the Year 2000 Issue and similar
uncertainties.
TAX MATTERS
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $50.0 million and $8.5 million,
respectively. The Company also had federal research and development and other
tax credit carryforwards for federal and state income tax purposes, of
approximately $2.4 million and $1.0 million respectively. The net operating loss
and credit carryforwards began expiring and will continue to expire at various
dates beginning in 1999 through 2018 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, 1998 was approximately $116
million. There can be no assurance that the Company will 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 1999, 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.
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<PAGE> 20
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. 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.
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 1996, 1997, and 1998, the Company's international sales were $16.9
million, $21.9 million and $32.2 million respectively, or 69%, 64% and 73% 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.
Suppliers. 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 and the pressure microchip are currently performed by single vendors.
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 these single source
vendors would have a material adverse effect on the Company's ability to
manufacture its products
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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 that then bill various
third-party payors. Medical institutions are reimbursed for the care of Medicare
hospital patients based at a predetermined lump sum amount for diagnostic
related group or DRGs regardless of the costs involved. The amount of money paid
for a specific DRG is determined by the average resource consumption needed to
treat a specific disease, including the nursing time, operating room time and
supplies. The amount of reimbursement is fixed and thus the amount of potential
profit for the medical institution relating to the procedure may be reduced to
the extent the physician performs additional procedures such as IVUS imaging,
pressure measurement or uses a more expensive product that combines ultrasound
imaging with therapeutic capabilities.
Private insurers and other payors determine whether to provide coverage for a
particular procedure and reimburse hospitals for medical treatment also usually
at a fixed rate based. 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. 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.
Physicians are reimbursed for performing medical producers based on the
amount of resource costs needed to provide the services. Included in the cost of
providing each service is the physician work, practice expense and malpractice
insurance. Payments are adjusted for geographic differences. CPT codes are now
available for all EndoSonics technology. CPT codes have been available since for
ultrasound procedures since 1997 and since January 1999 for Doppler flow and
pressure measurement. Physicians are responsible to determine that the clinical
benefits of intravascular ultrasound imaging and physiological assessment
justify the additional costs for the medical institutions.
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. A portion of capital
costs for medical equipment purchased by hospitals are currently reimbursed
separately from DRG payments. 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
"Third-Party Reimbursement."
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, and have significantly greater financial,
sales and marketing and technical resources available. 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 CVIS, Cordis, Guidant and Medtronic, Inc. 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."
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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" and "Legal Proceedings."
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 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
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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 Radiance'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 has received ISO 9001 certification of its Quality System as well
as CE Mark certifications for most of its products. 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 obtain the right to affix the CE Mark, an international symbol
of adherence to quality assurance standards and compliance with applicable
European medical device directives. All medical devices placed on the market
within the European Union are required to bear the CE Mark. ISO 9000
certification is one of the CE Mark certification requirements. Failure to
receive the right to affix the CE Mark for any product will prohibit the Company
from selling that product in member countries in the European Union. In Europe,
the Company has obtained ISO 9001 certification for operations at the EndoSonics
Europe, B.V. office. There can be no assurance that the Company will be
successful in meeting ongoing 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 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."
23
<PAGE> 24
Item 8. FINANCIAL STATEMENTS
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.
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 concerning the Company's directors required by this item is
incorporated by reference from the Company's Proxy Statement, to be mailed to
stockholders for the Annual Meeting to be held on or about June 10, 1999. 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 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's Proxy Statement, to be mailed to stockholders for the Annual Meeting
to be held on or about June 10, 1999.
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 stockholders for the Annual Meeting
to be held on or about June 10, 1999.
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 stockholders for the Annual Meeting
to be held on or about June 10, 1999.
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, 1997 and 1998 Consolidated
Statements of Operations for the years ended
December 31, 1996, 1997 and 1998
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998
24
<PAGE> 25
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998
Notes to Consolidated Financial Statements for the years ended
December 31, 1996, 1997 and 1998
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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
2.1(1) Agreement and Plan of Reorganization dated as of June 9, 1993 among
the Company, EndoSonics Acquisition Corporation and Radiance Medical
Systems, Inc.
("Radiance").
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
Radiance.
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.
4.3(11) Preferred Shares Rights Agreement, dated as of October 20, 1998,
between EndoSonics and ChaseMellon Shareholder Services, L.L.C.
10.1(3) Series F Preferred Stock Purchase Agreement dated February 1, 1991
between EndoSonics 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 EndoSonics and Fukuda
Denshi Co., Ltd.
10.3(3) Distribution Agreement dated as of January 31, 1991 between EndoSonics and
Esaote.
10.4(3) Line of Credit Agreement between EndoSonics and Wells Fargo Bank,
N.A. dated November 19, 1990.
10.5(3) Lease dated October 31, 1991 between EndoSonics 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 EndoSonics 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 EndoSonics and Radiance.
10.12(4) Stock Purchase Agreement dated June 5, 1992, by and between the
EndoSonics and Radiance.
10.13(4) Product Development Agreement dated June 5, 1992, by and between the
EndoSonics and Radiance.
10.14(6) Distribution Agreement dated May 28, 1993 between Radiance 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 EndoSonics and Du-MED.
10.16(9) Stock Purchase and Technology License Agreement dated September 10, 1994 by and
among EndoSonics, Radiance and SCIMED Life Systems, Inc.
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
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 EndoSonics.
10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and between Cordis and
EndoSonics.
10.20(10) Stockholder Agreement dated June 19, 1996 between EndoSonics and
Radiance.
10.21(10) License Agreement dated February 6, 1997 between EndoSonics
and Radiance.
10.22(11) Distribution Agreement dated August 31, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.23(11) Amendment to the Distribution Agreement (June 28, 1997) dated August
31, 1998, between EndoSonics, Navius Corporation and Fukuda Denshi
Co., Ltd.
10.24(11) Research and Development Agreement dated August 31, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.25(11) Common Stock Purchase Agreement dated October 7, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.26(11) Investors' Rights Agreement dated September 21, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.27* Distribution Agreement dated December 15, 1998, between EndoSonics and JOMED N.V.
10.28* IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement
dated December 15, 1998 between EndoSonics and JOMED N.V.
10.29 Certificates of Ownership and Merger, dated September 1998, Merging Microsound
Corporation into EndoSonics Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 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 Requested.
(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.
26
<PAGE> 27
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on November 15, 1998, for the quarter ended
September 30, 1998.
(d) 1. Financial Statement Schedule.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets - December 31, 1996 and 1997
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997
Consolidated Statements of Stockholders Equity for the years
ended December 31, 1995, 1996 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997
Notes to Consolidated Financial Statements for the years
ended December 31, 1995, 1996 and 1997
2. Financial Statement Schedule.
II. Valuation and Qualifying Accounts
27
<PAGE> 28
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 to
be signed on its behalf by the undersigned, thereunto duly authorized.
ENDOSONICS CORPORATION
Date: March 31, 1999 By: /s/ REINHARD J. WARNKING
-------------- -----------------------------------
Reinhard J. Warnking
Chief Executive Officer
(Principal Executive Officer)
By: /s/ RICHARD L. FISCHER
-----------------------------------
Richard L. Fischer
Vice President, Finance
(Principal Financial Officer)
By: /s/ KATHLEEN E. REDD
-----------------------------------
Kathleen E. Redd
Controller
(Principal Accounting Officer)
28
<PAGE> 29
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints, jointly and severally, Reinhard J. Warnking and
Richard L. Fischer, and each of them, as his true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Report on Form 10-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K 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>
/s/ REINHARD J. WARNKING President, Chief Executive Officer and March 31, 1999
- ---------------------------------------- Director (Principal Executive Officer)
Reinhard J. Warnking
/s/ RICHARD L. FISCHER Vice President, Finance and Chief Financial March 31, 1999
- ---------------------------------------- Officer (Principal Financial Officer)
Richard L. Fischer
/s/ ROGER SALQUIST Chairman of the Board of Directors March 31, 1999
- ----------------------------------------
Roger Salquist
/s/ JULIE A. BROOKS Director March 31, 1999
- ----------------------------------------
Julie A. Brooks
/s/ THOMAS J. CABLE Director March 31, 1999
- ----------------------------------------
Thomas J. Cable
/s/ DALE CONRAD Director March 31, 1999
- ----------------------------------------
Dale Conrad
/s/ JAKOB STAPFER Director March 31, 1999
- ----------------------------------------
Jakob Stapfer
/s/ GREGG W. STONE, M.D. Director March 31, 1999
- ----------------------------------------
Gregg W. Stone, M.D.
/s/ W. MICHAEL WRIGHT Director March 31, 1999
- ----------------------------------------
W. Michael Wright
</TABLE>
29
<PAGE> 30
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........................... 31
Consolidated Balance Sheets................................................. 32
Consolidated Statements of Operations....................................... 33
Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).... 34
Consolidated Statements of Cash Flows....................................... 35
Notes to Consolidated Financial Statements.................................. 36
</TABLE>
30
<PAGE> 31
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, 1998 and 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at Item 14(a)2. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, 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 16, 1999
31
<PAGE> 32
ENDOSONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,749 $ 13,889
Short-term investments 16,269 9,120
Trade accounts receivable, net of allowance for doubtful
accounts of $350 and $562 at December 31, 1998 and
1997, respectively 13,725 13,351
Inventories 6,834 6,915
Other current assets 560 424
--------- ---------
Total current assets 46,137 43,699
Property and equipment, net 4,064 3,408
Investment in Radiance Medical Systems, Inc. 4,137 8,478
Intangible assets, net 12,392 7,222
--------- ---------
$ 66,730 $ 62,807
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 8,200 $ 7,536
Accrued restructuring and integration expenses 3,674 6,017
--------- ---------
Total current liabilities 11,874 13,553
Other liabilities 604 --
--------- ---------
Total liabilities 12,478 13,553
Commitments and contingencies (Notes 10 & 13)
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, 17,590,120 and 16,153,113 shares issued and
outstanding as of December 31, 1998 and 1997,
respectively 18 16
Additional paid-in capital 176,433 157,588
Common stock in treasury, at cost, 860,000 shares (4,839) --
Accumulated deficit (116,055) (108,263)
Accumulated other comprehensive loss (1,305) (87)
--------- ---------
Total stockholders' equity 54,252 49,254
--------- ---------
$ 66,730 $ 62,807
========= =========
</TABLE>
See accompanying notes
32
<PAGE> 33
\
ENDOSONICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Product sales $ 42,929 $ 33,141 $ 23,542
Contract revenue 1,215 856 831
------------ ------------ ------------
Total revenue 44,144 33,997 24,373
Cost of sales 20,089 17,962 15,688
------------ ------------ ------------
Gross margin 24,055 16,035 8,685
Operating expenses:
Research, development and clinical 7,045 6,309 5,746
Marketing and related sales 9,575 6,068 5,411
General and administrative 4,849 5,840 4,821
Acquisition related expenses 10,554 47,956 518
Amortization of intangibles 1,391 475 --
------------ ------------ ------------
Total operating expenses 33,414 66,648 16,496
------------ ------------ ------------
Loss from operations (9,359) (50,613) (7,811)
Equity in net loss of Radiance Medical
Systems, Inc. (158) (2,358) (1,621)
Other income:
Interest income 1,208 1,881 2,269
Gain realized on equity investment in
Radiance Medical Systems, Inc. stock 739 4,021 --
------------ ------------ ------------
Total other income 1,947 5,902 2,269
------------ ------------ ------------
Net loss before provision for income taxes (7,570) (47,069) (7,163)
Provision for income taxes 222 175 --
------------ ------------ ------------
Net loss $ (7,792) $ (47,244) $ (7,163)
============ ============ ============
Basic and diluted net loss per share $ (0.47) $ (3.22) $ (0.53)
============ ============ ============
Shares used in per share calculations 16,471,953 14,669,975 13,394,728
============ ============ ============
</TABLE>
See accompanying notes
33
<PAGE> 34
ENDOSONICS CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-in Treasury
(In thousands, except share amounts) Shares Amount Capital Stock
- ------------------------------------ ------ ------ ------- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1995 12,831,512 $ 13 $98,989 $--
Increase in carrying value from Radiance Medical
Systems, Inc. initial public offering -- -- 17,606 --
Sale of common stock to Cordis Corporation 350,877 1 5,000 --
Exercise of common stock options 340,183 -- 2,429 --
Comprehensive loss:
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- --
Foreign currency translation -- -- -- --
Comprehensive loss -- -- -- --
---------- ----- -------- --------
Balance at December 31, 1996 13,522,572 14 124,024 --
Issuance of common stock to complete
Cardiometrics acquisition 2,502,500 2 33,137 --
Issuance of Radiance Medical Systems, Inc.
stock dividend -- -- -- --
Decrease in carrying value of Radiance
Medical Systems, Inc. -- -- (193) --
Exercise of common stock options 128,041 -- 620 --
Comprehensive loss:
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- --
Foreign currency translation -- -- -- --
Comprehensive loss -- -- -- --
---------- ----- -------- --------
Balance at December 31, 1997 16,153,113 16 157,588 --
Issuance of common stock to complete acquisitions 1,205,049 1 10,020 --
Issuance of common stock to Fukuda Denshi Co., Ltd.,
net issuance costs of $18 965,730 1 8,381 --
Repurchase of common stock (860,000) -- -- (4,839)
Exercise of common stock options 126,228 -- 444 --
Comprehensive loss:
Net loss -- -- -- --
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- --
Foreign currency translation -- -- -- --
Comprehensive loss -- -- -- --
---------- ----- -------- --------
Balance at December 31, 1998 17,590,120 $ 18 $176,433 ($4,839)
========== ===== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
(In thousands, except share amounts) Income (Loss) Deficit Equity
- ------------------------------------ ------------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ (10) $(50,837) $48,155
Increase in carrying value from Radiance Medical
Systems, Inc. initial public offering -- -- 17,606
Sale of common stock to Cordis Corporation -- -- 5,001
Exercise of common stock options -- -- 2,429
Comprehensive loss:
Net loss -- (7,163) (7,163)
Change in unrealized gain (loss) on
available-for-sale securities 8 -- 8
Foreign currency translation 31 -- 31
-------
Comprehensive loss -- -- (7,124)
------- -------- -------
Balance at December 31, 1996 29 (58,000) 66,067
Issuance of common stock to complete
Cardiometrics acquisition -- -- 33,139
Issuance of Radiance Medical Systems, Inc.
stock dividend -- (3,019) (3,019)
Decrease in carrying value of Radiance
Medical Systems, Inc. -- -- (193)
Exercise of common stock options -- -- 620
Comprehensive loss:
Net loss -- (47,244) (47,244)
Change in unrealized gain (loss) on
available-for-sale securities -- -- --
Foreign currency translation (116) -- (116)
-------
Comprehensive loss -- -- (47,360)
------- -------- -------
Balance at December 31, 1997 (87) (108,263) 49,254
Issuance of common stock in connection with acquisitions -- -- 10,021
Issuance of common stock to Fukuda Denshi Co., Ltd.,
net issuance costs of $18 -- -- 8,382
Repurchase of common stock -- -- (4,839)
Exercise of common stock options -- -- 444
Comprehensive loss
Net loss -- (7,792) (7,792)
Change in unrealized gain (loss) on
available-for-sale securities (1,275) -- (1,275)
Foreign currency translation 57 -- 57
-------
Comprehensive loss -- -- (9,010)
------- --------- -------
Balance at December 31, 1998 $(1,305) $(116,055) $54,252
======= ========= =======
</TABLE>
See accompanying notes
34
<PAGE> 35
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (7,792) $(47,244) $ (7,163)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Acquired in-process research and development 11,107 43,000 --
Depreciation 873 580 618
Amortization 1,391 549 --
Gain on investment in Radiance Medical Systems, Inc. (739) (4,021) --
Operating expense paid with Radiance Medical Systems, Inc.
common stock -- 542 --
Equity in net loss of Radiance Medical Systems, Inc. 158 2,358 1,621
Changes in operating assets and liabilities net of effects from
purchase of Cardiometrics and Navius:
Trade accounts receivable, net (141) (2,711) 170
Inventories 183 (419) 474
Other current assets (112) 1,232 (229)
Accounts payable and accrued expenses (492) (2,580) 424
Accrued restructuring and integration expenses (2,343) 5,084 --
-------- -------- --------
Net cash provided by (used in) operating activities 2,093 (3,630) (4,085)
======== ======== ========
INVESTING ACTIVITIES
Purchase of short-term investments (21,812) (9,090) (4,000)
Proceeds from sale of Radiance Medical Systems, Inc. common stock 3,942 528 289
Maturities of short-term investments 14,365 5,219 6,108
Capital expenditures for property and equipment (1,261) (1,299) (1,164)
Effect of Radiance Medical Systems, Inc. initial public offering -- -- (6,423)
Business acquisition, net of cash and cash equivalents acquired (6,511) (13,286) --
-------- -------- --------
Net cash used in investing activities (11,277) (17,928) (5,190)
======== ======== ========
FINANCING ACTIVITIES
Proceeds from issuance of common stock 8,826 620 7,430
Purchase of treasury stock (4,839) -- --
-------- -------- --------
Net cash provided by financing activities 3,987 620 7,430
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents 57 (116) 31
-------- -------- --------
Net decrease in cash and equivalents (5,140) (21,054) (1,814)
Cash and equivalents, beginning of year 13,889 34,943 36,757
-------- -------- --------
Cash and equivalents, end of year $ 8,749 $ 13,889 $ 34,943
======== ======== ========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisition of business (Note 3)
Fair value of assets acquired $ 19,510 $ 73,418 $ --
Cash paid (7,703) (22,281) --
EndoSonics common stock issued (9,500) (33,139) --
Radiance Medical Systems, Inc. common stock transferred -- (8,484) --
Other consideration (595) (4,674) --
-------- -------- --------
Liabilities assumed $ 1,712 $ 4,840 $ --
-------- -------- --------
Capital expenditures for property and equipment $ -- $ -- $ 292
======== ======== ========
Effect of Radiance Medical Systems, Inc. initial public offering $ -- $ -- $ 17,606
======== ======== ========
</TABLE>
See accompanying notes
35
<PAGE> 36
ENDOSONICS CORPORATION
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 and diagnostic
imaging catheters, functional measurement guidewires, angioplasty balloon
catheters, combined angioplasty imaging catheters and medical devices 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 Note 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 other comprehensive income. Transaction exchange
gains or losses are included in general and administrative 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, 1998 and 1997, 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.
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, 1998 and 1997, the Company's entire portfolio of
investments is classified as available-for-sale. 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 other comprehensive income.
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 general and administrative 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 a first-in,
first-out (FIFO) basis, or market value.
Property and Equipment
36
<PAGE> 37
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
Intangible Assets
Intangible assets consist of goodwill, assembled workforce, and developed
technology arising from business acquisitions. The values are being amortized on
a straight-line basis over periods ranging from three to nine years.
The Company continually evaluates the value and future benefits of its
intangible assets, and assesses the recoverability of the intangible assets
using cash flows and income from operations of the related acquired businesses
as measures. Under this approach, the carrying value would be reduced if it
becomes probable that our best estimate for expected future cash flows of the
related business would be less than the carrying amount of the intangible
assets. As of December 31, 1998, there have been no adjustments to the carrying
amounts of intangibles resulting from these evaluations.
Concentrations of Credit Risk, Significant Customers, Export Sales and
Suppliers
The Company sells its products primarily to medical institutions and
distributors worldwide (see Note 5). 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 customers represented 0.4% and 8% of net trade accounts receivable,
respectively, at December 31, 1998 ( 55% and 13%, respectively, at December 31,
1997).
During 1998, sales to two of the Company's customers comprised 47% and 15% of
the Company's total product sales, respectively. During 1997, sales to two
customers comprised 58% and 19% of the Company's total product sales,
respectively. During 1996, sales to two customers comprised 62% and 9% of the
Company's total product sales.
The Company had sales to customers outside the United States as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Europe $10,592 $11,528 $ 9,820
Asia 20,328 9,312 6,689
Other 1,275 1,027 359
------- ------- -------
$32,195 $21,867 $16,868
======= ======= =======
</TABLE>
The manufacturing of the Company's integrated circuit microchip and the
pressure microchip, important components for imaging and functional measurement
catheters, are currently performed by single vendors. Although management
believes that other vendors could provide similar microchips on comparable
terms, a change in suppliers can be a lengthy process. Consequently, any supply
interruption from these single sources could delay production and have a
material adverse effect on the Company's business, financial condition and
results of operations.
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. 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.
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.
37
<PAGE> 38
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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.
At December 31, 1996, 1997 and 1998 the Company had outstanding options to
purchase 2,315,366, 2,993,638 and 3,744,030 shares of common stock, respectively
(with exercise prices ranging from $0.125 to $16.50), and outstanding warrants
to purchase 12,304 shares of common stock (with exercise prices from $11.76 to
$12.55). If exercised, these options could potentially dilute basic earnings per
share in future periods. These options have not been included in the computation
of net loss per share, because to do so would have been antidilutive for the
periods presented.
