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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the Quarterly Period ended June 30, 2000
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from _________ to _________
Commission file number 0-19880
ENDOSONICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 68-0028500
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2870 Kilgore Road, Rancho Cordova, California 95670
(Address of principal executive offices)
Registrant's telephone number, including area code: (916) 638-8008
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of July 31, 2000, the registrant had 17,798,165 shares of Common Stock, $.001
par value, outstanding.
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ENDOSONICS CORPORATION
FORM 10-Q
SECOND QUARTER
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2000 and December 31, 1999 .... 1
Condensed Consolidated Statements of Operations for the three months and
six months ended June 30, 2000 and 1999 ......................................... 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2000 and 1999 .................................................... 3
Notes to Condensed Consolidated Financial Statements ............................ 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................................... 7
PART II. OTHER INFORMATION
Item 1. through 3. Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders ............................. 18
Item 5. Other Information ............................................................... 18
Item 6. Exhibits and Reports on Form 8-K ................................................ 18
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1.
ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,374 $ 4,990
Short-term investments 12,689 13,741
Investment in Radiance Medical Systems, Inc. 11,480 6,668
Trade accounts receivable, net 10,939 10,688
Inventories 9,900 12,981
Accrued interest receivable and
other current assets 265 517
--------- ---------
Total current assets 50,647 49,585
Property and equipment, net 7,127 5,898
Intangible assets, net 9,606 10,534
--------- ---------
Total assets $ 67,380 $ 66,017
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 7,112 $ 7,759
Accrued restructuring and integration expenses 403 786
--------- ---------
Total current liabilities 7,515 8,545
Other liabilities 482 523
--------- ---------
Total liabilities 7,997 9,068
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value
5,000,000 shares authorized, no shares
issued and outstanding -- --
Common stock, $.001 par value;
25,000,000 shares authorized, and
17,743,652 and 17,686,958 shares issued
and outstanding as of June 30, 2000 and
December 31, 1999 respectively 19 19
Additional paid-in capital 179,751 179,674
Common stock in treasury, at cost, 1,189,642
and 1,212,692 shares at June 30, 2000 and
December 31, 1999 respectively (6,734) (6,926)
Accumulated other comprehensive income 6,137 1,360
Accumulated deficit (119,790) (117,178)
--------- ---------
Total stockholders' equity 59,383 56,949
--------- ---------
$ 67,380 $ 66,017
========= =========
</TABLE>
See accompanying notes.
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenue $ 13,148 $ 13,965 $ 26,060 $ 26,026
Cost of sales 7,547 6,515 14,216 12,379
------------ ------------ ------------ ------------
Gross profit 5,601 7,450 11,844 13,647
Operating expenses:
Research, development and clinical 2,099 2,100 3,926 3,650
Marketing and sales 4,003 2,808 7,435 5,085
General and administrative 1,394 1,246 2,583 2,181
Restructuring (297) (738) (81) (738)
Amortization of intangibles 468 462 933 923
------------ ------------ ------------ ------------
Total operating expenses 7,667 5,878 14,796 11,101
------------ ------------ ------------ ------------
Income (loss) from operations (2,066) 1,572 (2,952) 2,546
Interest income 250 260 460 574
------------ ------------ ------------ ------------
Net income (loss) before tax (1,816) 1,832 (2,492) 3,120
Tax provision (benefit) -- 73 -- 125
------------ ------------ ------------ ------------
Net loss $ (1,816) $ 1,759 $ (2,492) $ 2,955
============ ============ ============ ============
Basic net income (loss) per share $ (0.10) $ 0.10 $ (0.14) $ 0.17
============ ============ ============ ============
Diluted net income (loss) per share $ (0.10) $ 0.10 $ (0.14) $ 0.16
============ ============ ============ ============
Shares used in computing basic net income
(loss) per share:
Basic 17,751,842 17,754,644 17,737,857 17,876,553
------------ ------------ ------------ ------------
Effect of dilutive common stock options - 243,699 -- 451,163
------------ ------------ ------------ ------------
Diluted 17,751,842 17,998,343 17,737,857 18,327,716
============ ============ ============ ============
</TABLE>
See accompanying notes
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ENDOSONICS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (2,492) $ 2,995
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,977 1,470
Net changes in :
Operating assets 3,444 (11,166)
Operating liabilities (904) 1,624
-------- --------
