-----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, Er0298KtyEwbeJ6XnKelzSIYukXRIwj8nSNyVrRoZgXWXAz4OMbUWMi0Db1SR/6V IIGun0864BPnQFBkQ/aSvA== 0000891618-99-001335.txt : 19990403 0000891618-99-001335.hdr.sgml : 19990403 ACCESSION NUMBER: 0000891618-99-001335 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 000-19880 FILM NUMBER: 99583796 BUSINESS ADDRESS: STREET 1: 2870 KILGORE ROAD CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 BUSINESS PHONE: 9166388008 MAIL ADDRESS: STREET 1: 2870 KILGORD ROAD CITY: RANCHO CORDOVA STATE: CA ZIP: 95670 10-K405 1 FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1998 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-K --------------- FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________. COMMISSION FILE NUMBER: 0-19880 ENDOSONICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE (I.R.S. EMPLOYER IDENTIFICATION NO.) (STATE OF INCORPORATION) 68-0028500 2870 KILGORE ROAD, RANCHO CORDOVA, CALIFORNIA 95670 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 638-8008 SECURITIES REGISTERED PURSUANT NAME OF EACH EXCHANGE ON TO SECTION 12(b) OF THE ACT: WHICH REGISTERED TITLE OF EACH CLASS NONE NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $.001 PAR VALUE. Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicated by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, as of March 29, 1999, was approximately $116,555,926 (based upon the closing price for shares of the Registrant's Common Stock as reported by the Nasdaq National Market for the last trading date prior to that date). Shares of Common Stock held by each officer, director and holder of 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. On March 29, 1999, approximately 17,760,903 shares of the Registrant's Common Stock, $.001 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE. Portions of the Registrant's Proxy Statement for the 1999 Annual Meeting of Stockholders to be held on or about June 10, 1999 are incorporated by reference into Part III. ================================================================================ 1 2 PART I FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-K, including, without limitation, statements containing the words "believes," "anticipates," "estimates," "expects" and words of similar import, constitute "forward-looking statements" within the meaning of Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained or incorporated by reference herein to reflect any events or developments. ITEM 1. BUSINESS EndoSonics Corporation ("EndoSonics" or the "Company") develops, manufactures and markets intravascular ultrasound ("IVUS") imaging systems and percutaneous transluminal coronary angioplasty ("balloon angioplasty") catheters to assist in the diagnosis and treatment of cardiovascular and peripheral vascular disease. The Company's IVUS imaging products enhance the effectiveness of the diagnosis and treatment of coronary artery and other vascular diseases by providing important diagnostic information not available from conventional x-ray angiography. This information includes the location, amount and composition of atherosclerotic plaque and enables physicians to identify lesion characteristics, select an optimum course of treatment, position therapeutic devices, treat disease sites with drugs or other therapies and promptly assess the results of treatment. In 1993, the Company commenced the Pinnacle Development Project to further enhance the image quality of its IVUS imaging products. This project resulted in the Five-64 catheter line and an enhancement to the Company's Oracle Imaging System. The Company has received United States Food and Drug Administration ("FDA") clearance for its Five-64 diagnostic catheters, which were commercially available in the first quarter of 1996. The Company believes that it offers the only FDA-approved combined coronary balloon angioplasty/IVUS imaging catheters; devices that can reduce the time and cost of interventional procedures by providing both diagnostic and therapeutic functions on the same catheter. The Company's IVUS products are based on two core proprietary technologies: digital, all-electronic IVUS imaging and specialized balloon catheter material technology. The Company's IVUS imaging system and catheters use high-speed, computer-based electronics and proprietary integrated circuit technologies to produce ultrasound images. The combination of these technologies and the Company's manufacturing expertise enables its catheters to provide high-quality ultrasound images while maintaining the small size, flexibility and trackability necessary to access, diagnose and treat a wide range of coronary and peripheral vessels. See "Risk Factors". Cardiometrics, Inc., ("Cardiometrics"), acquired by the Company in 1997, develops, manufactures and markets intravascular medical devices to measure blood flow impairment caused by coronary artery disease. Cardiometrics' principal products, the FloWire(R)Doppler guide wire and FloMap(R) ultrasound instrument, represent an advance in functional testing of blood flow impairment, enabling cardiologists to evaluate the appropriateness of angioplasty interventions and assess post-procedural results directly in the cardiac catheterization laboratory. Clinical experience demonstrates that the measurement of blood flow impairment downstream from (or distal to) an obstruction, which Cardiometrics calls functional angiometry, provides information to improve the quality of patient care and procedure outcomes in the diagnosis and treatment of cardiovascular disease. The FloWire/FloMap system has received clearance from the U.S. Food and Drug Administration and many corresponding European and Pacific Rim regulatory agencies. As of December 31, 1998, more than 98,000 FloWire guide wires have been sold and cumulative FloMap shipments were approximately 669. Cardiometrics has also developed the WaveWire(TM)/WaveMap(TM) intracoronary blood pressure measurement system, which was first used in a clinical case in Europe in December 1996. Cardiometrics received a 510(k) approval in August 1997 for the WaveWire(TM)/WaveMap(TM) system, and commenced shipments to United States customers in 1998. BUSINESS ACQUISITION On August 5, 1998, the Company acquired all of the outstanding shares of Navius Corporation ("Navius") for approximately $9.5 million in Common Stock of the Company, $7.7 million in cash and $2.3 million in other costs. The financial results of Navius' operations have been combined with those of the Company since the date of acquisition. Navius is a developer of balloon angioplasty catheters, stents, and intravascular radiation catheters. 2 3 The Company believes that the acquisition of Navius provides the company with basic technology for further development of its combination imaging and therapeutic products. The acquisition was accounted for using the purchase method of accounting. PRODUCTS EndoSonics develops and markets IVUS imaging systems and catheters, balloon angioplasty catheters, combination balloon angioplasty/IVUS imaging catheters and coronary functional assessment products. IVUS IMAGING PRODUCTS The Company's IVUS imaging products capture imaging data in a digital format, providing a platform for further enhancements of image quality and increased design flexibility in the development of new application catheters such as the Company's Five-64 catheter line. Advanced features include the following: In-Vision(TM), an enhanced Windows-like user interface, ChromaFLO(TM) imaging technology, which provides images of blood flow and In-Line Digital(TM) option, which offers a three-dimensional reconstruction of a specific region of interest in the artery. The Company believes that the In-Vision(TM) option, ChromaFLO(TM) imaging and In-Line Digital(TM) enables easier image interpretation for purposes such as lesion differentiation and characterization. The Company introduced the Oracle MegaSonics imaging catheters in 1998 which utilizes combination diagnostics (ultrasound imaging) and therapeutics (angioplasty balloon) in a single device. The images produced by the Company's IVUS imaging systems are displayed on a high resolution video screen located on the digital processor, and can be permanently stored on video tape and CD-R. The systems' software can also provide immediate measurements of lumen diameter, cross-sectional area and vessel wall thickness. The systems' fluoroscopic windowing feature lets the user simultaneously display both angiography and ultrasound images on the physician interface module's video screen. The Company believes this feature gives the physician the ability to analyze and compare ultrasound and angiographic images of the same disease site, thereby facilitating a determination of the therapeutic procedure and a review of the results. FUNCTIONAL ASSESSMENT AND BALLOON ANGIOPLASTY PRODUCTS The products produced by Cardiometrics include intravascular guidewires to measure blood flow and blood pressure in diseased coronary arteries. These products include the FloWire(TM) and WaveWire(TM), and the corresponding instrumentation, FloMap(TM) and WaveMap(TM). These products enable the cardiologist to evaluate the appropriateness of angioplasty interventions and assess post-procedural results directly in the cardiac catheterization laboratory. The Company believes that the use of these products can contribute to reduced procedural costs and better patient outcomes, particularly when stenting is avoided. Navius develops and manufactures balloon angioplasty catheters in its San Diego facility. These products are currently sold in Europe and Japan. The market for these catheters is very competitive in regard to price and product performance. Fukuda, the Company's exclusive distributor in Japan for Navius balloon catheters, has submitted the latest generation of Navius' balloon catheters for regulatory approval in Japan The following table lists the Company's key IVUS systems and imaging catheters, balloon catheters, and functional assessment instruments and guidewire products.
U.S. REGULATORY FIRST COMMERCIAL PRODUCT STATUS SALE ------- ------ ---- 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
3 4 Balance Balloon MOHW Approved Q4 1997 Catheter (Japan) Cardiometrics FloMap 510(k) Cleared 1994 Cardiometrics FloWire 510(k) Cleared 1994 Cardiometrics WaveMap 510(k) Cleared Q1 1998 Cardiometrics WaveWire, 510(k) Cleared Q1 1998
PRODUCT DEVELOPMENT The Company has conducted developmental programs to refine its proprietary integrated circuit and transducer technology towards smaller and more advanced integrated circuits and transducers in order to enhance image quality. The Company is continuing to develop combination diagnostic/therapeutic catheters as well as multiple therapeutic catheters such as balloon angioplasty catheters and IVUS/radiation delivery catheters. The Company is developing core technology for imaging other bodily organs. In addition, the Company is continuing to develop advanced functional assessment guidewire products. Substantially all of the Company's product development activities are performed by the Company's team of research scientists, engineers, technicians and consultants, who have extensive experience in ultrasound signal processing, semiconductor design, acoustics and catheter development. The Company's research, development and clinical expenditures approximated $5.7 million, $6.3 million and $7.0 million in 1996, 1997, and 1998 respectively, excluding acquired in-process research and development. The Company intends to continue to make significant investments in research and development. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Risk Factors Dependence on New Products; Rapid Technological Change." MANUFACTURING The Company fabricates certain proprietary components, then assembles, inspects, tests and packages all components into finished products. By designing and assembling its systems and catheter products, the Company believes it is better able to control quality and costs, limit third-party access to its proprietary technology, and manage manufacturing process enhancements and new product introductions. In addition, the Company purchases many standard and custom built components from independent suppliers, and contracts with third-parties for certain specialized electronic component manufacturing processes. Most of these purchased components and processes are available from more than one vendor. However, the manufacturing of the imaging integrated circuit microchips and pressure microchips is currently performed by a single vendor. Any supply interruptions from these single source vendors would have a material adverse effect on the Company's ability to manufacture its products until a new source of supply could be identified and qualified and, as a result, could have an adverse effect on the Company's business, financial condition and results of operations. Although the Company is in the process of identifying alternative vendors, the qualification of additional or replacement vendors for certain components or services is a lengthy process. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Future Operating Results - Suppliers." The Company provides a one-year limited warranty on its imaging systems sold in the United States. System repairs are made at the customer site by a Company service technician. In addition to the one-year warranty, the customer may purchase additional warranty coverage under the Company's extended warranty program. Service on the Company's systems sold outside the United States is provided either by the Company's European service engineer or by the international distributor responsible for the customer. The Company provides its international distributors with a one-year limited warranty covering service and parts. The Company's success will depend in part on its ability to manufacture its products in compliance with Good Manufacturing Practices, "GMP" regulations, ISO 9000 and other regulatory requirements, in sufficient quantities and on a timely basis, while maintaining product quality and acceptable manufacturing costs. In addition, the Company continues to automate manufacturing processes for its imaging catheter line in Rancho Cordova, California. Manufacturers often encounter difficulties in scaling up production of new products and integrating automation equipment, including problems involving production yields, quality control and assurance, component supply and shortages of qualified personnel. The Company's failure to fully integrate automation into the manufacturing process for the imaging catheter line in a timely manner, or to timely increase production volumes of the imaging catheter line, would materially adversely affect the Company's business, financial condition and results of operations. Failure to increase production volumes in a timely or cost-effective manner or to maintain compliance with GMP, ISO 9000 and other regulatory requirements could have a material adverse effect on the Company's sales and the Company's business, financial 4 5 condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Risk Factors - Limited Manufacturing Experience." BACKLOG The Company had a backlog of customer purchase orders for products representing approximately $0.6 million as of December 31, 1997. However, the Company did not have any backlog of customer purchase orders for products as of December 31, 1998. MARKETING AND SALES The Company's products are sold in the United States, Canada and other international markets, principally Europe and Japan. The Company sells its products through a direct sales force in the United States and Germany, and through distributors in other geographic markets. In several countries, where products are sold through distributors, the Company employs clinical and marketing representatives. In February 1996, EndoSonics and Cordis entered into an agreement pursuant to which Cordis was granted the exclusive right to distribute EndoSonics' IVUS imaging products for coronary applications in North America, Europe, Africa and the Middle East (the "Exclusive Distribution Agreement"). The Exclusive Distribution Agreement superseded and replaced a prior distribution agreement between Cordis and EndoSonics and a prior distribution agreement between EndoSonics Nederland B.V., a wholly owned subsidiary of EndoSonics, and Cordis S.A. Cordis was obligated during each year of the Exclusive Distribution Agreement to use reasonable efforts to purchase certain minimum annual amounts of products from EndoSonics. The Exclusive Distribution Agreement was terminated in April 1998 and replaced with a Transition Agreement which provides for Cordis to retain limited distribution rights through March, 1999. In March 1997, the Company and Johnson & Johnson Medical KK ("JJMKK"), a subsidiary of Johnson and Johnson, entered into a distribution agreement whereby JJMKK was granted exclusive right to distribute EndoSonics IVUS imaging products for coronary applications in Japan. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 1999. In April 1997, the Company and Johnson and Johnson, Professional Group-Latin America ("J & J Medical-LA"), a subsidiary of Johnson and Johnson, entered into a distribution agreement whereby J & J Medical-LA was granted exclusive rights to distribute EndoSonics IVUS imaging products for coronary applications in certain countries of Latin America. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 2000. In July, 1998, the Company announced that it has agreed in principal to enter into a strategic relationship with Fukuda Denshi Co., Ltd. ("Fukuda"), which includes an equity investment and research and development funding totaling $13 million in EndoSonics by Fukuda. Approximately $8.4 million of Fukuda's investment was for the purchase of newly issued EndoSonics common stock. The remaining $4.6 million of the investment will fund certain research and development/technical assistance programs for products intended for the Japanese market which will be distributed by Fukuda. The funding will occur over a two-year period commencing in August, 1998. In December 1998, the Company and JOMED N.V., ("JOMED") entered into an agreement for exclusive distribution of certain EndoSonics products into specified European and Middle Eastern countries. Also in December, EndoSonics and JOMED entered into an IVUS guided stent delivery system agreement which calls for the development of a JOMED balloon and stent incorporated into a modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply subassemblies to JOMED who will complete the manufacturing process and distribute the resulting product in the territory which is defined as certain European and Middle Eastern countries. In certain countries within the territory, EndoSonics may distribute exclusively or jointly with JOMED. In recent years there has been significant consolidation among medical device suppliers as the major suppliers have attempted to broaden their product lines in order to focus on product configurations that address a given procedure or treatment and in order to respond to cost pressures from health care providers. This consolidation has made it increasingly difficult for smaller suppliers, such as the Company, to effectively distribute their products without a major relationship with one of the major suppliers. The loss of one or more of these distributors could 5 6 materially affect the ability of the Company to distribute its products which could materially adversely affect the Company's business, financial condition and results of operations. In 1996, 1997 and 1998, total export sales were $16.9 million, $21.9 million and $32.2 million respectively, or approximately 72%, 66% and 75% respectively, of total product sales. In 1996, 1997 and 1998, sales to Europe accounted for $9.8 million, $11.5 million and $10.6 million respectively, and sales to Asia represented $6.7 million, $9.3 million, and $20.3 million respectively. A significant portion of the Company's revenues, therefore, will continue to be subject to the risks associated with international sales, including economic or political instability, shipping delays, fluctuations in foreign currency exchange rates and various trade restrictions, all of which could have a significant impact on the Company's ability to deliver products on a competitive and timely basis. Future imposition of, or significant increases in the level of, customs duties, export quotas or other trade restrictions, could have an adverse effect on the Company's business, financial condition and results of operation. The regulation of medical devices, particularly in the European Community, continues to expand and there can be no assurance that new laws or regulations will not have an adverse effect on the Company. STRATEGIC RELATIONSHIPS The Company entered into a license agreement with Radiance (Radiance Medical Systems, Inc., "Radiance", formerly Cardiovascular Dynamics, Inc.) dated December 22, 1995 (the "Radiance Agreement"), pursuant to which Radiance granted to EndoSonics a non-exclusive, royalty-free right to Radiance's FOCAL technology for the development and sale of a combined FOCAL/Ultrasound product. In exchange, Radiance received a non-exclusive, royalty-free right to submit PMA supplemental applications utilizing an EndoSonics PMA as a reference and to manufacture and distribute Radiance products as a supplement to the EndoSonics PMA. The Radiance Agreement may be terminated in the event of breach upon 60 days notice by the non-breaching party, subject to the breaching party's right to cure. In the event of termination, Radiance would be prohibited from submitting new PMA supplements referencing the EndoSonics PMA and would be required to seek independent FDA approval for such products, which would have a material adverse effect on the Radiance's business, financial condition and results of operations. The Company entered into a separate license agreement with Radiance on February 6, 1996, pursuant to which EndoSonics granted to Radiance a non-exclusive, royalty-free right and license to use and reference the EndoSonics PMA to enable Radiance to file for and obtain PMA approval for coronary balloon dilatation catheters from the FDA. The remaining terms of the February 6, 1996 agreement are substantially identical to the terms of the Radiance Agreement described above. On August 31, 1998, the Company entered into a strategic relationship with the Fukuda Denshi Company, Ltd. ("Fukuda"), a Japanese medical products company, which includes an equity investment and research and development and technical guidance funding totaling $13 million in EndoSonics by Fukuda. Approximately $8.4 million of the $13 million represents an equity investment. The remaining $4.6 million will fund research and development programs over the next 24 months. In October, 1998, the Company received approximately $8.4 million in cash and issued 965,730 shares of the Company's common stock, at a price of $8.70 per share, related to this strategic relationship with Fukuda. In December 1998, the Company and JOMED entered into an agreement for exclusive distribution of certain EndoSonics products into specified European and Middle Eastern countries. Also in December, EndoSonics and JOMED entered into an IVUS guided stent delivery system agreement which calls for the development of a JOMED balloon and stent incorporated into a modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply subassemblies to JOMED who will complete the manufacturing process and distribute the resulting product in the territory which is defined as certain European and Middle Eastern countries. In certain countries within the territory, EndoSonics may distribute exclusively or jointly with JOMED. COMPETITION The Company believes that the primary competitive factors in the market for IVUS imaging devices are: image quality, catheter size, flexibility and trackability, ease of use, reliability and price. In addition, a company's distribution capability and the time in which products can be developed and receive regulatory approval are important competitive factors. Certain of the Company's competitors have developed IVUS imaging products with high quality images. Therefore, the Company believes that its competitive position is dependent upon its ability to establish its reputation as a producer of high quality imaging products. The Company's IVUS catheters compete with mechanical ultrasound devices manufactured by Cardiovascular Imaging Systems, a subsidiary of Boston Scientific Corporation ("CVIS"). CVIS is significantly larger than the Company, and has significantly greater financial, marketing and technical resources available. Although the Company believes that CVIS is not currently 6 7 marketing or clinically testing combined coronary balloon angioplasty/IVUS imaging catheters, there can be no assurance that CVIS will not attempt to develop and market catheters in the future that would compete with the Company's combination products. Moreover, companies currently engaged in the manufacture and marketing of non-imaging balloon angioplasty catheters could attempt to expand their product lines to include combination balloon angioplasty/IVUS imaging products. Other companies could also attempt to enter the market with competitive devices. Many of the Company's competitors and potential competitors have substantially greater financial, manufacturing, marketing, distribution and technical resources. Competition in the market for devices used in the treatment of cardiovascular and peripheral vascular disease is intense, and is expected to increase. The interventional cardiology market is characterized by rapid technological innovation and change, and the Company's products could be rendered obsolete as a result of future innovations. The Company's non-imaging catheters and combination balloon angioplasty/IVUS imaging catheters compete with non-imaging balloon angioplasty catheters marketed by a number of manufacturers, including ACS, a subsidiary of Guidant Corporation, SciMed Life Systems, Inc., a subsidiary of Boston Scientific Corporation ("SciMed"), Cordis and Medtronic. Such companies have established market positions, substantial resources, and significantly larger sales and marketing organizations. In addition, the Company faces competition from manufacturers of atherectomy devices, vascular stents and pharmaceutical products intended to treat cardiovascular disease. THIRD-PARTY REIMBURSEMENT In the United States, the Company's products are purchased primarily by medical institutions, that then bill various third-party payors, (such as Medicare, Medicaid, and other government programs) and private insurance plans (such as Blue Cross/Blue Shield, United Healthcare), for the health care services provided to patients. U.S. Medical institutions are reimbursed for the care of Medicare hospital patients based on a predetermined lump sum amount for one of over 500 diagnostic related group, or DRGs (such as DRG 112 Percutaneous Cardiovascular Procedures), regardless of the costs involved. The amount of money paid for a specific DRG is determined by the average resource consumption needed to treat a specific disease, including the nursing time, operating room time and supplies. Reimbursement for Medicare patients for the equipment and hospital expense of an angioplasty procedure is usually covered under a specific DRG. However, since the amount of reimbursement is fixed and the amount of potential profit for the medical institution relating to the procedure may be reduced to the extent the physician performs additional procedures such as IVUS imaging, pressure measurement or uses a more expensive product that combines ultrasound imaging with therapeutic capabilities. Private insurers and other payors determine whether to provide coverage for a particular procedure and reimburse hospitals for medical treatment also usually at a fixed rate base. The fixed rate of reimbursement is based on the procedure performed, and is unrelated to the specific type or number of devices used in a procedure. Some payors may deny reimbursement if they determine that the device used in a treatment was unnecessary, inappropriate or not cost-effective, experimental or used for a non-approved indication. Physicians in the United States are reimbursed for performing medical procedures based on Current Procedural Terminology, "CPT" codes. Each type of procedure reimburses the physician a specific amount based on the amount of resource costs needed to provide the services. Included in the cost of providing each service are the physician work, practice expense and malpractice insurance. Payments are also adjusted for geographic differences. CPT codes are now available for all EndoSonics technology. CPT codes have been available since 1997 to reimburse physicians to perform ultrasound procedures and interpret the results when imaging is performed in conjunction with a therapeutic intervention. In January 1999 CPT codes were established to reimburse physician for performing physiological assessment including Doppler Flow and Pressure Measurement. These physician reimbursements are paid directly to the physician and are not intended to cover the costs of the supplies to perform the procedures. Physicians in the United States receive approximately $160 for physiological testing, $190 for IVUS and $1,232 for MegaSonics balloon and IVUS combination device for two vessel evaluation an/or treatment in a patient. Physicians are responsible for determining that the clinical benefits of intravascular ultrasound imaging justify the additional costs for the medical institutions. On April 1, 1996, the Japanese Ministry of Health approved reimbursement for IVUS-based procedures. The reimbursements cover both the cost of the physician and the cost of the devices and are approximately $2,000. The market for the Company's products could be adversely affected by changes in governmental and private third-party payors' policies. Capital costs for medical equipment purchased by hospitals in the United States are currently reimbursed separately from DRG payments. Medical institutions are reimbursed for a portion of the total capital equipment required to provide treatment. 7 8 Although the Company believes that less invasive procedures generally provide less costly overall therapies as compared to alternative surgical procedures, there can be no assurance that reimbursement for procedures using the Company's products will be available or, if currently available, will continue to be available, or that future reimbursement policies of payors will not adversely affect the Company's ability to sell its products on a profitable basis. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors, or changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products, would have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, the Company is unable to predict what additional legislation or regulation if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operation" and "Risk Factors - Limitations on Third-Party Reimbursement." GOVERNMENT REGULATION United States. The manufacturing and marketing of the Company's products are subject to extensive and rigorous government regulation in the United States. The process of obtaining and maintaining required regulatory approvals is lengthy, expensive and uncertain. The Company believes that its success will be significantly dependent upon commercial sales of improved versions of its imaging systems and catheter products. The Company will not be able to market these new products in the United States unless and until the Company obtains approval from the FDA. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 1976, or to a device that the FDA has found to be substantially equivalent to a legally marketed pre-1976 device, the manufacturer may seek clearance from the FDA to market the device by filing a premarket notification with the FDA under Section 510(k). A 510(k) premarket notification must be supported by appropriate data establishing the claim of substantial equivalence to the satisfaction of the FDA. Clearance under 510(k) normally takes at least three months and may require submission of clinical safety and efficacy data to the FDA. There can be no assurance that 510(k) clearance for any future product or modification of an existing product will be granted or that the process will not be unduly lengthy. In the future, the FDA will require manufacturers of certain medical devices introduced prior to 1976 to present additional safety and effectiveness data or face restrictions on the sale of these products, including the possible withdrawal of such devices from the market. All of the 510(k) clearances received for the Company's products were based on substantial equivalence to legally marketed pre-1976 devices. Review of the substantially equivalent pre-1976 devices on which the 510(k) clearances for the Company's catheters were based and any resulting restrictions on the Company or requirements imposed to present additional data could have a material adverse effect on the Company's business, financial condition and results of operations. If substantial equivalence cannot be established, or if the FDA determines that the device or the particular application for the device requires a more rigorous review, the FDA will require that the manufacturer submit a pre-market approval ("PMA") application that must be reviewed and approved by the FDA prior to sales and marketing of the device in the United States. The PMA process is significantly more complex, expensive and time consuming than the 510(k) clearance process and frequently requires submission of clinical data. It is expected that certain of the Company's combination products under development, such as an imaging-radiation catheter, will be subject to this PMA process. There can be no assurance that PMA approval for any future product or modification of an existing product will be granted or that the process will not be unduly lengthy. Failure to comply with applicable regulatory requirements can, among other consequences, result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. In addition, governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Delays in receipt of approvals, failure to receive approvals or the loss of previously received approvals would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and certain state agencies, such as the Food and Drug Branch of the California Department of Health Services ("CDHS"). As such, the Company is inspected on a routine basis by both the FDA and the CDHS for compliance with the FDA's Good Manufacturing Practices ("GMP") regulations. These regulations require that the Company manufacture its products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company is required to comply with various FDA requirements for labeling. The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious 8 9 injuries alleged to have been associated with the use of its devices, as well as product malfunctions that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. Specifically, the Company's FOCAL balloon catheters are approved in certain European countries, where the Company believes these catheters are being used principally for deployment of coronary stents and balloon angioplasty. In October 1995, EndoSonics received FDA approval to market Radiance's line of FACT catheters, which utilize the FOCAL technology, for coronary balloon angioplasty. These catheters may not be marketed by the Company in the United States for stent deployment without further FDA approval. If the FDA believes that a company is not in compliance with the law, it can institute proceedings to detain or seize products, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. The Company is also subject to other federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices. The extent of government regulation that might result from any future legislation or administrative action cannot be accurately predicted. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. See "-- Products." International. International sales of the Company's products are subject to the regulatory agency product registration requirements of each country. The regulatory review process varies from country to country and may in some cases require the submission of clinical data. The Company typically relies on its distributors in such foreign countries to obtain the requisite regulatory approvals. Distributors have obtained regulatory approval for certain products in certain European countries and Japan and have applied for additional approvals. There can be no assurance, however, that such approvals will be obtained on a timely basis or at all. The Company has received ISO 9001 certification of its Quality System as well as CE Mark certifications for most of its products. The ISO 9000 series of standards for quality operations has been developed to ensure that companies know the standards of quality to which they must adhere to receive certification. The European Union has promulgated rules which require that medical products obtain the right to affix the CE Mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. All medical devices placed on the market within the European Union are required to bear the CE Mark. ISO 9000 certification is one of the CE Mark certification requirements. Failure to receive the right to affix the CE Mark for any product will prohibit the Company from selling that product in member countries in the European Union. In Europe, the Company has obtained ISO 9001 certification for operations at the EndoSonics Europe, B.V. office. There can be no assurance that the Company will be successful in meeting ongoing certification requirements. PATENTS AND PROPRIETARY INFORMATION The Company's policy is to protect its proprietary position by, among other methods, filing U.S. and foreign patent applications to protect technology, inventions and improvements that are important to the development of its business. The Company holds 47 U.S. and 24 foreign issued patents; 38 are EndoSonics, 3 are Du-MED, and 30 are Cardiometrics. The Company has other U.S. and foreign patent applications pending covering various aspects of its technology. One issued U.S. patent covers IVUS imaging catheters, including IVUS balloon catheters, in which multiple transducer elements are electronically controlled by integrated circuits or other means mounted near the transducer elements in the catheter. This patent expires in April 2007. Two patents cover aspects of catheter design technology used by the Company in its catheters. A fourth patent covers improvements to the IVUS imaging system which enables it to obtain images closer to the transducer surface. A fifth patent covers modifications to the catheter tip transducer technology. A sixth patent covers a method and apparatus for imaging blood flow using an ultrasound catheter. Additional U.S. and foreign patent applications have been filed. No assurance can be given that pending patent applications will be approved, or that any issued patents will provide competitive advantages for the Company's products, or that they will not be challenged or circumvented by competitors. The Company relies upon trade secrets, technical know-how and continuing technological innovation to develop and maintain its competitive position. The Company typically requires its employees, consultants and advisors to execute appropriate confidentiality and assignment of inventions agreements in connection with their employment, consulting or advisory relationships with the Company. There can be no assurance, however, that these agreements will not be breached, or that the Company will have adequate remedies for any breach. Furthermore, no assurance can be given that competitors will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the Company's proprietary technology, or that the Company can meaningfully protect its unpatented proprietary technology. 9 10 The interventional cardiology market in general and the market for balloon angioplasty catheters in particular, has been characterized by substantial litigation regarding patent and other intellectual property rights. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from utilizing the subject matter claimed in such patents, or would be required to obtain licenses from the patent owners of any such patents, or redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be so on terms acceptable to the Company, or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. Litigation may be necessary to defend against claims of infringement, to enforce patents issued to the Company, or to protect trade secrets, and could result in substantial cost to, and diversion of effort by, the Company. PRODUCT LIABILITY AND INSURANCE Medical device companies are subject to a risk of product liability and other liability claims in the event that the use of their products results in personal injury claims. Although the Company has not experienced any product liability claims to date, any such claims could have an adverse impact on the Company. The Company maintains liability insurance with coverage of $1.0 million per occurrence and an annual aggregate maximum of $5.0 million. There can be no assurance that product liability or other claims will not exceed such insurance coverage limits, or that such insurance will continue to be available on commercially acceptable terms, or at all. EMPLOYEES As of December 31, 1998, the Company had 350 employees, including 220 in manufacturing, 65 in research, development and regulatory affairs, 42 in sales and marketing, and 23 in administration. The Company believes that the success of its business will depend, in part, on its ability to attract and retain qualified personnel. ITEM 2. PROPERTIES Currently, the Company leases approximately 59,000 square feet in Rancho Cordova, California, which is leased through the year 2006. The Company also leases approximately 4,100 square feet in The Netherlands for its European operations, which lease expires at the end of the year 2001. In connection with the acquisition of Navius, the Company obtained 11,000 square feet in San Diego, California, which is leased through August 31, 2000. In March 1998, the Company closed its Mountain View, California facility and consolidated the manufacturing operations conducted there into its Rancho Cordova facility. In February 1999, the Company executed a lease for approximately 44,000 square feet in San Diego, California which is leased through March 31, 2006. ITEM 3. LEGAL PROCEEDINGS In October 1998, the Company entered into a five-year litigation standstill agreement with Intravascular Research Limited with respect to certain intellectual property claims. The agreement includes the dismissal without prejudice of a pending Delaware lawsuit involving patent infringement claims. The agreement does not toll any potential patent infringement damages which may be accruing. The Company is subject to various legal actions and claims arising in the ordinary course of business. Management believes the outcomes of these matters will have no material adverse effect on the Company's financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company, their ages as of March 29, 1999, and their positions are as follows:
NAME AGE POSITION ---- --- -------- Roger H. Salquist 57 Chairman of the Board Reinhard J. Warnking 50 President, Chief Executive Officer and Director Dr. Hans P. de Weerd 51 Senior Vice President, European Operations Michael J. Eberle 42 Senior Vice President and General Manager, SmartWire Division Richard L. Fischer 57 Vice President, Finance and Chief Financial Officer Joerg Schulze-Clewing 41 Vice President and General Manager, Imaging Division Vice President and General Clifford R. Varney 48 Manager Image Guided Therapy Division
10 11 Oti M. Wooster 47 Vice President, Human Resources and Administration
BACKGROUND The principal occupations of each executive officer and key employee of the Company for at least the last five years are as follows: Roger H. Salquist. Mr. Salquist was appointed Chairman of the Board in November of 1996. Since March 1997, Mr. Salquist has been a partner in Bay City Capital, a life sciences merchant banking firm. Mr. Salquist served as Chairman and Chief Executive Officer of Calgene, Inc., a Davis, California-based agribusiness biotechnology company, from 1984 through August 1996. He also served on the Board of Directors of Collagen Corporation from 1988 through October 1997. Mr. Salquist serves on the Advisory Council of the Stanford University Graduate School of Business and is a member of the Board of Trustees of the University of San Francisco. Reinhard J. Warnking. Mr. Warnking joined EndoSonics in 1993 as a director, President and Chief Operating Officer. Mr. Warnking was appointed Chief Executive Officer on February 1, 1995. He was the President and Chief Executive Officer of Acoustic Imaging Technology Corporation, a manufacturer of ultrasound and transducer systems, from August 1991 to March 1993. From February 1989 to September 1990, he founded and operated Warnking Medizintechnik GmbH, which was acquired by Dornier Medizintechnik GmbH in September 1990. After the acquisition, Mr. Warnking founded and managed the ultrasound division of Dornier Medizintechnik. From August 1985 to February 1989, he held positions as Technical Director, General Manager and Vice President International for Squibb Medical Systems and Advanced Technology Laboratories (ATL). Dr. Hans P. de Weerd. Dr. de Weerd became Senior Vice President and Managing Director of European Operations effective September 1994. From June 1993 to August 1994, he was the Managing Director of Du-MED BV, a Dutch company which the Company acquired. Prior to joining Du-MED, he was the Managing Director of EME GmbH, a transcranial Doppler ultrasound company which he acquired for Nicolet Instrument Corporation in July 1992. From April 1983 until July 1992, Dr. De Weerd was with Nicolet Instrument Corporation, a division of Thermo Electron Corporation, in a variety of research and development, new business and general management positions. Michael J. Eberle. Mr. Eberle joined the Company as Director of Engineering in January 1985. In December 1985, he became a Vice President and Director of Research, with primary responsibility for the development of the Company's products. In 1992, Mr. Eberle became Senior Vice President, Engineering and Chief Technical Officer. In 1998, Mr. Eberle became Senior Vice President and General Manager of the Smart Wire Division. Prior to joining EndoSonics, Mr. Eberle served as an independent consultant, Manager of Electronic Research and Development at Second Foundation, an ultrasound imaging company, and as a scientist at GEC Hirst Research Center in the United Kingdom. Richard L. Fischer. Mr. Fischer joined the Company in November 1997 as Vice President, Finance, and Chief Financial Officer. From August 1996 to August 1997 he was Vice President and Chief Financial Officer of Calydon, Inc., an emerging biopharmaceutical company developing therapeutics for the treatment of prostate cancer. From October 1989 to August 1996, Mr. Fischer was Vice President and Chief Financial Officer of Microgenics Corporation, a manufacturer of immunoassays for medical diagnostics. Prior to joining Microgenics, he was Vice President, Finance and Chief Financial Officer for Verilink Corporation, a manufacturer of telecommunications equipment. Joerg Schulze-Clewing. Mr. Schulze-Clewing joined the Company in February 1997 as Vice President and Chief Technical Officer of MicroSound Corporation a former subsidiary of EndoSonics Corporation. In September 1998, MicroSound was merged with and into EndoSonics. Mr. Schulze-Clewing was promoted to the Vice President and General Manager of EndoSonics' Imaging Division in July, 1998. Before joining EndoSonics in 1997, he was an independent consultant. 11 12 Clifford R. Varney. Mr. Varney became Vice President of Catheter Development and Manufacturing in March 1994 and was promoted in 1998 to Vice President and General Manager, Image Guided Therapy Division. He joined the Company in October 1990 as Director of Catheter Manufacturing. From September 1984 to October 1990, prior to joining the Company, Mr. Varney was the Vice President, Manufacturing of BSW Technologies, a private automated equipment manufacturing and consulting company. Oti M. Wooster. Ms. Wooster joined the Company in April 1997 as Vice President, Human Resources and Administration. She is responsible for directing the Company's human resources, facilities and administration activities. From 1994 to 1997, Ms. Wooster was Director, Human Resources and Operations for U.S. West Cellular, a multinational telecommunications company. From 1987 to 1994, she was Vice President, Human Resources and Administration for Government Technology Services, Inc., the world's largest seller of computer products and services to the federal government. Prior to 1987, Ms. Wooster was a member of the Executive Staff, and Cabinet member at Northern Telecom. She held various line, human resources and administration management positions in both domestic and international levels there and at General Electric Corporation. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock has been traded on the Nasdaq National Market under the symbol "ESON" since the Company's initial public offering in March 1992. The following table sets forth the high and low close of market sales prices for the Common Stock for the periods indicated, as reported on the Nasdaq National Market.