New Accounting Pronouncements
In 1998 the company adopted Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, which establishes new rules for the
reporting and display of comprehensive income and its components. SFAS No. 130
requires to report, in addition to net income, other components of comprehensive
income including unrealized gains or losses on available for sale securities and
foreign currency translation adjustments. Adoption of SFAS No. 130 had no effect
on the Company's results of operations or financial position as reported
elsewhere in the condensed consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 Consolidated
Financial Statements to conform to the 1998 presentation.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
U.S. Treasury notes and
obligations of other U.S.
government agencies $ 2,614 $ 10 $ -- $ 2,624
Corporate debt securities 18,540 12 (39) 18,513
-------- -------- -------- --------
$ 21,154 $ 22 $ (39) $ 21,137
======== ======== ======== ========
</TABLE>
38
<PAGE> 39
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury notes and
obligations of other U.S.
government agencies $ 3,499 $ 1 $-- $ 3,500
Corporate debt securities 10,045 -- -- 10,045
------- --- --- -------
$13,544 $ 1 $-- $13,545
======= === === =======
</TABLE>
Included in the above table are securities with fair values totaling $4,868
and $4,425 at December 31, 1998 and 1997, 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, 1998, by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because the issuers of the securities may
have the rights to prepay obligations without prepayment penalties.
All short-term investments have maturity dates within one year.
3. BUSINESS ACQUISITIONS
Cardiometrics, Inc.
On July 23, 1997, the Company acquired all of the outstanding shares of
Cardiometrics, Inc. (Cardiometrics) for approximately $73,400. The results of
Cardiometrics' operations have been combined with those of the Company since the
date of acquisition.
The acquisition was accounted for using the purchase method of accounting.
Consideration for this transaction consisted of the following (in thousands):
<TABLE>
<S> <C>
Cash $22,281
EndoSonics common Stock 33,139
Radiance Medical Systems, Inc. common stock 8,484
Cancellation of the Company's pre-merger investment in Cardiometrics 2,317
Liabilities assumed (including Cardiometrics
termination benefits of $1,900) 4,840
Transaction costs 2,357
-------
$73,418
=======
</TABLE>
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Tangible assets acquired $22,721
In-process research and development 43,000
Developed technology 5,200
Other intangibles 700
Goodwill 1,797
-------
$73,418
=======
</TABLE>
In connection with the Company's acquisition of Cardiometrics in 1997, the
Company wrote-off in-process research and development totaling $43,000. This
write-off was necessary because the acquired technology had not reached
technological feasibility and had no future alternative uses. The Cardiometrics
acquired in-process research and development relates primarily to the
development of intravascular guidewires to measure blood flow and blood pressure
in diseased coronary arteries, as well as, other functional assessment
instruments. The nature of the efforts required to complete development of the
various purchased in-process research and development projects into
technologically viable products principally relate to efficacy validation and
regulatory approval and are projected to be completed from 1997 to 1999.
Goodwill and other intangible assets are being amortized over three-to-eight
years. Amortization expense was $1,068 and $475 and accumulated amortization was
$1,543 and $475 at December 31, 1998. In addition, the Company recognized a gain
of $3,700 related to the excess of the fair value over the book value of
Radiance common stock used as part of the purchase price consideration.
The purchase price includes $1,900 in severance and relocation liabilities
assumed by the Company related to plans to relocate certain Cardiometrics
employees to its corporate offices, and to terminate others. Approximately
$1,000 was paid in 1997 and $470 in 1998. The Company expects to pay the
remainder of this cash outlay by December 2000.
39
<PAGE> 40
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Unaudited proforma combined results of operations for the twelve month
periods ending December 31, 1997 and 1996, giving effect to certain adjustments,
including the acquisition restructuring, as if the Cardiometrics acquisition had
occurred at the beginning of each period, are displayed in the following table:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996
-------- --------
<S> <C> <C>
Total revenue $ 41,057 $ 38,376
Net loss (53,049) (59,206)
Loss per share ($3.66) ($3.79)
</TABLE>
The unaudited proforma results of operations for the twelve months ended
December 31, 1997 and 1996, include one-time charges of $43,000 related to the
write-off of acquired in-process research and development, and $5,000 related to
restructuring and integration of the two companies.
Navius Corporation
On August 5, 1998, the Company acquired all of the outstanding capital stock
of Navius Corporation (Navius) for approximately $19,500. The results of Navius'
operations have been combined with those of the Company since the date of
acquisition.
The acquisition was accounted for using the purchase method of accounting.
Consideration for this transaction consisted of the following.
<TABLE>
<S> <C>
Cash $ 7,703
EndoSonics Common Stock 9,500
Liabilities assumed (including Navius termination benefits of $100) 1,712
Transaction costs 595
--------
$ 19,510
========
</TABLE>
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Tangible assets acquired $ 2,363
In-process research and development 10,586
Developed technology 6,291
Other intangibles 270
--------
$ 19,510
========
</TABLE>
In connection with the Company's acquisition of Navius in 1998 , the Company
wrote off in-process research and development totaling $10.6 million. This
write-off was necessary because the acquired technology had not yet reached
technological feasibility and had no future alternative uses. The Navius
acquired in-process research and development relates primarily to the
development of intravascular ultrasound radiation devices. The Company
anticipates that products using the acquired in-process technology will be
generally released before the end of 2001. The nature of the efforts required to
develop the purchased in-process research and development into technologically
viable products principally relate to validation and regulatory approval. The
Company expects that the acquired in-process research and development will be
successfully developed, but there can be no assurance that commercial viability
of these products will be achieved.
Acquired intangibles are being amortized over three to nine years.
Amortization expense and accumulated amortization were $323 at December 31,
1998.
Unaudited pro forma combined results of operations for the twelve month
period ending December 31, 1998 and 1997 giving effect to certain adjustments
including acquisition restructuring as if the Navius acquisition had occurred at
the beginning of each period, are displayed in the following table.
40
<PAGE> 41
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Total revenue $ 45,426 $ 37,060
Net loss $ (9,704) $(59,893)
Basic net loss per share $ (0.57) $ (3.83)
</TABLE>
4. CHANGE IN OWNERSHIP PERCENTAGE OF RADIANCE MEDICAL SYSTEMS, INC.
On June 19, 1996, EndoSonics' 84% owned subsidiary, Radiance Medical Systems,
Inc., 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 Radiance's
underwriters). As a result of this transaction, Radiance's results of operations
for 1996 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 $17,600 representing the Company's
proportionate share of Radiance's net assets following the IPO.
For the years ended December 31, 1998 and 1997, the Company recorded ($158)
and ($2,358) respectively, representing its proportionate share of Radiance's
net losses for the period. As of December 31, 1998 and 1997, EndoSonics owned
14% and 24% respectively of the outstanding shares of Radiance.
During 1998, the Company sold approximately 843,000 shares of Radiance stock
resulting in a gain of $739. Since March 1, 1998, the Company has accounted for
its investment in Radiance under the cost method.
Radiance Medical Systems, Inc.'s stock is quoted on the Nasdaq Stock Market.
The closing price of Radiance stock at December 31, 1997 was $5.50 per share.
The Company held 1,350,566 and 2,194,016 shares of Radiance's common stock at
December 31, 1998 and 1997 respectively. In 1998, unrealized gains and losses on
the Company's investment in Radiance are reported as a separate component of
comprehensive income pursuant to the requirements of SFAS 115.
5. DISTRIBUTION AGREEMENTS
Cordis
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 superseded and replaced 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 was obligated during each year of the Exclusive Distribution
Agreement to use reasonable efforts to purchase certain minimum annual amounts
of products from EndoSonics. The Exclusive Distribution Agreement was terminated
in April 1998 and replaced with a Transition Agreement which provides for Cordis
to retain limited distribution rights through March, 1999.
JJMKK
In March 1997, the Company and Johnson & Johnson Medical KK (JJMKK), a
subsidiary of Johnson and Johnson, entered into an exclusive distribution
agreement whereby JJMKK was granted exclusive right to distribute EndoSonics
IVUS imaging products for coronary applications in Japan. The agreement
contained similar terms as the Exclusive Distribution Agreement between Cordis
and EndoSonics. The agreement was amended in December 1998 to extend the
agreement through December 1999.
J & J Medical - LA
In April 1997, the Company and Johnson and Johnson, Professional Group-Latin
America (J & J Medical-LA), a subsidiary of Johnson and Johnson, entered into an
exclusive distribution agreement whereby J & J Medical-LA was granted exclusive
rights to distribute EndoSonics IVUS imaging products for coronary applications
in certain countries of Latin America. The agreement contained similar terms as
the Exclusive Distribution Agreement between Cordis and EndoSonics. The
agreement was amended in December 1998 to extend the agreement through December
2000.
Fukuda
41
<PAGE> 42
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In August 1998, the Company entered into a strategic relationship with the
Fukuda Denshi Co., Ltd. (Fukuda), a Japanese medical products company, which
includes an equity investment, research and development funding and technical
guidance totaling $13 million in EndoSonics by Fukuda. Approximately $8.4
million of the $13 million represents an equity investment. The remaining $4.6
million will fund research and development programs over the next 24 months. In
October 1998, the Company issued 965,730 shares of the Company's common stock at
a price of $8.70 per share to Fukuda and received approximately $8.4 million in
cash, related to the equity investment and $1.0 million related to research and
development funding.
JOMED
In December 1998, the Company and JOMED N.V., (JOMED) entered into an
agreement for exclusive distribution of certain EndoSonics products into
specified European and Middle Eastern countries. Also in December, EndoSonics
and JOMED entered into an IVUS guided stent delivery system agreement which
calls for the development of a JOMED balloon and stent incorporated into a
modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply
subassemblies to JOMED who will complete the manufacturing process and
distribute the resulting product in the territory which is defined as certain
European and Middle Eastern countries. In certain countries within the
territory, EndoSonics may distribute exclusively or jointly with JOMED.
6. ACQUISITION RELATED EXPENSES
Acquisition related expenses include acquired in process research and
development and restructuring expenses relating primarily to the Company's
acquisition of Cardiometrics in 1997 and Navius in 1998. Acquisition expenses
consist of the following:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Acquired in process research and development $ 11,107 $ 43,000 $ --
Restructuring (Note 3) 223 5,806 518
Restructuring decrease (776) (850) --
-------- -------- --------
$ 10,554 $ 47,956 $ 518
======== ======== ========
</TABLE>
During the fourth quarter of 1998, the Company determined that approximately
$776 of restructuring reserves provided for in connection with the Cardiometrics
acquisition relating to corporate reorganization were not required.
Due to changes in conditions subsequent to the initial recording of the
restructuring and integration charges, the Company reduced the provision for the
1997 charges to $8,606 during the fourth quarter of 1997.
Concurrent with the purchases of Navius and Cardiometrics, the Company
recorded restructuring and integration charges of $223 and $9,456 respectively,
related to plans to reduce overhead of the combined companies and increase
operating efficiency in future periods. The restructuring and integration
charges for Navius are for corporate reorganization charges; the restructuring
and integration charges for Cardiometrics include $7,491 of corporate
reorganization costs and $1,965 related to relocation of certain product lines
and overall integration of the Company operations.
Additionally in June 1996, the Company recorded restructuring and integration
charges of approximately $3,066 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.
These charges are included in the accompanying Consolidated Statements of
Operations, as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Cost of sales 1,251 $ 794 --
Research and development -- 200 475
Marketing and sales -- 542 480
General and administrative -- 1,361 799
Restructuring (553) 4,956 518
</TABLE>
42
<PAGE> 43
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
Other -- 296 --
------ ------ ------
Total charges $ (553) $8,606 $3,066
====== ====== ======
</TABLE>
The elements of the 1998 restructuring accrual as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
ACCRUAL AS
OF
COST DECEMBER
PROVISION INCURRED 31, 1998
--------- -------- --------
<S> <C> <C> <C>
Corporate reorganization $ 223 $(196) $ 27
===== ===== =====
</TABLE>
The elements of the 1997 restructuring accrual as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
ACCRUAL AS
OF
COST DECEMBER
PROVISION DECREASE INCURRED 31, 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Corporate reorganization $ 7,491 $(1,151) $(2,693) $ 3,647
Consolidation of facilities 1,965 (475) (1,490) --
------- ------- ------- -------
9,456 (1,626) (4,183) 3,647
======= ======= ======= =======
</TABLE>
The elements of the 1996 restructuring accrual as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
ACCRUAL AS
OF
COST DECEMBER
PROVISION INCURRED 31, 1998
--------- -------- --------
<S> <C> <C> <C>
Consolidation of facilities $ 994 $ (994) $ --
Conversion to new technology 1,849 (1,849) --
Corporate reorganization 223 (223) --
------- ------- -----
$ 3,066 $(3,066) $ --
======= ======= =====
</TABLE>
The accrual for restructuring and integration charges was approximately
$3,674 and $6,017 as of December 31, 1998 and 1997.
7. INVENTORIES
Inventories consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Raw materials $3,206 $2,817
Work-in-process 1,354 1,842
Finished goods 2,274 2,256
------ ------
$6,834 $6,915
====== ======
</TABLE>
8. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Furniture, fixtures and equipment $ 9,190 $ 7,745
Leasehold improvements 240 161
-------- --------
9,430 7,906
Less accumulated depreciation and amortization (5,366) (4,498)
-------- --------
$ 4,064 $ 3,408
======== ========
</TABLE>
9. CURRENT LIABILITIES
43
<PAGE> 44
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Current liabilities consisted of the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accrued restructuring and integration $ 3,674 $ 6,017
Accounts payable 2,102 1,954
Accrued payroll and related expenses 2,822 2,058
Deferred revenue 521 377
Accrued royalties 97 96
Accrued warranty 107 95
Other accrued expenses 2,551 2,956
------- -------
$11,874 $13,553
======= =======
</TABLE>
10. 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 non-cancelable operating
leases are as follows:
<TABLE>
<S> <C>
1999 $1,050
2000 968
2001 790
2002 752
2003 734
Thereafter 2,753
------
$7,047
======
</TABLE>
Rental expense charged to operations for all operating leases during 1998,
1997 and 1996 was approximately $1,058, $742, and $630 respectively.
11. EQUITY
Common Stock
On September 26, 1997, the Company distributed to stockholders and common
stock option holders of record as of September 5, 1997, .04 shares of Radiance
common stock for each share of the Company's common stock outstanding or subject
to options. The Company recorded approximately $1,000 in compensation expense,
related to the distribution to stock option holders, which consisted of $540 in
Radiance common stock and $460 in cash. The compensation expense was based on
the closing price of $8.75 per share of Radiance common stock on September 25,
1997. The book value of the Radiance common stock distributed to stockholders
totaled $3,019, and was charged to accumulated deficit.
In February, 1998, the Board of Directors authorized a stock repurchase
program whereby the Company may repurchase up to $5,000 of its common stock from
time-to-time in the open market or private transactions. During the year ended
December 31, 1998, the Company repurchased 860,000 shares of its common stock on
the open market at an aggregate cost of approximately $4,839. In September,
1998, the Board of Directors expanded the existing stock repurchase program,
such that the Company may, from time-to-time, purchase a total of up to 1.7
million shares of its common stock in open market or private transactions.
Stockholder Rights Plan
In October 1998, the Company adopted a Stockholder Rights Plan (the "Rights
Plan"). Under the Rights Plan, each common stockholder receives one "Right" for
each share of common stock held. Each Right, once exercisable, entitles the
holder to purchase from the Company one one-thousandth of a share of the
Company's Series A Participating Preferred Stock at an exercise price of $35.
All Rights expire on October 20, 2008 unless earlier redeemed, exchanged or
exercised. At December 31, 1998, the Rights were neither exercisable nor traded
separately from the Company's common stock, and become exercisable only if a
person or a group of affiliated or associated persons has acquired, or obtained
the right to acquire, beneficial ownership of 20% or more of the voting power of
all outstanding shares of the Company's common stock and in certain other
limited circumstances. Upon separation from the common stock, each Right will
entitle the holder, other than the acquiring person that has triggered such
separation, to effectively purchase certain shares of the Company's common stock
equal in market value to two times the then applicable exercise price of the
Right. If the Company is acquired in a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power are sold in
one or more related transactions, the Rights will entitle holders, upon exercise
of the Rights, to receive shares of common stock of the acquiring or surviving
company with a market value equal to twice the exercise price of each Right.
Employee Stock Purchase Plan
In June 1998, EndoSonics established the 1998 Employee Stock Purchase Plan
(the "1998 Purchase Plan") under which a total of 250,000 shares of common stock
are reserved. As of December 31, 1998, there were no shares issued under the
1998 Purchase Plan.
44
<PAGE> 45
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock Options
In March 1988 and June 1998, EndoSonics established stock option plans (the
"1988 Plan" and the "1998" 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 and 1998 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. Additionally, from 1993 through 1998
the Company has purchased four companies. Pursuant to the terms of the merger
agreements, the Company has agreed to the assumption of all of the outstanding
stock options previously granted by these four acquired companies. These options
are included in the table below. As of December 31, 1998, 4,850,000 common
shares were reserved for issuance, 2,105,231 shares were fully exercisable
(1,488,072 at December 31, 1997) and 159,350 shares were available for future
grant (279,089 at December 31, 1997).
The following is a summary of the activity, including the range of per share
option prices, in the option plans during each of the three years in the period
ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
SHARES OPTION AVG.
UNDER PRICE EXERCISE
OPTION PER SHARE PRICE
---------- ------------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1995 2,050,934 $.167-$16.50 $ 8.24
Granted 668,685 11.88-16.50 12.18
Assumptions -- -- --
Exercises (340,183) .167-9.75 7.28
Expirations -- -- --
Cancellations (61,324) 3.75-13.88 10.92
---------- ------------- -------------
Outstanding at December 31, 1996 2,318,112 .167-16.50 7.90
========== ============= =============
Granted 1,057,490 8.93-13.38 10.59
Assumptions (128,467) .47-13.23 3.05
Exercises (128,041) .32-13.88 3.75
Expirations -- -- --
Cancellations (294,621) 3.75-13.88 11.32
---------- ------------- -------------
Outstanding at December 31, 1997 3,081,407 .167-16.50 9.00
========== ============= =============
Granted 660,150 4.50-9.375 8.91
Assumptions 398,215 .125-8.60 3.98
Exercises (170,317) .167-9.75 3.58
Expirations (59,754) .125-10.84 4.41
Cancellations (165,671) 6.00-13.88 5.35
---------- ------------- -------------
Outstanding at December 31, 1998 3,744,030 $0.125-$16.50 $ 8.39
========== ============= =============
</TABLE>
No shares purchased under the option plan are subject to repurchase at December
31, 1998.
The options outstanding at December 31, 1998 have been segregated into ranges
for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------------------------------------------------------
OPTIONS WEIGHTED-AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE
PRICES 1998 LIFE (IN YEARS) PRICE
------ ---- --------------- -----
<S> <C> <C> <C>
$ 0.125- $4.99 405,715 7.2 $ 2.27
$ 5.00 - 9.49 2,057,762 7.7 7.58
</TABLE>
45
<PAGE> 46
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
9.50 - 12.49 710,704 7.5 11.19
$12.50 - $20.00 569,849 7.6 13.47
--------- --- ------
3,744,030 7.6 $ 8.39
========= === ======
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- ---------------------------------------------------------------
OPTIONS
RANGE OF CURRENTLY
EXERCISE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES DECEMBER 31, 1998 EXERCISE PRICE
- ---------------- ----------------- ----------------
<S> <C> <C>
$ 0.125- $ 4.99 270,837 $ 2.67
5.00 - 9.49 1,014,576 7.80
9.50 - 12.49 439,384 11.13
$12.50 - $20.00 380,434 13.55
--------- ------
2,105,231 $ 8.87
========= ======
</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:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- ---------------
<S> <C> <C> <C>
Risk free interest rates 4.2-5.67% 5.5 - 6.6% 6.1 - 6.7%
Expected volatility 113% 101% 109%
Expected dividend yield -- -- --
Expected life (in years) 7 to 10 7 to 10 5 to 8.25
</TABLE>
The weighted-average fair value on the date of grant for options granted
during 1998, 1997 and 1996 was $6.02, $9.25 and $10.90 respectively.
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>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss ($13,728) ($49,096) ($10,642)
Pro forma loss per share ($0.83) ($3.35) ($0.80)
</TABLE>
12. INCOME TAXES
The provision for income taxes for the year ended December 31, 1998 consists
of currently payable federal, state, and foreign taxes of $97, $13, and $112,
respectively.
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ------------
<S> <C> <C> <C>
Federal
Current $ 97 $137 $ -
Deferred - - -
-------- -------- --------
</TABLE>
46
<PAGE> 47
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<S> <C> <C> <C>
Total federal $ 97 $ 137 $ --
-------- -------- --------
State
Current $ 13 $ 38 $ --
Deferred -- -- --
-------- -------- --------
Total state $ 13 $ 38 $ --
-------- -------- --------
Foreign provision $ 112 -- --
======== ======== ========
Income taxes $ 222 $ 175 $ --
======== ======== ========
</TABLE>
The income tax provisions differ from the amount computed by applying the
federal statutory rate (35% used in each year presented) to income (loss) before
income taxes. A reconciliation to the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax $ (2,650) $(16,474) $ (2,507)
State income taxes, net of
federal benefit 8 25 --
In-process research and development 3,888 15,050 --
Foreign taxes 112
Distributions of appreciated property -- 993 --
Net operating loss utilization (1,663) (2,042) --
Valuation allowance increases 527 2,571 2,507
Other -- 52 --
-------- -------- --------
Provision for income taxes $ 222 $ 175 $ --
======== ======== ========
</TABLE>
Significant components of the Company's deferred tax assets are as follows
at December 31, 1998:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards $ 17,880 $ 17,850
Research and development
and other tax credit 3,011 2,293
carryforwards
Other 5,355 7,322
-------- --------
Total deferred tax assets 26,246 27,465
Deferred tax liabilities:
Intangible assets (4,474) (2,264)
Investment basis (1,863) (3,173)
differences
-------- --------
Total deferred tax
liabilities (6,337) (5,437)
-------- --------
Net deferred tax assets 19,909 22,028
Valuation allowance (19,909) (22,028)
-------- --------
Deferred tax asset $ -- $ --
======== ========
</TABLE>
Income tax payments were $212 in 1998, $93 in 1997 and $0 in 1996. The
valuation allowance increased by $4,415 in 1997, and decreased by $275 in 1996.