Net cash provided by (used in) operating activities 2,025 (5,077)
-------- --------
Cash flows from investing activities:
Purchase of short-term investments (12,760) (10,169)
Maturities of short-term investments 13,812 9,435
Capital expenditures for property and equipment (2,289) (1,859)
-------- --------
Net cash (used in) investing activities (1,237) (2,593)
-------- --------
Cash flows from financing activities:
Treasury shares acquired (104) (2,482)
Proceeds from the issuance of common stock 253 2,223
-------- --------
Net cash provided by (used in) financing activities 149 (259)
-------- --------
Effect of exchange rate changes on cash and cash equivalents
(553) (82)
-------- --------
Net increase (decrease) in cash and equivalents 384 (8,011)
Cash and equivalents, beginning of period 4,990 8,749
======== ========
Cash and equivalents, end of period $ 5,374 $ 738
======== ========
</TABLE>
See accompanying notes.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim financial information is unaudited. In the opinion of the management
of EndoSonics Corporation ("EndoSonics" or the "Company"), the condensed
consolidated financial statements included in this report reflect all
adjustments necessary, consisting only of normal recurring adjustments, to
present fairly the Company's consolidated financial position at June 30, 2000
and 1999, and the consolidated results of its operations and cash flows for the
six month periods ended June 30, 2000 and 1999. Results for the interim periods
are not necessarily indicative of consolidated results to be expected for the
entire fiscal year. These financial statements should be read in conjunction
with the Company's audited financial statements for the year ended December 31,
1999, contained in the Company's Annual Report on Form 10-K.
DEFINITIVE AGREEMENT WITH JOMED
Subsequent to June 30, 2000, JOMED N.V. (SWX:JOM), a European medical technology
company and the Company entered into a definitive merger agreement wherein JOMED
will acquire all of the outstanding stock of EndoSonics Corporation against cash
payment of $11.00 per share, or a total of approximately $205 million. Under the
terms of the agreement, the cash tender offer will commence on or before August
21, 2000. The transaction has been approved by the boards of both companies.
$150 million of the purchase price is intended to be funded through an offering
of new JOMED shares and JOMED has arranged for commitments with Credit Suisse
First Boston to provide this financing. The balance of the purchase price will
come from JOMED's existing cash.
PRINCIPLES OF CONSOLIDATION
The 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 intercompany accounts and
transactions have been eliminated.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior period balances to conform
to current period presentations.
INVESTMENTS
In accordance with SFAS 115, the Company has classified its investment portfolio
as available-for-sale. Unrealized gains (losses) on available-for-sale
securities are included in accumulated other comprehensive income and recorded
as a separate component of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"). The
SAB states that all registrants are expected to apply the accounting and
disclosures described in it. The SEC staff, however, will not object if
registrants that have not applied this accounting do not restate prior financial
statements provided they report a change in accounting principle in accordance
with APB Opinion No. 20, Accounting Changes, by cumulative catch-up adjustment
no later than the fourth fiscal quarter of the fiscal year beginning after
December 15, 1999. The Company is currently evaluating the impact, if any, of
SAB 101 on its financial statements.
In June 1997, the FASB issued Statement No. 131, "Disclosure about Segments of
an Enterprise and Related Information" (SFAS 131) which establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. SFAS 131 was adopted during
the year ended December 31, 1999 and did not have a significant impact on the
Company's existing disclosures. The Company's three operating segments are
engaged in the development, manufacture and marketing of medical devices and
have similar characteristics. Accordingly, they have been aggregated pursuant to
the provisions of SFAS 131.
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2. INVENTORIES
Inventories are stated at the lower of cost, determined on a first in, first out
(FIFO) cost basis, or market value. Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Raw materials $ 4,130 $ 5,930
Work-in-process 2,072 1,867
Finished goods 3,698 5,184
------- -------
Total $ 9,900 $12,981
======= =======
</TABLE>
3. COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (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 of net loss per share because
their effect is antidilutive. Conversely, common equivalent shares from stock
options are included in the computation of net income per share to the extent
that the impact is dilutive.
At June 30, 2000 and December 31, 1999 the Company had outstanding options to
purchase 3,130,647 and 3,655,145 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.
4. COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income:
<TABLE>
<CAPTION>
Three months ended
June 30,
2000 1999
------- -------
<S> <C> <C>
Net income (loss) $(1,816) $ 1,759
Other comprehensive income:
Unrealized gain on available-for-sale securities
(net tax of $108 and $64 in 2000 and 1999, respectively) (1,243) (1,539)
Foreign currency translation (net tax of $6 and $1 in 2000
and 1999, respectively) 63 21
------- -------
Comprehensive income $(2,996) $ 241
======= =======
</TABLE>
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<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
------- -------
<S> <C> <C>
Net income (loss) $(2,492) $ 2,995
Other comprehensive income:
Unrealized gain on available-for-sale securities
(net tax of $385 and $7 in 2000 and 1999, respectively) 4,426 (162)
Foreign currency translation (net tax of $3 and $2 in 2000 and
1999, respectively) (32) (58)
------- -------
Comprehensive income $(1,902) $ 2,775
======= =======
</TABLE>
5. RESTRUCTURING AND OTHER CHARGES
In January 2000 the Company announced plans to reduce approximately 10% of its
non-sales workforce to allow for continued growth in its direct sales force and
for investment in certain key research and development projects. Approximately
40 non-sales positions were eliminated. The Company recorded restructuring
charges of $216 related to severance and related benefits paid during the
quarter to the terminated employees.
The elements of the accrual for the 1997 and 1998 restructuring and integration
charges as of June 30, 2000 are as follows:
<TABLE>
<CAPTION>
Restructuring
Accrual as of Charges Net Accrual as of
December 31, of Costs Restructuring June 30,
1999 Incurred Decrease 2000
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Corporate reorganization $ 786 $ (86) $ (297) $ 403
============= ============= ============== ==============
</TABLE>
6. STOCK REPURCHASE
The Board of Directors has authorized a stock repurchase program whereby the
Company may repurchase up to 1.7 million shares of its common stock from
time-to-time in the open market or private transactions. As of December 31,
1999, the Company held 1,212,692 shares of its common stock in treasury. During
the six months ended June 30, 2000, 43,050 shares of common stock held in
treasury were re-issued to participants of the Company's Employee Stock Purchase
Plan at approximately $4.09 per share. The Company also purchased an additional
20,000 shares of its common stock at approximately $5.18 per shares. As a
result, a total of 1,189,642 shares were held in treasury at June 30, 2000 at an
aggregate cost of approximately $6,734.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report on Form 10-Q contains forward-looking statements. These
statements are generally indicated by words or phrases such as "anticipates",
"estimates", "projects", "believes", "intends", "expects", and similar words and
phrases. The Company's business is subject to risks and uncertainties and the
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, the Company's ability to transition to new
distribution arrangements in Europe and North America, the introduction of new
products, FDA approval of new products and changes in regulatory requirements
and third-party reimbursement policies. For discussion of these and other
factors, please see "Risks Factors" on page 10 of this Form 10-Q and in the
Company's Annual Report on Form 10-K (starting on page 19) for the fiscal year
ended December 31, 1999.
RESULTS OF OPERATIONS
SECOND QUARTER OF 2000 COMPARED TO THE SAME PERIOD IN 1999
Total Revenue. Total revenue decreased 6% to $13.1 million for the second
quarter of 2000 from $13.9 million for the second quarter of 1999. The decrease
is primarily due to a reduction in revenue in Europe, particularly Germany, over
the second quarter of 1999. In the United States where the Company utilizes a
direct sales force revenues increased 44% over 1999 levels. Second quarter
revenues for the Intravascular Ultrasound ("IVUS") business decreased by $0.3
million or 3%, due primarily to lower IVUS system revenue shipments. This
decrease was only partially offset by the increase in disposable shipments.
Revenues for the Cardiometrics business decreased by $0.6 million, or 20%,
primarily due to decreased Wavewire shipments.
Cost of Sales. Cost of sales as a percentage of sales increased to 57% for the
second quarter of 2000, as compared to 47% for the second quarter of 1999. Cost
of sales as a percentage of total revenues increased primarily due to
manufacturing inefficiencies, including low manufacturing yields, related to the
transition of certain product lines to the Company's San Diego facility,
availability of quality sensors for the Company's Wave Wire production, and
downward pressure on IVUS system prices. Due to the uncertainty associated with
improvements in the efficiency of the Company's manufacturing process, the
availability of quality sensors and the impact of increasingly competitive
pricing, there can be no assurance that the Company's gross profit margin will
be maintained or improve in future periods.
Research, Development, and Clinical. Research, development and clinical expenses
remained constant at $2.1 million for the second quarter of 2000 and the second
quarter of 1999. In May 2000 the Company announced that it has received FDA
approval to begin human clinical trials of its directional radiation
(brachytherapy) device. The Company expects an increase in research development
and clinical expenses as it dedicates significant resources to this clinical
trial, as well as various other research and development projects related to
bringing new products to market.
