-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VjEbYI78QRdYkVy6T0coilYc8Q7crffYWxYPGpVUePwdIpFqs7klRa2NXPDpq0fi 9IBGhWMdEch7hBiQDeWsqA== 0000891618-98-002453.txt : 19980518 0000891618-98-002453.hdr.sgml : 19980518 ACCESSION NUMBER: 0000891618-98-002453 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENDOSONICS CORP CENTRAL INDEX KEY: 0000883420 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 680028500 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19880 FILM NUMBER: 98623410 BUSINESS ADDRESS: STREET 1: 6616 OWENS DRIVE CITY: PLEASANTON STATE: CA ZIP: 94508 BUSINESS PHONE: 9166388008 MAIL ADDRESS: STREET 1: 6616 OWENS DR CITY: PLEASANTON STATE: CA ZIP: 94508 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ---------------- FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the Quarter Ended March 31, 1998 [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to _____________ Commission file number 0-19880 ENDOSONICS CORPORATION (Exact name of registrant as specified in its charter) Delaware 68-0028500 (State or other jurisdiction of (I.R.S. Employer incorporated or organization) Identification No.) 2870 Kilgore Road, Rancho Cordova, California 95670 (Address of principal executive offices) Registrant's telephone number, including area code (916) 638-8008 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On March 31, 1998, the registrant had outstanding 16,187,830 shares of Common Stock of $.001 par value, which is the registrant's only class of Common Stock. This report on Form 10-Q including all exhibits, contains 17 pages. 2 ENDOSONICS CORPORATION FORM 10-Q FIRST QUARTER
TABLE OF CONTENTS Page ---- Part I. Financial Information Item 1. Condensed Consolidated Financial Statements Condensed consolidated balance sheets at March 31, 1998 and December 31, 1997.................................................. 3 Condensed consolidated statements of operations for the three months ended March 31, 1998 and 1997...................................... 4 Condensed consolidated statements of cash flows for the three months ended March 31, 1998 and 1997......................... 5 Notes to condensed consolidated financial statements..................... 6 Item 2. Management's discussion and analysis of financial condition and results of operations............................................... 10 Part II. Other Information Item 1 through 3. Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders...................... 15 Item 5. Not Applicable Item 6 Exhibits and Reports on Form 8K.......................................... 15 (a) Exhibits: Exhibit 27 - Financial Data Schedule..................................... 17 Signatures........................................................................ 16 Exhibit Index..................................................................... 15
2 3
ENDOSONICS CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share amounts) March 31, 1998 December 31, 1997 ------------------- ------------------- ASSETS Current assets: Cash and cash equivalents $ 20,073 $ 13,889 Short-term investments 7,935 9,120 Trade accounts receivable, net 9,754 13,351 Inventories 6,890 6,915 Accrued interest receivable and other current assets 445 424 --------- --------- Total current assets 45,097 43,699 Property and equipment, net 3,512 3,408 Investment in CardioVascular Dynamics, Inc. 7,316 8,478 Intangible assets, net 6,955 7,222 --------- --------- $ 62,880 $ 62,807 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses 6,963 7,536 Accrued restructuring and integration expenses 5,729 6,017 --------- --------- Total current liabilities 12,692 13,553 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 as of December 31, 1997; and 16,187,830 and 16,153,113 shares issued and outstanding as of March 31, 1998 and December 31, 1997, respectively 16 16 Additional paid-in capital 157,660 157,588 Accumulated deficit (109,344) (108,263) Unrealized gain on available-for-sale securities 1,939 1 Foreign currency translation (83) (88) --------- --------- Total stockholders' equity 50,188 49,254 --------- --------- $ 62,880 $ 62,807 ========= =========
See accompanying notes. 3 4
ENDOSONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except share and per share amounts) Three Months Ended March 31, 1998 1997 ------------ ------------ Revenues: Product sales $ 8,725 $ 6,221 Contract revenue 300 109 ------------ ------------ Total revenue 9,025 6,330 Cost of sales 5,000 3,419 ------------ ------------ Gross margin 4,025 2,911 Operating expenses: Research, development and clinical 1,845 1,016 Marketing and sales 2,094 906 General and administrative 1,579 832 Amortization of intangibles 267 -- ------------ ------------ Total operating expenses 5,785 2,754 Income (loss) from operations (1,760) 157 Equity in net loss of CardioVascular Dynamics, Inc. (158) (269) Other income: Interest income 227 617 Gain realized on sale of CardioVascular Dynamics, Inc. 610 -- ------------ ------------ Total other income 837 617 ------------ ------------ Net income (loss) before provision for income taxes (1,081) 505 Provision for income taxes -- -- Net income (loss) ($ 1,081) $ 505 ============ ============ Basic net income (loss) per share ($ 0.07) $ 0.04 ============ ============ Diluted net income (loss) per share ($ 0.07) $ 0.03 ============ ============ Shares used in computing net income (loss) per share: Basic 16,174,407 13,547,464 ------------ ------------ Effect of dilutive common stock options -- 1,723,153 ------------ ------------ Diluted 16,174,407 15,270,617 ============ ============