At December 31, 1998, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $50,000 and $8,500,
respectively, which expire in the years 1999 through 2018. At December 31, 1998,
the Company has research and development and other tax credit carryforwards for
federal and state income tax purposes of approximately $2,363 and $986,
respectively, which expire in the years 2005 through 2011.
As a result of the "change of ownership" provision of the Tax Reform Act of
1986, the utilization of the federal net operating loss and the deduction
equivalent of federal tax credit carryforwards of approximately $3,900 included
in the above amounts are subject to a cumulative annual limitation of
approximately $1,375 per year pursuant to certain stock ownership changes of
Cardiometrics prior to July 24, 1997. Due to the acquisition of Cardiometrics by
EndoSonics in 1997, a second annual limitation of approximately $4,000 per year
applies to approximately $15,500 of federal net operating loss, $630 of federal
research and development credits, $4,500 of state net operating loss and $360 of
state tax credit carryforwards included in the above amounts.
47
<PAGE> 48
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Future "changes in ownership" may further limit the ability of the Company to
utilize its net operating loss and tax credit carryforwards prior to their
expiration.
13. CONTINGENCIES
In October, 1998, the Company entered into a five-year litigation standstill
agreement with Intravascular Research Limited with respect to certain
intellectual property claims. The agreement includes the dismissal without
prejudice of a pending Delaware lawsuit involving patent infringement claims.
The agreement does not toll any potential patent infringement damages which may
be accruing. Management believes the outcomes of these matters will have no
material adverse effect on the Company's financial position, results of
operations or cash flows.
The Company is subject to various legal actions and claims arising in the
ordinary course of business. Management believes the outcomes of these matters
will have no material adverse effect on the Company's financial position,
results of operations or cash flows.
48
<PAGE> 49
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1998, 1997, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------- ---------- ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE AT CHARGES TO CHARGED TO BALANCE AT
BEGINNING COST AND OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACACCOUNTS PERIOD
- ------------------------------- ---------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for doubtful accounts $ 562 $ 9 $ -- $ 221(2) $ 350
Accrued warranty expenses $ 95 $ 12 $ -- $ -- $ 107
-------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1997
Allowance for doubtful accounts $ 646 $ 81 $ -- $ 165(2) (4) $ 562
Accrued warranty expenses $ 295 $ 440 $ 640 $ -- $ 95
-------- -------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1996
Allowance for doubtful
accounts $ 360 $ 497 $ $ (211)(2) $ 646
Accrued warranty expenses $ 280 $ 350 $ $ (335)(1)(3) $ 295
-------- -------- -------- -------- --------
</TABLE>
- -------------
(1) Deductions represent actual warranty expenses charged against the accrual.
(2) Deductions represent accounts written off, net of recoveries.
(3) Deductions represent impact of Radiance Medical Systems, Inc. initial public
offering.
(4) Deductions represent impact of Cardiometrics acquisition.
49
<PAGE> 50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... 51
Consolidated Balance Sheets................................. 52
Consolidated Statements of Operations....................... 53
Consolidated Statements of Stockholders' Equity (Net Capital
Deficiency)............................................... 54
Consolidated Statements of Cash Flows....................... 55
Notes to Consolidated Financial Statements.................. 56
</TABLE>
50
<PAGE> 51
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 subsidiaries as of December 31, 1996 and 1997,
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, 1997. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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
CardioVascular Dynamics, Inc. and subsidiaries at December 31, 1996 and 1997,
and the consolidated results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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 29, 1998
51
<PAGE> 52
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ........................................... $ 17,192 $ 6,141
Marketable securities available-for-sale ............................ 25,733 24,773
Accounts receivable, net of allowance for doubtful accounts of $377
and $500, respectively ............................................ 2,268 2,752
Other accounts receivable ........................................... 320 282
Inventories ......................................................... 2,899 3,205
Other current assets ................................................ 162 163
---------- ----------
Total current assets .......................................... 48,574 37,316
Property and Equipment:
Furniture and equipment ............................................. 1,161 1,871
Leasehold improvements .............................................. 310 322
---------- ----------
1,471 2,193
Less accumulated depreciation and amortization ...................... (289) (643)
---------- ----------
Net property and equipment ........................................ 1,182 1,550
Goodwill, net of amortization of $78 ................................ -- 1,809
Notes receivable from officers ...................................... 325 273
Other assets ........................................................ 3 413
---------- ----------
Total assets ...................................................... $ 50,084 $ 41,361
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses ............................... $ 2,382 $ 3,488
Deferred distributorship fee revenue, current portion ............... 50 --
---------- ----------
Total current liabilities ........................................... 2,432 3,488
Deferred distributorship fee revenue .................................... 29 --
Commitments (Note 10)
Stockholders' equity
Convertible Preferred Stock, $.001 par value; 7,560,000 shares
authorized, 2,000,000 and no shares issued and outstanding....... -- --
Common Stock, $.001 par value; 30,000,000 shares authorized,
9,004,000 and 9,389,000 shares issued and outstanding at December
31, 1996 and 1997, respectively ................................. 9 9
Additional paid-in capital .......................................... 58,869 60,371
Deferred compensation ............................................... (376) (634)
Accumulated deficit ................................................. (11,049) (19,821)
Treasury stock, at cost, 345,000 common shares ...................... -- (2,205)
Unrealized gain on available-for-sale securities .................... 170 176
Unrealized exchange rate loss ....................................... -- (23)
---------- ----------
Total stockholders' equity ...................................... 47,623 37,873
---------- ----------
Total liabilities and stockholders' equity ...................... $ 50,084 $ 41,361
========== ==========
</TABLE>
See accompanying notes.
52
<PAGE> 53
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
Revenue: 1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales .......................................................... $ 3,462 $ 8,384 $ 11,332
License fee and other from related party ....................... -- 150 --
Contract ....................................................... 641 200 --
---------- ---------- ----------
Total revenue ................................................ 4,103 8,734 11,332
Operating costs and expenses:
Cost of sales .................................................. 2,051 4,111 6,418
Charge for acquired in-process research and development ........ 488 2,133 --
Research and development ....................................... 1,683 3,582 7,041
Marketing and sales ............................................ 1,526 3,358 6,691
General and administrative (including $340 and $156 for the years
ended December 31, 1995 and 1996, respectively, paid to
EndoSonics) ............................................... 1,331 1,548 2,179
---------- ---------- ----------
Total operating costs and expenses ........................... 7,079 14,732 22,329
---------- ---------- ----------
Loss from operations ............................................ (2,976) (5,998) (10,997)
Other Income:
Interest income ................................................. 42 1,324 2,201
Distributorship fees and other income ........................... 60 50 24
---------- ---------- ----------
Total other income ........................................... 102 1,374 2,225
---------- ---------- ----------
Net Loss ........................................................ $ (2,874) $ (4,624) $ (8,772)
========== ========== ==========
Basic and diluted net loss per share (pro forma through
June 1996) ................................................... $ (0.71) $ (0.69) $ (0.96)
========== ========== ==========
Shares used in computing basic and diluted net loss per share
(pro forma through June 1996) ................................ 4,052 6,755 9,118
========== ========== ==========
</TABLE>
See accompanying notes.
53
<PAGE> 54
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
------------------------ ------------------------ Paid-In Deferred
Shares Amount Shares Amount Capital Compensation
---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......... -- $ -- 4,000,000 $ 4 $ 4,835 --
Additional effects of merger with
EndoSonics Acquisition Corp. ... -- -- -- -- 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 .............................. -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 .......... 2,000,000 2 -- -- 5,670 (345)
Sale of Preferred Stock to EndoSonics . 400,000 -- -- -- 8,000 --
Conversion of Preferred Stock ......... (2,400,000) (2) 4,800,000 5 (3) --
Exercise of Common Stock Options ...... -- -- 139,000 -- 138 --
Initial Public Offering of
Common Stock ................... -- -- 3,910,000 4 42,764 --
Deferred compensation resulting
From grant of options .......... -- -- -- -- 150 (150)
Amortization of deferred
Compensation ................... -- -- -- -- -- 119
Acquisition of Intraluminal
Devices, Inc. .................. -- -- 93,000 -- 1,400 --
Conversion of $750,000 debit by
Fukuda Denshi .................. -- -- 62,000 -- 750 --
Net loss ............................. -- -- -- -- -- --
Unrealized gain on investments ........ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance of December 31, 1996 .......... -- -- 9,004,000 9 58,869 (376)
Exercise of common stock options ...... -- -- 208,000 -- 238 --
Employee stock purchase plan .......... -- -- 33,000 -- 266 --
SCIMED warrant exercise ............... -- -- 120,000 -- 377 --
Sale of common stock to Cathex ........ -- -- 25,000 -- 200 --
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock ... -- -- (1,000) -- (16) --
Deferred compensation resulting from
grant of options ............... -- -- -- -- 437 (437)
Amortization of deferred
compensation ................... -- -- -- -- -- 179
Treasury Common Stock ................. -- -- -- -- -- --
Net Loss .............................. -- -- -- -- -- --
Unrealized gain on investments ........ -- -- -- -- -- --
Unrealized exchange rate loss ......... -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .......... -- $ -- 9,389,000 $ 9 $ 60,371 $ (634)
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Total
Stockholders'
Treasury Unrealized Unrealized Equity
Accumulated ----------------------- Gain on Exchange (Net Capital
Deficit Shares Amount Investments Rate Loss Deficiency)
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......... $ (3,551) -- $ -- $ -- $ -- $ 1,288
Additional effects of merger with
EndoSonics Acquisition Corp. ... -- -- -- -- -- 488
Issuance of Preferred Stock in
Exchange for Common Stock ...... -- -- -- -- -- --
Deferred compensation resulting
From grant of options .......... -- -- -- -- -- --
Net Loss .............................. (2,874) -- -- -- -- (2,874)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 .......... (6,425) -- -- -- -- (1,098)
Sale of Preferred Stock to EndoSonics . -- -- -- -- -- 8,000
Conversion of Preferred Stock ......... -- -- -- -- -- --
Exercise of Common Stock Options ...... -- -- -- -- -- 138
Initial Public Offering of
Common Stock ................... -- -- -- -- -- 42,768
Deferred compensation resulting
From grant of options .......... -- -- -- -- -- --
Amortization of deferred
Compensation ................... -- -- -- -- -- 119
Acquisition of Intraluminal
Devices, Inc. .................. -- -- -- -- -- 1,400
Conversion of $750,000 debit by
Fukuda Denshi .................. -- -- -- -- -- 750
Net loss ............................. (4,624) -- -- -- -- (4,624)
Unrealized gain on investments ........ -- -- -- 170 -- 170
---------- ---------- ---------- ---------- ---------- ----------
Balance of December 31, 1996 .......... (11,049) -- -- 170 -- 47,623
Exercise of common stock options ...... -- -- -- -- -- 238
Employee stock purchase plan .......... -- -- -- -- -- 266
SCIMED warrant exercise ............... -- -- -- -- -- 377
Sale of common stock to Cathex ........ -- -- -- -- -- 200
Expense repayment by Intraluminal
Devices, Inc. by transfer and
cancellation of common stock ... -- -- -- -- -- (16)
Deferred compensation resulting from
grant of options ............... -- -- -- -- -- --
Amortization of deferred
compensation ................... -- -- -- -- -- 179
Treasury Common Stock ................. -- 345 (2,205) -- -- (2,205)
Net Loss .............................. (8,772) -- -- -- -- (8,772)
Unrealized gain on investments ........ -- -- -- 6 -- 6
Unrealized exchange rate loss ......... -- -- -- -- (23) (23)
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 .......... $ (19,821) $ 345 $ (2,205) $ 176 $ (23) $ (37,873)
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes
54
<PAGE> 55
CARDIOVASCULAR DYNAMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR END DECEMBER 31,
-----------------------------------
1995 1996 1997
-------- --------- --------
<S> <C> <C> <C>
Operating activities
Net loss ......................................................... $(2,874) $ (4,624) $ (8,772)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ................................... 74 182 432
Amortization of deferred compensation ........................... -- 119 179
Bad debt expense ................................................ 249 221 318
Charge for acquired in-process research and development ......... 488 1,400 --
Net changes in:
Trade accounts receivable, net .................................. (639) (1,372) (2,767)
Receivable from related parties ................................. 125 -- --
Inventories ..................................................... (704) (2,145) 10
Other assets .................................................... (135) (671) 37
Accounts payable and accrued expenses ........................... 1,369 698 836
Deferred distributor fee revenue ................................ (54) (50) (79)
------- -------- --------
Net cash used in operating activities .............................. (2,101) (6,242) (9,806)
Investing activities:
Purchase of available-for-sale securities ........................ -- (25,563) (43,208)
Sales of available-for-sale securities ........................... -- -- 44,174
Capital expenditures for furniture, fixtures and equipment ....... (443) (940) (699)
Purchase of Clintec, net of cash acquired ........................ -- -- (30)
Change in other assets ........................................... -- -- (358)
------- -------- --------
Net cash used in investing activities .............................. (443) (26,503) (121)
--------
Financing activities:
Proceeds from issuance of convertible obligation ................. 750 -- --
Proceeds from sale of Common Stock ............................... -- 42,768 466
Proceeds from exercise of stock warrants ......................... -- -- 377
Proceeds from exercise of stock options .......................... -- 138 238
Proceeds from sale of Preferred Stock to EndoSonics .............. -- 8,000 --
Purchase of treasury common stock ................................ -- -- (2,205)
Payable to EndoSonics, net ....................................... (17) (2,537) --
------- -------- --------
Net cash provided by (used in) financing activities ................ 733 48,369 (1,124)
------- -------- --------
Net increase (decrease) in cash .................................... (1,811) 15,624 (11,051)
Cash and cash equivalents, beginning of period ..................... 3,379 1,568 17,192
------- -------- --------
Cash and cash equivalents, end of period ........................... $ 1,568 $ 17,192 $ 6,141
======= ======== ========
Supplemental disclosure 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 5 ................... -- 750 --
</TABLE>
See accompanying notes.
55
<PAGE> 56
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 4), 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 25, 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.
56
<PAGE> 57
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 formation of IDI Acquisition, Inc., a
wholly-owned subsidiary of CVD, and the merging of IDI into IDI Acquisition,
Inc. (See Note 2).
In July 1997, CVD the Company acquired all of the common stock of Clinitec GmbH
("Clinitec") its independent distributor in Germany and Switzerland, in exchange
for the assumption of the assets and liabilities of Clinitec.
The consolidated financial statements for December 31, 1996 and 1997 include the
accounts of the Company and its subsidiaries. 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.
57
<PAGE> 58
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Goodwill
The excess of the purchase price over the net assets of the business acquired
("goodwill") is amortized on the straight-line method over the estimated
recovery period. The goodwill stemming from the purchase of Clinitec is
amortized over ten years (See Note 2).
The carrying value of goodwill is reviewed if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will
not be recoverable, as determined based on the undiscounted cash flows of the
entity acquired over the remaining amortization period, the carrying value of
the goodwill is reduced to estimated fair value.
Long-lived Assets
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and
the undiscounted cash flows estimated to be generated by those assets are less
than the carrying amounts of those 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.
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 1995, 1996 and 1997 product sales to Fukuda Denshi Co., Ltd., ("Fukuda"),
the Company's Japanese distributor (see Note 5), comprised 18%, 14% and 7% of
total revenue, respectively. Accounts receivable from Fukuda represented 1% and
0% of net accounts receivable at December 31, 1996 and 1997, respectively.
The Company terminated its Agreement with Fukuda in May 1997 and signed a
five-year agreement with another Japan distributor, Cathex, LTD. ("Cathex").
During 1997, Product sales to Cathex comprised 13% of total revenues. Accounts
receivable from Cathex represented 44% of net accounts receivable at December
31, 1997.
Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% and 13% of
total revenues during 1996 and 1997, respectively. At December 31, 1996 and
1997, 27% and 0%, respectively, of net accounts receivable were due from
Medtronic. In May of 1997, Medtronic advised the Company of its election to not
make minimum purchases of product for the second year of the agreement. In June
1997, Medtronic informed CVD it would not fulfill its commitment for the first
year of the agreement and it did not believe it was required to fulfill such
commitment.
One other customer comprised 12% of revenues for the year ended December 31,
1995 and 14% of accounts receivable at December 31, 1995.
58
<PAGE> 59
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Export Sales
The Company had export sales by region as follows:
<TABLE>
<CAPTION>
Year Ended
December 31,
----------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Europe ... $ 1,179 $ 1,614 $ 3,020
Japan .... 744 1,240 2,350
Latin
America.. 131 243 253
Other .... -- 417 956
-------- -------- --------
$ 2,054 $ 3,514 $ 6,579
======== ======== ========
</TABLE>
Revenue Recognition and Warranty
The Company recognizes revenue from the sale of its products when the goods are
shipped to its customers. Reserves are provided for anticipated product returns
and warranty expenses at the time of shipment. License fees are recognized on a
contract with SCIMED Life Systems, Inc. ("SCIMED") when distribution rights to
certain markets are made available to SCIMED for the sale of products based upon
certain limited catheter technology. Contract revenues are recognized on
contracts with SCIMED and Advanced CardioVascular Systems, Inc. ("ACS") for
transferring certain limited catheter technology based upon the Company's
completion of (1) technical Assistance to aid SCIMED in manufacturing the
related products, and (2) research and development to develop the related
products for ACS and SCIMED (See Note 3).
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 existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
59
<PAGE> 60
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 %, 6.0%
and 5.5%; a dividend yield of 0%, 0% and 0%; volatility of the expected market
price of the Company's common stock of 0.475, 0.475 and 0.692; and a
weighted-average expected life of the options of 3.5, 3.5 and 5.0 years for
1995, 1996 and 1997, respectively.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information for the years ended December 31, 1995, 1996 and 1997 follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss ............. $ (2,905) $ (5,170) $ (9,320)
Pro forma basic and diluted
net loss per share ........... $ (0.72) $ (0.77) $ (1.02)
</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.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
(Statement No. 130), which is effective for years beginning after December 15,
1997. Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statement information. Management has not completed its review of
Statement No. 130, but does not anticipate that the adoption of this statement,
other than required financial statement reclassifications, will have a
significant effect on the Company's reported financial position.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information (Statement No. 131), which is effective for
years beginning after December 15, 1997. Statement No. 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Statement No. 131
is effective for financial statements for fiscal years beginning after December
15, 1997, and therefore the Company will adopt the new requirements
retroactively in 1998. The Company operates in one business segment.
Accordingly, the Company does not anticipate that the adoption of this
statement will have a significant effect on the Company's financial statements.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer
Software Developed For or Obtained For Internal Use. The SOP is effective for
companies beginning on January 1, 1999. The SOP will require the capitalization
of certain costs incurred after the date of adoption in connection with
developing or obtaining software for internal use. The Company currently
expenses such costs. The Company has not yet assessed what the impact of the SOP
will be on the Company's future earnings or financial position.
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
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented to conform with Statement No. 128.
Net loss per common share after the Company's initial public offering is
computed using the weighted average number of common shares outstanding during
the periods presented. Options to purchase shares of the Company's common stock
granted under the Company's stock option plan may have a dilutive effect on the
Company's earnings per share in the future. Net loss per share prior to the
Company's initial public offering is computed on a pro forma basis 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. The following table sets forth the
computation of basic and diluted net loss per share:
60
<PAGE> 61
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
(In thousands)
NUMERATOR:
Net loss .............................................. $ (2,874) $ (4,624) $ (8,772)
--------- --------- ---------
Net loss used for basic and diluted loss per share--
loss attributable to common stockholders ............ $ (2,874) $ (4,624) $ (8,772)
========= ========= =========
DENOMINATOR:
Denominator for basic and diluted loss per share--
weighted average common shares outstanding .......... 385 4,715 9,118
Assumed conversion of Preferred Stock from the date
of issuance (Series A and B)......................... 3,667 2,040 --
--------- --------- ---------
4,052 6,755 9,118
========= ========= =========
Basic and diluted net loss per share .................. $ (0.71) $ (0.69) $ (0.96)
========= ========= =========
</TABLE>
2. ACQUISITIONS
On October 16, 1996, the Company acquired all of the outstanding shares of
Intraluminal Devices, Inc. ("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 development stage, the purchase price and the associated
costs of acquisition $0.7 million were expensed as acquired in-process research
and development.
On July 29, 1997, the Company acquired all of the common stock of its
independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec").
The aggregate purchase price of the acquisition was $1,636 and consisted of cash
of $30 and the forgiveness of debt of $1,606. The transaction was accounted for
by the purchase method of accounting and, accordingly, the purchase price was
allocated to the assets acquired and the liabilities assumed based on their fair
market values at the date of acquisition. In connection with the acquisition,
the Company acquired assets and assumed liabilities with fair market values of
$401 and $652, respectively. The excess of the purchase price over the fair
value of the net assets acquired of $1,887 has been allocated to goodwill. The
results of operations of Clinitec are included in the consolidated statement of
operations subsequent to the date of acquisition.