Marketing and Sales. Marketing and sales expenses increased to $4.0 million in
the second quarter of 2000 as compared to $2.8 million in the second quarter of
1999. The 43% increase is due to increased headcount and marketing programs
related to staffing a direct sales force in the United States, France, Germany
and the Benelux Region. As a percentage of total revenues, marketing and sales
expenses increased to 30% in the second quarter of 2000 from 20% in the second
quarter of 1999. The Company anticipates that it will continue to expand its
direct sales force and marketing efforts in the United States and certain
European territories.
General and Administrative. General and administrative expenses increased to
$1.4 million or 11% of revenues in the second quarter of 2000 from $1.2 million
or 9% of revenues during the same quarter in 1999. The increase is attributable
to an overall increase in the level of operations, including an increase in
headcount and facility related expenses over the second quarter of 1999.
Restructuring. Restructuring charges of ($0.3) million relate to a reduction in
reserve requirement for the Company's termination agreement with a certain
distribution partner.
Amortization of Intangibles. Amortization of intangibles was $0.5 million in the
second quarter of 2000 and 1999. The amortization relates to goodwill and other
intangible assets acquired in the acquisition of
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Navius in August 1998 and Cardiometrics in July 1997. Goodwill and other
intangibles are being amortized over periods ranging from three-to-nine years.
Other Income. Other income remained at $0.3 million in the second quarter of
2000 compared to $0.3 million in the second quarter of 1999.
Net Income (Loss). Net loss was ($1.8) million, or ($0.10) per basic share, in
the second quarter of 2000 as compared to net income of $1.8 million, or $0.10
per basic share, in the second quarter of 1999.
FIRST SIX MONTHS OF 2000 COMPARED TO THE SAME PERIOD IN 1999
Total Revenue. Total revenue remained constant at $26.1 million for the first
six months of 2000 from $26.0 million for the first six months of 1999. In the
United States where the Company utilizes a direct sales force revenues increased
22% over 1999 levels. Six month revenues for the Intravascular Ultrasound
("IVUS") business decreased by $3.8 million or 21%, due primarily to lower IVUS
system revenue shipments. This decrease was only partially offset by the
increase in disposable shipments. Revenues for the Cardiometrics business
decreased by $1.4 million, or 24%, primarily due to decreased Wavewire
shipments.
Cost of Sales. Cost of sales as a percentage of sales increased to 55% for the
first six months of 2000, as compared to 47% for the first six months of 1999.
Cost of sales as a percentage of total revenues increased due primarily to
manufacturing inefficiencies, including low manufacturing yields, related to the
transition of certain product lines to the Company's San Diego facility,
availability of quality sensors for the Company's Wave Wire production, and
downward pressure on IVUS system prices. Due to the uncertainty associated with
improvements in the efficiency of the Company's manufacturing process, the
availability of quality sensors and the impact of increasingly competitive
pricing, there can be no assurance that the Company's gross profit margin will
be maintained or improve in future periods.
Research, Development, and Clinical. Research, development and clinical expenses
increased to $3.9 million for the first six months of 2000 from $3.6 million for
the first six months of 1999. The increase primarily relates to product
enhancements and new products for the IVUS and functional measurement product
lines. In May 2000 the Company announced that it has received FDA approval to
begin human clinical trials of its directional radiation (brachytherapy) device.
The Company expects an increase in research development and clinical expenses as
it dedicates significant resources to this clinical trial, as well as various
other research and development projects related to bringing new products to
market.
Marketing and Sales. Marketing and sales expenses increased to $7.4 million in
the first six months of 2000 as compared to $5.1 million in the first six moths
of 1999. The 46% increase is due to increased headcount and marketing programs
related to staffing a direct sales force in the United States, France, Germany
and the Benelux Region. As a percentage of total revenues, marketing and sales
expenses increased to 29% in the six months of 2000 from 20% in the first six
months of 1999. The Company anticipates that it will continue to expand its
direct sales force and marketing efforts in the United States and certain
European territories.
General and Administrative. General and administrative expenses increased to
$2.6 million or 10% of revenues in the first six months of 2000 from $2.2
million or 8% of revenues during the same six months in 1999. The increase is
attributable to an overall increase in the level of operations, including an
increase in headcount and facility related expenses over the first quarter of
1999.
Restructuring. Restructuring charges of ($0.1) million relate to a reduction in
non-sales headcount in January 2000, offset by the reduction in reserve
requirement for the Company's termination agreement with a certain distribution
partner.