See accompanying notes. 4 5
ENDOSONICS CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands, except share and per share amounts) Three months ended March 31, 1998 1997 -------- -------- Cash flows from operating activities Net income (loss) ($ 1,081) $ 505 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 775 149 Gain on sale of CardioVascular Dynamics, Inc. (610) -- Equity in net loss CardioVascular Dynamics, Inc. 158 269 Net changes in: Operating assets 3,606 (1,874) Operating liabilities (861) (498) -------- -------- Net cash provided by (used in) operating activities 1,987 (1,449) -------- -------- Cash flows from investing activities: Purchase of short-term investments (3,944) -- Proceeds from sale of CardioVascular Dynamics, Inc. Common Stock 3,552 -- Sales of short-term investments -- 56 Maturities of short-term investments 7,129 5,189 Purchase of Cardiometrics Common Stock -- (2,317) Capital expenditures for property and equipment (612) (357) -------- -------- Net cash provided by investing activities 6,125 2,571 -------- -------- Cash flows from financing activities: Proceeds from exercise of stock options 72 285 -------- -------- Net cash provided by financing activities 72 285 -------- -------- Net increase in cash and equivalents 8,184 1,407 Cash and equivalents, beginning of period 13,889 34,943 ======== ======== Cash and equivalents, end of period $ 20,073 $ 36,350 ======== ========
See accompanying notes. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The interim financial information is unaudited. In the opinion of management of EndoSonics Corporation ("EndoSonics" or the "Company"), the condensed consolidated financial statements included in this report reflect all adjustments necessary, consisting only of normal recurring adjustments, to present fairly the Company's consolidated financial position at March 31, 1998 and the consolidated results of its operations and cash flows for the three month periods ended March 31, 1998 and 1997. Results for the interim periods are not necessarily indicative of consolidated results to be expected for the entire fiscal year. These financial statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 1997, contained in the Company's Annual Report on Form 10-K. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of EndoSonics and its subsidiaries. (EndoSonics and its subsidiaries are collectively referred to hereinafter as "the Company".) All significant intercompany accounts and transactions have been eliminated. Investments in unconsolidated subsidiaries, and other investments in which the Company has a 20% to 50% interest or otherwise has the ability to exercise significant influence, are accounted for under the equity method (see Note 4). INVESTMENTS In accordance with SFAS 115, the Company has classified its investment portfolio as available-for-sale. Unrealized gains (losses) on available-for-sale securities are recorded as a separate component of stockholders' equity. 2. INVENTORIES Inventories are stated at the lower of cost, determined on a first in, first out (FIFO) cost basis, or market value. Inventories consist of the following:
March 31, 1998 December 31, 1997 -------------- ----------------- Raw materials $2,477 $2,817 Work-in-process 3,070 1,842 Finished goods 1,343 2,256 ------ ------ Total $6,890 $6,915 ====== ======
6 7 3. COMPUTATION OF NET INCOME (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 of net loss per share because their effect is antidilutive. Conversely, common equivalent shares from stock options are included in the computation of net income per share as their effect is dilutive. At December 31, 1997 and March 31, 1998 the Company had outstanding options to purchase 2,993,638 and 2,958,921 shares of common stock, respectively (with exercise prices ranging from $0.32 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 quarter ended March 31, 1998. 