The following table reflects unaudited pro forma combined results of operations
of the Company, IDI and Clinitec on the basis that the acquisitions had taken
place and the related charge for IDI, noted above, was recorded at the beginning
of 1996 for IDI and Clinitec, as IDI operations were not material to the
Company's operations prior to 1996:
<TABLE>
<CAPTION>
1996 1997
------- -------
<S> <C> <C>
Revenues......................... $8,822 $11,633
Net Loss......................... (5,060) (9,484)
Net Loss per common share........ (0.75) (1.04)
Shares used in computation....... 6,755 9,118
</TABLE>
61
<PAGE> 62
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In management's opinion, the unaudited pro forma combined results of operations
are not indicative of the actual results that would have occurred had the
acquisitions been consummated at the beginning of 1996 or 1997, respectively, 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
80,000 shares of Series A Preferred Stock at an exercise price of $3.29 per
share in exchange for a waiver of SCIMED's anti-dilution right.
During May 1996, the Company issued an additional warrant to SCIMED to
purchase up to 40,000 shares of Series A Preferred Stock at an exercise price of
$3.29 per share in exchange for a waiver of SCIMED's anti-dilution right related
to the shares to be issued under the 1996 Plan. In August 1997, SCIMED exercised
all 120,000 warrants, mentioned above.
SCIMED also paid CVD $641, $200 and $0 in 1995, 1996 and 1997, respectively, on
a cost reimbursement basis to fund continuing development of the technology and
for other support.
4. RELATED PARTY TRANSACTIONS
The following is a summary of significant transactions between CVD and
EndoSonics:
During 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 1995 amount to $172.
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 $340 and $156 for the years ended December 31, 1995 and
1996, respectively.
No interest expense has been charged on the net payable due to EndoSonics. The
following is an analysis of the payable to EndoSonics:
62
<PAGE> 63
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
YEAR-ENDED
DECEMBER 31,
------------------------
1995 1996
--------- ---------
<S> <C> <C>
Beginning balance .................................................. $ 2,554 $ 2,537
Inventory purchases ................................................ 172 --
Corporate cost allocations ......................................... 340 156
Cash disbursements made by EndoSonics on behalf of CVD.............. 312 --
Cash collections made by EndoSonics on behalf of CVD................ (700) --
Cash payments to EndoSonics ........................................ -- (2,693)
Cash disbursements made by CVD on behalf of EndoSonics and other ...
(141) --
--------- ---------
Ending balance ..................................................... $ 2,537 $ --
========= =========
Average balance during period ...................................... $ 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 had 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 terminated in the fourth quarter
of 1997 when EndoSonics beneficially owned less than 25% of CVD's Common Stock.
See also Notes 5 and 11.
5. AGREEMENTS WITH FUKUDA AND CATHEX
The Company had a distribution agreement with Fukuda which provided them with
exclusive distribution rights relative to certain of the Company's products in
Japan for periods extending through May 1999, which could be extended at the
option of the parties. Distribution fee revenues received from Fukuda were
deferred and were being recognized as revenue over the initial periods covered
by the respective agreement.
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 which converted into the right to receive 62,500
shares of Common Stock upon the consummation of the initial public offering. In
November, 1996, Fukuda exercised the conversion feature of said obligation. In
May 1997, the Company terminated the existing distribution agreement and does
not expect that any material obligations will arise as a result of such
termination.
The Company entered into a distribution agreement, dated May 1, 1997, with
Cathex, Ltd. (The "Cathex Agreement"), whereby Cathex serves as CVD's exclusive
distributor for certain of the Company's products in Japan. In exchange for this
exclusive distributorship, Cathex shareholders agreed to purchase $200,000 in
CVD
63
<PAGE> 64
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
common stock or approximately 25,000 shares, in addition to payments owing upon
the purchase of the products. Cathex also agreed to undertake all necessary
clinical trails to obtain approval from Japanese regulator authorities for the
sale of the products in Japan. Cathex's purchases under the Cathex Agreement are
subject to certain minimum requirements. The initial term of the Cathex
Agreement expires on January 1, 2001, subject to a five-year extension. The
Cathex Agreement may also be terminated in the event of breach upon 90 days
notice by the non-breaching party, subject to cure within the notice period.
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 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 was 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. In February 1997, ACS elected to terminate the
perfusion technology agreement.
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 and 1997.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------------------- ----------------------------------
Gross Gross
Unrealized Unrealized
Holding Holding
(Losses) Fair (Losses) Fair
Costs Gains Value Cost Gains Value
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury and other agencies debt securities .. $ 10,000 $ (19) $ 9,981 $ 4,976 $ 30 $ 5,006
Corporate debt securities ......................... 15,563 189 15,752 19,621 146 19,767
---------- ---------- ---------- ---------- ---------- ----------
$ 25,563 $ 170 $ 25,733 $ 24,597 $ 176 $ 24,773
========== ========== ========== ========== ========== ==========
</TABLE>
All short-term investments at December 31, 1996 and December 31, 1997 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:
64
<PAGE> 65
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Raw materials $ 1,015 $ 1,285
Work in process 510 165
Finished goods 1,374 1,755
-------- --------
$ 2,899 $ 3,205
======== ========
</TABLE>
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Accounts payable ....................... $ 750 $ 1,374
Accrued payroll and related expenses ... 1,040 1,317
Accrued clinical studies................ 290 548
Other accrued expenses ................. 302 249
-------- --------
$ 2,382 $ 3,488
======== ========
</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, noncancelable operating leases
were as follows as of December 31:
<TABLE>
<S> <C>
1998.................. $ 429
1999.................. 213
2000................... 80
2001................... 8
-----
$ 730
=====
</TABLE>
Rental expense charged to operations for all operating leases during the years
ended December 31, 1995, 1996 and 1997, was approximately $171, $365 and $574,
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.
65
<PAGE> 66
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, a determined
by the Board of Directors. The Company has authorized 1,990,000 shares of Common
Stock for issuance under the 1996 Plan. At December 31, 1997, the Company had
48,000 shares of Common Stock available for grant 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>
Balance at December 31, 1994 ......... $ 1.00 462,000
Granted .............................. $ 1.00 to $ 1.50 494,000
Exercised ............................ -- --
Forfeited ............................ -- --
Cancelled ............................ -- --
------------------- ---------
Balance at December 31, 1995 ......... $ 1.00 to $ 1.50 956,000
Granted .............................. $ 2.50 to $ 13.25 346,000
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 1,144,525
Granted .............................. $ 5.00 to $ 9.50 985,000
Exercised ............................ $ 1.00 to $ 2.50 (208,259)
Forfeited ............................ $ 1.00 to $ 13.25 (196,479)
Cancelled ............................ $ 6.87 (130,000)
------------------- ---------
Balance at December 31, 1997 ......... $ 1.00 to $ 13.25 1,594,787
=================== =========
</TABLE>
On April 21, 1997, the Board of Directors approved repricing of the options
granted on August 5, 1996 at $13.25 per share and on November 4, 1996 at $12.50
per share. As a result of the repricing, the exercise price became $6.88 and the
vesting period on the aforementioned options started anew.
The following table summarizes information regarding stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED-
OPTIONS REMAINING WEIGHTED- OPTIONS AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 PRICE
- --------------- ----------- ----------- -------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$ 1.00-$ 1.50 505,287 7.5 $ 1.25 242,912 $1.22
2.50- 13.25 1,089,500 9.4 7.23 25,292 6.96
--------- -------
1.00- 13.25 1,594,787 8.8 5.33 268,204 1.76
========= =======
</TABLE>
As of December 31, 1996 and 1997, 253,525 and 268,204 options were exercisable,
respectively.
66
<PAGE> 67
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The weighted-average grant-date fair value of options granted during 1995, 1996
and 1997, for options where the exercise price on the date of grant was equal to
the stock price on that date, was $0.40, $5.12 and $4.50. The weighted-average
grant-date fair value of options granted during 1995, 1996 and 1997, for options
where the exercise price on the date of grant was less than the stock price on
that date, was $1.44, $3.16 and $0.
During 1996, the Company recorded deferred compensation of approximately $150
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
$437 of deferred compensation was recorded to recognize compensation for
non-employee option grants during the year ended December 31, 1997. Deferred
compensation is being amortized over the vesting period of the related options.
$119 and $179 of deferred compensation was amortized in the year ended December
31, 1996 and 1997, respectively.
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. During 1997, a total of approximately 33,000 shares of
common stock was purchased at an average price of $8.18 per share.
12. INCOME TAXES
Significant components of the Company's deferred tax assets are as follows at
December 31:
<TABLE>
<CAPTION>
1996 1997
---------------------- ----------------------
Federal State Federal State
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net operating loss carryforward ....... $ 1,792 $ 44 $ 3,899 $ 60
Accrued expenses ...................... 456 78 346 59
Research and development credits ...... 256 144 521 291
Bad debt reserve ...................... 132 23 175 30
Depreciation .......................... 52 9 (48) (8)
Inventory write-downs ................. 51 9 385 66
Capitalized research and development .. -- 276 -- 642
Deferred revenue ...................... 28 5 -- --
Other ................................. 47 57 163 28
---------- ---------- ---------- ----------
Gross deferred tax assets ............. 2,814 645 5,441 1,168
Valuation allowance ................... (2,814) (645) (5,441) (1,168)
Total deferred tax assets ............. -- -- -- --
---------- ---------- ---------- ----------
Net deferred tax assets ............... $ -- $ -- $ -- $ --
========== ========== ========== ==========
</TABLE>
The valuation allowance increased by $3,150 and $1,569 in 1997 and 1996,
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, 1997, the Company has net operating loss carryforwards for
federal and state income tax purposes of approximately $11,000,000 and
$1,000,000, respectively, which expire in the years 1998 through 2010. In
addition, the Company has research and development tax credits for federal and
state income tax purposes of approximately $520,000 and $320,000, respectively,
which expire in the years 2008 through 2011.
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.
67
<PAGE> 68
CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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 1997.
14. FOURTH QUARTER ADJUSTMENTS
Adjustments were made in the fourth quarter of 1997 to increase the
reserve for excess and obsolete inventories by $955, increase the allowance
for doubtful accounts by $270 and to accrue expenses of $780.
68
<PAGE> 69
CARDIOVASCULAR DYNAMICS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
----------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for doubtful accounts ... $ 377 $ 318 $ -- $ (195) $ 500
Accrued warranty expenses ......... $ 29 $ -- $ -- $ (29) $ --
Reserve for excess and obsolete
inventories...................... $ 145 $ 955 $ -- $ -- $ 1,100
Year ended December 31, 1996
Allowance for doubtful accounts ... $ 180 $ 221 $ -- $ (24) $ 377
Accrued warranty expenses ......... $ 113 $ -- $ -- $ (84) $ 29
Reserve for excess and obsolete
inventories...................... $ 209 $ -- $ -- $ (64) $ 145
Year ended December 31, 1995
Allowance for doubtful accounts ... $ 85 $ 95 $ -- $ -- $ 180
Accrued warranty expenses ......... 20 $ 93 $ -- $ -- $ 113
Reserve for excess and obsolete
inventories...................... $ -- $ 209 $ -- $ -- $ 209
</TABLE>
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1(1) Agreement and Plan of Reorganization dated as of June 9, 1993 among
the Company, EndoSonics Acquisition Corporation and Radiance Medical
Systems, Inc. ("Radiance").
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 Radiance.
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.
4.3(11) Preferred Shares Rights Agreement, dated as of October 20, 1998,
between EndoSonics and ChaseMellon Shareholder Services, L.L.C.
10.1(3) Series F Preferred Stock Purchase Agreement dated February 1, 1991
between EndoSonics 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 EndoSonics
and Fukuda Denshi Co., Ltd.
10.3(3) Distribution Agreement dated as of January 31, 1991 between
EndoSonics and Esaote.
10.4(3) Line of Credit Agreement between EndoSonics and Wells Fargo Bank,
N.A. dated November 19, 1990.
10.5(3) Lease dated October 31, 1991 between EndoSonics 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 EndoSonics 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 EndoSonics and Radiance.
10.12(4) Stock Purchase Agreement dated June 5, 1992, by and between the
EndoSonics and Radiance.
10.13(4) Product Development Agreement dated June 5, 1992, by and between the
EndoSonics and Radiance.
10.14(6) Distribution Agreement dated May 28, 1993 between Radiance 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 EndoSonics and Du-MED.
10.16(9) Stock Purchase and Technology License Agreement dated September 10,
1994 by and among EndoSonics, Radiance and SCIMED Life Systems, Inc.
</TABLE>
<PAGE> 71
<TABLE>
<S> <C>
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 EndoSonics.
10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and
between Cordis and EndoSonics.
10.20(10) Stockholder Agreement dated June 19, 1996 between EndoSonics and
Radiance.
10.21(10) License Agreement dated February 6, 1997 between EndoSonics and
Radiance.
10.22(11) Distribution Agreement dated August 31, 1998, between EndoSonics and
Fukuda Denshi Co., Ltd.
10.23(11) Amendment to the Distribution Agreement (June 28, 1997) dated August
31, 1998, between EndoSonics, Navius Corporation and Fukuda Denshi
Co., Ltd.
10.24(11) Research and Development Agreement dated August 31, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.25(11) Common Stock Purchase Agreement dated October 7, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.26(11) Investors' Rights Agreement dated September 21, 1998, between
EndoSonics and Fukuda Denshi Co., Ltd.
10.27* Distribution Agreement dated December 15, 1998, between EndoSonics
and JOMED N.V.
10.28* IVUS Guided Stent Delivery System Development, Supply and
Distribution Agreement dated December 15, 1998 between EndoSonics
and JOMED N.V.
10.29 Certificates of Ownership and Merger, dated September 1998,
Merging Microsound Corporation into EndoSonics Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of KPMG LLP, Certified Public Accountants.
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 Requested.
(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.
(11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q,
filed with the Commission on November 15, 1998, for the quarter
ended September 30, 1998.
<PAGE> 1
EXHIBIT 10.27
DISTRIBUTION AGREEMENT
This Distribution Agreement is made this 15th day of December, 1998,
by and between
EndoSonics Europe B.V., De Bruyn Kopsstraat 15, 2288 EC Rijswijk, The
Netherlands ("EndoSonics"), a wholly owned subsidiary of EndoSonics Corporation,
2870 Kilgore Road, Rancho Cordova, CA 95670, USA,
and
JOMED N.V., Stravinskylaan 2001, P.O. Box 75640, 1070 AP Amsterdam, The
Netherlands, and any of its wholly owned subsidiaries ("Distributor").
In consideration of the mutual promises and covenants contained herein, the
parties agree as follows:
1. DEFINITIONS
The following terms when used in their capitalized form shall have the
following meanings:
1.1. "Agreement" shall mean this Distribution Agreement, as amended,
modified, or supplemented from time to time.
1.2. "Catheters" shall mean any of the catheters as defined in Exhibit A.
1.3. "Confidential Information" shall have the meaning provided in Section 0
hereof.
1.4. "GMP" shall mean the good manufacturing practices for medical devices
set forth by any act, statute, or regulation of any kind governing the
products in the Territory.
1.5. "Minimum Purchase Commitment" shall have the meaning provided in Section
0 hereof.
1.6. "Products" shall mean those EndoSonics products listed in Exhibit A
attached hereto.
1.7. "Renewal term" shall have the meaning provided in Section 0 hereof.
1.8. "System" shall mean any of the systems or system options as defined in
Exhibit A.
1.9. "Term" shall have the meaning provided in Section 0 hereof.
1.10. "Territory" shall mean those countries listed in Exhibit B hereof.
1.11. "Trademarks" shall mean each trademark, trade name, service marks, the
name "EndoSonics" or any derivation thereof, brand names, signs, symbols
or slogans now or hereafter used by EndoSonics in connection with the
Products.
1.12. "Wires" shall mean any of the wires as defined in Exhibit A.
<PAGE> 2
2. APPOINTMENT; RELATIONSHIP OF PARTIES
2.1. Appointment
EndoSonics hereby appoints Distributor as its distributor of the
Products in the Territory, subject to the rights as stipulated in
Exhibit B hereto. Distributor's rights shall be exclusive for the first
12 months of this Agreement, and shall be non-exclusive thereafter,
provided however, that the exclusive period may be extended in certain
geographic areas for another 12 months upon the mutual written consent
of the parties. Distributor shall not distribute or otherwise promote
the Products in any way outside the Territory, without the prior written
authorization of EndoSonics.
During the Term and each Renewal Term, if any, Distributor shall not
sell or commercially promote products that compete with Products, nor
shall Distributor represent, or provide either directly or indirectly
marketing services to, any manufacturer or distributor in the Territory,
that relate to such competing products.
2.2. Exclusive Account Protection
Irrespective of Distributor's appointment under the foregoing Section 0,
Distributor shall retain exclusive rights to sell Catheters or Wires,
whichever applies, to each end-customer account in which Distributor,
during the Term, has placed a System other than on the basis of an
outright capital equipment sale, and to which it retains legal title.
This exclusive right shall be for the shorter of a period of three (3)
years following the installation of said System or the duration of the
implicit or explicit financing program agreed to between Distributor and
end-customer, the terms of which shall be disclosed to EndoSonics upon
Distributor's claim of exclusive rights under this section.
2.3. Relationship of Parties
The relationship of Distributor to EndoSonics hereunder shall be solely
that of an independent contractor. Distributor and EndoSonics each
acknowledge and agree that neither Distributor nor EndoSonics is an
employee, employer, agent, partner, or joint venturer of the other.
Neither Distributor nor EndoSonics shall have or hold itself as having
the right or authority to assume or create any obligation or
responsibility, whether express or implied, on behalf of or in the name
of the other, except with the express written authority of the other.
3. TERM - TERMINATION
3.1. Term
The term ("Term") of this Agreement shall commence the date hereof, and,
unless terminated sooner pursuant to the provisions of Sections 0, shall
terminate two (2) years from the date hereof; provided, however, that
this Agreement may be extended for successive one-year periods (each
such period, a "Renewal Term") upon the mutual written consent of the
parties.
3.2. Termination of Agreement
This Agreement shall terminate upon the happening of any of the
following events:
<PAGE> 3
(a) either party's failure to cure the breach of any material term,
covenant, or condition of this Agreement within 30 days after the
breaching party receives notice of such breach;
(b) immediately upon written notice to one party upon the change in
the structure or organization of the other party including,
without limitation, the acquisition or merger of the other party;
(c) immediately upon either parties' cessation to function as a going
concern; or
(d) immediately upon either parties' dissolution, liquidation,
insolvency, bankruptcy, assignment for the benefit of creditors
or admission in writing of its inability to pay its debts as they
mature.
3.3. Obligations upon Termination or Expiration
On termination or expiration of this Agreement by either party for any
reason:
(a) All rights granted by EndoSonics to Distributor shall cease
immediately, except that EndoSonics, at its sole discretion, may
permit Distributor to sell any Products for which it has paid
full list price for a period of three (3) months following such
termination or expiration, for the sole purpose of depleting its
inventory of Products. If Distributor has not sold its remaining
inventory of Products at the end of said three-month period,
EndoSonics, at its sole discretion, may extend such three month
period for an additional three months. If EndoSonics refuses to
extend such three month period, EndoSonics shall purchase all of
Distributor's remaining inventory of Products at fair market
value, provided that none of the remaining inventory being
purchased by EndoSonics shall have been used, removed from its
original packaging or carry an expired sterilization date;
(b) Provided that the Agreement is not terminated as a result of
Distributor's breach, EndoSonics shall fulfill any unexecuted
orders placed by the Distributor prior to such termination or
expiration subject to advance payment, and provided that
Distributor shows official written documentation of pending
orders from its customers;
(c) Distributor shall promptly pay all outstanding invoices, if any,
for Products shipped by EndoSonics prior to such termination or
expiration;
(d) Distributor shall forthwith return to EndoSonics or otherwise
dispose of as EndoSonics may direct, all promotional literature,
manuals, catalogues, instruction sheets, diagrams and other typed
or printed matter relating to the Products or to the business of
EndoSonics and all copies thereof in the possession or under the
control of the Distributor;
(e) Distributor shall not claim, nor have the right to claim any
compensation or indemnity whatsoever for surrendering the
representation of the Products, the customers or the goodwill it
has acquired for the Products or for any other or similar reason,
regardless of which party terminates the Agreement or for what
reasons.
<PAGE> 4
4. SALES OF PRODUCTS TO DISTRIBUTOR
4.1. Price
Prices to Distributor for Products shall be those set forth in the price
list attached in Exhibit A. EndoSonics shall provide at least 60 days
prior written notice of changes in said price list. Price changes shall
not affect unfulfilled purchase orders accepted by EndoSonics prior to
the effective date of such changes.
4.2. Orders
All orders for Products by Distributor shall be initiated by a written
purchase order sent to EndoSonics and requesting a delivery date,
provided, however, that an order may initially be placed orally. No
order shall be binding upon EndoSonics until accepted by EndoSonics in
writing, and EndoSonics shall have no liability to Distributor with
respect to purchase orders that are not accepted. EndoSonics shall use
commercially reasonable efforts to deliver Products at the times
specified in its written acceptance of Distributor's purchase orders.
4.3. Shipments
(a) Systems: All EndoSonics systems delivered pursuant to the terms
of this Agreement shall be suitably packed for air freight
shipment in EndoSonics' standard shipping crates, marked for
shipment to Distributor's address set forth above, and delivered
to Distributor or its carrier agent ex-works Rancho Cordova,
California, USA.
