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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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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, 1999
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 TO NAME OF EACH EXCHANGE ON
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 20, 2000, was approximately $100,005,242 (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 20, 2000, approximately 17,680,641 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 2000 Annual Meeting
of Stockholders to be held on or about June 8, 2000 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
Since its inception in 1984, the Company has been engaged primarily in
the research and development of devices 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 coronary imaging systems and catheters. In
July 1997, the Company acquired Cardiometrics Corporation, adding a product
portfolio of cardiovascular functional measurement devices. In August 1998, the
Company acquired Navius Corporation, which added a line of therapeutic
angioplasty balloon catheters and other therapeutic products under development.
The Company's strategy is to advance its unique all electronic
ultrasound imaging technology and its complementary functional measurement
technology from pure cardiovascular diagnostic applications into combined
diagnostics and therapeutic applications. In executing this strategy, the
Company expects to move from an approximately $150 million cardiovascular
diagnostic market to address and capture a portion of the $4 billion
cardiovascular therapeutic market. In addition, the Company believes its
technology is applicable to non-cardiovascular applications and will address
other therapeutic markets by combining its imaging technology with therapeutic
treatments. The Company believes precision imaging of other human organs can
improve the treatment of certain diseases, for example, the imaging and removal
of cancerous tissues. Another example of applying this imaging technology in
therapeutic applications is the development of a combined imaging and radiation
catheter for the precise treatment of diseased coronaries to minimize vessel
re-closure or restenosis after angioplasty or stent deployment.
The Company has executed its strategy by developing its own technology
as represented by its IVUS imaging catheters, as well as acquisition of other
technologies as represented by the functional measurement and angioplasty
technologies acquired through its purchase of the Cardiometrics and Navius
Corporations, respectively. The Company relies on key suppliers for a majority
of its raw material components, but manufactures or assembles and conducts
testing on all of its finished products in three modern facilities: in Rancho
Cordova and San Diego, California, and in Rijswijk, the Netherlands. The Company
believes it possesses unique manufacturing know-how to produce all-electronic
imaging catheters in high volume. The all-electronic design provides for a high
degree of miniaturization, allowing physicians to deploy the catheter into
increasingly narrow or tortuous coronaries. In distributing its products, the
Company employs a direct sales force in the United States and certain key
countries in Europe. In Japan and lesser markets where a direct sales force
would not be economical, the Company has forged key distributor relationships.
The Company, in executing this strategy, has addressed the unique needs
of each market segment by organizing the company into three divisions. Each
division is responsible for the development and manufacture of its own products
that are then sold through a common sales organization or through distributors.
The Imaging Division is responsible for design and development of the Company's
all-electronics imaging devices, including the systems used to process and
display information to physicians. This division is also chartered with
developing future applications of the imaging technology to non-coronary
applications. The Wire Division is responsible for the development of functional
measurement devices including FlowWire(TM) and WaveWire(TM) products that are
currently used to measure coronary blood flow and blood pressure, respectively.
The Company believes its functional measurement technology can be developed to
make these products eventually serve as the "primary wire" for the majority of
all cardiovascular interventional procedures. The Image Guided Therapy Division
is responsible for the development and manufacture of all IVUS diagnostic
catheters, combination diagnostic/therapeutic catheters, and pure therapeutic
catheters. Examples of the foregoing include the IVUS 5-64(TM) imaging catheter,
the Oracle MegaSonics(TM) combination imaging and balloon catheter, and the
Vintage(TM) angioplasty balloon catheter. This division is also chartered with
the development of the peripheral vascular imaging catheter for abdominal aortic
aneurysm (AAA) applications and the Brigade(TM) combination imaging and
radiation catheter for treatment of coronaries in post angioplasty or stent
deployment applications.
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The Company distributes its products in the United States, Germany,
Belgium, Netherlands, Luxembourg, and France through a direct sales force. The
Company's investment in its direct sales force has continued to increase from
1997 to the end of 1999 as the Company added more territories. The direct sales
staff numbered 16, 29 and 45 at the end of 1997, 1998, and 1999, respectively.
The increase in the direct sales force has accounted primarily for the increase
in selling and marketing expense as a percent of product sales, amounting to 18,
22, and 24 percent in the respective years of 1997, 1998, and 1999. The Company
believes that a direct sales force is essential in executing its strategy in the
above-cited markets.
The Company relies on key distributors in certain other markets. In
Latin America, Johnson and Johnson Latin America distributes the Company's
products. In Japan, Fukuda Corporation is the Company's key distributor for IVUS
products with Johnson and Johnson KK providing an important sub-distributor
function. In this same market, the Goodman Company distributes the Company's
functional measurement products. In certain countries of Europe, the Middle East
and Africa, JOMED International AB or its subsidiaries sell all of the Company's
products.
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 have a materially adverse
affect on 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.
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 including: 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 products. See "Risk Factors."
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
These products include intravascular guide wires 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
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avoided.
The Company 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 guide
wire 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
Balance Balloon Catheter MOHW Approved Q4 1997
(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
NaviCross RX MOHW Approved (Japan) Q1 1999
</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 guide wire 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 expenses approximated $6.3 million, $7.0
million, and $7.7 million in 1997, 1998, and 1999 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
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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 engineers or by the
international distributor responsible for the customer. The Company provides its
international distributors with a one-year limited warranty covering service and
parts.
The Company's success will depend in part on its ability to manufacture
its products in compliance with GMP regulations, ISO 9000 and other regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. In addition, the Company
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 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 did not have any backlog of customer purchase orders for
products as of December 31, 1998, and as of December 31, 1999.
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, Germany, France, and
the Benelux Region, 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 that provided 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 an 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. This agreement has been concluded.
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 had 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
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Fukuda. The funding is occuring over a two-year period commencing in August
1998. In addition, Fukuda became the exclusive distributor of EndoSonics IVUS
products in Japan beginning January 2000.
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 that calls
for the development of a JOMED balloon and stent incorporated into a modular
EndoSonics IVUS catheter. Under the agreement, EndoSonics would supply
subassemblies to JOMED who would 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 could distribute exclusively or jointly with JOMED. The
distribution agreement with EndoSonics was terminated in October 1999 due to a
breach in operational obligation by JOMED. However, a new agreement was
restructured to provide more specific metrics regarding performance and was
implemented in December 1999. The IVUS guided stent delivery system agreement
was also terminated in October 1999 and has not been re-activated.
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 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. However, the Company
has continued to pursue direct sales operation in certain strategic markets in
an effort to provide additional stability to the operations.
In 1997, 1998 and 1999, total export sales were $21.9 million, $32.2
million and $30.8 million respectively, or approximately 66%, 75% and 67%
respectively, of total product sales. In 1997, 1998 and 1999, sales to Europe
accounted for $11.5 million, $10.6 million and $13.5 million respectively, and
sales to Asia represented $9.3 million, $20.3 and $16.3 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 through
August 2000. 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
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EndoSonics products into specified European and Middle Eastern countries. Also
in December, EndoSonics and JOMED entered into an IVUS guided stent delivery
system agreement that calls for the development of a JOMED balloon and stent
incorporated into a modular EndoSonics IVUS catheter. Under the agreement,
EndoSonics will sell 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.
These two agreements were terminated in October 1999, and replaced with a
restructured distribution agreement in December 1999.
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 ("BSC"). BSC is significantly larger than the
Company, and has significantly greater financial, marketing and technical
resources available. Although the Company believes that BSC is not currently
marketing or clinically testing combined coronary balloon angioplasty/IVUS
imaging catheters, there can be no assurance that BSC 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 groups, 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. 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 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 products except for PTCA balloons covered under
DRGs. CPT codes have been available since 1997 to reimburse physicians to
perform ultrasound procedures and interpret the results when imaging is
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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.
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,
8
<PAGE> 9
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 design control,
manufacturing, testing and control activities. Further, the Company is required
to comply with various FDA requirements for labeling. The Medical Device
Reporting regulation requires that the Company provide information to the FDA on
deaths or serious injuries alleged to have been associated with the use of its
devices, as well as product malfunctions that would likely cause or contribute
to death or serious injury if the malfunction were to recur. In addition, the
FDA prohibits an approved device from being marketed for unapproved
applications. Specifically, the Company's FOCAL balloon catheters are approved
in certain European countries, where the Company believes these catheters are
being used principally for deployment of coronary stents and balloon
angioplasty. In October 1995, EndoSonics received FDA approval to market
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 54 U.S. patents and numerous related foreign
patents. 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 that 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
9
<PAGE> 10
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.
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, 1999, the Company had 417 employees, including 242 in
manufacturing, 79 in research, development and regulatory affairs, 63 in sales
and marketing, and 33 in administration. The Company believes that the success
of its business will depend, in part, on its ability to attract and retain
qualified personnel.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, their ages as of March 20, 2000,
and their positions are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Chairman of the Board
Reinhard J. Warnking 51 President, Chief Executive Officer and
Director
Kathleen E. Redd 38 Acting Vice President Finance and Chief
Financial Officer
Michael J. Eberle 43 Senior Vice President and General
Manager, SmartWire Division
Joerg Schulze-Clewing 42 Vice President and General Manager,
Imaging Division
Robrecht L. W. 50 Vice President and General Manager,
Michiels Image Guided Therapy Division
Richard Hebert 43 Vice President, Clincial/Regulatory
Affairs and Quality Assurance
Gary L. Wilson 45 Vice President, Worldwide Sales and
Marketing
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:
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).
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<PAGE> 11
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 Hebert. Mr. Hebert returned to the Company as Vice President,
Clinical/Regulatory Affairs and Quality Assurance in April 1999. From May 1997
to May 1998 he served as Vice President of Operations and Administration for
BioSurgical & BioInterventional Corporations, sister companies developing
medical devices and bio-adhesives. Previously, from February 1993 through April
1997, he served in various positions with EndoSonics. Beginning in February 1993
Mr. Hebert served as Director of Quality Assurance until, in December 1994, when
he was promoted to Vice President of Operations with responsibility for leading
the Company's ultrasound transducer and catheter manufacturing facility in
Pleasanton, California. Mr. Hebert decided to leave the Company in May 1997 when
the corporate headquarters relocated from Pleasanton to Rancho Cordova,
California.
Robrecht L. W. Michiels. Mr. Michiels joined the Company in December
1999 as Vice President and General Manager of Image Guided Therapy Division.
Prior to joining the Company, from 1998 to 1999, Mr. Michiels served as Chief
Executive Officer of VenPro Corporation, a development stage venture company in
cardiovascular and less invasive surgery implants. From 1992 to 1998, Mr.
Michiels served as President and Chief Operating Officer of InterVentional
Technologies Inc., an interventional caridology company.
Kathleen E. Redd. Ms. Redd, a CPA., joined the Company in April 1996 as
Corporate Controller. In January 2000, Ms Redd was appointed the Acting Vice
President and Chief Financial Officer when Richard L. Fischer former Vice
President, Finance and CFO left this position because of personal reasons.
Before joining EndoSonics in 1996, Ms. Redd served as Controller for Acordia
Benefit Services of Northern California, a third party administrator for health
insurance providers, from 1991 to 1996.
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.
Gary L. Wilson. Mr. Wilson joined the Company in February 1996 as
Director, Asia Pacific/Latin America/Canada (APLAC) Sales. In August 1998, Mr.
Wilson was promoted to Vice President, APLAC Sales. In March 1999, he became
Vice President, Worldwide Sales and Marketing. Prior to joining EndoSonics, Mr.
Wilson was Director, Asia Pacific Sales for Advanced Technology Laboratories
(ATL), a manufacturer of diagnostic medical ultrasound equipment based in
Bothell, Washington.
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.
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<PAGE> 12
ITEM 2. PROPERTIES
Currently, the Company leases approximately 74,000 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 in 1998, the Company obtained 11,000 square feet in
San Diego, California, which is leased through August 31, 2000. In February
1999, the Company executed a lease for approximately 44,000 square feet in San
Diego, California that is leased through March 31, 2006. Portions of the San
Diego facilities have been subleased from dates ranging from April 1999 through
July 2001.
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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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>
1999
First Quarter............... $12.50 $6.38
Second Quarter.............. 8.25 4.50
Third Quarter............... 9.00 7.00
Fourth Quarter.............. 8.50 3.19
1998
First Quarter............... $10.38 $8.06
Second Quarter.............. 9.25 5.00
Third Quarter............... 9.38 4.50
Fourth Quarter.............. 9.94 4.25
</TABLE>
On March 20, 2000, the last reported sale price of the Common Stock as
reported on the Nasdaq National Market was $6.875 per share. As of March 20,
2000, there were approximately 206 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,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Product sales $ 16,175 $ 23,542 $ 33,141 $ 42,929 $ 45,933
Contract revenue 962 831 856 1,215 2,242
-------- -------- -------- -------- --------
Total revenue 17,137 24,373 33,997 44,144 48,175
Cost of sales 11,270 15,688 17,962 20,089 23,590
-------- -------- -------- -------- --------
Gross margin 5,867 8,685 16,035 24,055 24,585
OPERATING EXPENSES:
Research, development and clinical 7,127 5,746 6,309 7,045 7,713
Marketing and sales 5,096 5,411 6,068 9,575 11,648
General and administrative 4,516 4,821 5,840 4,849 6,876
Restructuring and other expenses 488 518 47,956 10,554 (1,490)
Amortization of intangibles -- -- 475 1,391 1,857
-------- -------- -------- -------- --------
Total operating expenses 17,227 16,496 66,648 33,414 26,604
-------- -------- -------- -------- --------
Loss from operations (11,360) (7,811) (50,613) (9,359) (2,019)
Equity in net loss of Radiance -- (1,621) (2,358) (158) --
Other income:
Interest income 888 2,269 1,881 1,208 924
Gain realized on equity investment
in Radiance -- -- 4,021 739 --
-------- -------- -------- -------- --------
Total other income 888 2,269 5,902 1,947 924
-------- -------- -------- -------- --------
Net loss before provision for income taxes (10,472) (7,163) (47,069) (7,570) (1,095)
Provision for income taxes -- -- 175 222 --
-------- -------- -------- -------- --------
Net loss $(10,472) $ (7,163) $(47,244) $ (7,792) $ (1,095)
-------- -------- -------- -------- --------
Basic and diluted net loss per share $ (1.01) $ (0.53) $ (3.22) $ (0.47) $ (0.06)
-------- -------- -------- -------- --------
Shares used in per share calculations 10,387 13,395 14,670 16,472 17,652
-------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(In thousands, except for per share amounts)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments $ 44,395 $ 40,192 $ 23,009 $ 29,155 $ 25,399
Working capital 49,872 44,676 30,146 38,400 41,040
Convertible obligation 750 -- -- -- --
Total assets 56,953 72,039 62,807 66,730 66,017
Total stockholders' equity 48,155 66,067 49,254 54,252 56,949
</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 18.
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<PAGE> 14
INTRODUCTION
Since its inception in 1984, the Company has been engaged primarily in
the research and development of devices 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 coronary imaging systems and catheters. In
July 1997, the Company acquired Cardiometrics Corporation, adding a product
portfolio of cardiovascular functional measurement devices. In August 1998, the
Company acquired Navius Corporation, which added a line of therapeutic
angioplasty balloon catheters and other therapeutic products under development.
The Company's strategy is to advance its unique all electronic
ultrasound imaging technology and its complementary functional measurement
technology from pure cardiovascular diagnostic applications into combined
diagnostics and therapeutic applications. In executing this strategy, the
Company expects to move from an approximately $150 million cardiovascular
diagnostic market to address and capture a portion of the $4 billion
cardiovascular therapeutic market. In addition, the Company believes its
technology is applicable to non-cardiovascular applications and will address
other therapeutic markets by combining its imaging technology with therapeutic
treatments. The Company believes precision imaging of other human organs can
improve the treatment of certain diseases, for example, the imaging and removal
of cancerous tissues. Another example of applying this imaging technology in
therapeutic applications is the development of a combined imaging and radiation
catheter for the precise treatment of diseased coronaries to minimize vessel
re-closure or restenosis after angioplasty or stent deployment.
The Company has executed its strategy by developing its own technology
as represented by its IVUS imaging catheters, as well as acquisition of other
technologies as represented by the functional measurement and angioplasty
technologies acquired through its purchase of the Cardiometrics and Navius
Corporations, respectively. The Company relies on key suppliers for a majority
of its raw material components, but manufactures or assembles and conducts
testing on all of its finished products in three modern facilities: in Rancho
Cordova and San Diego, California, and in Rijswijk, the Netherlands. The Company
believes it possesses unique manufacturing know-how to produce all-electronic
imaging catheters in high volume. The all-electronic design provides for a high
degree of miniaturization, allowing physicians to deploy the catheter into
increasingly narrow or tortuous coronaries. In distributing its products, the
Company employs a direct sales force in the United States and certain key
countries in Europe. In Japan and lesser markets where a direct sales force
would not be economical, the Company has forged key distributor relationships.