4. CHANGE IN OWNERSHIP PERCENTAGE OF CARDIOVASCULAR DYNAMICS, INC. On June 19, 1996, EndoSonics' 84% owned subsidiary, CVD, successfully completed an Initial Public Offering (IPO) of 3,400,000 shares of common stock at $12.00 per share, followed by an additional 510,000 shares issued in July 1996 (over-allotment option granted to CVD's underwriters). As a result of this transaction, the Company's ownership interest in CVD fell below 50%. Accordingly, CVD's results of operations for 1996 have been consolidated through June 19, 1996, and accounted for on the equity method until January 31, 1998 when the Company's ownership decreased to 16%. As of February 1, 1998, the Company is accounting for its investment in CVD under the cost method. In June 1996, the Company recorded an increase to additional paid-in capital of approximately $17,600 representing the Company's proportionate share of CVD's net assets following the IPO. For the year ended December 31, 1997 and for the period from June 20, 1996 to December 31, 1996, the Company recorded ($2,358) and ($1,621) respectively, representing its proportionate share of CVD's net losses for the period. In the quarter ended March 31, 1998, the Company sold 790,000 shares of CVD stock valued at $3.80 per share resulting in a gain of $610. As of March 31, 1998 and December 31, 1997, EndoSonics owned 16% and 24% respectively of the outstanding shares of CVD. Unrealized gains on its investment in CVD are reported in a separate component of stockholders' equity pursuant to the requirements of SFAS 115. Condensed financial information for CVD is shown below: 7 8
BALANCE SHEET March 31, 1998 December 31, 1997 - ---------------------------------------------- -------------- ----------------- (Unaudited - in thousands) Current assets $ 33,860 $ 37,316 Property and equipment, net 1,483 1,550 Other assets 2,073 2,495 ======== ======== Total assets $ 37,416 $ 41,361 ======== ======== Current liabilities $ 2,615 $ 3,488 Stockholders' equity 34,801 37,873 ======== ======== Total liabilities and stockholders' equity $ 37,416 $ 41,361 ======== ======== EndoSonics' share of CardioVascular Dynamic's net assets $ 7,316 $ 8,478 ======== ========
Three months ended, STATEMENT OF OPERATIONS March 31, 1998 March 31, 1997 - ---------------------------------------------- -------------- -------------- (Unaudited - in thousands) Total revenue $ 2,466 $ 3,019 Cost of sales 1,352 1,416 -------- -------- Gross profit 1,114 1,603 Total operating expenses 3,436 2,786 -------- -------- Other income (loss) from operations 348 585 ======== ======== Net loss ($ 1,974) ($ 598) ======== ========
CardioVascular Dynamics, Inc.'s stock is quoted on the Nasdaq Stock Market. The closing price of CVD's stock at March 31, 1998 and December 31, 1997 was $5.16 and $5.50 respectively, per share. The Company held 1,464,016 and 2,194,016 shares of CVD's common stock at March 31, 1998 and December 31, 1997, respectively. 5. RESTRUCTURING AND OTHER CHARGES Concurrent with the purchase of Cardiometrics, Inc., the Company recorded restructuring and integration charges in 1997 of approximately $9,500 related to plans to reduce overhead of the combined companies and increase operating efficiency in future periods. The restructuring and integration charges include approximately $7,500 of corporate reorganization costs and approximately $2,000 related to relocation of certain product lines and overall integration of the Company's operations. Due to changes in conditions subsequent to the initial recording of the restructuring and integration charges, the Company reduced the provision for these charges to $8,606 during the fourth quarter of 1997. These charges are included in the 1997 Consolidated Statements of Operations, as follows: 8 9
CONSOLIDATED STATEMENT OF OPERATIONS 1997 - ------------------------------------------ ------- (In Thousands) Cost of sales $1,251 Research and development 200 Marketing and sales 542 General and administrative 1,361 Restructuring 4,956 Other 296 ====== Total charges $8,606 ======
The elements of the total charges and the accrual for restructuring and integration charges as of March 31, 1998 are as follows:
Accrual as of 1997 Cost March 31, (In Thousands) Provision Adjustments Incurred 1998 - ------------ -------------- -------------- ------------- ------------- Corporate reorganization $7,491 ($375) ($2,071) $5,045 Consolidation of facilities 1,965 (475) (904) 586 ====== ===== ======= ====== $9,456 ($850) ($2,975) $5,631 ====== ===== ======= ======
In June 1996, the Company recorded restructuring and integration charges of approximately $3,066 in connection with the consolidation of the Company's IVUS manufacturing operations and with the start-up production of the new Five-64 imaging devices. The elements of the 1996 restructuring accrual as of March 31, 1998, were as follows:
Accrual as of Cost March 31, (In Thousands) Provision Incurred 1998 - ------------ -------------- ------------- ------------- Consolidation of facilities $ 994 ($ 986) $ 8 Conversion to new technology 1,849 (1,849) -- Corporate reorganization 223 (133) 90 ------ -------- ----- $3,066 ($2,968) $ 98 ====== ======== =====
The accrual for restructuring and integration charges was approximately $5,729 and $6,017 as of March 31, 1998 and December 31, 1997, respectively. 6. BUSINESS ACQUISITION 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): 9 10 Cash $ 22,281 EndoSonics common stock 33,139 CardioVascular Dynamics, 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 ========
A summary of the purchase price allocation is as follows: Tangible assets acquired $ 22,721 In-process research and development 43,000 Developed technology 5,200 Other intangibles 700 Goodwill 1,797 ======== $ 73,418 ========