(b) Catheters and Wires: All Catheters and Wires delivered pursuant
to the terms of this Agreement shall be suitably packed for
airfreight shipment in EndoSonics standard shipping boxes, marked
for shipment at Distributor's address set forth above, and
delivered to Distributor or its carrier agent ex-works Rijswijk,
The Netherlands.
(c) Partial shipments: Unless specifically disallowed by Distributor,
EndoSonics may make deliveries of shipments in installments. Such
partial shipments shall be billed upon shipment by EndoSonics.
(d) Choice of carrier: Unless otherwise instructed in writing by
Distributor, EndoSonics shall select the carrier. All freight,
insurance, and other shipping expenses, as well as any special
packing expense, shall be paid by Distributor. Distributor shall
also bear all applicable taxes, duties, and similar charges that
may be assessed against the Products after delivery to
Distributor or its carrier ex works Rancho Cordova, USA or
Rijswijk, The Netherlands, whichever applies.
4.4. Payment Terms
EndoSonics shall submit an invoice to Distributor upon shipment of all
Products ordered by Distributor. The invoice shall cover Distributor's
Purchase Price for the Products plus any freight, value-added, sales or
other taxes, duties and other applicable costs initially paid by
EndoSonics but to be borne by Distributor. Payment shall be made by wire
transfer, check or other instrument approved by EndoSonics, within 60
days net, 30 days -1% discount, from the date of receipt of each
invoice. No part of any amount payable to EndoSonics hereunder may be
reduced due to any counterclaim, set-off, adjustment or other right
which Distributor might have against EndoSonics, any other party or
otherwise.
<PAGE> 5
EndoSonics, at its sole discretion, reserves the right to limit the
amount of credit it may extend to Distributor, to require full or
partial payment in advance, or to revoke any credit previously extended,
if, in EndoSonics' judgment, Distributor's financial condition does not
warrant proceeding on the terms specified.
4.5. Payment Currency
All payments to be made by either party hereunder shall be made in
United States Dollars, or such other currency as the parties may agree
upon. In the event another currency is so agreed upon, then the amount
to be paid shall be calculated using the New York foreign exchange
selling rate for that other currency for the business day preceding the
invoice date as published in the Wall Street Journal.
4.6. Rejection of Products
Distributor shall inspect all Products promptly within 10 days of
receipt. Distributor shall reject any Products in which the integrity of
product sterility has been violated. Upon product rejection or product
failure, Distributor shall notify EndoSonics and request a Returned
Goods Authorization ("RGA") number. Only upon receipt of an RGA number,
Distributor shall return to EndoSonics the rejected or failed Products,
freight prepaid, in its original shipping carton with the RGA number
displayed on the outside of the carton. Upon receipt of failed Products,
EndoSonics will test such Products for failure analysis. If specific
failure is observed, EndoSonics will, at its expense, replace failed
Products with the same or similar Products of equal value.
4.7. Product modifications/obsolescence
EndoSonics reserves the right to change its Products and/or its
specifications or to discontinue the manufacture of one or more of the
Products, without payment or compensation to Distributor, provided that
at least sixty (60) days written notice is given to Distributor in case
of a Product and/or specification change, and at least one hundred
twenty (120) days written notice is given to Distributor in case of a
Product discontinuation. EndoSonics agrees to supply sufficient
quantities of spare parts of any discontinued product to cover customer
orders and/or tenders applied for by Distributor prior to the notice of
a discontinued product.
5. PURCHASE COMMITMENTS
5.1. Aggregate Minimum Purchase Commitment
During the first 12 months of the Term, Distributor shall purchase a
minimum amount of Products (the "Minimum Purchase Commitment") as
stipulated in Exhibit C. Distributor's failure to meet the aggregate
Minimum Purchase Commitment shall constitute a material breach and basis
for termination of this Agreement under Section 0, unless the sale of
Products in one or more geographic areas of the Territory is restricted
by regulatory authority having jurisdiction over Products, or EndoSonics
is unable to deliver Products by agreed upon delivery dates, in which
event Distributor shall be proportionally excused from the Minimum
Purchase Commitment.
Upon execution of this Agreement, Distributor shall place a
non-cancelable purchase order for Products with the delivery dates as
stipulated in Exhibit C. Such non-cancelable purchase order shall be
binding on Distributor except to the extent that the sale of the
Products is restricted by regulatory authority having jurisdiction over
the
<PAGE> 6
products. EndoSonics shall extend special pricing and payment terms with
regard to said non-cancelable purchase order.
For the purposes of this provision, a "purchase" of Products within the
time periods set forth in Exhibit C shall mean EndoSonics' shipment of
such Products on or before the last day of each of such time periods.
5.2. Purchase Commitment by Geographic Territory
During the first 12 months of the Term, Distributor shall purchase a
minimum amount of Products for each of the geographic areas as
stipulated in the individual schedules included under Exhibit C. If
during the first 12 months of the Term Distributor fails to meet at
least 75% of said minimum purchase amount (as measured by the total
sales amount in US Dollars) in any of the geographic areas, the parties
shall jointly decide on corrective actions to be undertaken in each such
area, and shall agree on a reasonable minimum commitment for the ensuing
6 months. If Distributor fails to meet said agreed upon 6-month minimum
commitment, the distribution rights in the affected geographic area
shall be cancelled effective immediately, and the Minimum Purchase
Commitment shall be proportionally reduced.
6. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR
6.1. Promotion of the Products
In addition to meeting the Minimum Purchase Commitment, Distributor
shall use its best efforts to promote the sale of the Products within
the Territory, to develop a market for the Products and to enhance the
Company's image in the marketplace as a provider of quality medical
devices. Distributor's obligations shall include, but not be limited to,
preparing promotional materials in appropriate languages for the
Territory, advertising the Products in trade publications within the
Territory, participating in and featuring the Products at appropriate
trade shows, and directly soliciting orders from customers for the
Product.
6.2. Market Analysis
Upon execution of this Agreement and within 30 days prior to the
beginning of each calendar year thereafter, Distributor shall provide
EndoSonics with an analysis of market changes and trends, competition
and an assessment of customer requirements for the Products, and
Distributor and EndoSonics shall mutually agree in writing on the sales
promotion activities and performance criteria to be met by Distributor
for the year.
6.3. Finances and Personnel
Distributor shall devote sufficient financial resources, technically
qualified sales representatives and clinical personnel to market and
sell the Products, in accordance with its obligations hereunder.
Additionally, distributor shall provide adequate training to physicians
and nursing staff to assist them in the proper use of the Products.
Distributor shall provide adequate contact with existing and potential
customers within the Territory on a regular basis, consistent with good
business practice.
6.4. Forecasts
Upon execution of this Agreement, and within the first week of every
quarter
<PAGE> 7
thereafter, Distributor shall provide EndoSonics with a 6-month rolling
forecast, showing prospective orders by Product model and intended
submittal date. The rolling forecast shall be updated quarterly by
Distributor.
6.5. Meetings
Distributor shall periodically make arrangements for EndoSonics'
representatives to conduct sales meetings with Distributor's sales force
in the Territory. EndoSonics and Distributor shall mutually agree on the
date, time and location of such meetings.
6.6. Inventory
Distributor shall, at its own expense, maintain sufficient inventory of
the Products, including inventory for demonstration purposes to fulfill
its commitments under this Agreement.
6.7. Representations
Distributor shall not make any false or misleading representations to
customers or others regarding EndoSonics or the Products. Distributor
shall not make any representations, warranties or guarantees with
respect to the specifications, features or capabilities of the Products
that are not consistent with EndoSonics' documentation accompanying the
Products or EndoSonics' literature describing the Products, including
the limited warranty and disclaimers.
6.8. Import and Export Requirements
Distributor shall, at its own expense, pay for all import and export
licenses and permits, pay customs charges and duty fees, and take all
other actions required to accomplish the export and import of the
Products purchased by Distributor.
Distributor acknowledges that EndoSonics is subject to regulation by
agencies of the US and other governments, including the US Department of
Commerce, which prohibit export or diversion of certain technical
products to certain countries. Distributor agrees to comply with all
export laws and restrictions and regulations of the US Department of
Commerce or other United States or foreign agency or authority, and not
to export, or allow the export or re-export of, any Proprietary
Information or Products or any direct product thereof in violation of
any such restrictions, laws or regulations.
7. ADDITIONAL OBLIGATIONS OF ENDOSONICS
7.1. Product and Marketing Materials
EndoSonics, at its expense, shall promptly provide Distributor with
reasonable amounts of printed commercial and technical data and
information and other publications which EndoSonics may have available
from time to time.
7.2. Territorial Inquiries
EndoSonics shall refer to Distributor all customer leads and any
correspondence or inquiries related to selling, marketing, or servicing
of Products in the Territory which EndoSonics may receive while this
Agreement is in effect. Similarly, Distributor shall promptly refer to
EndoSonics any such customer leads, correspondence or inquiries outside
the Territory.
<PAGE> 8
7.3. Distributor and Customer Support
EndoSonics shall provide a reasonable level of product application and
technical support to Distributor. EndoSonics may, at its own discretion
and expense, choose to send a representative to visit customers and
prospects in the Distributor's Territory, and Distributor agrees to
allow access and give support to perform such tasks, provided that such
visits are coordinated with Distributor. Any product application support
provided by EndoSonics such as application specialist's visits to
Distributor's Territory will not be invoiced to the Distributor unless
specifically requested by Distributor.
8. SERVICE AND MAINTENANCE, WARRANTY AND INSTALLATION
8.1. Systems Warranty and Service and Maintenance Agreements
EndoSonics shall make available to purchasers of the Systems its
standard warranty as stipulated in Exhibit D. Such warranty for the
first year after delivery shall be included in the purchase price of the
Systems. EndoSonics shall make an annual extended service and
maintenance agreement available, substantially in the form set forth in
Exhibit E, exclusively through Distributor in the Territory as from the
first year after delivery of the Systems. Distributor shall purchase
such annual service and maintenance agreement for each of the Systems to
which it retains title in the Territory at a cost set forth in Exhibit
A.
8.2. Systems Service and Maintenance
EndoSonics shall be solely responsible within the Territory for the
service, repair and maintenance of all Systems, including dispatching
calls and providing Distributor reports from time to time. Upon
termination of this Agreement for any reason whatsoever, EndoSonics
shall take such steps as are necessary to guarantee on-going service,
repair and maintenance of the systems installed through Distributor to
end customers. Distributor or the end-customers of Distributor shall
bear the cost of all service, repairs and maintenance performed that is
not covered under warranty or an annual service and maintenance
agreement.
8.3. Catheter and Wire Warranty
EndoSonics shall provide Product warranty for its Catheters and Wires as
stipulated in Exhibit D.
8.4. Systems Installation
EndoSonics shall support Distributor with the installation of the
Systems at the location of the end-user. Such installation shall include
the training of customers with respect to the Products sold. Distributor
shall be responsible for all reasonable travel expenses and related
disbursements incurred by EndoSonics in connection with said
installations.
9. MAINTENANCE OF RECORDS/PRODUCT RECALLS
9.1. Maintenance of Records
Distributor and EndoSonics shall, in compliance with applicable law,
including GMP's, maintain accurate records regarding the Products
including, without limitation, records
<PAGE> 9
of direct sales of Products to third parties, lot numbers, serial
numbers, and other manufacturing documentation necessary to ensure
traceability of Products. The parties shall retain these records
pursuant to the GMP's and applicable law.
9.2. Product Recalls
In the event of any recall of Products, either voluntary or otherwise,
Distributor shall cooperate with and assist EndoSonics in locating and
retrieving such recalled Products, as requested by EndoSonics and at
EndoSonics' expense.
10. COMPLAINTS AND RETURNS/REGULATORY REPORTING/ADVERSE IMPACT
10.1. Complaints and Returns
Distributor shall, as soon as reasonably practicable, notify, document
and forward to EndoSonics all customer complaints and any Products
returned in connection therewith. EndoSonics shall respond to
Distributor within ten business days of receipt of a complaint and
Distributor shall report EndoSonics' findings to customers, if
applicable. EndoSonics shall work diligently to resolve all customer
complaints.
10.2. Regulatory Reporting and Analysis of returned Products
EndoSonics shall file, or cause to be filed, all reports required of a
manufacturer pursuant to the applicable medical device reporting
regulations. EndoSonics, as the manufacturer of the Products, shall
perform all failure analysis on the Product within 30 days of receipt of
each failed Product and shall file all reports required with the
applicable regulatory agency. EndoSonics shall further cooperate with
and assist Distributor in submitting all reports that Distributor may be
required to file. Distributor shall promptly provide EndoSonics with
copies of all such reports.
10.3. Adverse Impact on the Products
Each party shall notify the other party's Regulatory Affairs and Quality
Assurance Officer or other designee as soon as reasonably practicable of
all actions or anticipated actions by any regulatory authority, that
could adversely affect the manufacture, marketing, distribution or sale
of the Product. Each party shall promptly provide copies to the other
party of all reports, citations, violations, warnings and deficiencies
received by such party in connection with the Products.
11. GOVERNMENT APPROVALS/REGISTRATION SUPPORT
11.1. Government Approvals
Distributor shall obtain all required government approvals or
registrations, if any, prior to the sale of any Product in the
Territory. All approvals and registrations shall be obtained under
EndoSonics' name, and EndoSonics and Distributor shall equally share in
the cost involved. In case of necessary adaptation or modification of
Products due to local requirements, the parties will assist each other
and will agree upon whether to conduct such adaptations or modifications
at EndoSonics' or Distributor's facilities.
Upon termination of this Agreement for any reason, Distributor shall
take all necessary steps to transfer any government approvals for
Products to EndoSonics or EndoSonics' nominee (or if such transfer is
not permitted, to cooperate in the cancellation of
<PAGE> 10
Distributor's government approvals and the re-issuance thereof to
EndoSonics or EndoSonics' nominee). Distributor shall promptly return to
EndoSonics all data and information relating to Product and make no
further use thereof.
11.2. Registration Support
EndoSonics shall assist Distributor in registering the Products in the
Territory by providing Distributor with:
(a) materials in EndoSonics' possession necessary to obtain health
registrations and marketing approvals, licenses and permits;
(b) certificates of analysis, export and compliance;
(c) trademark authorizations; and
(d) such other information as Distributor shall reasonably request
from time to time.
12. TRADEMARKS AND PROTECTION OF PROPRIETARY RIGHTS
12.1. Registration of Trademarks
EndoSonics shall, at its expense, use reasonable efforts to protect and
maintain all registrations, filings and issuance of its Trademarks in
full force and effect.
12.2. Title
The proprietary rights of EndoSonics in and to Trademarks and any items
related thereto are protected by the law of copyright, trademark, trade
secrets and unfair competition. Distributor shall have no proprietary
interest whatsoever in the Trademarks.
12.3. Notification of Infringement
Distributor shall promptly notify EndoSonics of any infringement, of
which Distributor has knowledge, of the proprietary rights of EndoSonics
in and to the Products or the Trademarks in the Territory and shall
cooperate with EndoSonics in any action by EndoSonics to investigate or
remedy any such infringement. All costs and expenses of investigating
and remedying any such infringement shall be borne by EndoSonics.
12.4. Use of Trademarks
EndoSonics hereby grants to Distributor a non-exclusive license to use
the Trademarks for the purpose of identifying and marketing the Products
in the Territory. Any use of the Trademarks will be in accordance with
such instructions as EndoSonics may give Distributor from time to time.
Distributor shall not grant any sub-licenses to use the Trademarks to
any Person, agent or other party without the prior written consent of
EndoSonics in each instance.
Upon the expiration or termination of this Agreement, the non-exclusive
license granted hereunder to Distributor shall expire and Distributor
shall immediately cease using the Trademarks.
12.5. Quality Control
<PAGE> 11
In order to comply with EndoSonics quality control standards,
Distributor shall (a) use the Trademarks in compliance with all relevant
laws and regulations in the Territory; (b) accord EndoSonics, after
previous written request, the right to inspect all marketing and
promotional materials in Distributor's possession containing the
Trademarks in order to confirm that Distributor's use of such Trademarks
is in compliance with this Agreement; and (c) not modify any of the
Trademarks in any way and not use any of the Trademarks on any goods or
services other than the Products or in connection therewith. In the
event EndoSonics has a good faith and substantial reason to believe that
Distributor is not complying with this provision, EndoSonics may, within
30 days of a written notification to Distributor stating and justifying
the reasons, suspend Distributor's right to use the Trademarks until
such time as Distributor gives EndoSonics adequate assurances that it
has taken corrective measures and that it will thereafter comply with
this provision.
12.6. Limitation of Distributor's Rights and Software License
Distributor shall have no access to or rights in the source codes of any
software included in the Products. Distributor shall have no right to
copy, modify or re-manufacture any Product or part thereof and shall
comply with the confidentiality obligations under Section 0.
For each System sold, EndoSonics licenses Distributor and its end
customer with a one-time paid in full perpetual license to use the
EndoSonics software and related updates and releases on the specific
System sold.
13. INDEMNIFICATION
13.1. Indemnification by Distributor
Except with respect to any of the following that arises from gross
negligence or willful misconduct of EndoSonics or its agents and subject
to Section 0 Distributor shall indemnify, defend and hold harmless
EndoSonics, its directors, officers, employees, representatives and
agents from and against any and all claims, suits, losses, damages,
costs, fees and expenses (including reasonable attorney's fees), and
other liabilities asserted by parties, both governmental and
non-governmental, resulting from or arising out of (a) any
misrepresentation of Distributor contained herein or breach of any
warranty made by Distributor; (b) any breach, violation or
non-performance of any covenant, condition or agreement in this
Agreement by Distributor; and (c) the material inaccuracy of any
representation or warranty of the Products made by Distributor.
13.2. Indemnification by EndoSonics
Except with respect to any of the following that arises from the gross
negligence or willful misconduct of Distributor or its agents and
subject to Section 0, EndoSonics shall indemnify, defend and hold
harmless Distributor, its directors, officers, employees,
representatives and agents from and against any and all claims, suits,
losses,damages, costs, fees and expenses (including reasonable
attorneys' fees), and other liabilities asserted by third parties, both
governmental and nongovernmental, resulting from or arising out of (a)
any misrepresentation of EndoSonics contained herein or breach of any
warranty or guaranty made by EndoSonics, (b) any breach, violation or
nonperformance of any covenant, condition or agreement in this Agreement
by EndoSonics, (c) the design of the Products, (d) any injury to any
property or person arising in connection with the design, manufacture,
use or application of the Products, (e) any infringement or alleged
infringement of the
<PAGE> 12
Products on any product, device, method, process, trade name, trademark
or patent, and (f) any and all taxes, fees, fines, penalties,
assessments, charges, expenses or other governmental levies assessed on
the Products which are not attributable to Distributor's acts or
omissions.
13.3. Limitations to Indemnity
The indemnities of Sections 0 and 0 shall not apply (a) if the
indemnified party fails to give the indemnifying party prompt notice of
any claim it receives and such failure materially prejudices the
indemnifying party, or (b) unless the indemnifying party is given the
opportunity to approve any settlement. Furthermore, the indemnifying
party shall not be liable for attorneys' fees or expenses of litigation
of the indemnified party unless the indemnified party gives the
indemnifying party the opportunity to assume control of the defense or
settlement. In addition, if the indemnifying party assumes such control,
it shall only be responsible for the legal fees and litigation expenses
of the attorneys it designates to assume control of the litigation. In
no event shall the indemnifying party assume control of the defense of
the indemnified party without the consent of the indemnified party
(which consent shall be given or not at its sole discretion).
14. CONFIDENTIALITY
Distributor acknowledges that by reason of its relationship to
EndoSonics hereunder it will have access to confidential or proprietary
information ("Confidential Information"). Confidential Information shall
include all technology, inventions, designs, processes, formulas,
computer software, specifications, customer lists, product development
plans, forecasts, and all other business, technical and financial
information provided to Distributor. Distributor agrees that it will not
use in any way for its own account or the account of any third party,
nor disclose to any third party, any Confidential Information revealed
to it by EndoSonics. Distributor shall take every reasonable precaution
to protect the confidentiality of such information.
Upon request by Distributor, EndoSonics shall advise whether or not it
considers any particular information or materials to be confidential.
Distributor shall not publish any technical description of the Products
beyond the description published by EndoSonics (except to translate that
description into appropriate languages for the Territory). In the event
of termination of this Agreement, there shall be no use or disclosure by
Distributor of Confidential Information of EndoSonics, and Distributor
shall not manufacture or have manufactured any devices, components or
assemblies utilizing any of EndoSonics' Confidential Information.
The duty of confidentiality set forth herein shall not apply to
information that:
(a) is, at the time of disclosure, in the public domain;
(b) after disclosure, enters the public domain except where such
entry is a direct result of a breach of this Agreement;
(c) prior to disclosure, was already known to the party receiving
such information, as evidenced by its written records;
<PAGE> 13
(d) subsequent to disclosure, is obtained from a third party in
possession of such information and not under a contractual or
fiduciary obligation to keep such information in confidence;
(e) is filed with any governmental or any regulatory authority and
available to the public; or
(f) is disclosed pursuant to any judicial or governmental requirement
or order.
Distributor's duty of confidentiality set forth above shall be limited
to the Term, each Renewal Term, if any, and 2 years from the expiration
thereof.