The Company, in executing this strategy, has addressed the unique needs
of each market segment by organizing the company into three divisions. Each
division is responsible for the development and manufacture of its own products
that are then sold through a common sales organization or through distributors.
The Imaging Division is responsible for design and development of the Company's
all electronics imaging devices, including the systems used to process and
display information to physicians. This division is also chartered with
developing future applications of the imaging technology to non-coronary
applications. The Wire Division is responsible for the development of functional
measurement devices including FlowWire(TM) and WaveWire(TM) products that are
currently used to measure coronary blood flow and blood pressure, respectively.
The Company believes its functional measurement technology can be developed to
make these products eventually serve as the "primary wire" for the majority of
all cardiovascular interventional procedures. The Image Guided Therapy Division
is responsible for the development and manufacture of all IVUS diagnostic
catheters, combination diagnostic/therapeutic catheters, and pure therapeutic
catheters. Examples of the foregoing include the IVUS 5-64(TM) imaging catheter,
the Oracle MegaSonics(TM) combination imaging and balloon catheter, and the
Vintage(TM) angioplasty balloon catheter. This division is also chartered with
the development of the peripheral vascular imaging catheter for abdominal aortic
aneurysm (AAA) applications and the Brigade(TM) combination imaging and
radiation catheter for treatment of coronaries in post angioplasty or stent
deployment applications.
The Company distributes its products in the United States, Germany,
Belgium, Netherlands, Luxembourg, and France through a direct sales force. The
Company's investment in its direct sales force has continued to increase from
1997 to the end of 1999 as the Company added more territories. The direct sales
staff numbered 16, 29 and 45 at the end of 1997, 1998, and 1999, respectively.
The increase in the direct sales force has accounted primarily for the increase
in selling and marketing expense as a percent of product sales, amounting to 18,
22, and 25 percent in the respective years of 1997, 1998, and 1999. The Company
believes that a direct sales force is essential in executing its strategy in the
above-cited markets.
The Company relies on key distributors in certain other markets. In
Latin America, Johnson and Johnson Latin America distributes the Company's
products. In Japan, Fukuda Corporation is the Company's key distributor for IVUS
products with Johnson and Johnson KK providing an important sub-distributor
function. In this same market, the Goodman Company distributes the Company's
functional measurement products. In certain countries of Europe, the Middle East
and Africa, JOMED International AB or its subsidiaries sell all of the Company's
products.
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<PAGE> 15
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 have a materially adverse
affect on 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.
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 including: 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 products. See "Risk Factors."
RESULTS OF OPERATIONS
Comparison of the Year Ended December 31, 1999 with the Year Ended
December 31, 1998
Navius' results of operations were included in the Company's consolidated
results of operations beginning August 5, 1998. (See Note 9 to Consolidated
Financial Statements.)
Total Revenue. Total revenue in 1999 increased by 9% to approximately
$48.2 million from $44.1 million in 1998. The increase is a result of an
increase of approximately $2.5 million in IVUS sales, $0.6 million in functional
testing revenue and $0.7 million in sales of balloon catheters.
In 1999 and 1998 sales of the Company's digital all-electronic IVUS
imaging system and catheter products accounted for 67% of total revenue. The
Company expects this percentage may decrease as it continues to expand its
product lines and move from primarily diagnostic applications to combined
diagnostic and therapeutic applications. The sales of IVUS imaging catheters as
a percentage of total IVUS sales has increased to 59% in 1999 from 50% in 1998
due to the increase in the Company's installed base.
In the United States, where the Company utilizes a direct-sales force,
product sales for 1999 were up 62% over 1998 levels. Consequently export sales
as a percentage of total revenue decreased to 64% as compared to 73% in 1998.
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 increased slightly to approximately 47% from approximately 46% in 1998.
Cost of sales as a percentage of product sales in 1999 increased primarily due
to inefficiencies related to the transfer of certain manufacturing activities to
the Company's San Diego facility and downward pressure on IVUS system prices.
Overall, gross profit margins were 51% in 1999 as compared to 54% in 1998. Due
to the uncertainty associated with improvements in efficiency of the Company's
manufacturing processes 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.
Restructuring and Other. During 1999 the Company determined that
approximately $1.9 of restructuring reserves and other expenses provided for in
1997 in connection with the acquisition of Cardiometrics were not required.
These reserves were reversed in 1999. Additionally, the Company incurred a stock
compensation charge of $0.4 relating to changes to the terms of the common stock
options for certain optionholders that were terminated as a result of an
organizational restructuring during 1999. (See Note 10 to the Consolidated
Financial Statements). 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 on the acquisition date.
Research, Development and Clinical. Research, development and clinical
expenses increased 9% to $7.7 million in 1999 from approximately $7.0 million in
1998. The increase relates primarily to product enhancements and new products
for the IVUS and functional measurement product lines. The Company expects to
continue to invest in various research and development projects as it brings new
products to market.
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Marketing and Sales. Marketing and sales expenses increased 22% to
approximately $11.6 million from $9.6 million in 1998 primarily due to increased
headcount and marketing programs related to staffing a direct sales force in the
United States, Germany and certain other European countries. As a percentage of
total revenue, marketing and sales expenses increased to 24% as compared to 22%
in 1998. The Company expects to continue to invest in its direct sales force in
2000.
General and Administrative. General and administrative expenses increase by
42% to approximately $6.9 million in 1999 from approximately $4.8 million in
1998. The increase is primarily due to additional bad debt reserves, $1.8
million, taken in the third and fourth quarters of 1999. General and
administrative expenses increased to 14% of total revenue in 1999 as compared to
11% of total revenue in 1998.
Other Income. Other income decreased to approximately $0.9 million in 1999
from approximately $1.9 million in 1998. The decrease reflects lower interest
income as compared to 1998, as a result of reduced average cash balances. Also,
in 1998 the Company had a gain of $0.7 million on its investment in Radiance
Medical Systems, Inc.
Net Loss. Net loss was $1.1 million, or $0.06 per share for 1999, as
compared to a net loss of approximately $7.8 million, or $0.47 per share in
1998.
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 9 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 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.
Restructuring and Other. 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 completed prior to the
date of acquisition, percent remaining to be developed post acquisition, time to
completion, and costs to complete the
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<PAGE> 17
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.
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.
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LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash, cash equivalents and
short-term investments of $25.4 million and $10 million available under a
revolving line of credit. Net cash used in operations was $ 3.6 million in 1999,
as compared to cash provided from operations of $2.1 million in 1998. The
increase in the cash used in operations is due primarily to higher inventory
balances. Working capital increased to $41.0 million in 1999, as compared to
$38.4 million in 1998.
Net cash used in investing activities was $1.0 million, as compared to
$11.3 million in 1998. The company received $17 million from the maturities of
short-term investments. This was offset by $ 14.7 million used to purchase
short-term investments and $3.5 million used to acquire property and equipment.
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 $0.7 million as compared
to $4.0 million in 1998. In 1999, the proceeds from the issuance of common stock
were $3.2 million. 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.
Intangible assets total approximately $10.5 million as of December 31,
1999 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. In accordance with
Statement of Financial Accounting Standard ("SFAS") No. 121, the carrying value
would be reduced to the estimated net realizable value 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, 1999, there have been no adjustments to the carrying amounts of intangibles
resulting from these evaluations. As of December 31, 1999, intangible assets
represented approximately 16% of our total assets and 18% 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, 1999 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 on terms satisfactory to the
Company. See "Risk Factors - Future Operating Results--History of Operating
Losses; Anticipated Future Losses."
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. The Company capitalized approximately $1.2 million in
software, hardware and developed software related to this ERP system
implementation.
TAX MATTERS
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards of approximately $52 million and $4.9 million, respectively.
The Company also had federal research and development and other tax credit
carryforwards for federal and state income tax purposes, of approximately $2.9
million and $1.6 million respectively. The net operating loss and credit
carryforwards began expiring and will continue to expire at various dates
beginning in 2000 through 2019 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
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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, 1999 was approximately $117
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. 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 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
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 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 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
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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. 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 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 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 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 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. 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."
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
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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 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
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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."
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
22
<PAGE> 23
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 8, 2000. 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 8, 2000.
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 8, 2000.
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 8, 2000.
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, 1999 and 1998 Consolidated
Statements of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997
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.
23
<PAGE> 24
(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.
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*(12) Distribution Agreement dated December 15, 1998, between EndoSonics and JOMED N.V.
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.28*(12) IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement dated December 15, 1998 between
EndoSonics and JOMED N.V.
10.29* Master Distribution Agreement dated December 13, 1999 between EndoSonics and JOMED N.V.
10.30 First Amendment to 1998 Stock Option Plan of the company, dated June 10, 1999
10.31 1999 Nonstatutory Stock Option Plan of the Company.
10.32 Nonstatutory Stock Option Agreement, dated November 8, 1999, by and between the Company and Robrecht L.W. Michiels.
10.33 1997 Stock Plan of MicroSound Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 27 of this Report on Form 10-K)
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.
(12) 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, 1999.
25
<PAGE> 26
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 30, 2000 By: /s/ REINHARD J. WARNKING
---------------------------------
Reinhard J. Warnking
Chief Executive Officer
(Principal Executive Officer)
By: /s/ KATHLEEN E. REDD
---------------------------------
Kathleen E. Redd
Acting Chief Financial Officer and
Corporate Controller
(Principal Financial and Accounting Officer)
26
<PAGE> 27
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 Kathleen E. Redd, 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 Chairman of the Board of Directors, March 30, 2000
- ----------------------------------------- President and Chief Executive Officer
Reinhard J. Warnking (Principal Executive Officer)
/s/ KATHLEEN E. REDD Acting Chief Financial Officer and Corporate Controller March 30, 2000
- ----------------------------------------- (Principal Financial Officer)
KATHLEEN E. REDD
/s/ JULIE A. BROOKS Director March 30, 2000
- -----------------------------------------
Julie A. Brooks
/s/ THOMAS J. CABLE Director March 30, 2000
- -----------------------------------------
Thomas J. Cable
/s/ DALE CONRAD Director March 30, 2000
- -----------------------------------------
Dale Conrad
/s/ JAKOB STAPFER Director March 30, 2000
- -----------------------------------------
Jakob Stapfer
/s/ GREGG W. STONE, M.D. Director March 30, 2000
- -----------------------------------------
Gregg W. Stone, M.D.
/s/ W. MICHAEL WRIGHT Director March 30, 2000
- -----------------------------------------
W. Michael Wright
</TABLE>
27
<PAGE> 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors................................ 29
Consolidated Balance Sheets...................................................... 30
Consolidated Statements of Operations............................................ 31
Consolidated Statements of Stockholders' Equity.................................. 32
Consolidated Statements of Cash Flows............................................ 33
Notes to Consolidated Financial Statements....................................... 34
</TABLE>
28
<PAGE> 29
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, 1999 and 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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 18, 2000
29
<PAGE> 30
ENDOSONICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,990 $ 8,749
Short-term investments 13,741 16,269
Investment in Radiance Medical Systems, Inc. 6,668 4,137
Trade accounts receivable, net of allowance for doubtful accounts of
$1,119 and $350 at December 31, 1999 and 1998, respectively 10,688 13,725
Inventories 12,981 6,834
Other current assets 517 560
--------- ---------
Total current assets 49,585 50,274
Property and equipment, net 5,898 4,064
Intangible assets, net 10,534 12,392
--------- ---------
$ 66,017 $ 66,730
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,891 $ 5,378
Accrued payroll and payroll related 2,868 2,822
Accrued restructuring 786 3,674
--------- ---------
Total current liabilities 8,545 11,874
Other liabilities 523 604
--------- ---------
Total liabilities 9,068 12,478
Commitments and contingencies (Notes 12 & 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,
17,686,958 and 17,590,120 shares issued and outstanding as of
December 31, 1999 and 1998, respectively 19 18
Additional paid-in capital 179,674 176,433
Common stock in treasury, at cost, 1,212,692 shares
and 860,000 shares as of December 31, 1999 and 1998, respectively (6,926) (4,839)
Accumulated other comprehensive gain (loss) 1,360 (1,305)
Accumulated deficit (117,178) (116,055)
--------- ---------
Total stockholders' equity 56,949 54,252
--------- ---------
========= =========
$ 66,017 $ 66,730
========= =========
</TABLE>
See accompanying notes
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Product sales $ 45,933 $ 42,929 $ 33,141
Contract revenue 2,242 1,215 856
----------- ----------- -----------
Total revenue 48,175 44,144 33,997
Cost of sales 23,590 20,089 17,962
----------- ----------- -----------
Gross margin 24,585 24,055 16,035
Operating expenses:
Research, development and clinical 7,713 7,045 6,309
Marketing and sales 11,648 9,575 6,068
General and administrative 6,876 4,849 5,840
Restructuring and other expenses (1,490) 10,554 47,956
Amortization of intangibles 1,857 1,391 475
----------- ----------- -----------
Total operating expenses 26,604 33,414 66,648
----------- ----------- -----------
Loss from operations (2,019) (9,359) (50,613)
Equity in net loss of Radiance Medical
Systems, Inc -- (158) (2,358)
Other income:
Interest income 924 1,208 1,881
Gain realized on equity investment in
Radiance Medical Systems, Inc.
common stock -- 739 4,021
----------- ----------- -----------
Total other income 924 1,947 5,902
----------- ----------- -----------
Net loss before provision for income taxes (1,095) (7,570) (47,069)
Provision for income taxes -- 222 175
----------- ----------- -----------
Net loss $ (1,095) $ (7,792) $ (47,244)
----------- ----------- -----------
Basic and diluted net loss per share $ (0.06) $ (0.47) $ (3.22)
----------- ----------- -----------
Shares used in per share calculations 17,651,515 16,471,953 14,669,975
=========== =========== ===========
</TABLE>
See accompanying notes
31
<PAGE> 32
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN TREASURY COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
(In thousands, except share amounts) SHARES AMOUNT CAPITAL STOCK INCOME (LOSS) DEFICIT EQUITY
- ------------------------------------ ---------- ------ ---------- ------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 13,522,572 $14 $124,024 $-- $ 29 $ (58,000) $ 66,067
Issuance of common stock to complete
Cardiometrics acquisition 2,502,500 2 33,137 -- -- -- 33,139
Issuance of Radiance Medical Systems, Inc.
stock dividend -- -- -- -- -- (3,019) (3,019)
Decrease in carrying value of Radiance
Medical Systems, Inc. -- -- (193) -- -- -- (193)
Exercise of common stock options 128,041 -- 620 -- -- -- 620
Comprehensive loss:
Net loss -- -- -- -- -- (47,244) (47,244)
Foreign currency translation -- -- -- -- (116) -- (116)
Comprehensive loss -- -- -- -- -- -- (47,360)
---------- --- -------- ------- ------- --------- --------
Balance at December 31, 1997 16,153,113 16 157,588 -- (87) (108,263) 49,254
Issuance of common stock in connection
with acquisitions 1,205,049 1 10,020 -- -- -- 10,021
Issuance of common stock to Fukuda Denshi
Co., Ltd., net issuance costs of $18 965,730 1 8,381 -- -- -- 8,382
Repurchase of common stock (860,000) -- -- (4,839) -- -- (4,839)
Exercise of common stock options 126,228 -- 444 -- -- -- 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 17,590,120 18 176,433 (4,839) (1,305) (116,055) 54,252
Repurchase of common stock (410,000) -- -- (2,482) -- -- (2,482)
Exercise of common stock options 449,530 1 2,854 -- -- -- 2,855
Issuance of treasury shares for Employee
Stock Purchase Plan 57,308 -- -- 395 -- (28) 367
Stock compensation charge -- -- 387 -- -- -- 387
Comprehensive income:
Net loss -- -- -- -- -- (1,095) (1,095)
Change in unrealized gain (loss) on
available-for-sale securities -- -- -- -- 2,532 -- 2,532
Foreign currency translation -- -- -- -- 133 -- 133
Comprehensive income -- -- -- -- -- -- 1,570
---------- --- -------- ------- ------- --------- --------
Balance at December 31, 1999 17,686,958 $19 $179,674 $(6,926) $ 1,360 $(117,178) $ 56,949
========== === ======== ======= ======= ========= ========
</TABLE>
See accompanying notes
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,095) $ (7,792) $(47,244)
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 1,698 873 580
Amortization 1,858 1,391 549
Stock compensation charge 387 -- --
Gain on partial sale of 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
Changes in operating assets and liabilities net of effects
from purchase of Cardiometrics and Navius:
Trade accounts receivable, net 1,046 (141) (2,711)
Inventories (6,146) 183 (419)
Other current assets 44 (112) 1,232
Accounts payable and accrued expenses 1,451 (1,256) (2,991)
Accrued payroll and payroll related expenses 46 764 411
Accrued restructuring (2,889) (2,343) 5,084
-------- -------- --------
Net cash provided by (used in) operating activities (3,600) 2,093 (3,630)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of short-term investments (14,698) (21,812) (9,090)
Proceeds from sale of Radiance Medical Systems, Inc. common
stock -- 3,942 528
Maturities of short-term investments 17,226 14,365 5,219
Capital expenditures for property and equipment (3,536) (1,261) (1,299)
Business acquisition, net of cash and cash equivalents acquired -- (6,511) (13,286)
-------- -------- --------
Net cash used in investing activities (1,008) (11,277) (17,928)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from issuance of common stock 3,222 8,826 620
Purchase of treasury stock (2,482) (4,839) --
-------- -------- --------
Net cash provided by financing activities 740 3,987 620
Effect of exchange rate changes on cash and cash equivalents 109 57 (116)
-------- -------- --------
Net decrease in cash and cash equivalents (3,759) (5,140) (21,054)
Cash and cash equivalents, beginning of year 8,749 13,889 34,943
-------- -------- --------
Cash and cash equivalents, end of year $ 4,990 $ 8,749 $ 13,889
======== ======== ========
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Acquisition of business (Note 9)
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
======== ======== ========
</TABLE>
See accompanying notes
33
<PAGE> 34
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 3).