HIGH LOW ---- --- 1998 First Quarter $ 10.38 $ 8.06 Second Quarter 5.00 9.25 Third Quarter 9.38 4.50 Fourth Quarter 9.94 4.25 1997 First Quarter $ 15.38 $ 9.25 Second Quarter 12.25 8.00 Third Quarter 15.88 10.50 Fourth Quarter 15.13 8.50
On March 29, 1999, the last reported sale price of the Common Stock as reported on the Nasdaq National Market was $6.5625 per share. As of March 29, 1999, there were approximately 213 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company declared a dividend for all stockholders of record on September 5, 1997 of .04 shares of Radiance Medical Systems, Inc. (NASDAQ: RADX) Common Stock for each outstanding EndoSonics share. The dividend was distributed on September 26, 1997. The Company has never declared or paid any cash dividends on its capital stock. The Company currently intends to retain any earnings to finance future growth and does not anticipate paying any cash dividends in the foreseeable future. 12 13 ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1994 1995 1996 1997 1998 -------- -------- -------- -------- -------- (In thousands, except for per share amounts) STATEMENT OF OPERATIONS REVENUES: Product sales $ 6,665 $ 16,175 $ 23,542 $ 33,141 $ 42,929 License fee 1,000 -- -- -- -- Contract revenue 353 962 831 856 1,215 -------- -------- -------- -------- -------- Total revenue 8,018 17,137 24,373 33,997 44,144 Cost of sales 4,716 11,270 15,688 17,962 20,089 -------- -------- -------- -------- -------- Gross margin 3,302 5,867 8,685 16,035 24,055 OPERATING EXPENSES: Research, development and clinical 8,445 7,127 5,746 6,309 7,045 Marketing and sales 4,056 5,096 5,411 6,068 9,575 General and administrative 2,854 4,516 4,821 5,840 4,849 Acquisition related expenses 2,315 488 518 47,956 10,554 Amortization of intangibles -- -- -- 475 1,391 -------- -------- -------- -------- -------- Total operating expenses 17,670 17,227 16,496 66,648 33,414 -------- -------- -------- -------- -------- Loss from operations (14,368) (11,360) (7,811) (50,613) (9,359) Equity in net loss of Radiance -- -- (1,621) (2,358) (158) Other income: Interest income 1,124 888 2,269 1,881 1,208 Gain realized on equity investment in Radiance -- -- -- 4,021 739 -------- -------- -------- -------- -------- Total other income 1,124 888 2,269 5,902 1,947 -------- -------- -------- -------- -------- Net loss before provision for income taxes (13,244) (10,472) (7,163) (47,069) (7,570) Provision for income taxes -- -- -- 175 222 -------- -------- -------- -------- -------- Net loss $(13,244) $(10,472) $ (7,163) $(47,244) $ (7,792) -------- -------- -------- -------- -------- Basic and diluted net loss per share $ (1.38) $ (1.01) $ (0.53) $ (3.22) $ (0.47) -------- -------- -------- -------- -------- Shares used in per share calculation 9,584 10,387 13,395 14,670 16,472 -------- -------- -------- -------- --------
AS OF DECEMBER 31, ------------------------------------------------ 1994 1995 1996 1997 1998 ------- ------- ------- ------- ------- BALANCE SHEET DATA: Cash, cash equivalents and short-term investments $20,410 $44,395 $40,192 $23,009 $25,018 Working capital 23,517 49,872 44,676 30,146 34,263 Convertible obligation -- 750 -- -- -- Total assets 28,295 56,953 72,039 62,807 66,730 Total stockholders' equity 22,268 48,155 66,067 49,254 54,252
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Annual Report on Form 10-K contains forward looking statements which involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in "Risk Factors" beginning on page 19. 13 14 INTRODUCTION Since its inception in 1984, EndoSonics has been engaged primarily in the research and development of products for the diagnosis and treatment of cardiovascular disease. Since 1991, a majority of the Company's net revenue has been derived from sales of its IVUS imaging systems and catheters. The Company markets and distributes its IVUS imaging products in the United States, Europe and Japan through relationships with strategic partners, certain other distributors and, to a lesser extent, through a direct sales force. In February 1996, EndoSonics and Cordis entered into the Exclusive Distribution Agreement pursuant to which Cordis was granted the exclusive right to distribute EndoSonics' IVUS imaging products for coronary applications in North America, Europe, Africa and the Middle East. Cordis was obligated during each year of the Exclusive Distribution Agreement to use reasonable efforts to purchase certain minimum annual amounts of products from EndoSonics. In connection with the execution of the Exclusive Distribution Agreement, the Company issued 350,877 shares of its Common Stock to Cordis in a private placement transaction for an aggregate purchase price of approximately $5.0 million. The Company has since registered the shares of Common Stock issued to Cordis. The exclusive Distribution Agreement was terminated in April, 1998. EndoSonics and Cordis entered into a Transition Agreement in April, 1998 which provided for Cordis to maintain significantly reduced distribution rights. These distribution rights terminated in March, 1999. In March 1997, the Company and Johnson & Johnson Medical K.K. ("JJMKK"), entered into a distribution agreement whereby JJMKK was granted exclusive right to distribute EndoSonics IVUS imaging products for coronary applications in Japan. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 1999. In April 1997, the Company and Johnson & Johnson, Professional Group - Latin America ("J & J Medical-LA"), entered into a distribution agreement whereby J & J Medical-LA was granted exclusive rights to distribute EndoSonics IVUS imaging products for coronary applications in certain countries of Latin America. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 2000. In July, 1998, the Company announced that it has agreed in principal to enter into a strategic relationship with Fukuda which includes an equity investment and research and development funding totaling $13 million in EndoSonics by Fukuda. Approximately $8.4 million of Fukuda's investment was for the purchase of newly issued EndoSonics common stock. The balance of the investment will fund certain research and development/technical assistance programs for products intended for the Japanese market which will be distributed by Fukuda. The funding will occur over a two-year period commencing in August, 1998. In December 1998, the Company and JOMED N.V., ("JOMED") entered into an agreement for exclusive distribution of certain EndoSonics products into specified European and Middle Eastern countries. Also in December, EndoSonics and JOMED entered into an IVUS-guided stent delivery system agreement which calls for the development of a JOMED balloon and stent incorporated into a modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply subassemblies to JOMED who will complete the manufacturing process and distribute the resulting product in the territory which is defined as certain European and Middle Eastern countries. In certain countries within the territory, EndoSonics may distribute exclusively or jointly with JOMED. Radiance, formerly a majority-owned subsidiary of the Company, designs, develops, manufactures and markets catheters used to treat certain vascular diseases. Radiance's catheters are used in conjunction with angioplasty and other interventional procedures such as vascular stenting and drug delivery. Radiance completed its initial public offering in June of 1996 and, as a result, its assets, liabilities and results of operations are no longer included in the Company's consolidated financial statements. At December 31, 1998, the Company held approximately 15% of the outstanding shares of the Common Stock of Radiance and accounted for its investment on the cost method. The Company's business strategy includes acquiring related businesses, products or technologies. On July 23, 1997, the Company acquired Cardiometrics through the merger of a wholly owned subsidiary of the Company with and into Cardiometrics, with Cardiometrics surviving as a wholly owned subsidiary of the Company. Cardiometrics develops, manufactures, and markets intravascular medical devices to measure blood flow impairment caused by coronary artery disease. Cardiometrics' initial products, the FloWire(TM) Doppler guide wire and FloMap ultrasound instrument, represent an advance in functional testing of blood flow impairment, enabling cardiologists to evaluate the appropriateness of angioplasty interventions and assess post-procedural results directly 14 15 in the cardiac catheterization laboratory. Clinical experience demonstrates that the measurement of blood flow impairment downstream from (distal to) an obstruction, which Cardiometrics calls functional angiometry, provides information to improve the quality of patient care and procedure outcomes in the diagnosis and treatment of cardiovascular disease. The FloWire(TM)/FloMap(TM) systems has received clearance from the FDA and many corresponding European and Pacific Rim regulatory agencies. Cardiometrics has also developed the WaveWire(TM)/WaveMap intracoronary blood pressure measurement system, which was first used in a clinical case in Europe in December 1996. Cardiometrics received a 510(k) approval in August 1997 for the WaveWire(TM)/WaveMap(TM) System, and commenced shipment to United States customers in 1998. On August 5, 1998, the Company acquired Navius Corporation, a San Diego based, privately-held developer of angioplasty balloons, stents, intravascular radiation devices and other medical products. Navius' results of operations are combined with those of the Company since the date of the acquisition. The Company expects that it may pursue additional acquisitions in the future. Any future acquisitions may result in potentially dilutive issuances of equity securities, the write-off of in-process research and development, the incurrence of debt and contingent liabilities and amortization expenses related to intangible assets acquired, any of which could materially adversely affect the Company's business financial condition and results of operations. In particular, if the Company is unable to use the "pooling of interests" method of accounting, the Company will be required to amortize any intangible assets acquired in connection with any additional acquisitions and the amortization periods for such costs will be over the useful lives of such assets, which range from three years to eight years. Additionally, unanticipated expenses may be incurred relating to the integration of technologies and research and development, and administrative functions. Any acquisition will involve numerous risks, including difficulties in the assimilation of the acquired company's employees, operations and products, uncertainties associated with operating in new markets and working with new customers, the potential loss of the acquired company's key employees as well as the costs associated with completing the acquisition and integrating the acquired company. The Company's financial results will be affected in the future by certain factors, market acceptance of the Company's new products, the revenue mix between sales of imaging systems and catheters and changes in government regulation regarding third-party reimbursement applicable to the Company's System and Products. See "Risk Factors." RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1998 with the Year Ended December 31, 1997 Cardiometrics' results of operations were included in the Company's consolidated results of operations beginning July 24, 1997. Navius' results of operations were included in the Company's consolidated results of operations beginning August 5, 1998. (See Note 3 to Consolidated Financial Statements.) Total Revenue. Total revenue in 1998 increased by 30% to approximately $44.1 million from $34.0 million in 1997. The increase is a result of an additional $4.4 million in IVUS sales, primarily in Europe and Japan, and $4.4 million in Cardiometrics revenue. The majority of the increase in Cardiometrics revenue was due to the inclusion of Cardiometrics for a full twelve month period in 1998 as compared to 5 months in 1997. In addition, there was an increase of $1.4 million, primarily sales of balloon catheters, as a result of the Navius acquisition. Sales of the Company's digital all-electronic IVUS imaging system and catheters accounted for 72% of total revenue and a 16% increase over 1997 results. The increase is due both to the growth of the overall market for IVUS imaging products and increased unit sales of the Company's imaging catheters. The sales of IVUS imaging catheters as a percentage of total IVUS sales has increased from 42% in 1997 to 50% in 1998 due to the increase in the Company's installed base. In 1998, export sales as a percentage of total revenue increased to 73% as compared to 64% in 1997, primarily due to strong customer demand in Japan. The Company currently anticipates that export sales will continue to represent a substantial portion of the Company's total revenue in future periods. Cost of Product Sales. Cost of product sales as a percentage of product sales decreased to approximately 46% from approximately 52% in 1997. Cost of sales as a percentage of product sales in 1998 was reduced principally by volume increases and improved manufacturing efficiencies, as well as favorable margins on Cardiometrics products. Gross profit margins on product sales improved to 54% in 1998 as compared to 48% in 1997. Due to the uncertainty associated with continued improvements in efficiency of the Company's manufacturing processes and 15 16 the impact of increasingly competitive pricing, there can be no assurance that the Company's gross profit margin will be maintained or continue to improve in future periods. Acquisition Related Expenses. In connection with the Company's acquisition of Navius in 1998 , the Company wrote off in-process research and development totaling $10.6 million. This amount was expensed as an Acquisition Related Charge on the acquisition date. This write-off was necessary because the acquired technology had not yet reached technological feasibility and had no future alternative uses. The Navius acquired in-process research and development relates primarily to the development of intravascular ultrasound radiation devices. The Company anticipates that products using the acquired in-process technology will be generally released before the end of 2001. The Company expects that the acquired in-process research and development will be successfully developed, but there can be no assurance that technological viability of these products will be achieved. The nature of the efforts required to develop the purchased in-process technology into technologically viable products principally relate to efficacy validation and regulatory approval. The value of the purchased in-process technology was determined by estimating the projected net cash flows related to such products, which incorporate the in-process technology including percent complete prior to the date of acquisition, percent remaining to be developed post acquisition, time to completion, and costs to complete the development of the technology and the future revenues to be earned upon commercialization of the products. These cash flows were discounted back to their net present value. The resulting projected net cash flows from such projects were based on management's estimates of revenues and operating profits related to such projects. The purchased in-process technology acquired in the Navius acquisition primarily relates to the radiation guide wire technology. The Company intends to use this technology to develop an IVUS radiation delivery product. This product will combine Navius' guide wire technology with the Company's IVUS imaging technology. Revenue attributable to the in-process technology was assumed to begin in 2001 and increase over the 12 year projection period (2001 to 2012) at rates ranging from 591% to 10%, resulting in projected annual revenues of approximately $2 million to approximately $98 million. Such projections were derived from the projected number of units sold and the expected price per unit. Projected revenues consider, among other factors, presumed market penetration, retention of the Company's existing customer base, as well as, new customer transactions Operating expenses include cost of goods sold, general and administrative expense, selling and marketing expense, and maintenance research and development costs. Operating expenses were estimated as a percentage of annual revenue. Cost of goods sold was estimated to be approximately 40%. General and administrative expenses and sales and marketing expenses as a percent of revenues were estimated to be 12% and 20% , respectively. Maintenance research and development cost are the costs to sustain the products once they have been introduced to the market. Maintenance research and development costs were estimated to be 2% of revenues. Operating profits were estimated to be approximately 26% of revenues and ranged from approximately $0.6 million to $25.5 million during the projection period. The projected net cash flows were discounted to their present value. The Weighted Average Cost of Capital ("WACC") was used to determine an appropriate discount rate. The WACC calculation produces the average required rate of return of an investment in an operating enterprise, based on required rates of return from investments in various areas of the enterprise. The Company used a 30% discount rate to calculate the present value of the in process technology. This rate was determined by applying a risk premium of 11%, to the calculated WACC of 19%. The risk premium was added to reflect the general business risks associated with the technology which has not yet reached technological feasibility. In calculating the present value of the developed technology and other acquired intangibles a 20% discount rate, which approximates the Company's WACC, was used. This rate reflects the fact that these assets face substantially the same risks as the business as a whole. The Company estimates that the cost to complete development of the in process technology will be approximately $6 million. Research, Development and Clinical. Research, development and clinical expenses increased 12% to $7.0 million in 1998 from approximately $6.3 million in 1997. This increase is due to a $0.9 million increase in clinical expenses compared to 1997 and the acquisition of Navius offset in part by research and development expenses which increased by $0.4 million. The majority of the increase in clinical expenses was due to the inclusion of Cardiometrics for a full twelve-month period in 1998. 16 17 Marketing and Sales. Marketing and sales expenses increased 58% to approximately $9.6 million from $6.1 million in 1997, primarily due to increased staffing and marketing programs related to staffing a direct sales force in the United States and Germany. As a percentage of total revenue, marketing and sales expenses increased to 22% as compared to 18% in 1997. General and Administrative. General and administrative expenses decreased by 17% to approximately $4.8 million in 1998 from approximately $5.8 million in 1997. After adjusting for integration charges of $1.4 million in 1997, general and administrative expenses increased $0.4 million. The increase is attributable to an overall increase in the Company's level of operations; however, general and administrative expenses decreased to 11% of total revenue in 1998 as compared to 17% of total revenue in 1997. Other Income. Other income decreased to approximately $1.9 million in 1998 from approximately $5.9 million in 1997. The decrease is due to the 1997 gains realized on the shares of Radiance common stock used to acquire Cardiometrics, distributions to the Company's stockholders and option holders, and the sale of Radiance stock. Interest income declined by $0.7 million due to reduced cash balances and lower short-term interest rates. Net Loss. Net loss was $7.8 million, or $0.47 per share for 1998, as compared to a net loss of approximately $47.2 million, or $3.22 per share in 1997. Comparison of the Year Ended December 31, 1997 with the Year Ended December 31, 1996 Radiance Medical Systems' results of operations were included in the Company's consolidated results through June 19, 1996, and accounted for on the equity method thereafter. Cardiometrics' results of operations were included in the Company's consolidated results of operations beginning July 24, 1997. (See Note 3 to Consolidated Financial Statements.) Total Revenue. Total revenue in 1997 increased by 39% to approximately $34.0 million from $24.4 million in 1996. The increase is a result of the Cardiometrics acquisition, which resulted in an additional $6.8 million in revenue and a $6.6 million increase in IVUS sales, primarily in Europe and Japan. Sales of the Company's digital all-electronic IVUS imaging system and catheters accounted for approximately 78% of total revenue and a 32% increase over 1996 results. The increase is due both to the growth of the overall market for IVUS imaging products and increased sales under the Company's distribution agreements with Cordis and Fukuda. Total revenue from Cardiometrics was approximately $6.8 million for the period from the acquisition, July 24, 1997 through December 31, 1997. Total Radiance revenue was approximately $3.8 million in 1996. There was no Radiance revenue included in 1997. A majority of the Company's sales of IVUS products consists of sales of IVUS imaging systems. The sales of IVUS imaging catheters as a percentage of total IVUS sales has increased from 30% in 1996 to 42% in 1997 due to the increase in the Company's installed base. In 1997, export sales as a percentage of total revenue decreased to 64% as compared to 69% in 1996, as domestic sales increased at a greater rate than export sales. The Company currently anticipates that export sales will continue to represent a substantial portion of the Company's total revenue in future periods. Cost of Product Sales. Cost of product sales as a percentage of product sales decreased to approximately 52% from approximately 63% in 1996. Cost of sales as a percentage of product sales in 1997 was reduced principally by volume increases and improved manufacturing efficiencies, as well as favorable margins on Cardiometrics products. Gross profit margins on product sales improved to 48% in 1997 as compared to 37% in 1996. Due to the uncertainty associated with continued improvements in efficiency of the Company's manufacturing process and the impact of increasingly competitive pricing, there can be no assurance that the Company's gross profit margin will be maintained or continue to improve in future periods. Acquisition Related Expenses. In connection with the Company's acquisition of Cardiometrics in 1997, the Company wrote-off in-process research and development totaling $43.0 million. This write-off was necessary because the acquired technology had not reached technological feasibility and had no future alternative uses. The Cardiometrics acquired in-process research and development relates primarily to the development of intravascular guidewires to measure blood flow and blood pressure in diseased coronary arteries, as well as, other functional assessment instruments. The nature of the efforts required to complete development of the various purchased in-process research and development projects into technologically viable products principally relate to efficacy and regulatory approval and are projected to be completed from 1997 to 1999. Additionally, the Company recorded restructuring charges of $5.0 million related to corporate reorganization costs 17 18 and plans to reduce overhead of the combined companies. The charges primarily consist of cash expenditures anticipated in 1998 related to termination of certain agreements and relocation and consolidation of facilities. Research, Development and Clinical. Research, development and clinical expenses increased 10% to $6.3 million in 1997 from approximately $5.7 million in 1996. Cardiometrics portion of research, development and clinical expense for 1997 was approximately $1.9 million. Marketing and Sales. Marketing and sales expenses increased 12% to approximately $6.1 million from $5.4 million in 1996, primarily due to increased staffing and marketing programs related to the acquisition of Cardiometrics. After adjusting for $0.5 million in integration charges in 1997, marketing and sales remained constant. As a percentage of total revenue, marketing and sales expenses decreased to 18% as compared to 22% in 1996. General and Administrative. General and administrative expenses increased by 21% to approximately $5.8 million in 1997 from approximately $4.8 million in 1996. After adjusting for integration charges of $1.4 million in 1997 and $0.3 million in 1996, general and administrative expenses increased $0.1 million. The increase is attributable to an overall increase in the Company's level of operations; however, general and administrative expenses decreased to 17% of total revenue in 1997 as compared to 20% of total revenue in 1996. Other Income. Other income increased to approximately $5.9 million in 1997 from approximately $2.3 million in 1996. The increase is due to the result of gains realized on the shares of Radiance common stock used to acquire Cardiometrics, distributions to the Company's stockholders and option holders, and the sale of Radiance stock, offset in part by a reduction in interest income of $0.4 million due to reduced cash balances. Net Loss. Net loss was $47.2 million, or $3.22 per share for 1997, as compared to a net loss of approximately $7.2 million, or $0.53 per share in 1996. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1998, the Company had cash, cash equivalents and short-term investments of $25 million and no borrowings or credit facilities. Net cash provided from operations was $2.1 million in 1998, as compared to cash used in operations of $3.6 million in 1997. Working capital increased to $34.3 million in 1998, as compared to $30.1 million in 1997. The increase is primarily due to the sale of common stock to Fukuda, the sale of Radiance common stock, and reduced accrued restructuring and integration expenses offset in part by the cash used in the acquisition of Navius and the acquisition of stock under the Company's stock repurchase program. Net cash used in investing activities was $11.3 million, as compared to $17.9 million in 1997. On August 5, 1998, the Company acquired all of the outstanding shares of Navius. As a result, Navius' assets, liabilities and results of operations since the acquisition date are included in the Company's consolidated statements of cash flows. Net cash used in the acquisition was $6.5 million. Net cash provided by financing activities was $4.0 million as compared to $0.6 million in 1997. In 1998, the Company received $8.8 million from the issuance of common stock, primarily related to the sale of common stock to Fukuda for $8.4 million and the exercise of stock options of $0.4 million. In 1997 proceeds from the issuance of common stock was $0.6 million. Intangible assets total approximately $12.4 million as of December 31, 1998 and consist primarily of developed technology, goodwill, and other intangible assets acquired in connection with the acquisitions of Cardiometrics and Navius in 1997 and 1998, respectively. The Company continually evaluates the value and future benefits of its intangible assets, and assesses the recoverability of the intangible assets using cash flows and income from operations of the related acquired businesses as measures. Under this approach, the carrying value would be reduced if it becomes probable that our best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible assets. As of December 31, 1998, there have been no adjustments to the carrying amounts of intangibles resulting from these evaluations. As of December 31, 1998, intangible assets represented approximately 19% of our total assets and 23% of stockholders equity. The Company anticipates using cash resources primarily for capital expenditures, product development, sales and marketing efforts and working capital purposes prior to achieving positive cash flow from operations. The Company believes that its existing cash, cash equivalents and short-term investments as of December 31, 1998 will be sufficient to meet the Company's operating expenses and capital requirements through 1999. However, there can be no assurance that the Company will not be required to seek other financing or that such financing, if required, will be available on terms satisfactory to the Company. See " Risk Factors--Future Operating Results--History of Operating Losses; Anticipated Future Losses."* IMPACT OF YEAR 2000 The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions to operations, including, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Should any of these disruptions occur, the financial impact on the Company is unknown. 18 19 The Company has completed an assessment and will have to modify or replace certain portions of its existing software in order for its computer systems to function properly with respect to dates in the year 2000 and thereafter. However, independent of the Year 2000 Issue, the Company has plans to replace the majority of its existing computer programs with an integrated, enterprise-wide software platform. The Company has identified a software program which meets the Company's operational needs and is also Year 2000 compliant. The Company believes that the new software can be installed and tested with regards to the Year 2000 Issue by September, 1999. It is expected that the cost of the new software, installation, and testing will be approximately $1.2 million, the majority of which would be capitalized. In the event that the new software does not function properly with regard to the Year 2000, and an adequate solution is not readily available, the Company's believes that it can make the necessary modifications, primarily software version upgrades, to its current computer programs in order to make them Year 2000 compliant. It is anticipated that the Year 2000 project will be completed not later than September, 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with the planned software conversion or with modifications to the existing software, the Year 2000 Issue will not pose a significant operational problem. However, if such modifications are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. Likewise, if any of the Company's key suppliers, vendors or customers experience a prolonged business interruption as a result of the Year 2000 Issue, it could have a material impact on the operations of the Company. The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which assume certain future events, including the continued availability of certain resources. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the effectiveness of the new software and, if necessary, the upgrades received from the Company's software vendors at addressing the Year 2000 Issue and similar uncertainties. TAX MATTERS As of December 31, 1998, the Company had federal and state net operating loss carryforwards of approximately $50.0 million and $8.5 million, respectively. The Company also had federal research and development and other tax credit carryforwards for federal and state income tax purposes, of approximately $2.4 million and $1.0 million respectively. The net operating loss and credit carryforwards began expiring and will continue to expire at various dates beginning in 1999 through 2018 if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the "change of ownership" rules provided by the Internal Revenue Code and similar state tax provisions. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. RISK FACTORS History of Operating Losses; Anticipated Future Losses. The Company was founded in 1984 and has experienced annual operating losses since its inception. The Company's accumulated deficit at December 31, 1998 was approximately $116 million. There can be no assurance that the Company will be able to achieve or sustain profitability in the future. Although the Company believes that its existing cash, cash equivalents and short-term investments will be sufficient to meet its liquidity requirements through 1999, there can be no assurance that the Company will not require additional financing or that such financing, if required, will be available on satisfactory terms, if at all. 19 20 Uncertainty of Market Acceptance. Although external ultrasound imaging and balloon angioplasty are widely used technologies, the use of IVUS imaging in connection with interventional cardiology is relatively new. The commercial success of the Company's products will depend upon their acceptance by the medical community as a useful, cost-effective component of interventional cardiovascular and peripheral vascular procedures. IVUS imaging is used in conjunction with angioplasty and other intravascular procedures such as vascular stenting. Accordingly, the medical community must determine that the information obtained from the use of the Company's ultrasound products will increase the safety or effectiveness or lower the overall cost of the care being provided and that the value of such information justifies the incremental expense of obtaining IVUS imaging. In addition, market acceptance of the Company's combination balloon angioplasty/IVUS imaging catheters will depend, among other things, on a determination by the medical community that the efficacy of the therapeutic component of the Company's combination catheters is at least comparable to that of competing non-imaging angioplasty catheters and other types of therapy. Although IVUS imaging devices have been available for over ten years, the market for such products has remained relatively small. Although the Company believes the benefits of IVUS imaging can be demonstrated, there can be no assurance that the benefits will be considered sufficient by the medical community to enable the Company's products to achieve widespread market acceptance. Failure of the Company's products to achieve market acceptance would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products." Dependence on Strategic Relationships. In recent years there has been significant consolidation among medical device suppliers as the major suppliers have attempted to broaden their product lines in order to focus on product configurations that address a given procedure or treatment and in order to respond to cost pressures from health care providers. This consolidation has made it increasingly difficult for smaller suppliers, such as the Company, to effectively distribute their products without a major relationship with one of the major suppliers. There can be no assurance that the Company will be able to maintain its relationship with Cordis or replace Cordis in the event the Company's relationship with Cordis would be terminated. In the event of such a termination, the Company's ability to distribute its IVUS imaging products would be materially adversely affected, which would have a material adverse effect on the Company's business, financial condition and results of operations. Dependence on New Products; Rapid Technological Change. The medical device industry generally, and the IVUS imaging device market in particular, are characterized by rapid technological change, changing customer needs, and frequent new product introductions. The Company's future success will depend upon its ability to develop and introduce new products that address the increasingly sophisticated needs of its customers. There can be no assurance that the Company will be successful in developing and marketing new products that achieve market acceptance or that the Company will not experience difficulties that could delay or prevent the successful development, introduction and marketing of new products. See "Business -- Products." Dependence on International Sales. The Company derives, and expects to continue to derive, a significant portion of its revenue from international sales. In 1996, 1997, and 1998, the Company's international sales were $16.9 million, $21.9 million and $32.2 million respectively, or 69%, 64% and 73% of total revenue. Therefore, a significant portion of the Company's revenues will continue to be subject to the risks associated with international sales, including economic or political instability, shipping delays, changes in applicable regulatory policies, fluctuations in foreign currency exchange rates and various trade restrictions, all of which could have a significant impact on the Company's ability to deliver products on a competitive and timely basis. Future imposition of, or significant increases in the level of, customs duties, import quotas or other trade restrictions, could have an adverse effect on the Company's business, financial condition and results of operation. The regulation of medical devices, particularly in the European Community, continues to expand and there can be no assurance that new laws or regulations will not have an adverse effect on the Company. Suppliers. The Company purchases many standard and custom built components from independent suppliers, and contracts with third parties for certain specialized electronic component manufacturing processes. Most of these purchased components and processes are available from more than one vendor. However, the manufacturing of the connection points on the integrated circuit microchips and the pressure microchip are currently performed by single vendors. Although the Company is in the process of identifying alternative vendors, the qualification of additional or replacement vendors for certain components or services is a lengthy process. Any supply interruption from these single source vendors would have a material adverse effect on the Company's ability to manufacture its products 20 21 until a new source of supply was qualified and, as a result, could have an adverse effect on the Company's business, financial condition and results of operations. See "Business --Manufacturing" and "-- Government Regulation." Limitations on Third-Party Reimbursement. In the United States, the Company's products are purchased primarily by medical institutions that then bill various third-party payors. Medical institutions are reimbursed for the care of Medicare hospital patients based at a predetermined lump sum amount for diagnostic related group or DRGs regardless of the costs involved. The amount of money paid for a specific DRG is determined by the average resource consumption needed to treat a specific disease, including the nursing time, operating room time and supplies. The amount of reimbursement is fixed and thus the amount of potential profit for the medical institution relating to the procedure may be reduced to the extent the physician performs additional procedures such as IVUS imaging, pressure measurement or uses a more expensive product that combines ultrasound imaging with therapeutic capabilities. Private insurers and other payors determine whether to provide coverage for a particular procedure and reimburse hospitals for medical treatment also usually at a fixed rate based. The fixed rate of reimbursement is based on the procedure performed, and is unrelated to the specific type or number of devices used in a procedure. Some payors may deny reimbursement if they determine that the device used in a treatment was unnecessary, inappropriate or not cost-effective, experimental or used for a non-approved indication. Physicians are reimbursed for performing medical producers based on the amount of resource costs needed to provide the services. Included in the cost of providing each service is the physician work, practice expense and malpractice insurance. Payments are adjusted for geographic differences. CPT codes are now available for all EndoSonics technology. CPT codes have been available since for ultrasound procedures since 1997 and since January 1999 for Doppler flow and pressure measurement. Physicians are responsible to determine that the clinical benefits of intravascular ultrasound imaging and physiological assessment justify the additional costs for the medical institutions. Although the Company believes that less invasive procedures generally provide less costly overall therapies as compared to alternative surgical procedures, there can be no assurance that reimbursement for such less invasive procedures will continue to be available, or that future reimbursement policies of payors will not adversely affect the Company's ability to sell its products on a profitable basis. Failure by hospitals and other users of the Company's products to obtain reimbursement from third-party payors, or changes in government and private third-party payors' policies toward reimbursement for procedures employing the Company's products, would have a material adverse effect on the Company's business, financial condition and results of operations. The market for the Company's products could be adversely affected by changes in governmental and private third-party payors' policies. A portion of capital costs for medical equipment purchased by hospitals are currently reimbursed separately from DRG payments. Moreover, the Company is unable to predict what additional legislation or regulation if any, relating to the health care industry or third-party coverage and reimbursement may be enacted in the future, or what effect such legislation or regulation would have on the Company. See "Third-Party Reimbursement." Competition. Competition in the market for devices used in the diagnosis and treatment of cardiovascular and peripheral vascular disease is intense, and is expected to increase. The interventional cardiology market is characterized by rapid technological innovation and change, and the Company's products could be rendered obsolete as a result of future innovations. The Company's digital, all-electronic IVUS imaging catheters compete with mechanical ultrasound devices manufactured by CVIS and Hewlett-Packard. Both CVIS and Hewlett-Packard are significantly larger than the Company, and have significantly greater financial, sales and marketing and technical resources available. These competitors have also developed IVUS imaging products with high quality images and the Company believes that its competitive position is dependent upon its ability to establish its reputation as a producer of high quality IVUS imaging products. There can be no assurance that these companies are not currently developing, or will not attempt to develop, combination balloon angioplasty/IVUS imaging catheters that would compete with the Company's combination balloon angioplasty/IVUS imaging products. Moreover, companies currently engaged in the manufacture and marketing of non-imaging angioplasty catheters could attempt to expand their product lines to include combination balloon angioplasty/IVUS imaging products. The Company's combination balloon angioplasty/IVUS imaging catheters compete or will compete with therapeutic catheters marketed by a number of manufacturers, including CVIS, Cordis, Guidant and Medtronic, Inc. Such companies have substantial resources, established market positions, and significantly larger sales and marketing organizations. In addition, the Company faces competition from manufacturers of atherectomy devices, vascular stents and pharmaceutical products intended to treat cardiovascular disease. See "Business - -- Competition." 21 22 Reliance on Patents and Proprietary Technology; Risk of Patent Infringement. The Company holds six issued United States patents and has other United States and several foreign patent applications pending covering various aspects of its IVUS imaging technology. No assurance can be given, however, that the Company's patent applications will issue as patents or that any issued patents will provide competitive advantages for the Company's products or will not be successfully challenged or circumvented by its competitors. Although the Company attempts to ensure that its products do not infringe other party's patents and proprietary rights, there can be no assurance that its products do not infringe such patents or rights. The interventional cardiovascular market has been characterized by substantial litigation regarding patent and other intellectual property rights. In the event that any relevant claims of third-party patents are upheld as valid and enforceable, the Company could be prevented from practicing the subject matter claimed in such patents, or would be required to obtain licenses from the owners of any such patents or redesign its products or processes to avoid infringement. There can be no assurance that such licenses would be available or, if available, would be so on terms acceptable to the Company or that the Company would be successful in any attempt to redesign its products or processes to avoid infringement. The Company also relies on trade secrets and proprietary technology and enters into confidentiality and non-disclosure agreements with its employees and consultants. There can be no assurance that the confidentiality of such trade secrets or proprietary information will be maintained by employees, consultants, advisors or others, or that the Company's trade secrets or proprietary technology will not otherwise become known or be independently developed by competitors in such a manner that the Company has no practical recourse. Litigation may be necessary to defend against claims of infringement or invalidity, to enforce patents issued to the Company or to protect trade secrets and could result in substantial cost to, and diversion of effort by, the Company. See "Business -- Patents and Proprietary Technology" and "Legal Proceedings." Government Regulation. The manufacturing and marketing of the Company's products are subject to extensive and rigorous government regulation in the United States and in other countries. The Company believes that its success will be significantly dependent upon commercial sales of improved versions of its imaging systems and catheter products. The Company will not be able to market these new products in the United States unless and until the Company obtains approval from the FDA. If a medical device manufacturer can establish that a newly developed device is "substantially equivalent" to a device that was legally marketed prior to May 1976, or to a device that the FDA has found to be substantially equivalent to a legally marketed pre-1976 device, the manufacturer may seek clearance from the FDA to market the device by filing a premarket notification with the FDA under Section 510(k) of the Federal Food, Drug, and Cosmetic Act ("510(k)"). There can be no assurance that 510(k) clearance for any future product or modification of an existing product will be granted or that the process will not be unduly lengthy. All of the 510(k) clearances received for the Company's catheters were based on substantial equivalence to legally marketed pre-1976 devices. Review of the substantially equivalent pre- 1976 devices on which the 510(k) clearances for the Company's catheters were based and any resulting restrictions on the Company or requirements imposed to present additional data could have a material adverse effect on the Company's business, financial condition and results of operations. If substantial equivalence cannot be established, or if the FDA determines that the device or the particular application for the device requires a more rigorous review, the FDA will require that the manufacturer submit a PMA application that must be reviewed and approved by the FDA prior to sales and marketing of the device in the United States. The PMA process is significantly more complex, expensive and time consuming than the 510(k) clearance process and frequently requires the submission of clinical data. It is expected that certain of the Company's combination angioplasty/IVUS imaging products under development will be subject to this PMA process. Failure to comply with applicable regulatory requirements can, among other consequences, result in fines, injunctions, civil penalties, suspensions or loss of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecution. In addition, governmental regulations may be established that could prevent or delay regulatory approval of the Company's products. Delays in receipt of approvals, failure to receive approvals or the loss of previously received approvals would have a material adverse effect on the Company's business, financial condition and results of operations. The Company is also required to register as a medical device manufacturer with the FDA and certain state agencies, such as the Food and Drug Branch of CDHS. As such, the Company is inspected on a routine basis by both the FDA and the CDHS for compliance with the GMP regulations. These regulations require that the Company manufacture its products and maintain related documentation in a prescribed manner with respect to manufacturing, testing and control activities. Further, the Company is required to comply with various FDA requirements for labeling. The Medical Device Reporting regulation requires that the Company provide information to the FDA on deaths or serious injuries alleged to have been associated with the use of its devices, as well as product malfunctions 22 23 that would likely cause or contribute to death or serious injury if the malfunction were to recur. In addition, the FDA prohibits an approved device from being marketed for unapproved applications. Specifically, the Company's FOCAL balloon catheters are approved in certain European countries. The Company believes that these catheters are being used in those countries principally for deployment of coronary stents and balloon angioplasty. In October 1995, EndoSonics received FDA approval to market Radiance's line of FACT catheters, which utilize the FOCAL technology, for coronary balloon angioplasty. Without specific FDA approval for use in stent deployment, these catheters may not be marketed by the Company in the United States for such use. If the FDA believes that a company is not in compliance with applicable laws and regulations, it can institute proceedings to detain or seize products, issue a recall, prohibit marketing and sales of the company's products and assess civil and criminal penalties against the company, its officers or its employees. The Company is also subject to other federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices. The extent of government regulation that might result from any future legislation or administrative action cannot be accurately predicted. Failure to comply with regulatory requirements could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Products" and "-- Government Regulation." International sales of the Company's products are subject to the regulatory agency product registration requirements of each country. The regulatory review process varies from country to country and may in some cases require the submission of clinical data. The Company typically relies on its distributors in such foreign countries to obtain the requisite regulatory approvals. There can be no assurance, however, that such approvals will be obtained on a timely basis or at all. The Company has received ISO 9001 certification of its Quality System as well as CE Mark certifications for most of its products. The ISO 9000 series of standards for quality operations has been developed to ensure that companies know the standards of quality to which they must adhere to receive certification. The European Union has promulgated rules which require that medical products obtain the right to affix the CE Mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. All medical devices placed on the market within the European Union are required to bear the CE Mark. ISO 9000 certification is one of the CE Mark certification requirements. Failure to receive the right to affix the CE Mark for any product will prohibit the Company from selling that product in member countries in the European Union. In Europe, the Company has obtained ISO 9001 certification for operations at the EndoSonics Europe, B.V. office. There can be no assurance that the Company will be successful in meeting ongoing certification requirements. Potential Product Liability; Limited Insurance. The Company faces the risk of financial exposure to product liability claims. The Company's products are often used in situations in which there is a high risk of serious injury or death. Such risks will exist even with respect to those products that have received, or in the future may receive, regulatory approval for commercial sale. The Company maintains product liability insurance with coverage limits of $1.0 million per occurrence and $5.0 million per year in the aggregate. There can be no assurance that the Company's product liability insurance is adequate or that such insurance coverage will remain available at acceptable costs. There can be no assurance that the Company will not incur significant product liability claims in the future. A successful claim brought against the Company in excess of its insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, adverse product liability actions could negatively affect the reputation and sales of the Company's products as well as the Company's ability to obtain and maintain regulatory approval for its products. See "Business -- Product Liability and Insurance." Volatility of Stock Price. The Company's Common Stock has experienced and can be expected to continue to experience substantial price volatility in response to actual or anticipated quarterly variations in operating results, announcements of technological innovations or new products by the Company or its competitors, developments related to patents or other intellectual property rights, developments in the Company's relationships with its customers, distributors or suppliers, acquisitions or divestitures of other companies in the health care industry, and other events or factors. In addition, any shortfall or changes in revenue, gross margins, earnings, or other financial results from analysts' expectations could cause the price of the Company's Common Stock to fluctuate significantly. In recent years, the stock market in general has experienced extreme price and volume fluctuations, which have particularly affected the market price of many technology and health care companies and which have often been unrelated to the operating performance of those companies. These broad market fluctuations may adversely affect the market price of the Company's Common Stock. See "Market for Registrant's Common Equity and Related Stockholder Matters." 23 24 Item 8. FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors Financial Statements Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Stockholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements The financial statement schedule listed under Part IV, Item 14, is filed as part of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this item is incorporated by reference from the Company's Proxy Statement, to be mailed to stockholders for the Annual Meeting to be held on or about June 10, 1999. The information concerning the Company's executive officers required by this item is incorporated by reference to the section of Part I hereof entitled "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference from the Company's Proxy Statement, to be mailed to stockholders for the Annual Meeting to be held on or about June 10, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference from the Company's Proxy Statement, to be mailed to stockholders for the Annual Meeting to be held on or about June 10, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference from the Company's Proxy Statement, to be mailed to stockholders for the Annual Meeting to be held on or about June 10, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS ANNUAL REPORT ON FORM 10-K: 1. Financial Statements of the Company. Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets - December 31, 1997 and 1998 Consolidated Statements of Operations for the years ended December 31, 1996, 1997 and 1998 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997 and 1998 24 25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998 Notes to Consolidated Financial Statements for the years ended December 31, 1996, 1997 and 1998 2. Financial Statement Schedule. II - Valuation and Qualifying Accounts Schedules not listed above have been omitted because they are not applicable or are not required to be set forth herein as such information is included in the Consolidated Financial Statements or the notes thereto. 3. Exhibits. Reference is made to Item 14(c) of this Annual Report on Form 10-K. (b) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the last quarter of the fiscal year covered by this Annual Report on Form 10-K. (c) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 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.
25 26 10.17(9) Exclusive Distribution Agreement dated November 1, 1994 between Cordis S.A. and EndoSonics, as amended on December 20, 1994. 10.18(7) Imaging/Therapeutic Combination Devices Development Agreement dated as of February 2, 1996 by and between Cordis Corporation ("Cordis") and EndoSonics. 10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and between Cordis and EndoSonics. 10.20(10) Stockholder Agreement dated June 19, 1996 between EndoSonics and Radiance. 10.21(10) License Agreement dated February 6, 1997 between EndoSonics and Radiance. 10.22(11) Distribution Agreement dated August 31, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.23(11) Amendment to the Distribution Agreement (June 28, 1997) dated August 31, 1998, between EndoSonics, Navius Corporation and Fukuda Denshi Co., Ltd. 10.24(11) Research and Development Agreement dated August 31, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.25(11) Common Stock Purchase Agreement dated October 7, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.26(11) Investors' Rights Agreement dated September 21, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.27* Distribution Agreement dated December 15, 1998, between EndoSonics and JOMED N.V. 10.28* IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement dated December 15, 1998 between EndoSonics and JOMED N.V. 10.29 Certificates of Ownership and Merger, dated September 1998, Merging Microsound Corporation into EndoSonics Corporation. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of Ernst & Young LLP, Independent Auditors. 24.1 Power of Attorney. (Reference is made to page 33 of this Report on Form 10-K/A.) 27.1 Financial Data Schedule.
- ------------ * Confidential Treatment Requested. (1) Filed as an exhibit to the Company's Current Report on Form 8-K (File No. 0-19880) filed with the Commission on July 14, 1993. (2) Filed as an exhibit to the Company's Registration Statement on Form 8-B filed with the Securities and Exchange Commission (the "Commission") on September 25, 1992 and incorporated by reference herein. (3) Filed as an exhibit to the Company's Registration Statement on Form S-1 (File No. 33-45280) filed with the Securities and Exchange Commission on January 24, 1992 (the "Registration Statement") and incorporated by reference herein. (4) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-19880) filed with the Commission on March 31, 1993. (5) Filed as Exhibit 10.13 to Amendment No. 1 to the Company's Registration Statement on Form S-1 (File No. 33-45280) filed with the Commission on February 25, 1992 and incorporated herein by reference. (6) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-19880) filed with the Commission on March 24, 1994. (7) Filed as an exhibit to the Company's Annual Report on Form 10-K/A (File No. 0-19880) filed with the Commission on July 29, 1996. (8) Filed as an exhibit to the Company's Form 8-K (File No. 0-19880) filed with the Commission on February 10, 1997 and incorporated herein by reference. (9) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-19880) filed with the Commission on March 21, 1995. (10) Filed as an exhibit to the Company's Annual Report on Form 10-K (File No. 0-19880) filed with the Commission on March 19, 1997. 26 27 (11) Filed as an exhibit to the Company's Quarterly Report on Form 10-Q, filed with the Commission on November 15, 1998, for the quarter ended September 30, 1998. (d) 1. Financial Statement Schedule. Report of Ernst & Young LLP, Independent Auditors Consolidated Balance Sheets - December 31, 1996 and 1997 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Stockholders Equity for the years ended December 31, 1995, 1996 and 1997 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 Notes to Consolidated Financial Statements for the years ended December 31, 1995, 1996 and 1997 2. Financial Statement Schedule. II. Valuation and Qualifying Accounts 27 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized. ENDOSONICS CORPORATION Date: March 31, 1999 By: /s/ REINHARD J. WARNKING -------------- ----------------------------------- Reinhard J. Warnking Chief Executive Officer (Principal Executive Officer) By: /s/ RICHARD L. FISCHER ----------------------------------- Richard L. Fischer Vice President, Finance (Principal Financial Officer) By: /s/ KATHLEEN E. REDD ----------------------------------- Kathleen E. Redd Controller (Principal Accounting Officer) 28 29 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints, jointly and severally, Reinhard J. Warnking and Richard L. Fischer, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ REINHARD J. WARNKING President, Chief Executive Officer and March 31, 1999 - ---------------------------------------- Director (Principal Executive Officer) Reinhard J. Warnking /s/ RICHARD L. FISCHER Vice President, Finance and Chief Financial March 31, 1999 - ---------------------------------------- Officer (Principal Financial Officer) Richard L. Fischer /s/ ROGER SALQUIST Chairman of the Board of Directors March 31, 1999 - ---------------------------------------- Roger Salquist /s/ JULIE A. BROOKS Director March 31, 1999 - ---------------------------------------- Julie A. Brooks /s/ THOMAS J. CABLE Director March 31, 1999 - ---------------------------------------- Thomas J. Cable /s/ DALE CONRAD Director March 31, 1999 - ---------------------------------------- Dale Conrad /s/ JAKOB STAPFER Director March 31, 1999 - ---------------------------------------- Jakob Stapfer /s/ GREGG W. STONE, M.D. Director March 31, 1999 - ---------------------------------------- Gregg W. Stone, M.D. /s/ W. MICHAEL WRIGHT Director March 31, 1999 - ---------------------------------------- W. Michael Wright
29 30 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........................... 31 Consolidated Balance Sheets................................................. 32 Consolidated Statements of Operations....................................... 33 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency).... 34 Consolidated Statements of Cash Flows....................................... 35 Notes to Consolidated Financial Statements.................................. 36
30 31 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders EndoSonics Corporation We have audited the accompanying consolidated balance sheets of EndoSonics Corporation as of December 31, 1998 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a)2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EndoSonics Corporation at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Sacramento, California February 16, 1999 31 32 ENDOSONICS CORPORATION CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share amounts)
December 31, ----------------------------- 1998 1997 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 8,749 $ 13,889 Short-term investments 16,269 9,120 Trade accounts receivable, net of allowance for doubtful accounts of $350 and $562 at December 31, 1998 and 1997, respectively 13,725 13,351 Inventories 6,834 6,915 Other current assets 560 424 --------- --------- Total current assets 46,137 43,699 Property and equipment, net 4,064 3,408 Investment in Radiance Medical Systems, Inc. 4,137 8,478 Intangible assets, net 12,392 7,222 --------- --------- $ 66,730 $ 62,807 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 8,200 $ 7,536 Accrued restructuring and integration expenses 3,674 6,017 --------- --------- Total current liabilities 11,874 13,553 Other liabilities 604 -- --------- --------- Total liabilities 12,478 13,553 Commitments and contingencies (Notes 10 & 13) Stockholders' equity: Convertible-preferred stock, $.001 par value; 5,000,000 shares authorized, no shares issued and outstanding -- -- Common stock, $.001 par value; 25,000,000 shares authorized, 17,590,120 and 16,153,113 shares issued and outstanding as of December 31, 1998 and 1997, respectively 18 16 Additional paid-in capital 176,433 157,588 Common stock in treasury, at cost, 860,000 shares (4,839) -- Accumulated deficit (116,055) (108,263) Accumulated other comprehensive loss (1,305) (87) --------- --------- Total stockholders' equity 54,252 49,254 --------- --------- $ 66,730 $ 62,807 ========= =========
See accompanying notes 32 33 \ ENDOSONICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except share and per share amounts)
Years Ended December 31, ---------------------------------------------------------- 1998 1997 1996 ------------ ------------ ------------ Revenues: Product sales $ 42,929 $ 33,141 $ 23,542 Contract revenue 1,215 856 831 ------------ ------------ ------------ Total revenue 44,144 33,997 24,373 Cost of sales 20,089 17,962 15,688 ------------ ------------ ------------ Gross margin 24,055 16,035 8,685 Operating expenses: Research, development and clinical 7,045 6,309 5,746 Marketing and related sales 9,575 6,068 5,411 General and administrative 4,849 5,840 4,821 Acquisition related expenses 10,554 47,956 518 Amortization of intangibles 1,391 475 -- ------------ ------------ ------------ Total operating expenses 33,414 66,648 16,496 ------------ ------------ ------------ Loss from operations (9,359) (50,613) (7,811) Equity in net loss of Radiance Medical Systems, Inc. (158) (2,358) (1,621) Other income: Interest income 1,208 1,881 2,269 Gain realized on equity investment in Radiance Medical Systems, Inc. stock 739 4,021 -- ------------ ------------ ------------ Total other income 1,947 5,902 2,269 ------------ ------------ ------------ Net loss before provision for income taxes (7,570) (47,069) (7,163) Provision for income taxes 222 175 -- ------------ ------------ ------------ Net loss $ (7,792) $ (47,244) $ (7,163) ============ ============ ============ Basic and diluted net loss per share $ (0.47) $ (3.22) $ (0.53) ============ ============ ============ Shares used in per share calculations 16,471,953 14,669,975 13,394,728 ============ ============ ============
See accompanying notes 33 34 ENDOSONICS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional ------------------------- Paid-in Treasury (In thousands, except share amounts) Shares Amount Capital Stock - ------------------------------------ ------ ------ ------- ----- Balance at December 31, 1995 12,831,512 $ 13 $98,989 $-- Increase in carrying value from Radiance Medical Systems, Inc. initial public offering -- -- 17,606 -- Sale of common stock to Cordis Corporation 350,877 1 5,000 -- Exercise of common stock options 340,183 -- 2,429 -- Comprehensive loss: Change in unrealized gain (loss) on available-for-sale securities -- -- -- -- Foreign currency translation -- -- -- -- Comprehensive loss -- -- -- -- ---------- ----- -------- -------- Balance at December 31, 1996 13,522,572 14 124,024 -- Issuance of common stock to complete Cardiometrics acquisition 2,502,500 2 33,137 -- Issuance of Radiance Medical Systems, Inc. stock dividend -- -- -- -- Decrease in carrying value of Radiance Medical Systems, Inc. -- -- (193) -- Exercise of common stock options 128,041 -- 620 -- Comprehensive loss: Change in unrealized gain (loss) on available-for-sale securities -- -- -- -- Foreign currency translation -- -- -- -- Comprehensive loss -- -- -- -- ---------- ----- -------- -------- Balance at December 31, 1997 16,153,113 16 157,588 -- Issuance of common stock to complete acquisitions 1,205,049 1 10,020 -- Issuance of common stock to Fukuda Denshi Co., Ltd., net issuance costs of $18 965,730 1 8,381 -- Repurchase of common stock (860,000) -- -- (4,839) Exercise of common stock options 126,228 -- 444 -- Comprehensive loss: Net loss -- -- -- -- Change in unrealized gain (loss) on available-for-sale securities -- -- -- -- Foreign currency translation -- -- -- -- Comprehensive loss -- -- -- -- ---------- ----- -------- -------- Balance at December 31, 1998 17,590,120 $ 18 $176,433 ($4,839) ========== ===== ======== ========
Accumulated Other Total Comprehensive Accumulated Stockholders' (In thousands, except share amounts) Income (Loss) Deficit Equity - ------------------------------------ ------------- ----------- ------------- Balance at December 31, 1995 $ (10) $(50,837) $48,155 Increase in carrying value from Radiance Medical Systems, Inc. initial public offering -- -- 17,606 Sale of common stock to Cordis Corporation -- -- 5,001 Exercise of common stock options -- -- 2,429 Comprehensive loss: Net loss -- (7,163) (7,163) Change in unrealized gain (loss) on available-for-sale securities 8 -- 8 Foreign currency translation 31 -- 31 ------- Comprehensive loss -- -- (7,124) ------- -------- ------- Balance at December 31, 1996 29 (58,000) 66,067 Issuance of common stock to complete Cardiometrics acquisition -- -- 33,139 Issuance of Radiance Medical Systems, Inc. stock dividend -- (3,019) (3,019) Decrease in carrying value of Radiance Medical Systems, Inc. -- -- (193) Exercise of common stock options -- -- 620 Comprehensive loss: Net loss -- (47,244) (47,244) Change in unrealized gain (loss) on available-for-sale securities -- -- -- Foreign currency translation (116) -- (116) ------- Comprehensive loss -- -- (47,360) ------- -------- ------- Balance at December 31, 1997 (87) (108,263) 49,254 Issuance of common stock in connection with acquisitions -- -- 10,021 Issuance of common stock to Fukuda Denshi Co., Ltd., net issuance costs of $18 -- -- 8,382 Repurchase of common stock -- -- (4,839) Exercise of common stock options -- -- 444 Comprehensive loss Net loss -- (7,792) (7,792) Change in unrealized gain (loss) on available-for-sale securities (1,275) -- (1,275) Foreign currency translation 57 -- 57 ------- Comprehensive loss -- -- (9,010) ------- --------- ------- Balance at December 31, 1998 $(1,305) $(116,055) $54,252 ======= ========= =======
See accompanying notes 34 35