15. MISCELLANEOUS
15.1. Notices
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be in writing, shall be deemed to
have been duly given when delivered in person, or when sent by telex or
telecopy or other facsimile transmission (with the receipt confirmed),
or on the third business day after posting thereof by registered or
certified mail, return receipt requested, prepaid and addressed as
follows (or such other address as the parties may designate by written
notice in the manner of aforesaid):
If to Distributor:
Company: JOMED International AB
Address: Drottninggatan 94
City: S-25221 Helsingborg
Country: Sweden
Attention: Mr. Tor Peters
Position: President
Telephone: +46-42-490.6000
Facsimile: +46-42-490.6001
If to EndoSonics:
EndoSonics Europe B.V.
P.O. Box 1178
2280 CD Rijswijk
The Netherlands
Attention: Dr. J.P.C. de Weerd
Managing Director
Telephone: +31-70-307.3929
Facsimile: +31-70-307.3922
15.2. Governing Law and Jurisdiction This Agreement shall be governed by and
construed in all respects in accordance with the laws of the Netherlands
and fall under the jurisdiction of the place of office of EndoSonics.
15.3. Entire Agreement
This Agreement sets forth the entire understanding of the parties with
respect to the
<PAGE> 14
subject matter hereof. This Agreement supersedes all prior
representations, agreements and understandings among the parties with
respect to such subject matter.
15.4. Amendments
No changes or amendments or alterations to this Agreement shall be
effective unless in writing and signed by all parties hereto.
15.5. Remedies Cumulative
The rights, powers and remedies set forth herein are cumulative and
shall be in addition to any and all other rights, powers and remedies
provided by law. The exercise of any right or remedy hereunder shall not
in any way constitute a cure under this Agreement, or prejudice either
party in the exercise of any of its rights under this Agreement or law.
15.6. Non-Assignment
This Agreement may not be assigned by either party without the prior
written consent of the other party.
15.7. Force Majeure
Non-performance of either party shall be excused (except for payment of
moneys and confidentiality) to the extent that performance is rendered
impossible by strike, fire, flood, governmental acts or orders or
restrictions, failure of suppliers, or any other reason where failure to
perform is beyond the reasonable control of and is not caused by the
negligence of the non-performing party.
15.8. Legal Expenses
The prevailing party in any legal action brought by one party against
the other arising out of this Agreement shall be entitled, in addition
to any other rights and remedies it may have, to reimbursement for its
expenses, including court costs and reasonable attorney's fees.
15.9. Survival of Certain Terms
The provisions of Sections 0, 0, 0, 0,0, 0, and 0 shall survive the
termination of this Agreement for any reason. All other rights and
obligations of the parties shall cease upon termination of this
Agreement.
15.10. Waiver
No waiver of any default in the performance of any of the duties or
obligations arising out of this Agreement shall be valid unless in
writing and signed by the waiving party. Waiver of any one default shall
not constitute or be construed as creating waiver of any other default
or defaults. No course of dealing between the parties shall operate as a
waiver or preclude the exercise of any rights or remedies under this
Agreement. Failure on the part of either party to object to any act or
failure to act of the other party, or declare the other party in
default, regardless of the extent of such default, shall not constitute
a waiver by the party of its rights hereunder.
15.11. Severability If any provision of this Agreement shall be held to be
unenforceable in whole or in part, then the invalidity of such provision
shall not be held to invalidate any other provision herein and all other
provisions shall remain in full force and effect.
15.12. Counterparts
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original and all of which together shall
constitute one and the same Agreement.
<PAGE> 15
IN WITNESS WHEREOF, this Agreement has been executed by both parties as of the
date first written above.
EndoSonics Europe B.V. Distributor
Signature: Signature:
----------------------- ------------------------
Name: Dr. J.P.C. de Weerd Name: Mr. T. Peters
Title: Managing Director Title: President
Date: Date:
----------------------- ------------------------
<PAGE> 16
EXHIBIT A
ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES
ENDOSONICS SYSTEMS, SYSTEM OPTIONS AND ACCESSORIES:
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION PRICE (US$)
----------- ----------- -----------
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
<TABLE>
<CAPTION>
PRICE
SPECIAL PRICING CONDITIONS: DESCRIPTION (US$)
----------- -----
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
ENDOSONICS CATHETERS:
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION PRICE (US$)
----------- ----------- -----------
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
- ------------------
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE> 17
ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES (continued)
CARDIOMETRICS SYSTEMS AND ACCESSORIES:
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION PRICE (US$)
----------- ----------- -----------
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
CARDIOMETRICS FLOWIRE(R) DOPPLER GUIDE WIRES:
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION PRICE (US$)
----------- ----------- -----------
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
CARDIOMETRICS WAVEWIRE(TM) PRESSURE GUIDE WIRES:
<TABLE>
<CAPTION>
PART NUMBER DESCRIPTION PRICE (US$)
----------- ----------- -----------
<S> <C> <C>
[ * ] [ * ] [ * ]
</TABLE>
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE> 18
ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES (continued)
<TABLE>
<CAPTION>
USAGE DISCOUNTS AVAILABLE
0.014" FLOWIRE(R) / WAVEWIRE(TM):
------------------------------------- 0.018" FLOWIRE(R):
FLOWIRE(R)/ --------------------------
WAVEWIRE(TM) # OF FLOWIRE(R)
# OF BOXES PRICE EACH BOXES PRICE EACH
---------- ------------ ----- ----------
<S> <C> <C> <C>
1-3 [ * ] 1-3 [ * ]
4-6 [ * ] 4-6 [ * ]
7-9 [ * ] 7-9 [ * ]
10+ [ * ] 10+ [ * ]
</TABLE>
SMARTWIRE(R) DOPPLER GUIDE WIRES
<TABLE>
<CAPTION>
UNIT PRICE EXTENDED
PART NUMBER DESCRIPTION (US$) PRICE* (US$)
- ----------- ----------- ---------- ------------
<S> <C> <C> <C>
1450J 0.014 OD SmartWire(R) "J" Tip [ * ] [ * ]
</TABLE>
*NOTE: EXTENDED PRICE REPRESENTS FIVE (5) WIRES PER BOX
All Products sales are ex-works Rijswijk, The Netherlands, except the Oracle(R)
In-Vision(TM) Imaging System, FloMap(R) I and II Systems, SmartMap(R) System and
WaveMap(R) System which are ex-works Rancho Cordova, California, USA.
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE> 19
EXHIBIT B
DISTRIBUTION RIGHTS BY TERRITORY
<TABLE>
<CAPTION>
Territory Distribution Rights
- --------- -------------------
<S> <C>
United Kingdom Full product line (includes EndoSonics and
Cardiometrics products)
East Block, excluding Poland, Czech Full product line (includes EndoSonics and
Republic, Slovakia, Bosnia and Croatia Cardiometrics products)
Scandinavia (Sweden, Norway, Denmark, Full product line (includes EndoSonics and
Finland) Cardiometrics products)
Baltic States (Estonia, Latvia, Lithuania) Full product line (includes EndoSonics and
Cardiometrics products)
Middle East (Lebanon, Syria, Jordan, Saudi Full product line (includes EndoSonics and
Arabia, Kuwait, Qatar, Bahrain, United Cardiometrics products)
Arab Emirates, Oman, Egypt)
France EndoSonics products only
Italy EndoSonics products only
Turkey EndoSonics products only
Israel EndoSonics products only
</TABLE>
<PAGE> 20
EXHIBIT C
MINIMUM PURCHASE COMMITMENT AND INITIAL PURCHASE ORDER
The following schedules ("1999 EndoSonics Plan" by country) set forth the
minimum purchases of Products by Distributor required over the first 12 months
of this Agreement for all geographic areas within the Territory. Purchases may
be made by Distributor in advance of the time period specified to count towards
future periods. System purchases include system placements by Distributor in
connection with the distribution of the "JOSONICS Flex System", as stipulated in
the IVUS Guided Stent Delivery System Development, Supply and Distribution
Agreement of even date.
Non-cancelable purchase order:
The following schedule specifies the non cancelable purchase order which
Distributor shall place at the time of signing the Agreement. The quantity of
Products on this purchase order shall count towards the Minimum Purchase
Commitment as specified above.
Delivery date: Prior to December 29, 1998.
<TABLE>
<CAPTION>
EndoSonics Products Cardiometrics Products
------------------------ ---------------------------------------
(Mega PV Flo Wave Flo Wave
Territory Five-64(TM) Sonics(R) 0.018" FloMap Map II Map Wire Wire
- ---------------------- ----------- --------- ------ ------- ------ ----- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United Kingdom [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
East Bloc [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
France [ * ] [ * ] [ * ]
Italy [ * ] [ * ] [ * ]
Turkey [ * ] [ * ]
Israel [ * ]
Middle East [ * ]
Scandinavia [ * ]
</TABLE>
[ * ] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
<PAGE> 21
EXHIBIT D
WARRANTY
1. SYSTEMS LIMITED WARRANTY
NOTICE: EndoSonics reserves the right to make changes in its products in
order to improve design or performance.
Subject to the conditions and limitations on liability stated herein,
EndoSonics warrants that Systems as so delivered shall materially
conform to EndoSonics' then current specifications for Systems, for a
period of one year from the date of delivery. ANY LIABILITY OF
ENDOSONICS WITH RESPECT TO THE SYSTEM OR THE PERFORMANCE THEREOF UNDER
ANY WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY WILL BE
LIMITED EXCLUSIVELY TO SYSTEM REPAIR, REPLACEMENT OR, IF REPLACEMENT IS
INADEQUATE AS A REMEDY OR, IN ENDOSONICS' OPINION IMPRACTICAL, TO REFUND
THE PRICE PAID FOR THE SYSTEM. EXCEPT FOR THE FOREGOING, THE SYSTEM IS
PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED,
INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF FITNESS, MERCHANTABILITY,
FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. FURTHER,
ENDOSONICS DOES NOT WARRANT, GUARANTEE, OR MAKE ANY REPRESENTATIONS
REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE SYSTEM OR WRITTEN
MATERIALS IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY, OR OTHERWISE.
Distributor understands that EndoSonics is not responsible for and will
have no liability for any items or any services provided by any persons
other than EndoSonics' authorized personnel. EndoSonics shall have no
liability for delays or failures beyond its reasonable control.
The happening of any one or more of the following events will void the
warranty:
1 - Defects due to negligence, alteration, modification,
installation or repair by anyone other than EndoSonics
authorized personnel, or a representative of Distributor
authorized by EndoSonics to repair the material.
2 - Abuse or misuse by end customer.
3 - Attempted or actual dismantling, disassembling, service or
repair in a procedure not specifically authorized by EndoSonics.
4 - Operating the System in a manner that is not in conformance
with purchase specifications and specifications contained in the
Operator's manual, and/or supplements.
5 - Maintenance of the System which is not in accordance with
procedures in the Operator's manual, and/or supplements.
6 - Repair, alteration or modification of the System in any way
other than by EndoSonics' authorized personnel, or without
EndoSonics' authorization.
If claims under this warranty become necessary, and the System or
components of the System are to be returned, Distributor shall contact
EndoSonics for instructions and issuance of a Returned Materials
Authorization number. The System or components
<PAGE> 22
will not be accepted for warranty purposes unless the return has been
authorized by EndoSonics.
System parts or components repaired or replaced under warranty bear the
same warranty expiration date as the original equipment. Consumable
parts (including, but not limited to rechargeable batteries, etc.) are
warranted only against defects in materials and workmanship. System
parts purchased outside the original warranty period are warranted for a
period of 90 days, subject to all of the restrictions contained in this
Limited Warranty. Use of unauthorized replacement parts may void the
warranty. In all cases, EndoSonics will be the sole judge as to what
constitutes warrantable damage.
2. CATHETERS AND WIRES LIMITED WARRANTY
Subject to the conditions and limitations on liability stated herein,
EndoSonics warrants that catheters and wires, as so delivered, shall
materially conform to EndoSonics' then current specifications for these
catheters or wires upon receipt. ANY LIABILITY OF ENDOSONICS, WITH
RESPECT TO CATHETERS OR WIRES OR THE PERFORMANCE THEREOF UNDER ANY
WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY, WILL BE LIMITED
EXCLUSIVELY TO CATHETER OR WIRE REPLACEMENT OR, IF REPLACEMENT IS
INADEQUATE AS A REMEDY OR, IN ENDOSONICS' OPINION IMPRACTICAL, TO REFUND
THE PRICE PAID FOR THE CATHETER OR WIRE. EXCEPT FOR THE FOREGOING,
CATHETERS AND WIRES ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF
FITNESS, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR
NON-INFRINGEMENT. FURTHER, ENDOSONICS DOES NOT WARRANT, GUARANTEE, OR
MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE,
OF CATHETERS OR WIRES OR WRITTEN MATERIALS IN TERMS OF CORRECTNESS,
ACCURACY, RELIABILITY, OR OTHERWISE.
Distributor understands that EndoSonics is not responsible for and will
have no liability for any items or any services provided by any persons
other than EndoSonics' authorized personnel. EndoSonics shall have no
liability for delays or failures beyond its reasonable control.
Additionally, this warranty does not apply if:
1. A catheter or wire is used in a manner other than described by
EndoSonics in the Directions for Use supplied with the catheter or
wire.
2. A catheter or wire is used in a manner that is not in conformance
with purchase specifications or specifications contained in the
Directions for Use.
3. A catheter or wire is re-used or re-sterilized.
4. A catheter or wire carries an expired sterilization date.
5. A catheter or wire is repaired, altered or modified in any way by
personnel other than EndoSonics authorized personnel, or without
EndoSonics' authorization.
All catheters and wires shall be inspected for obvious damage upon
arrival. If catheters or wires have been damaged in transit, EndoSonics
must be notified within 72 hours.
If claims under this warranty become necessary, contact EndoSonics for
instructions and issuance of a Returned Goods Authorization number, if a
catheter or wire is to be
<PAGE> 23
returned. Catheters or wires will not be accepted for warranty purposes
unless the return has been authorized by EndoSonics.
IN NO EVENT SHALL ENDOSONICS BE LIABLE FOR ANY INCIDENTAL OR
CONSEQUENTIAL DAMAGES DUE TO ANY CAUSE WHATSOEVER. No suit or action
shall be brought against EndoSonics more than one year after the related
cause of action has occurred.
THE FOREGOING CONSTITUTES ENDOSONICS' SOLE LIABILITY AND DISTRIBUTOR'S
SOLE REMEDY WITH RESPECT TO PRODUCTS SOLD BY ENDOSONICS.
<PAGE> 24
EXHIBIT E
ENDOSONICS EXTENDED MAINTENANCE AGREEMENT
This Extended Maintenance Agreement is made and entered into this ________th day
of __________, 1998, by and between EndoSonics Europe B.V., De Bruyn Kopsstraat
15, 2288 EC Rijswijk, The Netherlands (hereinafter referred to as "EndoSonics")
and _________________________ (hereinafter referred to as "Customer").
The Extended Maintenance Agreement covers the following:
Equipment:
-----------------------------------------
Serial no.:
-----------------------------------------
Period: , 1998 to , 1999
-------------- -----------
CONDITIONS OF EXTENDED MAINTENANCE AGREEMENT
1. CALL WINDOW
8:30 A.M. to 5:00 P.M. (Central European Time) Monday through Friday
excluding holidays.
2. RESPONSE TIME
48 Hour Response Time during specified call window.
3. PAYMENT SCHEDULE
Annually in advance.
4. TERM
The Extended Maintenance Agreement shall be effective when signed by
both parties. The initial term is twelve (12) months from the
commencement date, unless modified on the face of the contract document.
5. AUTOMATIC RENEWAL
At the end of each term, the Extended Maintenance Agreement shall be
automatically renewed for twelve (12) months, unless terminated by
either of the parties at least two (2) months prior to the expiry date.
6. ELIGIBILITY FOR SERVICE
The Extended Maintenance Agreement shall only be valid as long as the
equipment covered by it is properly installed, and is serviced by
EndoSonics authorized personnel only. EndoSonics site environmental
conditions must be met at all times.
7. SERVICE RESPONSIBILITIES OF ENDOSONICS
7.1. EndoSonics shall maintain the equipment in good condition and
furnish service for calls received within the call window.
Specifically, EndoSonics shall:
<PAGE> 25
A. Provide scheduled planned maintenance and safety check
one (1) time per year. Planned maintenance is to be
scheduled two weeks in advance within the call window;
excluding holidays.
B. Provide response to requests for remedial service within
the call window. Requests for service outside these
hours will be provided on a best effort basis at an
additional charge.
C. Provide all expenses incurred by EndoSonics Technical
Representative including airfare, lodging, and travel
time fees.
D. Provide original parts or parts of at least equal
quality.
E. Provide all applicable safety and reliability
modifications at no charge.
F. Provide all applicable software updates at no charge.
7.2. EndoSonics shall, at no additional cost to the customer, provide
replacement equipment on loan, should EndoSonics fail to service
or repair customer's equipment within a reasonable time period.
7.3. Parts not covered under this Agreement are:
Supplies, Video Cassettes and Consumables.
8. RESPONSIBILITIES OF CUSTOMER
Customer shall notify EndoSonics immediately of equipment malfunction
and allow EndoSonics full unrestricted access to all equipment and areas
in which the equipment is commonly operated.
9. CHARGES
9.1. The charge for Extended Maintenance during the initial term of
this Agreement is US$ .
9.2 Payments of service charges are due forty-five (45) days from
the date of the invoice.
9.3. All service calls received outside the call window are subject
to a four (4) hour minimum charge and any additional hours
necessary to complete the repair are based upon the overtime
rates prevailing at the time.
EndoSonics' overtime rates are:
(a) one and one half (1.5) times the normal hourly rate
after 5:00 P.M. and before 8:00 A.M. Monday through
Friday and all day Saturday.
(b) two (2) times the normal hourly rate on Sundays and
scheduled holidays.
9.4. Charges are exclusive of, and Customer is responsible for, all
sales, use, and like taxes where applicable.
10. The provisions of the Agreement shall be interpreted under the laws of
The Netherlands.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed
as of the day and year first above written.
AGREED TO AND ACCEPTED
Customer EndoSonics Europe B.V.
Name: Name: Dr. J.P.C. de Weerd
Title: Title: Managing Director
Signature: Signature:
<PAGE> 1
EXHIBIT 10.28
IVUS GUIDED STENT DELIVERY SYSTEM DEVELOPMENT, SUPPLY AND DISTRIBUTION
AGREEMENT
This IVUS Guided Stent Delivery System Development, Supply and Distribution
Agreement is made this 15th day of December, 1998,
by and between
EndoSonics Europe B.V., De Bruyn Kopsstraat 15, 2288 EC Rijswijk, The
Netherlands ("EndoSonics"), a wholly owned subsidiary of EndoSonics Corporation,
2870 Kilgore Road, Rancho Cordova, CA 95670, USA,
and
JOMED N.V., Stravinskylaan 2001, P.O. Box 75640, 1070 AP Amsterdam, The
Netherlands, and any of its wholly owned subsidiaries ("JOMED").
In consideration of the mutual promises and covenants contained herein, the
parties agree as follows:
1. DEFINITIONS
As used herein the following terms when used in their capitalized form
shall have the following meanings:
1.1. "Agreement" shall mean this IVUS Guided Stent Delivery System
Development, Supply and Distribution Agreement, as amended, modified, or
supplemented from time to time by the parties as set forth herein.
1.2. "Confidential Information" shall have the meaning provided in Section 0
hereof.
1.3. "Development Plan" means the development program containing a schedule
of milestones for the completion of the Product as shall be mutually
agreed upon in writing between JOMED and EndoSonics during the
Specification Phase.
1.4. "Distribution Agreement" means the agreement so named of even date
herewith between EndoSonics Europe B.V. and JOMED N.V.
1.5. "Dollars" or "$" shall mean United States Dollars.
1.6. "Product Specifications" shall have the meaning set forth in Section 0
hereof.
1.7. "Product" means the products to be developed and manufactured under this
Agreement. The specific product and design specifications will be
defined and mutually agreed upon in writing by the parties during the
Specification Phase.
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<PAGE> 2
1.8. "RGA Number" shall have the meaning set forth in Section 0 hereof.
1.9. "Specification Phase" shall have the meaning set forth in Section 0
hereof.
1.10. "Subassembly" shall mean EndoSonics' catheter shaft and intravascular
ultrasound scanner, which is suitable for integrating with JOMED's
balloons and stents.
1.11. "Term" shall have the meaning provided in Section 0 hereof.
1.12. "Territory" shall have the meaning set forth in Exhibit 4.
2. DEVELOPMENT
2.1. Specification Phase:
EndoSonics and JOMED shall use best efforts to jointly define, and agree
in writing on, the product specifications ("Product Specifications") and
Development Plan within a period of thirty (30) days following the date
of this Agreement. If EndoSonics and JOMED are unable to agree on
Product Specifications or the Development Plan either party shall have
the right to terminate this Agreement without any further obligations.
2.2. Project Manager:
EndoSonics and JOMED shall each appoint a Project Manager to act as
contact persons for the exchange of information during the development
program. The Project Managers shall provide progress reports on a
regular basis. Such reports shall enable EndoSonics and JOMED to review
the progress and activities carried out under the Development Plan.
