1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 1998.
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______ to ______
Commission file number 0-28440
CARDIOVASCULAR DYNAMICS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 68-0328265
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
13700 Alton Parkway, Suite 160, Irvine, California 92618
(Address of principal executive offices)
Registrant's telephone number, including area code (949) 457-9546
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 preceeding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
On November 4, 1998, the Registrant had outstanding approximately 9,537,000
shares of Common Stock (including 686,000 of treasury shares) of $.001 par
value, which is the Registrant's only class of Common Stock.
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CARDIOVASCULAR DYNAMICS, INC.
Form 10-Q
September 30, 1998
TABLE OF CONTENTS
Page
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Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets at September 30, 1998 and
December 31, 1997 3
Condensed consolidated statements of operations for the three
and nine months ended September 30, 1998 and 1997 4
Condensed consolidated statements of cash flows for the nine
months ended September 30, 1998 and 1997 5
Notes to condensed consolidated financial statements 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 11
Part II. Other Information
Items 1 through 6. 19
Signatures 22
Exhibit Index 23
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CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except per share amounts)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
Current assets:
Cash and equivalents $ 3,627 $ 6,141
Marketable securities available-for-sale 23,301 24,773
Trade accounts receivable, net 2,204 2,752
Other receivables 327 282
Inventories 2,334 3,205
Other current assets 296 163
-------- --------
Total current assets 32,089 37,316
Property and equipment, net 1,537 1,550
Notes receivable from officers 127 273
Goodwill 2,288 1,809
Other assets 251 413
-------- --------
Total Assets $ 36,292 $ 41,361
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,274 $ 1,374
Accrued payroll and related expenses 791 1,162
Other accrued expenses 1,067 952
Deferred license revenue 400 --
-------- --------
Total current liabilities 3,532 3,488
Minority interest 910 --
STOCKHOLDERS' EQUITY
Convertible preferred stock, $.001 par value;
7,560,000 shares authorized, no shares issued and
outstanding -- --
Common stock, $.001 par value; 30,000,000 authorized,
9,533,000 shares and 9,389,000 shares outstanding as of
September 30, 1998 and December 31, 1997, respectively 10 9
Additional paid-in capital 60,679 60,371
Deferred compensation (469) (634)
Accumulated deficit (25,014) (19,821)
Treasury stock at cost, 686,000 and 345,000 common
shares as of September 30, 1998 and December 31, 1997,
respectively (3,675) (2,205)
Unrealized gains on available-for-sale securities 164 176
Unrealized exchange rate gain (loss) 155 (23)
-------- --------
Total stockholders' equity 31,850 37,873
-------- --------
Total Liabilities and Stockholders' Equity $ 36,292 $ 41,361
======== ========
See accompanying notes
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CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
-------------- --------------- ------------- ---------------
Revenue:
Sales $ 2,108 $ 2,569 $ 7,031 $ 8,943
License revenue 1,205 -- 1,605
-------- -------- -------- --------
Total revenues 3,313 2,569 8,636 8,943
Cost of sales 1,692 1,405 4,339 4,392
-------- -------- -------- --------
Gross profit 1,621 1,164 4,297 4,551
Operating expenses:
Research, development and clinical 1,579 1,595 5,038 3,507
Marketing and sales 1,238 1,802 3,801 4,838
General and administrative 665 464 1,855 1,265
Minority interest (68) -- (68) --
-------- -------- -------- --------
Total operating expenses 3,414 3,861 10,626 9,610
-------- -------- -------- --------
Loss from operations (1,793) (2,697) (6,329) (5,059)
Other income (expense):
Interest income 395 577 1,202 1,727
Other income (expense) 29 54 (66) 79
-------- -------- -------- --------
Total other income 424 631 1,136 1,806
======== ======== ======== ========
Net loss ($ 1,369) ($ 2,066) ($ 5,193) ($ 3,253)
======== ======== ======== ========
Basic and diluted net loss per share ($ 0.16) ($ 0.23) ($ 0.59) ($ 0.36)
======== ======== ======== ========
Shares used in computing basic and
diluted net loss per share 8,854 9,107 8,857 9,098
======== ======== ======== ========
See accompanying notes