Year Ended December 31, ---------------------------------------------- 1998 1997 1996 -------- -------- -------- OPERATING ACTIVITIES Net loss $ (7,792) $(47,244) $ (7,163) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Acquired in-process research and development 11,107 43,000 -- Depreciation 873 580 618 Amortization 1,391 549 -- Gain on investment in Radiance Medical Systems, Inc. (739) (4,021) -- Operating expense paid with Radiance Medical Systems, Inc. common stock -- 542 -- Equity in net loss of Radiance Medical Systems, Inc. 158 2,358 1,621 Changes in operating assets and liabilities net of effects from purchase of Cardiometrics and Navius: Trade accounts receivable, net (141) (2,711) 170 Inventories 183 (419) 474 Other current assets (112) 1,232 (229) Accounts payable and accrued expenses (492) (2,580) 424 Accrued restructuring and integration expenses (2,343) 5,084 -- -------- -------- -------- Net cash provided by (used in) operating activities 2,093 (3,630) (4,085) ======== ======== ======== INVESTING ACTIVITIES Purchase of short-term investments (21,812) (9,090) (4,000) Proceeds from sale of Radiance Medical Systems, Inc. common stock 3,942 528 289 Maturities of short-term investments 14,365 5,219 6,108 Capital expenditures for property and equipment (1,261) (1,299) (1,164) Effect of Radiance Medical Systems, Inc. initial public offering -- -- (6,423) Business acquisition, net of cash and cash equivalents acquired (6,511) (13,286) -- -------- -------- -------- Net cash used in investing activities (11,277) (17,928) (5,190) ======== ======== ======== FINANCING ACTIVITIES Proceeds from issuance of common stock 8,826 620 7,430 Purchase of treasury stock (4,839) -- -- -------- -------- -------- Net cash provided by financing activities 3,987 620 7,430 -------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 57 (116) 31 -------- -------- -------- Net decrease in cash and equivalents (5,140) (21,054) (1,814) Cash and equivalents, beginning of year 13,889 34,943 36,757 -------- -------- -------- Cash and equivalents, end of year $ 8,749 $ 13,889 $ 34,943 ======== ======== ======== NON-CASH FINANCING AND INVESTING ACTIVITIES: Acquisition of business (Note 3) Fair value of assets acquired $ 19,510 $ 73,418 $ -- Cash paid (7,703) (22,281) -- EndoSonics common stock issued (9,500) (33,139) -- Radiance Medical Systems, Inc. common stock transferred -- (8,484) -- Other consideration (595) (4,674) -- -------- -------- -------- Liabilities assumed $ 1,712 $ 4,840 $ -- -------- -------- -------- Capital expenditures for property and equipment $ -- $ -- $ 292 ======== ======== ======== Effect of Radiance Medical Systems, Inc. initial public offering $ -- $ -- $ 17,606 ======== ======== ========
See accompanying notes 35 36 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 1. Organization, Business and Summary of Significant Accounting Policies Organization and Business EndoSonics Corporation (EndoSonics), a Delaware corporation, develops, manufactures and markets intravascular ultrasound imaging systems and diagnostic imaging catheters, functional measurement guidewires, angioplasty balloon catheters, combined angioplasty imaging catheters and medical devices for the diagnosis and treatment of coronary and peripheral vascular disease. Consolidation The accompanying consolidated financial statements include the accounts of EndoSonics and its subsidiaries (EndoSonics and its subsidiaries are collectively referred to hereinafter as the "Company"). All significant inter-company accounts and transactions have been eliminated in consolidation. Investments in unconsolidated subsidiaries, and other investments in which the Company has a 20% to 50% interest or otherwise has the ability to exercise significant influence, are accounted for under the equity method (see Note 4). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and in the accompanying notes. Actual results could differ from those estimates. Foreign Currency Translation The local currency is the functional currency of the Company's foreign subsidiary. Exchange gains or losses resulting from foreign currency translation are included as a component of other comprehensive income. Transaction exchange gains or losses are included in general and administrative expense in the consolidated statement of operations, and have not been significant in any year presented. Cash Equivalents and Short-Term Investments The Company invests its excess cash in various investment grade, interest-bearing securities. As of December 31, 1998 and 1997, cash equivalents and short-term investments consisted of money market mutual funds, U.S. Treasury Notes and obligations of other U.S. government agencies and corporate debt securities. With the exception of the U.S. government and its agencies, by policy, the amount of credit exposure to any one issuer is limited. The Company has not experienced any significant losses on such investments. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. At December 31, 1998 and 1997, the Company's entire portfolio of investments is classified as available-for-sale. These securities are stated at fair market value, determined based on quoted market prices, with the unrealized gains and losses reported in a separate component of other comprehensive income. The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, over the estimated life of the security. Such amortization is included in interest income. Realized gains and losses, which were not significant in any year presented, and declines in value judged to be other-than-temporary are included in general and administrative expense. The cost of securities sold is based on the specific identification method. For purposes of reporting cash flows, the Company considers highly liquid investments with original maturities of three months or less as cash equivalents. Inventories Inventories are stated at the lower of cost, determined on a first-in, first-out (FIFO) basis, or market value. Property and Equipment 36 37 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Property and equipment are stated at cost and depreciated or amortized on a straight-line basis over the lesser of the estimated useful lives of the assets or the lease term. The estimated useful lives range from three to seven years. Intangible Assets Intangible assets consist of goodwill, assembled workforce, and developed technology arising from business acquisitions. The values are being amortized on a straight-line basis over periods ranging from three to nine years. The Company continually evaluates the value and future benefits of its intangible assets, and assesses the recoverability of the intangible assets using cash flows and income from operations of the related acquired businesses as measures. Under this approach, the carrying value would be reduced if it becomes probable that our best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible assets. As of December 31, 1998, there have been no adjustments to the carrying amounts of intangibles resulting from these evaluations. Concentrations of Credit Risk, Significant Customers, Export Sales and Suppliers The Company sells its products primarily to medical institutions and distributors worldwide (see Note 5). The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral from customers. Management believes that an adequate allowance for doubtful accounts has been provided. Accounts receivable from two of the Company's customers represented 0.4% and 8% of net trade accounts receivable, respectively, at December 31, 1998 ( 55% and 13%, respectively, at December 31, 1997). During 1998, sales to two of the Company's customers comprised 47% and 15% of the Company's total product sales, respectively. During 1997, sales to two customers comprised 58% and 19% of the Company's total product sales, respectively. During 1996, sales to two customers comprised 62% and 9% of the Company's total product sales. The Company had sales to customers outside the United States as follows:
Year ended December 31, ----------------------------------------- 1998 1997 1996 ------- ------- ------- Europe $10,592 $11,528 $ 9,820 Asia 20,328 9,312 6,689 Other 1,275 1,027 359 ------- ------- ------- $32,195 $21,867 $16,868 ======= ======= =======
The manufacturing of the Company's integrated circuit microchip and the pressure microchip, important components for imaging and functional measurement catheters, are currently performed by single vendors. Although management believes that other vendors could provide similar microchips on comparable terms, a change in suppliers can be a lengthy process. Consequently, any supply interruption from these single sources could delay production and have a material adverse effect on the Company's business, financial condition and results of operations. Revenue Recognition and Warranties The Company recognizes revenue from the sale of its products when the goods are shipped to its customers, including distributors. Contract revenue is recognized upon the completion of specified milestones. For ultrasound imaging systems sold in the United States, the Company provides a 12-month limited warranty covering materials and workmanship. For ultrasound imaging systems sold to its international distributors, the Company provides various warranty periods up to 12 months covering replacement parts. Customers may purchase extended warranty coverage for additional one-year periods. Revenue from sales of extended warranties is deferred and recognized as revenue on a straight-line basis over the term of the extended warranty. Stock Compensation In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") which the Company adopted in 1996, the Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock option plans. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant as determined by the Company's Board of Directors, no compensation expense is recognized. 37 38 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Net Loss Per Share Net loss per share is computed using the weighted average number of shares of common stock outstanding. Common equivalent shares from stock options and warrants are excluded from the computation because their effect is antidilutive. At December 31, 1996, 1997 and 1998 the Company had outstanding options to purchase 2,315,366, 2,993,638 and 3,744,030 shares of common stock, respectively (with exercise prices ranging from $0.125 to $16.50), and outstanding warrants to purchase 12,304 shares of common stock (with exercise prices from $11.76 to $12.55). If exercised, these options could potentially dilute basic earnings per share in future periods. These options have not been included in the computation of net loss per share, because to do so would have been antidilutive for the periods presented. New Accounting Pronouncements In 1998 the company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, which establishes new rules for the reporting and display of comprehensive income and its components. SFAS No. 130 requires to report, in addition to net income, other components of comprehensive income including unrealized gains or losses on available for sale securities and foreign currency translation adjustments. Adoption of SFAS No. 130 had no effect on the Company's results of operations or financial position as reported elsewhere in the condensed consolidated financial statements. Reclassifications Certain reclassifications have been made to the 1997 and 1996 Consolidated Financial Statements to conform to the 1998 presentation. 2. SHORT-TERM INVESTMENTS The following is a summary of available-for-sale securities at December 31, 1998 and 1997:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE -------- -------- -------- -------- DECEMBER 31, 1998 U.S. Treasury notes and obligations of other U.S. government agencies $ 2,614 $ 10 $ -- $ 2,624 Corporate debt securities 18,540 12 (39) 18,513 -------- -------- -------- -------- $ 21,154 $ 22 $ (39) $ 21,137 ======== ======== ======== ========
38 39 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) December 31, 1997 U.S. Treasury notes and obligations of other U.S. government agencies $ 3,499 $ 1 $-- $ 3,500 Corporate debt securities 10,045 -- -- 10,045 ------- --- --- ------- $13,544 $ 1 $-- $13,545 ======= === === =======
Included in the above table are securities with fair values totaling $4,868 and $4,425 at December 31, 1998 and 1997, respectively, which are classified as cash equivalents in the accompanying balance sheet. The amortized cost and estimated fair value of debt securities at December 31, 1998, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the rights to prepay obligations without prepayment penalties. All short-term investments have maturity dates within one year. 3. BUSINESS ACQUISITIONS Cardiometrics, Inc. On July 23, 1997, the Company acquired all of the outstanding shares of Cardiometrics, Inc. (Cardiometrics) for approximately $73,400. The results of Cardiometrics' operations have been combined with those of the Company since the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Consideration for this transaction consisted of the following (in thousands): 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 =======
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 =======
In connection with the Company's acquisition of Cardiometrics in 1997, the Company wrote-off in-process research and development totaling $43,000. This write-off was necessary because the acquired technology had not reached technological feasibility and had no future alternative uses. The Cardiometrics acquired in-process research and development relates primarily to the development of intravascular guidewires to measure blood flow and blood pressure in diseased coronary arteries, as well as, other functional assessment instruments. The nature of the efforts required to complete development of the various purchased in-process research and development projects into technologically viable products principally relate to efficacy validation and regulatory approval and are projected to be completed from 1997 to 1999. Goodwill and other intangible assets are being amortized over three-to-eight years. Amortization expense was $1,068 and $475 and accumulated amortization was $1,543 and $475 at December 31, 1998. In addition, the Company recognized a gain of $3,700 related to the excess of the fair value over the book value of Radiance common stock used as part of the purchase price consideration. The purchase price includes $1,900 in severance and relocation liabilities assumed by the Company related to plans to relocate certain Cardiometrics employees to its corporate offices, and to terminate others. Approximately $1,000 was paid in 1997 and $470 in 1998. The Company expects to pay the remainder of this cash outlay by December 2000. 39 40 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Unaudited proforma combined results of operations for the twelve month periods ending December 31, 1997 and 1996, giving effect to certain adjustments, including the acquisition restructuring, as if the Cardiometrics acquisition had occurred at the beginning of each period, are displayed in the following table:
YEAR ENDED DECEMBER 31, --------------------------- 1997 1996 -------- -------- Total revenue $ 41,057 $ 38,376 Net loss (53,049) (59,206) Loss per share ($3.66) ($3.79)
The unaudited proforma results of operations for the twelve months ended December 31, 1997 and 1996, include one-time charges of $43,000 related to the write-off of acquired in-process research and development, and $5,000 related to restructuring and integration of the two companies. Navius Corporation On August 5, 1998, the Company acquired all of the outstanding capital stock of Navius Corporation (Navius) for approximately $19,500. The results of Navius' operations have been combined with those of the Company since the date of acquisition. The acquisition was accounted for using the purchase method of accounting. Consideration for this transaction consisted of the following. Cash $ 7,703 EndoSonics Common Stock 9,500 Liabilities assumed (including Navius termination benefits of $100) 1,712 Transaction costs 595 -------- $ 19,510 ========
A summary of the purchase price allocation is as follows: Tangible assets acquired $ 2,363 In-process research and development 10,586 Developed technology 6,291 Other intangibles 270 -------- $ 19,510 ========
In connection with the Company's acquisition of Navius in 1998 , the Company wrote off in-process research and development totaling $10.6 million. This write-off was necessary because the acquired technology had not yet reached technological feasibility and had no future alternative uses. The Navius acquired in-process research and development relates primarily to the development of intravascular ultrasound radiation devices. The Company anticipates that products using the acquired in-process technology will be generally released before the end of 2001. The nature of the efforts required to develop the purchased in-process research and development into technologically viable products principally relate to validation and regulatory approval. The Company expects that the acquired in-process research and development will be successfully developed, but there can be no assurance that commercial viability of these products will be achieved. Acquired intangibles are being amortized over three to nine years. Amortization expense and accumulated amortization were $323 at December 31, 1998. Unaudited pro forma combined results of operations for the twelve month period ending December 31, 1998 and 1997 giving effect to certain adjustments including acquisition restructuring as if the Navius acquisition had occurred at the beginning of each period, are displayed in the following table. 40 41 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1998 1997 -------- -------- Total revenue $ 45,426 $ 37,060 Net loss $ (9,704) $(59,893) Basic net loss per share $ (0.57) $ (3.83)
4. CHANGE IN OWNERSHIP PERCENTAGE OF RADIANCE MEDICAL SYSTEMS, INC. On June 19, 1996, EndoSonics' 84% owned subsidiary, Radiance Medical Systems, Inc., successfully completed an Initial Public Offering (IPO) of 3,400,000 shares of common stock at $12.00 per share, followed by an additional 510,000 shares issued in July 1996 (over-allotment option granted to Radiance's underwriters). As a result of this transaction, Radiance's results of operations for 1996 have been consolidated through June 19, 1996, and accounted for on the equity method thereafter. In June 1996, the Company recorded an increase to additional paid-in capital of approximately $17,600 representing the Company's proportionate share of Radiance's net assets following the IPO. For the years ended December 31, 1998 and 1997, the Company recorded ($158) and ($2,358) respectively, representing its proportionate share of Radiance's net losses for the period. As of December 31, 1998 and 1997, EndoSonics owned 14% and 24% respectively of the outstanding shares of Radiance. During 1998, the Company sold approximately 843,000 shares of Radiance stock resulting in a gain of $739. Since March 1, 1998, the Company has accounted for its investment in Radiance under the cost method. Radiance Medical Systems, Inc.'s stock is quoted on the Nasdaq Stock Market. The closing price of Radiance stock at December 31, 1997 was $5.50 per share. The Company held 1,350,566 and 2,194,016 shares of Radiance's common stock at December 31, 1998 and 1997 respectively. In 1998, unrealized gains and losses on the Company's investment in Radiance are reported as a separate component of comprehensive income pursuant to the requirements of SFAS 115. 5. DISTRIBUTION AGREEMENTS Cordis In February 1996, EndoSonics and Cordis entered into an agreement pursuant to which Cordis was granted the exclusive right to distribute EndoSonics' IVUS imaging products for coronary applications in North America, Europe, Africa and the Middle East (the "Exclusive Distribution Agreement"). The Exclusive Distribution Agreement superseded and replaced a prior distribution agreement between Cordis and EndoSonics and a prior distribution agreement between EndoSonics Nederland B.V., a wholly owned subsidiary of EndoSonics, and Cordis S.A. Cordis was obligated during each year of the Exclusive Distribution Agreement to use reasonable efforts to purchase certain minimum annual amounts of products from EndoSonics. The Exclusive Distribution Agreement was terminated in April 1998 and replaced with a Transition Agreement which provides for Cordis to retain limited distribution rights through March, 1999. JJMKK In March 1997, the Company and Johnson & Johnson Medical KK (JJMKK), a subsidiary of Johnson and Johnson, entered into an exclusive distribution agreement whereby JJMKK was granted exclusive right to distribute EndoSonics IVUS imaging products for coronary applications in Japan. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 1999. J & J Medical - LA In April 1997, the Company and Johnson and Johnson, Professional Group-Latin America (J & J Medical-LA), a subsidiary of Johnson and Johnson, entered into an exclusive distribution agreement whereby J & J Medical-LA was granted exclusive rights to distribute EndoSonics IVUS imaging products for coronary applications in certain countries of Latin America. The agreement contained similar terms as the Exclusive Distribution Agreement between Cordis and EndoSonics. The agreement was amended in December 1998 to extend the agreement through December 2000. Fukuda 41 42 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) In August 1998, the Company entered into a strategic relationship with the Fukuda Denshi Co., Ltd. (Fukuda), a Japanese medical products company, which includes an equity investment, research and development funding and technical guidance totaling $13 million in EndoSonics by Fukuda. Approximately $8.4 million of the $13 million represents an equity investment. The remaining $4.6 million will fund research and development programs over the next 24 months. In October 1998, the Company issued 965,730 shares of the Company's common stock at a price of $8.70 per share to Fukuda and received approximately $8.4 million in cash, related to the equity investment and $1.0 million related to research and development funding. JOMED In December 1998, the Company and JOMED N.V., (JOMED) entered into an agreement for exclusive distribution of certain EndoSonics products into specified European and Middle Eastern countries. Also in December, EndoSonics and JOMED entered into an IVUS guided stent delivery system agreement which calls for the development of a JOMED balloon and stent incorporated into a modular EndoSonics IVUS catheter. Under the agreement, EndoSonics will supply subassemblies to JOMED who will complete the manufacturing process and distribute the resulting product in the territory which is defined as certain European and Middle Eastern countries. In certain countries within the territory, EndoSonics may distribute exclusively or jointly with JOMED. 6. ACQUISITION RELATED EXPENSES Acquisition related expenses include acquired in process research and development and restructuring expenses relating primarily to the Company's acquisition of Cardiometrics in 1997 and Navius in 1998. Acquisition expenses consist of the following:
1998 1997 1996 -------- -------- -------- Acquired in process research and development $ 11,107 $ 43,000 $ -- Restructuring (Note 3) 223 5,806 518 Restructuring decrease (776) (850) -- -------- -------- -------- $ 10,554 $ 47,956 $ 518 ======== ======== ========
During the fourth quarter of 1998, the Company determined that approximately $776 of restructuring reserves provided for in connection with the Cardiometrics acquisition relating to corporate reorganization were not required. Due to changes in conditions subsequent to the initial recording of the restructuring and integration charges, the Company reduced the provision for the 1997 charges to $8,606 during the fourth quarter of 1997. Concurrent with the purchases of Navius and Cardiometrics, the Company recorded restructuring and integration charges of $223 and $9,456 respectively, related to plans to reduce overhead of the combined companies and increase operating efficiency in future periods. The restructuring and integration charges for Navius are for corporate reorganization charges; the restructuring and integration charges for Cardiometrics include $7,491 of corporate reorganization costs and $1,965 related to relocation of certain product lines and overall integration of the Company operations. Additionally in June 1996, the Company recorded restructuring and integration charges of approximately $3,066 in connection with the consolidation of the Company's IVUS manufacturing operations and with the start-up production of the new Five-64 imaging devices. These charges are included in the accompanying Consolidated Statements of Operations, as follows:
1998 1997 1996 ----- ------ ------ Cost of sales 1,251 $ 794 -- Research and development -- 200 475 Marketing and sales -- 542 480 General and administrative -- 1,361 799 Restructuring (553) 4,956 518
42 43 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Other -- 296 -- ------ ------ ------ Total charges $ (553) $8,606 $3,066 ====== ====== ======
The elements of the 1998 restructuring accrual as of December 31, 1998 were as follows:
ACCRUAL AS OF COST DECEMBER PROVISION INCURRED 31, 1998 --------- -------- -------- Corporate reorganization $ 223 $(196) $ 27 ===== ===== =====
The elements of the 1997 restructuring accrual as of December 31, 1998 were as follows:
ACCRUAL AS OF COST DECEMBER PROVISION DECREASE INCURRED 31, 1998 ------- ------- ------- ------- Corporate reorganization $ 7,491 $(1,151) $(2,693) $ 3,647 Consolidation of facilities 1,965 (475) (1,490) -- ------- ------- ------- ------- 9,456 (1,626) (4,183) 3,647 ======= ======= ======= =======
The elements of the 1996 restructuring accrual as of December 31, 1998 were as follows:
ACCRUAL AS OF COST DECEMBER PROVISION INCURRED 31, 1998 --------- -------- -------- Consolidation of facilities $ 994 $ (994) $ -- Conversion to new technology 1,849 (1,849) -- Corporate reorganization 223 (223) -- ------- ------- ----- $ 3,066 $(3,066) $ -- ======= ======= =====
The accrual for restructuring and integration charges was approximately $3,674 and $6,017 as of December 31, 1998 and 1997. 7. INVENTORIES Inventories consisted of the following as of December 31:
1998 1997 ------ ------ Raw materials $3,206 $2,817 Work-in-process 1,354 1,842 Finished goods 2,274 2,256 ------ ------ $6,834 $6,915 ====== ======
8. PROPERTY AND EQUIPMENT Property and equipment consisted of the following as of December 31:
1998 1997 -------- -------- Furniture, fixtures and equipment $ 9,190 $ 7,745 Leasehold improvements 240 161 -------- -------- 9,430 7,906 Less accumulated depreciation and amortization (5,366) (4,498) -------- -------- $ 4,064 $ 3,408 ======== ========
9. CURRENT LIABILITIES 43 44 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Current liabilities consisted of the following as of December 31:
1998 1997 ------- ------- Accrued restructuring and integration $ 3,674 $ 6,017 Accounts payable 2,102 1,954 Accrued payroll and related expenses 2,822 2,058 Deferred revenue 521 377 Accrued royalties 97 96 Accrued warranty 107 95 Other accrued expenses 2,551 2,956 ------- ------- $11,874 $13,553 ======= =======
10. OPERATING LEASES The Company leases its administrative, research and manufacturing facilities and certain equipment under long-term non-cancelable lease agreements that have been accounted for as operating leases. Certain of these leases include scheduled rent increases and renewal options as prescribed by the agreements. Future minimum payments by year under long-term non-cancelable operating leases are as follows: 1999 $1,050 2000 968 2001 790 2002 752 2003 734 Thereafter 2,753 ------ $7,047 ======
Rental expense charged to operations for all operating leases during 1998, 1997 and 1996 was approximately $1,058, $742, and $630 respectively. 11. EQUITY Common Stock On September 26, 1997, the Company distributed to stockholders and common stock option holders of record as of September 5, 1997, .04 shares of Radiance common stock for each share of the Company's common stock outstanding or subject to options. The Company recorded approximately $1,000 in compensation expense, related to the distribution to stock option holders, which consisted of $540 in Radiance common stock and $460 in cash. The compensation expense was based on the closing price of $8.75 per share of Radiance common stock on September 25, 1997. The book value of the Radiance common stock distributed to stockholders totaled $3,019, and was charged to accumulated deficit. In February, 1998, the Board of Directors authorized a stock repurchase program whereby the Company may repurchase up to $5,000 of its common stock from time-to-time in the open market or private transactions. During the year ended December 31, 1998, the Company repurchased 860,000 shares of its common stock on the open market at an aggregate cost of approximately $4,839. In September, 1998, the Board of Directors expanded the existing stock repurchase program, such that the Company may, from time-to-time, purchase a total of up to 1.7 million shares of its common stock in open market or private transactions. Stockholder Rights Plan In October 1998, the Company adopted a Stockholder Rights Plan (the "Rights Plan"). Under the Rights Plan, each common stockholder receives one "Right" for each share of common stock held. Each Right, once exercisable, entitles the holder to purchase from the Company one one-thousandth of a share of the Company's Series A Participating Preferred Stock at an exercise price of $35. All Rights expire on October 20, 2008 unless earlier redeemed, exchanged or exercised. At December 31, 1998, the Rights were neither exercisable nor traded separately from the Company's common stock, and become exercisable only if a person or a group of affiliated or associated persons has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the voting power of all outstanding shares of the Company's common stock and in certain other limited circumstances. Upon separation from the common stock, each Right will entitle the holder, other than the acquiring person that has triggered such separation, to effectively purchase certain shares of the Company's common stock equal in market value to two times the then applicable exercise price of the Right. If the Company is acquired in a merger or other business combination transaction, or 50% or more of the Company's assets or earning power are sold in one or more related transactions, the Rights will entitle holders, upon exercise of the Rights, to receive shares of common stock of the acquiring or surviving company with a market value equal to twice the exercise price of each Right. Employee Stock Purchase Plan In June 1998, EndoSonics established the 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan") under which a total of 250,000 shares of common stock are reserved. As of December 31, 1998, there were no shares issued under the 1998 Purchase Plan. 44 45 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Stock Options In March 1988 and June 1998, EndoSonics established stock option plans (the "1988 Plan" and the "1998" Plan) under which key employees, directors, officers and consultants may participate. Either incentive stock options or nonstatutory stock options may be granted under the 1988 and 1998 Plan. Option prices are established by the Board of Directors and cannot be less than 85% of the fair market value of a share of common stock on the date of the option grant in the case of nonstatutory options, or 100% of the fair market value in the case of incentive stock options (110% in the case of any options granted to a person who owns more than 10% of the total combined voting power of all classes of stock of the Company). Options generally vest over periods ranging from one to four years (principally four years) and are exercisable upon vesting over five or ten year terms as specified in the option grants. Certain options granted in 1995 and 1996 have accelerated vesting provisions. Additionally, from 1993 through 1998 the Company has purchased four companies. Pursuant to the terms of the merger agreements, the Company has agreed to the assumption of all of the outstanding stock options previously granted by these four acquired companies. These options are included in the table below. As of December 31, 1998, 4,850,000 common shares were reserved for issuance, 2,105,231 shares were fully exercisable (1,488,072 at December 31, 1997) and 159,350 shares were available for future grant (279,089 at December 31, 1997). The following is a summary of the activity, including the range of per share option prices, in the option plans during each of the three years in the period ended December 31, 1998:
WEIGHTED SHARES OPTION AVG. UNDER PRICE EXERCISE OPTION PER SHARE PRICE ---------- ------------- ------------- Outstanding at December 31, 1995 2,050,934 $.167-$16.50 $ 8.24 Granted 668,685 11.88-16.50 12.18 Assumptions -- -- -- Exercises (340,183) .167-9.75 7.28 Expirations -- -- -- Cancellations (61,324) 3.75-13.88 10.92 ---------- ------------- ------------- Outstanding at December 31, 1996 2,318,112 .167-16.50 7.90 ========== ============= ============= Granted 1,057,490 8.93-13.38 10.59 Assumptions (128,467) .47-13.23 3.05 Exercises (128,041) .32-13.88 3.75 Expirations -- -- -- Cancellations (294,621) 3.75-13.88 11.32 ---------- ------------- ------------- Outstanding at December 31, 1997 3,081,407 .167-16.50 9.00 ========== ============= ============= Granted 660,150 4.50-9.375 8.91 Assumptions 398,215 .125-8.60 3.98 Exercises (170,317) .167-9.75 3.58 Expirations (59,754) .125-10.84 4.41 Cancellations (165,671) 6.00-13.88 5.35 ---------- ------------- ------------- Outstanding at December 31, 1998 3,744,030 $0.125-$16.50 $ 8.39 ========== ============= =============
No shares purchased under the option plan are subject to repurchase at December 31, 1998. The options outstanding at December 31, 1998 have been segregated into ranges for additional disclosure as follows:
OPTIONS OUTSTANDING ----------------------------------------------------------------------- OPTIONS WEIGHTED-AVERAGE RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE PRICES 1998 LIFE (IN YEARS) PRICE ------ ---- --------------- ----- $ 0.125- $4.99 405,715 7.2 $ 2.27 $ 5.00 - 9.49 2,057,762 7.7 7.58
45 46 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) 9.50 - 12.49 710,704 7.5 11.19 $12.50 - $20.00 569,849 7.6 13.47 --------- --- ------ 3,744,030 7.6 $ 8.39 ========= === ======
OPTIONS EXERCISABLE - --------------------------------------------------------------- OPTIONS RANGE OF CURRENTLY EXERCISE EXERCISABLE AT WEIGHTED-AVERAGE PRICES DECEMBER 31, 1998 EXERCISE PRICE - ---------------- ----------------- ---------------- $ 0.125- $ 4.99 270,837 $ 2.67 5.00 - 9.49 1,014,576 7.80 9.50 - 12.49 439,384 11.13 $12.50 - $20.00 380,434 13.55 --------- ------ 2,105,231 $ 8.87 ========= ======
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:
1998 1997 1996 ---------- ----------- --------------- Risk free interest rates 4.2-5.67% 5.5 - 6.6% 6.1 - 6.7% Expected volatility 113% 101% 109% Expected dividend yield -- -- -- Expected life (in years) 7 to 10 7 to 10 5 to 8.25
The weighted-average fair value on the date of grant for options granted during 1998, 1997 and 1996 was $6.02, $9.25 and $10.90 respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands except for earnings per share information):
1998 1997 1996 ---------- --------- --------- Pro forma net loss ($13,728) ($49,096) ($10,642) Pro forma loss per share ($0.83) ($3.35) ($0.80)
12. INCOME TAXES The provision for income taxes for the year ended December 31, 1998 consists of currently payable federal, state, and foreign taxes of $97, $13, and $112, respectively.