The purchased in-process research and development was valued by an independent appraiser. As it had not reached technological feasibility, and had no probable alternative future uses, it was charged to operations upon acquisition. Goodwill and other intangible assets are being amortized over three-to-eight years. Amortization for the three month period ended March 31, 1998 amounted to $267. Accumulated amortization amounted to $742 at March 31, 1998. In addition, the Company recognized a gain of $3,700 in 1997 related to the excess of the fair value over the book value of CVD 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 for relocation of certain Cardiometrics employees to Rancho Cordova, and to terminate others. Approximately $1,000 was paid in 1997. The Company expects that the remainder of this cash outlay will be completed by April 1998. 7. STOCK REPURCHASE The Board of Directors has authorized a stock repurchase program whereby the Company may repurchase up to $5.0 million worth of its Common Stock from time-to-time in the open market or private transactions. Subsequent to March 31, 1998, the Company has repurchased 475,000 shares of its Common Stock on the open market at an aggregate cost of $3.1 million. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains forward looking statements. The Company's business is subject to risks and uncertainties and the Company's actual results may differ significantly from the results discussed in the forward looking statements. Factors that might 10 11 cause such a difference include, but are not limited to, the Company's ability to transition to new distribution arrangements in Europe and North America the introduction of new products, FDA approval of new products and changes in regulatory requirements and third-party reimbursement policies. For a discussion of these and other factors, please see "Risk Factors" in the Company's Annual Report on Form 10-K (starting at page 21) for the fiscal year ended December 31, 1997. INTRODUCTION Since its inception in 1984, EndoSonics has been engaged primarily in the research and development of products for the diagnosis and treatment of cardiovascular disease. Since 1991, a majority of the Company's net revenue has been derived from sales of its intravascular ultrasound ("IVUS") imaging systems and catheters. The Company markets and distributes its IVUS imaging products in the United States, Europe and Japan through relationships with strategic partners, certain other distributors and, to a lesser extent, through a direct sales force. In February 1996, EndoSonics and Cordis entered into an Exclusive Distribution Agreement (the "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. In 1997, the Company entered into similar agreements with affiliates of Cordis covering Japan and certain South American countries. Cordis is obligated during each year of the Agreement to use reasonable efforts to purchase certain minimum annual amounts of products from EndoSonics. Subject to certain exceptions, Cordis' failure to meet the minimum annual purchase amount during any year of the Agreement shall constitute a material breach of such agreement. Cordis is also obligated during the term of the Agreement to undertake certain efforts to market, promote, distribute and sell EndoSonics' IVUS imaging products, including the provision of adequate personnel and facilities, the maintenance of sufficient inventory for demonstration purposes and the appointment of a United States and European intracoronary ultrasound marketing manager to interface with EndoSonics' United States and European clinical and support staff. The Agreement also contains standard representations and warranties of each party and standard provisions regarding indemnification, service and maintenance and confidentiality. Under the terms of the Agreement, Cordis purchases IVUS imaging products from EndoSonics at agreed upon prices set forth in the Agreement, which prices are jointly reviewed by EndoSonics and Cordis every six months. In connection with the execution of the Agreement, the Company issued 350,877 shares of its Common Stock to Cordis in a private placement transaction for an aggregate purchase price of approximately $5,000,000. The Company has since registered the shares of Common Stock issued to Cordis. The Agreement initially expires on December 31, 1998. On April 16, 1998, the Company announced that it reached an agreement in principle with Cordis on the terms under which the Agreement will be terminated, subject to completion and execution of a definitive agreement. Under the terms of this agreement in principle, EndoSonics will begin direct distribution to the majority of its installed base in the United States effective July 1, 1998, assuming completion of a definitive agreement. In Europe, EndoSonics has already begun the process of transitioning to direct distribution. 