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CARDIOVASCULAR DYNAMICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
------------ ---------
Cash flows from operating activities:
Net loss ($ 5,193) ($ 3,253)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 359 248
Amortization of deferred compensation 190 93
Bad debt expense 190 36
Minority interest in losses of Radiance (68) --
Changes, net of effects from purchase of Radiance and Clinitec:
Trade accounts receivable, net 359 (433)
Inventories 871 (1,229)
Other assets (81) (154)
Accounts payable and accrued expenses (322) (2,483)
Deferred revenue 400 (29)
-------- --------
Net cash used in operating activities (3,295) (7,204)
Cash flows provided by (used in) investing activities:
Purchase of available-for-sale securities (32,444) (31,518)
Sales of available-for-sale securities 33,904 24,474
Capital expenditures for property and equipment
and other assets (311) (702)
Purchase of controlling interest in Radiance,
net of cash acquired 577 --
Purchase of Clinitec, net of cash acquired -- (30)
-------- --------
Net cash provided by (used in) investing activities 1,726 (7,776)
Cash flows used in financing activities:
Proceeds from sale of common stock 180 436
Proceeds from exercise of common stock options 112 204
Proceeds from exercise of common stock warrants 390
Proceeds from repayment of affiliate debt 233 --
Purchase of treasury stock (1,470) (1,450)
-------- --------
Net cash used in financing activities (945) (420)
-------- --------
Net decrease in cash and equivalents (2,514) (15,400)
Cash and equivalents, beginning of period 6,141 17,192
-------- --------
Cash and equivalents, end of period $ 3,627 $ 1,792
======== ========
Supplemental schedule of non-cash investing and
financing activities:
The Company exercised preferred stock warrants bringing
its ownership of Radiance to 50%. In conjunction with
the assumption of control of Radiance, the following
liabilities were assumed:
Fair value of assets acquired $ 1,535 --
Cash paid for capital stock (1,462) --
-------- --------
Liabilities assumed $ 73 --
======== ========
The Company purchased all of the capital stock of Clinitec
for $30. In conjunction with the acquisition, the
Company forgave $1,630 in debt and assumed the following
liabilities:
Fair value of assets acquired -- $ 401
Cash paid for capital stock -- (30)
-------- --------
Liabilities assumed -- $ 371
======== ========
See accompanying notes
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CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
1. Basis of Presentation
Cardiovascular Dynamics, Inc. and subsidiaries ("CVD" or the "Company") design,
develop, manufacture and market catheters and stents used to treat certain
vascular diseases. The accompanying condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1998 are not necessarily indicative of results that
may be expected for the year ending December 31, 1998 or any other period. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
2. Net Loss Per Share
As of December 31, 1997, the Company adopted the Financial Accounting Standards
Board 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.
3. Inventories
Inventories are stated at the lower of cost, determined on an average cost
basis, or market value. Inventories consist of the following:
September 30, 1998 December 31, 1997
------------------ -----------------
Raw materials $ 866,000 $1,285,000
Work-in-process 234,000 165,000
Finished goods 1,234,000 1,755,000
---------- ----------
$2,334,000 $3,205,000
========== ==========
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CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Deferred License Revenue
In June of 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute stent delivery products
using the Company's focal technology. Under the Agreement, the Company is
entitled to receive certain milestone payments based upon the transfer of the
technology to Guidant, and royalty payments based upon the sale of products
using the focal technology. An initial license payment of $2.0 million was
received by the Company upon the signing of the Agreement. Based upon the
completion of certain initial technology transfer milestones, the Company
recognized $1.2 million and $1.6 million in license revenue in the third quarter
and first nine months of 1998, respectively, and will recognize the remaining
$0.4 million of deferred license revenue in future periods. In October of 1998,
the Company received another $1.0 million license milestone payment upon the
completion of the technology transfer to Guidant.