1998 1997 1996 ---------- --------- ------------ Federal Current $ 97 $137 $ - Deferred - - - -------- -------- --------
46 47 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Total federal $ 97 $ 137 $ -- -------- -------- -------- State Current $ 13 $ 38 $ -- Deferred -- -- -- -------- -------- -------- Total state $ 13 $ 38 $ -- -------- -------- -------- Foreign provision $ 112 -- -- ======== ======== ======== Income taxes $ 222 $ 175 $ -- ======== ======== ========
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:
1998 1997 1996 -------- -------- -------- Statutory federal income tax $ (2,650) $(16,474) $ (2,507) State income taxes, net of federal benefit 8 25 -- In-process research and development 3,888 15,050 -- Foreign taxes 112 Distributions of appreciated property -- 993 -- Net operating loss utilization (1,663) (2,042) -- Valuation allowance increases 527 2,571 2,507 Other -- 52 -- -------- -------- -------- Provision for income taxes $ 222 $ 175 $ -- ======== ======== ========
Significant components of the Company's deferred tax assets are as follows at December 31, 1998:
1998 1997 -------- -------- Deferred tax assets: Net operating loss carryforwards $ 17,880 $ 17,850 Research and development and other tax credit 3,011 2,293 carryforwards Other 5,355 7,322 -------- -------- Total deferred tax assets 26,246 27,465 Deferred tax liabilities: Intangible assets (4,474) (2,264) Investment basis (1,863) (3,173) differences -------- -------- Total deferred tax liabilities (6,337) (5,437) -------- -------- Net deferred tax assets 19,909 22,028 Valuation allowance (19,909) (22,028) -------- -------- Deferred tax asset $ -- $ -- ======== ========
Income tax payments were $212 in 1998, $93 in 1997 and $0 in 1996. The valuation allowance increased by $4,415 in 1997, and decreased by $275 in 1996. At December 31, 1998, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $50,000 and $8,500, respectively, which expire in the years 1999 through 2018. At December 31, 1998, the Company has research and development and other tax credit carryforwards for federal and state income tax purposes of approximately $2,363 and $986, respectively, which expire in the years 2005 through 2011. As a result of the "change of ownership" provision of the Tax Reform Act of 1986, the utilization of the federal net operating loss and the deduction equivalent of federal tax credit carryforwards of approximately $3,900 included in the above amounts are subject to a cumulative annual limitation of approximately $1,375 per year pursuant to certain stock ownership changes of Cardiometrics prior to July 24, 1997. Due to the acquisition of Cardiometrics by EndoSonics in 1997, a second annual limitation of approximately $4,000 per year applies to approximately $15,500 of federal net operating loss, $630 of federal research and development credits, $4,500 of state net operating loss and $360 of state tax credit carryforwards included in the above amounts. 47 48 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) Future "changes in ownership" may further limit the ability of the Company to utilize its net operating loss and tax credit carryforwards prior to their expiration. 13. CONTINGENCIES In October, 1998, the Company entered into a five-year litigation standstill agreement with Intravascular Research Limited with respect to certain intellectual property claims. The agreement includes the dismissal without prejudice of a pending Delaware lawsuit involving patent infringement claims. The agreement does not toll any potential patent infringement damages which may be accruing. Management believes the outcomes of these matters will have no material adverse effect on the Company's financial position, results of operations or cash flows. The Company is subject to various legal actions and claims arising in the ordinary course of business. Management believes the outcomes of these matters will have no material adverse effect on the Company's financial position, results of operations or cash flows. 48 49 ENDOSONICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (IN THOUSANDS) SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS Years ended December 31, 1998, 1997, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ------------------------------- ---------- ---------------------- ----------- ------------ ADDITIONS ---------------------- BALANCE AT CHARGES TO CHARGED TO BALANCE AT BEGINNING COST AND OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACACCOUNTS PERIOD - ------------------------------- ---------- --------- ----------- -------- YEAR ENDED DECEMBER 31, 1998 Allowance for doubtful accounts $ 562 $ 9 $ -- $ 221(2) $ 350 Accrued warranty expenses $ 95 $ 12 $ -- $ -- $ 107 -------- -------- -------- -------- -------- YEAR ENDED DECEMBER 31, 1997 Allowance for doubtful accounts $ 646 $ 81 $ -- $ 165(2) (4) $ 562 Accrued warranty expenses $ 295 $ 440 $ 640 $ -- $ 95 -------- -------- -------- -------- -------- YEAR ENDED DECEMBER 31, 1996 Allowance for doubtful accounts $ 360 $ 497 $ $ (211)(2) $ 646 Accrued warranty expenses $ 280 $ 350 $ $ (335)(1)(3) $ 295 -------- -------- -------- -------- --------
- ------------- (1) Deductions represent actual warranty expenses charged against the accrual. (2) Deductions represent accounts written off, net of recoveries. (3) Deductions represent impact of Radiance Medical Systems, Inc. initial public offering. (4) Deductions represent impact of Cardiometrics acquisition. 49 50 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Report of Ernst & Young LLP, Independent Auditors........... 51 Consolidated Balance Sheets................................. 52 Consolidated Statements of Operations....................... 53 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency)............................................... 54 Consolidated Statements of Cash Flows....................... 55 Notes to Consolidated Financial Statements.................. 56
50 51 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders CardioVascular Dynamics, Inc. We have audited the accompanying consolidated balance sheets of CardioVascular Dynamics, Inc. and subsidiaries as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity (net capital deficiency) and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CardioVascular Dynamics, Inc. and subsidiaries at December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Orange County, California January 29, 1998 51 52 CARDIOVASCULAR DYNAMICS, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts)
December 31 -------------------------- 1996 1997 ---------- ---------- ASSETS Current Assets: Cash and cash equivalents ........................................... $ 17,192 $ 6,141 Marketable securities available-for-sale ............................ 25,733 24,773 Accounts receivable, net of allowance for doubtful accounts of $377 and $500, respectively ............................................ 2,268 2,752 Other accounts receivable ........................................... 320 282 Inventories ......................................................... 2,899 3,205 Other current assets ................................................ 162 163 ---------- ---------- Total current assets .......................................... 48,574 37,316 Property and Equipment: Furniture and equipment ............................................. 1,161 1,871 Leasehold improvements .............................................. 310 322 ---------- ---------- 1,471 2,193 Less accumulated depreciation and amortization ...................... (289) (643) ---------- ---------- Net property and equipment ........................................ 1,182 1,550 Goodwill, net of amortization of $78 ................................ -- 1,809 Notes receivable from officers ...................................... 325 273 Other assets ........................................................ 3 413 ---------- ---------- Total assets ...................................................... $ 50,084 $ 41,361 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses ............................... $ 2,382 $ 3,488 Deferred distributorship fee revenue, current portion ............... 50 -- ---------- ---------- Total current liabilities ........................................... 2,432 3,488 Deferred distributorship fee revenue .................................... 29 -- Commitments (Note 10) Stockholders' equity Convertible Preferred Stock, $.001 par value; 7,560,000 shares authorized, 2,000,000 and no shares issued and outstanding....... -- -- Common Stock, $.001 par value; 30,000,000 shares authorized, 9,004,000 and 9,389,000 shares issued and outstanding at December 31, 1996 and 1997, respectively ................................. 9 9 Additional paid-in capital .......................................... 58,869 60,371 Deferred compensation ............................................... (376) (634) Accumulated deficit ................................................. (11,049) (19,821) Treasury stock, at cost, 345,000 common shares ...................... -- (2,205) Unrealized gain on available-for-sale securities .................... 170 176 Unrealized exchange rate loss ....................................... -- (23) ---------- ---------- Total stockholders' equity ...................................... 47,623 37,873 ---------- ---------- Total liabilities and stockholders' equity ...................... $ 50,084 $ 41,361 ========== ==========
See accompanying notes. 52 53 CARDIOVASCULAR DYNAMICS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
YEAR ENDED DECEMBER 31, ------------------------------------------ Revenue: 1995 1996 1997 ---------- ---------- ---------- Sales .......................................................... $ 3,462 $ 8,384 $ 11,332 License fee and other from related party ....................... -- 150 -- Contract ....................................................... 641 200 -- ---------- ---------- ---------- Total revenue ................................................ 4,103 8,734 11,332 Operating costs and expenses: Cost of sales .................................................. 2,051 4,111 6,418 Charge for acquired in-process research and development ........ 488 2,133 -- Research and development ....................................... 1,683 3,582 7,041 Marketing and sales ............................................ 1,526 3,358 6,691 General and administrative (including $340 and $156 for the years ended December 31, 1995 and 1996, respectively, paid to EndoSonics) ............................................... 1,331 1,548 2,179 ---------- ---------- ---------- Total operating costs and expenses ........................... 7,079 14,732 22,329 ---------- ---------- ---------- Loss from operations ............................................ (2,976) (5,998) (10,997) Other Income: Interest income ................................................. 42 1,324 2,201 Distributorship fees and other income ........................... 60 50 24 ---------- ---------- ---------- Total other income ........................................... 102 1,374 2,225 ---------- ---------- ---------- Net Loss ........................................................ $ (2,874) $ (4,624) $ (8,772) ========== ========== ========== Basic and diluted net loss per share (pro forma through June 1996) ................................................... $ (0.71) $ (0.69) $ (0.96) ========== ========== ========== Shares used in computing basic and diluted net loss per share (pro forma through June 1996) ................................ 4,052 6,755 9,118 ========== ========== ==========
See accompanying notes. 53 54 CARDIOVASCULAR DYNAMICS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (In thousands, except share amounts)
Preferred Stock Common Stock Additional ------------------------ ------------------------ Paid-In Deferred Shares Amount Shares Amount Capital Compensation ---------- ---------- ---------- ---------- ---------- ------------ Balance at December 31, 1994 .......... -- $ -- 4,000,000 $ 4 $ 4,835 -- Additional effects of merger with EndoSonics Acquisition Corp. ... -- -- -- -- 488 -- Issuance of Preferred Stock in Exchange for Common Stock ...... 2,000,000 2 (4,000,000) (4) 2 -- Deferred compensation resulting From grant of options .......... -- -- -- -- 345 (345) Net Loss .............................. -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 .......... 2,000,000 2 -- -- 5,670 (345) Sale of Preferred Stock to EndoSonics . 400,000 -- -- -- 8,000 -- Conversion of Preferred Stock ......... (2,400,000) (2) 4,800,000 5 (3) -- Exercise of Common Stock Options ...... -- -- 139,000 -- 138 -- Initial Public Offering of Common Stock ................... -- -- 3,910,000 4 42,764 -- Deferred compensation resulting From grant of options .......... -- -- -- -- 150 (150) Amortization of deferred Compensation ................... -- -- -- -- -- 119 Acquisition of Intraluminal Devices, Inc. .................. -- -- 93,000 -- 1,400 -- Conversion of $750,000 debit by Fukuda Denshi .................. -- -- 62,000 -- 750 -- Net loss ............................. -- -- -- -- -- -- Unrealized gain on investments ........ -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance of December 31, 1996 .......... -- -- 9,004,000 9 58,869 (376) Exercise of common stock options ...... -- -- 208,000 -- 238 -- Employee stock purchase plan .......... -- -- 33,000 -- 266 -- SCIMED warrant exercise ............... -- -- 120,000 -- 377 -- Sale of common stock to Cathex ........ -- -- 25,000 -- 200 -- Expense repayment by Intraluminal Devices, Inc. by transfer and cancellation of common stock ... -- -- (1,000) -- (16) -- Deferred compensation resulting from grant of options ............... -- -- -- -- 437 (437) Amortization of deferred compensation ................... -- -- -- -- -- 179 Treasury Common Stock ................. -- -- -- -- -- -- Net Loss .............................. -- -- -- -- -- -- Unrealized gain on investments ........ -- -- -- -- -- -- Unrealized exchange rate loss ......... -- -- -- -- -- -- ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 .......... -- $ -- 9,389,000 $ 9 $ 60,371 $ (634) ========== ========== ========== ========== ========== ==========
Total Stockholders' Treasury Unrealized Unrealized Equity Accumulated ----------------------- Gain on Exchange (Net Capital Deficit Shares Amount Investments Rate Loss Deficiency) ----------- ---------- ---------- ----------- ---------- ---------- Balance at December 31, 1994 .......... $ (3,551) -- $ -- $ -- $ -- $ 1,288 Additional effects of merger with EndoSonics Acquisition Corp. ... -- -- -- -- -- 488 Issuance of Preferred Stock in Exchange for Common Stock ...... -- -- -- -- -- -- Deferred compensation resulting From grant of options .......... -- -- -- -- -- -- Net Loss .............................. (2,874) -- -- -- -- (2,874) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 .......... (6,425) -- -- -- -- (1,098) Sale of Preferred Stock to EndoSonics . -- -- -- -- -- 8,000 Conversion of Preferred Stock ......... -- -- -- -- -- -- Exercise of Common Stock Options ...... -- -- -- -- -- 138 Initial Public Offering of Common Stock ................... -- -- -- -- -- 42,768 Deferred compensation resulting From grant of options .......... -- -- -- -- -- -- Amortization of deferred Compensation ................... -- -- -- -- -- 119 Acquisition of Intraluminal Devices, Inc. .................. -- -- -- -- -- 1,400 Conversion of $750,000 debit by Fukuda Denshi .................. -- -- -- -- -- 750 Net loss ............................. (4,624) -- -- -- -- (4,624) Unrealized gain on investments ........ -- -- -- 170 -- 170 ---------- ---------- ---------- ---------- ---------- ---------- Balance of December 31, 1996 .......... (11,049) -- -- 170 -- 47,623 Exercise of common stock options ...... -- -- -- -- -- 238 Employee stock purchase plan .......... -- -- -- -- -- 266 SCIMED warrant exercise ............... -- -- -- -- -- 377 Sale of common stock to Cathex ........ -- -- -- -- -- 200 Expense repayment by Intraluminal Devices, Inc. by transfer and cancellation of common stock ... -- -- -- -- -- (16) Deferred compensation resulting from grant of options ............... -- -- -- -- -- -- Amortization of deferred compensation ................... -- -- -- -- -- 179 Treasury Common Stock ................. -- 345 (2,205) -- -- (2,205) Net Loss .............................. (8,772) -- -- -- -- (8,772) Unrealized gain on investments ........ -- -- -- 6 -- 6 Unrealized exchange rate loss ......... -- -- -- -- (23) (23) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 .......... $ (19,821) $ 345 $ (2,205) $ 176 $ (23) $ (37,873) ========== ========== ========== ========== ========== ==========
See accompanying notes 54 55 CARDIOVASCULAR DYNAMICS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR END DECEMBER 31, ----------------------------------- 1995 1996 1997 -------- --------- -------- Operating activities Net loss ......................................................... $(2,874) $ (4,624) $ (8,772) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ................................... 74 182 432 Amortization of deferred compensation ........................... -- 119 179 Bad debt expense ................................................ 249 221 318 Charge for acquired in-process research and development ......... 488 1,400 -- Net changes in: Trade accounts receivable, net .................................. (639) (1,372) (2,767) Receivable from related parties ................................. 125 -- -- Inventories ..................................................... (704) (2,145) 10 Other assets .................................................... (135) (671) 37 Accounts payable and accrued expenses ........................... 1,369 698 836 Deferred distributor fee revenue ................................ (54) (50) (79) ------- -------- -------- Net cash used in operating activities .............................. (2,101) (6,242) (9,806) Investing activities: Purchase of available-for-sale securities ........................ -- (25,563) (43,208) Sales of available-for-sale securities ........................... -- -- 44,174 Capital expenditures for furniture, fixtures and equipment ....... (443) (940) (699) Purchase of Clintec, net of cash acquired ........................ -- -- (30) Change in other assets ........................................... -- -- (358) ------- -------- -------- Net cash used in investing activities .............................. (443) (26,503) (121) -------- Financing activities: Proceeds from issuance of convertible obligation ................. 750 -- -- Proceeds from sale of Common Stock ............................... -- 42,768 466 Proceeds from exercise of stock warrants ......................... -- -- 377 Proceeds from exercise of stock options .......................... -- 138 238 Proceeds from sale of Preferred Stock to EndoSonics .............. -- 8,000 -- Purchase of treasury common stock ................................ -- -- (2,205) Payable to EndoSonics, net ....................................... (17) (2,537) -- ------- -------- -------- Net cash provided by (used in) financing activities ................ 733 48,369 (1,124) ------- -------- -------- Net increase (decrease) in cash .................................... (1,811) 15,624 (11,051) Cash and cash equivalents, beginning of period ..................... 3,379 1,568 17,192 ------- -------- -------- Cash and cash equivalents, end of period ........................... $ 1,568 $ 17,192 $ 6,141 ======= ======== ======== Supplemental disclosure of non-cash financing activities: Common stock issued upon the acquisition of Intraluminal Devices, Inc., Note 1 ........................................... $ -- $ 1,400 $ -- Conversion of Debentures to Common Stock, Note 5 ................... -- 750 --
See accompanying notes. 55 56 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except share and per share amounts) 1. BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Basis of Presentation CardioVascular Dynamics, Inc. (the "Predecessor") was incorporated on March 16, 1992 in the State of California. The Predecessor, and its successor corporation discussed below, develops, manufactures and markets proprietary therapeutic catheters used to treat certain vascular diseases. In June 1992, EndoSonics Corporation ("EndoSonics") acquired a 40% preferred interest in the Predecessor. EndoSonics, a Delaware corporation, develops, manufactures, and markets intravascular ultrasound imaging systems and diagnostic, therapeutic and imaging catheters for the treatment of coronary and peripheral vascular disease. In June 1993, EndoSonics acquired all of the remaining Preferred and Common Stock of the Predecessor. The acquisition was accomplished through a merger between the Predecessor and EndoSonics Acquisition Corp., a wholly owned subsidiary of EndoSonics (which then changed its name to CardioVascular Dynamics, Inc.) (hereinafter referred to as "CVD" or the "Company"). The acquisition by EndoSonics resulted in a new basis for the CVD assets and liabilities. Accordingly, the purchase price paid by EndoSonics has been allocated to the identifiable assets and liabilities, including in-process research and development, which was immediately expensed as no CVD products had received regulatory approval and the technology did not have identifiable alternative uses. The amount by which the purchase price exceeded the Predecessor's net book value has been reflected as paid-in capital in the accompanying financial statements. Pursuant to the terms of the original merger agreement, in June 1995 EndoSonics issued an additional 50,000 shares of its Common Stock to the former shareholders of the Predecessor. The fair market value of such shares of $488 has been reflected in the accompanying financial statements as an additional charge for acquired in-process technology. Subsequent to the acquisition, EndoSonics began performing certain services for CVD (see Note 4), including general management, accounting, cash management, and other administrative and engineering services. The amounts charged to CVD for such services have been determined based on proportional cost allocations and have been agreed to by the management of CVD and EndoSonics. In the opinion of CVD's management, the allocation methods used are reasonable. Such allocations, however, are not necessarily indicative of costs that would have been incurred had CVD continued to operate independent of EndoSonics. No formal agreement currently exists which specifies the nature of services to be provided by EndoSonics to CVD, or the charges for such services. Therefore, amounts are not necessarily indicative of the future charges to be incurred by CVD. In 1994 and 1996, the Board of Directors of CVD approved a 16,200-for-1 and a 2-for-1 Common Stock split, respectively, which has been reflected retroactively for all periods in the accompanying financial statements. On June 25, 1996, the Company closed its initial public offering (the "Offering") which consisted of 3,400,000 shares of Common Stock at $12.00 per share. On July 17, 1996, the Company's underwriters exercised their overallotment option to purchase an additional 510,000 shares of Common Stock at $12.00 per share. CVD received net offering proceeds from the sale of Common Stock of approximately $42.8 million after deducting underwriting discounts and commissions and other expenses of the Offering. 56 57 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In October 1996, CVD acquired 100% of the common stock of Intraluminal Device, Inc. ("IDI") in exchange for CVD common stock valued at $1.4 million. The acquisition was accomplished through the formation of IDI Acquisition, Inc., a wholly-owned subsidiary of CVD, and the merging of IDI into IDI Acquisition, Inc. (See Note 2). In July 1997, CVD the Company acquired all of the common stock of Clinitec GmbH ("Clinitec") its independent distributor in Germany and Switzerland, in exchange for the assumption of the assets and liabilities of Clinitec. The consolidated financial statements for December 31, 1996 and 1997 include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, demand deposits, and short-term investments with original maturities of three months or less. Marketable Securities Available-For-Sale The Company accounts for its investments pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains and losses included in shareholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums and accretions of discounts to maturity. Such amortization is included in interest income. Realized gains and losses are included in other income (expense). The cost of securities sold is based on the specific identification method. Inventories Inventories are comprised of raw materials, work-in-process and finished goods and are stated at the lower of cost, determined on an average cost basis, or market value. Property and Equipment Property and equipment are stated at cost and depreciated or amortized on a straight-line basis over the lesser of the estimated useful lives of the assets or the lease term. The estimated useful lives range from three to seven years. 57 58 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Goodwill The excess of the purchase price over the net assets of the business acquired ("goodwill") is amortized on the straight-line method over the estimated recovery period. The goodwill stemming from the purchase of Clinitec is amortized over ten years (See Note 2). The carrying value of goodwill is reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the carrying value of the goodwill is reduced to estimated fair value. Long-lived Assets The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. Concentrations of Credit Risk and Significant Customers The Company maintains its cash and cash equivalents in deposit accounts and in pooled investment accounts administered by a major financial institution. The Company sells its products primarily to medical institutions and distributors worldwide. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral from customers. Management believes that an adequate allowance for doubtful accounts has been provided. During 1995, 1996 and 1997 product sales to Fukuda Denshi Co., Ltd., ("Fukuda"), the Company's Japanese distributor (see Note 5), comprised 18%, 14% and 7% of total revenue, respectively. Accounts receivable from Fukuda represented 1% and 0% of net accounts receivable at December 31, 1996 and 1997, respectively. The Company terminated its Agreement with Fukuda in May 1997 and signed a five-year agreement with another Japan distributor, Cathex, LTD. ("Cathex"). During 1997, Product sales to Cathex comprised 13% of total revenues. Accounts receivable from Cathex represented 44% of net accounts receivable at December 31, 1997. Product sales to Medtronic, Inc. ("Medtronic") accounted for 21% and 13% of total revenues during 1996 and 1997, respectively. At December 31, 1996 and 1997, 27% and 0%, respectively, of net accounts receivable were due from Medtronic. In May of 1997, Medtronic advised the Company of its election to not make minimum purchases of product for the second year of the agreement. In June 1997, Medtronic informed CVD it would not fulfill its commitment for the first year of the agreement and it did not believe it was required to fulfill such commitment. One other customer comprised 12% of revenues for the year ended December 31, 1995 and 14% of accounts receivable at December 31, 1995. 58 59 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Export Sales The Company had export sales by region as follows:
Year Ended December 31, ---------------------------------- 1995 1996 1997 -------- -------- -------- Europe ... $ 1,179 $ 1,614 $ 3,020 Japan .... 744 1,240 2,350 Latin America.. 131 243 253 Other .... -- 417 956 -------- -------- -------- $ 2,054 $ 3,514 $ 6,579 ======== ======== ========
Revenue Recognition and Warranty The Company recognizes revenue from the sale of its products when the goods are shipped to its customers. Reserves are provided for anticipated product returns and warranty expenses at the time of shipment. License fees are recognized on a contract with SCIMED Life Systems, Inc. ("SCIMED") when distribution rights to certain markets are made available to SCIMED for the sale of products based upon certain limited catheter technology. Contract revenues are recognized on contracts with SCIMED and Advanced CardioVascular Systems, Inc. ("ACS") for transferring certain limited catheter technology based upon the Company's completion of (1) technical Assistance to aid SCIMED in manufacturing the related products, and (2) research and development to develop the related products for ACS and SCIMED (See Note 3). Accounting for Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. 59 60 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In calculating pro forma information regarding net income and net income per share the fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the options on the Company's common stock: risk-free interest rate of 6.0 %, 6.0% and 5.5%; a dividend yield of 0%, 0% and 0%; volatility of the expected market price of the Company's common stock of 0.475, 0.475 and 0.692; and a weighted-average expected life of the options of 3.5, 3.5 and 5.0 years for 1995, 1996 and 1997, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information for the years ended December 31, 1995, 1996 and 1997 follows:
1995 1996 1997 ------------ ------------ ------------ Pro forma net loss ............. $ (2,905) $ (5,170) $ (9,320) Pro forma basic and diluted net loss per share ........... $ (0.72) $ (0.77) $ (1.02)
Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1997. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (Statement No. 130), which is effective for years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting and displaying comprehensive income and its components with the same prominence as other financial statement information. Management has not completed its review of Statement No. 130, but does not anticipate that the adoption of this statement, other than required financial statement reclassifications, will have a significant effect on the Company's reported financial position. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (Statement No. 131), which is effective for years beginning after December 15, 1997. Statement No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Statement No. 131 is effective for financial statements for fiscal years beginning after December 15, 1997, and therefore the Company will adopt the new requirements retroactively in 1998. The Company operates in one business segment. Accordingly, the Company does not anticipate that the adoption of this statement will have a significant effect on the Company's financial statements. In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of Computer Software Developed For or Obtained For Internal Use. The SOP is effective for companies beginning on January 1, 1999. The SOP will require the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. The Company currently expenses such costs. The Company has not yet assessed what the impact of the SOP will be on the Company's future earnings or financial position. Income Taxes From June 1993 until June 1996, the Company's results of operations have been included in consolidated tax returns filed by EndoSonics. There was no income tax provision for the consolidated tax group during the periods covered by these financial statements. All net operating loss and credit carryforwards and deferred tax assets and liabilities have been disclosed herein on a separate company basis for CVD. Net Loss Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform with Statement No. 128. Net loss per common share after the Company's initial public offering is computed using the weighted average number of common shares outstanding during the periods presented. Options to purchase shares of the Company's common stock granted under the Company's stock option plan may have a dilutive effect on the Company's earnings per share in the future. Net loss per share prior to the Company's initial public offering is computed on a pro forma basis using the weighted average number of shares of Common Stock, convertible Preferred Stock (using the as-if-converted method) and Common Stock issuable upon conversion of the Convertible Obligation, outstanding. The following table sets forth the computation of basic and diluted net loss per share: 60 61 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, --------------------------------------- 1995 1996 1997 --------- --------- --------- (In thousands) NUMERATOR: Net loss .............................................. $ (2,874) $ (4,624) $ (8,772) --------- --------- --------- Net loss used for basic and diluted loss per share-- loss attributable to common stockholders ............ $ (2,874) $ (4,624) $ (8,772) ========= ========= ========= DENOMINATOR: Denominator for basic and diluted loss per share-- weighted average common shares outstanding .......... 385 4,715 9,118 Assumed conversion of Preferred Stock from the date of issuance (Series A and B)......................... 3,667 2,040 -- --------- --------- --------- 4,052 6,755 9,118 ========= ========= ========= Basic and diluted net loss per share .................. $ (0.71) $ (0.69) $ (0.96) ========= ========= =========
2. ACQUISITIONS On October 16, 1996, the Company acquired all of the outstanding shares of Intraluminal Devices, Inc. ("IDI") in exchange for approximately 93,000 shares of CVD common stock valued at $1.4 million. The acquisition was accounted for using the purchase method of accounting. As the assets of IDI were patents for products still in their development stage, the purchase price and the associated costs of acquisition $0.7 million were expensed as acquired in-process research and development. On July 29, 1997, the Company acquired all of the common stock of its independent distributor in Germany and Switzerland, Clinitec GmbH ("Clinitec"). The aggregate purchase price of the acquisition was $1,636 and consisted of cash of $30 and the forgiveness of debt of $1,606. The transaction was accounted for by the purchase method of accounting and, accordingly, the purchase price was allocated to the assets acquired and the liabilities assumed based on their fair market values at the date of acquisition. In connection with the acquisition, the Company acquired assets and assumed liabilities with fair market values of $401 and $652, respectively. The excess of the purchase price over the fair value of the net assets acquired of $1,887 has been allocated to goodwill. The results of operations of Clinitec are included in the consolidated statement of operations subsequent to the date of acquisition. The following table reflects unaudited pro forma combined results of operations of the Company, IDI and Clinitec on the basis that the acquisitions had taken place and the related charge for IDI, noted above, was recorded at the beginning of 1996 for IDI and Clinitec, as IDI operations were not material to the Company's operations prior to 1996:
1996 1997 ------- ------- Revenues......................... $8,822 $11,633 Net Loss......................... (5,060) (9,484) Net Loss per common share........ (0.75) (1.04) Shares used in computation....... 6,755 9,118
61 62 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) In management's opinion, the unaudited pro forma combined results of operations are not indicative of the actual results that would have occurred had the acquisitions been consummated at the beginning of 1996 or 1997, respectively, or of future operations of the combined companies under the ownership and management of the Company. 3. SCIMED LIFE SYSTEMS, INC. In September 1994, CVD and EndoSonics entered into a Stock Purchase and Technology License Agreement with SCIMED Life Systems, Inc. ("SCIMED"). SCIMED acquired a 19% interest in CVD in exchange for $2,500 in cash. CVD also granted SCIMED an exclusive license to certain patents in the cardiovascular field of use, which allows SCIMED to manufacture the Transport PTCA infusion catheter (the "Transport") developed by CVD in exchange for a $1,000 license fee that was paid in 1994. SCIMED will pay royalties to CVD on sales of the Transport and other products which use this patented technology. CVD retains rights to this technology and the associated patents for use outside of the cardiovascular field. During June 1995, the Company issued a warrant to SCIMED to purchase up to 80,000 shares of Series A Preferred Stock at an exercise price of $3.29 per share in exchange for a waiver of SCIMED's anti-dilution right. During May 1996, the Company issued an additional warrant to SCIMED to purchase up to 40,000 shares of Series A Preferred Stock at an exercise price of $3.29 per share in exchange for a waiver of SCIMED's anti-dilution right related to the shares to be issued under the 1996 Plan. In August 1997, SCIMED exercised all 120,000 warrants, mentioned above. SCIMED also paid CVD $641, $200 and $0 in 1995, 1996 and 1997, respectively, on a cost reimbursement basis to fund continuing development of the technology and for other support. 4. RELATED PARTY TRANSACTIONS The following is a summary of significant transactions between CVD and EndoSonics: During a portion of 1995, EndoSonics manufactured certain of the Company's catheter products at cost plus a mark-up of 30%. Total purchases from EndoSonics during 1995 amount to $172. Prior to the Company's initial public offering in June 1996, certain EndoSonics corporate expenses, primarily related to executive management time, accounting, cash management, and other administrative and engineering services, have been allocated to the Company. Total expenses allocated were $340 and $156 for the years ended December 31, 1995 and 1996, respectively. No interest expense has been charged on the net payable due to EndoSonics. The following is an analysis of the payable to EndoSonics: 62 63 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEAR-ENDED DECEMBER 31, ------------------------ 1995 1996 --------- --------- Beginning balance .................................................. $ 2,554 $ 2,537 Inventory purchases ................................................ 172 -- Corporate cost allocations ......................................... 340 156 Cash disbursements made by EndoSonics on behalf of CVD.............. 312 -- Cash collections made by EndoSonics on behalf of CVD................ (700) -- Cash payments to EndoSonics ........................................ -- (2,693) Cash disbursements made by CVD on behalf of EndoSonics and other ... (141) -- --------- --------- Ending balance ..................................................... $ 2,537 $ -- ========= ========= Average balance during period ...................................... $ 2,551 $ 1,974 ========= =========
In connection with the initial public offering, CVD and EndoSonics entered into a Tax Allocation Agreement that provides, among other things, for (i) the allocation of tax liabilities and adjustments thereto as between the business of the Company and other businesses conducted by EndoSonics and its affiliates related to periods in which the Company is includable in consolidated federal income tax returns filed by EndoSonics, (ii) the allocation of responsibility for filing tax returns and (iii) the conduct of and responsibility for taxes owed in connection with tax audits and various related matters. EndoSonics and CVD had entered into a Stockholder Agreement providing that all transactions between the Company and EndoSonics or any affiliate of EndoSonics must be approved by a special committee of CVD's Board of Directors comprised of two directors who are not officers, directors, employees or affiliates of EndoSonics. The provisions of this agreement became effective upon the consummation of the initial public offering and terminated in the fourth quarter of 1997 when EndoSonics beneficially owned less than 25% of CVD's Common Stock. See also Notes 5 and 11. 5. AGREEMENTS WITH FUKUDA AND CATHEX The Company had a distribution agreement with Fukuda which provided them with exclusive distribution rights relative to certain of the Company's products in Japan for periods extending through May 1999, which could be extended at the option of the parties. Distribution fee revenues received from Fukuda were deferred and were being recognized as revenue over the initial periods covered by the respective agreement. In July 1995 and May 1996, the distribution agreement with Fukuda was amended. In exchange for the exclusive distribution rights to additional CVD products, the Company received $750 which converted into the right to receive 62,500 shares of Common Stock upon the consummation of the initial public offering. In November, 1996, Fukuda exercised the conversion feature of said obligation. In May 1997, the Company terminated the existing distribution agreement and does not expect that any material obligations will arise as a result of such termination. The Company entered into a distribution agreement, dated May 1, 1997, with Cathex, Ltd. (The "Cathex Agreement"), whereby Cathex serves as CVD's exclusive distributor for certain of the Company's products in Japan. In exchange for this exclusive distributorship, Cathex shareholders agreed to purchase $200,000 in CVD 63 64 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) common stock or approximately 25,000 shares, in addition to payments owing upon the purchase of the products. Cathex also agreed to undertake all necessary clinical trails to obtain approval from Japanese regulator authorities for the sale of the products in Japan. Cathex's purchases under the Cathex Agreement are subject to certain minimum requirements. The initial term of the Cathex Agreement expires on January 1, 2001, subject to a five-year extension. The Cathex Agreement may also be terminated in the event of breach upon 90 days notice by the non-breaching party, subject to cure within the notice period. 6. LICENSE AGREEMENTS In January 1995 the Company entered into a license agreement with Advanced CardioVascular Systems, Inc. ("ACS") under which the Company acquired the exclusive worldwide rights to ACS' SmartNeedle technology. The Company assumed responsibility for manufacturing the product in 1996, subject to the payment of royalties. ACS was granted an option, which was exercised in February 1996, to obtain exclusive worldwide rights to certain CVD perfusion technology. In exchange for the perfusion technology, ACS was obligated to make milestone and minimum royalty payments to CVD, and also has certain obligations to develop and market the perfusion technology. An initial milestone of $150 was earned in the year ended December 31, 1996. In February 1997, ACS elected to terminate the perfusion technology agreement. The Company entered into a license agreement with EndoSonics pursuant to which CVD granted EndoSonics the non-exclusive, royalty-free right to certain technology for use in the development and sale of certain products. In exchange, CVD received the non-exclusive, royalty-free right to utilize certain of EndoSonics' product regulatory filings to obtain regulatory approval of CVD products. 7. MARKETABLE SECURITIES AVAILABLE-FOR-SALE The Company's investments in debt securities are diversified among high credit quality securities in accordance with the Company's investment policy. The Company's investment portfolio is managed by a major financial institution. The following is a summary of investments in debt securities classified as current assets and available-for-sale at December 31, 1996 and 1997.
DECEMBER 31, 1996 DECEMBER 31, 1997 ----------------------------------- ---------------------------------- Gross Gross Unrealized Unrealized Holding Holding (Losses) Fair (Losses) Fair Costs Gains Value Cost Gains Value ---------- ---------- ---------- ---------- ---------- ---------- U.S. Treasury and other agencies debt securities .. $ 10,000 $ (19) $ 9,981 $ 4,976 $ 30 $ 5,006 Corporate debt securities ......................... 15,563 189 15,752 19,621 146 19,767 ---------- ---------- ---------- ---------- ---------- ---------- $ 25,563 $ 170 $ 25,733 $ 24,597 $ 176 $ 24,773 ========== ========== ========== ========== ========== ==========
All short-term investments at December 31, 1996 and December 31, 1997 were due within one year. 8. INVENTORIES Inventories are stated at the lower of cost, determined on an average cost basis, or market value. Inventories consisted of the following: 64 65 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
DECEMBER 31, ------------------ 1996 1997 -------- -------- Raw materials $ 1,015 $ 1,285 Work in process 510 165 Finished goods 1,374 1,755 -------- -------- $ 2,899 $ 3,205 ======== ========
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consisted of the following:
DECEMBER 31, ------------------ 1996 1997 -------- -------- Accounts payable ....................... $ 750 $ 1,374 Accrued payroll and related expenses ... 1,040 1,317 Accrued clinical studies................ 290 548 Other accrued expenses ................. 302 249 -------- -------- $ 2,382 $ 3,488 ======== ========
10. COMMITMENTS Operating Leases The Company leases its administrative, research and manufacturing facilities and certain equipment under long-term, noncancelable lease agreements that have been accounted for as operating leases. Certain of these leases include scheduled rent increases and renewal options as prescribed by the agreements. Future minimum payments by year under long-term, noncancelable operating leases were as follows as of December 31: 1998.................. $ 429 1999.................. 213 2000................... 80 2001................... 8 ----- $ 730 =====
Rental expense charged to operations for all operating leases during the years ended December 31, 1995, 1996 and 1997, was approximately $171, $365 and $574, respectively. 11. SHAREHOLDERS EQUITY Preferred Stock In February 1995, every two shares of the Company's outstanding Common Stock was exchanged for one share of Series A Preferred Stock with a liquidation preference of $6.58 per share. In March 1996, the Company issued 400,000 shares of Series B Preferred Stock to EndoSonics at $20.00 per share for aggregate proceeds of $8,000. 65 66 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The preferred stockholders converted their shares to common shares upon the consummation of the Company's initial public offering. Stock Option Plan In May 1996, the Company, adopted the 1996 Stock Option/Stock Issuance Plan (the "1996 Plan") which is the successor to the Company's 1995 Stock Option Plan. Under the terms of the 1996 Plan, eligible key employees, directors, and consultants can receive options to purchase shares of the Company's Common Stock at a price not less than 100% for incentive stock options and 85% for nonqualified stock options of the fair value on the date of grant, a determined by the Board of Directors. The Company has authorized 1,990,000 shares of Common Stock for issuance under the 1996 Plan. At December 31, 1997, the Company had 48,000 shares of Common Stock available for grant under the 1996 Plan. The options granted under the 1996 Plan are exercisable over a maximum term of ten years from the date of grant and generally vest over a four year period. Shares underlying the exercise of unvested options are subject to various restrictions as to resale and right of repurchase by the Company which lapses over the vesting period.