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, 1999 and 1998, 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, 1999 and 1998, 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
34
<PAGE> 35
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
amortized on a straight-line basis over periods ranging from three to nine
years. Intangible assets total approximately $10,500 as of December 31, 1999 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. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 121, the carrying value would be reduced to
net realizable value 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, 1999, there have been no
adjustments to the carrying amounts of intangibles resulting from these
evaluations. As of December 31, 1999, intangible assets represented
approximately 16% of total assets and 18% of stockholders' equity.
Concentrations of Credit Risk, Significant Customers, Export Sales and
Suppliers
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. Accounts receivable from two of the Company's customers
represented 9% and 21% of net trade accounts receivable, respectively, at
December 31, 1999 (4% and .8%, respectively, at December 31, 1998).
During 1999, sales to two of the Company's customers comprised 19% and
8% of the Company's total product sales, respectively. During 1998, sales to two
of the Company's customers comprised 46% and 14% 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.
The Company had sales to customers outside the United States as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Europe $13,544 $10,592 $11,528
Asia 16,307 20,328 9,312
Other 933 1,275 1,027
------- ------- -------
$30,784 $32,195 $21,867
======= ======= =======
</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 title
transfers, generally when the goods are shipped, to its customers, including
distributors. Contract revenue is recognized as earned, normally 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
35
<PAGE> 36
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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.
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, 1997, 1998 and 1999 the Company had outstanding options
to purchase 3,081,407, 3,744,030 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. 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.
Reclassifications
Certain reclassifications have been made to the 1997 and 1998
Consolidated Financial Statements to conform to the 1999 presentation.
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 second fiscal quarter of the fiscal year beginning after
December 15, 1999. The Company is currently evaluating the impact, if any, of
SAB 101 on it's 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.
2. SHORT-TERM INVESTMENTS
The following is a summary of available-for-sale securities at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
Corporate debt securities $13,822 $ -- $ (81) $13,741
Marketable equity securities 5,410 1,258 -- 6,668
------- ------- -------- -------
$19,232 $ 1,258 $ (81) $20,409
======= ======= ======== =======
</TABLE>
36
<PAGE> 37
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
<TABLE>
<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
Marketable equity securities 5,410 -- (1,273) 4,137
------- ------- -------- -------
$26,564 $ 22 $ (1,312) $25,274
======= ======= ======== =======
</TABLE>
Included in the above table are securities with fair values totaling $0 and
$4,868 at December 31, 1999 and 1998, respectively, which are classified as cash
equivalents in the accompanying balance sheet. All debt securities mature within
one year.
3. CHANGE IN OWNERSHIP PERCENTAGE OF RADIANCE MEDICAL SYSTEMS, INC.
As of December 31, 1999 and 1998, the Company held 1,350,566 shares of
Radiance Medical System, Inc. (Radiance) common stock. Unrealized gains and
losses on the Company's investment in Radiance are reported as a separate
component of other comprehensive income pursuant to the requirements of SFAS
115.
As of December 31, 1997, EndoSonics owned 24% of the outstanding shares
of Radiance. During 1998, the Company sold approximately 843,000 shares of
Radiance stock resulting in a gain of $739 and since March 1, 1998, the Company
has accounted for its investment in Radiance under the cost method. 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, pursuant to the equity method of accounting for investment.
4. INVENTORIES
Inventories consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------- ------
<S> <C> <C>
Raw materials $ 5,930 $3,206
Work-in-process 1,867 1,354
Finished goods 5,184 2,274
------- ------
$12,981 $6,834
======= ======
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of December 31:
<TABLE>
1999 1998
------- -------
<S> <C> <C>
Furniture, fixtures and equipment $12,626 $ 9,190
Leasehold improvements 259 240
------- -------
12,885 9,430
Less accumulated depreciation and amortization (6,987) (5,366)
------- -------
$ 5,898 $ 4,064
======= =======
</TABLE>
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued SOP 98-1, Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use, ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain qualifying costs related to internal use software. The
Company implemented a new Enterprise Resource Planning ("ERP") system in 1999
and capitalized approximately $1,200 ($0.07 per share) related to this
implementation pursuant to SOP 98-1. The capitalized cost consists of
approximately $500 of purchased software and hardware and approximately $700 of
developed software. These amounts are included above in "Furniture, fixtures and
equipment" and are being depreciated over a five-year useful life.
6. INTANGIBLES
Intangibles consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Developed Technology $ 11,491 $ 11,491
</TABLE>
37
<PAGE> 38
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
<TABLE>
<S> <C> <C>
Goodwill 1,797 1,797
Other Intangibles 970 970
-------- --------
14,258 14,258
Less accumulated amortization (3,724) (1,866)
======== ========
$ 10,534 $ 12,392
======== ========
</TABLE>
7. CURRENT LIABILITIES
Current liabilities consisted of the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Accrued restructuring $ 786 $ 3,674
Accounts payable 1,453 2,102
Accrued payroll and related expenses 2,868 2,822
Deferred revenue 1,247 521
Accrued royalties 51 97
Accrued warranty 107 107
Other accrued expenses 2,033 2,551
------- -------
$ 8,545 $11,874
======= =======
</TABLE>
8. RESTRUCTURING AND OTHER
Concurrent with the purchases of Navius and Cardiometrics (See Note 9),
the Company recorded restructuring and other charges of $223 and $9,456,
respectively, related to plans to reduce overhead of the combined companies and
increase operating efficiency in future periods. In the fourth quarter of 1997,
due to changes in conditions subsequent to the initial recording of the 1997
restructuring and other charges, the Company reduced it's provision for the
charges from $9,456 to $8,606. The restructuring and other charges for Navius
are for corporate reorganization charges; the restructuring and other charges
for Cardiometrics include $7,116 of corporate reorganization costs and $1,490
related to relocation of certain product lines and overall integration of the
Company operations. During 1999 and 1998, the Company determined that
approximately $1,877 (including $1,139 in the fourth quarter of 1999) and $776,
respectively, of restructuring reserves provided for in connection with the
Cardiometrics acquisition relating to corporate reorganization were not
required. Additionally, in 1999 a stock compensation charge of $387 related to
certain employees which were terminated in 1999 as a result of an organizational
restructuring is included in restructuring and other expenses (See Note 10).
These restructuring and other charges are included in the accompanying
Consolidated Statements of Operations, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Cost of sales $ -- $ -- $ 1,251
Research and development -- -- 200
Marketing and sales -- -- 542
General and administrative -- -- 1,361
Restructuring and other expenses (1,490) 10,554 47,956
Other -- -- 296
------- ------- -------
Total charges $(1,490) $10,554 $51,606
======= ======= =======
</TABLE>
Restructuring and other expenses consist of the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Acquired in process research and
development (Note 9) $ -- $11,107 $43,000
Stock compensation charge 387 -- --
Restructuring -- 223 5,806
Restructuring and other decrease (1,877) (776) (850)
------- ------- -------
$(1,490) $10,554 $47,956
======= ======= =======
</TABLE>
The elements of the 1998 restructuring accrual as of December 31, 1999
were as follows:
38
<PAGE> 39
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
ACCRUAL AS
OF DECEMBER
PROVISION COST INCURRED 31, 1999
--------- ------------- ------------
<S> <C> <C> <C>
Corporate reorganization $223 $(223) $--
==== ===== ===
</TABLE>
The elements of the 1997 restructuring accrual as of December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
ACCRUAL AS
OF DECEMBER
PROVISION DECREASE COST INCURRED 31, 1999
--------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Corporate reorganization $ 7,491 $(3,028) $(3,677) $786
Consolidation of facilities 1,965 (475) (1,490) --
------- ------- ------- ----
$ 9,456 $(3,503) $(5,167) $786
======= ======= ======= ====
</TABLE>
The accrual for restructuring and other charges was approximately $786
and $3,674 as of December 31, 1999 and 1998.
9. 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 were substantially completed during the years 1997 to
1999, consistent with managements original estimates. Goodwill and other
intangible assets are being amortized over three-to-eight years. 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 $0, $470, and $1,000 was paid in 1999, 1998 and 1997 respectively.
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 years ending
December 31, 1997, giving effect to certain adjustments, including the
acquisition restructuring, as if the Cardiometrics acquisition had occurred at
the beginning of the period, are displayed in the following table:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Total revenue $ 41,057
Net loss (53,049)
Loss per share ($3.66)
</TABLE>
The unaudited proforma results of operations for the year ended December
31, 1997, includes 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>
<CAPTION>
<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.
Unaudited pro forma combined results of operations for the years 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.
<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>
10. EQUITY
40
<PAGE> 41
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
Treasury Stock
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 1998,
the Company had repurchased 860,000 shares of its common stock on the open
market at an aggregate cost of approximately $4,839. In 1999 the Company
repurchased an additional 410,000 shares of its common stock on the open market
at an aggregate cost of approximately $2,482. Also, during 1999, 57,308 shares
of common stock held in treasury were re-issued to participants of the Company's
Employee Stock Purchase Plan at prices ranging from $4.0375 to $7.3313 per
share. As a result, a total of 1,212,692 shares were held in treasury at
December 31, 1999, at an aggregate cost of approximately $6,926.
Dividends
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.
Strategic Relationship-Fukuda
In August 1998, the 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 $13,000 in EndoSonics by Fukuda. Approximately $8,400 of the
$13,000 represents an equity investment. The remaining $4,600 will fund certain
research and development 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 October 1998, the Company issued 965,730
shares of the Company's common stock at a price of $8.70 per share to Fukuda.
Effective January 2000, Fukuda became the exclusive distributor of the Company's
IVUS products in Japan.
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. At December
31, 1999, 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. The 1998 Purchase Plan allows participating employees to
purchase, through payroll deductions, shares of the Company's common stock at
85% of the prevailing market value at specified dates. A compensation charge of
$196 was calculated under Statement 123 and is included in the pro forma net
loss below. As of December 31, 1999 there were 57,308 shares issued under the
1998 Purchase Plan, at an aggregate cost of approximately $395. All of the
shares issued under the 1998 Purchase Plan are shares formerly held in treasury
by the Company. See Treasury Stock.
Stock Options
41
<PAGE> 42
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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. Also, in 1999 the Company established two nonstatutory stock option
plans with provisions similar to those of the 1988 and 1998 Plan's. These
options are included in the table below. As of December 31, 1999, 5,590,000
common shares were reserved for issuance, 2,138,160 shares were fully
exercisable (2,105,231 at December 31, 1998) and 298,083 shares were available
for future grant (159,350 at December 31, 1998).
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, 1999:
<TABLE>
<CAPTION>
SHARES OPTION WEIGHTED
UNDER PRICE AVG.
OPTION PER SHARE EXERCISE PRICE
---------- ----------- ------------
<S> <C> <C> <C>
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 0.135-16.50 8.39
--------- ----------- ------
Granted 766,939 3.41-12.13 6.94
Assumptions -- -- --
Exercises (449,530) .125-10.875 6.35
Expirations -- -- --
Cancellations (406,294) .125-16.50 9.29
--------- ----------- ------
Outstanding at December 31, 1999 3,655,145 $0.125-16.50 $ 8.45
========= ============ ======
</TABLE>
No shares purchased under the option plan are subject to repurchase at December
31, 1999.
The options outstanding at December 31, 1999 have been segregated into
ranges for additional disclosure as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
- ---------------------------------------------------------------------------
WEIGHTED-AVERAGE
OPTIONS REMAINING WEIGHTED-AVERAGE
RANGE OF EXERCISE OUTSTANDING AT CONTRACTUAL LIFE EXERCISE
PRICES DECEMBER 31, 1999 (IN YEARS) PRICE
- ----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$ 0.125 - $ 6.31 926,885 8.02 $ 4.84
6.38 - 7.75 947,933 6.63 7.41
7.88 - 10.75 922,567 6.99 9.20
$10.88 - $16.50 857,760 6.41 12.71
--------- ---- ------
3,655,145 7.02 $ 8.45
========= ==== ======
</TABLE>
42
<PAGE> 43
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
- ------------------------------------------------------------------------
OPTIONS CURRENTLY
RANGE OF EXERCISE EXERCISABLE AT WEIGHTED-AVERAGE
PRICES DECEMBER 31, 1999 EXERCISE PRICE
----------------- ----------------- -------------------
<S> <C> <C>
$ 0.125 - $ 6.31 377,275 $ 4.58
6.38 - 7.75 513,191 7.27
7.88 - 10.75 540,696 9.28
$10.88 - $16.50 706,998 12.77
========= ======
2,138,160 $ 9.12
========= ======
</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>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Risk free interest rates 6.0 - 9.25% 4.2 - 5.67% 5.5 - 6.6%
Expected volatility 1.12 1.13 1.01
Expected dividend yield -- -- --
Expected life (in years) 7 to 10 7 to 10 7 to 10
</TABLE>
The weighted-average fair value on the date of grant for options granted
during 1999, 1998 and 1997 was $5.38, $6.02, and $9.25, 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>
1999 1998 1997
-------- --------- ---------
<S> <C> <C> <C>
Pro forma net loss $(6,624) $(13,728) $(49,096)
Pro forma loss per share $ (0.38) $ (0.83) $ (3.35)
</TABLE>
In 1999, the Company extended the option vesting period for certain
terminated employees. The vesting period for a total of 84,469 options was
extended for periods ranging from three months to one year. Compensation expense
of $387 related to these option extensions is included in Restructuring and
other expenses.
11. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999,
1998 and 1997 consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal
Current $-- $ 97 $137
Deferred -- -- --
--- ---- ----
Total federal -- $ 97 $137
--- ---- ----
State
Current -- $ 13 $ 38
Deferred -- -- --
--- ---- ----
Total state -- $ 13 $ 38
--- ---- ----
Foreign provision -- $112 --
=== ==== ====
Income taxes $-- $222 $175
=== ==== ====
</TABLE>
43
<PAGE> 44
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
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>
1999 1998 1997
----- ------- --------
<S> <C> <C> <C>
Statutory federal income tax $(383) $(2,650) $(16,474)
State income taxes, net of federal -- 8 25
benefit
In-process research and development -- 3,888 15,050
Foreign taxes (96) 112 --
Distributions of appreciated property -- -- 993
Net operating loss utilization -- (1,663) (2,042)
Valuation allowance increases 442 527 2,571
Other 37 -- 52
----- ------- --------
Provision for income taxes $ -- $ 222 $ 175
===== ======= ========
</TABLE>
Significant components of the Company's deferred tax assets are as
follows at December 31,
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 18,647 $ 17,880
Research and development and other tax credit carryforwards 3,903 3,011
Other 4,881 5,355
-------- --------
Total deferred tax assets 27,431 26,246
Deferred tax liabilities:
Intangible assets
(3,799) (4,474)
Investment basis differences (1,857) (1,863)
-------- --------
Total deferred tax liabilities (5,656) (6,337)
-------- --------
Net deferred tax assets 21,775 19,909
Valuation allowance (21,775) (19,909)
-------- --------
Deferred tax asset $ -- $ --
======== ========
</TABLE>
Income tax payments were $111 in 1999, $212 in 1998 and $93 in 1997. The
valuation allowance decreased by $2,119 in 1998, and increased by $4,415 in
1997.
At December 31, 1999, the Company has net operating loss carryforwards
for federal and state income tax purposes of approximately $52,000 and $4,900,
respectively, which expire in various years from 1999 through 2019. At December
31, 1999, the Company has research and development and other tax credit
carryforwards for federal and state income tax purposes of approximately $2,877
and $1,578, respectively, which expire in various years from 2003 through 2019.