5. Recent Accounting Pronouncements
For the year beginning January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income
("Statement No. 130"). Statement No. 130 establishes standards for reporting and
displaying comprehensive income and its components with the same prominence as
other financial statement information. For the periods ending September 30, 1998
and 1997, the changes in the components of comprehensive income were not
materially different than the reported net loss.
For the year beginning January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 131, which concerns disclosures about
Segments of an Enterprise and Related Information ("Statement No. 131").
Statement No. 131 establishes standards for the way that public business
enterprises report selected information about operating segments in annual and
interim financial statements. However, as the Company operates in one business
segment, no additional interim reporting is required under Statement No. 131.
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
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CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5. Recent Accounting Pronouncements (continued)
beginning January 1, 1999 and requires 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, and it
anticipates that the impact of the SOP will not be material on its results of
operations or financial position for the foreseeable future as amounts expended
to develop or obtain software have not been and are not expected to be material.
6. Acquisitions
In September 1998, the Company exercised warrants to purchase an additional
1,500,000 Preferred Series B shares in Radiance Medical Systems, Inc.
("Radiance") for $0.975 per share or a total of $1.5 million, bringing CVD's
ownership of the outstanding equity of Radiance to above 50%. Radiance was
incorporated in August 1997 to develop radiation products to treat restenosis
based on CVD's patented focal delivery systems technology. In consideration for
the granting by CVD of a license to this technology, Radiance issued to CVD
750,000 shares of Series B Preferred Stock, a Warrant to purchase 1,500,000
shares of Series B Preferred Stock, rights of first offer with respect to the
commercialization of Radiance's products, and a promise to receive royalties on
sales of products based upon the licensed technology.
In November 1998, the Company signed a definitive merger agreement with
Radiance, whereby CVD will acquire all of the outstanding shares which it does
not already own, subject to the approval of the shareholders of both companies.
Under the terms of the agreement, on the effective date of the merger, CVD will
pay the shareholders of Radiance $3.00 for each share of Preferred Stock and
$2.00 for each share of Common Stock for a total consideration of approximately
$7.0 million, excluding the value of CVD stock options to be provided to
Radiance employees in exchange for their Radiance stock options. The Radiance
common stock options outstanding immediately prior to the closing of the merger
will accelerate, vest and be converted into an option to acquire $2.00 of CVD
Common Stock. In addition, Radiance share and option holders may receive product
development milestone payments of $2.00 for each share of Preferred Stock and
$3.00 for each share of Common Stock. The aforementioned development milestone
payments may be increased up to 30%, or reduced or eliminated if the milestones
are reached earlier or later, respectively, than the milestone target dates.
Lastly, the merger consideration paid is subject to certain price adjustment and
collar provisions and, at CVD's option,
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CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6. Acquisitions (continued)
CVD may pay up to 30% of the consideration due to Radiance Preferred
shareholders in cash.
Proforma combined results of the Company and Radiance for the three and nine
month periods ended September 30, 1998, on the basis that the acquisition had
taken place at the beginning of 1998, would have reported the following:
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1998
------------------- -------------------
Pro forma Revenues $ 3,313,000 $8,636,000
Pro forma Net Loss (1,542,000) (5,638,000)
Pro forma Net Loss
Per Share (0.17) (0.64)
Operating results for Radiance for the period from inception in August 1997 to
September 30, 1997 were immaterial; therefore, pro forma operating results are
not presented for the quarter and nine month periods ending September 30, 1997.
In July 1997, the Company acquired its independent distributor in Germany and
Switzerland, Clinitec GmbH ("Clinitec"). In exchange for the assumption of the
assets and liabilities of Clinitec, including bank debt of $0.3 million, the
Company acquired all of the common stock of Clinitec. At the time of the
acquisition, Clinitec had a deficiency in stockholder's equity of approximately
$0.5 million.