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Amortization of Intangibles. Amortization of intangibles was $0.9 million in the
first six months of 2000 and 1999. The amortization relates to goodwill and
other intangible assets acquired in the acquisition of Navius in August 1998 and
Cardiometrics in July 1997. Goodwill and other intangibles are being amortized
over periods ranging from three-to-nine years.
Other Income. Other income decreased to $0.5 million in the first six months of
2000 compared to $0.6 million in the first six months of 1999. This is due to a
decrease in interest income resulting from lower cash balances.
Net Income (Loss). Net loss was ($2.5) million, or ($0.14) per share, in the
first six months of 2000 as compared to net income of $3.0 million, or $0.17 per
basic share, in the first six months of 1999.
LIQUIDITY AND CAPITAL RESOURCES
On June 30, 2000, the Company had cash and cash equivalents of $5.4 million,
short-term investments of $24.2 million and $10 million available under a
revolving line of credit. Net cash provided by (used in) operations was $2.0
million in the six months ended June 30, 2000 as compared to ($5.1) million in
the same period in 1999. The improvement is primarily due to a reduction in the
amount the Company invested under its stock repurchase program, and a reduction
in inventory, partially offset by an increase in accounts receivable.
Net cash used in investing activities was $1.2 million in the six months ended
June 30, 2000 as compared to $2.6 million in the same period of 1999. The
increase was due primarily to the maturities of short-term investments, offset
partially by capital expenditures and the purchase of short-term investments.
Net cash provided by (used in) financing activities was $0.1 million for the six
months ended June 30, 2000 as compared to ($0.3) million in the same period of
1999. In the six months ended June 30, 2000 the Company repurchased 20,000
shares of its stock under its stock repurchase program at an aggregate cost of
$0.1 million and received $0.2 million from the issuance of common stock related
to the Employee Stock Purchase Plan and the exercise of stock options. In the
six months ended June 30, 1999 the Company used $2.5 million to acquire treasury
stock under its repurchase program and received $2.2 million from the exercise
of stock options.
The Company anticipates using cash resources primarily for capital expenditures,
product development, sales and marketing efforts, stock repurchases and working
capital purposes. The Company believes that its existing cash, cash equivalents,
and short-term investments as of June 30, 2000 will be sufficient to meet the
Company's operating expenses and capital requirements through 2000. 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 at all or on
terms satisfactory to the Company.
IMPACT OF YEAR 2000
Independent of the "Year 2000 Issue" the Company had plans to implement an
enterprise-wide software platform. In late 1999, this installation was completed
and the Company began using a new Enterprise Resource Planning system (ERP),
which was Year 2000 compliant. As a result of this installation the Company
experienced no significant disruptions of its internal systems related to the
date change. In addition, the Company experienced no significant disruptions
related to the systems, products and services of the Company's vendors and
customers.
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SUBSEQUENT EVENT
Subsequent to June 30, 2000, JOMED N.V. (SWX:JOM), a European medical technology
company and the Company entered into a definitive merger agreement wherein JOMED
will acquire all of the outstanding stock of the Company against cash payment of
$11.00 per share, or a total of approximately $205 million. Under the terms of
the agreement, the cash tender offer will commence on or before August 21, 2000.
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 June 30, 2000 is approximately $120 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 2000, 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.
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.
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 its key distributors or replace one of these
distributors in the event that a distributor relationship would be terminated.
In the event of such a termination, the Company's ability to distribute its
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
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<PAGE> 13
difficulties that could delay or prevent the successful development,
introduction and marketing of new products.
Dependence on International Sales. The Company derives, and expects to continue
to derive, a significant portion of its revenue from international sales. In
1997, 1998, and 1999, the Company's international sales were $21.9 million,
$32.2 million and $30.8 million respectively, or 64%, 73% and 64% 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 certain 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 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.
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 groups, or DRGs regardless of the costs involved. The amount of money
paid for a specific DRG is determined by the average 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. 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 procedures 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. Current Procedural
Terminology or CPT codes are now available for all EndoSonics technology. CPT
codes have been available 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.
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<PAGE> 14
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.
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 Cardiovascular Imaging Systems ("CVIS"), a division of Boston
Scientific Corporation. CVIS is significantly larger than the Company, and has
significantly greater financial, sales and marketing and technical resources
available. CVIS has 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. 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. 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.
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. 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
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<PAGE> 15
Company or to protect trade secrets and could result in substantial cost to, and
diversion of effort by, the Company.
Litigation. 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.