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.
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.
12. 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:
44
<PAGE> 45
ENDOSONICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share and per share amounts)
<TABLE>
<S> <C>
2000 $1,509
2001 1,425
2002 1,419
2003 1,376
2004 1,384
Thereafter 5,405
-------
$12,518
=======
</TABLE>
Rental expense charged to operations for all operating leases during
1999, 1998 and 1997 was approximately $1,174, $1,058 and $742 respectively.
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 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 and 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.
14. LINE OF CREDIT
During 1999, the Company obtained a revolving line of credit from a
commercial bank (the "Agreement") for $10,000 collateralized by all of the
Company's assets. At the Company's option, interest is payable monthly at either
the bank's prime rate or 2.5% per annum plus Libor. At December 31, 1999 the
interest rate was 8.5%. Principal matures and the line of credit expires October
23, 2000. At December 31, 1999 there were no outstanding draws.
The Agreement requires the Company to maintain certain financial ratios
and other covenants. Effective December 31,1999 the Company obtained a waiver of
the required minimum level of profitability.
45
<PAGE> 46
ENDOSONICS CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 1999, 1998, and 1997
(In thousands)
<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 ACCOUNTS PERIOD
----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for doubtful accounts $350 $1,910 $(1,081) $ (60)(2) $1,119
Accrued warranty expenses $107 $ -- $ -- $ -- $ 107
---- ------ ------- ----- ------
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
==== ====== ======= ===== ======
</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.
<PAGE> 47
INDEX TO 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.
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*(12) Distribution Agreement dated December 15, 1998, between EndoSonics and JOMED N.V.
</TABLE>
<PAGE> 48
<TABLE>
<S> <C>
10.28*(12) IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement dated December 15, 1998 between
EndoSonics and JOMED N.V.
10.29* Master Distribution Agreement dated December 13, 1999 between EndoSonics and JOMED N.V.
10.30 First Amendment to 1998 Stock Option Plan of the Company, dated June 10, 1999.
10.31 1999 Nonstatutory Stock Option Plan of the Company.
10.32 Nonstatutory Stock Option Agreement, dated November 8, 1999, by and between the Company and Robrecht L.W. Michiels.
10.33 1997 Stock Plan of MicroSound Corporation.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
24.1 Power of Attorney. (Reference is made to page 27 of this Report on Form 10-K.)
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.
(12) 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, 1999.
<PAGE> 1
EXHIBIT 10.29
MASTER DISTRIBUTION AGREEMENT
This Master Distribution Agreement is made this 13th day of December, 1999,
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, acting for and on behalf 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 Master 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 14
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
5 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 3.1 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 3.1 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.
-1-
<PAGE> 2
2. APPOINTMENT; RELATIONSHIP OF PARTIES
2.1. Appointment
EndoSonics hereby appoints Distributor as its exclusive distributor of
the Products in the Territory, subject to the terms of this Agreement.
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, EndoSonics shall not
appoint any other distributor for the sale, distribution or marketing of
Products in the Territory.
During the Term and each Renewal Term, if any, Distributor shall not
sell or commercially promote products, incorporating intravascular
ultrasound and/or physiological assessment technology, 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
Following expiration or termination, other than by reason of a
Distributor default, of this Agreement, 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 3.3,
shall terminate two (2) years from the date hereof; provided, however,
that the parties shall meet in January 2001 to negotiate in good faith
an extension of this Agreement for one year beyond the Term, if
-2-
<PAGE> 3
Distributor has met its obligations under this Agreement for the
preceding year. Following the Term, 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 Distribution Rights by Geographic Area
It is understood and agreed between the parties that the distribution
rights under this Agreement are granted to Distributor on a geographic
area by area basis. At EndoSonics' option, the distribution rights in
any geographic area within the Territory shall terminate upon
Distributor's failure to meet the Minimum Purchase Commitment in said
area subject to the provisions of Section 5. Upon such termination,
Exhibit B of this Agreement shall be amended accordingly, and all rights
granted by EndoSonics to Distributor within this geographic area shall
cease immediately.
3.3. Termination of Entire Agreement
This Agreement shall terminate in its entirety 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 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.
3.4. 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
-3-
<PAGE> 4
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.
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. Purchase Orders
Purchase orders for Products by Distributor shall be placed with
EndoSonics on a monthly basis, on or before the 10th of the month in
which Product shipment is requested. Purchase orders shall include a
specification of unit quantities by Product model, broken down by
geographic area as defined in Exhibit B hereof. Purchase order
quantities for any month shall conform to forecast as specified in
Section 6.4.
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 distribution center, 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 to Distributor's distribution center set forth
-4-
<PAGE> 5
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 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.
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 20 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 substantially the same Products of equal
value.
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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 for Catheters and Wires, and at
least one hundred twenty (120) days written notice for Systems, is given
to Distributor in case of a Product and/or specification change, and at
least one hundred twenty (120) days written notice for Catheters and
Wires, and at least one hundred eighty (180) days written notice for
Systems, 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. MINIMUM PURCHASE COMMITMENT
During the Term, Distributor shall purchase an annual minimum amount,
with reasonable Quarterly allocation, of Products (the "Minimum Purchase
Commitment") for each of the geographic areas as stipulated in the
individual schedules included under Exhibit C. If Distributor fails to
meet the Minimum Purchase Commitment 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 Purchase
Commitment for the ensuing 6 months. If Distributor fails to meet said
agreed upon 6-month Minimum Purchase Commitment, this shall constitute a
material breach and basis for termination of distribution rights under
Section 3.2, unless the sale of Products in such geographic area of the
Territory is restricted by regulatory authority having jurisdiction over
Products, or EndoSonics is unable to deliver Products by agreed upon
delivery dates.
For the purposes of this provision, a "purchase" of Products within the
time period set forth in Exhibit C shall mean EndoSonics' shipment of
such Products on or before the last day of each of such time periods.
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.
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<PAGE> 7
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 prior to the 15th of each month
thereafter, Distributor shall provide EndoSonics with a 6-month rolling
forecast in written or electronic form, showing prospective orders by
Product and intended submittal date for each geographic area in the
Territory. The rolling forecast shall be updated monthly by Distributor.
All forecasts shall be good faith estimates of Distributors'
requirements; provided, however, that Distributor shall be obligated to
purchase 100% (on a unit basis) of the Product quantity specified for
the initial month of each such forecast. In addition, the initial month
of Distributors' subsequent, monthly updated, rolling forecast shall not
deviate by more than 25% of the previous forecast for that same month.
6.5. Product Disposition by Distributor
Distributor shall provide EndoSonics with a monthly specification of all
Product shipments to its subsidiaries, agents, or representatives,
broken down by geographic area as defined in Exhibit B hereof, to enable
EndoSonics to track Distributor's performance by geographic area under
this Agreement. Said specifications shall be provided, in written or
electronic form, on or before the 15th of each month, showing Product
shipments for the immediately preceding month.
6.6. 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.
6.7. 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.
6.8. 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.
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<PAGE> 8
6.9. 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.
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.
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<PAGE> 9
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 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.
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<PAGE> 10
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 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
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<PAGE> 11
(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.
Except for its affiliated companies, subdistributors and agents,
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
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.
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<PAGE> 12
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 14.
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 13.3 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 13.3, 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 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 13.1 and 13.2 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
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<PAGE> 13
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;
(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.
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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: Mr. Leo H. Vogelzang
Director
Telephone: +31-70-307.3929
Facsimile: +31-70-307.3922
With a copy to:
EndoSonics Corporation
2870 Kilgore Road
Rancho Cordova, CA 95670
USA
Attention: Mr. Gary Wilson
Vice President Worldwide Sales & Marketing
Telephone: +1-916-861.0105
Facsimile: +1-916-631.9546
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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 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 3.4, 8.2, 8.3, 9,10.2, 10.3, and 14 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
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<PAGE> 16
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.
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: Mr. L.H. Vogelzang Name: Mr. T. Peters
Title: Director Title: President
Date: Date:
------------------------- -------------------------
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EXHIBIT A
ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES
ENDOSONICS SYSTEMS, SYSTEM OPTIONS AND ACCESSORIES:
[ * ]
ENDOSONICS CATHETERS:
[ * ]
[ * ] Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission.
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<PAGE> 18
ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES (continued)
CARDIOMETRICS SYSTEMS AND ACCESSORIES:
[ * ]
CARDIOMETRICS FLOWIRE(R) DOPPLER GUIDE WIRES:
[ * ]
CARDIOMETRICS WAVEWIRE(TM) PRESSURE GUIDE WIRES:
[ * ]
USAGE DISCOUNTS AVAILABLE
[ * ]
All Products sales are ex-works Rijswijk, The Netherlands, except the Oracle(R)
In-Vision(TM) Imaging System, FloMap(R) I and II Systems, 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.
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EXHIBIT B
DISTRIBUTION RIGHTS BY GEOGRAPHIC AREA
Territory
- - Baltic States (Estonia, Latvia, Lithuania)
- - East Block, excluding Poland, Czech Republic, Slovakia, Bosnia and Croatia
- - Israel
- - Italy
- - Middle East (Lebanon, Northern Africa, Syria, Jordan, Saudi Arabia, Kuwait,
Qatar, Bahrain, United Arab Emirates, Oman, Egypt)
- - Nordic (Sweden, Norway, Denmark, Finland, Iceland)
- - Russia
- - South Africa
- - Switzerland
- - Turkey
- - United Kingdom
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<PAGE> 20
EXHIBIT C
MINIMUM PURCHASE COMMITMENT
[ * ]
[ * ] Confidential Treatment Requested. Confidential portion has been filed
separately with the Securities and Exchange Commission.
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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.
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<PAGE> 22
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 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.
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<PAGE> 23
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 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.
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<PAGE> 24
EXHIBIT E
ENDOSONICS EXTENDED MAINTENANCE AGREEMENT
This Extended Maintenance Agreement is made and entered into this ___________th
day of _________________, 1999, 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: ______________, 1999 to ___________, 2000
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
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<PAGE> 25
7.1. EndoSonics shall maintain the equipment in good condition and
furnish service for calls received within the call window.
Specifically, EndoSonics shall:
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: F. van den Broek
Title: Title: Service Manager
Signature: Signature:
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<PAGE> 1
EXHIBIT 10.30
FIRST AMENDMENT TO
THE 1998 STOCK OPTION PLAN
OF ENDOSONICS CORPORATION
This First Amendment to the 1998 Stock Option Plan of EndoSonics
Corporation is adopted as of June 10, 1999 by the Board of Directors (the
"Board") of EndoSonics Corporation, a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Company maintains the 1998 Stock Option Plan of the
Company, effective as of June 4, 1998, (hereinafter the "Plan"); and
WHEREAS, pursuant to Article Four, Section I of the Company Plan, the
Board may amend the Plan from time to time with the approval of the
stockholders, which approval was obtained at the Annual Meeting of Stockholders
held on June 10, 1999;
NOW THEREFORE, BE IT RESOLVED, that the Plan be amended as follows,
effective June 10, 1999:
1. Article One, Section V.A. shall be amended and restated in its
entirety as follows:
A. The stock issuable under the Plan shall be shares of the
Company's authorized but unissued or reacquired Common Stock. The aggregate
number of shares which may be issued under the Plan shall not exceed 1,250,000
shares. The total number of shares issuable under the Plan shall be subject to
adjustment from time to time in accordance with the provisions of this Section V
of Article One.
I hereby certify that the foregoing First Amendment to the Plan was duly
approved by the Board of Directors of the Company on February 8, 1999 and by the
stockholders of the Company on June 10, 1999.
By /s/ Michael W. Hall
----------------------------------
Secretary
<PAGE> 1
EXHIBIT 10.31
ENDOSONICS CORPORATION
1999 NONSTATUTORY STOCK OPTION PLAN
ARTICLE ONE
GENERAL PROVISIONS
I. GENERAL
A. PURPOSES OF PLAN. This 1999 Nonstatutory Stock Option Plan (the
"Plan") is intended to promote the interests of EndoSonics Corporation, a
Delaware corporation (the "Company"), by providing a method whereby eligible
individuals may be offered incentives and rewards which will encourage them to
acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Company and continue to render services to the Company (or any
Parent or Subsidiary corporation (as defined below)).
B. DEFINITIONS. For purposes of the Plan, the following definitions
shall apply:
(i) "Administrator" shall mean the Board or any of its
Committees appointed pursuant to Section I of Article Two of the Plan.
(ii) "Affiliate" shall mean an entity other than a Subsidiary in
which the Company owns an equity interest.
(iii) "Applicable Laws" shall mean the requirements relating to
the administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options are granted under the Plan.
(iv) "Board" shall mean the Company's board of directors.
(v) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(vi) "Common Stock" shall mean the Common Stock of the Company.
(vii) "Consultant" shall mean any consultant or adviser if: (i)
the consultant or adviser renders bona fide services to the Company; (ii) the
services rendered by the consultant or adviser are not in connection with the
offer or sale of securities in a capital-raising transaction and do not directly
or indirectly promote or maintain a market for the Company's securities; and
(iii) the consultant or adviser is a natural person who has contracted directly
with the Company to render such services.
(viii) "Continuous Status as an Employee or Consultant" shall
mean the absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave,
<PAGE> 2
military leave, or any other leave of absence approved by the Administrator,
provided that such leave is for a period of not more than 90 days or
reemployment upon the expiration of such leave is guaranteed by contract or
statute. For purposes of this Plan, a change in status from an Employee to a
Consultant or from a Consultant to an Employee will not constitute a termination
of employment.
(ix) "Director" shall mean a member of the Board.
(x) "Employee" shall mean any person employed by the Company or
any Parent, Subsidiary or Affiliate of the Company.
(xi) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended.
(xii) "Fair Market Value" shall mean, as of any date, the value
of Common Stock determined as follows:
(a) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock as quoted on such system on the date of
determination (if for a given day no sales were reported, the closing bid on
that day shall be used), as such price is reported in The Wall Street Journal or
such other source as the Administrator deems reliable;
(b) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the bid and asked prices for the Common Stock; or
(c) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(xiii) "Officer" shall mean a person who is an officer of the
Company within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(xiv) "Option" shall mean a nonstatutory stock option, not
intended to meet the requirements of Section 422 of the Code, granted pursuant
to this Plan. All Options granted under this Plan shall be nonstatutory stock
options.
(xv) "Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(xvi) "Rule 16b-3" shall mean Rule 16b-3 promulgated under the
Exchange Act as the same may be amended from time to time, or any successor
provision.
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<PAGE> 3
(xvii) "Subsidiary" shall mean a "subsidiary
corporation," whether now or hereafter existing, as defined in Section 424(f) of
the Code.
II. STRUCTURE OF THE PLAN
A. OPTION PROGRAMS. Eligible individuals may, at the discretion of the
Administrator, be granted options to purchase shares of Common Stock in
accordance with the provisions of Article Two.
B. GENERAL PROVISIONS. Unless the context clearly indicates otherwise,
the provisions of Articles One and Two of the Plan shall apply to all Option
grants under the Plan and shall accordingly govern the interests of all
individuals under the Plan.
III. ELIGIBILITY FOR OPTION GRANTS
A. The persons eligible to participate in the Plan shall be limited to
the following:
(i) Employees and Consultants of the Company (or its Parent or
Subsidiary corporations) who render services which contribute to the management,
growth and financial success of the Company (or its Parent or Subsidiary
corporations) and who are not Officers or Directors of the Company;
(ii) Employees and Consultants of the Company who, as of the
date of grant of Options to them hereunder, were not previously employed by the
Company; provided, that the grant of such Options is an inducement essential to
each such individual's entering into an employment contract with the Company.
B. The Administrator shall have full authority to make Option grants
under the Plan to the eligible individuals within the scope of its
administrative functions under the Plan and to determine the number of shares to
be covered by each such grant, including the time or times at which each such
option is to become exercisable, and the maximum term for which the Option is to
remain outstanding.
IV. STOCK SUBJECT TO THE PLAN
A. The stock issuable under the Plan shall be shares of the Company's
authorized but unissued or reacquired Common Stock. The aggregate number of
shares which may be issued under the Plan shall not exceed 200,000 shares. The
total number of shares issuable under the Plan shall be subject to adjustment
from time to time in accordance with the provisions of this Section IV of
Article One.
B. Should an outstanding Option expire or terminate for any reason prior
to exercise in full, the shares subject to the portion of the Option not so
exercised shall be available for subsequent Option grant. Notwithstanding any
other provision of the Plan, shares issued under the Plan and later repurchased
by the Company shall not become available for future grant under the Plan.