2.3. Development Plan:
EndoSonics and JOMED shall use best efforts to carry out the Development
Plan for the Product in accordance with the terms of the Development
Plan and within all agreed upon timetables and milestones set forth
therein. Each party shall be responsible for its own expenses and
development costs under the Development Plan. Either party's failure to
meet the agreed upon milestones for a period of more than ninety (90)
days shall constitute a material breach and basis for termination of
this Agreement under Section 0.
2.4. Development Support:
Each party shall use best efforts to timely provide the other with all
support required in accordance with the Development Plan. Any material
change in the Development Plan shall be agreed to in writing between
EndoSonics and JOMED.
2.5. Disclosure of Information:
Each party shall use best efforts to assist the other to obtain, and
make available to the other on a timely basis, all information needed
for the successful completion of
2
<PAGE> 3
the Development Plan, including, but not limited to, results of medical
and clinical trials and results of technical, regulatory and safety
studies and evaluations performed by such party. All disclosures
hereunder are subject to the confidentiality provisions of Section 0
below.
3. MANUFACTURING; PURCHASE OF SUBASSEMBLIES
3.1. Manufacturing Scope:
The Product shall consist of a JOMED balloon and stent, incorporated
into a modular EndoSonics intravascular ultrasound catheter. During the
Term, EndoSonics and JOMED shall mutually review and agree on the most
appropriate logistics of the manufacturing process. The initial
manufacturing logistics, and the resulting obligations between the
parties are set forth in Exhibit 1.
Under the Medical Device Directive 93/42/EWG, JOMED shall be considered
as the manufacturer of Product.
3.2. Purchase of Subassemblies:
EndoSonics shall supply JOMED with all of those quantities of
Subassemblies as ordered by JOMED pursuant to this Agreement. The
Subassemblies shall be packaged by EndoSonics in its standard packaging
configuration and shall be shipped to JOMED non-sterile. Nothing
contained herein shall restrict the right of EndoSonics to sell
Subassemblies to other parties or to utilize the Subassemblies in other
products. JOMED agrees that it is buying the Subassemblies solely for
incorporation in the Product and that it will sell such Product only in
accordance with the distribution rights as set forth in Section 0.
3.3. Prices:
Prices to JOMED for Subassemblies shall be as set forth in Exhibit 2..
The price for each Subassembly shall include any labor and overhead
charges incurred for the mounting of a JOMED balloon onto an EndoSonics
catheter. EndoSonics shall provide at least 60 days prior written notice
of changes in said prices. Price changes shall not affect unfulfilled
purchase orders accepted by EndoSonics prior to the effective date of
such changes.
3.4. Forecasts:
At least thirty (30) days prior to the beginning of each calendar month
commencing with the month of February 1999, JOMED shall provide
EndoSonics with a written forecast of JOMED's expected order
requirements for Subassemblies during each of the following six (6)
months. All such forecasts shall be good faith estimates of JOMED's
requirements; provided, however, that JOMED shall be obligated to
purchase all Subassemblies specified for the initial month of each such
forecast, and provided further, that JOMED's subsequent order for the
second month of each such forecast shall not deviate by more than 30%
from said forecast.
3
<PAGE> 4
The initial forecast for 1999 as agreed between the parties is attached
as Exhibit 3.
3.5. Orders:
JOMED shall place any binding orders for Subassemblies by written or
electronic purchase order (or by any other means agreed to by the
parties) to EndoSonics. Such purchase orders shall set forth the desired
date of delivery with respect to the Subassemblies ordered and shall be
placed at least thirty (30) days prior to such desired date of delivery,
in accordance with the foregoing Section 0. No order shall be binding
upon EndoSonics until accepted by EndoSonics in writing. EndoSonics
shall use best efforts to deliver Subassemblies at the times specified
in its written acceptance of JOMED's purchase orders.
3.6. Payment Terms:
All invoices submitted by EndoSonics shall be payable within 60 days
net, 30 days -1% discount, from the date of such invoices. Any invoice
which is not paid in a timely manner shall accrue interest until paid at
a rate equal to the lesser of 1.5% interest per month or the highest
rate permitted by law.
3.7. Shipment:
EndoSonics shall ship, F.O.B. EndoSonics' factory, at JOMED's cost to
any location chosen by JOMED utilizing carriers approved by JOMED.
EndoSonics will pack all Subassemblies ordered hereunder in a manner
suitable for shipment and sufficient to withstand the effects of
shipping, including handling during loading and unloading. Title to the
Subassemblies sold hereunder shall pass to JOMED upon delivery to a
carrier designated by JOMED, whereupon JOMED shall assume all risk of
loss.
3.8. Pilot Manufacturing:
Immediately upon the completion of the development program, EndoSonics
and JOMED shall manufacture a total of 200 Products intended to be used
in the Registry as set forth under Section 0.
3.9. Defective Subassemblies:
Claims concerning any failure of any Subassembly to meet the warranties
set forth in Section 0 below shall be promptly made by JOMED following
such failure being discovered by JOMED. At EndoSonics' request and after
EndoSonics' issuance of a Returned Goods Authorization number ("RGA
Number"), JOMED shall forward for inspection all Subassemblies that are
the subject of JOMED's claim. EndoSonics shall inspect such
Subassemblies and, if it concurs with JOMED's claim, shall, within
fifteen (15) days from the date EndoSonics concurs with JOMED's claim,
replace the defective Subassemblies without any cost to JOMED or refund
the purchase price. If either party does not agree with the other
party's decision regarding such claim and the parties are unable to
resolve their differences within fifteen (15) days of such initial
claim, then either party may refer the matter to an independent
specialized firm of international reputation agreeable to both parties
for
4
<PAGE> 5
final analyses within a thirty (30) day period, which shall be a final
resolution of such issue, binding on both parties hereto. No
Subassemblies shall be returned without the prior written consent of
EndoSonics, as evidenced by the issuance of an RGA Number.
3.10. Improvements and Enhancements; Change Notices:
EndoSonics shall notify JOMED of any material changes or modifications
which may improve or enhance the performance of the Subassemblies and
shall use best efforts to timely incorporate such changes and
modifications in future deliveries of said Subassemblies.
In addition, EndoSonics shall provide JOMED with prompt notice of any
change or modification to the Subassemblies (or any change or
modification to the Specifications) to be implemented or made by
EndoSonics, to the extent such change or modification may affect the
manner in which JOMED handles the Subassemblies or markets or sells
Products incorporating the Subassemblies.
4. MINIMUM PURCHASE COMMITMENT
During the first 12 months of the Term, JOMED shall purchase a minimum
amount of [*] Subassemblies (the "Minimum Purchase Commitment"). For the
purposes of this provision, a "purchase" of Subassemblies shall mean
EndoSonics' shipment of such Subassemblies on or before the last day of
the agreed upon time period. JOMED's failure to meet the Minimum
Purchase Commitment shall constitute a material breach and basis for
termination of this Agreement under Section 0.
JOMED's purchase order 1/98SE dated 30 September 1998 for *
pilot-production catheter Subassemblies shall count towards the Minimum
Purchase Commitment as specified above.
5. REGULATORY COMPLIANCE; QUALITY ASSURANCE AND CORRECTIVE ACTIONS
5.1. Regulatory Compliance:
As the finished device manufacturer, JOMED shall be responsible for
fulfillment of all regulatory obligations including, but not limited to,
obtaining the CE Mark, filing medical device reports and compliance with
all other pre- and post-marketing governmental requirements. JOMED shall
use best efforts to timely fulfill said regulatory obligations. At the
request of JOMED, EndoSonics shall cooperate to permit cross-referencing
by the Food and Drug Administration ("FDA") of data from the FDA master
file for the Subassembly or parts thereof, and timely provide such
information as may be necessary to enable JOMED to comply fully with all
applicable regulatory requirements ("Regulatory Information") to a
mutually agreed upon notified body, provided that such notified body has
agreed in writing not to disclose such Regulatory Information to JOMED
or any third party except to a competent governmental authority in
connection with a regulatory process. Third
5
<PAGE> 6
party costs and expenses incurred in connection with the retention of
any notified body and providing such information shall be shared between
the parties.
[ * ] COFIDENTIAL TREATMENT REQUESTED. COFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
5.2. Quality Assurance:
With respect to the manufacturing, supply and market introduction of
Product, EndoSonics and JOMED have entered into a Quality Assurance
Agreement which is hereby incorporated as Exhibit 5..
5.3. Corrective Actions:
In the event any governmental agency having jurisdiction shall request
or order, or if JOMED shall determine to undertake any corrective action
with respect to any Product which incorporates a Subassembly, including
any recall, corrective action or market action, and the cause or basis
of such recall or action is attributable to a fault of JOMED, then JOMED
shall be liable, and shall reimburse EndoSonics, for the reasonable
costs of such action. In the event such recall is due to the fault of
EndoSonics, such costs shall be the responsibility of EndoSonics.
6. DISTRIBUTION
6.1. Distribution rights:
During the Term, and provided that the Development Plan has been
successfully completed, EndoSonics and JOMED shall mutually agree on the
geographic territories in which the Product shall be distributed and on
the most appropriate distribution channels for each of these
territories. The initial territories and distribution channels are set
forth in Exhibit 4.
Neither party shall appoint any distributor, sales agent or other
representative with respect to the Product within or outside of the
Territory, or shall solicit any business from customers outside of the
Territory, without the prior written consent of the other party.
6.2. Product Transfer Price:
In the event EndoSonics wishes to distribute Product through its direct
sales force or through a third party distributor other than JOMED, the
parties shall negotiate in good faith a reasonable transfer price to be
paid by EndoSonics to JOMED for specified quantities of the Product to
be purchased by EndoSonics. Such transfer price shall in no event be
less favorable than the price afforded by JOMED to its most favored
customer.
6.3. Exclusive Arrangement:
During the first 12 months of this Agreement, EndoSonics shall not enter
into agreements with any other parties for the sale of a product for use
in the coronary
6
<PAGE> 7
intravascular ultrasound market, which is substantially similar to
Product, in the Territory.
Notwithstanding the above, EndoSonics shall be free to market any
products, similar to Product, incorporating a balloon and stent
manufactured by EndoSonics, its subsidiaries, affiliates, or any other
party in which EndoSonics has a controlling interest.
6.4. Product Labeling and Promotion:
JOMED shall distribute any Product incorporating the Subassembly under a
joint EndoSonics and JOMED label, clearly identifying the corporate
names of each of the parties. Similarly, JOMED shall clearly identify
the corporate names of each of the parties in connection with the
promotion, advertising or distribution of any Product incorporating the
Subassembly.
6.5. Product Registry:
Upon completion of the pilot manufacturing of the first 200 Products as
set forth in Section 0, JOMED shall initiate a Registry including up to
20 centers in Europe which will each complete a total of 10 clinical
cases using the Product. For each clinical case, a case evaluation form
shall be completed. The information from the completed case evaluation
forms shall be shared with EndoSonics.
7. TERM - TERMINATION
7.1. Term:
The term ("Term") of this Agreement shall commence the date hereof, and,
unless terminated sooner pursuant to the provisions of Section 0, shall
terminate two (2) years from the date hereof; provided, however, that
this Agreement may be extended upon the mutual written consent of the
parties.
7.2. Termination of Agreement:
This Agreement shall terminate upon the happening of any of the
following events :
(a) either party's failure to cure the breach of any material term,
covenant, or condition of this Agreement within 60 days after
the breaching party receives notice of such breach;
(b) immediately upon written notice to one party upon a material
change in control of the other party including, without
limitation, the acquisition or merger of the other party;
(c) immediately upon either parties' cessation to function as a
going concern;
(d) immediately upon either parties' dissolution, liquidation,
insolvency, bankruptcy, assignment for the benefit of creditors
or admission in writing of its inability to pay its debts as
they mature.
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<PAGE> 8
7.3. Obligations upon Termination or Expiration:
Upon termination of this Agreement for other than JOMED's breach,
EndoSonics shall continue to fulfill all orders for Subassemblies
accepted by EndoSonics prior to the date of termination.
If this Agreement is terminated by JOMED, pursuant to Section 0, JOMED
shall have no further obligation to EndoSonics except with respect to
payment for Products accepted by JOMED or shipped by EndoSonics prior to
such termination.
In the event of termination by either party in accordance with any of
the provisions of this Agreement, neither party shall be liable to the
other because of such termination, for compensation, reimbursement or
damages on account of the loss of prospective profits or anticipated
sales or on account of expenditures, inventory, investments, leases or
commitments in connection with the business or goodwill of EndoSonics or
JOMED. Termination shall not, however, relieve either party of
obligations incurred prior to the termination.
Upon termination or expiration of this Agreement, all rights granted by
EndoSonics to JOMED shall cease immediately, except that JOMED may sell,
market or distribute any Products for a period of three months following
such termination.
8. PROPRIETARY RIGHTS AND THIRD PARTY INFRINGEMENT
8.1. Proprietary Rights:
Except as expressly agreed in writing between the parties, all
proprietary rights, title, and interest (including all patent rights,
copyrights, trade secret rights and other intellectual property rights
throughout the world ("Proprietary Rights")) with respect to the
Product, including, but not limited to, all inventions (whether or not
patentable), know-how, discoveries, ideas and improvements thereof,
which are
(a) developed or conceived solely by employees of JOMED as a result
of the work performed hereunder shall be owned by JOMED;
(b) developed or conceived solely by employees of EndoSonics as a
result of the work performed hereunder shall be owned by
EndoSonics;
(c) inseparably contributed by employees of both parties shall be
jointly owned by EndoSonics and JOMED.
8.2. Third Party Infringement:
(a) JOMED shall promptly notify EndoSonics if it becomes aware of
any infringement by a third party of any patent owned or
otherwise controlled by EndoSonics. Any decision concerning the
taking of any action against such infringer shall be solely that
of EndoSonics. In the event EndoSonics decides to take any such
action, EndoSonics shall bear all expenses of any suit brought
by it based upon such infringement and shall retain all damages
or other monies awarded or received in settlement of such suit.
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<PAGE> 9
(b) EndoSonics shall promptly notify JOMED if it becomes aware of
any infringement by a third party of any patent owned or
otherwise controlled by JOMED. Any decision concerning the
taking of any action against such infringer shall be solely that
of JOMED. In the event JOMED decides to take any such action,
JOMED shall bear all expenses of any suit brought by it based
uponsuch infringement and shall retain all damages or other
monies awarded or received in settlement of such suit.
9. CONFIDENTIALITY
During the Term it is anticipated that the parties shall disclose to
each other confidential or proprietary information, including but not
limited to trade secrets, know-how, documentation, pre-clinical and
clinical data, product development plans, specifications, forecasts,
customer information, notes, reports, models, and samples ("Confidential
Information"). Only such information that is marked or labeled by a
party as "Confidential Information" shall be considered Confidential
Information.
If a party orally transmits information that it deems to be of a
confidential nature, such party shall, within thirty (30) days from the
transmittal thereof, summarize such information in a written form and
mark such information "Confidential" and provide a copy of such writing
to the other party. The duty of confidentiality set forth herein shall
not apply to information that:
(a) is, at the time of disclosure, in the public domain and
generally available;
(b) after disclosure, enters the public domain except where such
entry is a direct result of a breach of this Agreement;
(c) prior to disclosure, was already known to the party receiving
such information, as evidenced by its written records;
(d) subsequent to disclosure, is obtained from a third party in
possession of such information and not under a contractual or
fiduciary obligation to keep such information in confidence;
(e) is developed by the receiving party in the course of work
entirely independent of any disclosure hereunder by employees
without access or use of the disclosing party's Confidential
Information and such development can be documented to the
reasonable satisfaction of the other party hereto;
(f) is filed with any governmental or regulatory authority to the
extent required or desirable to secure governmental or
regulatory approval for marketing of the Product (provided the
receiving party shall first notify the disclosing party of the
extent of the proposed disclosure and seek to limit disclosure
and to obtain confidential treatment) and
(g) is provided to pre-clinical and clinical investigators where
necessary or desirable for their information to the extent
normal and usual in the custom of the trade and under a
confidentiality agreement with essentially the same
confidentiality provisions contained in this Section 0;
9
<PAGE> 10
(h) is disclosed pursuant to any judicial or governmental
requirement or order.
Except as expressly allowed herein, the receiving party shall hold in
confidence and not use or disclose any Confidential Information of the
disclosing party and shall similarly bind its employees in writing. All
Confidential Information heretofore disclosed in writing by either
party, including any Confidential Information which may be exchanged
between the parties during the term of this Agreement, shall be deemed
to have been disclosed under this Agreement and shall be subject to the
provisions of this Section 0.
10. CLAIMS AND WARRANTS
10.1. Product Claims:
JOMED shall limit claims of safety and efficacy of a Subassembly to
those statements that EndoSonics itself utilizes in connection with its
sale of Products which incorporate said Subassemblies. JOMED shall
promptly notify EndoSonics of any customer complaints and shall
cooperate with EndoSonics in the resolution of such complaints.
10.2. EndoSonics Subassembly Warrants:
EndoSonics represents and warrants to JOMED that all Subassemblies
supplied in connection with this Agreement shall, at the time of
delivery to JOMED, (i) meet the Product Specifications, (ii) be produced
in compliance with good manufacturing practices and (iii) be in
compliance with all applicable laws and regulations applicable to the
manufacture of the Subassemblies. In addition, EndoSonics represents and
warrants to JOMED that, as of the date hereof, it is aware of no patent
or patent applications, not already known to JOMED and not licensed to
JOMED or EndoSonics, owned by a third party that would present an issue
of patent infringement with respect to the manufacture, use or sale of
the Subassemblies supplied hereunder, which issue of patent infringement
would also be present in the manufacture, use or sale of such
Subassemblies without such Subassemblies ever being incorporated into a
product by JOMED. THE FOREGOING WARRANTIES ARE THE SOLE AND EXCLUSIVE
WARRANTIES OFFERED BY ENDOSONICS REGARDING SUBASSEMBLIES SUPPLIED
HEREUNDER. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, ARE DISCLAIMED. IN NO EVENT SHALL ENDOSONICS BE
LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL OR
PUNITIVE DAMAGES (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS) ARISING
OUT OF A BREACH OF WARRANTY OR OTHER OBLIGATION UNDER THIS AGREEMENT.
JOMED shall make no warranties or claims with respect to any
Subassemblies that exceed the warranties made by EndoSonics to JOMED
herein or the claims that are utilized by EndoSonics in connection with
its sale of products incorporating the Subassemblies.
10
<PAGE> 11
10.3. JOMED Product Warrants:
JOMED represents and warrants to EndoSonics that all Product
manufactured in connection with this Agreement shall (i) meet the
Product Specifications, (ii) be produced in compliance with good
manufacturing practices and (iii) be in compliance with all applicable
laws and regulations applicable to the manufacture of the Product. In
addition, JOMED represents and warrants to EndoSonics that, as of the
date hereof, it is aware of no patent or patent applications, not
already known to EndoSonics and not licensed to JOMED or EndoSonics,
owned by a third party that would present an issue of patent
infringement with respect to the manufacture, use or sale of the Product
manufactured hereunder, which issue of patent infringement would also be
present in the manufacture, use or sale of such Product without such
Subassemblies ever being incorporated into a product by JOMED. THE
FOREGOING WARRANTIES ARE THE SOLE AND EXCLUSIVE WARRANTIES OFFERED BY
JOMED REGARDING PRODUCT MANUFACTURED HEREUNDER. ALL OTHER WARRANTIES,
EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE DISCLAIMED.
IN NO EVENT SHALL JOMED BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL
OR CONSEQUENTIAL OR PUNITIVE DAMAGES (INCLUDING WITHOUT LIMITATION, LOSS
OF PROFITS) ARISING OUT OF A BREACH OF WARRANTY OR OTHER OBLIGATION
UNDER THIS AGREEMENT.
11. INDEMNIFICATION
11.1. Indemnification by JOMED:
Except with respect to any of the following that arises from gross
negligence or willful misconduct of EndoSonics or its agents and subject
to Section 0, JOMED shall indemnify, defend and hold harmless
EndoSonics, its directors, officers, employees, customers,
representatives and agents from and against any and all claims, suits,
awards, losses, damages, demands, costs, fees and expenses incurred by
EndoSonics (including reasonable attorney's fees), and other liabilities
asserted by parties, both governmental and non-governmental, resulting
from or arising out of (a) any misrepresentation of JOMED contained
herein or breach of any warranty made by JOMED; (b) any material breach
or violation of this Agreement by JOMED; (c) the material inaccuracy of
any representation of the Product made by JOMED; or (d) a claim that the
JOMED balloon and/or stent provided under this Agreement by JOMED
individually or in combination infringes any patent.
In the event the balloon and/or stent provided by JOMED under this
Agreement, is subject to a claim of infringement, JOMED may, at its own
expense and at its option, either (a) procure for EndoSonics the right
to continue using said balloon and/or stent, (b) modify them to become
non-infringing, or (c) substitute another interchangeable balloon and/or
stent with substantially the same performance but which is
non-infringing.
11.2. Indemnification by EndoSonics:
Except with respect to any of the following that arises from the gross
negligence or
11
<PAGE> 12
willful misconduct of JOMED or its agents and subject to Section 0,
EndoSonics shall indemnify, defend and hold harmless JOMED, its
directors, officers, employees, customers, representatives and agents
from and against any and all claims, suits, awards, losses, damages,
demands, costs, fees and expenses (including reasonable attorneys'
fees), and other liabilities asserted by third parties, both
governmental and nongovernmental, resulting from or arising out of (a)
any misrepresentation of EndoSonics contained herein or breach of any
warranty made by EndoSonics; (b) any material breach or violation of
this Agreement by EndoSonics; (c) the material inaccuracy of any
representation of the Subassemblies made by EndoSonics; or (d) a claim
that EndoSonics' Subassembly provided under this Agreement infringes any
patent.