OPTION PRICE NUMBER PER SHARE OF SHARES ------------ --------- Balance at December 31, 1994 ......... $ 1.00 462,000 Granted .............................. $ 1.00 to $ 1.50 494,000 Exercised ............................ -- -- Forfeited ............................ -- -- Cancelled ............................ -- -- ------------------- --------- Balance at December 31, 1995 ......... $ 1.00 to $ 1.50 956,000 Granted .............................. $ 2.50 to $ 13.25 346,000 Exercised ............................ $ 1.00 to $ 1.50 (138,600) Forfeited ............................ $ 1.00 to $ 13.25 (18,875) Cancelled ............................ -- -- ------------------- --------- Balance at December 31, 1996 ......... $ 1.00 to $ 13.25 1,144,525 Granted .............................. $ 5.00 to $ 9.50 985,000 Exercised ............................ $ 1.00 to $ 2.50 (208,259) Forfeited ............................ $ 1.00 to $ 13.25 (196,479) Cancelled ............................ $ 6.87 (130,000) ------------------- --------- Balance at December 31, 1997 ......... $ 1.00 to $ 13.25 1,594,787 =================== =========
On April 21, 1997, the Board of Directors approved repricing of the options granted on August 5, 1996 at $13.25 per share and on November 4, 1996 at $12.50 per share. As a result of the repricing, the exercise price became $6.88 and the vesting period on the aforementioned options started anew. The following table summarizes information regarding stock options outstanding at December 31, 1997:
WEIGHTED- AVERAGE WEIGHTED- OPTIONS REMAINING WEIGHTED- OPTIONS AVERAGE RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE EXERCISE EXERCISE PRICES AT 12/31/97 LIFE EXERCISE PRICE AT 12/31/97 PRICE - --------------- ----------- ----------- -------------- ----------- --------- $ 1.00-$ 1.50 505,287 7.5 $ 1.25 242,912 $1.22 2.50- 13.25 1,089,500 9.4 7.23 25,292 6.96 --------- ------- 1.00- 13.25 1,594,787 8.8 5.33 268,204 1.76 ========= =======
As of December 31, 1996 and 1997, 253,525 and 268,204 options were exercisable, respectively. 66 67 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) The weighted-average grant-date fair value of options granted during 1995, 1996 and 1997, for options where the exercise price on the date of grant was equal to the stock price on that date, was $0.40, $5.12 and $4.50. The weighted-average grant-date fair value of options granted during 1995, 1996 and 1997, for options where the exercise price on the date of grant was less than the stock price on that date, was $1.44, $3.16 and $0. During 1996, the Company recorded deferred compensation of approximately $150 for financial reporting purposes to reflect the difference between the exercise price of certain options and the deemed fair value, for financial statement presentation purposes, of the Company's shares of Common Stock. An additional $437 of deferred compensation was recorded to recognize compensation for non-employee option grants during the year ended December 31, 1997. Deferred compensation is being amortized over the vesting period of the related options. $119 and $179 of deferred compensation was amortized in the year ended December 31, 1996 and 1997, respectively. Stock Purchase Plan Under the terms of the Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan"), eligible employees can purchase Common Stock through payroll deductions at a price equal to the lower of 85% of the fair market value of the Company's Common Stock at the beginning or end of the applicable offering period. A total of 200,000 shares of Common Stock are reserved for issuance under the Purchase Plan. During 1997, a total of approximately 33,000 shares of common stock was purchased at an average price of $8.18 per share. 12. INCOME TAXES Significant components of the Company's deferred tax assets are as follows at December 31:
1996 1997 ---------------------- ---------------------- Federal State Federal State ---------- ---------- ---------- ---------- Net operating loss carryforward ....... $ 1,792 $ 44 $ 3,899 $ 60 Accrued expenses ...................... 456 78 346 59 Research and development credits ...... 256 144 521 291 Bad debt reserve ...................... 132 23 175 30 Depreciation .......................... 52 9 (48) (8) Inventory write-downs ................. 51 9 385 66 Capitalized research and development .. -- 276 -- 642 Deferred revenue ...................... 28 5 -- -- Other ................................. 47 57 163 28 ---------- ---------- ---------- ---------- Gross deferred tax assets ............. 2,814 645 5,441 1,168 Valuation allowance ................... (2,814) (645) (5,441) (1,168) Total deferred tax assets ............. -- -- -- -- ---------- ---------- ---------- ---------- Net deferred tax assets ............... $ -- $ -- $ -- $ -- ========== ========== ========== ==========
The valuation allowance increased by $3,150 and $1,569 in 1997 and 1996, respectively. The Company's effective tax rate differs from the statutory rate of 35% due to federal and state losses which were recorded without tax benefit. At December 31, 1997, the Company has net operating loss carryforwards for federal and state income tax purposes of approximately $11,000,000 and $1,000,000, respectively, which expire in the years 1998 through 2010. In addition, the Company has research and development tax credits for federal and state income tax purposes of approximately $520,000 and $320,000, respectively, which expire in the years 2008 through 2011. Because of the "change of ownership" provision of the Tax Reform Act of 1986, utilization of the Company's net operating loss and research credit carryforwards may be subject to an annual limitation against taxable income in future periods. As a result of the annual limitation, a portion of these carryforwards may expire before ultimately becoming available to reduce future income tax liabilities. 67 68 CARDIOVASCULAR DYNAMICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 13. EMPLOYEE BENEFIT PLAN The Company provides a 401(k) Plan for all employees 21 years of age or older with over 3 months of service. Under the 401(k) Plan, eligible employees voluntarily contribute to the Plan up to 15% of their salary through payroll deductions. Employer contributions may be made by the Company at its discretion based upon matching employee contributions, within limits, and profit sharing provided for in the Plan. No employer contributions were made in 1996 and 1997. 14. FOURTH QUARTER ADJUSTMENTS Adjustments were made in the fourth quarter of 1997 to increase the reserve for excess and obsolete inventories by $955, increase the allowance for doubtful accounts by $270 and to accrue expenses of $780. 68 69 CARDIOVASCULAR DYNAMICS, INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995 (IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- -------- -------- -------- -------- ADDITIONS ----------------------- BALANCE AT CHARGES TO CHARGED BALANCE AT BEGINNING COSTS AND TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- ---------- Year ended December 31, 1997 Allowance for doubtful accounts ... $ 377 $ 318 $ -- $ (195) $ 500 Accrued warranty expenses ......... $ 29 $ -- $ -- $ (29) $ -- Reserve for excess and obsolete inventories...................... $ 145 $ 955 $ -- $ -- $ 1,100 Year ended December 31, 1996 Allowance for doubtful accounts ... $ 180 $ 221 $ -- $ (24) $ 377 Accrued warranty expenses ......... $ 113 $ -- $ -- $ (84) $ 29 Reserve for excess and obsolete inventories...................... $ 209 $ -- $ -- $ (64) $ 145 Year ended December 31, 1995 Allowance for doubtful accounts ... $ 85 $ 95 $ -- $ -- $ 180 Accrued warranty expenses ......... 20 $ 93 $ -- $ -- $ 113 Reserve for excess and obsolete inventories...................... $ -- $ 209 $ -- $ -- $ 209
70 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION 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.
71 10.17(9) Exclusive Distribution Agreement dated November 1, 1994 between Cordis S.A. and EndoSonics, as amended on December 20, 1994. 10.18(7) Imaging/Therapeutic Combination Devices Development Agreement dated as of February 2, 1996 by and between Cordis Corporation ("Cordis") and EndoSonics. 10.19(7) Exclusive Distribution Agreement dated February 2, 1996 by and between Cordis and EndoSonics. 10.20(10) Stockholder Agreement dated June 19, 1996 between EndoSonics and Radiance. 10.21(10) License Agreement dated February 6, 1997 between EndoSonics and Radiance. 10.22(11) Distribution Agreement dated August 31, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.23(11) Amendment to the Distribution Agreement (June 28, 1997) dated August 31, 1998, between EndoSonics, Navius Corporation and Fukuda Denshi Co., Ltd. 10.24(11) Research and Development Agreement dated August 31, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.25(11) Common Stock Purchase Agreement dated October 7, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.26(11) Investors' Rights Agreement dated September 21, 1998, between EndoSonics and Fukuda Denshi Co., Ltd. 10.27* Distribution Agreement dated December 15, 1998, between EndoSonics and JOMED N.V. 10.28* IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement dated December 15, 1998 between EndoSonics and JOMED N.V. 10.29 Certificates of Ownership and Merger, dated September 1998, Merging Microsound Corporation into EndoSonics Corporation. 23.1 Consent of Ernst & Young LLP, Independent Auditors. 23.2 Consent of KPMG LLP, Certified Public Accountants. 24.1 Power of Attorney. (Reference is made to page 33 of this Report on Form 10-K/A.) 27.1 Financial Data Schedule.
- ------------ * 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. EX-10.27 2 DISTRIBUTION AGREEMENT 1 EXHIBIT 10.27 DISTRIBUTION AGREEMENT This Distribution Agreement is made this 15th day of December, 1998, by and between EndoSonics Europe B.V., De Bruyn Kopsstraat 15, 2288 EC Rijswijk, The Netherlands ("EndoSonics"), a wholly owned subsidiary of EndoSonics Corporation, 2870 Kilgore Road, Rancho Cordova, CA 95670, USA, and JOMED N.V., Stravinskylaan 2001, P.O. Box 75640, 1070 AP Amsterdam, The Netherlands, and any of its wholly owned subsidiaries ("Distributor"). In consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. DEFINITIONS The following terms when used in their capitalized form shall have the following meanings: 1.1. "Agreement" shall mean this Distribution Agreement, as amended, modified, or supplemented from time to time. 1.2. "Catheters" shall mean any of the catheters as defined in Exhibit A. 1.3. "Confidential Information" shall have the meaning provided in Section 0 hereof. 1.4. "GMP" shall mean the good manufacturing practices for medical devices set forth by any act, statute, or regulation of any kind governing the products in the Territory. 1.5. "Minimum Purchase Commitment" shall have the meaning provided in Section 0 hereof. 1.6. "Products" shall mean those EndoSonics products listed in Exhibit A attached hereto. 1.7. "Renewal term" shall have the meaning provided in Section 0 hereof. 1.8. "System" shall mean any of the systems or system options as defined in Exhibit A. 1.9. "Term" shall have the meaning provided in Section 0 hereof. 1.10. "Territory" shall mean those countries listed in Exhibit B hereof. 1.11. "Trademarks" shall mean each trademark, trade name, service marks, the name "EndoSonics" or any derivation thereof, brand names, signs, symbols or slogans now or hereafter used by EndoSonics in connection with the Products. 1.12. "Wires" shall mean any of the wires as defined in Exhibit A. 2 2. APPOINTMENT; RELATIONSHIP OF PARTIES 2.1. Appointment EndoSonics hereby appoints Distributor as its distributor of the Products in the Territory, subject to the rights as stipulated in Exhibit B hereto. Distributor's rights shall be exclusive for the first 12 months of this Agreement, and shall be non-exclusive thereafter, provided however, that the exclusive period may be extended in certain geographic areas for another 12 months upon the mutual written consent of the parties. Distributor shall not distribute or otherwise promote the Products in any way outside the Territory, without the prior written authorization of EndoSonics. During the Term and each Renewal Term, if any, Distributor shall not sell or commercially promote products that compete with Products, nor shall Distributor represent, or provide either directly or indirectly marketing services to, any manufacturer or distributor in the Territory, that relate to such competing products. 2.2. Exclusive Account Protection Irrespective of Distributor's appointment under the foregoing Section 0, Distributor shall retain exclusive rights to sell Catheters or Wires, whichever applies, to each end-customer account in which Distributor, during the Term, has placed a System other than on the basis of an outright capital equipment sale, and to which it retains legal title. This exclusive right shall be for the shorter of a period of three (3) years following the installation of said System or the duration of the implicit or explicit financing program agreed to between Distributor and end-customer, the terms of which shall be disclosed to EndoSonics upon Distributor's claim of exclusive rights under this section. 2.3. Relationship of Parties The relationship of Distributor to EndoSonics hereunder shall be solely that of an independent contractor. Distributor and EndoSonics each acknowledge and agree that neither Distributor nor EndoSonics is an employee, employer, agent, partner, or joint venturer of the other. Neither Distributor nor EndoSonics shall have or hold itself as having the right or authority to assume or create any obligation or responsibility, whether express or implied, on behalf of or in the name of the other, except with the express written authority of the other. 3. TERM - TERMINATION 3.1. Term The term ("Term") of this Agreement shall commence the date hereof, and, unless terminated sooner pursuant to the provisions of Sections 0, shall terminate two (2) years from the date hereof; provided, however, that this Agreement may be extended for successive one-year periods (each such period, a "Renewal Term") upon the mutual written consent of the parties. 3.2. Termination of Agreement This Agreement shall terminate upon the happening of any of the following events: 3 (a) either party's failure to cure the breach of any material term, covenant, or condition of this Agreement within 30 days after the breaching party receives notice of such breach; (b) immediately upon written notice to one party upon the change in the structure or organization of the other party including, without limitation, the acquisition or merger of the other party; (c) immediately upon either parties' cessation to function as a going concern; or (d) immediately upon either parties' dissolution, liquidation, insolvency, bankruptcy, assignment for the benefit of creditors or admission in writing of its inability to pay its debts as they mature. 3.3. Obligations upon Termination or Expiration On termination or expiration of this Agreement by either party for any reason: (a) All rights granted by EndoSonics to Distributor shall cease immediately, except that EndoSonics, at its sole discretion, may permit Distributor to sell any Products for which it has paid full list price for a period of three (3) months following such termination or expiration, for the sole purpose of depleting its inventory of Products. If Distributor has not sold its remaining inventory of Products at the end of said three-month period, EndoSonics, at its sole discretion, may extend such three month period for an additional three months. If EndoSonics refuses to extend such three month period, EndoSonics shall purchase all of Distributor's remaining inventory of Products at fair market value, provided that none of the remaining inventory being purchased by EndoSonics shall have been used, removed from its original packaging or carry an expired sterilization date; (b) Provided that the Agreement is not terminated as a result of Distributor's breach, EndoSonics shall fulfill any unexecuted orders placed by the Distributor prior to such termination or expiration subject to advance payment, and provided that Distributor shows official written documentation of pending orders from its customers; (c) Distributor shall promptly pay all outstanding invoices, if any, for Products shipped by EndoSonics prior to such termination or expiration; (d) Distributor shall forthwith return to EndoSonics or otherwise dispose of as EndoSonics may direct, all promotional literature, manuals, catalogues, instruction sheets, diagrams and other typed or printed matter relating to the Products or to the business of EndoSonics and all copies thereof in the possession or under the control of the Distributor; (e) Distributor shall not claim, nor have the right to claim any compensation or indemnity whatsoever for surrendering the representation of the Products, the customers or the goodwill it has acquired for the Products or for any other or similar reason, regardless of which party terminates the Agreement or for what reasons. 4 4. SALES OF PRODUCTS TO DISTRIBUTOR 4.1. Price Prices to Distributor for Products shall be those set forth in the price list attached in Exhibit A. EndoSonics shall provide at least 60 days prior written notice of changes in said price list. Price changes shall not affect unfulfilled purchase orders accepted by EndoSonics prior to the effective date of such changes. 4.2. Orders All orders for Products by Distributor shall be initiated by a written purchase order sent to EndoSonics and requesting a delivery date, provided, however, that an order may initially be placed orally. No order shall be binding upon EndoSonics until accepted by EndoSonics in writing, and EndoSonics shall have no liability to Distributor with respect to purchase orders that are not accepted. EndoSonics shall use commercially reasonable efforts to deliver Products at the times specified in its written acceptance of Distributor's purchase orders. 4.3. Shipments (a) Systems: All EndoSonics systems delivered pursuant to the terms of this Agreement shall be suitably packed for air freight shipment in EndoSonics' standard shipping crates, marked for shipment to Distributor's address set forth above, and delivered to Distributor or its carrier agent ex-works Rancho Cordova, California, USA. (b) Catheters and Wires: All Catheters and Wires delivered pursuant to the terms of this Agreement shall be suitably packed for airfreight shipment in EndoSonics standard shipping boxes, marked for shipment at Distributor's address set forth above, and delivered to Distributor or its carrier agent ex-works Rijswijk, The Netherlands. (c) Partial shipments: Unless specifically disallowed by Distributor, EndoSonics may make deliveries of shipments in installments. Such partial shipments shall be billed upon shipment by EndoSonics. (d) Choice of carrier: Unless otherwise instructed in writing by Distributor, EndoSonics shall select the carrier. All freight, insurance, and other shipping expenses, as well as any special packing expense, shall be paid by Distributor. Distributor shall also bear all applicable taxes, duties, and similar charges that may be assessed against the Products after delivery to Distributor or its carrier ex works Rancho Cordova, USA or Rijswijk, The Netherlands, whichever applies. 4.4. Payment Terms EndoSonics shall submit an invoice to Distributor upon shipment of all Products ordered by Distributor. The invoice shall cover Distributor's Purchase Price for the Products plus any freight, value-added, sales or other taxes, duties and other applicable costs initially paid by EndoSonics but to be borne by Distributor. Payment shall be made by wire transfer, check or other instrument approved by EndoSonics, within 60 days net, 30 days -1% discount, from the date of receipt of each invoice. No part of any amount payable to EndoSonics hereunder may be reduced due to any counterclaim, set-off, adjustment or other right which Distributor might have against EndoSonics, any other party or otherwise. 5 EndoSonics, at its sole discretion, reserves the right to limit the amount of credit it may extend to Distributor, to require full or partial payment in advance, or to revoke any credit previously extended, if, in EndoSonics' judgment, Distributor's financial condition does not warrant proceeding on the terms specified. 4.5. Payment Currency All payments to be made by either party hereunder shall be made in United States Dollars, or such other currency as the parties may agree upon. In the event another currency is so agreed upon, then the amount to be paid shall be calculated using the New York foreign exchange selling rate for that other currency for the business day preceding the invoice date as published in the Wall Street Journal. 4.6. Rejection of Products Distributor shall inspect all Products promptly within 10 days of receipt. Distributor shall reject any Products in which the integrity of product sterility has been violated. Upon product rejection or product failure, Distributor shall notify EndoSonics and request a Returned Goods Authorization ("RGA") number. Only upon receipt of an RGA number, Distributor shall return to EndoSonics the rejected or failed Products, freight prepaid, in its original shipping carton with the RGA number displayed on the outside of the carton. Upon receipt of failed Products, EndoSonics will test such Products for failure analysis. If specific failure is observed, EndoSonics will, at its expense, replace failed Products with the same or similar Products of equal value. 4.7. Product modifications/obsolescence EndoSonics reserves the right to change its Products and/or its specifications or to discontinue the manufacture of one or more of the Products, without payment or compensation to Distributor, provided that at least sixty (60) days written notice is given to Distributor in case of a Product and/or specification change, and at least one hundred twenty (120) days written notice is given to Distributor in case of a Product discontinuation. EndoSonics agrees to supply sufficient quantities of spare parts of any discontinued product to cover customer orders and/or tenders applied for by Distributor prior to the notice of a discontinued product. 5. PURCHASE COMMITMENTS 5.1. Aggregate Minimum Purchase Commitment During the first 12 months of the Term, Distributor shall purchase a minimum amount of Products (the "Minimum Purchase Commitment") as stipulated in Exhibit C. Distributor's failure to meet the aggregate Minimum Purchase Commitment shall constitute a material breach and basis for termination of this Agreement under Section 0, unless the sale of Products in one or more geographic areas of the Territory is restricted by regulatory authority having jurisdiction over Products, or EndoSonics is unable to deliver Products by agreed upon delivery dates, in which event Distributor shall be proportionally excused from the Minimum Purchase Commitment. Upon execution of this Agreement, Distributor shall place a non-cancelable purchase order for Products with the delivery dates as stipulated in Exhibit C. Such non-cancelable purchase order shall be binding on Distributor except to the extent that the sale of the Products is restricted by regulatory authority having jurisdiction over the 6 products. EndoSonics shall extend special pricing and payment terms with regard to said non-cancelable purchase order. For the purposes of this provision, a "purchase" of Products within the time periods set forth in Exhibit C shall mean EndoSonics' shipment of such Products on or before the last day of each of such time periods. 5.2. Purchase Commitment by Geographic Territory During the first 12 months of the Term, Distributor shall purchase a minimum amount of Products for each of the geographic areas as stipulated in the individual schedules included under Exhibit C. If during the first 12 months of the Term Distributor fails to meet at least 75% of said minimum purchase amount (as measured by the total sales amount in US Dollars) in any of the geographic areas, the parties shall jointly decide on corrective actions to be undertaken in each such area, and shall agree on a reasonable minimum commitment for the ensuing 6 months. If Distributor fails to meet said agreed upon 6-month minimum commitment, the distribution rights in the affected geographic area shall be cancelled effective immediately, and the Minimum Purchase Commitment shall be proportionally reduced. 6. ADDITIONAL OBLIGATIONS OF DISTRIBUTOR 6.1. Promotion of the Products In addition to meeting the Minimum Purchase Commitment, Distributor shall use its best efforts to promote the sale of the Products within the Territory, to develop a market for the Products and to enhance the Company's image in the marketplace as a provider of quality medical devices. Distributor's obligations shall include, but not be limited to, preparing promotional materials in appropriate languages for the Territory, advertising the Products in trade publications within the Territory, participating in and featuring the Products at appropriate trade shows, and directly soliciting orders from customers for the Product. 6.2. Market Analysis Upon execution of this Agreement and within 30 days prior to the beginning of each calendar year thereafter, Distributor shall provide EndoSonics with an analysis of market changes and trends, competition and an assessment of customer requirements for the Products, and Distributor and EndoSonics shall mutually agree in writing on the sales promotion activities and performance criteria to be met by Distributor for the year. 6.3. Finances and Personnel Distributor shall devote sufficient financial resources, technically qualified sales representatives and clinical personnel to market and sell the Products, in accordance with its obligations hereunder. Additionally, distributor shall provide adequate training to physicians and nursing staff to assist them in the proper use of the Products. Distributor shall provide adequate contact with existing and potential customers within the Territory on a regular basis, consistent with good business practice. 6.4. Forecasts Upon execution of this Agreement, and within the first week of every quarter 7 thereafter, Distributor shall provide EndoSonics with a 6-month rolling forecast, showing prospective orders by Product model and intended submittal date. The rolling forecast shall be updated quarterly by Distributor. 6.5. Meetings Distributor shall periodically make arrangements for EndoSonics' representatives to conduct sales meetings with Distributor's sales force in the Territory. EndoSonics and Distributor shall mutually agree on the date, time and location of such meetings. 6.6. Inventory Distributor shall, at its own expense, maintain sufficient inventory of the Products, including inventory for demonstration purposes to fulfill its commitments under this Agreement. 6.7. Representations Distributor shall not make any false or misleading representations to customers or others regarding EndoSonics or the Products. Distributor shall not make any representations, warranties or guarantees with respect to the specifications, features or capabilities of the Products that are not consistent with EndoSonics' documentation accompanying the Products or EndoSonics' literature describing the Products, including the limited warranty and disclaimers. 6.8. Import and Export Requirements Distributor shall, at its own expense, pay for all import and export licenses and permits, pay customs charges and duty fees, and take all other actions required to accomplish the export and import of the Products purchased by Distributor. Distributor acknowledges that EndoSonics is subject to regulation by agencies of the US and other governments, including the US Department of Commerce, which prohibit export or diversion of certain technical products to certain countries. Distributor agrees to comply with all export laws and restrictions and regulations of the US Department of Commerce or other United States or foreign agency or authority, and not to export, or allow the export or re-export of, any Proprietary Information or Products or any direct product thereof in violation of any such restrictions, laws or regulations. 7. ADDITIONAL OBLIGATIONS OF ENDOSONICS 7.1. Product and Marketing Materials EndoSonics, at its expense, shall promptly provide Distributor with reasonable amounts of printed commercial and technical data and information and other publications which EndoSonics may have available from time to time. 7.2. Territorial Inquiries EndoSonics shall refer to Distributor all customer leads and any correspondence or inquiries related to selling, marketing, or servicing of Products in the Territory which EndoSonics may receive while this Agreement is in effect. Similarly, Distributor shall promptly refer to EndoSonics any such customer leads, correspondence or inquiries outside the Territory. 8 7.3. Distributor and Customer Support EndoSonics shall provide a reasonable level of product application and technical support to Distributor. EndoSonics may, at its own discretion and expense, choose to send a representative to visit customers and prospects in the Distributor's Territory, and Distributor agrees to allow access and give support to perform such tasks, provided that such visits are coordinated with Distributor. Any product application support provided by EndoSonics such as application specialist's visits to Distributor's Territory will not be invoiced to the Distributor unless specifically requested by Distributor. 8. SERVICE AND MAINTENANCE, WARRANTY AND INSTALLATION 8.1. Systems Warranty and Service and Maintenance Agreements EndoSonics shall make available to purchasers of the Systems its standard warranty as stipulated in Exhibit D. Such warranty for the first year after delivery shall be included in the purchase price of the Systems. EndoSonics shall make an annual extended service and maintenance agreement available, substantially in the form set forth in Exhibit E, exclusively through Distributor in the Territory as from the first year after delivery of the Systems. Distributor shall purchase such annual service and maintenance agreement for each of the Systems to which it retains title in the Territory at a cost set forth in Exhibit A. 8.2. Systems Service and Maintenance EndoSonics shall be solely responsible within the Territory for the service, repair and maintenance of all Systems, including dispatching calls and providing Distributor reports from time to time. Upon termination of this Agreement for any reason whatsoever, EndoSonics shall take such steps as are necessary to guarantee on-going service, repair and maintenance of the systems installed through Distributor to end customers. Distributor or the end-customers of Distributor shall bear the cost of all service, repairs and maintenance performed that is not covered under warranty or an annual service and maintenance agreement. 8.3. Catheter and Wire Warranty EndoSonics shall provide Product warranty for its Catheters and Wires as stipulated in Exhibit D. 8.4. Systems Installation EndoSonics shall support Distributor with the installation of the Systems at the location of the end-user. Such installation shall include the training of customers with respect to the Products sold. Distributor shall be responsible for all reasonable travel expenses and related disbursements incurred by EndoSonics in connection with said installations. 9. MAINTENANCE OF RECORDS/PRODUCT RECALLS 9.1. Maintenance of Records Distributor and EndoSonics shall, in compliance with applicable law, including GMP's, maintain accurate records regarding the Products including, without limitation, records 9 of direct sales of Products to third parties, lot numbers, serial numbers, and other manufacturing documentation necessary to ensure traceability of Products. The parties shall retain these records pursuant to the GMP's and applicable law. 9.2. Product Recalls In the event of any recall of Products, either voluntary or otherwise, Distributor shall cooperate with and assist EndoSonics in locating and retrieving such recalled Products, as requested by EndoSonics and at EndoSonics' expense. 10. COMPLAINTS AND RETURNS/REGULATORY REPORTING/ADVERSE IMPACT 10.1. Complaints and Returns Distributor shall, as soon as reasonably practicable, notify, document and forward to EndoSonics all customer complaints and any Products returned in connection therewith. EndoSonics shall respond to Distributor within ten business days of receipt of a complaint and Distributor shall report EndoSonics' findings to customers, if applicable. EndoSonics shall work diligently to resolve all customer complaints. 10.2. Regulatory Reporting and Analysis of returned Products EndoSonics shall file, or cause to be filed, all reports required of a manufacturer pursuant to the applicable medical device reporting regulations. EndoSonics, as the manufacturer of the Products, shall perform all failure analysis on the Product within 30 days of receipt of each failed Product and shall file all reports required with the applicable regulatory agency. EndoSonics shall further cooperate with and assist Distributor in submitting all reports that Distributor may be required to file. Distributor shall promptly provide EndoSonics with copies of all such reports. 10.3. Adverse Impact on the Products Each party shall notify the other party's Regulatory Affairs and Quality Assurance Officer or other designee as soon as reasonably practicable of all actions or anticipated actions by any regulatory authority, that could adversely affect the manufacture, marketing, distribution or sale of the Product. Each party shall promptly provide copies to the other party of all reports, citations, violations, warnings and deficiencies received by such party in connection with the Products. 11. GOVERNMENT APPROVALS/REGISTRATION SUPPORT 11.1. Government Approvals Distributor shall obtain all required government approvals or registrations, if any, prior to the sale of any Product in the Territory. All approvals and registrations shall be obtained under EndoSonics' name, and EndoSonics and Distributor shall equally share in the cost involved. In case of necessary adaptation or modification of Products due to local requirements, the parties will assist each other and will agree upon whether to conduct such adaptations or modifications at EndoSonics' or Distributor's facilities. Upon termination of this Agreement for any reason, Distributor shall take all necessary steps to transfer any government approvals for Products to EndoSonics or EndoSonics' nominee (or if such transfer is not permitted, to cooperate in the cancellation of 10 Distributor's government approvals and the re-issuance thereof to EndoSonics or EndoSonics' nominee). Distributor shall promptly return to EndoSonics all data and information relating to Product and make no further use thereof. 11.2. Registration Support EndoSonics shall assist Distributor in registering the Products in the Territory by providing Distributor with: (a) materials in EndoSonics' possession necessary to obtain health registrations and marketing approvals, licenses and permits; (b) certificates of analysis, export and compliance; (c) trademark authorizations; and (d) such other information as Distributor shall reasonably request from time to time. 12. TRADEMARKS AND PROTECTION OF PROPRIETARY RIGHTS 12.1. Registration of Trademarks EndoSonics shall, at its expense, use reasonable efforts to protect and maintain all registrations, filings and issuance of its Trademarks in full force and effect. 12.2. Title The proprietary rights of EndoSonics in and to Trademarks and any items related thereto are protected by the law of copyright, trademark, trade secrets and unfair competition. Distributor shall have no proprietary interest whatsoever in the Trademarks. 12.3. Notification of Infringement Distributor shall promptly notify EndoSonics of any infringement, of which Distributor has knowledge, of the proprietary rights of EndoSonics in and to the Products or the Trademarks in the Territory and shall cooperate with EndoSonics in any action by EndoSonics to investigate or remedy any such infringement. All costs and expenses of investigating and remedying any such infringement shall be borne by EndoSonics. 12.4. Use of Trademarks EndoSonics hereby grants to Distributor a non-exclusive license to use the Trademarks for the purpose of identifying and marketing the Products in the Territory. Any use of the Trademarks will be in accordance with such instructions as EndoSonics may give Distributor from time to time. Distributor shall not grant any sub-licenses to use the Trademarks to any Person, agent or other party without the prior written consent of EndoSonics in each instance. Upon the expiration or termination of this Agreement, the non-exclusive license granted hereunder to Distributor shall expire and Distributor shall immediately cease using the Trademarks. 12.5. Quality Control 11 In order to comply with EndoSonics quality control standards, Distributor shall (a) use the Trademarks in compliance with all relevant laws and regulations in the Territory; (b) accord EndoSonics, after previous written request, the right to inspect all marketing and promotional materials in Distributor's possession containing the Trademarks in order to confirm that Distributor's use of such Trademarks is in compliance with this Agreement; and (c) not modify any of the Trademarks in any way and not use any of the Trademarks on any goods or services other than the Products or in connection therewith. In the event EndoSonics has a good faith and substantial reason to believe that Distributor is not complying with this provision, EndoSonics may, within 30 days of a written notification to Distributor stating and justifying the reasons, suspend Distributor's right to use the Trademarks until such time as Distributor gives EndoSonics adequate assurances that it has taken corrective measures and that it will thereafter comply with this provision. 