Exercise of an Option in any manner shall result in a decrease in the number of
shares which thereafter may be available, both for purposes of the Plan and for
sale under the Option, by
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<PAGE> 4
the number of shares as to which the Option is exercised. Should the exercise
price of an Option be paid with shares of Common Stock or should shares of
Common Stock otherwise issuable under the Plan be withheld by the Company in
satisfaction of the withholding taxes incurred in connection with the exercise
of an Option under the Plan, then the number of shares of Common Stock available
for issuance under the Plan shall be reduced by the gross number of shares for
which the Option is exercised and not by the net number of shares of Common
Stock issued to the holder of such Option.
C. If any change is made to the outstanding Common Stock by reason of
any stock split, reverse stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, then appropriate adjustments shall be made to (i) the maximum
number and/or class of securities issuable under the Plan, (ii) the maximum
number and/or class of securities for which any one individual may be granted
stock options, and (iii) the number and/or class of securities and price per
share in effect under each outstanding Option under the Plan; provided, however
that the conversion of convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustments to
the outstanding Options shall preclude the enlargement or dilution of rights and
benefits under such Options. Such adjustment shall be made by the Administrator,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of stock subject to an Option. In the event of a
dissolution or liquidation of the Company, each outstanding Option shall expire
on a date specified in a written notice given by the Administrator to an
Optionee specifying the terms and conditions of such termination (which date
shall be at least fifteen (15) days after the date the Administrator gives the
written notice).
ARTICLE TWO
OPTION GRANTS
I. ADMINISTRATION AND ELIGIBILITY
A. ADMINISTRATION OF OPTIONS. With respect to Option grants, the Plan
shall be administered by (A) the Board or (B) a committee designated by the
Board ("Committee"), which committee shall be constituted in such a manner as to
satisfy the Applicable Laws. Options granted pursuant to this Article Two shall
be authorized by action of the Administrator and shall be nonstatutory stock
options which are not intended to meet the requirements of Section 422 of the
Code. Each Option granted shall be evidenced by one or more instruments in the
form approved by the Administrator. Each such instrument shall, however, comply
with the terms and conditions specified below. Subject to the provisions of the
Plan and in the case of a Committee, the specific duties delegated by the Board
to such Committee, the Administrator shall have the authority, in its
discretion:
(a) to determine the Fair Market Value of the Common Stock, in
accordance with Section I.B.(xii) of Article One of the Plan;
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<PAGE> 5
(b) to select the Employees and Consultants to whom options may
from time to time be granted hereunder;
(c) to determine whether and to what extent Options are granted
hereunder;
(d) to determine the number of shares of Common Stock to be
covered by each such award granted hereunder;
(e) to approve forms of agreement for use under the Plan;
(f) to determine the terms and conditions, not inconsistent with
the terms of the Plan, of any award granted hereunder (including, but not
limited to, the share price and any restriction or limitation, or any vesting
acceleration or waiver of forfeiture restrictions regarding any option and/or
the shares of Common Stock relating thereto, based in each case on such factors
as the Administrator shall determine, in its sole discretion); and
(g) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option shall have declined since the date the Option was granted.
B. RECIPIENTS OF GRANTS. Options may be granted to Employees and
Consultants. An Employee or Consultant who has been granted an Option may, if he
or she is otherwise eligible, be granted an additional Option or Options.
II. TERMS AND CONDITIONS OF OPTIONS
A. OPTION EXERCISE PRICE AND CONSIDERATION.
(i) EXERCISE PRICE. The per share exercise price for the shares
to be issued pursuant to exercise of an Option shall be such price as is
determined by the Administrator, but shall be no less than 85% of the Fair
Market Value on the date of the grant.
(ii) PERMISSIBLE CONSIDERATION. The consideration to be paid for
the shares to be issued upon exercise of an Option, including the method of
payment, shall be determined by the Administrator and may consist entirely of
(1) cash, (2) check, (3) other shares that (x) in the case of shares acquired
upon exercise of an Option either have been owned by the Optionee for more than
six months on the date of surrender or were not acquired, directly or
indirectly, from the Company, and (y) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the shares as to which said
Option shall be exercised, (4) authorization from the Company to retain from the
total number of shares as to which the Option is exercised that number of shares
having a Fair Market Value on the date of exercise equal to the exercise price
for the total number of shares as to which the Option is exercised, (5) delivery
of a properly executed exercise notice together with irrevocable instructions to
a broker to deliver promptly to the Company the amount of sale or loan proceeds
required to pay the exercise price, (6) a combination of any of the foregoing
methods of payment, (7) a combination of any of the foregoing methods of payment
at least equal in value to the stated capital represented by the
5
<PAGE> 6
shares to be issued, plus a promissory note for the balance of the exercise
price, or (8) such other consideration and method of payment for the issuance of
shares to them to the extent permitted under Applicable Laws. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
B. TERM OF OPTIONS. The term of each Option shall be the term stated in
the written Option agreement, provided, however that the term shall be no more
than ten (10) years from the date of grant thereof or such shorter term as may
be provided in the written Option agreement.
C. EXERCISE OF OPTIONS.
(i) PROCEDURE FOR EXERCISE: RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan. An Option may not be exercised for a fraction of a share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section II.A.(ii) of this
Article Two. Until the issuance (as evidenced by the appropriate entry on the
books of the Company or of a duly authorized transfer agent of the Company) of
the stock certificate evidencing such shares, no right to vote or receive
dividends or any other rights as a stockholder shall exist with respect to the
optioned stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly upon exercise of
the Option. No adjustment will be made for a dividend or other right for which
the date is prior to the date the stock certificate is issued, except as
provided in Section IV.C. of Article One of the Plan.
(ii) TERMINATION OF STATUS AS AN EMPLOYEE OR CONSULTANT. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant, such optionee may, but only within three (3) months (or such other
period of time, not exceeding six (6) months, as is determined by the
Administrator) after the date of such termination (but in no event later than
the date of expiration of the term of such Option set forth in the written
Option agreement), exercise his or her Option to the extent that he or she was
entitled to exercise it at the date of such termination. To the extent that the
optionee was not entitled to exercise the Option at the date of such
termination, or if the optionee does not exercise such Option (which he or she
was entitled to exercise) within the time specified herein, the Option shall
terminate.
(iii) DISABILITY OF OPTIONEE. Notwithstanding Section II.C.(ii)
of this Article Two above, in the event of termination of an optionee's
Continuous Status as an Employee or Consultant as a result of his or her total
and permanent disability (as defined in Section 22(e)(3) of the Code), he or she
may, but only within six (6) months (or such other period of time not
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<PAGE> 7
exceeding twelve (12) months as is determined by the Administrator) from the
date of such termination (but in no event later than the date of expiration of
the term of such Option as set forth in the written Option agreement), exercise
his or her Option to the extent he or she was entitled to exercise it at the
date of such termination. To the extent that he or she was not entitled to
exercise the Option at the date of termination, or if he does not exercise such
Option (which he was entitled to exercise) within the time specified herein, the
Option shall terminate.
(iv) DEATH OF OPTIONEE. In the event of the death of an
Optionee:
(a) during the term of the Option who is at the time of
his death an Employee or Consultant of the Company and who shall have been in
Continuous Status as an Employee or Consultant since the date of grant of the
Option, the Option may be exercised, at any time within six (6) months (or such
other period of time, not exceeding twelve (12) months, as is determined by the
Administrator) following the date of death (but in no event later than the date
of expiration of the term of such Option as set forth in the written Option
agreement), by the optionee's estate or by a person who acquired the right to
exercise the Option by bequest or inheritance but only to the extent of the
right to exercise that would have accrued had the optionee continued living and
remained in Continuous Status as an Employee or Consultant three (3) months (or
such other period of time as is determined by the Administrator as provided
above) after the date of death, subject to the limitation set forth in Article
Two; or
(b) within thirty (30) days (or such other period of
time not exceeding three (3) months as is determined by the Administrator after
the termination of Continuous Status as an Employee or Consultant, the Option
may be exercised, at any time within six (6) months following the date of death
(but in no event later than the date of expiration of the term of such Option as
set forth in the written Option agreement), by the optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent of the right to exercise that had accrued at the date of
termination.
(v) EARLY EXERCISE. The Administrator shall have complete
discretion, exercisable either at the time the Option is granted or at any time
while the Option remains outstanding, to permit one or more Options held by the
optionee under this Article Two to be exercised, during the limited period of
exercisability provided under Sections II.C.(ii), II.C.(iii) and II.C.(iv)
above, not only with respect to the number of shares for which each such Option
is exercisable at the time of the optionee's termination of Continuous Status as
an Employee or Consultant but also with respect to one or more subsequent
installments of purchasable shares for which the Option would otherwise have
become exercisable had such termination not occurred.
(vi) EXTENSION OF EXERCISE PERIOD. The Administrator shall have
full power and authority, within the scope of its administrative functions under
the Plan, to extend the period of time for which any Option granted under this
Plan is to remain exercisable following the optionee's termination of Continuous
Status as an Employee or Consultant or death from the limited period in effect
under Sections II.C.(ii) and II.C.(iv) of this Article Two to such greater
period of time as the Administrator shall deem appropriate; provided, however,
that in no event shall such Option be exercisable after the specified expiration
date of the Option term.
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<PAGE> 8
(vii) RULE 16B-3. Options granted to persons subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
D. REPURCHASE RIGHTS. The shares of Common Stock acquired upon the
exercise of Options granted under the Plan may be subject to one or more
repurchase rights of the Company in accordance with the following provisions:
(i) The Administrator may in its discretion determine that it
shall be a term and condition of one or more Options exercised under the Plan
that the Company (or its assignees) shall have the right, exercisable upon the
optionee's termination of Continuous Status as an Employee or Consultant, to
repurchase, at the Option price any or all of the unvested shares of Common
Stock at the time held by the optionee. Any such repurchase right shall be
exercisable by the Company (or its, assignees) upon such terms and conditions
(including the establishment of the appropriate vesting schedule and other
provision for the expiration of such right in one or more installments over the
optionee's period of Continuous Status as an Employee or Consultant) as the
Administrator may specify in the instrument evidencing such right.
(ii) The Administrator may assign the Company's repurchase
rights under subparagraph D.(i) above to any person or entity selected by the
Administrator, including one or more stockholders of the Company.
(iii) All of the Company's outstanding repurchase rights shall
automatically terminate, and all shares subject to such terminated rights shall
immediately vest in full, upon the occurrence of any Corporate Transaction under
Section III of this Article Two, except to the extent (i) the Company's
outstanding repurchase rights are to be assigned to the successor corporation
(or parent thereof) in connection with the Corporate Transaction or (ii) such
termination of repurchase rights and acceleration of vesting are precluded by
other limitations imposed by the Administrator at the time of the Option grant.
E. LIMITED TRANSFERABILITY OF OPTIONS. The Option may not be sold,
pledged, assigned, hypothecated, transferred or disposed of in any manner other
than by will or by the laws of descent or distribution provided that the
Administrator may in its discretion grant transferable Options pursuant to
Option agreements specifying (i) the manner in which such Options are
transferable and (ii) that any such transfer shall be subject to the Applicable
Laws. The designation of a beneficiary by an optionee will not constitute a
transfer. An Option may be exercised, during the lifetime of the optionee, only
by the optionee or a transferee permitted by this subparagraph E.
F. TIME OF GRANTING OPTIONS. The date of grant of an Option under this
Article Two shall, for all purposes, be the date on which the Administrator
makes the determination granting such Option or such other date as is determined
by the Administrator. Notice of the determination shall be given to each
Employee or Consultant to whom an Option is so granted within a reasonable time
after the date of such grant.
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III. CORPORATE TRANSACTIONS/CHANGES IN CONTROL
A. In the event of any of the following stockholder-approved
transactions (a "Corporate Transaction");
(i) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which is to
change the State of the Company's incorporation,
(ii) the sale, transfer or other disposition of all or
substantially all of the assets of the Company, or
(iii) any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's outstanding
voting stock is transferred to holders different from those who held the stock
immediately prior to such merger, the exercisability of each Option outstanding
under this Article Two shall automatically accelerate so that each such Option
shall, immediately prior to the specified effective date for the Corporate
Transaction, become fully exercisable with respect to the total number of shares
of Common Stock at the time subject to such Option and may be exercised for all
or any portion of such shares. However, an outstanding Option under this Article
Two shall not so accelerate if and to the extent: (i) such Option is, in
connection with the Corporate Transaction, either to be assumed by the successor
corporation or parent thereof or be replaced with a comparable option to
purchase shares of the capital stock of the successor corporation or parent
thereof, (ii) such Option is to be replaced with a cash incentive program of the
successor corporation based on the option spread at the time of the Corporate
Transaction, or (iii) the acceleration of such Option is subject to other
limitations imposed by the Administrator at the time of grant. The determination
of option comparability under clause (i) above shall be made by the Committee,
and its determination shall be final, binding and conclusive.
For purposes of this Section III of Article Two, an Option shall
be considered "assumed," without limitation, if, at the time of issuance of the
stock or other consideration upon such merger or sale of assets, each optionee
would be entitled to receive upon exercise of an Option the same number and kind
of shares of stock or the same amount of property, cash or securities as the
optionee would have been entitled to receive upon the occurrence of such
transaction if the optionee had been, immediately prior to such transaction, the
holder of the number of shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of shares covered by
the Option as provided for in Section IV.C. of Article One).
B. Immediately following the consummation of the Corporate Transaction,
all outstanding Options under this Article Two shall terminate and cease to be
outstanding, except to the extent assumed by the successor corporation or its
parent company.
C. Each outstanding Option under this Article Two which is assumed in
connection with the Corporate Transaction or is otherwise to continue in effect
shall be appropriately adjusted, immediately after such Corporate Transaction,
to apply and pertain to the number and class of
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securities which would have been issuable, in consummation of such Corporate
Transaction, to an actual holder of the same number of shares of Common Stock as
are subject to such Option immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the Option price payable per
share, provided the aggregate Option price payable for such securities shall
remain the same. In addition, the class and number of securities available for
issuance under the Plan on both an aggregate and per participant basis following
the consummation of the Corporate Transaction shall be appropriately adjusted.
D. The Options outstanding under this Article Two shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
E. The Administrator shall have the discretionary authority, exercisable
either at the time the Option is granted or at any time while the Option remains
outstanding, to provide for the automatic acceleration of one or more
outstanding Options under this Article Two upon the occurrence of a Change in
Control (as defined below). The Administrator shall also have full power and
authority to condition any such Option acceleration upon the subsequent
termination of the optionee's Continuous Status as an Employee or a Consultant
within a specified period following the Change in Control.
F. For purposes of this Section III of Article Two, a "Change in
Control" shall be deemed to occur in the event:
(i) any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled by, or
is under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act) of
securities possessing more than twenty-five percent (25%) of the total combined
voting power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's stockholders which the Board does
not recommend such stockholders to accept; or
(ii) there is a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a majority of
the Board members (rounded up to the next whole number) cease, by reason of one
or more proxy contests for the election of Board members, to be comprised of
individuals who either (A) have been Board members continuously since the
beginning of such period or (B) have been elected or nominated for election as
Board Members during such period by at least two-thirds of the Board members
described in clause (A) who were still in office at the time such election or
nomination was approved by the Board.
G. Any Options accelerated in connection with the Change in Control
shall remain fully exercisable until the expiration or sooner termination of the
Option term.
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IV. LOANS OR INSTALLMENT PAYMENT
The Administrator may assist any optionee in the exercise of one or more
outstanding Options under this Article Two by (a) authorizing the extension of a
loan to such optionee from the Company or (b) permitting the optionee to pay the
Option price for the purchased Common Stock in installments over a period of
years. The terms of any loan or installment method of payment (including the
interest rate and terms of repayment) will be established by the Administrator
in its sole discretion. Loans and installment payments may be granted without
security or collateral, but the maximum credit available to the optionee shall
not exceed the sum of (i) the aggregate Option price of the purchased shares
(less the par value) plus (ii) any federal and state income and employment tax
liability incurred by the optionee in connection with the exercise of the
Option.
ARTICLE THREE
MISCELLANEOUS
I. AMENDMENT OF THE PLAN
A. AGREEMENT OF THE PLAN. The Board may amend or terminate the Plan from
time to time in such respects as the Board may deem advisable.
Notwithstanding the foregoing, the provisions set forth in
Section II.B. of Article Three (and any other Sections of the Plan that affect
the formula award terms to be specified in this Plan by Rule 16b-3) shall not be
amended more than once every six (6) months, other than to comport with changes
in the Code, the Employee Retirement Income Security Act of 1974, as amended, or
the rule thereunder.
B. EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination
of the Plan that would impair the rights of any optionee shall not affect
Options already granted to such optionee and such Options shall remain in full
force and effect as if this Plan had not been amended or terminated, unless
mutually agreed otherwise between the optionee and the Board, which agreement
must be in writing and signed by the optionee and the Company.