Pro forma combined results of the Company and Clinitec for the three and nine
month periods ended September 30, 1997 on the basis that the acquisition had
taken place at the beginning of 1997, would have reported the following:
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1997
------------------- -------------------
Pro forma Revenues $ 2,627,000 $9,263,000
Pro forma Net Loss (2,201,000) (3,945,000)
Pro forma Net Loss
Per Share (0.24) (0.43)
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CARDIOVASCULAR DYNAMICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7. Other Significant and Subsequent Events
In October 1998, the Company signed a letter of intent to sell its Vascular
Access Business Unit to Escalon Medical Corporation. Under the terms of the
letter of intent, CVD will receive an initial payment upon the signing of an
agreement to sell the business, a milestone payment upon the transferring of the
assets and technology, and royalty payments upon the sale of products for a
five-year period following the execution of the agreement. The sale is subject
to various conditions, including the negotiation and execution of a definitive
sale agreement.
In July 1996, the Company and Medtronic, Inc. ("Medtronic") entered into a
written OEM agreement ("Agreement") pursuant to which Medtronic was to purchase
certain angioplasty balloon catheters and related components from the Company.
In May 1997, Medtronic advised the Company of its election to not make minimum
purchases of product for the second year of the Agreement. This dispute
adversely affected the Company's financial results for the quarter and
nine-month period ended September 30, 1997 and the three and nine-month periods
ended September 30, 1998.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
All statements other than statements of historical fact included in this Report
on Form 10-Q are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. The Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable at this
time, it can give no assurance that such expectations will prove to have been
correct. The Company makes no undertaking to correct or update any such
statements in the future. Important factors that could cause actual results to
differ materially from the Company's expectations ("Cautionary Statements") are
set forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" as well as in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Statements.
Overview
Since its inception in 1992, CardioVascular Dynamics, Inc. has engaged primarily
in the research and development of products for the treatment of cardiovascular
disease. The Company's financial results will be affected in the future by
several factors, including the timing of any FDA approval to market the
Company's products, FDA approval of IDE sites and the number of patients
permitted to be treated, future changes in government regulations and third
party reimbursement policies applicable to the Company's products, the progress
of competing technologies and the ability of the Company to develop the
manufacturing and marketing capabilities necessary to support commercial sales.
As a result of these factors, revenue levels, gross margins and operating
results may fluctuate materially from quarter to quarter.
On July 15, 1996, the Company entered into co-distribution agreements with
Medtronic, providing for the co-distribution of the Company's FACT, CAT and ARC
balloon angioplasty catheters. Under the terms of these agreements, Medtronic
was to purchase a minimum number of angioplasty catheters manufactured by the
Company for distribution worldwide for a period of up to three years. Specific
products to be distributed by Medtronic would differ in individual country
markets. The initial term of the Medtronic agreements was for a period of three
years from the date of first delivery of a product. In May of 1997, Medtronic
advised the Company of its election to not make minimum purchases of product for
the second year of the
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
agreement. In June 1997 Medtronic informed CVD that it would not fulfill its
commitment for the first year of the agreement and that it did not believe it
was required to fulfill such commitment. This dispute adversely affected the
Company's financial results for the quarter and nine-month periods of 1997 and
1998.
In June 1998, the Company signed a technology license agreement with Guidant
Corporation, an international interventional cardiology products company, to
grant them the ability to manufacture and distribute products using the
Company's focal technology. Under the terms of the Agreement, the Company is
entitled to receive certain milestone payments based upon the transfer of the
technological knowledge to Guidant, and royalty payments based upon the sale of
products using focal technology by Guidant. See Note 4 to the Condensed
Consolidated Financial Statements.
In August 1997, CVD incorporated Radiance Medical Systems, Inc. ("Radiance") to
focus on the development of radiation technology for treating and preventing
restenosis based on CVD's patented focal delivery systems technology. In
September 1997, Radiance issued to CVD 750,000 shares of Series B Preferred
Stock, a warrant to purchase an additional 1,500,000 shares of Series B
Preferred Stock at a price equal to the lower of: (i) $2.05 per share, or (ii)
One and one-half times the per share price of Radiance stock sold in its then
most recent equity financing. In addition, Radiance granted to CVD the rights of
first offer with respect to the commercialization of Radiance's products, and
promised the payment of royalties on sales of products based upon the licensed
technology.