12.6. Limitation of Distributor's Rights and Software License Distributor shall have no access to or rights in the source codes of any software included in the Products. Distributor shall have no right to copy, modify or re-manufacture any Product or part thereof and shall comply with the confidentiality obligations under Section 0. For each System sold, EndoSonics licenses Distributor and its end customer with a one-time paid in full perpetual license to use the EndoSonics software and related updates and releases on the specific System sold. 13. INDEMNIFICATION 13.1. Indemnification by Distributor Except with respect to any of the following that arises from gross negligence or willful misconduct of EndoSonics or its agents and subject to Section 0 Distributor shall indemnify, defend and hold harmless EndoSonics, its directors, officers, employees, representatives and agents from and against any and all claims, suits, losses, damages, costs, fees and expenses (including reasonable attorney's fees), and other liabilities asserted by parties, both governmental and non-governmental, resulting from or arising out of (a) any misrepresentation of Distributor contained herein or breach of any warranty made by Distributor; (b) any breach, violation or non-performance of any covenant, condition or agreement in this Agreement by Distributor; and (c) the material inaccuracy of any representation or warranty of the Products made by Distributor. 13.2. Indemnification by EndoSonics Except with respect to any of the following that arises from the gross negligence or willful misconduct of Distributor or its agents and subject to Section 0, EndoSonics shall indemnify, defend and hold harmless Distributor, its directors, officers, employees, representatives and agents from and against any and all claims, suits, losses,damages, costs, fees and expenses (including reasonable attorneys' fees), and other liabilities asserted by third parties, both governmental and nongovernmental, resulting from or arising out of (a) any misrepresentation of EndoSonics contained herein or breach of any warranty or guaranty made by EndoSonics, (b) any breach, violation or nonperformance of any covenant, condition or agreement in this Agreement by EndoSonics, (c) the design of the Products, (d) any injury to any property or person arising in connection with the design, manufacture, use or application of the Products, (e) any infringement or alleged infringement of the 12 Products on any product, device, method, process, trade name, trademark or patent, and (f) any and all taxes, fees, fines, penalties, assessments, charges, expenses or other governmental levies assessed on the Products which are not attributable to Distributor's acts or omissions. 13.3. Limitations to Indemnity The indemnities of Sections 0 and 0 shall not apply (a) if the indemnified party fails to give the indemnifying party prompt notice of any claim it receives and such failure materially prejudices the indemnifying party, or (b) unless the indemnifying party is given the opportunity to approve any settlement. Furthermore, the indemnifying party shall not be liable for attorneys' fees or expenses of litigation of the indemnified party unless the indemnified party gives the indemnifying party the opportunity to assume control of the defense or settlement. In addition, if the indemnifying party assumes such control, it shall only be responsible for the legal fees and litigation expenses of the attorneys it designates to assume control of the litigation. In no event shall the indemnifying party assume control of the defense of the indemnified party without the consent of the indemnified party (which consent shall be given or not at its sole discretion). 14. CONFIDENTIALITY Distributor acknowledges that by reason of its relationship to EndoSonics hereunder it will have access to confidential or proprietary information ("Confidential Information"). Confidential Information shall include all technology, inventions, designs, processes, formulas, computer software, specifications, customer lists, product development plans, forecasts, and all other business, technical and financial information provided to Distributor. Distributor agrees that it will not use in any way for its own account or the account of any third party, nor disclose to any third party, any Confidential Information revealed to it by EndoSonics. Distributor shall take every reasonable precaution to protect the confidentiality of such information. Upon request by Distributor, EndoSonics shall advise whether or not it considers any particular information or materials to be confidential. Distributor shall not publish any technical description of the Products beyond the description published by EndoSonics (except to translate that description into appropriate languages for the Territory). In the event of termination of this Agreement, there shall be no use or disclosure by Distributor of Confidential Information of EndoSonics, and Distributor shall not manufacture or have manufactured any devices, components or assemblies utilizing any of EndoSonics' Confidential Information. The duty of confidentiality set forth herein shall not apply to information that: (a) is, at the time of disclosure, in the public domain; (b) after disclosure, enters the public domain except where such entry is a direct result of a breach of this Agreement; (c) prior to disclosure, was already known to the party receiving such information, as evidenced by its written records; 13 (d) subsequent to disclosure, is obtained from a third party in possession of such information and not under a contractual or fiduciary obligation to keep such information in confidence; (e) is filed with any governmental or any regulatory authority and available to the public; or (f) is disclosed pursuant to any judicial or governmental requirement or order. Distributor's duty of confidentiality set forth above shall be limited to the Term, each Renewal Term, if any, and 2 years from the expiration thereof. 15. MISCELLANEOUS 15.1. Notices All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing, shall be deemed to have been duly given when delivered in person, or when sent by telex or telecopy or other facsimile transmission (with the receipt confirmed), or on the third business day after posting thereof by registered or certified mail, return receipt requested, prepaid and addressed as follows (or such other address as the parties may designate by written notice in the manner of aforesaid): If to Distributor: Company: JOMED International AB Address: Drottninggatan 94 City: S-25221 Helsingborg Country: Sweden Attention: Mr. Tor Peters Position: President Telephone: +46-42-490.6000 Facsimile: +46-42-490.6001 If to EndoSonics: EndoSonics Europe B.V. P.O. Box 1178 2280 CD Rijswijk The Netherlands Attention: Dr. J.P.C. de Weerd Managing Director Telephone: +31-70-307.3929 Facsimile: +31-70-307.3922 15.2. Governing Law and Jurisdiction This Agreement shall be governed by and construed in all respects in accordance with the laws of the Netherlands and fall under the jurisdiction of the place of office of EndoSonics. 15.3. Entire Agreement This Agreement sets forth the entire understanding of the parties with respect to the 14 subject matter hereof. This Agreement supersedes all prior representations, agreements and understandings among the parties with respect to such subject matter. 15.4. Amendments No changes or amendments or alterations to this Agreement shall be effective unless in writing and signed by all parties hereto. 15.5. Remedies Cumulative The rights, powers and remedies set forth herein are cumulative and shall be in addition to any and all other rights, powers and remedies provided by law. The exercise of any right or remedy hereunder shall not in any way constitute a cure under this Agreement, or prejudice either party in the exercise of any of its rights under this Agreement or law. 15.6. Non-Assignment This Agreement may not be assigned by either party without the prior written consent of the other party. 15.7. Force Majeure Non-performance of either party shall be excused (except for payment of moneys and confidentiality) to the extent that performance is rendered impossible by strike, fire, flood, governmental acts or orders or restrictions, failure of suppliers, or any other reason where failure to perform is beyond the reasonable control of and is not caused by the negligence of the non-performing party. 15.8. Legal Expenses The prevailing party in any legal action brought by one party against the other arising out of this Agreement shall be entitled, in addition to any other rights and remedies it may have, to reimbursement for its expenses, including court costs and reasonable attorney's fees. 15.9. Survival of Certain Terms The provisions of Sections 0, 0, 0, 0,0, 0, and 0 shall survive the termination of this Agreement for any reason. All other rights and obligations of the parties shall cease upon termination of this Agreement. 15.10. Waiver No waiver of any default in the performance of any of the duties or obligations arising out of this Agreement shall be valid unless in writing and signed by the waiving party. Waiver of any one default shall not constitute or be construed as creating waiver of any other default or defaults. No course of dealing between the parties shall operate as a waiver or preclude the exercise of any rights or remedies under this Agreement. Failure on the part of either party to object to any act or failure to act of the other party, or declare the other party in default, regardless of the extent of such default, shall not constitute a waiver by the party of its rights hereunder. 15.11. Severability If any provision of this Agreement shall be held to be unenforceable in whole or in part, then the invalidity of such provision shall not be held to invalidate any other provision herein and all other provisions shall remain in full force and effect. 15.12. Counterparts This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. 15 IN WITNESS WHEREOF, this Agreement has been executed by both parties as of the date first written above. EndoSonics Europe B.V. Distributor Signature: Signature: ----------------------- ------------------------ Name: Dr. J.P.C. de Weerd Name: Mr. T. Peters Title: Managing Director Title: President Date: Date: ----------------------- ------------------------ 16 EXHIBIT A ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES ENDOSONICS SYSTEMS, SYSTEM OPTIONS AND ACCESSORIES:
PART NUMBER DESCRIPTION PRICE (US$) ----------- ----------- ----------- [ * ] [ * ] [ * ]
PRICE SPECIAL PRICING CONDITIONS: DESCRIPTION (US$) ----------- ----- [ * ] [ * ] [ * ]
ENDOSONICS CATHETERS:
PART NUMBER DESCRIPTION PRICE (US$) ----------- ----------- ----------- [ * ] [ * ] [ * ]
- ------------------ [*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 17 ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES (continued) CARDIOMETRICS SYSTEMS AND ACCESSORIES:
PART NUMBER DESCRIPTION PRICE (US$) ----------- ----------- ----------- [ * ] [ * ] [ * ]
CARDIOMETRICS FLOWIRE(R) DOPPLER GUIDE WIRES:
PART NUMBER DESCRIPTION PRICE (US$) ----------- ----------- ----------- [ * ] [ * ] [ * ]
CARDIOMETRICS WAVEWIRE(TM) PRESSURE GUIDE WIRES:
PART NUMBER DESCRIPTION PRICE (US$) ----------- ----------- ----------- [ * ] [ * ] [ * ]
[*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 18 ENDOSONICS/CARDIOMETRICS PRODUCTS AND PRICES (continued)
USAGE DISCOUNTS AVAILABLE 0.014" FLOWIRE(R) / WAVEWIRE(TM): ------------------------------------- 0.018" FLOWIRE(R): FLOWIRE(R)/ -------------------------- WAVEWIRE(TM) # OF FLOWIRE(R) # OF BOXES PRICE EACH BOXES PRICE EACH ---------- ------------ ----- ---------- 1-3 [ * ] 1-3 [ * ] 4-6 [ * ] 4-6 [ * ] 7-9 [ * ] 7-9 [ * ] 10+ [ * ] 10+ [ * ]
SMARTWIRE(R) DOPPLER GUIDE WIRES
UNIT PRICE EXTENDED PART NUMBER DESCRIPTION (US$) PRICE* (US$) - ----------- ----------- ---------- ------------ 1450J 0.014 OD SmartWire(R) "J" Tip [ * ] [ * ]
*NOTE: EXTENDED PRICE REPRESENTS FIVE (5) WIRES PER BOX All Products sales are ex-works Rijswijk, The Netherlands, except the Oracle(R) In-Vision(TM) Imaging System, FloMap(R) I and II Systems, SmartMap(R) System and WaveMap(R) System which are ex-works Rancho Cordova, California, USA. [*] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 19 EXHIBIT B DISTRIBUTION RIGHTS BY TERRITORY
Territory Distribution Rights - --------- ------------------- United Kingdom Full product line (includes EndoSonics and Cardiometrics products) East Block, excluding Poland, Czech Full product line (includes EndoSonics and Republic, Slovakia, Bosnia and Croatia Cardiometrics products) Scandinavia (Sweden, Norway, Denmark, Full product line (includes EndoSonics and Finland) Cardiometrics products) Baltic States (Estonia, Latvia, Lithuania) Full product line (includes EndoSonics and Cardiometrics products) Middle East (Lebanon, Syria, Jordan, Saudi Full product line (includes EndoSonics and Arabia, Kuwait, Qatar, Bahrain, United Cardiometrics products) Arab Emirates, Oman, Egypt) France EndoSonics products only Italy EndoSonics products only Turkey EndoSonics products only Israel EndoSonics products only
20 EXHIBIT C MINIMUM PURCHASE COMMITMENT AND INITIAL PURCHASE ORDER The following schedules ("1999 EndoSonics Plan" by country) set forth the minimum purchases of Products by Distributor required over the first 12 months of this Agreement for all geographic areas within the Territory. Purchases may be made by Distributor in advance of the time period specified to count towards future periods. System purchases include system placements by Distributor in connection with the distribution of the "JOSONICS Flex System", as stipulated in the IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement of even date. Non-cancelable purchase order: The following schedule specifies the non cancelable purchase order which Distributor shall place at the time of signing the Agreement. The quantity of Products on this purchase order shall count towards the Minimum Purchase Commitment as specified above. Delivery date: Prior to December 29, 1998.
EndoSonics Products Cardiometrics Products ------------------------ --------------------------------------- (Mega PV Flo Wave Flo Wave Territory Five-64(TM) Sonics(R) 0.018" FloMap Map II Map Wire Wire - ---------------------- ----------- --------- ------ ------- ------ ----- ---- ---- United Kingdom [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] East Bloc [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] France [ * ] [ * ] [ * ] Italy [ * ] [ * ] [ * ] Turkey [ * ] [ * ] Israel [ * ] Middle East [ * ] Scandinavia [ * ]
[ * ] CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 21 EXHIBIT D WARRANTY 1. SYSTEMS LIMITED WARRANTY NOTICE: EndoSonics reserves the right to make changes in its products in order to improve design or performance. Subject to the conditions and limitations on liability stated herein, EndoSonics warrants that Systems as so delivered shall materially conform to EndoSonics' then current specifications for Systems, for a period of one year from the date of delivery. ANY LIABILITY OF ENDOSONICS WITH RESPECT TO THE SYSTEM OR THE PERFORMANCE THEREOF UNDER ANY WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY WILL BE LIMITED EXCLUSIVELY TO SYSTEM REPAIR, REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN ENDOSONICS' OPINION IMPRACTICAL, TO REFUND THE PRICE PAID FOR THE SYSTEM. EXCEPT FOR THE FOREGOING, THE SYSTEM IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF FITNESS, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. FURTHER, ENDOSONICS DOES NOT WARRANT, GUARANTEE, OR MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE, OF THE SYSTEM OR WRITTEN MATERIALS IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY, OR OTHERWISE. Distributor understands that EndoSonics is not responsible for and will have no liability for any items or any services provided by any persons other than EndoSonics' authorized personnel. EndoSonics shall have no liability for delays or failures beyond its reasonable control. The happening of any one or more of the following events will void the warranty: 1 - Defects due to negligence, alteration, modification, installation or repair by anyone other than EndoSonics authorized personnel, or a representative of Distributor authorized by EndoSonics to repair the material. 2 - Abuse or misuse by end customer. 3 - Attempted or actual dismantling, disassembling, service or repair in a procedure not specifically authorized by EndoSonics. 4 - Operating the System in a manner that is not in conformance with purchase specifications and specifications contained in the Operator's manual, and/or supplements. 5 - Maintenance of the System which is not in accordance with procedures in the Operator's manual, and/or supplements. 6 - Repair, alteration or modification of the System in any way other than by EndoSonics' authorized personnel, or without EndoSonics' authorization. If claims under this warranty become necessary, and the System or components of the System are to be returned, Distributor shall contact EndoSonics for instructions and issuance of a Returned Materials Authorization number. The System or components 22 will not be accepted for warranty purposes unless the return has been authorized by EndoSonics. System parts or components repaired or replaced under warranty bear the same warranty expiration date as the original equipment. Consumable parts (including, but not limited to rechargeable batteries, etc.) are warranted only against defects in materials and workmanship. System parts purchased outside the original warranty period are warranted for a period of 90 days, subject to all of the restrictions contained in this Limited Warranty. Use of unauthorized replacement parts may void the warranty. In all cases, EndoSonics will be the sole judge as to what constitutes warrantable damage. 2. CATHETERS AND WIRES LIMITED WARRANTY Subject to the conditions and limitations on liability stated herein, EndoSonics warrants that catheters and wires, as so delivered, shall materially conform to EndoSonics' then current specifications for these catheters or wires upon receipt. ANY LIABILITY OF ENDOSONICS, WITH RESPECT TO CATHETERS OR WIRES OR THE PERFORMANCE THEREOF UNDER ANY WARRANTY, NEGLIGENCE, STRICT LIABILITY OR OTHER THEORY, WILL BE LIMITED EXCLUSIVELY TO CATHETER OR WIRE REPLACEMENT OR, IF REPLACEMENT IS INADEQUATE AS A REMEDY OR, IN ENDOSONICS' OPINION IMPRACTICAL, TO REFUND THE PRICE PAID FOR THE CATHETER OR WIRE. EXCEPT FOR THE FOREGOING, CATHETERS AND WIRES ARE PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION, ANY WARRANTY OF FITNESS, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE OR NON-INFRINGEMENT. FURTHER, ENDOSONICS DOES NOT WARRANT, GUARANTEE, OR MAKE ANY REPRESENTATIONS REGARDING THE USE, OR THE RESULTS OF THE USE, OF CATHETERS OR WIRES OR WRITTEN MATERIALS IN TERMS OF CORRECTNESS, ACCURACY, RELIABILITY, OR OTHERWISE. Distributor understands that EndoSonics is not responsible for and will have no liability for any items or any services provided by any persons other than EndoSonics' authorized personnel. EndoSonics shall have no liability for delays or failures beyond its reasonable control. Additionally, this warranty does not apply if: 1. A catheter or wire is used in a manner other than described by EndoSonics in the Directions for Use supplied with the catheter or wire. 2. A catheter or wire is used in a manner that is not in conformance with purchase specifications or specifications contained in the Directions for Use. 3. A catheter or wire is re-used or re-sterilized. 4. A catheter or wire carries an expired sterilization date. 5. A catheter or wire is repaired, altered or modified in any way by personnel other than EndoSonics authorized personnel, or without EndoSonics' authorization. All catheters and wires shall be inspected for obvious damage upon arrival. If catheters or wires have been damaged in transit, EndoSonics must be notified within 72 hours. If claims under this warranty become necessary, contact EndoSonics for instructions and issuance of a Returned Goods Authorization number, if a catheter or wire is to be 23 returned. Catheters or wires will not be accepted for warranty purposes unless the return has been authorized by EndoSonics. IN NO EVENT SHALL ENDOSONICS BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES DUE TO ANY CAUSE WHATSOEVER. No suit or action shall be brought against EndoSonics more than one year after the related cause of action has occurred. THE FOREGOING CONSTITUTES ENDOSONICS' SOLE LIABILITY AND DISTRIBUTOR'S SOLE REMEDY WITH RESPECT TO PRODUCTS SOLD BY ENDOSONICS. 24 EXHIBIT E ENDOSONICS EXTENDED MAINTENANCE AGREEMENT This Extended Maintenance Agreement is made and entered into this ________th day of __________, 1998, by and between EndoSonics Europe B.V., De Bruyn Kopsstraat 15, 2288 EC Rijswijk, The Netherlands (hereinafter referred to as "EndoSonics") and _________________________ (hereinafter referred to as "Customer"). The Extended Maintenance Agreement covers the following: Equipment: ----------------------------------------- Serial no.: ----------------------------------------- Period: , 1998 to , 1999 -------------- ----------- CONDITIONS OF EXTENDED MAINTENANCE AGREEMENT 1. CALL WINDOW 8:30 A.M. to 5:00 P.M. (Central European Time) Monday through Friday excluding holidays. 2. RESPONSE TIME 48 Hour Response Time during specified call window. 3. PAYMENT SCHEDULE Annually in advance. 4. TERM The Extended Maintenance Agreement shall be effective when signed by both parties. The initial term is twelve (12) months from the commencement date, unless modified on the face of the contract document. 5. AUTOMATIC RENEWAL At the end of each term, the Extended Maintenance Agreement shall be automatically renewed for twelve (12) months, unless terminated by either of the parties at least two (2) months prior to the expiry date. 6. ELIGIBILITY FOR SERVICE The Extended Maintenance Agreement shall only be valid as long as the equipment covered by it is properly installed, and is serviced by EndoSonics authorized personnel only. EndoSonics site environmental conditions must be met at all times. 7. SERVICE RESPONSIBILITIES OF ENDOSONICS 7.1. EndoSonics shall maintain the equipment in good condition and furnish service for calls received within the call window. Specifically, EndoSonics shall: 25 A. Provide scheduled planned maintenance and safety check one (1) time per year. Planned maintenance is to be scheduled two weeks in advance within the call window; excluding holidays. B. Provide response to requests for remedial service within the call window. Requests for service outside these hours will be provided on a best effort basis at an additional charge. C. Provide all expenses incurred by EndoSonics Technical Representative including airfare, lodging, and travel time fees. D. Provide original parts or parts of at least equal quality. E. Provide all applicable safety and reliability modifications at no charge. F. Provide all applicable software updates at no charge. 7.2. EndoSonics shall, at no additional cost to the customer, provide replacement equipment on loan, should EndoSonics fail to service or repair customer's equipment within a reasonable time period. 7.3. Parts not covered under this Agreement are: Supplies, Video Cassettes and Consumables. 8. RESPONSIBILITIES OF CUSTOMER Customer shall notify EndoSonics immediately of equipment malfunction and allow EndoSonics full unrestricted access to all equipment and areas in which the equipment is commonly operated. 9. CHARGES 9.1. The charge for Extended Maintenance during the initial term of this Agreement is US$ . 9.2 Payments of service charges are due forty-five (45) days from the date of the invoice. 9.3. All service calls received outside the call window are subject to a four (4) hour minimum charge and any additional hours necessary to complete the repair are based upon the overtime rates prevailing at the time. EndoSonics' overtime rates are: (a) one and one half (1.5) times the normal hourly rate after 5:00 P.M. and before 8:00 A.M. Monday through Friday and all day Saturday. (b) two (2) times the normal hourly rate on Sundays and scheduled holidays. 9.4. Charges are exclusive of, and Customer is responsible for, all sales, use, and like taxes where applicable. 10. The provisions of the Agreement shall be interpreted under the laws of The Netherlands. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. AGREED TO AND ACCEPTED Customer EndoSonics Europe B.V. Name: Name: Dr. J.P.C. de Weerd Title: Title: Managing Director Signature: Signature: EX-10.28 3 IVUS GUIDED STENT DELIVERY SYSTEM DEVELOPMENT 1 EXHIBIT 10.28 IVUS GUIDED STENT DELIVERY SYSTEM DEVELOPMENT, SUPPLY AND DISTRIBUTION AGREEMENT This IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement is made this 15th day of December, 1998, by and between EndoSonics Europe B.V., De Bruyn Kopsstraat 15, 2288 EC Rijswijk, The Netherlands ("EndoSonics"), a wholly owned subsidiary of EndoSonics Corporation, 2870 Kilgore Road, Rancho Cordova, CA 95670, USA, and JOMED N.V., Stravinskylaan 2001, P.O. Box 75640, 1070 AP Amsterdam, The Netherlands, and any of its wholly owned subsidiaries ("JOMED"). In consideration of the mutual promises and covenants contained herein, the parties agree as follows: 1. DEFINITIONS As used herein the following terms when used in their capitalized form shall have the following meanings: 1.1. "Agreement" shall mean this IVUS Guided Stent Delivery System Development, Supply and Distribution Agreement, as amended, modified, or supplemented from time to time by the parties as set forth herein. 1.2. "Confidential Information" shall have the meaning provided in Section 0 hereof. 1.3. "Development Plan" means the development program containing a schedule of milestones for the completion of the Product as shall be mutually agreed upon in writing between JOMED and EndoSonics during the Specification Phase. 1.4. "Distribution Agreement" means the agreement so named of even date herewith between EndoSonics Europe B.V. and JOMED N.V. 1.5. "Dollars" or "$" shall mean United States Dollars. 1.6. "Product Specifications" shall have the meaning set forth in Section 0 hereof. 1.7. "Product" means the products to be developed and manufactured under this Agreement. The specific product and design specifications will be defined and mutually agreed upon in writing by the parties during the Specification Phase. 1 2 1.8. "RGA Number" shall have the meaning set forth in Section 0 hereof. 1.9. "Specification Phase" shall have the meaning set forth in Section 0 hereof. 1.10. "Subassembly" shall mean EndoSonics' catheter shaft and intravascular ultrasound scanner, which is suitable for integrating with JOMED's balloons and stents. 1.11. "Term" shall have the meaning provided in Section 0 hereof. 1.12. "Territory" shall have the meaning set forth in Exhibit 4. 2. DEVELOPMENT 2.1. Specification Phase: EndoSonics and JOMED shall use best efforts to jointly define, and agree in writing on, the product specifications ("Product Specifications") and Development Plan within a period of thirty (30) days following the date of this Agreement. If EndoSonics and JOMED are unable to agree on Product Specifications or the Development Plan either party shall have the right to terminate this Agreement without any further obligations. 2.2. Project Manager: EndoSonics and JOMED shall each appoint a Project Manager to act as contact persons for the exchange of information during the development program. The Project Managers shall provide progress reports on a regular basis. Such reports shall enable EndoSonics and JOMED to review the progress and activities carried out under the Development Plan. 2.3. Development Plan: EndoSonics and JOMED shall use best efforts to carry out the Development Plan for the Product in accordance with the terms of the Development Plan and within all agreed upon timetables and milestones set forth therein. Each party shall be responsible for its own expenses and development costs under the Development Plan. Either party's failure to meet the agreed upon milestones for a period of more than ninety (90) days shall constitute a material breach and basis for termination of this Agreement under Section 0. 2.4. Development Support: Each party shall use best efforts to timely provide the other with all support required in accordance with the Development Plan. Any material change in the Development Plan shall be agreed to in writing between EndoSonics and JOMED. 2.5. Disclosure of Information: Each party shall use best efforts to assist the other to obtain, and make available to the other on a timely basis, all information needed for the successful completion of 2 3 the Development Plan, including, but not limited to, results of medical and clinical trials and results of technical, regulatory and safety studies and evaluations performed by such party. All disclosures hereunder are subject to the confidentiality provisions of Section 0 below. 3. MANUFACTURING; PURCHASE OF SUBASSEMBLIES 3.1. Manufacturing Scope: The Product shall consist of a JOMED balloon and stent, incorporated into a modular EndoSonics intravascular ultrasound catheter. During the Term, EndoSonics and JOMED shall mutually review and agree on the most appropriate logistics of the manufacturing process. The initial manufacturing logistics, and the resulting obligations between the parties are set forth in Exhibit 1. Under the Medical Device Directive 93/42/EWG, JOMED shall be considered as the manufacturer of Product. 3.2. Purchase of Subassemblies: EndoSonics shall supply JOMED with all of those quantities of Subassemblies as ordered by JOMED pursuant to this Agreement. The Subassemblies shall be packaged by EndoSonics in its standard packaging configuration and shall be shipped to JOMED non-sterile. Nothing contained herein shall restrict the right of EndoSonics to sell Subassemblies to other parties or to utilize the Subassemblies in other products. JOMED agrees that it is buying the Subassemblies solely for incorporation in the Product and that it will sell such Product only in accordance with the distribution rights as set forth in Section 0. 3.3. Prices: Prices to JOMED for Subassemblies shall be as set forth in Exhibit 2.. The price for each Subassembly shall include any labor and overhead charges incurred for the mounting of a JOMED balloon onto an EndoSonics catheter. EndoSonics shall provide at least 60 days prior written notice of changes in said prices. Price changes shall not affect unfulfilled purchase orders accepted by EndoSonics prior to the effective date of such changes. 3.4. Forecasts: At least thirty (30) days prior to the beginning of each calendar month commencing with the month of February 1999, JOMED shall provide EndoSonics with a written forecast of JOMED's expected order requirements for Subassemblies during each of the following six (6) months. All such forecasts shall be good faith estimates of JOMED's requirements; provided, however, that JOMED shall be obligated to purchase all Subassemblies specified for the initial month of each such forecast, and provided further, that JOMED's subsequent order for the second month of each such forecast shall not deviate by more than 30% from said forecast. 3 4 The initial forecast for 1999 as agreed between the parties is attached as Exhibit 3. 3.5. Orders: JOMED shall place any binding orders for Subassemblies by written or electronic purchase order (or by any other means agreed to by the parties) to EndoSonics. Such purchase orders shall set forth the desired date of delivery with respect to the Subassemblies ordered and shall be placed at least thirty (30) days prior to such desired date of delivery, in accordance with the foregoing Section 0. No order shall be binding upon EndoSonics until accepted by EndoSonics in writing. EndoSonics shall use best efforts to deliver Subassemblies at the times specified in its written acceptance of JOMED's purchase orders. 3.6. Payment Terms: All invoices submitted by EndoSonics shall be payable within 60 days net, 30 days -1% discount, from the date of such invoices. Any invoice which is not paid in a timely manner shall accrue interest until paid at a rate equal to the lesser of 1.5% interest per month or the highest rate permitted by law. 3.7. Shipment: EndoSonics shall ship, F.O.B. EndoSonics' factory, at JOMED's cost to any location chosen by JOMED utilizing carriers approved by JOMED. EndoSonics will pack all Subassemblies ordered hereunder in a manner suitable for shipment and sufficient to withstand the effects of shipping, including handling during loading and unloading. Title to the Subassemblies sold hereunder shall pass to JOMED upon delivery to a carrier designated by JOMED, whereupon JOMED shall assume all risk of loss. 3.8. Pilot Manufacturing: Immediately upon the completion of the development program, EndoSonics and JOMED shall manufacture a total of 200 Products intended to be used in the Registry as set forth under Section 0. 3.9. Defective Subassemblies: Claims concerning any failure of any Subassembly to meet the warranties set forth in Section 0 below shall be promptly made by JOMED following such failure being discovered by JOMED. At EndoSonics' request and after EndoSonics' issuance of a Returned Goods Authorization number ("RGA Number"), JOMED shall forward for inspection all Subassemblies that are the subject of JOMED's claim. EndoSonics shall inspect such Subassemblies and, if it concurs with JOMED's claim, shall, within fifteen (15) days from the date EndoSonics concurs with JOMED's claim, replace the defective Subassemblies without any cost to JOMED or refund the purchase price. If either party does not agree with the other party's decision regarding such claim and the parties are unable to resolve their differences within fifteen (15) days of such initial claim, then either party may refer the matter to an independent specialized firm of international reputation agreeable to both parties for 4 5 final analyses within a thirty (30) day period, which shall be a final resolution of such issue, binding on both parties hereto. No Subassemblies shall be returned without the prior written consent of EndoSonics, as evidenced by the issuance of an RGA Number. 3.10. Improvements and Enhancements; Change Notices: EndoSonics shall notify JOMED of any material changes or modifications which may improve or enhance the performance of the Subassemblies and shall use best efforts to timely incorporate such changes and modifications in future deliveries of said Subassemblies. In addition, EndoSonics shall provide JOMED with prompt notice of any change or modification to the Subassemblies (or any change or modification to the Specifications) to be implemented or made by EndoSonics, to the extent such change or modification may affect the manner in which JOMED handles the Subassemblies or markets or sells Products incorporating the Subassemblies. 4. MINIMUM PURCHASE COMMITMENT During the first 12 months of the Term, JOMED shall purchase a minimum amount of [*] Subassemblies (the "Minimum Purchase Commitment"). For the purposes of this provision, a "purchase" of Subassemblies shall mean EndoSonics' shipment of such Subassemblies on or before the last day of the agreed upon time period. JOMED's failure to meet the Minimum Purchase Commitment shall constitute a material breach and basis for termination of this Agreement under Section 0. JOMED's purchase order 1/98SE dated 30 September 1998 for * pilot-production catheter Subassemblies shall count towards the Minimum Purchase Commitment as specified above. 5. REGULATORY COMPLIANCE; QUALITY ASSURANCE AND CORRECTIVE ACTIONS 5.1. Regulatory Compliance: As the finished device manufacturer, JOMED shall be responsible for fulfillment of all regulatory obligations including, but not limited to, obtaining the CE Mark, filing medical device reports and compliance with all other pre- and post-marketing governmental requirements. JOMED shall use best efforts to timely fulfill said regulatory obligations. At the request of JOMED, EndoSonics shall cooperate to permit cross-referencing by the Food and Drug Administration ("FDA") of data from the FDA master file for the Subassembly or parts thereof, and timely provide such information as may be necessary to enable JOMED to comply fully with all applicable regulatory requirements ("Regulatory Information") to a mutually agreed upon notified body, provided that such notified body has agreed in writing not to disclose such Regulatory Information to JOMED or any third party except to a competent governmental authority in connection with a regulatory process. Third 5 6 party costs and expenses incurred in connection with the retention of any notified body and providing such information shall be shared between the parties. [ * ] COFIDENTIAL TREATMENT REQUESTED. COFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 5.2. Quality Assurance: With respect to the manufacturing, supply and market introduction of Product, EndoSonics and JOMED have entered into a Quality Assurance Agreement which is hereby incorporated as Exhibit 5.. 