II. WITHHOLDING TAXES AND TAX WITHHOLDING
A. WITHHOLDING TAXES. As a condition to the exercise of Options granted
hereunder, the optionee shall make such arrangements as the Administrator may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of such Option. The Company shall not be required to issue any shares
under the Plan until such obligations are satisfied.
B. STOCK WITHHOLDING TO SATISFY WITHHOLDING TAX OBLIGATIONS. At the
discretion of the Administrator, optionees may satisfy withholding obligations
as provided in this paragraph. When an optionee incurs tax liability in
connection with an Option which tax liability is subject to tax withholding
under applicable tax laws, and the optionee is obligated to pay the Company an
amount required to be withheld under applicable tax laws, the optionee may
satisfy the
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withholding tax obligation by one or some combination of the following methods:
(a) by cash payment, or (b) out of optionee's current compensation, or (c) if
permitted by the Administrator, in its discretion, by surrendering to the
Company shares that (i) in the case of shares previously acquired from the
Company, have been owned by the optionee for more than six (6) months on the
date of surrender, and (ii) have a Fair Market Value on the date of surrender
equal to or less than the applicable taxes, or (d) by electing to have the
Company withhold from the shares to be issued upon exercise of the Option that
number of shares having a fair market value equal to the statutory minimum
amount required to be withheld. For this purpose, the fair market value of the
shares to be withheld shall be determined on the date that the amount of tax to
be withheld is to be determined (the "Tax Date").
Any surrender of previously owned shares to satisfy tax withholding
obligations arising upon exercise of this option must comply with the applicable
provisions of Rule 16b-3.
All elections by an optionee to have shares withheld to satisfy tax
withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
(b) once made, the election shall be irrevocable as to the
particular shares of the Option as to which the election is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have shares withheld is made by an optionee
and the Tax Date is deferred under Section 83 of the Code because no election is
filed under Section 83(b) of the Code, the optionee shall receive the full
number of shares with respect to which the Option is exercised but such optionee
shall be unconditionally obligated to tender back to the Company the proper
number of shares on the Tax Date.
III. EFFECTIVE DATE AND TERM OF PLAN
The Plan shall become effective upon its adoption by the Board. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section I of this Article Three.
IV. USE OF PROCEEDS
Any cash proceeds received by the Company from the sale of shares
pursuant to Options granted under the Plan shall be used for general corporate
purposes.
V. REGULATORY APPROVALS
Shares shall not be issued pursuant to the exercise of an Option unless
the exercise of such Option and the issuance and delivery of such shares
pursuant thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act of 1933, as amended,
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the Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
VI. NO EMPLOYMENT/SERVICE RIGHTS
Neither the action of the Company in establishing the Plan, nor any
action taken by the Administrator hereunder, nor any provision of the Plan shall
be construed so as to grant any individual the right to remain in the employ or
service of the Company (or any Parent or Subsidiary corporation) for any period
of specific duration, and the Company (or any Parent or Subsidiary corporation
retaining the services of such individual) may terminate such individual's
employment or service at any time and for any reason, with or without cause.
VII. OPTION AGREEMENTS
Options issued under the Plan shall be evidenced by written Option
agreements in such form as the Board shall from time to time approve.
VIII. RESERVATION OF SHARES
The Company, during the term of this Plan, will at all times reserve and
keep available such number of shares as shall be sufficient to satisfy the
requirements of the Plan. The inability of the Company to obtain authority from
any regulatory body having jurisdiction, which authority is deemed by the
Company's counsel to be necessary to the lawful issuance and sale of any shares
hereunder, shall relieve the Company of any liability in respect of the failure
to issue or sell such shares as to which such requisite authority shall not have
been obtained.
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EXHIBIT 10.32
ENDOSONICS CORPORATION
NONSTATUTORY STOCK OPTION AGREEMENT
AGREEMENT made this 8th day of November 1999 by and between EndoSonics
Corporation, a corporation organized and existing under the laws of the State of
Delaware (the "Company"), and Robrecht L. W. Michiels (the "Optionee").
RECITALS
A. The Company's Board of Directors (the "Board") has entered into this
Nonstatutory Stock Option Agreement (the "Agreement") for the purpose of
attracting and retaining the services of Optionee who is in a position to
contribute to the management, growth and financial success of the Company or its
parent or subsidiary corporations.
B. The granted option is intended to be a Nonstatutory stock option
which does not satisfy the requirements of Section 422 of the Internal Revenue
Code.
C. For purposes of this Agreement, the following definitions shall be in
effect:
"Affiliate" shall mean an entity other than a Subsidiary in
which the Company owns an equity interest.
"Board" shall mean the board of directors of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall mean the common stock of the Company, par
value $.001 per share.
"Continuous Status as an Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status
as an Employee shall not be considered interrupted in the case of sick
leave, military leave, or any other leave of absence approved by the
Board, provided that such leave is for a period of not more than 90 days
or reemployment upon the expiration of such leave is guaranteed by
contract or stature.
"Employee" shall mean any person (including the Optionee)
employed by the Company or any Parent, Subsidiary or Affiliate of the
Company. The Optionee shall be deemed an Employee until the Optionee's
employment is terminated by either the Company or the Optionee.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
<PAGE> 2
"Fair Market Value" shall mean the fair market value per share
of Common Stock on any date in question shall be determined in
accordance with the following provisions:
(i) If the Common Stock is not at the time listed or
admitted to trading on any stock exchange but is traded on the
Nasdaq National Market, then the market value shall be the
closing selling price per share of Common Stock on the date in
question, as such prices are reported by the National
Association of Securities Dealers on the Nasdaq National Market
or any successor system. If there is no reported closing selling
price on the date in question, then the closing selling price on
the last preceding date for which such quotation exists shall be
determinative of fair market value.
(ii) If the Common Stock is at the time listed or
admitted to trading on any stock exchange, then the fair market
value shall be the closing selling price per share of Common
Stock on the date in question on the stock exchange serving as
the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such
exchange. If there is no reported sale of Common Stock on such
exchange on the date in question, then the fair market value
shall be the closing selling price on the exchange on the last
preceding date for which such quotation exists.
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined
in good faith by the Board.
"Option" shall mean a non-qualified stock option granted
pursuant to this Agreement.
"Parent" shall mean a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
"Subsidiary" shall mean a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
TERMS
1. RESERVATION OF SHARES. The stock issuable under this Agreement shall
be shares of authorized but unissued Common Stock. The Company, shall, until the
Expiration Date, reserve and keep available such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of this Agreement. The
inability of the Company to obtain authority from any regulatory body having
jurisdiction, which authority is deemed by the Company's counsel to be necessary
to the lawful issuance and sale of any shares of Common Stock hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such shares as to which such requisite authority shall not have been obtained.
2. GRANT OF OPTION. Pursuant to the provisions of this paragraph set
forth below, there is hereby granted to the Optionee, on the date first written
above (the "Grant Date"), an Option to purchase up to 40,000 shares of Common
Stock (the "Option Shares") upon the
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terms and conditions set forth in this Agreement. The Option Shares shall be
purchasable in accordance with such terms and conditions at the purchase price
of $3.50 per share (the "Option Price").
The terms of the Option granted under this Agreement shall be as
follows:
A. the Option shall be exercisable only while the Employee
remains an employee of the Company, except as otherwise set forth below;
B. the Option shall be come exercisable in installments
cumulatively as to 25% of the shares subject to the Option on each of the first,
second, third and fourth anniversary of the date of the grant of the Option.
3. OPTION TERM. The Option shall have a maximum term of ten (10) years
measured from the Grant Date and shall accordingly expire at the close of
business on November 8, 2009 (the "Expiration Date"), unless sooner terminated
in accordance with this Agreement.
4. LIMITED TRANSFERABILITY. The Option shall not be transferable or
assignable by the Optionee except for a transfer of the Option by will or by the
laws of inheritance following the Optionee's death. Accordingly, the Option may
be exercised, during the Optionee's lifetime, only by the Optionee. Any attempt
to assign, pledge, transfer, and hypothecate or otherwise dispose of the Option,
and any levy of execution, attachment or similar process on the Option, shall be
null and void.
5. EXERCISE OF OPTIONS.
A. Except as provided in this paragraph and Paragraph 5.B below, the
Option shall become exercisable for the Option Shares in a series of
installments as follows:
(i) The Option shall become exercisable for twenty-five percent
(25%) of the Option Shares upon the Optionee's completion of twelve (12)
months of continuous service as an Employee measured from the Grant
Date.
(ii) One forty-eighth (1/48th) of the total number of Option
Shares shall become exercisable on each monthly anniversary of the Grant
Date thereafter, while the Optionee remains an employee of, or
consultant to, the Company.
B. Once the Option becomes exercisable for one or more installments of
the Option Shares, those installments shall accumulate, and the Option shall
remain exercisable for the accumulated installments until the Expiration Date or
sooner termination of the option term under Paragraph 6 or Paragraph 8.A of this
Agreement.
C. The Option shall not become exercisable for any additional Option
Shares following the Optionee's cessation of service as an Employee.
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6. TERMINATION OF EMPLOYMENT. Should the Optionee's service as an
Employee terminate while the Option remains outstanding, then the option term
specified in Paragraph 3 of this Agreement shall terminate (and this Option
shall cease to be exercisable) prior to the Expiration Date in accordance with
the following provisions.
(i) Should the Optionee cease service as an Employee for any
reason (other than death) while holding the Option, then the period for
exercising the Option shall be reduced to the three (3)-month period
commencing with the date of such cessation of service. During such
limited period of exercisability, the Option may not be exercised for
more than the number of Option Shares (if any) for which it is
exercisable on the date the Optionee ceased service as an Employee. Upon
the expiration of such three (3)-month period, the Option shall
terminate and cease to be outstanding.
(ii) Should the Optionee die either while serving as an Employee
or during the three (3)-month period following the cessation of service
as an Employee, then the personal representative of the Optionee's
estate (or the person or persons to whom the Option is transferred
pursuant to the Optionee's will or in accordance with the laws of
inheritance) shall have the right to exercise the Option for any or all
of the Option Shares for which the Option is exercisable on the date the
Optionee ceased service as an Employee, less any Option Shares
subsequently purchased by the Optionee prior to death. Such right shall
lapse, and the Option shall cease to be outstanding, upon the expiration
of the twelve (12)-month period measured from the date of the Optionee's
death.
(iii) In no event may the Option be exercised at any time after
the specified Expiration Date.
(iv) Upon the Optionee's termination of employment for any
reason, the Option shall immediately terminate and cease to be
outstanding with respect to any and all Option Shares for which the
Option is not otherwise at that time exercisable in accordance with the
normal exercise provisions of Paragraph 5.A or the special acceleration
provisions of Paragraph 8 of this agreement.
(v) The Board shall have full power and authority to extend the
period of time for which the Option is to remain exercisable following
the Optionee's termination of Continuous Status as an Employee or death
from the limited period in effect under this Paragraph 6 to such greater
period of time as the Board shall deem appropriate; provided, however,
that in no event shall such Option be exercisable after the Expiration
Date.
(vi) The Board shall have complete discretion, exercisable
either on the date first written above or at any time while the Option
remains outstanding, to permit the Option to be exercised, during the
limited period of exercisability provided under this Paragraph 6, not
only with respect to the number of shares for which the Option is
exercisable at the time of Optionee's
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termination of Continuous Status as an Employee but also with respect to
one or more subsequent installments of purchasable shares for which the
Option would otherwise have been exercisable had such termination not
occurred.
7. ADJUSTMENT IN OPTION SHARES. If any change is made to the company's
outstanding Common Stock by reason of any stock split, stock dividend,
recapitalization, combination of shares, exchange of shares or other change
affecting the outstanding Common Stock as a class without the Company's receipt
of consideration, appropriate adjustments shall automatically be made to the
class and/or number of securities subject to the Option and the Option Price
payable per share in order to reflect such transaction or change and thereby
preclude the dilution or enlargement of benefits hereunder.
8. CORPORATE TRANSACTION/CHANGE IN CONTROL/HOSTILE TAKE-OVER.
A. In the event of any of the following stockholder-approved
transactions (a "Corporate Transaction"):
(i) A merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of
which is to change the State of the Company's incorporation,
(ii) The sale, transfer or other disposition of all or
substantially all of the assets of the Company, or
(iii) Any reverse merger in which the Company is the surviving
entity but in which fifty percent (50%) or more of the Company's
outstanding voting stock is transferred to holders different from those
who held the stock immediately prior to such merger,
The Option (if outstanding at the time but not otherwise fully
exercisable) shall automatically accelerate so that the Option shall,
immediately prior to the specified effective date for the Corporate Transaction,
become fully exercisable for all of the Option Shares and may be exercised for
all or any portion of such shares. However, the Option shall not so accelerate
if and to the extent: (i) the Option is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
or be replaced with a comparable option to purchase shares of the capital stock
of the successor corporation or parent thereof, or (ii) the Option is to be
replaced with a cash incentive program of the successor corporation based on the
option spread at the time of the Corporate Transaction. The determination of
option comparability under clause (i) above shall be made by the Board, and its
determination shall be final, binding and conclusive.
For purposes of this Paragraph 8 the Option shall be considered
"assumed," without limitation, if, at the time of issuance of the stock or other
consideration upon such merger or sale of assets, the Optionee would be entitled
to receive upon exercise of the Option the same number and kind of shares of
stock or the same amount of property, cash or securities as the Optionee would
have been entitled to receive upon the occurrence of such
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transaction if the Optionee had been, immediately prior to such transaction, the
holder of the number of shares of Common Stock covered by the Option at such
time (after giving effect to any adjustments in the number of shares of Common
Stock covered by the Option as provided for in Paragraph 7 above).
B. Immediately following the consummation of the Corporate Transaction,
the Option shall terminate and cease to be outstanding, except to the extent
assumed by the successor corporation or its parent company.
C. Should there occur any Change in Control of the Company, then the
Option (if outstanding at the time but not otherwise fully exercisable) shall
automatically accelerate so that the Option shall, immediately prior to the
specified effective date for the Change in Control, become fully exercisable for
all the Option Shares and may be exercised for all or any portion of such shares
at any time prior to the Expiration Date or sooner termination of the option
term under Paragraph 6 or Paragraph 8.A of this Agreement. For purposes of this
Agreement, a "Change in Control" shall be deemed to occur in the event:
(i) Any person or related group of persons (other than the
Company or a person that directly or indirectly controls, is controlled
by, or is under common control with the Company) directly or indirectly
acquires beneficial ownership (within the meaning of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended (the "1934 Act") of
securities possessing more than twenty-five percent (25%) of the total
combined voting power of the Company's outstanding securities pursuant
to a tender or exchange offer which the Board does not recommend the
Company's stock holders to accept; or
(ii) There is a change in the composition of the Board over a
period of twenty-four (24) consecutive months or less such that a
majority of the Board members (rounded up to the next whole number)
ceases, by reason of one or more proxy contests for the election of
Board members, to be comprised of individuals who either (A) have been
Board members continuously since the beginning of such period or (B)
have been elected or nominated for election as Board members during such
period by at least two-thirds of the board members described in clause
(A) who were still in office at the time such election or nomination was
approved by the Board.
D. If the Option is accelerated in connection with the Change in
Control, the Option shall remain fully exercisable until the expiration or
sooner termination of the Option term.
E. Should a Hostile Take-Over of the Company occur at any time after the
Option has been outstanding for a period of at least six (6) months measured
from the Grant Date, then the Option (if outstanding at the time) shall
automatically be canceled upon the effective date of such Hostile Take-Over, and
the Optionee shall, in exchange, receive a cash distribution from the Company.
Such distribution shall be in an amount equal to the excess of (i) the Take-Over
Price of the shares of Common Stock at the time subject to the Option (whether
or
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not the Option is otherwise at the time exercisable for such shares) over (ii)
the aggregate Option Price payable for such shares. The cancellation of the
Option and the cash distribution to be paid in connection therewith is hereby
pre-approved by the Board. Accordingly, the cash distribution shall be made to
the Optionee within five (5) days following the effective date of the Hostile
Take-Over, and no further consent of the Board shall be required at the time of
the actual cancellation and cash distribution. For purposes of this Paragraph
8.E, the following definitional provisions shall be in effect:
(i) A "Hostile Take-Over" shall be deemed to occur in the event
(a) any person or related group of persons (other than the Company or a
person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 of the 1934 Act)
of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant
to a tender or exchange offer which the Board does not recommend the
Company's stockholders to accept and (b) more than fifty percent (50%)
of the securities so acquired in such tender or exchange offer are
accepted from holders other than Company officers and directors
participating in the Plan.