In September 1998, the Company exercised its warrant to purchase 1,500,000
Series B Preferred of Radiance, bringing CVD's ownership of the outstanding
equity of Radiance to above 50%.
In November 1998, the Company signed a definitive merger agreement with
Radiance, whereby CVD will acquire all of the outstanding shares it does not
already own, subject to the approval of the shareholders of both companies.
Under the terms of the Agreement, on the effective date of the merger, CVD will
pay the shareholders of Radiance total consideration of approximately $7.0
million, excluding the value of CVD options to be issued to Radiance employees
in exchange for their Radiance stock options. Radiance Common Stock Options
outstanding immediately prior to the closing of the merger will accelerate, vest
and be converted into an option to acquire $2.00 of CVD Common Stock for an
aggregate value of approximately $1.1 million. In addition, Radiance share and
option
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
holders may receive product development milestone payments of $2.00 for each
share of Preferred Stock and $3.00 for each share of Common Stock. The milestone
payments may be increased up to 30%, or reduced or eliminated if the milestones
are reached earlier or later, respectively, than the milestone target dates. See
Note 6 to the Condensed Consolidated Financial Statements.
Results of Operations
Third quarter of 1998 compared to the same period in 1997
Revenue for the third quarter of 1998 increased 29% to $3.3 million compared to
$2.6 million for the third quarter of 1997. The increase resulted primarily from
$1.2 million in license revenue recognized in the third quarter of 1998. Product
revenues decreased 18% to $2.1 million compared to $2.6 million for the third
quarter of 1997. The decrease was primarily attributable to lower domestic sales
as co-exclusive rights to sell focus technology products in the domestic market,
along with the technology license, were transferred to Guidant under
aforementioned license agreement, and secondarily attributable to the turnover
of certain distributor relationships in Europe.
The gross profit percentage for the third quarter of 1998 increased to 49%
compared to 45% of revenues for the same period of 1997. The increase is
attributable primarily to the inclusion in revenues for the third quarter of
1998 product license fees of $1.2 million that had no associated cost of sales,
offset by the recognition of $0.5 million in inventory obsolescence reserves.
Research, development and clinical expenses were $1.6 million in the quarters
ended September 30, 1998 and 1997. During the quarter, the company continued
efforts to develop its SEAL technology stent products and expects the
expenditures to increase in the fourth quarter and in 1999 as the technology is
developed for clinical trials. The SEAL technology involves a new concept in
vascular stenting and is designed to line a significant portion of the diseased
vessel wall with metal to attempt to reduce restenosis. At any time during the
development process, work on this technology could be halted or restarted under
a different design, for example, unless the efficacy of the design and
technology is proven at each stage of its development. There is no certainty
that the technology will ever reach the market or produce material sales due to
many risks, including competitor development of superior technologies or
products, an unrecoverable product cost, lack of product
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
reimbursement, the uncertainty of regulatory approval and other factors
mentioned below concerning the risks associated with CVD's operations within
this market.
Marketing and sales expenses decreased 31% to $1.2 million, down $0.6 million in
the quarter ended September 30, 1998, compared to $1.8 million in the same
period of 1997. This decrease primarily reflects reductions in the Company's
domestic sales force and related expenses.
General and administrative expenses increased by 43% to $0.7 million for the
quarter ended September 30, 1998, from $0.5 million for the same quarter in
1997. The increase was due primarily to additions to the allowance for
uncollectible accounts receivable and the salary expense of an additional
executive officer.
Interest income decreased 32% to $0.4 million in the third quarter of 1998 from
$0.6 million for the same period of 1997. The decrease was due primarily to the
use of funds for operations and, secondarily, due to the purchase of property
and equipment and treasury stock, resulting in a reduction in cash and cash
equivalents and marketable securities of 45% ($10.6 million) from September 30,
1997 to September 30, 1998, excluding the cash of Radiance.