In the event the Subassembly provided by EndoSonics under this
Agreement, or any part thereof, is subject to a claim of infringement,
EndoSonics may, at its own expense and at its option, either (a) procure
for JOMED the right to continue using said Subassembly, (b) modify the
Subassembly to become non-infringing, or (c) substitute another
interchangeable Subassembly with substantially the same performance but
which is non-infringing.
11.3. Limitations to Indemnity:
The indemnities of Sections 0 and 0 shall not apply (a) if the
indemnified party fails to give the indemnifying party prompt notice of
any claim it receives and such failure materially prejudices the
indemnifying party, or (b) unless the indemnifying party is given the
opportunity to approve any settlement. Furthermore, the indemnifying
party shall not be liable for attorneys' fees or expenses of litigation
of the indemnified party unless the indemnified party gives the
indemnifying party the opportunity to assume control of the defense or
settlement. In addition, if the indemnifying party assumes such control,
it shall only be responsible for the legal fees and litigation expenses
of the attorneys it designates to assume control of the litigation. In
no event shall the indemnifying party assume control of the defense of
the indemnified party without the consent of the indemnified party
(which consent shall be given or not at its sole discretion).
12. MISCELLANEOUS
12.1. Relationship of Parties:
The relationship of JOMED to EndoSonics hereunder shall be solely that
of an independent contractor. JOMED and EndoSonics each acknowledge and
agree that neither JOMED nor EndoSonics is an employee, employer, agent,
partner, or joint venturer of the other.
Neither JOMED nor EndoSonics shall have or hold itself as having the
right or authority to assume or create any obligation or responsibility,
whether express or implied, on behalf of or in the name of the other,
except with the express written authority of the other.
12
<PAGE> 13
12.2. Notices:
All notices, requests, demands and other communications required or
permitted to be given hereunder shall be in writing, shall be deemed to
have been duly given when delivered in person, or when sent by telex or
telecopy or other facsimile transmission (with the receipt confirmed),
or on the fifth business day after posting thereof by registered or
certified mail, return receipt requested, prepaid and addressed as
follows (or such other address as the parties may designate by written
notice in the manner of aforesaid):
If to JOMED:
JOMED International AB
Drottninggatan 94
S-25221 Helsingborg
Sweden
Attention: T. Peters, President
Telephone: +46-42-490.6000
Telefax: +46-42-490.6001
If to EndoSonics:
EndoSonics Europe B.V.
P.O. Box 1178
2280 CD Rijswijk
The Netherlands
Attention: Dr. J.P.C. de Weerd, Managing Director
Telephone: +31-70-307.3929
Telefax: +31-70-307.3922
12.3. Governing Law:
This Agreement shall be governed by and construed in all respects in
accordance with the laws of The Netherlands.
12.4. Non-Assignment:
This Agreement may not be assigned by either party without the prior
written consent of the other party.
12.5. Entire Agreement:
This Agreement sets forth the entire understanding of the parties with
respect to the subject matter hereof. This Agreement supersedes all
prior representations, agreements and understandings among the parties
with respect to such subject matter.
12.6. Remedies Cumulative:
The rights, powers and remedies set forth herein are cumulative and
shall be in
13
<PAGE> 14
addition to any and all other rights, powers and remedies provided by
law. The exercise of any right or remedy hereunder shall not in any way
constitute a cure under this Agreement, or prejudice either party in the
exercise of any of its rights under this Agreement or law.
12.7. Attorneys' Fees:
If litigation between the parties arises out of or relates to this
Agreement, the prevailing party of any such litigation shall, for as
long as allowed by the law and jurisdiction ruling the litigation, be
entitled to recover from the other party its reasonable attorneys' and
legal assistants' fees and other costs incurred in such litigation.
12.8. Amendment:
No changes or amendments or alterations shall be effective unless in
writing and signed by all parties hereto.
12.9. Waiver:
No waiver of any default in the performance of any of the duties or
obligations arising out of this Agreement shall be valid unless in
writing and signed by the waiving party. Waiver of any one default shall
not constitute or be construed as creating waiver of any other default
or defaults. No course of dealing between the parties shall operate as a
waiver or preclude the exercise of any rights or remedies under this
Agreement.
Failure on the part of either party to object to any act or failure to
act of the other party, or declare the other party in default,
regardless of the extent of such default, shall not constitute a waiver
by the party of its rights hereunder.
12.10. Severability:
If any provision of this Agreement shall be held to be unenforceable in
whole or in part, then the invalidity of such provision shall not be
held to invalidate any other provision herein and all other provisions
shall remain in full force and effect.
12.11. Force Majeure:
No delay or failure of EndoSonics or JOMED to perform any of their
respective obligations under this Agreement shall be considered a breach
of this Agreement if it results from any cause beyond the control of
EndoSonics or JOMED, as the case may be, including, without limitation,
any act of God, earthquake, hurricane, fire, flood, strike, lockout or
other dispute, natural catastrophe, severe weather or public emergency,
insurrection, riot, war, transportation shortage, or actions of
governmental authorities.
12.12. Survival of Sections:
14
<PAGE> 15
The obligations set forth in Sections 0, 0, 0, 0, 0, 0, and 0 shall
survive the termination of this Agreement.
12.13. Counterparts:
This Agreement may be executed in one or more counterparts, including
facsimile counterparts, each of which shall be deemed an original and
all which together shall constitute one and the same agreement.
12.14. Captions:
The captions contained in this Agreement are inserted only as a matter
of convenience and in no way define, limit or extend the scope or intent
of this Agreement or any provision hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first written above.
EndoSonics Europe B.V. JOMED N.V.
- -------------------------- ---------------------------
Dr. J.P.C. de Weerd T. Peters
Managing Director President
15
<PAGE> 16
EXHIBIT 1.
INITIAL MANUFACTURING LOGISTICS
1. Responsibilities of the Parties:
In order to minimize time-to-market for the JOSONICS Flex System, the
parties have agreed on the following initial manufacturing logistics:
(a) JOMED will ship its balloons to EndoSonics.
(b) EndoSonics will integrate said balloons in its modular intravascular
ultrasound catheters, and ship fully tested Subassemblies to JOMED.
(c) JOMED will crimp its Flex Stent onto the balloon portion of the
Subassembly, final test the Product, package it and have it sterilized.
2. Supply of JOMED balloons:
Concurrent with JOMED placing a binding purchase order for Subassemblies,
pursuant to Section 0 of this Agreement, JOMED shall supply EndoSonics, free
of charge, with all balloons required to fill JOMED's purchase order for
Subassemblies plus 10%, to allow for manufacturing scrap. If EndoSonics'
manufacturing scrap exceeds 10%, EndoSonics shall order additional balloons
from JOMED, and JOMED shall supply said balloons to EndoSonics at its
manufacturing cost.
Prior to February 1, 1999, JOMED shall supply EndoSonics, free of charge,
with an initial manufacturing stock of 400 balloons.
EndoSonics agrees that it is obtaining the balloons solely for incorporation
in the Subassemblies and that it will sell such Subassemblies to JOMED only
in accordance with the terms of this Agreement.
3. Balloon Shipments:
JOMED shall ship its balloons, F.O.B. JOMED's factory, at EndoSonics' cost
to any location agreed between the parties, utilizing carriers approved by
EndoSonics. JOMED shall package all balloons hereunder in a manner suitable
for shipment and sufficient to withstand the effects of shipping, including
handling during loading and unloading.
4. Defective Balloon Claims:
Claims concerning any failure of any balloons to meet the Product
Specifications shall be promptly made by EndoSonics following such failure
being discovered by EndoSonics. At JOMED's request and after JOMED's
issuance of a Returned Goods Authorization number ("RGA Number"), EndoSonics
shall forward for inspection all balloons that are the subject of
EndoSonics' claim. No balloons shall be returned without the prior written
consent of JOMED, as evidenced by the issuance of an RGA Number. JOMED shall
use best efforts to timely resolve any balloon deficiencies and
16
<PAGE> 17
replace defective balloons, and shall proportionally excuse EndoSonics from
meeting its delivery schedule pursuant to Section 0 of this Agreement.
5. Improvements and Enhancements; Change Notices:
JOMED shall notify EndoSonics of any material changes or modifications which
may improve or enhance the performance of the balloons and shall use best
efforts to timely incorporate such changes and modifications in future
deliveries of said balloons.
In addition, JOMED shall provide EndoSonics with prompt notice of any change
or modification to the balloons (or any change or modification to the
Specifications) to be implemented or made by JOMED, to the extent such
change or modification may affect the manner in which EndoSonics handles the
balloons or incorporates these into the Subassemblies.
17
<PAGE> 18
EXHIBIT 2.
ENDOSONICS MODULAR IVUS CATHETER
SUBASSEMBLY PRICING
<TABLE>
<CAPTION>
UNITS PRICE (US$)
- ----- -----------
<S> <C>
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
[ * ] [ * ]
</TABLE>
18
<PAGE> 19
[ * ] COFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
19
<PAGE> 20
EXHIBIT 3.
ENDOSONICS MODULAR IVUS CATHETER
INITIAL FORECAST
[ * ]
20
<PAGE> 21
[ * ] COFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED
SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION
EXHIBIT 4.
JOSONICS FLEX SYSTEM
TERRITORY AND DISTRIBUTION CHANNEL
<TABLE>
<CAPTION>
TERRITORY DISTRIBUTION CHANNEL
- --------- --------------------
<S> <C>
Baltic States (Estonia, Latvia, - JOMED Distributor
Lithuania)
Turkey - JOMED Distributor
Middle East (Lebanon, Syria, Jordan, - JOMED Direct Organization / Distributors
Saudi Arabia, Kuwait, Qatar, Bahrain,
United Arab Emirates, Oman, Egypt)
Russia - JOMED Direct Organization / Distributor
Benelux - JOMED Direct Organization
France - JOMED Direct Organization
Germany - JOMED Direct Organization
Hungary - JOMED Direct Organization
Israel - JOMED Direct Organization
Italy - JOMED Direct Organization
Scandinavia (Sweden, Norway, Denmark, - JOMED Direct Organization
Finland)
United Kingdom - JOMED Direct Organization
Spain - Joint distributor Diagnostic Grifols
- JOMED's distributor Cormax (t.b.d.)
Czech Republic - Joint distributor A-Care
Slovakia - Joint distributor A-Care
Portugal - EndoSonics' distributor Material Hospitalar Lda.
Austria - EndoSonics' distributor Euromed
Bosnia - EndoSonics' distributor Euromed
Croatia - EndoSonics' distributor Euromed
Switzerland - EndoSonics' distributor Euromed
</TABLE>
Distribution rights in the Territory include the right to sell or place
Oracle(R) Intracoronary Imaging Systems with In-Vision(TM) option, ChromaFlo
and/or 3D at customer sites in conjunction with the sale of JOSONICS Flex
Systems to said sites.
21
<PAGE> 22
EXHIBIT 5.
QUALITY ASSURANCE AGREEMENT
This Agreement is made this 15th day of December, 1998 between
EndoSonics Europe B.V., a company incorporated under the laws of The Netherlands
with its principal office located in Rijswijk, The Netherlands, represented by
Dr. J.P.C. de Weerd (hereinafter referred to as the "Supplier").
and
JOMED / SITOmed GmbH, a company incorporated under the laws of Germany with its
principal office located in Unterschlei(beta)heim, Germany, represented by Mr.
Siegfried Einhellig (hereinafter referred to as the "Manufacturer").
1. This Agreement governs the manufacturing, supply and market introduction of
the "VisionStent", in accordance with the Medical Device Directive
93/42/EWG. The "VisionStent" is manufactured per the specifications set
forth in attached Technical Information Sheet.
The "VisionStent" shall consist of Manufacturer's balloon and stent,
incorporated into Supplier's modular intravascular ultrasound catheter
("Modular Catheter").
2. The Manufacturer, according to the Medical Device Directive 93/42/EWG, is
JOMED Implantate GmbH.
3. This Agreement shall commence the date hereof and may be terminated at the
end of any calendar quarter by either party giving the other party at least
three (3) months written notice in advance of said date.
4. The "VisionStent" is a class III device according to Medical Device
Directive 93/42/EWG, Appendix IX.
The intended use and the specification will be described by a manufacturing
product file determined by the manufacturer.
The essential requirements according to Medical Device Directive 93/42/EWG
for the Modular Catheter, as well as the production of the Modular Catheter,
are the responsibility of the Supplier.
5. The Modular Catheter documentation according to Medical Device Directive
93/42/EWG, Appendix II, is provided by the Supplier. These documents will be
22
<PAGE> 23
stored for the duration of at least 5 years after the final circulation and
shall be presented on request to the notified body and the competent
national authorities. This obligation exists independent of the validation
of this Agreement.
The "VisionStent" final product documentation and filing thereof will be the
responsibility of the Manufacturer, in accordance with the Medical Device
Directive 93/42/EWG.
6. Manufacturer and Supplier shall each build up a QM-System and shall maintain
this system according to standard EN ISO 9001, EN 46001 and the Medical
Device Directive 93/42/EWG, Appendix II.
The QM-Systems of both parties shall be certified by a notified body. Each
party shall promptly inform the other, should there be any changes in the
certification of the other party.
6. Upon notification of any risk and/or malfunction (incident, near incident)
concerning the product which could result in death or serious injury to a
patient, user or other person or lead to a product recall (according to the
guidelines of the Medical Device Vigilance System, MEDDEV 2.1271 - rev. 3),
each party shall inform the other immediately. In such event both parties
shall promptly define, agree on, and implement preventive and corrective
actions and shall inform the designated competent national authorities
accordingly.
7. The Supplier shall inform the Manufacturer immediately of any changes to the
Modular Catheter and shall support these changes with suitable documentation
to the Manufacturer.
Any decision to implement design changes shall be made by the Manufacturer
in consultation with the Supplier. The documentation for such design
changes, if any, shall be in accordance with the Medical Device Directive
93/42/EWG.
8. The Supplier agrees to support any Quality audits by the notifying body, the
competent authority and/or the Manufacturer, provided proper advance
notification is given.
EndoSonics Europe B.V. JOMED GmbH
Rijswijk, The Netherlands Unterschlei(beta)heim
- ---------------------------- ------------------------------
Dr. J.P.C. de Weerd S. Einhellig
23
<PAGE> 24
Managing Director Vice President
Sr. Vice President Sales & Marketing Europe
24
<PAGE> 1
EXHIBIT 10.29
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
MICROSOUND CORPORATION
(A DELAWARE CORPORATION)
INTO
ENDOSONICS CORPORATION
(A DELAWARE CORPORATION)
(PURSUANT TO SECTION 253 OF THE DELAWARE
GENERAL CORPORATION LAW)
Endosonics Corporation, a corporation organized and existing under the laws
of the State of Delaware (the "Company"), does hereby certify:
1. The Company was incorporated on August 14, 1992, under the name
Endosonics Delaware Corporation pursuant to the Delaware General Corporation
Law.
2. The Company is the owner of at least 90% of the outstanding shares of
each class of the capital stock of Microsound Corporation, a Delaware
corporation ("Subsidiary").
3. The Company, by the following resolutions adopted on September 16,
1998, by the Board of Directors of the Company, merges Subsidiary into the
Company.
SHORT-FORM MERGER WITH MICROSOUND CORPORATION
RESOLVED: That the Board of Directors of the Company deems it to be
advisable and in the best interests of the Company and its
stockholders that the Company merge into itself its subsidiary,
Microsound Corporation (the "Subsidiary"), and assume all of
Subsidiary's liabilities and obligations.
RESOLVED FURTHER: That, in accordance with the Delaware General
Corporation Law, the proper officers of the Company are hereby
authorized to execute and acknowledge a Certificate of Ownership and
Merger setting forth a copy of the resolutions to merge Subsidiary
into the Company and to assume
<PAGE> 2
Subsidiary's liabilities and obligations and the date of adoption
thereof and to file such Certificate of Ownership and Merger with the
Delaware Secretary of State and record such certificate in the office
of the recorder of each county in which the registered office of the
Company and the Subsidiary is located.
RESOLVED FURTHER: That the terms of the merger are as follows: Upon
the proposed merger becoming effective, (i) each outstanding share of
Subsidiary's Common Stock held of record by stockholders other than
the Company shall cease to be outstanding, and such stockholders of
record shall be entitled to receive from the Company, as the surviving
corporation in the merger, one (1) share of the Company's Common Stock
(the "Acquisition Shares") for each such share of Subsidiary Common
Stock upon surrender to the Company, which is hereby appointed paying
agent for such purpose, of their certificate formerly representing
ownership of Subsidiary Common Stock; (ii) each outstanding share of
Subsidiary's Common Stock owned of record by the Company shall cease
to be outstanding, without any payment being made in respect thereof;
(iii) each outstanding option to purchase shares of Subsidiary's
Common Stock held by option holders other than the Company shall be
assumed by the Company and deemed to constitute an option to acquire,
on the same terms and conditions (including exercise price and
vesting), the same number of shares of the Company's Common Stock; and
(iv) each outstanding option or warrant to purchase shares of
Subsidiary's Common Stock held by the Company shall cease to be
outstanding, without any payment being made in respect thereof.
RESOLVED FURTHER: That the Board of Directors hereby determines that
the terms of the merger of the Subsidiary into the Company set forth
herein are fair and reasonable.
RESOLVED FURTHER: That the officers of the Company are hereby
authorized and directed to cause the Acquisition Shares to be issued
and delivered to the stockholders of Subsidiary, in accordance with
these resolutions, and upon such issuance, the Acquisition Shares
shall be fully paid and non-assessable.
RESOLVED FURTHER: That all options to purchase Subsidiary's stock
outstanding as of the effective date of the Merger shall be assumed by
the Company, subject to all of the terms and conditions of such
options, in accordance with these resolutions.
RESOLVED FURTHER: That the Company, as the surviving corporation,
shall notify each stockholder of record of Subsidiary within ten days
after the effective date of the merger that the merger has become
effective.
-2-
<PAGE> 3
OMNIBUS RESOLUTION
RESOLVED: That the proper officers of the Company are hereby
authorized to take such other actions and sign such other documents as
may be necessary or appropriate to carry out the intent of the
foregoing resolutions, and all prior actions taken in connection
therewith are hereby confirmed, ratified and approved.
Executed on September 29, 1998.
Endosonics Corporation
By: /s/Reinhard Warnking
-----------------------
Reinhard Warnking,
President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
listed below of our report dated February 16, 1999, with respect to the
consolidated financial statements and schedule of EndoSonics Corporation
included in the Annual Report (Form 10-K) for the year ended December 31, 1998:
Form S-8 No. 333-74639 pertaining to the Navius 1996 Stock Option Plan
Form S-8 No. 333-60827 pertaining to the EndoSonics Corporation 1998
Employee Stock Purchase Plan and the EndoSonics Corporation 1998 Stock
Option Plan
Form S-8 No. 333-32273 pertaining to the Endosonics Corporation Restated
1988 Stock Option Plan Certain Option Grant to Mr. Salquist Pursuant
to a written Compensation Agreement and the Cardiometrics, Inc. 1995
Stock Incentive Plan
Form S-8 Nos. 33-93330, 33-80880, 33-67734 and 33-48208 pertaining to the
EndoSonics Corporation Restated 1988 Stock Option Plan
/s/ ERNST & YOUNG LLP
Sacramento, California
March 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
listed below of our report dated January 29, 1998, with respect to the
consolidated financial statements and schedule of Radiance Medical Systems,
Inc., formerly CardioVascular Dynamics, Inc., and subsidiaries included in this
Annual Report (Form 10-K) of EndoSonics Corporation for the year ended December
31, 1998:
Form S-8 No. 333-74639 pertaining to the Navius 1996 Stock Option Plan
Form S-8 No. 333-60827 pertaining to the EndoSonics Corporation 1998
Employee Stock Purchase Plan and the EndoSonics Corporation 1998 Stock
Option Plan
Form S-8 No. 333-32273 pertaining to the EndoSonics Corporation Restated
1988 Stock Option Plan Certain Option Grant to Mr. Salquist Pursuant
to a written Compensation Agreement and the Cardiometrics, Inc. 1995
Stock Incentive Plan
Form S-8 Nos. 33-93330, 33-80880, 33-67734 and 33-48208 pertaining to the
EndoSonics Corporation Restated 1988 Stock Option Plan
/s/ ERNST & YOUNG LLP
Orange County, California
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,749
<SECURITIES> 16,269
<RECEIVABLES> 14,075
<ALLOWANCES> 350
<INVENTORY> 6,834
<CURRENT-ASSETS> 46,137
<PP&E> 9,430
<DEPRECIATION> (5,366)
<TOTAL-ASSETS> 66,730
<CURRENT-LIABILITIES> 11,874
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 54,234
<TOTAL-LIABILITY-AND-EQUITY> 66,730
<SALES> 44,144
<TOTAL-REVENUES> 44,144
<CGS> 20,089
<TOTAL-COSTS> 33,414
<OTHER-EXPENSES> (1,789)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,570)
<INCOME-TAX> 222
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,792)
<EPS-PRIMARY> (0.47)<F1>
<EPS-DILUTED> (0.47)
<FN>
<F1>For Purposes of This Exhibit, Primary means Basic.
</FN>
</TABLE>