(ii) The "Take-Over Price" per share shall be deemed to be equal
to the greater of (a) the Fair Market Value per share of Common Stock on
the date of cancellation of the Option or (b) the highest reported price
per share paid in effecting the Hostile Take-Over.
F. The Option granted pursuant to this Agreement shall not in any way
affect the right of the Company to adjust, reclassify, reorganize or otherwise
make changes in its capital or business structure or to merge, consolidate,
dissolve, liquidate or sell or transfer all or any part of its business or
assets.
G. If the Option is assumed in connection with a Corporate Transaction
or is otherwise to continue, then the Option shall be appropriately adjusted,
immediately after such Corporate Transaction, to apply to the number and class
of securities which would have been issuable, in consummation of such Corporate
Transaction, to an actual holder of the same number of shares of Common Stock as
are subject to the Option immediately prior to such Corporate Transaction.
Appropriate adjustments shall also be made to the Option Price, provided the
aggregate Option Price shall remain the same.
H. The Board shall have the discretionary authority, exercisable at any
time while the Option remains outstanding, to provide for the automatic
acceleration of the Option upon the occurrence of a Change in Control. The Board
shall also have full power and authority to condition any such option
acceleration upon the subsequent termination of the Optionee's Continuous Status
as an Employee within a specified period following the Change in Control.
9. PRIVILEGE OF STOCK OWNERSHIP. The Optionee shall not have any
stockholder rights with respect to the Option Shares until such individual shall
have exercised the Option and paid the Option Price for the purchased shares.
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<PAGE> 8
10. MANNER OF EXERCISING OPTION.
A. In order to exercise the Option for one or more Option Shares for
which the Option is at the time exercisable, the Optionee (or in the case of
exercise after the Optionee's death, the Optionee's executor, administrator,
heir or legatee, as the case may be) must take the following actions:
(i) Execute and deliver to the Secretary of the Company a
written notice of exercise (the "Exercise Notice"), in substantially the
form of Exhibit I attached hereto, in which there is specified the
number of Option Shares for which the Option is exercised.
(ii) Pay the aggregate Option Price for the purchased shares in
one or more of the following alternative forms:
(a) full payment in cash or check made payable to the
Company's order;
(b) full payment in shares of Common Stock held by the
Optionee for the requisite period necessary to avoid a charge to
the Company's earnings for financial reporting purposes and
valued at Fair Market Value on the Exercise Date;
(c) full payment through a broker-dealer sale and
remittance procedure pursuant to which the Optionee shall
provide irrevocable written instructions (1) to a designated
brokerage firm to effect the immediate sale of the purchased
shares and remit to the Company, out of the sale proceeds
available on the settlement date, sufficient funds to cover the
aggregate Option Price payable for the purchased shares and (2)
to the Company to deliver the certificates for the purchased
shares directly to such brokerage firm in order to complete the
sale transaction.
(iii) Furnish to the Company appropriate documentation that the
person or persons exercising the Option (if other than the Optionee)
have the right to exercise the Option.
(iv) Execute and deliver to the Company such representations and
documents as the Board, in its absolute discretion, deems necessary or
advisable to effect compliance with all applicable provisions of the
Securities Act of 1933, as amended, and any other federal or state
securities laws or regulations. The Board may, in its absolute
discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends
on share certificates and issuing stop-transfer notices to agents and
registrars.
B. For purposes of this Agreement, the Exercise Date shall be the date
on which the Exercise Notice shall have been delivered to the Company. Except to
the extent the
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<PAGE> 9
sale and remittance procedure specified above may be utilized in connection with
the exercise of the Option, payment of the Option Price for the purchased shares
must accompany such notice.
C. As soon as practical after the exercise of the Option in accordance
with the provisions of this Agreement, the Company shall mail or deliver to or
on behalf of the Optionee (or to the other person or persons exercising the
Option) a stock certificate representing the purchased shares.
11. WITHHOLDING TAXES. As a condition to the exercise of the Option
granted hereunder, the Optionee shall make such arrangements as the Board may
require for the satisfaction of any federal, state, local or foreign withholding
tax obligations that may arise in connection with the exercise, receipt or
vesting of the Option. The company shall not be required to issue any shares
under this Agreement until such obligations are satisfied.
12. LEGALITY OF ISSUANCE. Option Shares shall be issued pursuant to the
exercise of an Option and the issuance and delivery of such shares pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed, and shall be further subject
to the approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of the Option, the Company may require
the Optionee (or such other person permitted to exercise the Option) to
represent and warrant at the time of any such exercise that the shares are being
purchased only for investment and without any present intention to sell or
distribute any such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned relevant provisions of
law.
13. NO EMPLOYMENT RIGHTS. Neither the action of the Company in entering
into this Agreement, nor any action taken by the Board hereunder, nor any
provision of this Agreement shall be construed so as to grant the Optionee the
right to remain in the employ or service of the Company (or any Parent or
Subsidiary corporation) for any period of specific duration, and the Company (or
any Parent or Subsidiary corporation retaining the services of the Optionee) may
terminate the Optionee's employment or service at any time and for any reason,
with or without cause.
14. USE OF PROCEEDS. Any cash proceeds received by the Company from the
sale of shares pursuant to the Option granted pursuant to this Agreement shall
be used for general corporate purposes.
15. BINDING EFFECT. Subject to the limitations set forth in Paragraph 4
of this Agreement, this Agreement shall be binding upon, and shall inure to the
benefit of, (i) the executors, administrators, heirs, legal representatives and
assigns of the Optionee and (ii) the successors and assigns of the Company.
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<PAGE> 10
16. NO IMPAIRMENT OF RIGHTS. Nothing in this Agreement or in the Plan
shall be deemed to impair or otherwise restrict the rights of the Company or the
stockholders to remove the Optionee from the Board at any time pursuant to the
provisions of applicable law.
17. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
entered into and wholly to be performed within the State of California by
residents of such State.
18. NOTICES. All notices and other communications under this Agreement
shall be in writing. Unless and until the Optionee is notified in writing to the
contrary, all notices, communications and documents directed to the Company and
related to this Agreement, if not delivered by hand, shall be mailed, addressed
as follows:
EndoSonics Corporation
2870 Kilgore Road
Rancho Cordova, CA 95670
Unless and until the Company is notified in writing to the contrary, all
notices, communications and documents intended for the Optionee and related to
this Agreement, if not delivered by hand, shall be mailed to the Optionee's last
known address as shown on the Company's books.
Notices and communications shall be mailed by first class mail, postage
prepaid; documents shall be mailed by registered mail, return receipt requested,
postage prepaid. All mailings and deliveries related to this Agreement shall be
deemed received only when actually received, unless properly mailed by
registered mail, return receipt requested, in which event they shall be deemed
received two (2) days after the date of mailing.
19. CONSTRUCTION. The Option evidenced hereby is issued pursuant to this
Agreement and shall be subject to the express terms and provisions of this
Agreement applicable to such automatic grants.
(Signature Page Follows)
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IN WITNESS WHEREOF, EndoSonics Corporation has caused this Agreement to
be executed on its behalf by its duly-authorized officer and the Optionee has
executed this Agreement, all on the day and year first above written.
COMPANY:
ENDOSONICS CORPORATION
By: /s/ Reinhard J. Warnking
-------------------------------------
President and Chief Executive Officer
OPTIONEE:
/s/ Robrecht L.W. Michiels
----------------------------------------
ROBRECHT L. W. MICHIELS
Address:
--------------------------------
----------------------------------------
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EXHIBIT I
NOTICE OF EXERCISE OF STOCK OPTION
I hereby notify EndoSonics Corporation (the "Company") that I elect to
purchase ______ shares of the Company's Common Stock (the "Purchased Shares")
pursuant to that certain option (the "Option") granted to me on November 8, 1999
to purchase up to ________ shares of such Common Stock at an option price of
$3.50 per share (the "Option Price").
Concurrently with the delivery of this Exercise Notice to the Secretary
of the Company, I shall pay to the Company the Option Price for the Purchased
Shares in accordance with the provisions of my agreement with the Company
evidencing the Option and shall deliver whatever additional documents may be
required by such agreement as a condition for exercise. Alternatively, I may
utilize the special broker/dealer sale and remittance procedure specified in my
agreement to effect payment of the option price for the purchased shares.
- --------------------- --------------------------------
Date Optionee
Address:
------------------------------------
------------------------------------
Print name in exact manner
it is to appear on the
stock certificate:
------------------------------------
------------------------------------
Address to which certificate
is to be sent, if different
from address above:
------------------------------------
------------------------------------
Social Security Number:
------------------------------------
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<PAGE> 1
EXHIBIT 10.33
MICROSOUND CORPORATION
1997 STOCK PLAN
1. Purposes of the Plan. The purposes of this 1997 Stock Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and its Subsidiaries and to promote the success of the Company's
business. Options granted under the Plan may be incentive stock options (as
defined under Section 422 of the Code) or nonstatutory stock options, as
determined by the Administrator at the time of grant of an option and subject to
the applicable provisions of Section 422 of the Code, as amended, and the
regulations promulgated thereunder. Stock purchase rights may also be granted
under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended-
(d) "COMMITTEE" means the Committee appointed by the Board of
Directors in accordance with Section 4(a) of the Plan.
(e) "COMMON STOCK" means the Common Stock of the Company.
(f) "COMPANY" means MicroSound Corporation, a Delaware
corporation.
(g) "CONSULTANT" means any person, including an advisor, who is
engaged by the Company or any Parent or Subsidiary to render services and is
compensated for such services, and any director of the Company whether
compensated for such services or not.
(h) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of: (i) sick leave; (ii) military leave;
(iii) any other leave of absence approved by the Administrator, provided that
such leave is for a period of not more than ninety (90) days, unless
reemployment upon the expiration of such leave is guaranteed by contract or
statute, or unless provided otherwise pursuant to Company policy adopted from
time to time; or (iv) in the case of transfers between locations of the Company
or between the Company, its Subsidiaries or their respective successors. For
purposes of this Plan, a change in status from an Employee to a Consultant or
from a Consultant to an Employee will not constitute an interruption of
Continuous Status as an Employee or Consultant.
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(i) "EMPLOYEE" means any person, including officers and
directors, employed by the Company or any Parent or Subsidiary of the Company,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Administrator in its discretion,
subject to any requirements of the Code. The payment by the Company of a
director's fee to a Director shall not be sufficient to constitute "employment"
of such Director by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the fair market
value of Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system including without limitation the
National Market of the National Association of Securities Dealers, Inc.
Automated Quotation ("Nasdaq") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such system or exchange, or the exchange with the
greatest volume of trading in Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq System
(but not on the National Market thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
for the last market trading day prior to the time of determination, as reported
in The Wall Street Journal or such other source as the Administrator deems
reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Administrator.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code, as
designated in the applicable written option agreement.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option, as designated in the applicable written
option agreement.
(n) "OPTION" means a stock option granted pursuant to the Plan.
(o) "OPTIONED STOCK" means the Common Stock subject to an Option
or a Stock Purchase Right.
(p) "OPTIONEE" means an Employee or Consultant who receives an
Option or a Stock Purchase Right.
(q) "PARENT" means a "parent corporation," whether now or
hereafter existing, as defend in Section 424(c) of the Code, or any successor
provision.
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(r) "PLAN" means this 1997 Stock Plan.
(s) "REPORTING PERSON" means an officer, director, or greater
than ten percent stockholder of the Company within the meaning of Rule 16a-2
under the Exchange Act, who is required to file reports pursuant to Rule 16a-3
under the Exchange Act.
(t) "RESTRICTED STOCK" means shares of Common Stock acquired
pursuant to a grant of a Stock Purchase Right under Section 10 below.
(u) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange
Act, as the same may be amended from time to time, or any successor provision.
(v) "SHARE" means a sham of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(w) "STOCK EXCHANGE" means any stock exchange or consolidated
stock price reporting system on which prices for the Common Stock are quoted at
any given time.
(x) "STOCK PURCHASE" means the fight to purchase Common Stock
pursuant to Section 10 below.
(y) "SUBSIDIARY" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code, or any
successor provision.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 400,000 shares of Common Stock. The Shares may be authorized,
but unissued, or reacquired Common Stock. If an Option should expire or become
unexercisable for any reason without having been exercised in full, the
unpurchased Shares that were subject thereto shall, unless the Plan shall have
been terminated, become available for future grant under the Plan. In addition,
any Shares of Common Stock which are retained by the Company upon exercise of an
Option or Stock Purchase Right in order to satisfy the exercise or purchase
price for such Option or Stock Purchase Right or any withholding taxes due with
respect to such exercise shall be treated as not issued and shall continue to be
available under the Plan. Shares repurchased by the Company pursuant to any
repurchase right which the Company may have shall not be available for future
grant under the Plan.
4. ADMINISTRATION OF THE PLAN.
(a) INITIAL PLAN PROCEDURE. Prior to the date, if any, upon
which the Company becomes subject to the Exchange Act, the Plan shall be
administered by the Board or a committee appointed by the Board,
(b) PLAN PROCEDURE AFTER THE DATE, IF ANY, UPON WHICH THE
COMPANY BECOMES SUBJECT TO THE EXCHANGE ACT.
(i) MULTIPLE ADMINISTRATIVE BODIES. If permitted by Rule
16b-3,
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<PAGE> 4
grants under the Plan may be made by different bodies with respect to directors,
non-director officers and Employees or Consultants who are not Reporting
Persons.
(ii) ADMINISTRATION WITH RESPECT TO REPORTING PERSONS.
With respect to grants of Options or Stock Purchase Rights to Employees who are
Reporting Persons, such grants shall be made by (A) the Board if the Board may
make grants to Reporting Persons under the Plan in compliance with Rule 16b-3,
or (B) a committee designated by the Board to make such grants under the Plan,
which committee shall be constituted in such a manner as to permit grants under
the Plan to comply with Rule 16b-3. Once appointed, such committee shall
continue to serve in its designated capacity until otherwise directed by the
Board. From time to time the Board may increase the size of the committee and
appoint additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however caused,
and remove all members of the committee and thereafter directly make grants to
Reporting Persons under the Plan, all to the extent permitted by Rule 16b-3.
(iii) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND
OTHER Employees. With respect to grants of Options or Stock Purchase Rights to
Employees or Consultants who are not Reporting Persons, the Plan shall be
administered by (A) the Board or (B) a committee designated by the Board, which
committee shall be constituted in such a manner as to satisfy the legal
requirements relating to the administration of incentive stock option plans, if
any, of California's corporate and securities laws, of the Code and of any
applicable Stock Exchange (the "Applicable Laws"). Once appointed, such
Committee shall continue to serve in its designated capacity until otherwise
directed by the Board. From time to time the Board may increase the size of the
Committee and appoint additional members thereof, remove members (with or
without cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(c) POWERS OF THE ADMINISTRATOR. Subject to the provisions of
the Plan and in the case of a Committee, the specific duties delegated by the
Board to such Committee, and subject to the approval of any relevant
authorities, including the approval, if required, of any Stock Exchange, the
Administrator shall have the authority, in its discretion:
(i) to determine the Fair Market Value of the Common
Stock, in accordance with Section 2(k) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Stock Purchase Rights may from time to time be granted hereunder;
(iii) to determine whether and to what extent Options
and Stock Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of shares of Common Stock
to be covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the
Plan;
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<PAGE> 5
(vi) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any award granted hereunder;
(vii) to determine whether and under what circumstances
an Option may be settled in cash under Section 9(f) instead of Common Stock;
(viii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(ix) to determine the terms and restrictions applicable
to Stock Purchase Rights and the Restricted Stock purchased by exercising such
Stock Purchase Rights;
(x) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan; and
(xi) in order to fulfill the purposes of the Plan and
without amending the Plan, to modify grants of Options or Stock Purchase Rights
to participants who are foreign nationals or employed outside of the United
States in order to recognize differences in local law, tax policies or customs.
(d) EFFECT OF ADMINISTRATOR'S DECISION. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all holders of Options or Stock Purchase Rights.
5. ELIGIBILITY.
(a) RECIPIENTS OF GRANTS. Nonstatutory Stock Options and Stock
Purchase Rights may be granted to Employees and Consultants. Incentive Stock
Options may be granted only to Employees. An Employee or Consultant who has been
granted an Option or Stock Purchase Right may, if he or she is otherwise
eligible, be granted additional Options or Stock Purchase Rights.
(b) TYPE OF OPTION. Each Option shall be designated in the
written option agreement as either an Incentive Stock Option or a Nonstatutory
Stock Option. However, notwithstanding such designations, to the extent that the
aggregate Fair Market Value of Shares with respect to which Options designated
as Incentive Stock Options are exercisable for the first time by any Optionee
during any calendar year (under all plans of the Company or any Parent or
Subsidiary) exceeds $100,000, such excess Options shall be treated as
Nonstatutory Stock Options. For purposes of this Section 5(b), Incentive Stock
Options shall be taken into account in the order in which they were granted, and
the Fair Market Value of the Shares subject to an Incentive Stock Option shall
be determined as of the date of the grant of such Option.