First nine months of 1998 compared to the same period of 1997
Revenue for the first nine months of 1998 decreased 3% to $8.6 million compared
to $8.9 million for the same period of 1997. The revenue decrease was primarily
due to the change in product revenues, which decreased 21% to $7.0 million in
the first nine months of 1998 compared to $8.9 million for the same period in
1997. The decrease resulted primarily from sales to one large former
international distributor of approximately $1.5 million made in the first nine
months of 1997. Revenue for the first nine months of 1998 included $1.6 million
from certain product licensing fees paid by Guidant Corporation.
The gross profit percentage for the first nine months of 1998 decreased to 50%
compared to 51% for the same period of 1997. Although revenue for the first nine
months of 1998 included $1.6 million from licensing fees that had no associated
cost of sales, the gross profit percentage decreased, compared with the same
period of 1997, primarily due to increases in the Company's provision for
inventory obsolescence.
Research, development and clinical expenses increased by 44% to $5.0 million in
the nine-month period ended September 30, 1998 from $3.5 million in the same
period
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
ended September 30, 1997. The primary reason for this increase was additional
spending on development of the Company's new SEAL technology stent products and
increased spending on clinical trials for these products.
Marketing and sales expenses declined 21% to $3.8 million, from $4.8 million in
the nine month period ended September 30, 1997. This decrease primarily reflects
reductions in the Company's domestic sales force and related expenses.
General and administrative expenses increased by 47% to $1.9 million for the
nine months ended September 30, 1998 from $1.3 million for the same period in
1997. The increase was due primarily to additions to the allowance for
uncollectible accounts receivable and the salary expense of an additional
executive officer.
Interest income declined to $1.2 million in the first nine months of 1998
compared with $1.7 million in the same period of 1997. The decrease was due to a
reduction of $10.6 million in cash and cash equivalents and marketable
securities since September 30, 1997, excluding the cash of Radiance, due to the
use of funds for operations, the purchase of treasury stock and capital
expenditures.
The Company has experienced an operating loss for each of the last five years.
After considering the anticipated operating losses of Radiance, the Company
expects to continue to incur consolidated operating losses through at least
2000, and there can be no assurance that the Company will ever be able to
achieve or sustain profitability in the future. CVD's results of operations have
varied significantly from quarter to quarter. Quarterly operating results will
depend upon several factors, including the timing and amount of expenses
associated with expanding the Company's operations, the conduct of clinical
trials and the timing of regulatory approvals, new product introductions both in
the United States and internationally, the mix between pilot production of new
products and full-scale manufacturing of existing products, the mix between
domestic and export sales, variations in foreign exchange rates, changes in
third-party payors' reimbursement policies and healthcare reform. The Company
does not operate with a significant backlog of customer orders, and therefore
revenues in any quarter are significantly dependent on orders received within
that quarter. In addition, the Company cannot predict ordering rates by
distributors, some of whom place infrequent stocking orders. The Company's
expenses are relatively fixed and difficult to adjust in response to fluctuating
revenues. As a result of these and other factors, the Company expects to
continue to experience significant fluctuations in quarterly operating results,
and
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
there can be no assurance that the Company will be able to achieve or maintain
profitability in the future.
The Company has completed an assessment, has upgraded, and must upgrade portions
of its hardware and software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. Of the total Year 2000
project cost estimated at $15,000, approximately $5,000 has been expended and
future expenditures for upgrades and other project costs are not expected to
exceed said estimate by a material amount. The project is estimated to be
completed not later than December 31, 1998, which is prior to any anticipated
impact on the operating systems.
In addressing the Year 2000 Issue, the Company will also be contacting its
vendors and customers to assess the impact that they will have on the Company's
operations and whether the Company will be able to meet their needs. Based upon
our assessment of the Company's systems and software, we believe that the
planned system enhancements and upgrades should prevent related problems that
could affect our ability to supply or service our customers. However, there can
be no assurance that all of our systems and software will be Year 2000 ready.