11 12 The failure of EndoSonics to complete a new agreement with Cordis terminating the Agreement and/or to successfully transition to new distribution arrangements could have a material adverse effect on the Company's 1998 operating results. CardioVascular Dynamics, Inc., ("CVD") formerly an 84%-owned subsidiary of the Company, designs, develops, manufactures and markets catheters used to treat certain vascular diseases. CVD's catheters are used in conjunction with angioplasty and other interventional procedures such as vascular stenting and drug delivery. CVD completed its initial public offering in June of 1996 and, as a result, the Company's ownership interest in CVD fell below 50% of CVD's outstanding stock. Accordingly, CVD's assets, liabilities and results of operations are no longer included in the Company's consolidated financial statements. At March 31, 1998, the Company held approximately 16% of the outstanding shares of the Common Stock of CVD. Effective February 1, 1998, the Company is accounting for its investment in CVD under the cost method. The Company's business strategy includes acquiring related businesses, products or technologies. In January 1997, the Company entered into an agreement to acquire Cardiometrics, Inc. (Cardiometrics) through the merger of a wholly-owned subsidiary of the Company with and into Cardiometrics, with Cardiometrics surviving as a wholly-owned subsidiary of the Company. Cardiometrics develops, manufactures, and markets intravascular medical devices to measure blood flow impairment caused by coronary artery disease. Cardiometrics' primary products, the FloWire(R) Doppler guide wire and FloMap ultrasound intsrument, represent an advance in functional testing of blood flow impairment, enabling cardiologists to evaluate the appropriateness of angioplasty interventions and assess post-procedural results directly in the cardiac catherization laboratory. Clinical experience demonstrates that the measurement of blood flow impairment downstream from (distal to) an obstruction, which Cardiometrics calls functional angiometry, provides information to improve the quality of patient care and procedure outcomes in the diagnosis and treatment of cardiovascular disease. The FloWire(R)/FloMap system has received clearance from the FDA and many corresponding European and Pacific Rim regulatory agencies. Cardiometrics has also developed the WaveWire(TM)/WaveMap intracoronary blood pressure measurement system, which was first used in a clinical case in Europe in December 1996. Cardiometrics received a 510(k) approval in August 1997 and began shipments of the product in the first quarter of 1998. The acquisition of Cardiometrics, which was finalized on July 23, 1997, was accounted for under the purchase method of accounting. In 1997, the Company incurred a $43 million dollar in-process research and development charge as a result of the acquisition and $8.6 million in restructuring, integration and other charges in connection with plans to reduce overhead of the combined companies. The Company expects that it may pursue additional acquisitions in the future. Any future acquisitions may result in potentially dilutive issuances of equity securities, the write-off of in-process research and development, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets acquired, any of which could materially adversely affect the Company's business 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 12 13 such assets, which range from three years to eight years. Additionally, unanticipated expenses may be incurred relating to the integration of technologies and research and development, and administrative functions. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's employees, operations and products, uncertainties associated with operating in new markets and working with new customers, the potential loss of the acquired company's key employees as well as the costs associated with completing the acquisition and integrating the acquired company. RESULTS OF OPERATIONS FIRST QUARTER OF 1998 COMPARED TO THE SAME PERIOD IN 1997 Total Revenue. Total revenue increased 43% to $9.0 million for the first quarter of 1998, which included $2.9 million of Cardiometrics revenue, from $6.3 million in the first quarter of 1997. Revenues for the IVUS business decreased by 3%, or $0.2 million primarily due to the decline in revenue from Cordis Corporation, a unit of Johnson & Johnson. In April 1998, EndoSonics reached an agreement in principle with Cordis on the terms under which Cordis' exclusive distribution rights for certain EndoSonics products in the United States, Europe, the Middle East and Africa will be terminated, subject to completion and execution of a definitive agreement. Further revenue growth is dependent on the ability of the Company to increase its direct sales force and penetrate the market. Cost of Sales. Cost of sales as a percentage of product sales increased to 55% for the first quarter of 1998 from 54% for the first quarter of 1997. Cost of sales as a percentage of product sales in 1998 increased primarily due to start-up manufacturing costs associated with the Company's WaveWire(TM) catheter. Due to the uncertainty associated with continued improvements in the efficiency of the Company's manufacturing process and the impact of increasingly competitive pricing, there can be no assurance that the