(c) The Plan shall not confer upon any Optionee any right with
respect to continuation of employment or consulting relationship with the
Company, nor shall it interfere in
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<PAGE> 6
any way with such Optionee's right or the Company's right to terminate his or
her employment or consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company as described in Section 19 of the Plan. It shall
continue in effect for a term of ten (10) years unless sooner terminated under
Section 15 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof or such shorter term as may be
provided in the Option Agreement and provided further that, in the case of an
Incentive Stock Option granted to an Optionee who, at the time the Option is
granted, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the term of the Option shall be five (5) years from the date of
grant thereof or such shorter term as may be provided in the written option
agreement.
8. OPTION EXERCISE PRICE AND CONSIDERATION.
(a) The per share exercise price for the Shares to be issued
pursuant to exercise of an Option shall be such price as is determined by the
Board and set forth in the applicable agreement, but shall be subject to the
following:
(i) In the case of an Incentive Stock Option that is:
(A) granted to an Employee who, at the time of the grant
of such Incentive Stock Option, owns stock representing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any Parent or Subsidiary, the per Share exercise price shall be no less than
110% of the Fair Market Value per Share on the date of grant.
(B) granted to any other Employee, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(ii) In the case of a Nonstatutory Stock Option that is:
(A) granted to a person who, at the time of the grant of
such Option, owns stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of the grant.
(B) granted to any person, the per Share exercise price
shall be no less than 85% of the Fair Market Value per Share on the date of
grant.
(b) The consideration to be paid for the Shares to be issued
upon exercise of an Option, including the method of payment, shall be determined
by the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist
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<PAGE> 7
entirely of (1) cash, (2) check, (3) promissory note (subject to the provisions
of Section 153 of the Delaware General Corporation Law), (4) other Shares that
(x) in the case of Shares acquired upon exercise of an Option, have been owned
by the Optionee for more than six months on the date of surrender or such other
period as may be required to avoid a charge to the Company's earnings, and (y)
have a Fair Market Value on the date of surrender equal to the aggregate
exercise price of the Shares as to which such Option shall be exercised, (5)
authorization for the Company to retain from the total number of Shares as to
which the Option is exercised that number of Shares having a Fair Market Value
on the date of exercise equal to the exercise price for the total number of
Shares as to which the Option is exercised, (6) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price and any applicable income or employment taxes, (7) any
combination of the foregoing methods of payment, or (8) such other consideration
and method of payment for the issuance of Shares to the extent permitted under
Applicable Laws. In making its determination as to the type of consideration to
accept, the Administrator shall consider if acceptance of such consideration may
be reasonably expected to benefit the Company.
9. EXERCISE OF OPTION.
(a) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, and reflected in the written option
agreement, which may include vesting requirements and/or performance criteria
with respect to the Company and/or the Optionee; provided that such Option shall
become exercisable at the rate of at least twenty percent (20%) per year over
five (5) years from the date the Option is grante. In the event that any of the
Shares issued upon exercise of an Option should be subject to a right of
repurchase in the Company's favor, such repurchase right shall lapse at the rate
of at least twenty percent (20%) per year over five (5) years from the date the
Option is granted. Notwithstanding the above, in the case of an option granted
to an officer, director or consultant of the Company or any Parent or Subsidiary
of the Company, the option may be fully exercisable, or the repurchase right may
lapse in its entirety, at any time or during any period established by the
Administrator.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and the Company has
received full payment for the Shares with respect to which the Option is
exercised. Full payment may, as authorized by the Board, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the Optioned Stock,
not withstanding the exercise of the Option. The Company shall issue (or cause
to be issued) such stock certificate promptly upon exercise of the Option. No
adjustment
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<PAGE> 8
will be made for a dividend or other right for which the record date is prior to
the date the stock certificate is issued, except as provided in Section 12 of
the Plan.
Exercise of an Option in any manner shall result in a decrease
in the number of Shares that thereafter may be available, both for purposes of
the Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) TERMINATION OF EMPLOYMENT OR CONSULTING RELATIONSHIP.
Subject to Section 9(c), in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant with the Company, such Optionee may, but
only within three (3) months (or such other period of time not less than thirty
(30) days as is determined by the Administrator, with such determination in the
case of an Incentive Stock Option being made at the time of grant of the Option
and not exceeding three (3) months) after the date of such termination (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), exercise his or her Option to the extent that the
Optionee was entitled to exercise it at the date of such termination. To the
extent that Optionee was not entitled to exercise the Option at the date of such
termination, or if Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate. No
termination shall be deemed to occur and this Section 9(b) shall not apply if
(i) the Optionee is a Consultant who becomes an Employee; or (ii) the Optionee
is an Employee who becomes a Consultant.
(c) DISABILITY OF OPTIONEE.
(i) Notwithstanding Section 9(b) above, in the event of
termination of an Optionee's Continuous Status as an Employee or Consultant as a
result of his or her total and permanent disability (within the meaning of
Section 22(e)(3) of the Code), Optionee may, but only within twelve (12) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. To the extent that Optionee was not entitled to exercise the Option
at the date of termination, or if Optionee does not exercise such Option to the
extent so entitled within the time specified herein, the Option shall terminate.
(ii) In the event of termination of an Optionee's
Continuous Status as an Employee or Consultant as a result of a disability which
does not fall within the meaning of total and permanent disability (as set forth
in Section 22(c)(3) of the Code), Optionee may, but only within six (6) months
from the date of such termination (but in no event later than the expiration
date of the term of such Option as set forth in the Option Agreement), exercise
the Option to the extent otherwise entitled to exercise it at the date of such
termination. However, to the extent that such Optionee fails to exercise an
Option which is an Incentive Stock Option ("ISO") (within the meaning of Section
422 of the Code) within three (3) months of the date of such termination, the
Option will not qualify for ISO treatment under the Code. To the extent that
Optionee was not entitled to exercise the Option at the date of termination, or
if Optionee does not exercise such Option to the extent so entitled within six
months (6) from the date of termination, the Option shall terminate.
8
<PAGE> 9
(d) DEATH OF OPTIONEE. In the event of the death of an Optionee
during the period of Continuous Status as an Employee or Consultant since the
date of grant of the Option, or within three (3) months following termination of
Optionee's Continuous Status as an Employee or Consultant, the Option may be
exercised, at any time within six (6) months following the date of death (but in
no event later than the expiration date of the term of such Option as set forth
in the Option Agreement), by Optionee's estate or by a person who acquired the
right to exercise the Option by bequest or inheritance, but only to the extent
of the right to exercise that had accrued at the date of death or, if earlier,
the date of termination of Optionee's Continuous Status as an Employee or
Consultant. To the extent that Optionee was not entitled to exercise the Option
at the date of death or termination, as the case may be, or if Optionee does not
exercise such Option to the extent so entitled within the time specified herein,
the Option shall terminate.
(e) RULE 16B-3. Options granted to Reporting Persons shall
comply with Rule 16b-3 and shall contain such additional conditions or
restrictions as may be required thereunder to qualify for the maximum exemption
for Plan transactions.
(f) BUYOUT PROVISIONS. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted, based
on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
10. STOCK PURCHASE RIGHTS.
(a) RIGHTS TO PURCHASE. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Shares that such person shall be entitled
to purchase, the price to be paid (which price shall not be less than 85% of the
Fair Market Value of the Shares as of the date of the offer, or, in the case of
a person owning stock representing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or any Parent or
Subsidiary, the price shall not be less than one hundred percent (100%) of the
Fair Market Value of the Shares as of the date of the offer), and the time
within which such person must accept such offer, which shall in no event exceed
thirty (30) days from the date upon which the Administrator made the
determination to grant the Stock Purchase Right. The offer shall be accepted by
execution of a Restricted Stock purchase agreement in the form determined by the
Administrator. Shares purchased pursuant to the grant of a Stock Purchase Right
shall be referred to herein as "Restricted Stock."
(b) REPURCHASE OPTION. Unless the Administrator determines
otherwise, the Restricted Stock purchase agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's employment with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original purchase price paid by
the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the
9
<PAGE> 10
Company. The repurchase option shall lapse at such rate as the Administrator may
determine, but at a minimum rate of 20% per year, except that in the case of
Shares held by an officer, director or consultant of the Company or any Parent
or Subsidiary of the Company, the repurchase option may lapse in its entirety at
any time or during any period established by the Administrator.
(c) OTHER PROVISIONS. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(d) RIGHTS AS A STOCKHOLDER. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section i2
of the Plan.
11. Stock Withholding to Satisfy Withholding Tax Obligations. At the
discretion of the Administrator, Optionees may satisfy withholding obligations
as provided in this paragraph. When an Optionee incurs tax liability in
connection with an Option or Stock Purchase Right, which tax liability is
subject to tax withholding under applicable tax laws, and the Optionee is
obligated to pay the Company an amount required to be withheld under applicable
tax laws, the Optionee may satisfy the withholding tax obligation by one or some
combination of the following methods: (a) by cash payment, or (b) out of
Optionee's current compensation, (c) if permitted by the Administrator, in its
discretion, by surrendering to the Company Shares that (i) in the case of Shares
previously acquired from the Company, have been owned by the Optionee for more
than six months on the date of surrender, and (ii) have a fair market value on
the date of surrender equal to or less than Optionee's marginal tax rate times
the ordinary income recognized, or (d) by electing to have the Company withhold
from the Shares to be issued upon exercise of the Option, or the Shares to be
issued in connection with the Stock Purchase Right, if any, that number of
Shares having a fair market value equal to the amount required to be withheld.
For this purpose, the fair market value of the Shares to be withheld shall be
determined on the date that the amount of tax to be withheld is to be determined
(the "Tax Date").
Any surrender by a Reporting Person of previously owned Shares
to satisfy tax withholding obligations arising upon exercise of this Option must
comply with the applicable provisions of Rule 16b-3.
All elections by an Optionee to have Shares withheld to satisfy
tax withholding obligations shall be made in writing in a form acceptable to the
Administrator and shall be subject to the following restrictions:
(a) the election must be made on or prior to the applicable Tax
Date;
10
<PAGE> 11
(b) once made, the election shall be irrevocable as to the
particular Shares of the Option or Stock Purchase Right as to which the election
is made; and
(c) all elections shall be subject to the consent or disapproval
of the Administrator.
In the event the election to have Shares withheld is made by an
Optionee and the Tax Date is deferred under Section 83 of the Code because no
election is filed under Section 83(b) of the Code, the Optionee shall receive
the full number of Shares with respect to which the Option or Stock Purchase
Right is exercised but such Optionee shall be unconditionally obligated to
tender back to the Company the proper number of Shares on the Tax Date.
12. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER OR CERTAIN OTHER
TRANSACTIONS.
(a) CHANGES IN CAPITALIZATION. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock that have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or that have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination, recapitalization or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify the Optionee
at least fifteen (15) days prior to such proposed action. To the extent it has
not been previously exercised, the Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) MERGER OR SALE OF ASSETS. In the event of a sale of all or
substantially all of the Company's assets or a merger of the Company with or
into another corporation where, the successor corporation issues its securities
to the Company's stockholders, each outstanding Option or Stock Purchase Right
shall be assumed or an equivalent option or right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the successor corporation does not agree to assume the Option or Stock
Purchase Right or to substitute an equivalent option or right, in which case
such Option shall become fully vested
11
<PAGE> 12
and exercisable and the Company's repurchase option on Restricted Stock shall
immediately terminate upon the consummation of the merger or sale of assets. For
purposes of this Section 12, an Option or Stock Purchase Right shall be
considered assumed, without limitation, if, at the time of issuance of the stock
or other consideration upon such merger or sale of assets, each Optionee or
Stock Purchase Right Holder would be entitled to receive upon exercise of an
Option or Stock Purchase Right the same number and kind of shares of stock or
the same amount of property, cash or securities as the Optionee or Stock
Purchase Right Holder would have been entitled to receive upon the occurrence of
such transaction if the Optionee or Stock Purchase Right Holder had been,
immediately prior to such transaction, the holder of the number of Shares of
Common Stock covered by the Option or Stock Purchase Right at such time (after
giving effect to any adjustments in the number of Shares covered by the Option
or Stock Purchase Right as provided for in this Section 12).
(d) CERTAIN DISTRIBUTIONS. In the event of any distribution to
the Company's stockholders of securities of any other entity or other assets
(other than dividends payable in cash or stock of the Company) without receipt
of consideration by the Company, the Administrator may, in its discretion,
appropriately adjust the price per share of Common Stock covered by each
outstanding Option or Stock Purchase Right to reflect the effect of such
distribution.
13. Non-Transferability of Options and Stock Purchase Rights. Options
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised or purchased during the lifetime of
the Optionee or Stock Purchase Rights Holder only by the Optionee or Stock
Purchase Rights Holder.
14. Time of Granting Options and Stock Purchase Rights. The date of
grant of an Option or Stock Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Board; provided,
however, that in the case of any Incentive Stock Option, the grant date shall be
the later of the date on which the Administrator makes the determination
granting such Incentive Stock Option or the date of commencement of the
Optionee's employment relationship with the Company. Notice of the determination
shall be given to each Employee or Consultant to whom an Option or Stock
Purchase Right is so granted within a reasonable time after the date of such
grant.
15. AMENDMENT AND TERMINATION OF THE PLAN.
(a) AUTHORITY TO AMEND OR TERMINATE. The Board may at any time
amend, alter, suspend or discontinue the Plan, but no amendment, alteration,
suspension or discontinuation shall be made that would impair the rights of any
Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with Rule 16b-3 or
with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of any Stock Exchange), the Company shall obtain
stockholder approval of any Plan amendment in such a manner and to such a degree
as required.
12
<PAGE> 13
(b) EFFECT OF AMENDMENT OR TERMINATION. No amendment or
termination of the Plan shall adversely affect Options already granted, unless
mutually agreed otherwise between the Optionee and the Board, which agreement
must be in writing and signed by the Optionee and the Company,
16. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option or Stock Purchase Right unless the
exercise of such Option or Stock Purchase Right and the issuance and delivery of
such Shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended, the
Exchange Act, the rules and regulations promulgated thereunder, and the
requirements of any Stock Exchange. As a condition to the exercise of an Option,
the Company may require the person exercising such Option to represent and
warrant at the time of any such exercise that the Shares are being purchased
only for investment and without any present intention to sell or distribute such
Shares if, in the opinion of counsel for the Company, such a representation is
required by law.
17. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. The inability of the Company
to obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to which
such requisite authority shall not have been obtained.
18. Agreements. Options and Stock Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such stockholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any Stock Exchange upon which the Common Stock is listed. All Options
and Stock Purchase Rights issued under the Plan shall become void in the event
such approval is not obtained.
20. Information and Documents to Optionees and Purchasers. The Company
shall provide financial statements at least annually to each Optionee and to
each individual who acquired Shares Pursuant to the Plan, during the period such
Optionee or purchaser has one or more Options or Stock Purchase Rights
outstanding, and in the case of an individual who acquired Shares pursuant to
the Plan, during the period such individual owns such Shares. The Company shall
not be required to provide such information if the issuance of Options or Stock
Purchase Rights under the Plan, is limited to key employees whose duties in
connection with the Company assure their access to equivalent information. In
addition, at the time of issuance of any securities under the Plan, the Company
shall provide to the Optionee or the Purchaser a copy of the Plan and any
agreement(s) pursuant to which securities under the Plan are issued.
13
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
listed below of our report dated February 18, 2000, 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, 1999:
Form S-8 No. 333-95633 pertaining to the Non-statutory Stock Option
Agreement between Robrecht L.W. Michiels and EndoSonics Corporation
and the Microsound Corporation 1997 Stock Plan
Form S-8 No. 33-95639 pertaining to the EndoSonics Corporation 1998 Stock
Option Plan
Form S-8 No. 333-95635 pertaining to the EndoSonics Corporation 1999
Non-statutory Stock Option Plan
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 No. 33-93330, 33-80880, 33-67734 and 33-48208 pertaining to the
EndoSonics Corporation Restated 1998 Stock Option Plan
/s/ ERNST & YOUNG LLP
Sacramento, California
March 28, 2000
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
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<SECURITIES> 20,400
<RECEIVABLES> 11,807
<ALLOWANCES> (1,119)
<INVENTORY> 12,981
<CURRENT-ASSETS> 49,585
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 66,017
<SALES> 48,175
<TOTAL-REVENUES> 48,175
<CGS> 23,590
<TOTAL-COSTS> 26,604
<OTHER-EXPENSES> (924)
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<INCOME-PRETAX> (1,095)
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