The Company filed a complaint against Radiance Medical Systems, Inc.
("Radiance"), seeking a judicial determination that the Company has rights
under a certain license agreement with Radiance to market and sell a catheter
combining Focus Technology, a Company Transducer and a stent for coronary
applications. The complaint does not currently seek damages but only a
declaration confirming the Company's interpretation of the contract language
over Radiance's interpretation of such language. In the event that Radiance
prevails in the litigation, there may be a material adverse impact on the
Company's future development efforts.
In October 1998, the Company entered into a five year litigation standstill
agreement with Intravasular 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 that 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.
Defending and prosecuting intellectual property suits and related legal and
administrative proceedings are costly and time-consuming. Further litigation may
be necessary to enforce our patents, to protect our trade secrets or know-how or
to determine the enforceability , scope and validity of the proprietary rights
of others. Any litigation or other proceedings will be costly and will result in
significant diversion of effort by our technical and management personnel.
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
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<PAGE> 16
and criminal prosecution. In addition, governmental regulations may be
established that could prevent or delay regulatory approval of the Company's
products. Delays in receipt of approvals, failure to receive approvals or the
loss of previously received approvals would have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company is also required to register as a medical device manufacturer with
the FDA and certain state agencies, such as the Food and Drug Branch of CDHS. As
such, the Company is inspected on a routine basis by both the FDA and the CDHS
for compliance with the GMP regulations. These regulations require that the
Company manufacture its products and maintain related documentation in a
prescribed manner with respect to manufacturing, testing and control activities.
Further, the Company is required to comply with various FDA requirements for
labeling. The Medical Device Reporting regulation requires that the Company
provide information to the FDA on deaths or serious injuries alleged to have
been associated with the use of its devices, as well as product malfunctions
that would likely cause or contribute to death or serious injury if the
malfunction were to recur. In addition, the FDA prohibits an approved device
from being marketed for unapproved applications. Specifically, the Company's
FOCAL balloon catheters are approved in certain European countries. The Company
believes that these catheters are being used in those countries principally for
deployment of coronary stents and balloon angioplasty. In October 1995,
EndoSonics received FDA approval to market 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.
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
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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.
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.
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PART II. OTHER INFORMATION
ITEMS 1 through 3. Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on June 22, 2000. The
three matters voted upon at the meeting were: (i) to elect the members of the
Board of Directors of the Company set forth below to a one-year term of office;
(ii) to approve an amendment to the Company's 1998 Stock Option Plan,
increasing the number of shares of common stock authorized for issuance under
such plan by 500,000 shares; and (iii) to ratify the selection of Ernst & Young
LLP as independent auditors of the Company for the year ending December 31,
2000. The three matters were approved by the stockholders at such meeting by
the number of votes set forth below:
<TABLE>
<CAPTION>
Abstentions
Affirmative Negative and Broker
Votes Votes Non-Votes
----------- -------- -----------
<S> <C> <C> <C>
A. Election of Directors:
Julie A. Brooks 9,207,978 791,626 7,745,107
Thomas J. Cable 9,207,078 791,526 7,746,107
Dale Conrad 9,207,978 791,626 7,745,107
Jakob Stapfer 9,270,078 729,526 7,808,107
Gregg W. Stone, M.D. 9,208,078 791,826 7,744,807
Reinhard J. Warnking 9,207,978 791,626 7,745,107
W. Michael Wright 9,207,978 791,626 7,745,107
B. Amendment to the 1998 Stock:
Option Plan 6,509,152 3,436,942 7,798,617
C. Ratification of Ernst & Young LLP
As Independent Auditors: 9,937,679 46,822 7,760,210
</TABLE>
ITEM 5. Other Information. None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarterly period ending
June 30, 2000.
The Company filed a Current Report on Form 8-K on August 8, 2000 to
report the execution of a definitive merger agreement with JoMed N.V. pursuant
to which JoMed, N.V. will acquire all of the outstanding common stock of the
Company at a price of $11.00 per share.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENDOSONICS CORPORATION
/s/ REINHARD J. WARNKING
--------------------------------------
Reinhard J. Warnking
President and
Chief Executive Officer
Date: August 14, 2000
/s/ JEFFREY L. ELDER
--------------------------------------
Jeffrey L. Elder
Sr. Vice President and
Chief Financial Officer
Date: August 14, 2000
/s/ KATHLEEN E. REDD
--------------------------------------
Kathleen E. Redd
Vice President and
Corporate Controller
Principal Accounting Officer
Date: August 14, 2000
19