There is also no assurance that our vendor's systems and software will be Year
2000 ready. In an effort to prepare for any vendor problems we will be
attempting to identify alternative supply sources. However, there can be no
assurance that the alternative sources will be Year 2000 ready or be able to
provide the same level of service and supply as our current vendors. Even if the
Company's project to be Year 2000 ready is completed by the end of 1998, there
can be no assurance that such plans will be sufficient to address any third
party failures or that unresolved or undetected internal and external Year 200
issues will not have a material adverse affect on the Company's business,
financial condition and results of operations.
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily through
the sale of its equity securities. Prior to the Company's initial public
offering on June 19, 1996, the Company raised approximately $11.4 million from
the private sales of preferred and common stock and $2.7 million in working
capital advances from Endosonics Corporation (CVD's former parent company). The
Company repaid Endosonics Corporation during the third quarter of 1996.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
On June 19, 1996, the Company closed its initial public offering, which
consisted of the sale 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.
On September 30, 1998, the Company had cash, cash equivalents and marketable
securities available for sale of $26.9 million. Net cash used in operating
activities was $3.3 million for the first nine months of 1998 as compared to
$7.2 million for the same period of 1997. The Company expects to incur
substantial costs related to, among other things, clinical testing, product
development, marketing and sales expenses, and increased working capital, prior
to achieving positive cash flow from operations. The Company anticipates that
its existing capital resources will sufficient to fund its operations through
the first quarter of 2000; however, if the anticipated acquisition of Radiance
is consummated, the amount of capital resources expended, especially for
clinical tests and research and development, will be substantial, and the
Company may not be able to fund its operations from its existing capital
resources in the year 2001 or sooner. The timing and extent of expenditures for
the research and development and testing of Radiance technology will be
dependent upon many variables, including but not limited to the success of the
research and development and clinical testing process, changes in the
competitive environment, internal resource allocations and external resource
availability. CVD's future capital requirements will depend on many factors,
including its research and development programs, the scope and results of
clinical trials, the regulatory approval process, the costs involved in
intellectual property rights enforcement or litigation, competitive products,
the establishment of manufacturing capacity, the establishment of sales and
marketing capabilities, and the establishment of collaborative relationships
with other parties. The Company may need to raise funds through additional
financings, including private or public equity offerings and collaborative
arrangements with existing or new corporate partners. There can be no assurance
that funds will be raised on favorable terms, or at all. If adequate funds are
not available, the Company may be required to delay, scale back or eliminate one
or more of its development programs or obtain funds through arrangements with
collaborative partners or others that may require the Company to grant rights to
certain technologies or products that the Company would not otherwise grant.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Trade accounts receivable, net, decreased 20% to $2.2 million as of September
30, 1998, compared with $2.8 million at December 31, 1997. The decrease was
primarily due to the decrease in the product sales levels for the nine months
ended September 30, 1998 compared with sales for the same period of 1997.
Inventories decreased 27% to $2.3 million as of September 30, 1998, compared
with $3.2 million at December 31, 1997. This decrease resulted from inventory
obsolescence reserves and lower production levels associated with the lower
level of sales. Accounts payable and accrued expenses decreased 7% to $1.3
million at September 30, 1998, compared with $1.4 million at the end of 1997
primarily due to lower production levels.
Property and equipment, net, was unchanged at $1.5 million at December 31, 1997
and September 30, 1998 with capital additions of $0.3 million being offset by
depreciation expense of a similar amount in the nine months ended September 30,
1998.
Deferred license revenue resulted from a $2.0 million technology license revenue
payment paid by Guidant Corporation to the Company upon the signing of a
technology license agreement for the Company's focal technology. Based on the
completion of the technology transfer milestones, the Company will recognize the
remaining $0.4 million in deferred license revenue. See Note 4 to the Condensed
Consolidated Financial Statements.
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Part II.