5.3. Corrective Actions: In the event any governmental agency having jurisdiction shall request or order, or if JOMED shall determine to undertake any corrective action with respect to any Product which incorporates a Subassembly, including any recall, corrective action or market action, and the cause or basis of such recall or action is attributable to a fault of JOMED, then JOMED shall be liable, and shall reimburse EndoSonics, for the reasonable costs of such action. In the event such recall is due to the fault of EndoSonics, such costs shall be the responsibility of EndoSonics. 6. DISTRIBUTION 6.1. Distribution rights: During the Term, and provided that the Development Plan has been successfully completed, EndoSonics and JOMED shall mutually agree on the geographic territories in which the Product shall be distributed and on the most appropriate distribution channels for each of these territories. The initial territories and distribution channels are set forth in Exhibit 4. Neither party shall appoint any distributor, sales agent or other representative with respect to the Product within or outside of the Territory, or shall solicit any business from customers outside of the Territory, without the prior written consent of the other party. 6.2. Product Transfer Price: In the event EndoSonics wishes to distribute Product through its direct sales force or through a third party distributor other than JOMED, the parties shall negotiate in good faith a reasonable transfer price to be paid by EndoSonics to JOMED for specified quantities of the Product to be purchased by EndoSonics. Such transfer price shall in no event be less favorable than the price afforded by JOMED to its most favored customer. 6.3. Exclusive Arrangement: During the first 12 months of this Agreement, EndoSonics shall not enter into agreements with any other parties for the sale of a product for use in the coronary 6 7 intravascular ultrasound market, which is substantially similar to Product, in the Territory. Notwithstanding the above, EndoSonics shall be free to market any products, similar to Product, incorporating a balloon and stent manufactured by EndoSonics, its subsidiaries, affiliates, or any other party in which EndoSonics has a controlling interest. 6.4. Product Labeling and Promotion: JOMED shall distribute any Product incorporating the Subassembly under a joint EndoSonics and JOMED label, clearly identifying the corporate names of each of the parties. Similarly, JOMED shall clearly identify the corporate names of each of the parties in connection with the promotion, advertising or distribution of any Product incorporating the Subassembly. 6.5. Product Registry: Upon completion of the pilot manufacturing of the first 200 Products as set forth in Section 0, JOMED shall initiate a Registry including up to 20 centers in Europe which will each complete a total of 10 clinical cases using the Product. For each clinical case, a case evaluation form shall be completed. The information from the completed case evaluation forms shall be shared with EndoSonics. 7. TERM - TERMINATION 7.1. Term: The term ("Term") of this Agreement shall commence the date hereof, and, unless terminated sooner pursuant to the provisions of Section 0, shall terminate two (2) years from the date hereof; provided, however, that this Agreement may be extended upon the mutual written consent of the parties. 7.2. Termination of Agreement: This Agreement shall terminate upon the happening of any of the following events : (a) either party's failure to cure the breach of any material term, covenant, or condition of this Agreement within 60 days after the breaching party receives notice of such breach; (b) immediately upon written notice to one party upon a material change in control of the other party including, without limitation, the acquisition or merger of the other party; (c) immediately upon either parties' cessation to function as a going concern; (d) immediately upon either parties' dissolution, liquidation, insolvency, bankruptcy, assignment for the benefit of creditors or admission in writing of its inability to pay its debts as they mature. 7 8 7.3. Obligations upon Termination or Expiration: Upon termination of this Agreement for other than JOMED's breach, EndoSonics shall continue to fulfill all orders for Subassemblies accepted by EndoSonics prior to the date of termination. If this Agreement is terminated by JOMED, pursuant to Section 0, JOMED shall have no further obligation to EndoSonics except with respect to payment for Products accepted by JOMED or shipped by EndoSonics prior to such termination. In the event of termination by either party in accordance with any of the provisions of this Agreement, neither party shall be liable to the other because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of EndoSonics or JOMED. Termination shall not, however, relieve either party of obligations incurred prior to the termination. Upon termination or expiration of this Agreement, all rights granted by EndoSonics to JOMED shall cease immediately, except that JOMED may sell, market or distribute any Products for a period of three months following such termination. 8. PROPRIETARY RIGHTS AND THIRD PARTY INFRINGEMENT 8.1. Proprietary Rights: Except as expressly agreed in writing between the parties, all proprietary rights, title, and interest (including all patent rights, copyrights, trade secret rights and other intellectual property rights throughout the world ("Proprietary Rights")) with respect to the Product, including, but not limited to, all inventions (whether or not patentable), know-how, discoveries, ideas and improvements thereof, which are (a) developed or conceived solely by employees of JOMED as a result of the work performed hereunder shall be owned by JOMED; (b) developed or conceived solely by employees of EndoSonics as a result of the work performed hereunder shall be owned by EndoSonics; (c) inseparably contributed by employees of both parties shall be jointly owned by EndoSonics and JOMED. 8.2. Third Party Infringement: (a) JOMED shall promptly notify EndoSonics if it becomes aware of any infringement by a third party of any patent owned or otherwise controlled by EndoSonics. Any decision concerning the taking of any action against such infringer shall be solely that of EndoSonics. In the event EndoSonics decides to take any such action, EndoSonics shall bear all expenses of any suit brought by it based upon such infringement and shall retain all damages or other monies awarded or received in settlement of such suit. 8 9 (b) EndoSonics shall promptly notify JOMED if it becomes aware of any infringement by a third party of any patent owned or otherwise controlled by JOMED. Any decision concerning the taking of any action against such infringer shall be solely that of JOMED. In the event JOMED decides to take any such action, JOMED shall bear all expenses of any suit brought by it based uponsuch infringement and shall retain all damages or other monies awarded or received in settlement of such suit. 9. CONFIDENTIALITY During the Term it is anticipated that the parties shall disclose to each other confidential or proprietary information, including but not limited to trade secrets, know-how, documentation, pre-clinical and clinical data, product development plans, specifications, forecasts, customer information, notes, reports, models, and samples ("Confidential Information"). Only such information that is marked or labeled by a party as "Confidential Information" shall be considered Confidential Information. If a party orally transmits information that it deems to be of a confidential nature, such party shall, within thirty (30) days from the transmittal thereof, summarize such information in a written form and mark such information "Confidential" and provide a copy of such writing to the other party. The duty of confidentiality set forth herein shall not apply to information that: (a) is, at the time of disclosure, in the public domain and generally available; (b) after disclosure, enters the public domain except where such entry is a direct result of a breach of this Agreement; (c) prior to disclosure, was already known to the party receiving such information, as evidenced by its written records; (d) subsequent to disclosure, is obtained from a third party in possession of such information and not under a contractual or fiduciary obligation to keep such information in confidence; (e) is developed by the receiving party in the course of work entirely independent of any disclosure hereunder by employees without access or use of the disclosing party's Confidential Information and such development can be documented to the reasonable satisfaction of the other party hereto; (f) is filed with any governmental or regulatory authority to the extent required or desirable to secure governmental or regulatory approval for marketing of the Product (provided the receiving party shall first notify the disclosing party of the extent of the proposed disclosure and seek to limit disclosure and to obtain confidential treatment) and (g) is provided to pre-clinical and clinical investigators where necessary or desirable for their information to the extent normal and usual in the custom of the trade and under a confidentiality agreement with essentially the same confidentiality provisions contained in this Section 0; 9 10 (h) is disclosed pursuant to any judicial or governmental requirement or order. Except as expressly allowed herein, the receiving party shall hold in confidence and not use or disclose any Confidential Information of the disclosing party and shall similarly bind its employees in writing. All Confidential Information heretofore disclosed in writing by either party, including any Confidential Information which may be exchanged between the parties during the term of this Agreement, shall be deemed to have been disclosed under this Agreement and shall be subject to the provisions of this Section 0. 10. CLAIMS AND WARRANTS 10.1. Product Claims: JOMED shall limit claims of safety and efficacy of a Subassembly to those statements that EndoSonics itself utilizes in connection with its sale of Products which incorporate said Subassemblies. JOMED shall promptly notify EndoSonics of any customer complaints and shall cooperate with EndoSonics in the resolution of such complaints. 10.2. EndoSonics Subassembly Warrants: EndoSonics represents and warrants to JOMED that all Subassemblies supplied in connection with this Agreement shall, at the time of delivery to JOMED, (i) meet the Product Specifications, (ii) be produced in compliance with good manufacturing practices and (iii) be in compliance with all applicable laws and regulations applicable to the manufacture of the Subassemblies. In addition, EndoSonics represents and warrants to JOMED that, as of the date hereof, it is aware of no patent or patent applications, not already known to JOMED and not licensed to JOMED or EndoSonics, owned by a third party that would present an issue of patent infringement with respect to the manufacture, use or sale of the Subassemblies supplied hereunder, which issue of patent infringement would also be present in the manufacture, use or sale of such Subassemblies without such Subassemblies ever being incorporated into a product by JOMED. THE FOREGOING WARRANTIES ARE THE SOLE AND EXCLUSIVE WARRANTIES OFFERED BY ENDOSONICS REGARDING SUBASSEMBLIES SUPPLIED HEREUNDER. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE DISCLAIMED. IN NO EVENT SHALL ENDOSONICS BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL OR PUNITIVE DAMAGES (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS) ARISING OUT OF A BREACH OF WARRANTY OR OTHER OBLIGATION UNDER THIS AGREEMENT. JOMED shall make no warranties or claims with respect to any Subassemblies that exceed the warranties made by EndoSonics to JOMED herein or the claims that are utilized by EndoSonics in connection with its sale of products incorporating the Subassemblies. 10 11 10.3. JOMED Product Warrants: JOMED represents and warrants to EndoSonics that all Product manufactured in connection with this Agreement shall (i) meet the Product Specifications, (ii) be produced in compliance with good manufacturing practices and (iii) be in compliance with all applicable laws and regulations applicable to the manufacture of the Product. In addition, JOMED represents and warrants to EndoSonics that, as of the date hereof, it is aware of no patent or patent applications, not already known to EndoSonics and not licensed to JOMED or EndoSonics, owned by a third party that would present an issue of patent infringement with respect to the manufacture, use or sale of the Product manufactured hereunder, which issue of patent infringement would also be present in the manufacture, use or sale of such Product without such Subassemblies ever being incorporated into a product by JOMED. THE FOREGOING WARRANTIES ARE THE SOLE AND EXCLUSIVE WARRANTIES OFFERED BY JOMED REGARDING PRODUCT MANUFACTURED HEREUNDER. ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, ARE DISCLAIMED. IN NO EVENT SHALL JOMED BE LIABLE FOR ANY INCIDENTAL, INDIRECT, SPECIAL OR CONSEQUENTIAL OR PUNITIVE DAMAGES (INCLUDING WITHOUT LIMITATION, LOSS OF PROFITS) ARISING OUT OF A BREACH OF WARRANTY OR OTHER OBLIGATION UNDER THIS AGREEMENT. 11. INDEMNIFICATION 11.1. Indemnification by JOMED: Except with respect to any of the following that arises from gross negligence or willful misconduct of EndoSonics or its agents and subject to Section 0, JOMED shall indemnify, defend and hold harmless EndoSonics, its directors, officers, employees, customers, representatives and agents from and against any and all claims, suits, awards, losses, damages, demands, costs, fees and expenses incurred by EndoSonics (including reasonable attorney's fees), and other liabilities asserted by parties, both governmental and non-governmental, resulting from or arising out of (a) any misrepresentation of JOMED contained herein or breach of any warranty made by JOMED; (b) any material breach or violation of this Agreement by JOMED; (c) the material inaccuracy of any representation of the Product made by JOMED; or (d) a claim that the JOMED balloon and/or stent provided under this Agreement by JOMED individually or in combination infringes any patent. In the event the balloon and/or stent provided by JOMED under this Agreement, is subject to a claim of infringement, JOMED may, at its own expense and at its option, either (a) procure for EndoSonics the right to continue using said balloon and/or stent, (b) modify them to become non-infringing, or (c) substitute another interchangeable balloon and/or stent with substantially the same performance but which is non-infringing. 11.2. Indemnification by EndoSonics: Except with respect to any of the following that arises from the gross negligence or 11 12 willful misconduct of JOMED or its agents and subject to Section 0, EndoSonics shall indemnify, defend and hold harmless JOMED, its directors, officers, employees, customers, representatives and agents from and against any and all claims, suits, awards, losses, damages, demands, costs, fees and expenses (including reasonable attorneys' fees), and other liabilities asserted by third parties, both governmental and nongovernmental, resulting from or arising out of (a) any misrepresentation of EndoSonics contained herein or breach of any warranty made by EndoSonics; (b) any material breach or violation of this Agreement by EndoSonics; (c) the material inaccuracy of any representation of the Subassemblies made by EndoSonics; or (d) a claim that EndoSonics' Subassembly provided under this Agreement infringes any patent. In the event the Subassembly provided by EndoSonics under this Agreement, or any part thereof, is subject to a claim of infringement, EndoSonics may, at its own expense and at its option, either (a) procure for JOMED the right to continue using said Subassembly, (b) modify the Subassembly to become non-infringing, or (c) substitute another interchangeable Subassembly with substantially the same performance but which is non-infringing. 11.3. Limitations to Indemnity: The indemnities of Sections 0 and 0 shall not apply (a) if the indemnified party fails to give the indemnifying party prompt notice of any claim it receives and such failure materially prejudices the indemnifying party, or (b) unless the indemnifying party is given the opportunity to approve any settlement. Furthermore, the indemnifying party shall not be liable for attorneys' fees or expenses of litigation of the indemnified party unless the indemnified party gives the indemnifying party the opportunity to assume control of the defense or settlement. In addition, if the indemnifying party assumes such control, it shall only be responsible for the legal fees and litigation expenses of the attorneys it designates to assume control of the litigation. In no event shall the indemnifying party assume control of the defense of the indemnified party without the consent of the indemnified party (which consent shall be given or not at its sole discretion). 12. MISCELLANEOUS 12.1. Relationship of Parties: The relationship of JOMED to EndoSonics hereunder shall be solely that of an independent contractor. JOMED and EndoSonics each acknowledge and agree that neither JOMED nor EndoSonics is an employee, employer, agent, partner, or joint venturer of the other. Neither JOMED nor EndoSonics shall have or hold itself as having the right or authority to assume or create any obligation or responsibility, whether express or implied, on behalf of or in the name of the other, except with the express written authority of the other. 12 13 12.2. Notices: All notices, requests, demands and other communications required or permitted to be given hereunder shall be in writing, shall be deemed to have been duly given when delivered in person, or when sent by telex or telecopy or other facsimile transmission (with the receipt confirmed), or on the fifth business day after posting thereof by registered or certified mail, return receipt requested, prepaid and addressed as follows (or such other address as the parties may designate by written notice in the manner of aforesaid): If to JOMED: JOMED International AB Drottninggatan 94 S-25221 Helsingborg Sweden Attention: T. Peters, President Telephone: +46-42-490.6000 Telefax: +46-42-490.6001 If to EndoSonics: EndoSonics Europe B.V. P.O. Box 1178 2280 CD Rijswijk The Netherlands Attention: Dr. J.P.C. de Weerd, Managing Director Telephone: +31-70-307.3929 Telefax: +31-70-307.3922 12.3. Governing Law: This Agreement shall be governed by and construed in all respects in accordance with the laws of The Netherlands. 12.4. Non-Assignment: This Agreement may not be assigned by either party without the prior written consent of the other party. 12.5. Entire Agreement: This Agreement sets forth the entire understanding of the parties with respect to the subject matter hereof. This Agreement supersedes all prior representations, agreements and understandings among the parties with respect to such subject matter. 12.6. Remedies Cumulative: The rights, powers and remedies set forth herein are cumulative and shall be in 13 14 addition to any and all other rights, powers and remedies provided by law. The exercise of any right or remedy hereunder shall not in any way constitute a cure under this Agreement, or prejudice either party in the exercise of any of its rights under this Agreement or law. 12.7. Attorneys' Fees: If litigation between the parties arises out of or relates to this Agreement, the prevailing party of any such litigation shall, for as long as allowed by the law and jurisdiction ruling the litigation, be entitled to recover from the other party its reasonable attorneys' and legal assistants' fees and other costs incurred in such litigation. 12.8. Amendment: No changes or amendments or alterations shall be effective unless in writing and signed by all parties hereto. 12.9. Waiver: No waiver of any default in the performance of any of the duties or obligations arising out of this Agreement shall be valid unless in writing and signed by the waiving party. Waiver of any one default shall not constitute or be construed as creating waiver of any other default or defaults. No course of dealing between the parties shall operate as a waiver or preclude the exercise of any rights or remedies under this Agreement. Failure on the part of either party to object to any act or failure to act of the other party, or declare the other party in default, regardless of the extent of such default, shall not constitute a waiver by the party of its rights hereunder. 12.10. Severability: If any provision of this Agreement shall be held to be unenforceable in whole or in part, then the invalidity of such provision shall not be held to invalidate any other provision herein and all other provisions shall remain in full force and effect. 12.11. Force Majeure: No delay or failure of EndoSonics or JOMED to perform any of their respective obligations under this Agreement shall be considered a breach of this Agreement if it results from any cause beyond the control of EndoSonics or JOMED, as the case may be, including, without limitation, any act of God, earthquake, hurricane, fire, flood, strike, lockout or other dispute, natural catastrophe, severe weather or public emergency, insurrection, riot, war, transportation shortage, or actions of governmental authorities. 12.12. Survival of Sections: 14 15 The obligations set forth in Sections 0, 0, 0, 0, 0, 0, and 0 shall survive the termination of this Agreement. 12.13. Counterparts: This Agreement may be executed in one or more counterparts, including facsimile counterparts, each of which shall be deemed an original and all which together shall constitute one and the same agreement. 12.14. Captions: The captions contained in this Agreement are inserted only as a matter of convenience and in no way define, limit or extend the scope or intent of this Agreement or any provision hereof. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. EndoSonics Europe B.V. JOMED N.V. - -------------------------- --------------------------- Dr. J.P.C. de Weerd T. Peters Managing Director President 15 16 EXHIBIT 1. INITIAL MANUFACTURING LOGISTICS 1. Responsibilities of the Parties: In order to minimize time-to-market for the JOSONICS Flex System, the parties have agreed on the following initial manufacturing logistics: (a) JOMED will ship its balloons to EndoSonics. (b) EndoSonics will integrate said balloons in its modular intravascular ultrasound catheters, and ship fully tested Subassemblies to JOMED. (c) JOMED will crimp its Flex Stent onto the balloon portion of the Subassembly, final test the Product, package it and have it sterilized. 2. Supply of JOMED balloons: Concurrent with JOMED placing a binding purchase order for Subassemblies, pursuant to Section 0 of this Agreement, JOMED shall supply EndoSonics, free of charge, with all balloons required to fill JOMED's purchase order for Subassemblies plus 10%, to allow for manufacturing scrap. If EndoSonics' manufacturing scrap exceeds 10%, EndoSonics shall order additional balloons from JOMED, and JOMED shall supply said balloons to EndoSonics at its manufacturing cost. Prior to February 1, 1999, JOMED shall supply EndoSonics, free of charge, with an initial manufacturing stock of 400 balloons. EndoSonics agrees that it is obtaining the balloons solely for incorporation in the Subassemblies and that it will sell such Subassemblies to JOMED only in accordance with the terms of this Agreement. 3. Balloon Shipments: JOMED shall ship its balloons, F.O.B. JOMED's factory, at EndoSonics' cost to any location agreed between the parties, utilizing carriers approved by EndoSonics. JOMED shall package all balloons hereunder in a manner suitable for shipment and sufficient to withstand the effects of shipping, including handling during loading and unloading. 4. Defective Balloon Claims: Claims concerning any failure of any balloons to meet the Product Specifications shall be promptly made by EndoSonics following such failure being discovered by EndoSonics. At JOMED's request and after JOMED's issuance of a Returned Goods Authorization number ("RGA Number"), EndoSonics shall forward for inspection all balloons that are the subject of EndoSonics' claim. No balloons shall be returned without the prior written consent of JOMED, as evidenced by the issuance of an RGA Number. JOMED shall use best efforts to timely resolve any balloon deficiencies and 16 17 replace defective balloons, and shall proportionally excuse EndoSonics from meeting its delivery schedule pursuant to Section 0 of this Agreement. 5. Improvements and Enhancements; Change Notices: JOMED shall notify EndoSonics of any material changes or modifications which may improve or enhance the performance of the balloons and shall use best efforts to timely incorporate such changes and modifications in future deliveries of said balloons. In addition, JOMED shall provide EndoSonics with prompt notice of any change or modification to the balloons (or any change or modification to the Specifications) to be implemented or made by JOMED, to the extent such change or modification may affect the manner in which EndoSonics handles the balloons or incorporates these into the Subassemblies. 17 18 EXHIBIT 2. ENDOSONICS MODULAR IVUS CATHETER SUBASSEMBLY PRICING
UNITS PRICE (US$) - ----- ----------- [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ] [ * ]
18 19 [ * ] COFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION 19 20 EXHIBIT 3. ENDOSONICS MODULAR IVUS CATHETER INITIAL FORECAST [ * ] 20 21 [ * ] COFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTION HAS BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION EXHIBIT 4. JOSONICS FLEX SYSTEM TERRITORY AND DISTRIBUTION CHANNEL
TERRITORY DISTRIBUTION CHANNEL - --------- -------------------- Baltic States (Estonia, Latvia, - JOMED Distributor Lithuania) Turkey - JOMED Distributor Middle East (Lebanon, Syria, Jordan, - JOMED Direct Organization / Distributors Saudi Arabia, Kuwait, Qatar, Bahrain, United Arab Emirates, Oman, Egypt) Russia - JOMED Direct Organization / Distributor Benelux - JOMED Direct Organization France - JOMED Direct Organization Germany - JOMED Direct Organization Hungary - JOMED Direct Organization Israel - JOMED Direct Organization Italy - JOMED Direct Organization Scandinavia (Sweden, Norway, Denmark, - JOMED Direct Organization Finland) United Kingdom - JOMED Direct Organization Spain - Joint distributor Diagnostic Grifols - JOMED's distributor Cormax (t.b.d.) Czech Republic - Joint distributor A-Care Slovakia - Joint distributor A-Care Portugal - EndoSonics' distributor Material Hospitalar Lda. Austria - EndoSonics' distributor Euromed Bosnia - EndoSonics' distributor Euromed Croatia - EndoSonics' distributor Euromed Switzerland - EndoSonics' distributor Euromed
Distribution rights in the Territory include the right to sell or place Oracle(R) Intracoronary Imaging Systems with In-Vision(TM) option, ChromaFlo and/or 3D at customer sites in conjunction with the sale of JOSONICS Flex Systems to said sites. 21 22 EXHIBIT 5. QUALITY ASSURANCE AGREEMENT This Agreement is made this 15th day of December, 1998 between EndoSonics Europe B.V., a company incorporated under the laws of The Netherlands with its principal office located in Rijswijk, The Netherlands, represented by Dr. J.P.C. de Weerd (hereinafter referred to as the "Supplier"). and JOMED / SITOmed GmbH, a company incorporated under the laws of Germany with its principal office located in Unterschlei(beta)heim, Germany, represented by Mr. Siegfried Einhellig (hereinafter referred to as the "Manufacturer"). 1. This Agreement governs the manufacturing, supply and market introduction of the "VisionStent", in accordance with the Medical Device Directive 93/42/EWG. The "VisionStent" is manufactured per the specifications set forth in attached Technical Information Sheet. The "VisionStent" shall consist of Manufacturer's balloon and stent, incorporated into Supplier's modular intravascular ultrasound catheter ("Modular Catheter"). 2. The Manufacturer, according to the Medical Device Directive 93/42/EWG, is JOMED Implantate GmbH. 3. This Agreement shall commence the date hereof and may be terminated at the end of any calendar quarter by either party giving the other party at least three (3) months written notice in advance of said date. 4. The "VisionStent" is a class III device according to Medical Device Directive 93/42/EWG, Appendix IX. The intended use and the specification will be described by a manufacturing product file determined by the manufacturer. The essential requirements according to Medical Device Directive 93/42/EWG for the Modular Catheter, as well as the production of the Modular Catheter, are the responsibility of the Supplier. 5. The Modular Catheter documentation according to Medical Device Directive 93/42/EWG, Appendix II, is provided by the Supplier. These documents will be 22 23 stored for the duration of at least 5 years after the final circulation and shall be presented on request to the notified body and the competent national authorities. This obligation exists independent of the validation of this Agreement. The "VisionStent" final product documentation and filing thereof will be the responsibility of the Manufacturer, in accordance with the Medical Device Directive 93/42/EWG. 6. Manufacturer and Supplier shall each build up a QM-System and shall maintain this system according to standard EN ISO 9001, EN 46001 and the Medical Device Directive 93/42/EWG, Appendix II. The QM-Systems of both parties shall be certified by a notified body. Each party shall promptly inform the other, should there be any changes in the certification of the other party. 6. Upon notification of any risk and/or malfunction (incident, near incident) concerning the product which could result in death or serious injury to a patient, user or other person or lead to a product recall (according to the guidelines of the Medical Device Vigilance System, MEDDEV 2.1271 - rev. 3), each party shall inform the other immediately. In such event both parties shall promptly define, agree on, and implement preventive and corrective actions and shall inform the designated competent national authorities accordingly. 7. The Supplier shall inform the Manufacturer immediately of any changes to the Modular Catheter and shall support these changes with suitable documentation to the Manufacturer. Any decision to implement design changes shall be made by the Manufacturer in consultation with the Supplier. The documentation for such design changes, if any, shall be in accordance with the Medical Device Directive 93/42/EWG. 8. The Supplier agrees to support any Quality audits by the notifying body, the competent authority and/or the Manufacturer, provided proper advance notification is given. EndoSonics Europe B.V. JOMED GmbH Rijswijk, The Netherlands Unterschlei(beta)heim - ---------------------------- ------------------------------ Dr. J.P.C. de Weerd S. Einhellig 23 24 Managing Director Vice President Sr. Vice President Sales & Marketing Europe 24 EX-10.29 4 CERTIFICATE OF OWNERSHIP AND MERGER 1 EXHIBIT 10.29 CERTIFICATE OF OWNERSHIP AND MERGER MERGING MICROSOUND CORPORATION (A DELAWARE CORPORATION) INTO ENDOSONICS CORPORATION (A DELAWARE CORPORATION) (PURSUANT TO SECTION 253 OF THE DELAWARE GENERAL CORPORATION LAW) Endosonics Corporation, a corporation organized and existing under the laws of the State of Delaware (the "Company"), does hereby certify: 1. The Company was incorporated on August 14, 1992, under the name Endosonics Delaware Corporation pursuant to the Delaware General Corporation Law. 2. The Company is the owner of at least 90% of the outstanding shares of each class of the capital stock of Microsound Corporation, a Delaware corporation ("Subsidiary"). 3. The Company, by the following resolutions adopted on September 16, 1998, by the Board of Directors of the Company, merges Subsidiary into the Company. SHORT-FORM MERGER WITH MICROSOUND CORPORATION RESOLVED: That the Board of Directors of the Company deems it to be advisable and in the best interests of the Company and its stockholders that the Company merge into itself its subsidiary, Microsound Corporation (the "Subsidiary"), and assume all of Subsidiary's liabilities and obligations. RESOLVED FURTHER: That, in accordance with the Delaware General Corporation Law, the proper officers of the Company are hereby authorized to execute and acknowledge a Certificate of Ownership and Merger setting forth a copy of the resolutions to merge Subsidiary into the Company and to assume 2 Subsidiary's liabilities and obligations and the date of adoption thereof and to file such Certificate of Ownership and Merger with the Delaware Secretary of State and record such certificate in the office of the recorder of each county in which the registered office of the Company and the Subsidiary is located. RESOLVED FURTHER: That the terms of the merger are as follows: Upon the proposed merger becoming effective, (i) each outstanding share of Subsidiary's Common Stock held of record by stockholders other than the Company shall cease to be outstanding, and such stockholders of record shall be entitled to receive from the Company, as the surviving corporation in the merger, one (1) share of the Company's Common Stock (the "Acquisition Shares") for each such share of Subsidiary Common Stock upon surrender to the Company, which is hereby appointed paying agent for such purpose, of their certificate formerly representing ownership of Subsidiary Common Stock; (ii) each outstanding share of Subsidiary's Common Stock owned of record by the Company shall cease to be outstanding, without any payment being made in respect thereof; (iii) each outstanding option to purchase shares of Subsidiary's Common Stock held by option holders other than the Company shall be assumed by the Company and deemed to constitute an option to acquire, on the same terms and conditions (including exercise price and vesting), the same number of shares of the Company's Common Stock; and (iv) each outstanding option or warrant to purchase shares of Subsidiary's Common Stock held by the Company shall cease to be outstanding, without any payment being made in respect thereof. RESOLVED FURTHER: That the Board of Directors hereby determines that the terms of the merger of the Subsidiary into the Company set forth herein are fair and reasonable. RESOLVED FURTHER: That the officers of the Company are hereby authorized and directed to cause the Acquisition Shares to be issued and delivered to the stockholders of Subsidiary, in accordance with these resolutions, and upon such issuance, the Acquisition Shares shall be fully paid and non-assessable. RESOLVED FURTHER: That all options to purchase Subsidiary's stock outstanding as of the effective date of the Merger shall be assumed by the Company, subject to all of the terms and conditions of such options, in accordance with these resolutions. RESOLVED FURTHER: That the Company, as the surviving corporation, shall notify each stockholder of record of Subsidiary within ten days after the effective date of the merger that the merger has become effective. -2- 3 OMNIBUS RESOLUTION RESOLVED: That the proper officers of the Company are hereby authorized to take such other actions and sign such other documents as may be necessary or appropriate to carry out the intent of the foregoing resolutions, and all prior actions taken in connection therewith are hereby confirmed, ratified and approved. Executed on September 29, 1998. Endosonics Corporation By: /s/Reinhard Warnking ----------------------- Reinhard Warnking, President EX-23.1 5 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement listed below of our report dated February 16, 1999, with respect to the consolidated financial statements and schedule of EndoSonics Corporation included in the Annual Report (Form 10-K) for the year ended December 31, 1998: Form S-8 No. 333-74639 pertaining to the Navius 1996 Stock Option Plan Form S-8 No. 333-60827 pertaining to the EndoSonics Corporation 1998 Employee Stock Purchase Plan and the EndoSonics Corporation 1998 Stock Option Plan Form S-8 No. 333-32273 pertaining to the Endosonics Corporation Restated 1988 Stock Option Plan Certain Option Grant to Mr. Salquist Pursuant to a written Compensation Agreement and the Cardiometrics, Inc. 1995 Stock Incentive Plan Form S-8 Nos. 33-93330, 33-80880, 33-67734 and 33-48208 pertaining to the EndoSonics Corporation Restated 1988 Stock Option Plan /s/ ERNST & YOUNG LLP Sacramento, California March 29, 1999 EX-23.2 6 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement listed below of our report dated January 29, 1998, with respect to the consolidated financial statements and schedule of Radiance Medical Systems, Inc., formerly CardioVascular Dynamics, Inc., and subsidiaries included in this Annual Report (Form 10-K) of EndoSonics Corporation for the year ended December 31, 1998: Form S-8 No. 333-74639 pertaining to the Navius 1996 Stock Option Plan Form S-8 No. 333-60827 pertaining to the EndoSonics Corporation 1998 Employee Stock Purchase Plan and the EndoSonics Corporation 1998 Stock Option Plan Form S-8 No. 333-32273 pertaining to the EndoSonics Corporation Restated 1988 Stock Option Plan Certain Option Grant to Mr. Salquist Pursuant to a written Compensation Agreement and the Cardiometrics, Inc. 1995 Stock Incentive Plan Form S-8 Nos. 33-93330, 33-80880, 33-67734 and 33-48208 pertaining to the EndoSonics Corporation Restated 1988 Stock Option Plan /s/ ERNST & YOUNG LLP Orange County, California March 26, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 8,749 16,269 14,075 350 6,834 46,137 9,430 (5,366) 66,730 11,874 0 0 0 18 54,234 66,730 44,144 44,144 20,089 33,414 (1,789) 0 0 (7,570) 222 0 0 0 0 (7,792) (0.47) (0.47) For Purposes of This Exhibit, Primary means Basic.
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