Company's gross profit margin will be maintained or continue to improve in future periods. Research, Development, and Clinical. Research, development and clinical expenses increased by $0.8 million from $1.0 million for the first quarter of 1997 to $1.8 million for the first quarter of 1998 due primarily to on-going Cardiometrics clinical studies which were not included in the results of operations in the first quarter of 1997, and an increase in expenses related to the Company's majority owned subsidiary, MicroSound. Marketing and Sales. Marketing and sales increased to $2.1 million in the first quarter of 1998 from $0.9 million in the first quarter of 1997. The increase is due to increased staffing and marketing programs related to the acquisition of Cardiometrics. As a percentage of total revenue, marketing and sales has increased to 23% in the first quarter of 1998 from 14% in the first quarter of 1997. The increase is due to personnel additions and related expenditures associated with the transition to a direct sales force in certain world markets. General and Administrative. General and administrative expenses increased by $0.8 million dollars to $1.6 million dollars for the first quarter of 1998 compared to $0.8 million dollars for the first quarter of 1997. The increase is attributable to approximately $0.6 million dollars of legal expenses related to the company's on-going patent litigation proceedings. After excluding 13 14 $0.6 million dollars related to such legal expenses, general and administrative expenses decreased to 11% of total revenue in the first quarter of 1998 as compared to 13% of total revenue in the first quarter of 1997. Amortization of Intangibles. Amortization of intangibles of $0.3 million in the first quarter of 1998 relates to goodwill and other intangible assets acquired in connection with the acquisition of Cardiometrics in July of 1997. Goodwill and other intangibles acquired in the Cardiometrics acquisition are being amortized over three-to-eight years. Equity in Loss of CardioVascular Dynamics, Inc. Equity in loss of CardioVascular Dynamics, Inc. decreased to $0.2 million in the first quarter of 1998 as compared to $0.3 million in the first quarter of 1997. The decrease is due to a reduction in ownership to 16% from 45% in the first quarter of 1998 and 1997, respectively. Other Income. Other income increased to $0.8 million in the first quarter of 1998 as compared to $0.6 million in the first quarter of 1997. The increase is due primarily to the sale of CardioVascular Dynamics, Inc. stock for which the Company recognized a gain of $0.6 million in the first quarter of 1998. This was offset by reduced interest income in the first quarter of 1998 as compared to the first quarter of 1997 due to the decrease in the Company's cash and investments as of March 31, 1998. Net Income (Loss). Net income (loss) decreased to $1.1 million net loss, or ($0.07) per share, in the first quarter of 1998 as compared to $0.5 net income, or $0.04 per share, in the first quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES On March 31, 1998, the Company had cash and equivalents of $20.1 million, short-term investments of $7.9 million and no borrowings or credit facilities. Net cash provided by (used in) operations was $2.0 million in the first quarter of 1998 as compared to ($1.5) million in the first quarter of 1997. The deterioration is due in part to a net loss of $1.1 million, and decreases in current liabilities of $0.9 million offset by a $3.6 million decrease in accounts receivable. The Company anticipates using cash resources primarily for capital expenditures, product development, sales and marketing efforts and working capital purposes. The Company believes that its existing cash, cash equivalents, and short-term investments as of March 31, 1998 will be sufficient to meet the Company's operating expenses and capital requirements through 1998. However, there can be no assurance that the Company will not be required to seek other financing or that such financing, if required, will be available on terms satisfactory to the Company. 14 15 Part II. OTHER INFORMATION ITEMS 1 through 3. Not applicable. ITEM 4. None. ITEM 5. Not applicable. ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 27 Financial Data Schedule (b) No reports of Form 8-K were filed during the period. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENDOSONICS CORPORATION /s/ REINHARD J. WARNKING ------------------------------- Reinhard J. Warnking President and Chief Executive Officer Date: May 15, 1998 /s/ RICHARD L. FISCHER ------------------------------- Richard L. Fischer Vice President, Finance and Chief Financial Officer Date: May 15, 1998 /s/ KATHLEEN E. REDD ------------------------------- Kathleen E. Redd Corporate Controller and Principal Accounting Officer Date: May 15, 1998 16 17 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 28,808 0 9,754 0 6,890 45,097 3,512 0 62,880 0 0 0 0 16 50,172 62,880 9,025 9,025 5,000 5,000 5,106 0 0 (1,081) 0 (1,081) 0 0 0 (1,081) (0.07) (0.07)
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