OTHER INFORMATION
Items 1 and 3. Not applicable
Item 2. Changes in Securities and Use of Proceeds
(d) Use of Proceeds
The Company has used approximately $2.7 million of the net proceeds from its
initial public offering on June 19, 1996, SEC file number 333-04560, the IPO for
repayment of certain outstanding indebtedness to Endosonics, Inc., a holder of
in excess of ten percent of the Common Stock of the Company. From the date of
the IPO until September 30, 1998, in the normal course of business, the Company
has paid salaries and bonuses in excess of $0.1 million each to seven officers
of the Company and used $6.3 million for working capital. The Company has also
used approximately $1.7 million of the net proceeds for machinery and equipment
and leasehold improvement purchases. Through the end of the third quarter of
1998, the Company used approximately $3.7 million to purchase 686,000 shares of
the Company's Common Stock on the open market. In September of 1998, the Company
exercised a Warrant to acquire 1,500,000 Series B Preferred Stock of Radiance
Medical Systems, Inc. for $1.5 million. At September 30, 1998, approximately
$24.6 million was held in temporary investments, of which approximately $4.5
million was invested in U.S. Agency debt securities, $1.5 million was invested
in Canadian Government debt securities, and $18.6 million was invested in
corporate debt securities.
Item 5. Other Information
Amendment of By-Laws
On August 21, 1998, the Board of Directors amended Section 11 of the
Company's By-Laws to elect to be governed by Section 141(C)(2) of the Delaware
General Corporation Law. The By-Law amendment allows the Board of Directors to
designate a committee comprised of one or more directors. Any committee which is
designated by the Board of Directors may exercise all of the authority of the
Board of Directors in the management of the business and affairs of the Company,
except for matters which expressly are required under Delaware law to be
submitted to the stockholders for approval, and except to adopt, amend or repeal
any By-Laws.
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Part II.
OTHER INFORMATION
Item 5. Other Information (continued)
Stockholder Proposals
Any stockholder desiring to submit a proposal for action at the 1999 Annual
Meeting of Stockholders and presentation in the Company's proxy statement with
respect to such meeting should arrange for such proposal to be delivered to the
Company's principal executive office, Attn: Secretary, Cardiovascular Dynamics,
Inc., 13700 Alton Parkway, Suite 160, Irvine, California 92618, no later than
December 16, 1998 in order to be considered for inclusion in the Company's proxy
statement relating to the meeting. Matters pertaining to such proposals,
including the number and length thereof, eligibility of persons entitled to have
such proposals included and other aspects are regulated by the Securities
Exchange Act of 1934, Rules and Regulations of the Securities and Exchange
Commission and other laws and regulations to which interested persons should
refer.
On May 21, 1998 the Securities and Exchange Commission adopted an amendment
to Rule 14a-4, as promulgated under the Securities and Exchange Act of 1934, as
amended. The amendment to Rule 14a-4(C)(1) governs the Company's use of its
discretionary proxy voting authority with respect to a stockholder proposal that
is not addressed in the Company's proxy statement. The new amendment provides
that if a proponent of a proposal fails to notify the Company at least 45 days
prior to the month and day of mailing of the prior year's proxy statement, then
the Company will be allowed to use its discretionary voting authority when the
proposal is raised at the meeting, without any discussion of the matter in the
proxy statement.
With respect to the Company's 1999 Annual Meeting of Stockholders, if the
Company is not provided notice of a stockholder proposal, which the stockholder
has not previously sought to include in the Company's proxy statement, by March
1, 1999, the Company will be allowed to use its voting authority as outlined.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit 3.3 Amended and Restated Certificate of Incorporation
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21
Part II.
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K (continued)
Exhibit 3.4 Amended By-Laws
Exhibit 11 Statement Regarding the Computation of Net Loss Per Share
Exhibit 27 Financial Data Schedule
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(b) No reports on Form 8-K were filed during the quarter.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by undersigned
thereto duly authorized.
CARDIOVASCULAR DYNAMICS, INC.
Date: November 16, 1998 /s/ Jeffrey F. O'Donnell
----------------------------------------
Chief Executive Officer
(Principal Executive Officer)
Date: November 16, 1998 /s/ Stephen R. Kroll
----------------------------------------
Vice President-Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
3.3 Amended and Restated Certificate of Incorporation
3.4 Amended By-Laws
11 Statement Regarding the Computation of Net Loss Per Share
27 Financial Data Schedule
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